- When you think about what the field of economics is about,
it is quite daunting.
An economy is made up of millions or even billions of actors
organized in incredibly complex ways.
Write down, this is complex real-world
and each of the actors, human beings or organizations,
these are incredibly complex.
A human brain.
I can't predict what you're going to do the next second
much less what you're going to do
the next day or the next year
and imagine trying to make insights
about what millions or billions of people will do
but the field of economics has borrowed an idea
from other fields.
So for example, in chemistry,
chemists have tried to understand at a high level,
well, how do molecules in a container behave?
Let's say molecules of gas.
Well, you could imagine if you have a container here
with trillions upon trillions of molecules,
this is incredibly complex
but by making some simplifying assumptions
about the type of interactions these particles will have
or don't have, they can come up with models
like the ideal gas law which you might be familiar with
or not from your chemistry class
that relates the pressure to the volume
to the number of particles you have
to the actual temperature
and so this right over here
where you're taking something that's hairy and complex
and making simplifying assumptions
to help you understand it,
this thing right over here is a model
and this is in other fields as well.
Sometimes, it's not an equation.
Sometimes, it might be a simpler organism.
For example, in biology,
human beings are incredibly complex organisms
and not only are they incredibly complex
but certain forms of experimentation
would also feel fairly unethical to our modern moral ethos
and so what do biologists do?
Well, they make simplifying assumptions or they pare down,
they say, okay, we can't do that study on human beings
but maybe we can simplify the problem
by looking at simpler organisms.
Maybe you can look at an individual cell right over here.
Maybe you can look at things like fruit flies
which are famous in the study of genetics.
Maybe you can even look at fairly complex organisms.
Even a mouse is a very complex thing
but it's still simpler than a human being
and at least to our modern ethics,
we're willing to do certain things to mice
that we aren't willing to do to human beings
and so that's why in a biological context,
you will hear people talk about things like a mouse model
where they will test a drug on a mouse
or try to understand how something happens in a mouse
and then say, well, that's a pretty good indication
that might be happening to human beings.
In fact, when they do drug trials in medicine,
they often will do it on mice first
and when they have good confidence that it works there
and that it's fairly safe,
only then will they start to do the experiments
on human beings.
Well, economists are doing the same thing.
Even before the advent of computers and computer models,
economists make simplifying assumptions,
assumptions like all of the actors in an economy
are rational which we already know is not exactly true.
I'm not always rational
and I definitely know people who aren't always rational.
They're simplifying assumptions
that all of the people in an economy
have the same access to information
or that they all even have perfect information
which we also know isn't necessarily true in a real economy.
So depending on the model,
there are going to be these simplifying assumptions
that take this large, complex real-world thing
and try to break it down into simple equations
or lines or charts.
We have models early on in our economic study.
We will see things like the production possibility frontier
where it assumes that you're only trading off
between two things and everything else is equal,
this notion of ceteris, ceteris paribus
which means all things equal.
In a real-world, you're not gonna be able to say,
hey, let's just pick between these two things
and then hold everything else equal.
There's hundreds or thousands
or millions of variables are operating
but if you wanna make a model,
maybe we can make these assumptions.
Same thing with famous price equilibria
that we're going to study later on
where you have supply and demand
and then you have these notions
of equilibrium prices and quantities.
These also make similar types of assumptions
about rational actors and perfect information
and these economic models can be very useful
and that's why most of your study
in a first year economics course is of these models.
Now, with that said,
you should also take them with a grain of salt
and you shouldn't just accept them
as the absolute description of reality.
In fact, that's when economic models can get dangerous.
You always have to be conscientious
of what are those assumptions you made?
In fact, Nobel Prizes have been won in economics
by revisiting some simplifying assumptions
and coming up with new models.
The other difficulty about economics
is it's hard to test it in as absolute a way
definitely as something like chemistry or physics
but even in biology
where you're dealing with similarly complex systems,
a human body and an economy,
these are both extremely complex systems.
If I wanna see in medicine
whether a certain medication works,
I can do a clinical trial.
I could take hundreds or thousands of people
and give maybe half of them the drug
and I could try to control
for a bunch of different variables
but in economics,
you can't take a thousand different economies
that look very similar in what you think matters
and then apply some type of economic prescription
to half of them and then see what happens,
to see whether your model is exactly true
or whether your prescription
for what makes an economy grow faster actually works
and so the big takeaway,
models are valuable across the various sciences
including in economics
but economics straddles between a social science
and the sciences like chemistry or physics
because you can't run experiments in the same way
and we often make simplifying assumptions
that even though we know aren't exactly true,
they're the only way that we're able to make sense
of an incredibly complex real-world.