the useful economic model: social surplus modeling and the inductive approach
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Grad Students Honoring Fred Lee session at 12th International ConferenceTRANSCRIPT
The Useful Economic
Model
Social Surplus Modeling and the Inductive
Approach
Nicola MatthewsUMKC
Contents:
Introduction
Modeling and Credibility
Nature of the Model
Role of Ontology-Epistemology
Model Credibility
Social Surplus Models
The Useful Model
Intro.
Modeling is both an orthodox and heterodox approach
and is dated back to the Classical economists of the
1700s
Modeling is the what conventional economists do: “If it
isn’t modeled, it isn’t economics, no matter how
insightful” (Colander, 2004)
The practice and type of modeling in standard
economic theory is non-controversial
The practice and type of modeling in heterodox
economic theory is controversial
Cont. Intro
3 Heterodox Perspectives Towards Modeling (Lee, 2014)
1. Models are mathematically overly complex and do not reflect the
real world, thus they should be avoided as a choice of method
2. Models are credible, if they are built on heterodox theory
3. Models are credible and can contribute to the advancement of
economic theory, if they are empirically grounded
What Is an Economic Model?
A model is an abstract intellectual representation of a system, a miniature world
A system is set of interacting and interdependent elements which together constitute a whole; a system may be nested and its size can vary
Systems are typically complex and difficult to analyze
Closed-modeling and Linear modeling limit the amount of assistance the model can provide
Thus, modeling is a systems approach towards science that is, it is a METHOD towards science
An advantage of using economic models as a method is that they can be manipulated to reveal structural relationships
2 General Approaches Toward Model construction
Deductive
Inductive
Conventional, Deductive Economic Models
Currently one dominant form of reasoning in conventional model construction—deduction
Begin with a series of presuppositions based on “reductive” and “idealized” framework (ex. individualism, rational acting, profit seeking, etc.)
Create axioms based on presuppositions
Deduce model from these premises; choice of math technique assumed prior to presuppositions
Note: there is no ‘discovery’ process in the formation of the model, although there is a minimal amount of induction
Original assumptions are not derived in a vacuum but based partially on observation
Problem: used reductionism and idealization (like a caricature, blow up one feature)
Model becomes distorted
Reductionist modeling
Alternative, Inductive Economic Model
Inductive reasoning towards model construction Begin with a series of presuppositions based on cumulative
observations (capitalist state, agency, class analysis)
Make observations, collect data, categorize
Sort, combine and filter data based on ``recipe making” framework
Build model on categorical data; primary math technique depends on applicability and assessed after data collection
Discovery process begins at the start of model construction; the type of structures are not assumed a priori
Limited distortions
Constructivist modeling
One should subordinate deduction to induction, and discover the empirical regularities first...(Kaldor, 1985)
Role of Ontology-Epistemology in Model
Building
The world and the universe are real and can be
measured but…..
All science is practiced through the human habitual
mind and its associated culture/history/politics, making
direct (appearances) and indirect (essence)
measurements imprecise
How do we know this? Failure of theories and the
existence of paradigms
Role of Ontology-Epistemology in Model
Building Obstacles towards precise science
Neurath’s Boat—science conducted ON Neurath’s boat, can’t bring the boat to land for complete overhaul
The “active” element of science is how we rebuild and navigate the boat not that the objective world exists (passive)
No such thing as a view from nowhere (Barker and Feiner, 2004; Nelson, 1996)
Multiple sets of conditions which may yield same or very similar results (Lowe, 1936)
Duhem-Quine Theory—impossible to test a single hypothesis in isolation = logical-positivism untenable
Theory dependence of observation—the actual process of observing, collecting, recording and categorizing data is not free from subjectivity-bias as it is dependent upon theories to do so (Hanson,1965 [1958]) (more relevant to inductive modeling)
Deductive reasoning weak, one break in chain, entire theory invalid (Peirce, 1868)
Model Credibility Conventional Deductive Models
Credibility relies on predictive power; Positivism
No criteria to model building apart from linked-chain deductive reasoning
Subjective benchmarks for prediction (Lee, 2014)
Model is intended to support the underlying axioms and math, NOT to be used as a method in theory development
Result: Reductionist Model-Theory
Duhem-Quine Thesis = logical positivism not credible whether the data is correlated to the real world or not
Singular deductive approach is weak
Suffers from subjectivity-bias; the choice of tool prior to the development of axioms; the model behaves as the theory not as a method
Model Credibility
Heterodox Inductive Models
