Beware models

Economist Dean Baker was interviewed on TRNN about the Federal Reserve raising interest rates. He mentions economic models and their predictions: 

So, first off, I'd just point out they've been wrong in the past. The other point I'd make is that to my view there's very little risk in probing, in the sense, let's get the unemployment rate lower, and we don't have any models that say inflation just shoots up. So, let's say they're right. 4.7% is the right number, and they foolishly listened to me and let the unemployment rate fall to 4.3% or something like that. Well, the models say that inflation would rise very gradually. We're currently at 1.7% by the measure they use. It might rise after six months, a year, to 2%. That's not a big deal.

The points I want to illustrate is (1) the existence of economic models and (2) they are used to drive economic policy. But the usefulness of any model is predicated on the accuracy of its predictions and based on how poorly the economy functions for most workers, these models are terribly ineffectual. 

[Warning: I am not an economist. The following are my opinion only.]

One major flaw of the most popular economic models is they presume capitalistic principles. And as anyone who ever listens to Richard Wolff would know, capitalism is notoriously unstable, prone to repeated boom and bust cycles. I prefer to liken it to simple predator-prey relationships whose models have a similar boom and bust trend with the distinct possibility of complete bust in that both predator and prey species die out. If my hypothesis is true and economic models are based on predator-prey dynamics, then the underlying assumptions of these models are just plain wrong! It is well past time for the economics discipline to determine the universal rules of economics so they and we can actually have accurate models.

See my earlier writings for more of my thinking on this matter.