Paste your essay in here…Faced with the complexity of the world every science is compelled to employ methods of modifying or deforming it so as to make it or the image of it theoretically manageable and comprehensible"
Uskali Maki used this phrase on his paper 'on the method of isolations in economics' which I think fit perfectly for introducing the argument that it will be discussed in this paper.
I mentioned this sentence because whenever we try to explain some events of the real world we tend to idealize the situation with the intent to explain how that is happened, think about the financial crisis of 2008 nobody saw it coming but with a model we try to give a plausible understanding of the causal factors .
In the first part of the essay I will introduce what the 'Explanation paradox' is about and in the second part I will discuss the solution proposed by Maki.
But what is a paradox and how can we solve it? We have identified a paradox as made by some phrases that seem plausible from which you derive something that seems true but they are not applicable in the real world. There are two ways for solving it, firstly you show that it is not really a paradox there is no logical consistency as there is something wrong with the logic bases or secondly challenge one of the statement that I will try to explain in point two but in doing so we have reason to believe that one of them is false.
2. Statement Reiss's explanation paradox
The explanation paradox introduced by Reiss is composed by three statements:
1) Economic models are false
2) Economic models are nevertheless explanatory
3) Only true accounts can explain
The starting point is to explain a specific economic model and derive the causes, and then try to examine each statement one by one.
Reiss used Hotelling's law to try to explain what he means when the models are false but they are perceived as something actually explanatory.
The Hotelling's law begins with two firms in a situation of duopoly where they sell the same good which are similar in price in a distance defined as a straight line and he continue by saying if the price of one good increase the seller will not lose immediately the clients because there are factors to be taken into account such as the preferences of the consumer and by implying this the model concludes that one thing that could make the person change his mind and go the seller is found in the differentiation of the good but Reiss sustains that no model explain everything as a model take into account only a part of the real world.
An example in class we talked about Akerloff – market of lemons and how asymmetric information damage the market of used cars.
Asymmetric information about the quality of the goods traded in the market can cause problems and inefficiency because as Akerlof said the "the bad lemons will drive the good one out of the market"
He is making a point of the real world but using a model, a fictional market to explain what asymmetric information would cause.
Akerloff is fully aware that this is not a realistic model but it is concrete in the sense that is something familiar because maybe we know the market of used cars so from this model we can generalize the implication towards the real world
So when Reiss says that models are false he means that in the real world there is not such a thing as completely asymmetric information that would lead to the disappearance of the market of second cars and so they misrepresent their target because in an abstract model in our case the market of lemon, it uses some assumptions that are true for the model but are false in the target system of interest.
3. Maki argument about explanation paradox
There is a lot of falsity in economic models, an attempt to try to save the idea about truth that make causal relationship are argued by Nancy Cartwright, Dan Hausman and Uslaki Maki, each of them challenge Reiss' statement A by saying that a good model is able to tell some true and so derive causal stories.
The Maki's papers that I analyzed try to explain if scientific models can be true facing the problem of the deformation of reality as most of the time models are criticized to be too much unrealistic or abstract to explain what is happening on the real world.
Akerloff with his model Market of lemon probably yes, he is saying that there are situation in which a perfect competitive market and change one very assumption that is normally made (homogeneity of the goods) and perfect information keeping everything else fixed (ceteris paribus) we would obtained something else as the allocation of commodities is inefficient.
Change only one variable and see what happens, guarantees of developing countries causal claim if we introduce one the institutions we should expect an asymmetry that would consequently drop the level of trade.
That is the causal relationship in a standard competitive market: what we have to do is to check the truth of the model given the false statement in Akerloff's model.
In the paper 'models and the locus of their truth' he explain that scientists and philosophers consider the model just a model and not an instrument to derive the truth.
The paradox suggested by Maki could be summarized with three statements
a) models violate nothing but the truth
b) models violate the whole truth
c) nevertheless models might be truth
In the sense that if we isolate some characteristic of the world so violating 'the whole truth' and adding false assumption that is violating 'nothing but the truth', models can still be true about what they are trying to describe.
Akerlof's model (1970) the false assumption is made in a way tovmake us appreciate the differences by making the causal truth appear more clearly.
For Maki the solution to the statement a) Economic models are false, can be found in the method of isolation where some elements are not take into account when explaining the causal mechanism, he suppose that q1= f(p1) but in real life we know that the quantity of a good is actually influenced by the prices of similar product q1= f(p1,p2,p3…..pn) but Maki suggests that we use the first function every times we select some aspect of realty by ignoring other aspect to make our statement and truth clearer.
For example Akerlof supposed that in the market of used cars there were only four type but we know actually there are many other types in the real world but nevertheless he uses a limited number to make his model easier to understand, and by assigning a specific value we go one step forward that Reiss describe as Idealization.
Idealization is a subspecies of isolation, it is introduced to simplify the analysis mathematically by giving some specific value to the variable with the aim to simplify the ceteris paribus clause, they are assumptions composed of false statement in the sense that the philosopher of economics made them with the purpose to gain a better understanding of the world.
Sudgen argue the same thing, idealization is not bad thing if it is robust by saying this he means that if we relax some factors we would still have some similarities, when economists build their model they do make it similar to the real world and if we relax some variables we should obtain good results with the implication that the model is acceptable and truthful therefore the model should be credible that is explain what is really going on in the real world.
So he regards robustness as a tendency, going back to the Akerlof example we can conclude that asymmetry tends to lower the trading level.
Sudgen believe that a model is good because its credible but the problem of moving from the model to the real world is the inductive problem as any inductive statement will require a leap of faith that is the final step to the real world through empirical evidence, look at the model the criteria and empirical data plus the theory model to the real world.
4. Conclusions
To get out from the explanation paradox maybe the only solution is find in option A.
Reiss believe that models misrepresent reality because they fail to represent everything because for him a model represent objects in an idealized or impossible way, misrepresent the causal interactions between entities or it set up interactions and properties that do not actually exist.
I think that what Maki wanted to say is that the statement 'economics models are false' is incorrect in the sense that even if they contain some falsehood the result of the model could still be true.
This means that an economist employing the method of isolation can pursue the truth about the economy while having to live with false elements in his theory, in other words the pursuit of realisticness presupposes the acceptance of many kind of unrealisticness.
It follows that the notion of realisticness in the sense of truth about the isolated essence of the object under study has not been formulated with the meaning of 'essential truth' but it has to do with a comprehensive representation of the whole structure of principals and secondary factors.
An isolating theory or statement is true if it correctly represents the isolated essence of the object, otherwise it is false. the theory inevitably involves false assumption but this does not undermine the possibility that its fundamental message is true or close to the truth.