A plea for realistic assumptions in economic modelling


Abstract
The use of unrealistic assumptions in Economics is usually defended not only for pragmatic reasons, but also because of the intrinsic difficulties in determining the degree of realism of assumptions. Additionally, the criterion used for evaluating economic models is associated with their ability to provide accurate predictions. This mode of thought involves –at least implicitly– a commitment to the existence of unvarying invariant factors or regularities. Contrary to this, the present paper presents a critique to the use of invariant knowledge in economics. One reason for this analysis lies in the fact that economic phenomena are not compatible with the logic of invariance, but with the logic of "possibility trees" or "open-ended results". The other reason is that the use of invariant knowledge may entail both external validity problems and negative exposures to a "black swan". Alternatively, an approach where models are understood as possible scenarios is proposed. It is argued that the realism of assumptions is crucial here, since it helps to ascertain the degree of resemblance between the different models and the target system.
Keywords Milton Friedman   economic models   invariance   assumptions   prediction
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DOI 10.1387/theoria.18133
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Thinking About Mechanisms.Peter K. Machamer, Lindley Darden & Carl F. Craver - 2000 - Philosophy of Science 67 (1):1-25.
Making Things Happen. A Theory of Causal Explanation.Michael Strevens - 2007 - Philosophy and Phenomenological Research 74 (1):233-249.
The Dappled World: A Study of the Boundaries of Science.Nancy Cartwright - 2003 - Philosophy and Phenomenological Research 66 (1):244-247.

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