Chapter 2 — Further Reading

On models and how to use them

Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science, W. W. Norton, 2015 Rodrik, a Harvard economist who has worked extensively on trade and development, makes the case that economics is best understood as a collection of models — none of them universally true, each useful for a particular kind of question. The book is a defense of the modeling enterprise that is also honest about its limits, and it is the single best follow-up reading for Chapter 2.

George Box, "Robustness in the Strategy of Scientific Model Building," 1979 Box, a statistician (not an economist), is the source of the famous aphorism "All models are wrong, but some are useful." The original essay is short, technical in places, and worth reading for the original context of the line.

Mary S. Morgan, The World in the Model: How Economists Work and Think, Cambridge University Press, 2012 A historian of science's careful examination of how economic models are actually built and used. Long but illuminating. Especially good on the role of "stylized facts" and on how models that simplify reality nevertheless make claims about it.

On the production possibilities frontier and economic growth

Paul Romer, "Mathiness in the Theory of Economic Growth," American Economic Review, 2015 Romer, the 2018 Nobel laureate (with William Nordhaus) for his work on growth and innovation, argues that economic models can be used dishonestly to dress up rhetoric in math. The essay is a useful corrective to the assumption that mathematical models are necessarily more rigorous than verbal arguments.

Robert Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics, 1956 The paper that launched modern growth economics and gave us the Solow model — which is a more sophisticated version of the PPF as a model of growth. Technical, but the introductory section is accessible. We will come back to it in Chapter 25.

On the circular flow

Paul Samuelson, Economics, McGraw-Hill, multiple editions (originally 1948) Samuelson's textbook introduced the circular flow diagram to a generation of American economics students. The mid-century editions are still readable and worth picking up for historical perspective on how the field used to teach itself.

On positive vs. normative economics

Milton Friedman, "The Methodology of Positive Economics," 1953, in Essays in Positive Economics The classic statement of the positive-vs-normative distinction. Already cited in Chapter 1's further reading; the case for re-reading it after Chapter 2 is that the discussion of how economists test their positive claims (or fail to) is more meaningful once you have models in front of you.

Daniel Hausman, The Inexact and Separate Science of Economics, Cambridge University Press, 1992 A philosophy-of-science treatment of how economic models work — what it means for an economic claim to be "tested," whether economics is properly a science, and what its limits are. Technical in places but rewarding for serious readers.

Hilary Putnam, The Collapse of the Fact/Value Dichotomy, Harvard University Press, 2002 A philosopher's argument that the positive-normative distinction, while useful, cannot be cleanly maintained in practice. Worth reading as a counterpoint to Friedman.

On why economists disagree

Edward Lazear, "Economic Imperialism," Quarterly Journal of Economics, 2000 Lazear, a labor economist at Stanford, argues that economic methodology is so productive that it should be applied to non-economic domains (sociology, anthropology, political science, etc.). The essay is also an interesting window into how economists think about their own discipline. (For an opposing view, see Sandel's What Money Can't Buy, cited in Chapter 1.)

Daniel Kahneman, Thinking, Fast and Slow, Farrar, Straus and Giroux, 2011 Kahneman's account of his decades of work with Amos Tversky on cognitive biases. Much of the book is a sustained argument that the standard rational-choice assumption used in many economic models is empirically wrong in important ways — and that the disagreement between behavioral economics and standard economics is at root a disagreement about which model best describes how humans actually decide. We will come back to this in Chapter 10.

Paul Krugman, "How Did Economists Get It So Wrong?" New York Times Magazine, September 2, 2009 Krugman's post-2008-crisis essay arguing that mainstream macroeconomics had failed to predict or explain the financial crisis. The essay was controversial within the profession; many of Krugman's targets disputed his characterization. Worth reading both for the substantive critique and for what it shows about how disagreement in economics actually plays out in public.

John Cochrane, "How Did Paul Krugman Get It So Wrong?" 2009 (response, available on his blog) The most-cited response to Krugman's essay, by a Chicago-school macroeconomist who thought Krugman's critique was unfair. The exchange is a model of substantive disagreement among serious people.

Brad DeLong, "Should We Still Believe in DSGE Models?" 2018 (essay/blog post) DeLong, a Berkeley economic historian, takes a middle position: dynamic stochastic general equilibrium models (the workhorse of modern macroeconomics) are useful but failed in the 2008 crisis, and the field has been slowly updating since. Good for getting a sense of how working macroeconomists think about their own modeling tradition.

On the 2021–23 inflation debate (case study 2)

Jason Furman and Wilson Powell III, "What's the Best Way to Set Monetary Policy?" Hamilton Project, 2021 A pre-inflation-surge essay that includes Furman's reservations about the size of the American Rescue Plan. Furman, who served as chair of the Council of Economic Advisers under Obama, was one of the early voices warning about inflation risk.

Larry Summers, "The Inflation Risk Is Real," Washington Post, February 4, 2021 The op-ed in which Summers warned that the American Rescue Plan was likely to be inflationary. Read this with full awareness of the date — most economists in February 2021 thought Summers was overreacting.

Olivier Blanchard, "In Defense of Concerns over the $1.9 Trillion Relief Plan," Peterson Institute for International Economics, 2021 Blanchard, the former IMF chief economist, made a similar case to Summers's, more academically. Worth reading alongside Summers.

Christina Romer and David Romer, "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Macroeconomics Annual, 1989 A foundational empirical paper on the effects of monetary policy. Useful for understanding the evidence base behind the 2022–23 monetary tightening debate. Not specifically about the recent episode, but methodologically influential.

Jerome Powell, semi-annual congressional testimony, 2022–2024 (Federal Reserve archives) Reading the Fed Chair's actual statements as the inflation surge unfolded gives you a feel for how the Fed thought about the situation in real time — including the moment in 2022 when "transitory" was officially abandoned.

Janet Yellen, Treasury statements and interviews, 2021–2024 Same idea, from the Treasury side. Yellen's framing of the inflation problem evolved significantly over the period.

Brookings Papers on Economic Activity, Spring 2023 and Fall 2023 issues Several of the BPEA papers from these issues address the inflation surge with full data and several years of perspective. The papers are technical but the introductions are accessible.

On reading economic news critically

Tim Harford, The Data Detective: Ten Easy Rules to Make Sense of Statistics, Riverhead Books, 2021 Harford's most recent book, a practical guide to evaluating quantitative claims in news and policy. Most of the rules apply directly to economic claims. We will come back to it in Chapter 4.

Jordan Ellenberg, How Not to Be Wrong: The Power of Mathematical Thinking, Penguin, 2014 A mathematician's tour of the kinds of reasoning errors that show up in public arguments — many of which are about economic claims. Funny, accessible, and useful.

Daniel Kahneman and Olivier Sibony, Noise: A Flaw in Human Judgment, Little, Brown Spark, 2021 Less famous than Thinking, Fast and Slow but more directly relevant to how individual judgments — including economic forecasts — can vary even when the inputs are the same. Useful for understanding why two economists looking at the same data can come to different conclusions.

A reading order recommendation

If you have time for one of the books above before continuing to Chapter 3, read Rodrik's Economics Rules. It is the most direct extension of what Chapter 2 was trying to teach.

If you want to develop your sense of how serious economic disagreement actually unfolds, read Krugman's NYT Magazine essay and Cochrane's response together — they are both online, both free, both short, and reading them in dialogue tells you more about how the field works than any single textbook chapter could.

Chapter 3 — Interdependence and the Gains from Trade — is next. It is shorter than this one and much more concrete. You will like it.