Realism vs. Instrumentalism in Economic Models - Philosophical Concept | Alexandria
Realism versus instrumentalism in economic models: This enduring debate confronts the fundamental nature of economic models: are they simplified representations striving to approximate the truth about how economies function, or are they merely tools, judged solely by their predictive power, regardless of whether their assumptions reflect reality? The heart of the matter questions if economic models should be assessed by their correspondence to the world or by their utility as forecasting devices. Some mistakenly believe the dichotomy is a modern issue, but its roots delve deep into philosophical inquiry.
The genesis of this intellectual tussle can be traced back to debates surrounding scientific methodology in the 19th century. Though not explicitly framed within economics, early arguments about the legitimacy of idealizations in physics – are abstract, frictionless systems ‘real’ in an important sense? – resonate with the core tensions. While pinpointing an exact "first" reference is elusive, the burgeoning positivist movement of the early 20th century, with its emphasis on empirical verification and observable phenomena, provided fertile ground for instrumentalist views to take hold. This period, marked by turbulent economic shifts and the rise of sophisticated statistical analysis, saw economists increasingly focused on quantifiable results.
The 20th century witnessed the formalization of these opposing viewpoints. Milton Friedman's influential 1953 essay, "The Methodology of Positive Economics," became a flashpoint. Friedman famously argued that the "more significant" a theory, the more unrealistic its assumptions. Critics countered that models divorced from real-world foundations risked generating misleading or even harmful policy prescriptions. This sparked widespread discussion, with figures like Paul Samuelson challenging the instrumentalist stance and advocating for models grounded in greater empirical validity. The rise of behavioral economics in recent decades further complicated the picture. By incorporating more psychologically realistic assumptions, it attempts to reconcile predictive accuracy with a richer understanding of human behavior, blurring the lines of the traditional divide.
Today, the tension between realism and instrumentalism continues to shape the development and interpretation of economic models. From macroeconomic models used to forecast economic growth to microeconomic models analyzing individual choices, the question of how to balance simplicity, accuracy, and realism persists. Are these models merely elegant devices for generating predictions? Or do they offer valuable, albeit imperfect, insights into the inner workings of a complex and ever-changing world? The ongoing discourse invites us to examine our own assumptions about the nature of economic knowledge and the role of models in shaping our understanding of reality.