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TagEzra Klein

Stock Market Management

Some Economic Models are Alluring, Others are Useful

In some markets, prices are affected by market forces and in others, like the job market, they are not

Statistician George Box is credited with the aphorism, “All models are wrong, but some are useful.” Unfortunately, as the brilliant economist Ed Leamer, once quipped, “Economists are like artists. They tend to fall in love with their models.” A large part of the art of economics is distinguishing between attractive models and useful models. The traditional bedrock of economics is the demand-and-supply model. Every introductory economics course explains how demand and supply are related to price and how the equilibrium price is where demand is equal to supply. This can be a very useful model for predicting how changes in demand and supply affect prices and trades — if we make the tempting assumption that the market price is equal…