I just finished reading Harvard economics professor Dani Rodrik's new book, Economics Rules: The Rights and Wrongs of the Dismal Science. My overall impression was that it is lively, well-written, and completely understandable by readers of ordinary capability. The arguments he makes are cogent and well-conceived. Rodrik's book is a welcome corrective to the doctrinaire blather that we continually get from economists who should know better, but who are either too lazy or self-regarding to quit worshiping idols of their own creation. My personal view is that markets are human constructs, with all the flaws and foibles that we create for ourselves. The fact that some of these people resort to arcane mathematical symbols and runes when they can't make sense of themselves in a declarative sentence has become a scandal, especially in light of our experience over the past seven or eight years.
Prof. Rodrik is a specialist in international development and is an expert on developing logical models to explain the nuances and differences in economic behaviors used by state entities, groups, and individuals. His central premise in his book would be that conceptual models are as many as are necessary to identify the salient factors that govern economic behavior and that the modeling itself needs to correspond as closely as possible with the realities of economic behavior. In this respect Rodrik's approach close resembles that of a specialist in the life sciences, such as a botanist, whose work involves identifying, cataloguing, and differentiating among the major and minor characteristics of the species of the lifeforms with which they deal.
Unlike the physiognomy of lifeforms, economic modeling deals with concepts, some of which are hard to describe in plain language; so, not infrequently, economists utilize mathematical concepts and analytic techniques to explore the various behaviors of their theoretical constructs as to the ways they interact in response to internal and external pressures. They also use mathematics to clean up the untidiness of common language and to ensure that cardinal and subsidiary relationships are properly shown and that all necessary constituent components are properly accounted for. Regrettably, the mathematics sometimes takes on a life of its own, and for some, mathematical consistency sometimes takes precedence over observable reality. Other times, mathematical models, elegant as they are, come to conclusions that are absolutely dead wrong. It is not that complete and accurate information is not available; it simply may not fit the mathematical construct that the economist has created to support his conclusion. It is not for nothing, as the joke has it, that economists have successfully predicted nine of the last five recessions.
Frequently, economic theorists employ a variety of competitive strategies sometimes referred to as Game Theory to test their economic prognostications. The idea is not only to explain events that occurred in the past, but also to attempt to predict what might happen in the future based upon ongoing and future events if things go in accordance with patterns of predictive behavior.
I like the idea of using economic modeling, so long as the models themselves clearly reflect the salient forces, economic and otherwise, that control economic outcomes, including externalities and spillover effects. But there are dangers to this approach. They arise principally from a variety of causes, but the one we see most often, and not surprisingly in political rhetoric, is what some have called 'the overvalued idea'. The British philosopher Sir Isaiah Berlin addressed this phenomenon when he divided thinkers into two categories, those who are captivated by a single big idea, a grand vision – Karl Marx's critique of capitalism being a foremost example – in describing how the world works, whom Berlin dubbed 'hedgehogs', and those, whom he called 'foxes' who know many things. Foxes have no use for grand theories but rather who take a more modest approach in describing cause-and-effect relationships, often with the result that superficially similar events can be described in contradictory ways. The hedgehogs, with their unrelenting emphasis on overemphasizing the core tenets of their Big Idea tend to view the world through a single lens, even when the distortions inherent in that approach make their conclusions unreliable. By temperament, they are cautious in attributing grand hypotheses to events or processes that contain ambiguities of one sort or another, or which may contain unknown factors that influence the outcome is being examined. Foxes, of which Prof. Rodrik can justly claim to be one, examines the influences that many causative factors may have in describing and analyzing events. It's much harder work, but the results speak for themselves. Best of all, the more modest, modular approach that Prof. Rodrik advocates is less likely to suffer the public embarrassment that so many highflying, single-idea economists experience when their grand ideas crash and burn.
Prof. Rodrik is a member of a growing school of economists who is doing pioneering work in the area of behavioral economics, which combines economic theory with research-validated behavioral models that were developed by psychologists to explain cause-and-effect relationships in human behavior. The upshot appears to be that the logic of human behavior is not nearly as predictable as mathematical logic, but that the former prevails the vast majority of the time. The wants and needs of the human personality is what makes behavioral economics such a good explainer and predictor of economic events in much the same way that gravity so successfully explains many astrophysical matters, but is not the answer to every phenomenon that might be observed.
So to conclude, I congratulate Prof. Rodrik on a well-written book that makes its points nicely. The only thing I could ask is more of the same in greater schematic or analytical detail that would provide a taxonomy of analytical models arranged in their respective family trees and lines of inheritance and commonalities. It would be like creating a Venn diagram for each of the variants that he might want to consider. That might take some doing, but I think it would be well worth the effort. I am confident that real-world examples could be found to illustrate the main points of the discussion. Now that he has established that there are many models to describe economic behavior, there will be many readers who will be keen to see where he will go with this line of inquiry.
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