Credibility relies on real world observations and measurements
Model is intended to aid in the discovery process and assist in theory development
Result: Constructivist Model-Method
But still….. Theory Dependence of Observation, Neurath’s Boat
No Guarantee that observations, measurements and categorization represents ultimate reality of the objective world
3 Heterodox Perspectives (Lee, 2014)
1. Models are mathematically overly complex and do not reflect the
real world, thus they should be avoided as a choice of method
2. Models are credible, if they are built on heterodox theory
3. Models are credible and can contribute to the advancement of
economic theory, if they are empirically grounded
Surplus Models: Sraffa
Sraffian Model
Presuppositions:
Circular production (basic commodities go into all production, indecomposable)
Homogenous labor
Fixed technical coefficients
Convergence (uniform rates of profit)
Real wages (commodity numeraire)
Closed System
Value determined by social system of production
Fixed Technology
Given Surplus (difference between the social product and the total amount of intermediate inputs)
Class Analysis
Capitalist State
No Agency
Results:
Inverse relation between wages and profits
Role of Prices = are exchange ratios of commodities relative to the numeraire, coordinate economic activity
Sraffian Surplus Model
Credibility of Sraffian Model
Model is semi-deductive, semi-inductive
Quasi model-theory, model-method
Sraffa closes his system by assuming a given surplus, a given technical condition and no agency
Surplus is a residual, meaning there is no explanation for the level and composition of the social product
Able to solve for prices in the system independent of Supply & Demand
Critique of the Marginal Theory of Value and Distribution
Model devised to support theory not to discover it
Model is a theoretical exposition
Taking a host of givens, certain properties fall out of the model
Surplus Models: Frederic S. Lee Lee’s Model
Presuppositions:
Circular production (basic commodities go into all production, production indecomposable); input-output
Heterogeneous labor
Fixed technical coefficients
No convergence (parameters are not fixed)
Nominal wages
Open System
Value determined by social system of production
Surplus not given
Class Analysis
Capitalist State
State Money
Agency
Results:
Surplus = determined by capitalist investment decisions and government spending decisions
No inverse relation between wages and profits
Role of Prices = serve to reproduce the system (going-concern prices), not to coordinate the system
Matrix Algebra
Lee’s Heterodox Surplus Model
Credibility of Lee’s Model
Model is primarily inductive; constructed from the ground-up
Surplus is not a residual, meaning there is an explanation for the level and composition of the social product
Investment and government decisions determine surplus, surplus determines the social product
Price theory explains how prices are determined (based on budgeted output) and their role (going-prices) but nothing more
Model created to assist in the discovery process and theory development
Model credible in that it was built from real world observations and measurements where structures and patterns emerged
But….still do not know for certain (Theory Dependence of Observation)
Yet…in the right direction – induction
Induction vs. Deduction
Lee’s Heterodox Model has built upon the Social Surplus Approach
Philosophy ought to imitate the successful sciences in its methods, so far as to proceed only from tangible premises which can be subjected to careful scrutiny, and to trust rather to the multitude and variety of its arguments than to the conclusiveness of any one. Its reasoning should not form a chain which is no stronger than its weakest link, but a cable whose fibers may be ever so slender, provided they are sufficiently numerous and intimately connected (Peirce, 1868)
Model as Method, Model as Abduction =
Model as Useful, Model as Tool
Sometimes we do not know how to weave the fibers in the thread; can use abduction
Abduction is a type of inference that generates a conjectured solution to a problem that is not readily traceable (Peirce, 1933)
It is ``a sudden advance towards the solution...[it is] a bright idea, a good idea, a happy thought, a brain-wave” (George Polya, 1945, p.146)
Abduction is an interruption of habitual thinking
Abductive inference can be triggered by:
Reorganizing, reshuffling, decomposing and recombining, through lateral thinking, through creative thinking, through brainstorming or even through the use of analogies
Michael Polanyi (1958) and Charles Wright Mills1(1959) some of the above technique as ``ransack[ing] our memory for any similar problem" (p.128) and ``get[ing] a comparative grip on the materials” respectively
Humble the Model = Model as Tool
General perceptions of Models and Modeling
At Best—viewed as a sense of accomplishment, rigorous
At Worst—viewed as a theory
To use model as a tool for theory development, it must be
subdued, it must be humbled
Opens the door to inquiry, specifically inquiry of the
presuppositions
Facilitates the abductive process
Empirically grounded modeling can be credible but only to a
degree
Empirically grounded modeling has value as a method;
applicable mathematical techniques do not negate this
End
Thank You