The Power of Models

The first time that I saw the circular flow model of the economy, I almost cried in disgust. To me, representing the entire economy with a couple of circles and arrows seemed overly-simplified, counter-intuitive, un-useful, and just generally stupid. Did I really need a textbook to tell me that the money I spend goes to business firms? Though rhetorical, I answered my question with an emphatic NO. And though people often call me a contrarian, I venture to say that this mind set is representative of the entire high school population.

However, as the year progressed, this once overly-simplified, counter-intuitive, un-useful, and just-generally-stupid model began to seem intuitive, useful, and, dare I say, even elegant. As I progressed throughout the year, I realized that the economy is not just complex, it's too complex. There are too many variables, too many factors that affect something as simple as a demand curve. The goal of the circular flow model was not to be obvious and useless, it was to condense the entire economy into a manageable package. And to you naysayers, sure, not everything in real life progresses as in the model--I could easily give my money to a friend or donate it to charity--but the ability to look at the essence, the bare minimum of the economy "ceteris paribus" is one that has been useful to me in the course of my economic study.

Indeed, many things in economics are deceptively simple. Take, for example, the economic principal that "people respond to incentives."

"Duh," you say, "that's obvious!" And yes, it is, if you only take the statement at face value. But it is surprising how many times seemingly intelligent people will act in blatant disregard of this principal that is so "obvious." At the same time that we are attempting to lift the economically challenged out of poverty, we hand out unemployment checks and enact tax brackets, which incentivizes the poor to stay poor. This is an example of the law of unintended consequences. But I digress.

The best way to understand the power of models is to look at pure sciences. Most models in pure science are simply theories--they are only accepted because they explain a series of phenomena convincingly and concisely. Some of these models are outright wrong. Yet, they are still used. A perfect example of this is chemistry's theory of the atom. It has been proven that electrons do not line up in perfectly symmetrical rings about the nucleus, yet this model is still taught in every introductory chemistry class across the world for the fact that it demonstrates the concept of atoms in a convincing, elegant, and simple way. In this way, economics is a science. It takes various social phenomena and attempts to explain them through the formulating of theories and models. As such, I see economics as much closer of a kin to science than to humanities.

So the next time that you see the circular flow diagram and roll your eyes in disgust, dismissing its value as overly-simplified,  just remember that its simplicity is not a product of torture, but one of necessity.