"All models are wrong, but some are useful." George Box 30 years ago.
Abstractions of reality, models, are created when we need to interact with a reality that is beyond our immediate grasp - like physics, weather and economy.
To get a grasp on and predict what those puny atoms are up to we use models from nuclear physics. But we do not bother much about elaborate models for the movements of a football, a toddler grasps quickly how it rolls and changes direction. He can see it, he can interact with it, he understands and knows soon enough where to place himself to catch the trajectory.
But beware, not seeing while trusting a model that invariably will be proven wrong will clearly lead us astray. Alan Greenspan, a man who's work day often was relying on models said this a year ago in the Financial Times:
"We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response."
And for those who call for more regulation in the economy, please remember this: Control and regulation equals slapping another model (PID anyone?) onto the other model - the proverbial adding insult to injury.
We must be allowed to do the occasional stupid thing, have mishaps or the straight out failures in an economy, otherwise all would come to a screeching halt. But if the stupid actions, the mishaps and the failures were as obvious and transparent as a football in a field, then even a three year old would understand the ongoing and place himself for a good game.
Calls for more regulation and more or better models seems to me to be classic barking up the wrong tree. Focus on how to implement real and practical transparency should be the obvious way to go.
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