Economists routinely create models (i.e., simplifications of the real world) so they can study the impact of changing a small number of variables. The variables being studied are the intrinsic variables and the variables not being studied are the extrinsic variables. Studies assume extrinsic variables are held constant.
That’s all well and good, and some revelations are possible, but the problem arises when people think economic studies predict the real world. They often do not. The reason? The extrinsic variables were not held constant (that’s why they call them variables).
Increasing the number of intrinsic variables may or may not increase the predictive power of the economists’ models. However, it is impossible to create a model that includes every variable that exists in the real world.
Our conclusion: Economics may provide some useful information, but we need to be careful when we apply that information in the real world. The extrinsic variables can change.
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