I wrote recently about three different ways to think about economic models. Here are two more. John Gruber of MIT to his undergraduate micro students:
We’re going to be modeling individual and firm behavior. Now technically, as you know, a model is any description of the relationship between two or more economic variables.But the difference from your other courses– and I’m telling you right now, it’s going to be frustrating.I’m warning you in advance, is unlike the relationship between energy and mass, there is no law that tells you exactly how things relate.We’re going to build a series of models that is going to help us try to understand the way things relate. But this is not a real science. As much as we wish we were, we are not. We’re not a real science. We are a quasi-science, social science.What we’re trying to do with our models is make assumptions that negotiate the tension between, on the one hand, explaining real world phenomena, and on the other hand, being mathematically tractable.
A good model has four attributes:
- It is clear: It helps us better understand something important.
- It predicts accurately: Its predictions are consistent with evidence.
- It improves communication: It helps us to understand what we agree (and disagree) about.
- It is useful: We can use it to find ways to improve how the economy works.