Grad Students Honoring Fred Lee session at 12th International Conference

1. The Useful Economic
Model
Social Surplus Modeling and the Inductive
Approach
Nicola Matthews
UMKC

2. Contents:
 Introduction
 Modeling and Credibility
 Nature of the Model
 Role of Ontology-Epistemology
 Model Credibility
 Social Surplus Models
 The Useful Model

3. Intro.
 Modeling is both an orthodox and heterodox approach
and is dated back to the Classical economists of the
1700s
 Modeling is the what conventional economists do: “If it
isn’t modeled, it isn’t economics, no matter how
insightful” (Colander, 2004)
 The practice and type of modeling in standard
economic theory is non-controversial
 The practice and type of modeling in heterodox
economic theory is controversial

4. Cont. Intro
3 Heterodox Perspectives Towards Modeling (Lee, 2014)
1. Models are mathematically overly complex and do not reflect the
real world, thus they should be avoided as a choice of method
2. Models are credible, if they are built on heterodox theory
3. Models are credible and can contribute to the advancement of
economic theory, if they are empirically grounded

5. What Is an Economic Model?
 A model is an abstract intellectual representation of a system, a
miniature world
 A system is set of interacting and interdependent elements which together
constitute a whole; a system may be nested and its size can vary
 Systems are typically complex and difficult to analyze
 Closed-modeling and Linear modeling limit the amount of assistance the
model can provide
 Thus, modeling is a systems approach towards science that is, it is a
METHOD towards science
 An advantage of using economic models as a method is that they can
be manipulated to reveal structural relationships
 2 General Approaches Toward Model construction
 Deductive
 Inductive

6. Conventional, Deductive Economic Models
 Currently one dominant form of reasoning in conventional model
construction—deduction
 Begin with a series of presuppositions based on “reductive” and “idealized”
framework (ex. individualism, rational acting, profit seeking, etc.)
 Create axioms based on presuppositions
 Deduce model from these premises; choice of math technique assumed prior to
presuppositions
 Note: there is no ‘discovery’ process in the formation of the model, although
there is a minimal amount of induction
 Original assumptions are not derived in a vacuum but based partially on
observation
 Problem: used reductionism and idealization (like a caricature, blow up one
feature)
 Model becomes distorted
 Reductionist modeling

7. Alternative, Inductive Economic Model
 Inductive reasoning towards model construction
 Begin with a series of presuppositions based on cumulative
observations (capitalist state, agency, class analysis)
 Make observations, collect data, categorize
 Sort, combine and filter data based on ``recipe making”
framework
 Build model on categorical data; primary math technique
depends on applicability and assessed after data collection
 Discovery process begins at the start of model construction; the
type of structures are not assumed a priori
 Limited distortions
 Constructivist modeling
 One should subordinate deduction to induction, and
discover the empirical regularities first...(Kaldor, 1985)

8. Role of Ontology-Epistemology in Model
Building
 The world and the universe are real and can be
measured but…..
 All science is practiced through the human habitual
mind and its associated culture/history/politics, making
direct (appearances) and indirect (essence)
measurements imprecise
 How do we know this? Failure of theories and the
existence of paradigms

9. Role of Ontology-Epistemology in Model
Building
 Obstacles towards precise science
 Neurath’s Boat—science conducted ON Neurath’s boat, can’t bring
the boat to land for complete overhaul
 The “active” element of science is how we rebuild and navigate
the boat not that the objective world exists (passive)
 No such thing as a view from nowhere (Barker and Feiner, 2004;
Nelson, 1996)
 Multiple sets of conditions which may yield same or very similar
results (Lowe, 1936)
 Duhem-Quine Theory—impossible to test a single hypothesis in
isolation = logical-positivism untenable
 Theory dependence of observation—the actual process of
observing, collecting, recording and categorizing data is not
free from subjectivity-bias as it is dependent upon theories to
do so (Hanson,1965 [1958]) (more relevant to inductive
modeling)
 Deductive reasoning weak, one break in chain, entire theory
invalid (Peirce, 1868)

10. Model Credibility
 Conventional Deductive Models
 Credibility relies on predictive power; Positivism
 No criteria to model building apart from linked-chain
deductive reasoning
 Subjective benchmarks for prediction (Lee, 2014)
 Model is intended to support the underlying axioms and
math, NOT to be used as a method in theory
development
 Result: Reductionist Model-Theory
 Duhem-Quine Thesis = logical positivism not credible
whether the data is correlated to the real world or not
 Singular deductive approach is weak
 Suffers from subjectivity-bias; the choice of tool prior to the
development of axioms; the model behaves as the theory
not as a method

