Mathematical Modeling to Economic Analysis

Heilbronner (1979) stated that "The prestige accorded to mathematics in economics has given it rigor, but, alas, also morths" (p. 198). Alfred Marshall was critical of an over-reliance on mathematical models. John Maynard Keynes applied mathematical models; however, he also included psychological variables in his economic analyses. Keynes' emphasis upon psychological factors involved in expectations is viewed by some economists as antithetical to rationality in the derivation of economic decisions from individual optimization (Ascheim & Tavlas, 1990.

Referring to the "political and social atmosphere" and to "the nerves and hysteria and even the digestions and reactions to the weather" of investment decision makers, Keynes (p. 162) stated the following: We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, w ether personal or political or economic, cannot depend on strict mathematical expectation, since the basis of making such calculation does not exist and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back from our motive on whim or sentiment or chance. (Keynes, 1936, pp. 162-163) (b) Comment on Paul Krugman's article "Two Cheers for Formalism".

In "Two Cheers for Formalism", Paul Krugman (2005) appears to be making something better than a half-hearted defense of mathematically-based economic analysis. Essentially, he contends that critics fall into one of two camps - either they are among those who do not understand the mathematics or they are among those who are dissatisfied with the findings of the mathematically-based analyses. This writer recognizes that much of what Krugman (2005) writes in the article is reasonable. Beyond the reasonable aspects of the article, however, he appears to be a little defensive about the profession.

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