Sunday, September 4, 2016

Don't People Read Solow Anymore?

Unlearning Economics had long blog post this morning, reviewing Dani Rodrik’s Economics Rules at Pieria. As one might guess from his name, Unlearning Economics thinks Rodrik is too attached to neoclassical economics and insufficiently supportive of pluralism. I generally, disagree with him. I am an economic historian and an institutional economist, but I am fundamentally a traditional economist. My favorite class to teach is Principles of Microeconomics. I like using very simple models to demonstrate things like the influence of barriers to entry and product differentiation on the performance of firms, or the influence of elasticity on who bears the burden of a tax. I often struggle to see the added value of, for instance, behavioral economics. But what struck me about the post was this passage.

“Though he doesn’t claim so himself, Rodrik’s methodological approach could be considered a more sophisticated restatement of Milton Friedman’s famous paper The Methodology of Positive Economics, which similarly sought to defend economic models from charges of unrealism and irrelevance. While Friedman argued that the unrealism of a theory’s assumptions does not matter as long as the theory makes correct predictions, Rodrik adds nuance to this by stating that while unrealistic assumptions are in general necessary and useful, some assumptions are so important that they must be amended to be more in line with reality. Rodrik calls these ‘critical assumptions’, stating that “an assumption is critical if its modification in an arguably more realistic direction would produce a substantive difference in the conclusion produced by the model.” By doing so he distinguishes his argument from the seeming ‘anything goes’ implications of Friedman’s essay.”

What struck me about the passage was that the author seemed unaware of Robert Solow’s work. I have not read Rodrik’s book yet, but I searched the book on line and was a little surprised that it did not appear to mention Solow either.
This is the introduction of Solow’s 1956 “A Contribution to the Theory of Economic Growth.”

In other words, you have to make simplifying assumptions, but that does not mean that you can assume anything you want. The first footnote is important as well.


What is or is not a crucial (or critical) assumption depends on what question you are trying to answer.

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