I’ve heard economics students and those in the field ask “what’s your model?” when debating someone on the possible outcomes of fiscal policy or during a discussion on macroeconomics. The person asking this question is typically presenting a challenge to those they’re speaking to, framing the conversation in a way in which analyzing cause and effect is can be measured somewhat rather than expounded through ad hoc reasoning. More specifically, a model serves the purpose of providing a certain reference point for a framework in which we can “visualize” the magnitude of change in certain objects or values, and how they affect changes in other variables.

Some may object that you cannot isolate all those variables and measure these things with any certain degree of accuracy. Fair enough (though not really), but that’s not the point. What I see in many economics discussions is a reliance on a deterministic system in which the outcome of one change in a variable is already set in stone regardless of other variables at play. One example would be those who claim that any increase in the supply of money will cause the business cycle, resulting in a boom and bust. Are they using a model? Yes, it’s called Austrian business cycle theory (ABCT). Yet there’s no room for any counter-prevailing forces to offset this result. None. Even if the institutional framework of the model changes (such as central banking to free banking), the result must remain the same. Is this a good model? It depends.

While the word “model” can be a dirty word to some who value deductive reasoning and despise the crude and mechanistic methods of orthodox economists, a model doesn’t have to be explicit. It can be a mental construct and nothing more. Or it can be an equation, a graph, or some other visual display. This poses two thoughts. First, while you can lie with statistics and models, it’s even easier to lie without them. You could claim that government is the root of all the economic problems in society. Some would consider this a “model” of the world. Some would say it’s a bad model. I would say it’s barely a model at all, because it presupposes that government is the problem before all possibilities are taken into account. As Roger Garrison has said, “We must first understand how things could go right before considering how they might go wrong.” This is why a supply and demand graph is a fabulous model.

Beyond being simple and explicit, this model is also both open-ended and versatile. It can be incorporated into other models to where they become interdependent. For example, the Austrian view on capital can be visualized through relating basic supply and demand analysis in the loanable funds model with the more mainstream production possibilities frontier, along with the Hayekian triangle. Below is a basic visual framework of these three, and a demonstration of how an increase in real savings affects each of these models and hence different variables in the economy.

For those familiar with ABCT, the effects of an increase in voluntary savings on Hayek’s triangle should be obvious, and those also familiar with the more mainstream production possibilities frontier should understand them as well. It’s not required that you have a photographic memory of these models per se, but that you understand and can visualize the causation in your mind. This makes it more difficult to give ad hoc analysis when describing these events. We will see below what happens with an artificial credit-induced boom and bust.

Again, this should be fairly easy to follow. Even if you understand ABCT like the back of your hand and can read a basic supply and demand graph, it is not required that you memorize these explicit models, though it does help when trying to explain or reason through them. Yet, even supply and demand doesn’t explain everything in economics, but it explains a lot and it’s ability to be used with other models makes it very valuable for understanding the world around you. This should be your goal, regardless of what “model” of economics you choose to go by.

A model should be judged on how restrictive it is, and a model with presuppositions built into it prevents (either purposefully or incidentally) those who have constructed it to allow for variables which may not coincide with their assumptions about the world. It is in this sense that a more “open-ended” model which allows for irregularities and anomalies better serves those who wish to discuss economics.

Second, with a model you are at the same time constrained by the framework you reason in. Notice this isn’t contradictory to what was said earlier. If a model is “good” and open-ended, it should be easier to incorporate exogenous factors which may help explain economic causation. At the same time, those who use such a model will be held accountable for explaining phenomenon observed using it. It can be seen quickly if their model is derivative or acquired second-hand, and therefore more suspect. These two questions should be asked:

Does this model address factor (a)? How about factor (b)? Factor (x)? Can these factors “fit” in this model?

It is up to the person using a model to answer both these questions. If #1 and #2 are answered in the negative, then the model is less useful. If the answer to #2 is yes, then the burden of proof as to how the model explains real factors is on the one who advocates for that model. To use ABCT as an example again, if we eliminate the possibility of fluctuations in the supply of money, does that prevent a bust/recession from occurring? It depends. There are different versions of ABCT and therefore different assumptions involved in each of them. If Hayek’s version of the model is explored, we can see that, using his framework, there is theoretical room for a harmful fall in prices which he calls the secondary deflation, and he advocates an increase in the money supply to prevent it. Yet others who generally use ABCT claim that deflation during the recovery is optimal. Which model is better? It depends.

To emphasize, this doesn’t mean that a model is superior if it has more moving parts. On the contrary, a simple model is always useful, though not always realistic. It’s merely to advise those who “do” economics to think in terms of open-ended constructs, rather than presuppositions. Ask yourself, “what’s my model?” Ask your opponent in debate, “what’s your model?” Force them to explain their understanding of the world if you find their position to be incoherent or incomplete. While this does not guarantee you’ll come to a definitive conclusion in the discussion, or that you’ll fully understand where their coming from, it does make answering economic questions easier.