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The Useful Economic Model: Social Surplus Modeling and the Inductive Approach

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Information about The Useful Economic Model: Social Surplus Modeling and the Inductive...
Economy & Finance

Published on October 15, 2014

Author: pkconference

Source: slideshare.net

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Grad Students Honoring Fred Lee session at 12th International Conference
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1. The Useful Economic Model Social Surplus Modeling and the Inductive Approach Nicola Matthews UMKC

2. Contents:  Introduction  Modeling and Credibility  Nature of the Model  Role of Ontology-Epistemology  Model Credibility  Social Surplus Models  The Useful Model

3. Intro.  Modeling is both an orthodox and heterodox approach and is dated back to the Classical economists of the 1700s  Modeling is the what conventional economists do: “If it isn’t modeled, it isn’t economics, no matter how insightful” (Colander, 2004)  The practice and type of modeling in standard economic theory is non-controversial  The practice and type of modeling in heterodox economic theory is controversial

4. Cont. Intro 3 Heterodox Perspectives Towards Modeling (Lee, 2014) 1. Models are mathematically overly complex and do not reflect the real world, thus they should be avoided as a choice of method 2. Models are credible, if they are built on heterodox theory 3. Models are credible and can contribute to the advancement of economic theory, if they are empirically grounded

5. What Is an Economic Model?  A model is an abstract intellectual representation of a system, a miniature world  A system is set of interacting and interdependent elements which together constitute a whole; a system may be nested and its size can vary  Systems are typically complex and difficult to analyze  Closed-modeling and Linear modeling limit the amount of assistance the model can provide  Thus, modeling is a systems approach towards science that is, it is a METHOD towards science  An advantage of using economic models as a method is that they can be manipulated to reveal structural relationships  2 General Approaches Toward Model construction  Deductive  Inductive

6. Conventional, Deductive Economic Models  Currently one dominant form of reasoning in conventional model construction—deduction  Begin with a series of presuppositions based on “reductive” and “idealized” framework (ex. individualism, rational acting, profit seeking, etc.)  Create axioms based on presuppositions  Deduce model from these premises; choice of math technique assumed prior to presuppositions  Note: there is no ‘discovery’ process in the formation of the model, although there is a minimal amount of induction  Original assumptions are not derived in a vacuum but based partially on observation  Problem: used reductionism and idealization (like a caricature, blow up one feature)  Model becomes distorted  Reductionist modeling

7. Alternative, Inductive Economic Model  Inductive reasoning towards model construction  Begin with a series of presuppositions based on cumulative observations (capitalist state, agency, class analysis)  Make observations, collect data, categorize  Sort, combine and filter data based on ``recipe making” framework  Build model on categorical data; primary math technique depends on applicability and assessed after data collection  Discovery process begins at the start of model construction; the type of structures are not assumed a priori  Limited distortions  Constructivist modeling  One should subordinate deduction to induction, and discover the empirical regularities first...(Kaldor, 1985)

8. Role of Ontology-Epistemology in Model Building  The world and the universe are real and can be measured but…..  All science is practiced through the human habitual mind and its associated culture/history/politics, making direct (appearances) and indirect (essence) measurements imprecise  How do we know this? Failure of theories and the existence of paradigms

9. Role of Ontology-Epistemology in Model Building  Obstacles towards precise science  Neurath’s Boat—science conducted ON Neurath’s boat, can’t bring the boat to land for complete overhaul  The “active” element of science is how we rebuild and navigate the boat not that the objective world exists (passive)  No such thing as a view from nowhere (Barker and Feiner, 2004; Nelson, 1996)  Multiple sets of conditions which may yield same or very similar results (Lowe, 1936)  Duhem-Quine Theory—impossible to test a single hypothesis in isolation = logical-positivism untenable  Theory dependence of observation—the actual process of observing, collecting, recording and categorizing data is not free from subjectivity-bias as it is dependent upon theories to do so (Hanson,1965 [1958]) (more relevant to inductive modeling)  Deductive reasoning weak, one break in chain, entire theory invalid (Peirce, 1868)

10. Model Credibility  Conventional Deductive Models  Credibility relies on predictive power; Positivism  No criteria to model building apart from linked-chain deductive reasoning  Subjective benchmarks for prediction (Lee, 2014)  Model is intended to support the underlying axioms and math, NOT to be used as a method in theory development  Result: Reductionist Model-Theory  Duhem-Quine Thesis = logical positivism not credible whether the data is correlated to the real world or not  Singular deductive approach is weak  Suffers from subjectivity-bias; the choice of tool prior to the development of axioms; the model behaves as the theory not as a method

11. Model Credibility  Heterodox Inductive Models  Credibility relies on real world observations and measurements  Model is intended to aid in the discovery process and assist in theory development  Result: Constructivist Model-Method  But still….. Theory Dependence of Observation, Neurath’s Boat  No Guarantee that observations, measurements and categorization represents ultimate reality of the objective world

12. 3 Heterodox Perspectives (Lee, 2014) 1. Models are mathematically overly complex and do not reflect the real world, thus they should be avoided as a choice of method 2. Models are credible, if they are built on heterodox theory 3. Models are credible and can contribute to the advancement of economic theory, if they are empirically grounded

13. Surplus Models: Sraffa  Sraffian Model  Presuppositions:  Circular production (basic commodities go into all production, indecomposable)  Homogenous labor  Fixed technical coefficients  Convergence (uniform rates of profit)  Real wages (commodity numeraire)  Closed System  Value determined by social system of production  Fixed Technology  Given Surplus (difference between the social product and the total amount of intermediate inputs)  Class Analysis  Capitalist State  No Agency  Results:  Inverse relation between wages and profits  Role of Prices = are exchange ratios of commodities relative to the numeraire, coordinate economic activity

