Dilemmas of Formal Economic Theory

11 December 2006 at 4:09 am Peter G. Klein Leave a comment

| Peter Klein |

In “Dilemmas of an Economic Theorist” (Econometrica, July 2006) Ariel Rubinstein reflects on the meaning, implications, and relevance of formal economic modeling:

What are we trying to accomplish as economic theorists? We essentially play with toys called models. We have the luxury of remaining children over the course of our entire professional lives and we are even well paid for it. We get to call ourselves economists and the public naively thinks that we are improving the economy’s performance, increasing the rate of growth, or preventing economic catastrophes. Of course, we can justify this image by repeating some of the same fancy sounding slogans we use in our grant proposals, but do we ourselves believe in those slogans?

Rubinstein goes on to identify four dilemmas facing the formal economic theorist:

The dilemma of absurd conclusions: Should we abandon a model if it produces absurd conclusions or should we regard it as a very limited set of assumptions that will inevitably fail in some contexts?
The dilemma of responding to reality: Should our models be judged according to experimental results?
The dilemma of modelless regularities: Should models provide the hypothesis for testing or are they simply exercises in logic that have no use in identifying regularities?
The dilemma of relevance: Do we have the right to offer advice or to make statements that are intended to influence the real world? Personally, I did not fulfill any childhood fantasy by becoming a professor. It was never my dream to become an economist.

A few observations. First, these are fundamental questions about the methodology of economics. There is a vast literature, dating back to the birth of discipline, about economic methodology, and an entire subdiscipline, with its own societies and journals, devoted to it. None of this is cited, or even acknowledged, in the paper. Either Rubinstein finds this literature of little worth, or (more likely), he is unaware of it. What does it say about the economics profession that one can become a prominent, senior member without any training in the history of economic thought or economic methodology? Is this an indictment of the discipline itself, or the subdiscipline of methodology? Or is this no big deal?

Second, Rubinstein clearly sees economic theory as primarily about puzzles, not problems:

Frankly, I respect philosophers, teachers, writers, and nurses more than I do economists. I don’t care about stock market prices and I’m not sure I know what “equities” are. I am reluctant to give policy advice to the government, and I am not happy with the idea that I may be acting in the interest of fanatic profit maximizers. Fortunately, people seldom ask me what I do. Perhaps after many years in the profession, I still get excited when formal abstract models are successfully constructed and meaning emerges from the manipulation of symbols.

But not all economists have seen it this way. At the other extreme is Mises, who describes economic theory as an “essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built” (Human Action, chapter 39). Israel Kirzner remarked, in a speech delivered just last month, that he learned from Mises that economics “is not simply a matter of intellectual problem solving, like a challenging crossword puzzle, but literally a matter of the life or death of the human race.” I suspect that most economists would be somewhere in the middle.

In any case, Rubinstein’s paper is clever and witty, and provides for the non-economist (or non-mathematical economist) considerable insight on how contemporary mainstream economic theorists think.

HT: Michael Greinecker