March of the Models by Niall Kishtainy

Source details

Economists moved from the literary, humanistic methods exemplified by Adam Smith’s 1776 The Wealth of Nations to concise journal articles “full of crisp equations.”
Later economists sought to pin down Smith’s metaphor of the “invisible hand” with highly abstract “general equilibrium” theory applied to simplified models of the economy.
The transition from classical to neoclassical approaches involved replacing rich, varied portraits of human motivations with simplified, stylized “economic agents” who make consistent choices.

François Quesnay (1758 Tableau économique)
- Drew on the circulation of blood to create the first economic model: a diagram of zigzags depicting the circulation of money and goods.
- Argued that “net product” from agriculture powered the economy and that high taxes on France’s peasantry reduced net product.
- Foreshadowed Keynes’ circular flow of income and the multiplier of the 1930s.
David Ricardo (early 19th century)
- Used simplification and assumption to build verbal models of the economy (e.g., varying land fertility, competition for land leading landlords to gain).
- Employed rigorous chains of logical implication to derive conclusions about distributional outcomes (landlords vs. workers and capitalists).
- Ricardo’s style impressed contemporaries and advanced a new standard of rigor and logic in economics.

Mary Morgan’s concept of “small worlds”: distilled, model-based representations of economic reality used to “inquire into” and “inquire with” models.
Edgeworth box (Francis Edgeworth)
- A rectangle representing allocation of two goods between two people, with indifference curves showing preferences.
- Demonstrates how trade can move an economy to a “socially optimal” outcome and isolates efficiency from distribution.
- Encodes the first welfare theorem and translates naturally into mathematical general equilibrium theory.
Marginalist revolution and calculus
- Introduction of calculus to represent marginal changes (e.g., marginal utility).
- Over the 20th century, the mathematical method spread to macroeconomics (from Keynes), growth theory (Robert Solow), industrial economics (game theory), and econometrics.

Critics (e.g., Joseph Schumpeter) argued that extreme abstraction can produce tautologies and omit important social reality.
The early 21st-century global financial crisis highlighted perceived failures of models that assumed “rational agents,” accused of missing irrationality and malfeasance in finance.
Edgeworth-box-style abstraction can excise messy histories of institutions and power determining distributional outcomes.
The “Ricardian vice”: the tendency to favor ingenious but potentially unrealistic models.

Remedies are not to abandon modeling but to use models more deliberately to support economics’ humanistic values.
Recent developments broadening mainstream economics:
- Behavioral economics: introduces psychological realism into models.
- Revival of historical, narrative, and critical approaches (example: Thomas Piketty’s 700-page Capital in the Twenty-First Century) demonstrating appetite for wide-ranging historical analysis.
Good economics should:
- Continue developing simplified theories that are useful.
- Strike a balance between models as intellectually fascinating objects and as instruments for understanding the “unwieldy chaos of economic reality.”

March of the Models by Niall Kishtainy, F&D Magazine, March 2024.

March of the Models
- March of the Models (Markdown version)
- March of the Models (PDF)