Overview

Using as examples Akerlof's ‘market for “lemons”’ and Schelling's ‘checkerboard’ model of racial segregation, this paper asks how economists' abstract theoretical models can explain features of the real world. It argues that such models are not abstractions from, or simplifications of, the real world. They describe counterfactual worlds which the modeller has constructed. The gap between model world and real world can be filled only by inductive inference, and we can have more confidence in such inferences, the more credible the model is as an account of what could have been true.

Introduction

I write this paper not as a methodologist or as a philosopher of social science – neither of which I can make any claim to be – but as a theoretical economist. I have spent a considerable part of my life building economic models, and examining the models that other economists have built.