Boldyrev, I. A. (2012). Philosophy of Science or Science and Technology Studies? Economic Methodology and Auction Theory. International Studies in the Philosophy of Science, 26(3), 289–307. https://doi.org/10.1080/02698595.2012.731732
Today (25.11.2019), TINT is organizing a little event about the 2019 Nobel Prize in Economics (see the poster below). For those who are unable to attend, I prepared a quick reading list that contains some articles about the 2019 Prize as well as some critical perspectives about the work of Nobel Laureates. Of course, this is not an exhaustive literature list. Nevertheless, I hope it is useful.
First, the documents that you can find on the Nobel Prize website. They give a very good overview of the work of Abhijit Banerjee, Esther Duflo, and Michael Kremer:
I prepared this list for my Philosophy of Economics students (Erasmus School of Economics, Erasmus University Rotterdam). Most books in this list should be interesting even if you do not like philosophy of economics, but they are related to the topics we have discussed in class. Of course, they will be even more interesting if you put your philosopher of economics hat on. The list consists mostly of light books that you can read on the beach, in a hammock, on top of a mountain, or wherever you are fancying for the holiday. They are good books, nevertheless. I hope you will find this list useful and enjoy reading these books.
The reading list
The first group of books in the list is about economics, economists, and how models are used. The first book, Dani Rodrik’s Economics Rules gives a wonderful and easily digestible overview of how economics works. Rodrik is a prominent economist and in this book, he defends economics against criticism. However, he also criticises economists for misusing their models. Dani Rodrik’s overview closely relates to our discussion concerning models and explanation in economics. This is a very good book. The second book by Diane Coyle, The Soulful Science, gives an overview of what economists actually do. Although it is a bit outdated, its overview of research areas in economics is very useful—especially if you are considering pursuing a career that involves research. Roger Backhouse’s The Puzzle of Modern Economics paints a picture of economics as a powerful science by discussing how economic models are used by economists in practice. This is not a bestseller. In fact, many people do not know that this book exists, but it is a very good book. The last book in the list also discusses how economic models are used in practice. Alvin Roth received the Nobel Prize in Economics in 2012. His book, Who Gets What—and Why, gives a highly readable and moderately enjoyable story of how economists design markets. The whole book about to the following question we discussed during the lectures: what are the conditions under which we can carry the lessons we learn from models to the real world?
Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik
The Soulful Science: What Economists Really Do and Why It Matters by Diane Coyle
The Puzzle of Modern Economics: Science or Ideology? by Roger E. Backhouse
Who Gets What ― and Why: The New Economics of Matchmaking and Market Design by Alvin Roth
Next in our list are two books that are closely related to the several topics we have discussed in class. Both talk about the crowding-out effect of monetary incentives, touch on criticisms concerning rational choice and game theory, discuss several experiments, etc. Both books also discuss the moral and policy implications of economic models and the assumptions we employ. The Moral Economy requires a more careful reading. Thus, I suggest starting with The Why Axis.
The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens by Samuel Bowles
The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life by Uri Gneezy and John List
Now, a bunch of books on behavioural economics. I am sure that many of you have read some of these books, but I would like to mention them anyway. I think both Nudge and Misbehaving are very readable introductions to behavioural economics, so they are definitely recommended. If you did not read it already, read Daniel Kahneman’s Thinking, Fast and Slow this summer. It is a very good book. But if you’d like to read something lighter to begin with, consider Dan Ariely’s Predictably Rational. It is a fun book. In fact, although they are not in my list, consider reading Ariely’s other books too. While reading these books you will remember several topics from our philosophy of economics course, or at least many things should sound familiar :)
Misbehaving: The Making of Behavioral Economics by Richard H. Thaler
Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein
Thinking, Fast and Slow by Daniel Kahneman
Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely
If you are up for some serious reading on philosophy of economics, the following books should satisfy your desire. The first book by Robert Sugden (The Community of Advantage) wonderfully combines almost everything we discussed during the semester: welfare economics, behavioral economics, normative analysis, invisible hand, incentives, theories of justice, moral limits of markets etc. It is a new book, and if you would like to catch up with recent debates among economists, this is the book to read. If you would like to make some heavy lifting in philosophy of economics then you should also read the book by Hausman et al. It is heavier than other books. So, it is definitely not for the sunbed.
The Community of Advantage: A Behavioural Economist’s Defence of the Market by Robert Sugden
Economic Analysis, Moral Philosophy, and Public Policy (3rd Edition), by Daniel Hausman, Michael McPherson, and Debra Satz
If our discussion on the moral limits of markets was interesting, I suggest the following two books. They are easy to read, but also critical. Test your philosophical argumentation skills as economists against these books!
What Money Can’t Buy: The Moral Limits of Markets by Michael J. Sandel
Why Some Things Should Not Be for Sale: The Moral Limits of Markets by Debra Satz
If you’d like to brush up your economics while critically thinking about economics, I suggest the following books. Economics in Two Lessons is fairly new. I did not finish reading it yet, but it looks like an excellent book. The other two books are also fun to read.
