I’ve been thinking a lot about this old Paul Krugman post, in which he discusses how hard it is for many, even serious economists, to grapple rationally with the current world financial situation. He ascribes it as a need to see economics as a morality play that punishes wrongdoers. Others have pointed out that Krugman has been right on so many major issues, despite intense resistance not only from the political class but also other economists. And the funny thing is that his correct reading of the situation doesn’t make people stop and reevaluate their assumptions.
All of this leads me to think about the difference between stories and models. The human brain is made to understand the world in terms of stories. If we see two completed unrelated things together, the brain makes up a story to connect them. That’s exactly the source of the post hoc ergo prompter hoc fallacy. That’s why jury selection works. We can’t be entirely rational in most of our understanding of the world because it is too complex. So we have certain stories about how the world works, how people should and do interact, why things happen as they do. Stories are effectively simple models that should contain the most important elements of what is going on, models that operate correctly much of the time.
Real models are carefully crafted to contain all the important elements, so that they explain the world correctly most of the time. Models are too complex to hold in our heads. They are created and run, like a computer algorithms, and sometimes they predict things that our stories never would have. Models are agnostic–if they do mix in morality or emotion they do so in defined ways. And the construction of models is scientific–if the model doesn’t work, you refine it and run it again to see if you can make it cleave better to real world behaviors.
It seems to me that economics has become much more driven by stories than models. But perhaps this is always the way things have been. It used to be that people thought that there was a natural and correct price for everything. If bread was $3 a loaf, it was unnatural and immoral to charge more. Then the model of supply and demand was created, and because the model is simple enough to be a story, people now understand that if the wheat crop fails and people are vying for fewer loaves of bread, the price will go up. But for more complex phenomenon, people are willing to come up with wilder stories when their current stories don’t model the world or create emotionally unsatisfying explanations (or not even that much more complex–witness the need of even business journalist to seek explanation for increasing fuel prices in terms of inputs like refinery shutdowns or oil shortages instead of the natural and proper corporate desire to maximize profits). People don’t trust a scientific approach to economics because they think their story explains the world, data be damned.