14. Sraffian Surplus Model  Credibility of Sraffian Model  Model is semi-deductive, semi-inductive  Quasi model-theory, model-method  Sraffa closes his system by assuming a given surplus, a given technical condition and no agency  Surplus is a residual, meaning there is no explanation for the level and composition of the social product  Able to solve for prices in the system independent of Supply & Demand  Critique of the Marginal Theory of Value and Distribution  Model devised to support theory not to discover it  Model is a theoretical exposition  Taking a host of givens, certain properties fall out of the model

15. Surplus Models: Frederic S. Lee  Lee’s Model  Presuppositions:  Circular production (basic commodities go into all production, production indecomposable); input-output  Heterogeneous labor  Fixed technical coefficients  No convergence (parameters are not fixed)  Nominal wages  Open System  Value determined by social system of production  Surplus not given  Class Analysis  Capitalist State  State Money  Agency  Results:  Surplus = determined by capitalist investment decisions and government spending decisions  No inverse relation between wages and profits  Role of Prices = serve to reproduce the system (going-concern prices), not to coordinate the system  Matrix Algebra

16. Lee’s Heterodox Surplus Model  Credibility of Lee’s Model  Model is primarily inductive; constructed from the ground-up  Surplus is not a residual, meaning there is an explanation for the level and composition of the social product  Investment and government decisions determine surplus, surplus determines the social product  Price theory explains how prices are determined (based on budgeted output) and their role (going-prices) but nothing more  Model created to assist in the discovery process and theory development  Model credible in that it was built from real world observations and measurements where structures and patterns emerged  But….still do not know for certain (Theory Dependence of Observation)  Yet…in the right direction – induction

17. Induction vs. Deduction  Lee’s Heterodox Model has built upon the Social Surplus Approach  Philosophy ought to imitate the successful sciences in its methods, so far as to proceed only from tangible premises which can be subjected to careful scrutiny, and to trust rather to the multitude and variety of its arguments than to the conclusiveness of any one. Its reasoning should not form a chain which is no stronger than its weakest link, but a cable whose fibers may be ever so slender, provided they are sufficiently numerous and intimately connected (Peirce, 1868)

18. Model as Method, Model as Abduction = Model as Useful, Model as Tool  Sometimes we do not know how to weave the fibers in the thread; can use abduction  Abduction is a type of inference that generates a conjectured solution to a problem that is not readily traceable (Peirce, 1933)  It is ``a sudden advance towards the solution...[it is] a bright idea, a good idea, a happy thought, a brain-wave” (George Polya, 1945, p.146)  Abduction is an interruption of habituated thinking  Abductive inference can be triggered by:  Reorganizing, reshuffling, decomposing and recombining, through lateral thinking, through creative thinking, through brainstorming or even through the use of analogies  Michael Polanyi (1958) and Charles Wright Mills1(1959) some of the above technique as ``ransack[ing] our memory for any similar problem" (p.128) and ``get[ing] a comparative grip on the materials” respectively

19. Humble the Model = Model as Tool  General perceptions of Models and Modeling  At Best—viewed as a sense of accomplishment, rigorous  At Worst—viewed as a theory  To use model as a tool for theory development, it must be subdued, it must be humbled  Opens the door to inquiry, specifically inquiry of the presuppositions  Facilitates the abductive process  Empirically grounded modeling can be credible but only to a degree  Empirically grounded modeling has value as a method; applicable mathematical techniques do not negate this

20. End Thank You

21.  Neo-c about how behavior relates to prices, output and distribution through positive and negative forces  Heterodox not about behavior; about Y, P  Distinguish between what models should be and what they are  Choose one tool (differential calculus)  Monistic epistemology (becomes habituated)  Development of theories to support and validate use of the tool  Models built on presumed axioms (no discovery process, no criteria to model building apart from linked-chain deductive reasoning)

22.  Principles to practicing semi-objective science 1. Be conscious of the fact that science is practiced subjectively 2. Use different methods and approaches to interrupt habitual thinking

23. What are Economic Models?  Many approaches to the scientific enterprise (Morgan, 2014):  Mathematical Postulation and Proof  Experiment  Hypothetical modeling  Taxonomy  Statistical  Evolutionary  These can be reduced to two general approaches:  Inductive  Deductive  Science toggles back and forth between these approaches  Model construction may incorporate many of these methods of reasoning

24.  3 Perspectives (Lee, 2014) 1. Models are mathematically overly complex and do not reflect the real world, thus they should be avoided as a choice of method 2. Models are credible, if they are built on heterodox theory 3. Models are credible and can contribute to the advancement of economic theory, if they are empirically grounded Models that are empirically grounded are our best way forward

25. Social Surplus Models  Classical Social Surplus Model  Assumptions:  Linear production  Homogenous labor  Price convergence  Real wages  Closed  Labor Theory of Value  Tech?  Class Analysis  No State theory?  No Agency  Results:  Surplus = consumption goods  Inverse relation between wages and profits  Role of Prices =

26. Social Surplus Models  Marxian  Assumption:  Circular production  Homo Labor?  Price convergence  Real Wages  Closed  Labor Theory of Value  Fixed Technology  Class Analysis  Capitalist State  No Agency  Results:  Surplus = surplus labor  Inverse relation between wages and profits  Role of prices =

27. Social Surplus Models  2-Sector Burchardt-Kalecki  Assumptions:  Quasi-circular production  Homo Labor?  Price convergence?  Nominal Wages  Closed?  Capital Theory of Value?  Fixed Technology?  Class Analysis  No State theory?  No Agency  Results:  Surplus = machines?  No inverse relation between wages and profits  Role of Prices =

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