Note that the last book in the list is special. Thomas Schelling’s Micromotives and Macrobehavior is one of my all-time favorites. If you read it, you will be amazed by the clarity of Schelling’s thinking. Although it does not explain economic concepts like the other books, it is about how you can understand the world with very simple models. It is a must read for all economics students.
Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly by John Quiggin
Economics: The User’s Guide: A Pelican Introduction by Ha-Joon Chang
Economics Without Illusions: Debunking the Myths of Modern Capitalism by Joseph Heath
Micromotives and Macrobehavior by Thomas C. Schelling
As an economist, you need to know more about inequality, international trade, economic growth, and many other topics. Here are four books that I think will help you follow the debates concerning important topics. I would like to mention One Economics, Many Recipes separately because it is the most relevant from the perspective of philosophy of economics. It shows how to use models of economic growth in practice, paying close attention to economic methodology.
Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic
Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik
One Economics, Many Recipes: Globalization, Institutions, and Economic Growth by Dani Rodrik
Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson
Finally, a book about writing. Read it to improve your writing.
Economical Writing: Thirty-Five Rules for Clear and Persuasive Prose (3rd edition) by Deirdre N. McCloskey
I think this list should get you through summer, but if you want more look at this reading list. If you would like to do some more serious reading, there is a reading list at the end of our syllabus.
Synthese Special Issue WHAT TO MAKE OF HIGHLY UNREALISTIC MODELS?
Guest Editors: N. Emrah Aydinonat, Uskali Mäki, and Till Grüne-Yanoff
What to make of highly unrealistic models? This is one of the big questions in contemporary philosophy of science, especially in philosophy of economics and biology.
We consider two set of issues particularly relevant here. The first has to do with the ways in which highly unrealistic models should be characterized and the numerous ways in which models can be unrealistic. The key concepts here include those of representation and target, truth and falsity, abstraction and isolation, idealization and simplification. Recent literature on models exhibits conceptual and terminological diversity and disagreement in characterizing unrealistic models. Different authors use different names to refer to highly unrealistic models, including ‘toy model’, ‘fictional model’, ‘minimal model’, ‘non-representative model’, ‘model without a target’, ‘substitute model’. Moreover, they sometimes use the same name to refer to different types of models. Neither the precise meanings nor the relations between these notions are clear in the literature.
The second set of issues has to do with the functions and uses of such unrealistic models. What purposes can they serve, and what purposes are actually pursued when using them? The main body of literature points to representational quality as grounding explanatory capacity despite abstraction, isolation, simplification and idealization. Others dispute this idea. Moreover, highly unrealistic models can serve other possible functions, next to their explanatory uses. Obviously, debates concerning the appropriate uses of highly unrealistic models need some tidying up.
The Special Issue What to Make of Highly Unrealistic Models aims to sort out some of the ambiguities and confusions in the literature and to contribute to a better understanding of the interpretations and uses of highly abstract and idealizing models. We are particularly interested in contributions that (i) clarify the meaning of commonly used terms such as toy model, minimal model, fictional model, substitute model, etc, and that (ii) clarify the arguments for and against such models having explanatory import or some other epistemic or non-epistemic function. Papers that focus on the uses (and misuses) specific (set of) models in scientific practice are particularly welcome.
Please submit your paper using the editorial manager at https://www.editorialmanager.com/synt/ by 31 January 28 February 2019. When the system asks you to “Choose Article Type”, select “S.I. Unrealistic Models” in the pulldown menu.
ABSTRACT: Economists have long been criticized for their use of highly idealized models. In Economics rules: Why economics works, when it fails, and how to tell the difference [Oxford: Oxford University Press, 2015] Dani Rodrik responds to this criticism by offering an account of models that emphasizes the diversity of models in economics. Rodrik’s account presents a rare opportunity for economists and philosophers of economics to engage in mutually beneficial exchange that could better our understanding of the power and limits of economics, and the rights and wrongs of the dismal science. The symposium on Rodrik’s Economics Rules is the first attempt to seize this opportunity.
Keywords: economics, philosophy of economics, criticism of economics, history of economics, Dani Rodrik, symposium
JEL Codes: B40, B41
Everyone is familiar with the (aesthetically) unpleasant walking-paths on public green fields. Usually, around these fields there are constructed paths for the service of the beloved citizens. However, citizens seem to deviate from these designed paths and take shortcuts passing through the green fields, through the zones they should not pass. The outcome of this behaviour is the death of the plants and the emergence of paths on these fields. Is there a good and acceptable explanation of why these walking-paths emerge? What kind of an explanation would be acceptable?
One scenario about the emergence of these paths may be the following. The first person to take a shortcut through the aforementioned field believes that his behaviour will do no harm to the green field and proceeds to take the shortcut. Obviously, he will in
fact have a negligible impact on the field. Subsequently, a second person, without being aware of the fact that he is the second person, takes the same shortcut with similar thoughts in mind. However, although the second person’s impact is still negligible, in time the damage on the plants accumulates. After some time, if some other people take that very same shortcut the damage will soon become visible. As a consequence, even if some earlier citizens did not intend the outcome of their behaviour, the damage to the plants will become visible; and hence the emergence of the path.
