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‘Economic models are often misleading’

Recently, in the Volkskrant newspaper, Minister Wouter Bos agitated against the current trend towards model thinking in politics. Policy is increasingly based on all kinds of economic models, with little attention now being paid to what does not fit into the models. Henk Folmer, Professor of Economic Geography at the University of Groningen, agrees with Bos. He wants to go even further. ‘Many economic models are misleading’, he said in his inaugural lecture on 16 October 2007. The title of the lecture is ‘Why economists make blunders so often’.

 

Economics research is often incorrect, states Folmer. This is caused by the fact that in economics, neoclassical thinking has the upper hand. ‘Neoclassicists assume that a human being is a selfish, rational thinking being, a homo economicus, who is only guided by financial incentives and only takes financial limitations into consideration.’ But there’s more to life than financial incentives. ‘Ask people how many hours they want to work, for example. The answer will not only depend on salary and economic limitations. All kinds of other, sociological and psychological, factors will play a role. These equally important factors are left out of neoclassical models.’

Criticism

The models constructed on the basis of neoclassical approaches thus produce a skewed image of reality. Nevertheless they are used by neoclassical economists to explain and predict human behaviour and by policymakers to support their policies. Folmer thinks this is a bad thing. ‘Neoclassical approaches have been attacked for decades. Five Nobel Laureates have strongly criticized the standard neoclassical paradigm, but it still survives and is still used everywhere. Despite its many shortcomings and the fact that there are many alternatives.’

Reality level

Folmer thinks that the popularity of neoclassical approaches is caused by the fact that it’s relatively easy to get results with them. ‘If you’re any good at maths you can make a beautiful and impressive model. From behind your desk you can provide explanations and make predictions. But that does not mean that you have grasped reality. In neoclassical economics literature, the content sometimes takes second place to the aim of constructing a mathematically elegant and manageable model.’ Social and psychological models, on the other hand, are often messy, unstructured and require lots of empirical research – and that’s why they’re a lot less popular. ‘But their reality level is often much higher’.

Integrated structures

Policies based on neoclassical models where essential sociological and psychological elements are missing are thus misleading. That’s why Folmer argues that this ‘partial’ economics way of thinking be abandoned. When constructing models, particularly to support policy, psychological and sociological factors must be taken into account. Thus economics should form an integrated whole with psychology, sociology and geography. ‘In the past it was perhaps useful to divide social reality up into bits and organize them into separate subjects, but the time has now come to join the bits up again and search for reality. This means that integrated structures should be formed at universities and research institutes. The dividing line between economics and the social sciences must disappear’.

Curriculum Vitae

Henk Folmer (1945) studied social sciences at the University of Nijmegen and gained his PhD at the RUG in 1983 with a thesis entitles ‘Measurement of effects of regional economic policy. Some methodological aspects’. Until 1975 he was a lecturer at the Tilburg Traffic Academy, after which he came to the RUG as a lecturer and researcher. In 1986 he became Professor of General Economics at the University of Wageningen and in 1997 at the University of Tilburg, in the Environmental Economics Department. In 2006 he was appointed Professor in the Department of Economic Geography at the Faculty of Spatial Sciences of the RUG. Folmer has a significant track record in his field, for which he has been awarded a medal by the Royal Economic Society (UK), an honorary doctorate by the University of Gothenburg (Sweden), and an honorary professorship by the Chinese Academy of Agricultural Sciences. Folmer also publishes regularly in newspapers such as the Volkskrant, the NRC and the Leeuwarder Courant. /EvL

Contact: Henk Folmer, tel. 0317-48 5455 (secr.), e-mail: Henk.Folmer wur.nl of h.folmer rug.nl

Last modified:15 September 2017 3.10 p.m.
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