Computing the Perfect Model: Why Do Economists Shun Simulation?

Abstract

Like other mathematically intensive sciences, economics is becoming increasingly computerized. Despite the extent of the computation, however, there is very little true simulation. Simple computation is a form of theory articulation, whereas true simulation is analogous to an experimental procedure. Successful computation is faithful to an underlying mathematical model, whereas successful simulation directly mimics a process or a system. The computer is seen as a legitimate tool in economics only when traditional analytical solutions cannot be derived, i.e., only as a purely computational aid. We argue that true simulation is seldom practiced because it does not fit the conception of understanding inherent in mainstream economics. According to this conception, understanding is constituted by analytical derivation from a set of fundamental economic axioms. We articulate this conception using the concept of economists' perfect model. Since the deductive links between the assumptions and the consequences are not transparent in ‘bottom-up’ generative microsimulations, microsimulations cannot correspond to the perfect model and economists do not therefore consider them viable candidates for generating theories that enhance economic understanding.

Bridging the Gap between Economic Modelling and Simulation: A Simple Dynamic Aggregate Demand-Aggregate Supply Model with Matlab

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