The plants may recover if everybody ceases to use the path. However, people generally continue taking shortcuts given the fact that they see the damage previously done by others. What are they thinking? Do they intend to bring about and maintain a visible path with no plants on it? Probably (and hopefully) not! Their reasoning is perhaps the following: ‘Even if I do not take the shortcut, some others will, thus the path will stay there anyway. Then, why should not I take the shortcut?’ So in this scenario, although individuals do foresee the outcome of their behaviour, they think that the creation of the path would be inevitable, given that everyone takes the shortcut. Moreover, if one particular individual is the only one taking the shortcut, the consequence of her action would be negligible. Thus, she takes the shortcut without intending to create such a nasty path. In this scenario the damage done to the plants has reinforced other people
to use that same path for it already exists. Thus, unless someone intervenes, the path is there to stay.
Would this scenario explain the emergence of these walking-paths? It sounds reasonable, but definitely not everyone is likely to accept this explanation. In fact, this was just one possible explanation. By introspection some of you may think that there may be other motivations behind taking these shortcuts. You may argue that people do not think about the consequences of their action at all when taking these shortcuts or you may think that these paths are intentionally created. For example, you may argue that one of those paths emerged due to a poorly planned city park which resulted in people intentionally taking a particular shortcut to show their dissatisfaction with the planning of this particular public space.
The above is yet another possible way to explain the emergence of these paths. More importantly, this explanation contradicts the previous general scenario. Thus one is tempted to ask: ‘unless some evidence is provided why should we believe in such speculations?’ If we would ask different people to explain this fact, we would get many different explanations. Many of these explanations would contain a story that makes the emergence of the path plausible. Hence, we would be left with many different (but not necessarily mutually exclusive) speculations or conjectures instead of ‘proper’ explanations. The fact that there are walking paths on public green fields is ostensibly simple to explain; however, it seems we are left only with conjectures.
Broadly speaking, conjectures and their explanatory characteristics are the subject matters of this book. It examines one particular type of explaining practice in social sciences, namely explaining the emergence of institutions (e.g., conventions and norms) and macro-social structures as unintended consequences of human action, from a methodological and philosophical perspective.
Explanations of ‘unintended consequences’ show numerous similarities with the above example of walking-paths on public green fields. The basic similarity however is that they seem to lack empirical content and as such they can be criticised as being simple conjectures with no explanatory value. This book illustrates the merits and demerits of such explanations by examining some of these attempts to explain institutions and macro-social structures as unintended consequences.
This is a book about ‘unintended consequences of human action’ and the mechanisms that bring about these consequences. It investigates the explanatory role of the models that characterise institutions and macro-social structures as unintended consequences of human action.
Many economists argue that certain institutions and/or social structures, such as money, language, rules of the road, fairness, segregated city patterns, and localisation are unintended consequences of human action. Similar ideas can be found in other disciplines, such as in philosophy of language (e.g., Lewis 1969), in political philosophy (e.g., Nozick 1974), in linguistics (e.g., Keller 1994) in philosophy of science (e.g., Hull 1988), in sociology (e.g., Merton 1936, Boudon 1982). The above list, which can definitely be extended, illustrates the importance of the problem of explaining unintended consequences in social sciences and in (political) philosophy. Popper (1962: 342) acknowledged the significance of unintended consequences for social sciences by arguing that the explanation of unintended consequences of human action is ‘the main task of theoretical social sciences.’ Yet unintended consequence is a vague concept and as such it may denote many different things. In this book we will be concerned with a subset of the set of possible unintended consequences; the one which is of paramount importance to economics in explaining institutions and macro-social structures. The rough description of this subset is as follows (see Mäki 1990b, and Chapter 2 & 5):
Individuals do not intend to bring about a social phenomenon (e.g., a social institution, or a macro-social structure).
The consequence of their action is a social phenomenon (i.e., an institution or a social structure)
One individual alone is not enough to bring about the ‘social’ consequence—that is, independent actions of similar (in the sense that they do not intend to bring about the consequence) agents are needed.
An explanation of unintentionally hurting your hand, or an explanation of the unintended consequences of a government tax plan does not fall under the above definition and hence are not examined in this book. The former is not examined because the consequence is not a social phenomenon (violates condition b—and c depending on the case); the latter is not examined because the intention is about a social institution (condition a is violated). Given our definition, ‘unintended consequence’ is a crucial component of the ‘theory of spontaneous order’, of Adam Smith’s ‘invisible hand’, of Carl Menger’s notion of ‘organic phenomena’ and of ‘invisible-hand explanations’. It lies at the core of many contemporary models of institutions and macro-social structures.
