Why economist’s models don’t work well in real life

Their models are based on many assumptions, so it’s easier to reduce them to equations, which can be studied and manipulated.

This ” small-world ” simplified model is a fictional narrative, and its truth is found in its broad insights rather than its specific detail.

‘The representative agent’, ‘the consumer’ or ‘the firm’ in an economic model is not an actual person or business, but an artificial construct, every bit as much a conceit of the author as is Sherlock Holmes

We should be studying the world as it really is’. But a small-world model does not do that; its value lies in framing a problem to provide insights into the large-world problem facing the policy-maker and not in the pretense that it can provide precise quantitative guidance. You cannot derive a probability or a forecast or a policy recommendation from a model; the probability is meaningful, the forecast accurate or the policy recommendation well founded only within the context of the model .

If we don’t understand the limitations of these models, we will continue abusing and misusing them !

Notes from the book, Radical Uncertainty by Mervyn King

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