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