The theory of spontaneous order finds its origins in 18th century Scottish Thought and it is defined with its characterisation of the social order as ‘unintended consequence of countless individual actions’ (Hamowy 1987: 3). Adam Smith, the founder of modern economics, who was part of this tradition, presented a metaphorical statement of ‘spontaneous order’ with the ‘invisible hand’. Menger, on the other hand, presented a closely related account of spontaneously created social institutions where he considered them as being similar to ‘organic phenomena’. Many social scientists and philosophers followed Smith and Menger by trying to answer versions of their questions about institutions and macro-social structures. Their aim was to show how institutions and social structures could emerge (or persist) without any design. Generally it is believed that neoclassical economists followed Smith’s lead and tried to prove his insights. However, neoclassical economists’ approach is only one of the possible ways to interpret Smith’s insights. There are at least two different interpretations of the ‘invisible hand’: the one that stresses ‘processes’ and the other that emphasizes ‘end-states’ (see Chapter 5). Neoclassical economists’ approach is an end-state interpretation: The ‘invisible hand theorem’ in economics stresses the consequences (e.g., optimum allocation of resources), rather than the processes that bring about these consequences.
This book is mainly concerned with what may be called the process interpretation of the invisible hand. Under this interpretation the ‘invisible hand’ represents causal and structural relationships and processes that may bring about unintended social consequences. Explanations under this particular interpretation can be gathered under the notion of ‘invisible-hand explanations’. An invisible-hand explanation aims to show the process that brings about the unintended consequence. Rather than merely focusing on the properties of the end-state (e.g., equilibrium), it explicates the way in which the end-state may be reached (Nozick 1974, Ullmann-Margalit 1978). It is possible to find many examples of such process models in the contemporary literature. The most prominent examples are game-theoretic models of institutions that show how institutions may emerge (or persist) as an unintended consequence of human action (e.g., Bicchieri 1993, Sugden 1986, Ullmann-Margalit 1977, Young 1998 etc.). Another area where unintended consequences are important is the emerging field of agent based computational economics (e.g., Axelrod 1997, Axtell et al. 1999, Epstein and Axtell 1996, Marimon, McGrattan et al. 1990 etc.). The pioneers of the game-theoretic literature acknowledge David Hume, Adam Smith and Carl Menger as their forefathers (see Lewis 1969, Sugden 1986, Ullmann-Margalit 1977, Young 1998) and similarly agent based computational economists generally acknowledge their intellectual debts to Adam Smith and Thomas Schelling (e.g., see Epstein and Axtell 1996, Tesfatsion 2002).
Carl Menger’s (1892a) story of the emergence of a medium of exchange, Thomas Schelling’s (1969, 1971, 1978) models of residential segregation, Peyton H. Young’s (1993a, 1996, 1998) model of emergence of the rules of the road and Joshua Epstein’s and Robert Axtell’s (1996) ‘Sugarscape’ (where they grow artificial societies from the bottom up) are well known examples of such models. These examples range from verbal models (or stories) to formal game theoretic and computational models. Despite the differences in their methods and research tools there is an important similarity between them. Each shows how institutions and macro-social structures may emerge (or persist) as an unintended consequence of the (inter)actions of individuals. In order to do this, the authors conjecture (in the latter case with the help of computers) about the conditions under which individual actions may lead to the social phenomena in question. The common feature of these examples is that the observed social phenomenon (i.e., institution or macro-social structure) is ‘produced’ within the model-world by conjecturing about the initial conditions (e.g., environmental conditions, characteristics of the agents etc.) that may bring about the social phenomenon in question as an unintended consequence of the interactions of the agents. Moreover, these models are typically ahistorical in the sense that historical facts about the social phenomenon in question do not seem to play any role in these models. They are general and thus they are supposed to be applicable to all instances of the social phenomenon in question in different times and places. These models illustrate the possible ways in which certain mechanisms may interact (or may have interacted) to produce the types of institutions or macro-social structures in question.
More strikingly, some of these models seem to challenge the common sense and the historical knowledge about these social phenomena. For example, while many believe that money is a matter of design and was issued by central authorities in the past, Menger argues that it was brought about by the (inter)actions of individuals who were pursuing their self-interests without the intention to bring about a commonly acceptable medium of exchange. Schelling, on the other hand, shows that if individuals cannot tolerate living as an extreme minority in their neighbourhood, then residential segregation cannot be avoided even if they are happy in a mixed neighbourhood. Of course this seems to go against our belief that strong discriminatory preferences (e.g., racism) and economic factors (e.g., wealth differences among ethnic groups) are the main causes of residential segregation. A more recent example is Young’s model of the rules of the road. He shows that the rules of the road may emerge with the accumulation of the precedent as an unintended consequence of the (inter)actions of the individuals. This model also goes against the belief that the rule that specifies on which side of the road one should drive was designed and imposed by central authorities like other traffic rules. Finally, Epstein and Axtell show how under certain conditions fundamental social structures and group behaviours (e.g., institutions, segregation, cooperation) could emerge from the micro level. In this example, social phenomena are quite literally grown by the authors.
All of the aforementioned examples pose difficult questions for social scientists and philosophers. How could these models explain anything if they are simply speculations about the initial conditions under which social phenomena may be brought about as unintended consequences? In other words, we understand that these authors are able to ‘produce’ a certain social phenomenon in their model world as an unintended consequence of the interactions of model agents. However, given that these models are so abstract, ahistorical and speculative, how could they be used to explain something about the real world?
