On economic modelling - John Consiglio
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On economic modelling - John Consiglio

The word ‘model’ in economics is one which is pregnant with meaning. And as often happens in such circumstances, every Tom, Dick and Harry tries to enjoy himself through using it according to whatever whims come to his mind. Such, I am afraid, is the case of this paper’s leader on March 13.

 It needs to be said at the outset that if one really understands what an economic model really is, then it immediately should become obvious how dangerous it is to pronounce any economic model as flawed. 

An economic model is not at all a picture of selective quoting from international body reports, or random references towards what one may be subjectively seeing as going wrong or lacking in this or that type of economic or social activity in a nation. 

What real economic models are all about is the purely statistical relationship between macroeconomic aggregates in an economy. In essence economic models are never politically inspired constructs, or views of what may seem as going right or wrong in any jurisdiction, or of what Tom, Dick and Harry may think should be done differently. True, scientific, economic models are never subjective but objective.

Within such an understanding of economic models Malta factually has a very good model of its economy which is based at the Research Division of the Central Bank of Malta. This construct of processes or relationships between various parts of our economy is like a big ‘machine’ that has now existed for quite some time, and over time may be said to have functioned well, even if of course there is never any real end to the sets of logical and quantitative variables or even formulae that can conceptually be added to it (or even removed!).

 To the totally non-initiated in econometrics – as indeed it seems most of our present crop of politicians seem to be – it is generally impossible to comprehend the mathematical framework designed to build up, and properly analyse, such mathematical results (publishable or not) of complex relational processes. 

If one really understands and accepts this, then it becomes obvious that to pronounce any ‘model’ as fraught is either dangerous or outrightly incorrect. 

Another big misconception about economic models is to interpret them as being some sort of guaranteed indicator of future conditions or situations in an economy. Cobb-Douglas has written extensively about the problems of economic models when it comes to prediction functions. 

An existing economic model set-up is fed data collated (ergo referring to past periods) on which it works and produces outcomes. To cite just one element: no society is ever static in the creation or construction of its mores or realities. 

But indeed when it then factually becomes necessary to quantify and include as numerary aggregates such new realities into an existing economic model, yes that is then not only a big problem of how the function of change or addition is to be performed to the model, but very often also then the new ‘model’ creates big issues of comparability with the past, and also the new “excitement” of what will be “next down the road”.

 The good analyst of economic realities will yes, with any document or report, be concerned with numerary projections, while, however, at the same time fully cognisant of the fact that there never is any economic decision or trend that can be dogmatically pronounced as “constantly good” for a nation, a community, for even the international scenario.

What real economic models are all about is the purely statistical relationship between macroeconomic aggregates in an economy

Does it presently tell us anything that most numerary economic indicators about the Maltese economy, as appearing in international reports, definitely pro-ject positive futures in that or other areas. For me personally paramount are figures about the management of our public finances (annual deficits, national debt, GDP, unemployment, etc). But that does not mean that it is only those that are important. 

“The big machine”, so to speak, can be made to work to produce sectorial results, e.g. on scenarios such as demographics, health, labour scenarios, educational outcomes, and others.

 In a previous article some time ago I had also argued against the dangerous practice of selectively quoting – often only word passages, but never supporting with figures – from the reports of international bodies.  

There is a particular, generally always highly respectful, dialectic which, I know from experience, governs the relationships between visitors from, e.g. the IMF or the EU on one side, and the local personnel who work for local-being-studied-bodies. 

The former are generally highly competent persons and technocrats, and it is always because of this that they will go about doing their analytical work with competence and use of various skills. 

And it is precisely because of their competence that they will never ever go short of using figures, statistics, charts, tables, et similia to support whatever point their recommendation or views would be making. 

As I write I have on my desk the IMF-Malta 2019 Article IV Consultation Report, submitted after their formal visit to Malta visit which ended on February 22.

In a total of 54 pages of the main report (excluding an appendix) there are no fewer than 44 pages showing precisely statistics and numerary tables, pie charts, graphs, and so on. It is here that the real discourse about Malta’s economic construct, what others will erroneously describe as “the model”, lies, and it is about the facts arising from figures that we should all really be talking. Because, as the Italians say, la matematica non è una opinione. 

Of course there is nothing to stop commentators from writing about socio-political ideals that they would like to see becoming implemented: e.g. wanting better value from monies being spent, wanting smaller queues and waiting lists wherever for government services, seeing a prison population becoming ever smaller, etc, etc. 

But, for God’s sake, don’t call that “a flawed economic model”, it isn’t an economic model but only a series of legitimate items in some wish lists.

John Consiglio teaches in the Faculty of Economics, Management and Accountancy at the University of Malta.

This is a Times of Malta print opinion piece

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