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  • Writer's pictureSam Wilks

The limitations of mathematical modelling in economics and the advantages of praxeological analysis.

In my own observations and opinions, I am going to try to construct an argument concerning the limitations of relying solely on mathematical modelling in economics as well as the advantages of a praxeological analysis.

Limitations of Mathematical Modeling in Economics:

Oversimplification: Mathematical models, by necessity, simplify the real-world phenomena they represent. While this makes them tractable, it can also lead to significant distortions. Complex economic behaviours and outcomes are influenced by numerous variables, many of which are hard to quantify or might be omitted from mathematical models. This was extremely obvious in the case of recent Health Bureaucracy failures internationally, unintentionally killing millions through reliance on oversimplified "modelling.".

Static Nature: Many mathematical models are static, representing a snapshot in time. The dynamic nature of human action, preferences, and information, is difficult to capture in such models.

Assumption of Rationality: A lot of economic models assume perfectly rational agents. However, as all thinkers would attest, real-world actors have varied motivations, imperfect knowledge, and sometimes act in ways that might seem irrational from a strictly mathematical standpoint.

Lack of Qualitative Insights: I am a particular critic of the over-reliance on quantification in economics. I believe that much of the knowledge in the economy is implicit—hard to quantify but essential. Mathematical models, by their nature, struggle to incorporate this qualitative, often subjective, information.

Advantages of Praxeological Analysis:

Focus on Human Action: At its core, praxeology is the study of human action. Ludwig Von Mises implied that all economic phenomena arise from individual choices and actions. Praxeological analysis starts from this foundational point, ensuring that the human element is never lost, as it sometimes is in purely mathematical treatments.

Incorporation of Subjective Value: Praxeology recognises that value is subjective, varying from person to person. This stands in contrast to many mathematical models, which might assume objective functions of value or utility.

Understanding Time and Uncertainty: Praxeology incorporates the roles of time and uncertainty in human decision-making. The dynamic nature of the market and the inherent unpredictability of future events and their nuances are often more effectively captured through praxeological analysis than static mathematical models.

Broad Scope of Analysis: A praxeological approach, while grounded in economics, doesn't shy away from incorporating insights from history, sociology, and culture, offering a richer and more comprehensive understanding of economic phenomena.

Decentralised Knowledge: The dispersion of knowledge in society can be better understood through praxeology. No single entity could ever compile all of the knowledge that people in an economy possess. Praxeological analysis respects this decentralised nature of information and the consequent importance of mechanisms (like market prices) that help in its dissemination.

While mathematical modelling offers valuable tools for understanding certain economic behaviours and patterns, it comes with limitations. Praxeological analysis, rooted in the Austrian school of economics, provides a complementary approach that delves deep into the nature of human action, subjective value, and the dynamic interplay of myriad factors in the economy. For a holistic understanding of economics, both approaches can be invaluable, each illuminating different facets of the intricate tapestry of economic behaviour.

From the author.

The opinions and statements are those of Sam Wilks and do not necessarily represent whom Sam Consults or contracts to. Sam Wilks is a skilled and experienced Security Consultant with almost 3 decades of expertise in the fields of Real estate, Security, and the hospitality/gaming industry. His knowledge and practical experience have made him a valuable asset to many organizations looking to enhance their security measures and provide a safe and secure environment for their clients and staff.

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