## March of the Models by Niall Kishtainy

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## Bibliographic details
- Authors: NIALL KISHTAINY
- Published: March 4, 2024

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### Transformation from word-based political economy to mathematical discipline
- 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.

### Early modelers and the origins of economic modeling
- 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.

### “Small worlds,” diagrams, and the move to mathematics
- 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.

### Critiques of modeling and limits of abstraction
- 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.

### Contemporary broadening and suggested remedies
- 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.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2024/03/march-of-the-models-niall-kishtainy_