The philosophical and methodological challenges posed by these models created many debates in related areas. These debates constitute a significant part of the controversies about the role of abstract modelling in social sciences. The related question here is whether we can learn anything about the real world by studying highly abstract models. This is one of the basic questions of philosophy of science. The usual defence of scientific models is the claim that they isolate the relevant parts of the real world and that such realistic representations of the real world give a close to true account of the phenomenon in question when other things are absent or constant. Some economists also use the argument from realistic representation in defence of their models. For example, Young (1998: 10) argues that the assumptions of his models ‘represent a fairly accurate picture of reality.’
However, the main criticism to these models is that they ignore the relevant facts, such as the history of the social phenomenon in question—and therefore they do not realistically represent the relevant parts of the real world. For example Menger’s ‘the origin of money’ does not take into account the way in which money was issued and introduced in history. Moreover, Schelling’s model of segregation seems to sidestep two of the most important facts about segregation—the presence of strong discriminatory preferences and the role of economic factors. Thus the argument concerning realistic representation either has to demonstrate why history is irrelevant, or to show the complementarity between these models and history.
As mentioned above, these models start with the problem (e.g., that there is residential segregation) and try to produce the conditions under which this problem may emerge as an unintended consequence of human (inter)action. This methodology invites criticism for the following two reasons. Firstly, it seems to be one sided, for it tries to construct a model that shows something that the author wishes to see (e.g., residential segregation as an unintended consequence). Secondly, it may be argued that if one devotes enough time and energy it should be possible to construct a reasonable model that is able to show whatever we wish.
Given the focus of this book the relevant place to start seeking solutions to these problems is the literature on ‘invisible-hand explanations.’ It is argued in this literature that invisible-hand explanations are valuable independently from their truth for they explicate the process that may have brought about the social phenomenon at hand (Ullmann-Margalit 1978). This suggests that these models are valuable even if they are false, or even if they do not get the facts right. It is argued that explication of a hypothetical process that is sufficient to bring about the social phenomenon in question is valuable for its own sake. However, it is not explained why this explication would be valuable, or in what sense it would help us understand the real world. Simply this argument does not help us much unless it is explicated! This is merely a statement of the author’s intuition about the value of these ‘explanations’. Economists use these models because they believe that they are valuable. For example, Robert Sugden (2000) argues that the reason we believe that these models are conveying a true message about the real world is that we find them ‘credible’—by way of examining Schelling’s segregation model. He argues that these models are credible like a good story or a novel. Sugden’s basic argument boils down to the statement that we think these models are valuable because we find them plausible. This argument cannot demonstrate the value of these models unless it explains why they are plausible and in what sense plausibility of a conjectural process sheds light on the real world.
Another type of justification comes from computer simulations. It is argued that artificial environments (models, computer models) are used to gain insights about the social phenomenon in question (e.g., see Gilbert and Doran 1994a, Liebrand et al. 1998) or that models and computer simulations are like experiments where we test our ideas (e.g., see Drogoul and Ferber 1994) or that they are similar to thought experiments (e.g., Liebrand 1998, Liebrand et al. 1998). Briefly it is argued that models and simulations help us in finding out the necessary conditions under which certain results (e.g., segregation) are brought about (within the computer model) and in easily exploring the properties of these model environments. In this account these models are not for explanation but for exploration. However, this does not answer our question about moving from the model world to the real world. Specifically, a satisfactory defence of these models would have to tell us how to translate the results of the model in order to interpret the real word.
The discussions about the interpretation of game theory are also relevant in this respect. As mentioned above, some economists like Young use the argument from realistic representation to justify game-theoretic models. Yet not every game theorist would agree with this. One of the most prominent scholars of this field, Robert Aumann (1985) (also see van Damme 1998) argues that realisticness of the models does not matter that much. According to him, the conclusions are much more important: If the model is applicable to many situations and is productive, then it is a good model. He also argues that game theory (and other sciences—in his opinion) ‘is not a quest for truth, but a quest for understanding.’ He says, ‘science makes sense of what we see, but it is not what is “really” there’ (van Damme 1998: 181, 182). Aumann basically argues that game-theoretical models help us in putting together what we observe in a coherent framework, that they help us in fitting things together. He also argues that they lead to prediction and control. However, if we accept Aumann’s interpretation of game theory (and science) we are still faced with the following questions: Firstly, if the models of institutions and macro-social structures do not represent the reality how could they lead to prediction and control, and most importantly to understanding? Secondly, Aumann emphasises the productiveness and applicability of the models. Yet the current state of the modelling of institutions and macro-social structures (as unintended consequences) cannot be considered to have many real world applications or satisfactory predictive power. Should we then conclude that these models are not valuable?
It is the argument of this book that all of the interpretations expressed above convey justifiable intuitions about these models. That is, ‘realisticness’, ‘explication’, ‘credibility’, ‘exploration’, and ‘fitting things together’ are all parts of a framework that would help us in making sense of these models. However, there is no existing framework where these things are presented coherently and satisfactorily. It is the main task of this book to develop such a framework and to use it to gain new insights into the contemporary literature that characterises institutions and macro-social structures as unintended consequences of human action.
