Disclaimer: The views and opinions expressed by this author are their own and do not represent the official position of the Barbados Today.
by Adrian Sobers
“Finally, this method can show us where the math in economic models is bogus.” – (Antifragile, Nassim Taleb)
Robert Skidelsky (What’s Wrong with Economics?) explains the centrality of models to economics: “In today’s classroom, students are fed models: the better the university, the more complete their drilling in the conventional models. The basic model is that of a perfectly competitive economy, in which prices adjust the preferences of perfectly informed buyers and sellers to each other. Students must be taught to learn such models, not question them.” If the students don’t question, the public should, for it is we who bear the brunt of this drilling.
The problem with economic models, is that they represent closed systems, and, as Skidelsky correctly points out, “to model an open system [reality] as though it were a closed system ‘introduces a damaging rift between ontology and epistemology – i.e. between the way the social world actually is, and the way it is represented in economic models. Once in place, the rift cannot be healed.’” This rift causes us anger as it causes people economic pain. The model can be “right” on paper but have different/unexpected outcomes in a world dominated by uncertainty.
Nassim Taleb (The Black Swan) also speaks to this, “Also when I was railing against models, social scientists kept repeating that they knew it and that there is a saying, ‘all models are wrong, but some are useful’— not understanding that the real problem is that ‘some are harmful.’ Very harmful.”
Which brings us to a public lecture given in September 2018, by the late, former Prime Minister, Professor Owen Arthur titled, “The IMF and the Caribbean: New Directions for a New Relationship.”
Read the entire speech if you have never done so. It resonates even more in 2020. Take this bit, for example, “First, an IMF programme is not a panacea intended to bring intense pleasure. It is still very much a remedy which entails the application of tough, painful measures.
As such, the best way a country should deal with the IMF is to so manage its affairs as not to have to be forced to engage in a borrowing relationship with the institution.” But let us
not get distracted.
Speaking about balance of payments, Mr Arthur said, “Based on the work of its own economists led by J.J. Polak, the IMF developed and for a considerable period based its financial programmes with countries on models that treat the balance of payments solely as a monetary phenomenon. […] The quantative targets that were at the core of Barbados Standby Arrangements in 1982 and 1992 were based upon the application of the Polak model to Barbados’ economic circumstances.”
He continued, “While that formula is a tautology, it was not a fully explanatory model of things that can cause balance of payment position.”
After giving an example, he made a point that stuck with me as I revisited this, “The rigid application of the demand compression models that ensued from the Polak approach did not yield the desired results in places where they were applied over an extended period almost as an act of religious faith, such as the many programmes with Jamaica beginning in the late 1970s.”
He ended this thought, “It is the recognition of this relative failure that has led to changes in the content of the IMF program.” Some of the changes included accommodating “new important variables which affect a country’s balance of payments, its prospects for growth and its international competitiveness in general.” It is commendable that the IMF changed course after their models did not yield the desired results (which is no surprise to us, given what we now know about said models).
More concerning to the average business and household, however, is the continual (daresay, stubborn?) reliance on models that do not accurately map reality given the subject matter of economics (namely, fallible, flawed, and fallen humans).
It is why I have respect for Keynes the probabilist, but precious little for Keynes the economist. But to reiterate, this is nothing “against” economists. “Keynes’s attack on the orthodoxy of his day”, writes Mr Skidelsky, “was an attack not on the competence of economists but on their methodology.”
Similarly, Skidelsky presents a much needed case for the “radical rethinking of its methodology today.” To navigate the pandemic, we all need to do more than wear masks; we also need to take off our blinders and deal with problems the pandemic has exposed and exacerbated.
In “Capitalism After the Pandemic”, Mariana Mazzucato ends by suggesting that normal is broken and the new goal is to “build back better.”
No such thing will happen unless we first acknowledge and then address our philosophical problems. A little epistemic humility might be a good place to start.