Megan McArdle posts on the Sad State of Economic Modeling. She quotes economist Arnold Kling:
But it just adds to my frustration about the infamous Blinder-Zandi black-box simulations purporting to show that the economy would have been much worse without TARP. Such an exercise assumes that we have precise quantitative knowledge of the feedback between real and financial variables.
Kling’s comment here is that we can’t model the real world. It reminds me of a quote from Carl Sagan:
If you want to make an apple pie from scratch, you first have to create the universe.
I like to give Nassim Taleb, author of The Black Swan, credit.
He made the point that because economists and mathematicians are very smart people and the use of mathematics seems scientific and mathematical modeling seems scientific, we assume that all the work these people do is scientific and accurate.
That’s fallacious thinking. Even if all of the previous paragraph were true (which it isn’t), it doesn’t logically follow that they are right. In fact, their records of being right about the future are dismal and we don’t seem to factor that in when giving them credit on their current predictions.
But, like I mentioned in parenthesis, it isn’t true that the models economists create (or any other models like climate change) are accurate. The data and math used to model is very limited compared to what happens in the real world.
That’s almost like saying we can model apple pie. We can draw pictures of apple pie, we can capture some of the essence in fragrance. We might be able to collect and represent it mathematically somehow. But, none of that adequately compares to cutting into a piece with your fork and putting in your mouth.
Perhaps one benefit of the stimulus spending fiasco is that more people are learning to beware geeks bearing economic models, just as mortgage investors learned to beware geeks bearing mortgage risk models.
I’ll generalize on those rules. Beware models.