PLAN AND SUMMARY OF THE BOOK
To be able to develop such a framework one has to understand what these models really accomplish. The most obvious way to do this is to carefully examine these models and their methodology. But before doing this, a clarification of the very idea of ‘unintended consequences’ is needed. The Second Chapter analyses and explicates the concept of unintended consequences to prevent misunderstandings that may be caused by its vagueness. In particular, the subset of the set of possible unintended consequences, which is relevant for understanding the models of institutions and macro-social structures as unintended consequences, is specified.
In Chapters Three and Four, the most prominent examples of such models, Menger’s ‘origin of money’ and Schelling’s ‘checkerboard model of segregation’ are examined. It appears they are natural candidates for several reasons. First of all, these models are paradigmatic examples of ‘explaining unintended consequences of human action’ and of invisible-hand explanations. Contemporary authors consider these models as conveying the key insights about their subject matter and about the way in which related issues should be handled. Their models are the predecessors of contemporary research in modelling institutions and macro-social structures as unintended consequences of human (inter)action. Menger is considered to be one of the founding fathers of the theoretical approach to institutions as opposed to the historical approach (e.g., see Rutherford 1994, Schotter 1981). Schelling’s model is one of the main predecessors of agent-based computer models (e.g., see Epstein and Axtell 1996, Blume and Durlauf 2001, Pancs and Vriend 2003, Rosser 2000, and Casti 1989) and it is considered to be the paradigmatic example of explaining with mechanisms in social sciences (e.g., see Hedström and Sedberg 1998). Briefly, since their models play an important role in the history of ‘explaining unintended consequences of human action’ understanding Menger’s and Schelling’s models should shed light on the related areas of contemporary research.
Another good reason to start our examination with these models is the fact that both Menger and Schelling are explicit about their methodology. In their work, they explain why they prefer the type of research they are engaged in. Moreover, in the literature there is a considerable amount of philosophical discussion about their methodology. As previously mentioned, their works are predominantly considered to be paradigmatic examples of invisible-hand type of ‘individualistic’ explanations (e.g., see Nozick 1974, Pettit 1996, Rosenberg 1995, Rutherford 1994, Ullmann-Margalit 1977). It is also common to examine the recent game-theoretical models of institutions alongside invisible-hand explanations (e.g., see Langlois 1986bc, Mäki 1993, Rosenberg 1994, Rutherford 1995, Vanberg 1994). It has also been stated that the authors of these models (including the authors of the computational models) consider themselves as following the invisible-hand tradition, or providing the mechanisms behind the invisible hand. For these reasons there is a considerable amount of resources that may help us in our quest. Thus we are more likely to find hints about the nature of similar models by starting our examination from Menger and Schelling’s models and their relation to the invisible hand. In addition, this choice makes it easier to see the common misunderstandings about ‘explaining unintended consequences of human action’ for the literature on invisible hand type of ‘individualistic’ models is abound with controversies. The Fifth Chapter undertakes the task of examining ‘invisible-hand explanations’ in light of the chapters on unintended consequences, and Menger and Schelling’s models. This examination sheds light on the nature of invisible-hand explanations. Particularly, an important misunderstanding about the relation between ‘unintended consequences’ and the ‘invisible hand’ is removed. By way of removing this misunderstanding the chapter prepares the ground for examining contemporary examples of invisible-hand explanations.
Menger and Schelling’s models and insights were reconsidered and remodelled by contemporary authors. For this reason there is an explicit link between these models and the contemporary literature we wish to understand. This gives us a chance to evaluate the progress of this ‘research program’. For example, some of the papers directly related to Menger’s account of the medium of exchange can be listed as follows: Duffy and Ochs (1999), Gintis (1997), Kiyotaki and Wright (1989), Marimon, McGrattan et al. (1990), Schotter (1981), Selgin and Klein (2000), Townsend (1980), Young (1998). Some of the follow-ups to Schelling’s segregation model are the following: Clark (1991), Epstein and Axtell (1996), Sander et. al. (2001), Young (2001), and Zhang (2000, 2004ab). By examining these reconsiderations we may indeed see whether there is any progress or whether contemporary tools (e.g., game theory and computer modelling) improve the way in which we understand and explain the origin of money and segregation. Accordingly, the Sixth Chapter examines the more recent models of the emergence of money in detail, while recent reconsiderations ‘residential segregation’ are used as examples in Chapter Seven.
Particularly, in Chapter Six it is argued that we should not evaluate models that characterise macro-social phenomena as unintended consequences in isolation from other related models of the same phenomenon. In order to substantiate this proposition, recent reconsiderations of Menger’s explanation of the origin of money are examined. The chapter shows how Menger’s intuitions are further explored in the modern literature in various ways. It is argued that these recent models test the logical soundness of Menger’s arguments but do not bring us any closer to the real world. Recent models of the origin of money do not introduce new mechanisms but test the plausibility of the mechanisms that were suggested by Menger. While these models increase the plausibility of the idea that media of exchange may be brought about unintendedly, it is argued here that the idea that fiat money may be considered as an unintended consequence of human action does not appear to have a firm basis. Moreover, the chapter examines and demonstrates the relation among these models. This examination supports the thesis that different models have different functions and different models of the same phenomenon may be considered as forming a loose framework for explaining particular instantiations of it.
