Fault Lines: How Hidden Fractures Still Threaten The World Economy - Plot & Excerpts
Many commentators have gone overboard in poking fun at economists’ models, deriding them as oversimplified. Others wonder about the excessive mathematical complexity of some modeling, and yet others combine the criticisms by arguing that human behavior is too complex to be captured by mathematical models. The most realistic model would be one that details all individuals and their whimsical behavior, and all institutions, but it would be hopelessly complex and of little value in analysis. The whole point of economic modeling is to create useful simplifications of the economy that allow us to analyze what might happen under varying policies and conditions. The test then is whether the model is a useful simplification or an oversimplification. Many past macroeconomic models had a single representative agent making all decisions. The representative-agent models were easy to work with and did offer useful predictions about policy, but they took for granted the plumbing underlying the industrial economy—the financial claims, the transactions, the incentive structures, the firms, the banks, the markets, the regulations, and so on.
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