Good Predictions and Bad Policies

20 Pages Posted: 21 Nov 2009

See all articles by Luis R. Martinez

Luis R. Martinez

University of Chicago - Harris School of Public Policy

Date Written: November 10, 2009

Abstract

Relatively little has been said on economic policy by participants in the debate on the realisticness of assumptions in economic models. What has been said is that a ‘Friedmanian’ methodology which accepts unrealistic assumptions and is only concerned with correct predictions is appropriate from the perspective of a practical economist who is in charge of designing policy. This paper tries to show that this is not true. Even if a model provides very accurate predictions of an event, its ability to provide valid explanations is determined by the realisticness of its underlying assumptions. Different assumptions yield different explanations and unrealistic assumptions tend to provide no explanation at all. There is a strong relation between the way a phenomenon is explained and understood and the actions that are consequently recommended. Therefore, a model based on unrealistic assumptions is not a reliable source of advice on policy.

Keywords: Milton Friedman, unrealistic assumptions, economic policy, economic models, instrumentalism

JEL Classification: B41.

Suggested Citation

Martinez, Luis, Good Predictions and Bad Policies (November 10, 2009). Documento CEDE No. 2009-29, Available at SSRN: https://ssrn.com/abstract=1510162 or http://dx.doi.org/10.2139/ssrn.1510162

Luis Martinez (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

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