Simple models, complex reality

A model focuses on certain causes to show how their effects work in a system. It builds an "artificial world" that reveals certain connections between the parts that make up a whole. Connections very difficult to glimpse without the manipulation of the real world in its cumbersome complexity.

Economists have always been concerned with the functioning of markets and the way in which they characterize them is usually quite broad, where it is worth asking: how are prices established?, or are resources used efficiently? can prices be improved?, in what way?, how are the profits from the exchanges distributed?, etc.

Economic models serve to clarify these types of questions, but what exactly is a model? It is very difficult to answer this question, however, a simple way to define it is to think of it as simplifications designed to show the operation of a mechanism, isolating it from other effects that can lead to confusion.

A model focuses on certain causes to show how their effects work in a system, that is, an "artificial world" is built that reveals certain connections between the parts that make up a whole. Connections very difficult to glimpse without the manipulation of the real world in its cumbersome complexity.

Models in economics are not far removed from architectural models or anatomical models of doctors. Architects use a formal narrative in their models, one of volumes and shapes. This narrative is also a mathematical language because it involves Euclidean geometry, works with areas, angles, vectors, etc.

Architectural design does not stray too far from model design in economics. Let's say that an architect uses drawings, sketches, plans and models as "tools" to carry out his work, and believes in the pedagogical virtues of geometric form.

The method of architecture is closely related to that of painting and sculpture: composition, vanishing point, perspective, etc., to create these tools. In this sense, simplicity and clarity are two fundamental values.

Similarly, we can say that the economist uses "drawings" (in a broad sense) that could be mathematical equations, just as he uses analytical geometry with the Cartesian plane to graphically represent these equations. He uses scale models or simplifications of the vast real world and employs the theory, assumptions and axioms of it to create his "tools" of work.

Ergo, the architectural model relies on a refined formal language that takes the design to its minimum expression, in principle, rejects any decorative derivation and underlines the invariable essential elements that represent order and volumetric economy in a clear structural system.

A language is required that distills the essence of a form down to its most basic components. Then it communicates with the landscape, the environment, with the environmental conditions, integrating itself with the specific context. As a consequence, and from a scale representation, the urban landscape is produced in reality.

For example, the project for the Dom-ino house in 1914 ―a name made up of the union of “domus” and “innovation”― by the Swiss theoretical architect Charles-Edouard Jeanneret (possibly the most famous architect of all and one of the most influential of the 20th century), better known by the pseudonym Le Corbusier.

In this model-model, architectural plasticity is nourished by the political, artistic and scientific news ―the nouveau spirit of the time, the advent of modernism and the avant-garde―. It establishes links with the universe of machinery (industry) and art, and assimilates them. It dispenses with irrelevant details (such as walls or sanitary facilities) to concentrate on the relevant structures - structural principle of piles and concrete slabs - which offer numerous design possibilities on each floor.

This design was completely revolutionary, a new housing model that led to mass production highly influenced by Fordism under the premise of "reproducing the architectural product". With this modular design, production times and costs were reduced.

It became so popular that virtually all modern buildings were built on this "free plan" principle. This prototype represented a turning point in architectural design and used the technological advances in materials and construction methods of the time.

A design steeped in the second industrial revolution and impregnated with the modernist atmosphere that generated the development of large-scale industry at the dawn of the 20th century. This is, broadly speaking, the use of new energy sources that replaced coal with oil and electricity, the internal combustion engine was developed, there was a great expansion of means of transportation and productivity at work, new industries such as petrochemical, pharmaceutical, steel and new forms of organization in production such as Taylorism among other very important consequences for capitalism either. Not so for the planet.

Through history we can realize that the world at the beginning of the 20th century experienced a complex situation of causal relationships that led to social and economic transformations.

An example of this was that the location of the manufacturing centers in the cities caused a significant demographic growth, the social masses that moved to the urban centers were formed, which in a short time were overwhelmed, which produced a housing deficit.

From this problem caused by the industrious scenario in North America and Europe at the beginning of the last century, a "revolution" in architecture took place, that is, the house ceased to be an individualistic work with a sculptural character, and began to have characteristics of universality, standardization and reproducibility.

The Dom-ino model intended to solve the housing problem and make it accessible to the working masses. In this way, it is proposed that the house is no longer "built" brick by brick, but that it gives rise to "assembly" in stages with pre-constructed materials in series.

In such a way that this model represents in a very schematic and simple way a new “concept” of housing, capturing the most relevant structure and dispensing with others that are not. It focuses on the measurements of height between slabs, distance between columns, etc.

