In defense of economic theory

I’ve just read JW Mason’s post “The Wit and Wisdom of Trygve Haavelmo.” I read this post as an empiricist’s view of economics, and I think that there is an equally valid theorist’s view of economics. The difference, in my view, lies more in how we think about what economics is that in the more practical question of how we do economics.

That is, I agree “that we study economics not as an end in itself, but in response to the problems forced on us by the world,” but I disagree strongly with the claim that “the content of a theory is inseparable from the procedures for measuring the variables in it.”

JW Mason writes “Within a model, the variables have no meaning, we simply have a set of mathematical relationships that are either tautologous, arbitrary, or false. The variables only acquire meaning insofar as we can connect them to concrete social phenomena.” Oddly, while I disagree vehemently with the first sentence, I have a lot of sympathy with the second.

So how does a theorist think about economic modelling?

To me the purpose of an economic model is to define a vocabulary that we can use to discuss economic phenomena. So the inherent value of a variable in an economic model is the way that the economic model gives the variable a very specific concrete meaning. “Consumer demand” means something very specific and clear in the context of a neoclassical model, and the fact that we can agree on this — separate and apart from economic data — is useful for the purposes of economic discourse.

Of course, it is also true that we need to be able to map this vocabulary over to real economic phenomena in order for the value of the vocabulary to be realized. Thus, the hardest and most important part of economic theory is mapping the theory back into real world phenomena. Thus while I don’t agree that “the content of a theory is inseparable from the procedures for measuring the variables in it,” I wouldn’t have a problem with the claim that “the usefulness of a theory is inseparable from the procedures for measuring the variables in it.”

Economic models are dictionaries, whereas a brilliant economic paper is more like a literary classic. As someone who is always using dictionaries to check the meaning of words, I consider dictionaries valuable in and of themselves, even though I don’t by any means consider that value to be the same as the value of literary classic.

I hope JW Mason won’t see this as splitting hairs, but I think it’s important to understand economic modelling as a means of creating a vocabulary for discussing the economy. The power of theory is that if it is mastered, it can be used to create new words and new ways of understanding the economy. Such a new vocabulary will only be truly useful if it can be brought to the data and if it helps explain the real world. But I think it is essential to understand the power of theory, lest this point be lost in a sea of data.

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