Friday, March 12, 2010

Economics = Poetry + Mathematics?

Quotation from

THE DEFLATIONSIT: How Paul Krugman found politics
by Larissa MacFarquhar
The New Yorker, March 1, 2010, pp. 38-49.

"Economic geography" is about regional specialties. It explains why a particular region gained a comparative advantage with a particular product and benefits from economies of scale-- by history and accident.

"I explained this basic idea" --of economic geography-- "to a non-economist friend," Krugman wrote, "who replied in some dismay, 'Isn't that pretty obvious?' And of course it is." Yet, because it had not been well modelled, the idea had been disregarded by economists for years. Krugman began to realize that in the previous few decades economic knowledge that had not been translated into models had effectively lost, because economists didn't know what to do with it. (p. 45)

Krugman is superb at deciding what to explain and what not to:

He [=Krugman] could take an intriguing notion that had come up in real-world discussions, pare away the details (knowing just what to take out and what was essential), and refine what was left into a clean, clever, "cute" (as he liked to put it), and simple model. "It's poetry," Kenneth Rogoff, an economist at Harvard says. (p. 45)

Economic models often explains some aspect of really really beautifully at the price of neglecting more important aspect.

"I think there's a pretty good case to be made that the stuff that I stressed in the models is a less important story than the things that I left out because I couldn't model them, like spillovers of information and social networks," he says. But failure to represent reality accurately is rarely a fatal flaw in an economics model -- what's valued is the model's usefulness as an analytic tool. (p. 45)

Sometimes we choose to be ignorant to look smart.


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