Economic abstractions conceal the true contours of human life; No mathematical model can describe ‘the world as it really is’

March 11, 2014 6:50 pm

Economic abstractions conceal the true contours of human life

By John Kay

No mathematical model can describe ‘the world as it really is’

In Alan Greenspan’s recently published book, he argues that the economist’s assumption of rationality is inadequate to describe human behaviour, and that banks that are too big to fail are too big. These are not novel opinions; what is – mildly – significant is that it is Mr Greenspan who is expressing them. The former US Federal Reserve chairman also claims that government spending on Social Security and Medicare, the healthcare programme for the elderly, is drawn more or less dollar for dollar from business investment. And he thinks that economic forecasting is difficult.

Perhaps the most interesting thing about the book is the title. Why is it called The Map and the Territory ? I could not find reference to map or territory in it. And I was looking for such references, because more than two years ago I wrote an essay on the state of economics called “The Map is not the Territory”. Mr Greenspan did not refer to that essay. Nor, more strikingly, did he refer to another book published the previous year with exactly Mr Greenspan’s own title.

But perhaps that is not surprising. The original The Map and the Territory was written in French (although an English translation is now available). The novel won the Prix Goncourt, France’s most prestigious literary award, in 2010. The choice was controversial. Some described the work as pornographic, others said it was plagiarised. The book has many odd aspects; one is that the author, Michel Houllebecq (real surname: Thomas), not only features in the novel himself but is also brutally murdered. Mr Houllebecq has described the erosion of relationships, particularly sexual ones, by the free market as a central theme of his writing; the book is not a work one might to expect to find on the bedside table of a prominent American conservative.

But neither Mr Houllebecq nor I can – or did – lay claim to originality in our titles. The phrase “the map is not the territory” was coined in the 1920s by Alfred Korzybski, the Polish philosopher. The essence of Korzybski’s thought is that we interpret the world through abstractions, abstractions that should not be confused with “the world as it really is”. There are many different possible maps of the same territory, each useful for specific purposes – and the only completely realistic map, one that exactly reproduces the whole territory, is of no practical value at all (a theme developed in Jorge Luis Borges’ essay, “On Exactitude in Science”).

Korzybski’s thought has profound implications for economics and related subjects. No economic model can describe “the world as it really is”; there are only provisional approximations that can be pragmatically applied in particular situations.

Many economists struggle to accept this. They suffer physics envy, believing (I think wrongly) that physicists employ models that do describe “the world as it really is”. If economics is to be a science, these economists think, those who practice the subject must identify truths that are similarly independent of time, place or context.

And Mr Greenspan appears, on the evidence of his book, to be among that group. He now professes a humility not, perhaps, evident in his pronouncements as chairman of the Fed. But he still pursues the quest for a model that might describe “the world as it really is”. He acknowledges that “producing a fully detailed model is beyond the scope of this book”, further conceding that “we may never approach the fantasy success of either the Oracle of Delphi or Nostradamus”. But he assures us: “Most of our intuitive insights, when subject to the discipline of a syllogism, apparently do conform to reality.” Despite everything, he clings to the notion that valid economic policy conclusions can be deduced from a priori axioms about the nature of the economic world.

At first sight the two authors of The Map and the Territory, Mr Greenspan and Mr Houllebecq, could hardly have less in common. Yet perhaps they share an underlying superficiality of thought concealed by a complexity of expression. Both the American central banker and the French novelist are applauded within their own culture and derided outside it. But the chairman of the Fed can do a great deal more damage than the winner of the Prix Goncourt.