Chapter Seven explores the philosophical literature on models and explanation to provide a firmer basis for the arguments of the previous chapters. In particular, firstly, the concept of partial potential explanations is explicated. Secondly, it is argued that models help us explain by way of providing a proper way to conceptualise the phenomenon under question. Yet this further implies that the relationship between the model world and the real world is rather complex. Thirdly, it examines this complex relationship by way of discussing the related philosophical literature in light of the previous chapters. Fourthly, it is argued that similarity between models that are examined in this book and the real world amounts to the existence of certain (known) tendencies (individual mechanisms) in the model world. For this reason these models may be interpreted as revealing the possible ways in which these tendencies may interact, even if some of the assumptions of these models do not hold. Fifthly, the chapter emphasises the importance of exploration. Particularly, it shows how one may gain confidence about the implications of an existing model by way of further exploring its premises and results. To do this the chapter discusses reconsiderations of the checkerboard model. Finally, the chapter fortifies the idea that no model of this sort should be evaluated in isolation from other related models.
Chapter Eight examines the modern game theoretical models of conventions in light of the ideas developed in previous chapters. These models may be considered as attempts to provide a general theory of the emergence of conventions. The chapter reviews some of the existing game-theoretic literature on conventions and shows that existent conventions and norms, particular institutions and history are crucial for explaining the emergence of conventions. Six arguments are put forth in the chapter: (i) Static models of coordination (and convention) are concerned with examining the conditions under which certain outcomes are plausible, rather than explaining why and how such outcomes are brought about. Hence such models are in line with the end-state interpretation of the invisible hand. (ii) Dynamic models of coordination provide partial potential (theoretical) explanations of the emergence of coordination and conventions. Hence such models are in line with the process interpretation of the invisible hand. (iii) None of these models rule out the possibility that coordination and conventions may be brought about intentionally. Rather they examine whether successful coordination and conventions may emerge as unintended consequences of human action. The interpretation of these models as providing partial potential explanations is well in line with this remark. (iv) Explaining particular cases (e.g., explaining the emergence of a particular convention) necessitates empirical research. Nevertheless, general models of coordination and conventions need not be empirical or historical. (v) The collection of different models of coordination and conventions may be considered as providing a general framework for empirical research and providing singular explanations. (vi) Game-theoretic models in general may be interpreted as providing a framework for analysis, rather than providing ultimate explanations concerning social phenomena and individual behaviour. The Final Chapter concludes the book with questions for further research.
The Invisible Hand in Economics How Economists Explain Unintended Social Consequences INEM Advances in Economic Methodology London: Routledge, 2008.
This is a book about one of the most controversial concepts in economics: the invisible hand. The author explores the unintended social consequences implied by the invisible hand and discusses the mechanisms that bring about these consequences.
The book questions, examines and explicates the strengths and weaknesses of invisible-hand type of explanations of emergence of institutions and macro-social structures, from a methodological and philosophical perspective. Aydinonat analyses paradigmatic examples of invisible-hand explanations such as Carl Menger’s ‘Origin of Money’ and Thomas Schelling’s famous checkerboard model of residential segregation in relation to contemporary models of emergence of money and segregation. Based on this analysis, he provides a fresh look at the philosophical literature on models and explanation and develops a philosophical framework for interpreting invisible-hand type of explanations in economics and elsewhere. Finally, the author applies this framework to recent game theoretic models of institutions and outlines the way in which they should be evaluated.
Covering areas such as History, Philosophy of Economics and Game Theory, this book will appeal to philosophers of social science and historians of economic thought as well as to practicing economists.
Conjectural models aim at devising the initial conditions required for individual actions to generate a given social phenomenon as unintended consequence. Social scientists make frequent use of this modeling technique. Indeed the list of those who have applied it – from Smith to Menger, from Schelling to Lewis – reads likely a veritable “who’s who” of the last 250 years of social sciences. Yet the question of how these purely speculative models may actually enjoy any explanatory power with respect to real world phenomena has only rarely been tackled. Aydinonat’s outstanding work fills this gap by thoroughly investigating the philosophical and methodological challenges posed by conjectural models and by developing a coherent and persuasive framework to account for the role of abstract theorizing in the social sciences. The book is a candidate to become compulsory reading for methodologists and philosophers of science, as well as for those economists who take seriously the issue of their models’ epistemological foundations.
by Robert Sugden:
There is a long tradition in the social sciences, going back to Adam Smith, of explaining social phenomena as the unintended consequences of human actions. In this illuminating book, Aydinonat investigates the structure of such explanations and the nature of the claims that can legitimately be derived from them. In the process, he analyses some of the classic ideas in social theory – Smith’s invisible hand, Carl Menger’s explanation of the emergence of money, Thomas Schelling’s analysis of racial segregation, and David Lewis’s theory of convention – with acuity and subtlety. This is a significant contribution to the philosophy of social science which will also engage the interest of reflective economic theorists.
by Edna Ullmann-Margalit:
The book’s choice of the topic with which economists and philosophers could start engaging each other cannot be improved on. The notion of the invisible hand, and the type of explanations it gives rise to, of social patterns of behavior as unintended consequences of individual actions and interactions, are just right for the cross-fertilization between a variety of philosophical ﬁelds, prominently including the philosophy of science, on one side, and economic theory, prominently including game theory, on the other. Moreover, the experience of reading this book leaves the reader feeling that the choice of author for this undertaking can hardly be improved on either.
