We study the Johansen–Ledoit–Sornette model of financial market crashes :219–255, 2000). On our view, the JLS model is a curious case from the perspective of the recent philosophy of science literature, as it is naturally construed as a “minimal model” in the sense of Batterman and Rice :349–376, 2014) that nonetheless provides a causal explanation of market crashes, in the sense of Woodward’s interventionist account of causation.

Philosophers sometimes claim that economics, and the idealizing strategies it employs, is ultimately unable to provide genuine laws of nature. Therefore, unlike physics, it does not qualify as an actual science. Careful consideration of thermodynamics, a well-developed physical theory, reveals substantial parallels with economic methodology. The corrective account of scientific understanding I offer appreciates these parallels: understanding in terms of efficient performance.

Economists often consult multiple models in order to combat model uncertainty in the face of misspecification. By examining modeling practices at the Bank of England, this paper identifies an important, but underappreciated modeling procedure. Sometimes an idealized model is manipulated to reproduce the results from another distinct auxiliary model, ones which it could not produce on its own. However, this procedure does not involve making the original model “more realistic,” insofar as this means adding in additional causal factors. This suggests (...) that there are ways to make models more representationally adequate that do not involve de-idealization in the straightforward sense. (shrink)

In this paper, I draw a parallel between the stability of physical systems and that of economic ones, such as the US financial system. I argue that the use of equilibrium assumptions is central to the analysis of dynamic behavior for both kinds of systems, and that we ought to interpret such idealizing strategies as footholds for causal exploration and explanation. Our considerations suggest multi-scale modeling as a natural home for such reasoning strategies, which can provide a backdrop for the (...) assessment and prevention of financial crises. Equilibrium assumptions are critical elements of the epistemic scaffolding that make up multi-scale models, which we should understand as a means of constructing explanations of dynamic behavior. (shrink)

This paper claims that how economists actually treat the consumption function, both theoretically and empirically, seems to be at odds with traditional structural realism. While economics aims to find out the way the world actually is, economic theory – including theoretical staples such as the consumption Euler equation – do not always state literal truths. Yet, such methods persist. Our investigation will reveal that the Euler equation is deployed as part of a realist methodology to identify scale-dominant behaviors. These analyses (...) permit the economist to conduct counterfactual reasoning and sometimes (via policy) to intervene on the world itself; the implication is when this is successful, the economist has uncovered real structure. (shrink)