I started reading Ariel Rubinstein’s Economic Fables. Before reading his description below of what an economic model is, keep in mind that he is one of the world’s foremost game theories, and a former President of the Econometric Society.
Economic theory formulates thoughts via what we call “models.”
The word model sounds more scientific than the word fable or tale, but I think we are talking about the same thing. The author of a tale seeks to impart a lesson about life to his readers. He does this by creating a story that hovers between fantasy and reality. It is possible to dismiss any tale on the grounds that it is unrealistic, or that it is too simplistic. But this is also its advantage. The fact that it hovers between fantasy and reality means that it can be free from irrelevant details and unnecessary diversions. This freedom can enable us to broaden our outlook, make us aware of a repressed emotion and help us learn a lesson from the story. We will take the tale’s message with us when we return from the world of fantasy to the real world, and apply it judiciously when we encounter situations similar to those portrayed in the tale.
In economic theory, as in Harry Potter, the Emperor’s New Clothes or the tales of King Solomon, we amuse ourselves in imaginary worlds. Economic theory spins tales and calls them models. An economic model is also somewhere between fantasy and reality. Models can be denounced for being simplistic and unrealistic, but modeling is essential because it is the only method we have of clarifying concepts, evaluating assumptions, verifying conclusions and acquiring insights that will serve us when we return from the model to real life.
What I love about this description of models as fables is that it removes the excessive scientific pretensions of economics models and beautifully explains what it is that models do for us and why they are necessary and important. This also helps make economics more accessible – if you like reading or watching Harry Potter than there might be something for you in economic models.
I would pair Rubinstein’s description of economic fables with one of my favourite Keynes quotes:
Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory of fluctuating so as to develop a logical way of thinking about the latter.