It could be said that the social phenomenon that he tried to "explain" and/or solve is the adaptation of a house to a "typical family" of the time. That is why the design refrains from representing the layout of the rooms, so neither the furniture nor the color of the walls are present in the design. These details are not shown in the model, because they are not important, but because they are not part of the formal language of the house or the purpose, which is precisely the possibility of adapting the rooms as each user wishes.

Although it is a very simple and abstract model in appearance, its design focuses on a housing phenomenon, and allows us to see that it is a prototype designed so that in "reality" it is quick to manufacture, at a low cost and that it adapts to the needs of a prototypical family.

The models in economics are very similar, they are symbolic representations that, for the design of a policy to regulate the emission of greenhouse gases or other kinds of sulfurous fumes by polluting companies, for example, it is dispensed with modeling an entire range of motivations present in the moral psychology of agents in their decision making. This is where the degree of realism and simplicity in the models lies.

The most widespread economic model is the model of supply and demand (or Marshallian cross) that is attributed to the British economist Alfred Marshall in his book Principles of Economics published in 1890, and represents the demand curve with a negative slope and the curve of the supply with a positive slope forming a cross or a cross on the Cartesian plane with prices and quantities on the ordinate and abscissa axes, respectively.

In this case, the "artificial world" that is constructed - isolating it from certain effects with simplifications designed to show the functioning of a system - is the "perfectly competitive market" based on assumptions or distorted statements of the real world such as: that there is a large number of producers and consumers where all of them are rational and pursue their own interests, there is free entry and exit of factors to the market, all have the same knowledge or symmetric information and none has the ability to affect the price of the goods that is established socially etc

This model ignores many things, such as the fact that economic agents are not only motivated by selfishness or profit, or that they have motivations other than material ones, that rationality can be affected by cognitive short circuits or that it is often displaced by emotions, where not everyone has the same knowledge, that the price of a good often has little to do with its demand, etc.

Despite this, it helps us a lot to clarify some aspects of the functioning of the economy in the real world. For example, it allows us to see that the increase in the production costs of a product will be transferred to its price, thus reducing the quantities demanded and supplied. From this model is derived the theory of the consumer, the utility function, or the elasticity of demand, very familiar to anyone who has taken an introductory course in microeconomics.

Let us now consider a very different model of how the market works. The prisoner's dilemma is a model of game theory and is the classic example of a non-cooperative zero-sum game, which means that what one player wins is exactly what the other loses. It is very popular in abundant contemporary works experimental economics.

The way to illustrate the problem is as follows: suppose that two competing companies in the same market must decide whether or not to allocate more resources to advertising to increase the demand for their products. This increase would allow one of them to capture part of the other's customers, but if both companies increase their advertising, the effect on demand would be canceled out and they would have invested money uselessly.

This model shows that companies make their decisions separately and that they only do so with their own benefit in mind regardless of what the other does. In this way, each company would have an interest in increasing its publicity. If one company does it, the other will be forced to do it too so as not to lose market share (customers).

The first economic model describes a competitive scenario with many participants; for example, the orange market where there are many producers and consumers. The second describes a scenario with only two participants; a duopolistic market where only two large companies compete in the aerospace industry, for example SpaceX and Blue Origin.

It is clear that these examples do not tell us everything about competitive markets, or if they are really efficient, if they achieve some kind of balance, or if they work correctly or not. But if they clarify for us a part of the functioning of a causal mechanism of their phenomenal universe. Both models are not right or wrong, each one highlights different mechanisms present in real-world economies.

Economic models and architectural models are quite similar: they are simple, they are developed in abstract scenarios, they do not claim much realism and the behavior of the agents they characterize has a very schematic or instrumental form.

In certain circumstances, a simple model may be too simple, and a little more detail may be needed. Making something simple is not easy, simplifying is a process that eliminates complexity without affecting functionality, the key is hypothetically isolating the most important interactions.

One model is never better than another. Models are relevant and teach us about the real world precisely because they are simple, and simple models are indispensable. Models are never the absolute truth, but at least part of the truth can be found in them. Therefore, the best way in which we can understand the (architectural) world is by resorting to simplification.

References

Cohen, Jean-Louis. Le Corbusier 1887-1965. El lirismo de la arquitectura en la era mecánica, Taschen, 2006, 7-15.

Gibbard, A. & Varian, H. Economic Models, The Journal of Philosophy, Vol. 75, No. 11, 1978, 664-677.

Rodrik, Dani. Economics Rules: The Rights And Wrongs of The Dismal Science, W.W. Norton & Company, 2015, 9-44.