11. Model Credibility
 Heterodox Inductive Models
 Credibility relies on real world observations and
measurements
 Model is intended to aid in the discovery process and
assist in theory development
 Result: Constructivist Model-Method
 But still….. Theory Dependence of Observation, Neurath’s
Boat
 No Guarantee that observations, measurements and
categorization represents ultimate reality of the objective
world

12. 3 Heterodox Perspectives (Lee, 2014)
1. Models are mathematically overly complex and do not reflect the
real world, thus they should be avoided as a choice of method
2. Models are credible, if they are built on heterodox theory
3. Models are credible and can contribute to the advancement of
economic theory, if they are empirically grounded

13. Surplus Models: Sraffa
 Sraffian Model
 Presuppositions:
 Circular production (basic commodities go into all production, indecomposable)
 Homogenous labor
 Fixed technical coefficients
 Convergence (uniform rates of profit)
 Real wages (commodity numeraire)
 Closed System
 Value determined by social system of production
 Fixed Technology
 Given Surplus (difference between the social product and the total amount of intermediate
inputs)
 Class Analysis
 Capitalist State
 No Agency
 Results:
 Inverse relation between wages and profits
 Role of Prices = are exchange ratios of commodities relative to the numeraire, coordinate
economic activity

14. Sraffian Surplus Model
 Credibility of Sraffian Model
 Model is semi-deductive, semi-inductive
 Quasi model-theory, model-method
 Sraffa closes his system by assuming a given surplus, a given
technical condition and no agency
 Surplus is a residual, meaning there is no explanation for the level
and composition of the social product
 Able to solve for prices in the system independent of Supply &
Demand
 Critique of the Marginal Theory of Value and Distribution
 Model devised to support theory not to discover it
 Model is a theoretical exposition
 Taking a host of givens, certain properties fall out of the model

15. Surplus Models: Frederic S. Lee
 Lee’s Model
 Presuppositions:
 Circular production (basic commodities go into all production, production
indecomposable); input-output
 Heterogeneous labor
 Fixed technical coefficients
 No convergence (parameters are not fixed)
 Nominal wages
 Open System
 Value determined by social system of production
 Surplus not given
 Class Analysis
 Capitalist State
 State Money
 Agency
 Results:
 Surplus = determined by capitalist investment decisions and government spending
decisions
 No inverse relation between wages and profits
 Role of Prices = serve to reproduce the system (going-concern prices), not to
coordinate the system
 Matrix Algebra

16. Lee’s Heterodox Surplus Model
 Credibility of Lee’s Model
 Model is primarily inductive; constructed from the ground-up
 Surplus is not a residual, meaning there is an explanation for the level
and composition of the social product
 Investment and government decisions determine surplus, surplus determines
the social product
 Price theory explains how prices are determined (based on budgeted
output) and their role (going-prices) but nothing more
 Model created to assist in the discovery process and theory
development
 Model credible in that it was built from real world observations and
measurements where structures and patterns emerged
 But….still do not know for certain (Theory Dependence of
Observation)
 Yet…in the right direction – induction

17. Induction vs. Deduction
 Lee’s Heterodox Model has built upon the Social
Surplus Approach
 Philosophy ought to imitate the successful sciences in its
methods, so far as to proceed only from tangible
premises which can be subjected to careful scrutiny, and
to trust rather to the multitude and variety of its arguments
than to the conclusiveness of any one. Its reasoning
should not form a chain which is no stronger than its
weakest link, but a cable whose fibers may be ever so
slender, provided they are sufficiently numerous and
intimately connected (Peirce, 1868)

19. Model as Method, Model as Abduction =
Model as Useful, Model as Tool
 Sometimes we do not know how to weave the fibers in the thread; can
use abduction
 Abduction is a type of inference that generates a conjectured solution
to a problem that is not readily traceable (Peirce, 1933)
 It is ``a sudden advance towards the solution...[it is] a bright idea, a good
idea, a happy thought, a brain-wave” (George Polya, 1945, p.146)
 Abduction is an interruption of habitual thinking
 Abductive inference can be triggered by:
 Reorganizing, reshuffling, decomposing and recombining, through lateral
thinking, through creative thinking, through brainstorming or even through
the use of analogies
 Michael Polanyi (1958) and Charles Wright Mills1(1959) some of the
above technique as ``ransack[ing] our memory for any similar problem"
(p.128) and ``get[ing] a comparative grip on the materials” respectively

20. Humble the Model = Model as Tool
 General perceptions of Models and Modeling
 At Best—viewed as a sense of accomplishment, rigorous
 At Worst—viewed as a theory
 To use model as a tool for theory development, it must be
subdued, it must be humbled
 Opens the door to inquiry, specifically inquiry of the
presuppositions
 Facilitates the abductive process
 Empirically grounded modeling can be credible but only to a
degree
 Empirically grounded modeling has value as a method;
applicable mathematical techniques do not negate this

21. End
Thank You