Macroeconomic Models

In the next few chapters, we will build up a macroeconomic model to help understand the relationship among inflation, unemployment, and other economic variables. Actually, we will look at several models, starting with a very simple -- oversimplified! -- model and building from that to less oversimplified, more "realistic" models.

Many (not all) economic models are more like maps than like the theories of physics. Unavoidably, in economic models, we have to leave out some detail. That means an economic model may not be "true" or "false" in any simple sense. What detail we include depends on the purposes we have in mind. Some details may be exaggerated, and others diminished, if that will make the model more useful. As with a map, the purpose is to understand reality, and the ultimate test is whether it helps us to do that. Now and then, including some plain falsehood may help, as when maps make the roads seem much wider on the map than they are in reality.

A map has to have a lot of truth in it. A map that would show Philadelphia in the west and Pittsburgh in the east would not represent Pennsylvania as it is, and at best could cause confusion and make the map useless. But, on the other hand, no map is perfectly accurate. Maps are designed to be useful, not to be true. To be useful, they have to have a mixture of truth and falsehood -- and just what needs to be true, and what needs to be false, depends on what you want to use the map for.

Macroeconomic models are that sort of models. Complex as they are, they are radically more simple than the national economy they represent. They leave out many details that could be important for other purposes. They are designed to help us find out way around the macroeconomy and understand how it changes and where it might go next. It distorts a few things in the hope of making the important things more clear.

The New Economics of the 1930's