Page 63 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
also requires exogenous or external variables andone or more behav-
ioral assumptions that connect the exogenous andendogenous vari-
ables. The central behavioral assumption is that individual actors are
rational andare always seeking to satisfy their own economic inter-
ests. The exogenous variable or variables are the “givens,” or initial
conditions, that determine or influence the value of the endogenous
variables. These explanatory or independent variables are external to
the model; they could include a change in consumer tastes, innovation
of a new technology, and/or other factors.
Economics, then, is essentially a collection of formal models ap-
pliedto analysis of specific problems andto an explanation of eco-
nomic phenomena. The fundamental purpose of economic research is
8
to create new models or to extend existing ones. The professional
training of the economist centers on the task of learning analytic tools
andknowing which model is applicable to a particular circumstance.
To paraphrase Paul Krugman, to say that models define the subject
of economics means that, if there is no model available to explain a
particular phenomenon, that phenomenon is of little interest to the
economics profession regardless of its importance for the real world.
Krugman has suggestedthat this explains why little attention has
been given to the determinants of economic development, an area for
which economists have not yet developed an adequate model. 9
The utility of a model is situation-specific, and as situations are
seldom identical, it can be difficult to know which model is in fact
applicable and whether the model can actually predict or explain the
outcome of a particular situation. Indeed, economists disagree on the
validity of various models and on which model is applicable to a
particular situation. As Charles Kindleberger has commented, the an-
swer to every important question in economics is “it depends!” Or,
in more formal terms, every economic model is qualified by the caveat
of ceteris paribus (or, providing that all other things are equal!). Be-
cause all economic theories are partial theories andeven such basic
laws as supply anddemand are contingent on specific circumstances,
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Models play a crucial selective role in determining what economists choose to
study. If a theory, for example, cannot be expressed in a formal model that, at least in
principle, is subject to testing, then it is very likely not to be of interest to the economics
profession. What this means in practice is that many ideas and theories that might,
andI emphasize might, explain economic affairs are ignoredby economists in favor of
ideas that can be tested. This tendency leads to the frequently deserved charge that
economics lacks relevance. Economists wouldno doubt respondthat they would prefer
to be irrelevant than to be wrong.
9
Paul R. Krugman, Development, Geography, and Economic Theory (Cambridge:
MIT Press, 1995).
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