Economists use a similar distinction between top-down macroeconomic models and bottom-up microeconomic models. A key issue in both business analysis and economics is the relationship between the top-down and bottom-up models, and the level of consistency between them. Business analysts have debated these issues for many years, so what does business analysis have to contribute to the current modelling debates in economics?
Most people have no interest in, or experience with, either business models or economic models, so I’m going to use a more familiar set of models to make some relevant points, although I learned these lessons through developing business models.
Let’s start with a top-down view of the geography of the earth. Here is a photograph taken from Apollo 17. It’s known as the Blue Marble.
The Blue Marble
At this scale and perspective, we can see that the earth is round, and we can identify feature such as continents, the sea, the snow-covered poles and large areas of cloud. A second model, at a similar scale, might help us understand that the earth orbits the sun with its polar axis at an angle of around 23 degrees. This model would allow us to explain the seasons of the year.
When we change scale to look at the earth in greater detail, we move to atlases and maps. As these models show a round object on a flat surface, we need to use projections such as Mercator, Gall-Peters and Mollweide to produce these models. Projections distort the relative size and position of different objects on the earth. Different projections distort the earth in different ways. At this scale, and subject to the rules of any specific projection, we can use these models to see the relative size and positions of countries, and large features such as mountain ranges, large lakes and the biggest rivers.
When we change scale again to look at an individual country, the distortions of different projections become less pronounced, particularly for small countries. At this scale, we can use different maps to see more detail. For example, we might see geographical and political boundaries, towns and cities, and major road and rail networks. Even if we are unfamiliar with a country, we can ask interesting questions which can help expand our knowledge: why are the states in the north-east of the USA often small while the states elsewhere are much larger; why do some states have regular boundaries while others have jagged boundaries? If we are not familiar with the distortions in the map, we may misunderstand the picture we are viewing: is Alaska really an island off the south-west coast of Texas; and what happened to Canada and Mexico?
Map of US States
Finally, when we change scale again, we can use street maps to navigate around a single town or city. We can also use highly stylised maps to navigate tube and subway networks. In these latter maps, we may even lose a sense of the physical distance between stations. However, these maps are still useful in helping us to select the correct train line and to understand when we need to change from one line to another.
What general rules can we take from these geographical models which could also be applied to business and economic models?
| Rule | Description |
|---|---|
| 1 | Models can be developed at different scales and with different perspectives |
| 2 | All models are simplifications of reality |
| 3 | Models should be judged as useful rather than correct. Models which distort reality can still be useful as long as the reader understands the distortion and its limitations |
| 4 | It is vital that any model helps you answer specific questions. It is often better to develop several simple models, with different perspectives, to answer different questions. A model which helps you understand the seasons of the year may not help you find your way round the London tube network, and vice versa |
| 5 | It is essential to develop models which provide insights for the layman into the complexities associated with the questions he is asking, and into the answers to these questions. This does not preclude the use of expert-only models but such models cannot, and should not, be used to communicate with non-experts |
| 6 | A model presented as a diagram is normally easier for a layman to understand than an equivalent verbal description |
| 7 | Different people may need and expect to see the same situation from different scales and perspectives, so multiple models may be needed to communicate with different audiences |
| 8 | It is not always possible to develop top-down models simply by combining bottom-up models. You cannot tell that the world is round from a city street map. |
In general, business analysts have recognised these characteristics in their use of models. Perhaps that’s because their customers hold them to account in providing useful answers to specific questions, and because they insist on models that reflect the facts as they understand them. In contrast, the debates in economics seems to focus more on the correctness and consistency of economic models rather than their usefulness in solving problems or in explaining problems and solutions to non-experts.
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