Wednesday, October 22, 2008

Where do they come up with these things?

In the previous post I complained about the poor state of some statistics. I think, in general, economists do a better job of avoiding a lot of statistical issues than most as we are so worried about causation.

One thing I think we do much, much worse than other researchers though is modeling. While our models are often complicated and full of a lot of interesting math, the actual questions they ask, and they way they go about answering them, is sometimes ridiculous. Take the work of Edward Prescott, 2004 Nobel Prize winner, professor at my undergraduate institution ASU, and proponent of dynamic macroeconomic modeling, which basically assumes an economy is composed of one infinitely lived person that pre-chooses his optimal consumption and work over this infinite period. I can't believe anyone thinks, or has ever thought, this sounds reasonable, yet it is the basis of all modern macroeconomics.

Or take a paper to be presented at the upcoming American Economics Association conference in San Francisco, and forthcoming in the journal AEJ: Economic Policy, that models squatters behavior in slums. Like the other (few) models of slum dwelers, the paper assumes people are making an optimal choice over income, preferences and propensity to be caught.

Unlike other models, this paper finds that squatters "squeeze" the formal market and raise the price of titled land. This comes from a few important assumptions, such as land is limited, squatters use up land that the formal market would want, and they are organized enough to regulate themselves from getting too big.

In an early post I suggested I would look into the issue in Gulu, where IDPs have been forced to settle near the cities. I couldn't find much evidence, and I became increasingly convinced squatters are taking up land no one in the formal sector wants, even at near zero cost.

When I emailed one of the authors, he readily admitted there is no evidence of such "squeezing" and sent me an empirical part of the paper that finds no significant evidence, and only very weak support for the idea, that the journal editors had asked the authors to remove. But this lack of real world evidence does not seem to be causing anyone to rethink the model.

The author ended his email to me with the comment that if I don't like the model, I should come up with one of my own. Fair enough. Its easy to complain, but hard to come up with solutions.

But the problem still remains: a model that doesn't base itself in reality amazes me, though its common in economics.

Imagine if the natural sciences acted this way. Our leading theory of gravity may be based on a series of invisible tubes holding us down. Or some nut might have come up with string theory.

1 comment:

newyorklenny said...

Given my recent exchange with Edward Prescott, it's pretty hard to think that he is reasonable.