<b>The meaning of models</b><br><br>I do wish people would understand the mea...

Julian Bond - 2012-04-18 10:31:51+0000 - Updated: 2012-04-18 10:31:51+0000

The meaning of models

I do wish people would understand the meaning of "models". ISTM that when we say things like "at our current growth rate ... " what we're really doing is suggesting a straw man model in which exponential growth rate continues indefinitely and then arguing that is obviously impossible. What we really mean is that our model is wrong. So suggest a better model or go and investigate people who specialise in building models and testing them. Like the "Limits to Growth" people and the world3 model.

Here's an example quoted from http://www.growthbusters.org

Economist: I don't think energy will ever be a limiting factor to economic growth. Sure, conventional fossil fuels are finite. But we can substitute non-conventional resources like tar sands, oil shale, shale gas, etc. By the time these run out, we'll likely have built up a renewable infrastructure of wind, solar, and geothermal energy—plus next-generation nuclear fission and potentially nuclear fusion.

In other words:-
* The human mind can overcome all problems
* We have yet to discover many forms of cheap energy
* The natural world doesn't matter (only humans do)
Ok. So they're suggesting a model where unlimited exponential use of energy by the whole world is possible and ok because human ingenuity will find all the alternate non-renewables, then build renewable infrastructure and then replace that with some magic technology that is permanently 30 years in the future. Sorry, but this is just a lot of hand waving and magic spells isn't it? As an economist, if you want economics to be taken seriously aren't you supposed to be in the model business rather than the magic business?

Jim Lai - 2012-04-18 14:36:27+0000

One reality check: how many institutions would put capital at risk based on a model that assumed exponential abundance?

Julian Bond - 2012-04-18 14:42:52+0000

+Jim Lai Indeed, however there are plenty that will put capital at risk on the basis of a model that predicts 10 straight years of exponential growth. Isn't that exactly what happened in 2000 and resulted in the dotcom crash? You must have seen the excel spreadsheet financial projection that consists of just copying B23=A23*1.1 across the sheet. Hockey-Stick-Curves 'r' us

Jim Lai - 2012-04-18 14:54:33+0000 - Updated: 2012-04-18 14:54:56+0000

Fitch made that mistake, contributing to the real estate bubble.
http://www.fpafunds.com/docs/special-commentaries/absence_of_fear.pdf?sfvrsn=2
Quote: My associate asked several questions. “What are the key drivers of your rating model?” They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years. My associate then asked, "What if HPA was flat for an extended period of time?” They responded that their model would start to break down. He then asked, “What if HPA were to decline 1% to 2% for an extended period of time?” They responded that their models would break down completely.