Why Simple Models Work, According To Nobel Prize Winner Paul Krugman

This entry is basically a repeat of one from about 2 years ago but with one excerpt added in. For any of my students, here is a link that talks about why Krugman won the Nobel prize: Krugman. One of his great skills is to take complex issues and break them down to their essence with simple models that add alot to our understanding.

So here is the original post followed by an additional excerpt. Keep in mind that even supply and demand is a model. It is simple, but it can tells us alot about what happens in markets.

"I was at a symposium about a month ago and one thing we talked about was how the abstract thinking in economics can be hard for our students. Then some teachers said they tell stories. I think that a good abstraction will be a good story and vice-versa (maybe not a perfect correlation there but pretty strong). As Steven Landsburg put it one of his books, "there never was a hare and an tortoise who raced, but the story tells an important lesson that slow and steady wins the race." A great example of this is an article Paul Krugman wrote in Slate. I think he presents an abstract idea very well by telling a good story. He shows how increased productivity can reduce employment in one sector of the economy but increase it elsewhere while everyone gains. As Krugman says "A simple story is not the same as a simplistic one." (from 10-29-2006)

Now an additional quote from the Slate article. I think it summarizes how good economic analysis can be done:

"Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings."