Paul Krugman explaining the IS-LM model:
[T]he first thing you need to know is that there are multiple correct ways of explaining IS-LM. That’s because it’s a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.
Which beautifully illustrates this point:
There seem to be two ways of understanding things; either by way of a metaphor or by way of a story, …[and] the metaphorical and narrative explanations answer to each other.
The metaphors McCloskey refers to are what we commonly term ‘models’; the narrative is the story that justifies the model’s existence. The metaphor provides a framework for the narrative, as the narrative provides a context for the metaphor. The importance of this interdependence is that models are empty without a narrative to explain why they exist. Equally, a historical narrative is of little help if it doesn’t give rise to a generalisable metaphor that we can use to simulate counterfactual worlds.
Krugman’s introduction to IS-LM (a macroeconomic metaphor) illustrates not only the importance of the narrative but also the fact that multiple narratives can support the same metaphor. This ties in really well to Matt’s discussions of the value of economic forecasting. The value in forecasting is not in the predictions that our models make about the future, but in the usefulness of the narrative the forecaster tells. That narrative varies across forecasters depending upon the relative importance of various actors in their story, despite the fact that they all have pretty much the same model of the economy in mind. That may help explain why they all tell a different story and yet profess to largely agree about all the important issues.