Trained both in economics and in philosophy, Emrah Aydinonat has formal and technical skills as well as a historical sensibility and a keen intellectual curiosity, and he has the tenacity to go on digging for gem-stones where previous visitors to the same terrain seem content with surface pebbles. Setting himself the task of developing a framework capable of making sense of the marketplace of extant models, and then to use this framework to ‘gain new insights into the contemporary literature that characterizes institutions and macro-social structures as unintended consequences of human action’ (p. 7), he has produced a book that is pleasingly disciplined and well organized.”
“Aydinonat’s book provides a historical context in which the notion of the invisible hand emerged, and analyzes the concepts and the distinctions behind this notion at such a high resolution that no scholar is likely to revisit this territory ever again. Any and every future discussion of the invisible hand – and there are sure to be such – will from now on make the obligatory reference to this book and simply take off from it. (Read the review)
by Mark Blaug
This is a splendid book about a controversial concept in economics, the notion that there may be unintended benevolent social consequences of actions undertaken by individuals for entirely private reasons and that these consequences are not merely benevolent but are capable of producing an order that appears to be designed although it is actually the product of spontaneous action. (Read the review)
by Wade Hands:
In summary, I found Aydinonat’s book to be a very important contribution to the literature. This is not to say that I would not quibble about specific details of his argument – but it does provide a very useful, and quite coherent, framework for thinking about the explanatory power and adequacy of invisible hand-type explanations. Such explanations are so pervasive in economics – for some they define economics – and yet we previously lacked any coherent framework for situating them within the broader context of scientific explanations in general. Aydinonat has provided us with a badly needed framework for investigating these issues. The Invisible Hand in Economics will not be the last word on invisible hand explanations, but it will become an obligatory reference point for any future research on the subject, and I recommend it to anyone who would like to better understand this very important class of models. (Read the review)
by Warren Samuels:
This study by a sensitive and imaginative intellect is a substantive contribution to the literature developing the meaning of the concept of ‘‘the invisible hand’’ while simultaneously attempting to establish how interpretation can be structured to convey ‘‘understanding’’ albeit not ‘‘truth.’’ (Read the review).
by Anna Alexandrova:
Where do social institutions and phenomena come from? A venerable tradition in economics seeks to explain some of these institutions and phenomena, for example, money, traffic rules, racial segregation and many others, using a concept of invisible hand. Such explanations show a phenomenon to be an unintended outcome of a multitude of actions and interactions of individual persons. In a book based on his doctoral dissertation, Emrah Aydinonat seeks to a) give an account of what sort of social phenomena are susceptible to this sort of explanation, b) evaluate the success of some of the most famous explanations of this type, and along the way, c) draw lessons for philosophical accounts of formal models in economics. In many ways, this book represents philosophy of economics at its finest. It is impeccably informed on the present state of economics, sensitive to the history of the discipline and full of interesting and thoughtful philosophical analysis. A significant problem, however, is that the central notion of the paper – partial potential explanation – does not receive an appropriate articulation. After presenting Aydinonat’s views, I explain the problems and why they matter. (Read the review)
ABSTRACT. This paper discusses the epistemic import of highly abstract and simplified theoretical models using Thomas Schelling’s checkerboard model as an example. We argue that the epistemic contribution of theoretical models can be better understood in the context of a cluster of models relevant to the explanatory task at hand. The central claim of the paper is that theoretical models make better sense in the context of a menu of possible explanations. In order to justify this claim, we introduce a distinction between causal scenarios and causal mechanism schemes. These conceptual tools help us to articulate the basis for modelers’ intuitive confidence that their models make an important epistemic contribution. By focusing on the role of the menu of possible explanations in the evaluation of explanatory hypotheses, it is possible to understand how a causal mechanism scheme can improve our explanatory understanding even in cases where it does not describe the actual cause of a particular phenomenon.
Citation: Ylikoski, Petri & N. Emrah Aydinonat. 2014. “The Diversity of Models as a Means to Better Explanations in Economics.” Journal of Economic Methodology, 21 (1), 19-36. https://doi.org/10.1080/1350178X.2014.886470
ABSTRACT. In Economics Rules, Rodrik [(2015). Economics rules: Why economics works, when it fails, and how to tell the difference. Oxford: Oxford University Press] argues that what makes economics powerful despite the limitations of each and every model is its diversity of models. Rodrik suggests that the diversity of models in economics improves its explanatory capacities, but he does not fully explain how. I offer a clearer picture of how models relate to explanations of particular economic facts or events, and suggest that the diversity of models is a means to better economic explanations.
KEYWORDS: Theoretical models, explanation, diversity of models, how-possibly reasoning, functions of models