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Tuesday, January 10, 2012

"Mechanisms vs Models"

I need to think about this more before signing onto or rejecting this argument, but here is Chris Dillow's response to the post above this one (and it provides a nice complement to the post that follows by Dan Little):

Mechanisms vs models, by Chris Dillow: Simon Wren-Lewis asks a good question about Robert Lucas‘s and John Cochrane‘s apparent misunderstanding of the balanced budget multiplier: how can very clever people make silly errors?

He suggests two good answers. I’d like to suggest a third. There are two different ways of thinking about economics - the model paradigm and the mechanism paradigm, and the former has crowded out the latter.

Simon says:

If you spend X at time t to build a bridge, aggregate demand increases by X at time t. If you raise taxes by X at time t, consumers will smooth this effect over time, so their spending at time t will fall by much less than X. Put the two together and aggregate demand rises.

This is clear and true. And it would be obvious to anyone using the mechanism paradigm. If you ask “What is the mechanism whereby higher taxes reduce consumer spending?” you pretty much walk into the notion of consumption smoothing. ...

But lots of brilliant economists don’t think merely in terms of mechanisms but rather build impressive models. And like photographers, they tend to fall in love with their models which distracts them both from others’ models and from mechanisms.

This matters, because the importance of particular mechanisms varies from time to time. The social sciences, wrote Jon Elster:

can isolate tendencies, propensities and mechanisms and show that they have implications for behaviour that are often surprising and counter-intuitive. What they are more rarely able to do is state necessary and sufficient conditions under which the various mechanisms are switched on. This is [a] reason for emphasizing mechanisms rather than laws. Laws by their nature are general…Mechanisms by contrast make no claim to generality. (Nuts and bolts for the social sciences, p 9-10)

A good example of this lies in the idea of expansionary fiscal contraction. The virtue of this idea is that it draws our attention to mechanisms (a falling exchange rate, better corporate animal spirits, whatever) whereby fiscal contraction might boost the economy. The drawback is that these mechanisms are just unlikely to operate here and now. Yes, there’s a model that tells us that expansionary fiscal contraction can work. And there are models that say it can’t. But arguing about competing models misses the practical point.

Now, there is an obvious reply to all this. Models have the virtue of ensuring internal consistency, and thus avoiding potentially misleading partial analysis. However, I’m not sure whether this is an argument against mechanisms so much as against poor thinking about them.

When I was a student (back in the 80s!) I learned lots of models (OK, a few), but when I became a practising economist, I found them to be less useful in thinking about the economy than Elsterian thinking about mechanisms.

This is not to dismiss models entirely. I’m just saying that, insofar as they have uses other than as mental gymnastics for torturing students, it is because of the mechanisms contained within them. The parts might be more useful than the sum.

    Posted by on Tuesday, January 10, 2012 at 10:02 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (26)


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