Why Economic Models Can’t Provide a Realistic Picture of Human Behavior

While in the natural sciences a laboratory experiment can isolate various elements and their movements can be followed through, there is no equivalent in the economic discipline. The introduction of econometrics and model building is an attempt to produce a laboratory where controlled experiments can be conducted.

The idea of having such a laboratory is very appealing to economists and politicians, since once the model is built and endorsed as a good replica of the economy, politicians can evaluate the outcomes of various policies.

This, it is argued, will enhance the efficiency of government policies and thus lead to a better and more prosperous economy. It is also suggested that the model can serve as a referee in validating various economic ideas.

Apart from assessing the impact of various policies, the other purpose of a model is to provide an indication regarding the future.

By means of mathematical and statistical methods, a model builder establishes relationships between various economic variables.

For example, personal consumer outlays are related to personal disposable income and interest rates, while fixed capital spending is explained by the past stock of capital, interest rates, and economic activity. A collection of such various estimated relations—i.e., equations—constitutes an econometric model.

A comparison of the goodness of the fit between the dynamic simulation and the actual data is an important in assessing the reliability of a model. (In a static simulation, the model is solved using known lagged variables. In a dynamic simulation, the model is solved by employing its own generated lagged variables).

The final test of the model is its response to a policy variable change, such as an increase in taxes or a rise in government outlays. By means of a qualitative assessment, a model builder decides whether the response is reasonable or not. Once the model is successfully constructed, it is ready to be used.

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Πηγή: mises.org