Bob Murphy warns Austrian economists to be careful when attacking mainstream economists about their models. I object. He writes:
Austrians need to be a little careful when they make sweeping condemnations of the “unrealistic models” of their opponents. After all, when “our side” teaches comparative advantage, we use the completely unrealistic 2-good 2-country model. When we explain Menger’s theory of the origin of money, we tell simplistic stories that have no basis in history. When we explain Bohm-Bawerk’s views on capital accumulation, we often start with ludicrous Robinson Crusoe tales. And even Mises himself pounds home the fact that his “evenly rotating economy” is not only false, but internally inconsistent.
Murph really has a problem differentiating models. The Austrian models that Murphy references are all thought experiments. They are designed to mentally isolate specific cause and effect factors that can't be isolated in the real world. There is no Austrian economist in the world that believes the “evenly rotating economy" is designed to reflect a real world situation. Indeed, Murphy correctly writes that "Mises himself pounds home the fact that his 'evenly rotating economy' is not only false, but internally inconsistent."
Thus, there is no problem in the manner Austrians design models. They are not attempting to paint a detailed picture of the real world. However, Austrian "opponents," as Murphy calls them, are attempting to design models that reflect the real world in detail, and, indeed, they often believe these models can predict the future (or at a minimum "prove" correlations). This is all vomit to an Austrian.
Austrian models never attempt to make a detailed forecast of an economy. Indeed, Austrians believe this can't be done because all factors can not be known in advance. The models of Austrian "opponents" are of an entirely different type. They assemble empirical data, create equations (that is, create the model) and attempt to forecast the future or to "test" their models. Austrians object to this because the data can not be complete, the full economy is just unknowable. Thus, the Austrian charge that the mainstream models are unrealistic, is true. The models can't possibly do what the designers of the models believe they can.
This, however, has nothing to do with the deductive models created by Austrians, which are not attempting to make precise forecasts of a given economy at a given place and time or to "test" theory. Thus, the charge that Austrian models are unrealistic and therefore unuseful, does not hold for Austrian models. They are nothing like mainstream models that attempt to forecast the future. They are simply attempting to create mental experiments to understand how different factors play out in the economy.
For Murphy to warn Austrians about their models and to tie this in, in any fashion, with mainstream models, which are of a totally different nature, is absurd.
Robert Higgs in his comment today on the death of Ronald Coase, outlines quite accurately the nature of mainstream modeling:
Ronald Coase (1910-2013) died yesterday at the age of 102. Since Coase became an economist, in the early 1930s, the economics profession has been altered enormously in fundamental ways. Most notably, perhaps, (1) the degree of analytical formality (especially the mathematical specification of theoretical models) has increased greatly in every part of the field; (2) Keynesian and other types of macro theories have become central parts of economic theory; (3) econometric testing has become an integral part of the profession’s evaluation of its theoretical models; and (4) interest in and writing about economic history and the profession’s greatest contributors in previous eras have waned greatly.This trend is what Austrians object to, when they warn about unrealistic models. Austrian modeling is completely different from these trends that Higgs' correctly identifies in mainstream economics.