Economics, Philosophy of
Daniel M. Hausman
Entry in Routledge Encyclopedia
People have thought about economics for as long as they have thought about how to manage their households, and indeed Aristotle assimilated the study of the economic affairs of a city to the study of the management of a household. During the two millennia between Aristotle and Adam Smith, one finds reflections concerning economic problems mainly in the context of discussions of moral or policy questions. For example, scholastic philosophers commented on money and interest in inquiries concerning the justice of "usury" (charging interest on money loans), and in the 17th century, there was a great deal of discussion of policy concerning foreign trade. Economics only emerged as a distinct field of study with the bold 18th-century idea that there were "economies"--that is autonomous law-governed systems of human interaction involving production, distribution and exchange. This view is already well developed in Adam Smith's Wealth of Nations, from which much of economics derives.
Economics is of philosophical interest in three main regards. It raises moral questions concerning welfare, justice and freedom. It raises foundational questions concerning the nature of rationality. And it raises methodological or epistemological questions concerning the character and possibility of knowledge of social phenomena. The fundamental theory of standard orthodox economics is of particular epistemological interest because of its consequent resemblance to theories in the natural sciences coupled with its uneven empirical performance.
More than 150 years ago John Stuart Mill confronted the problem of how to reconcile his high regard for economics (despite its empirical adequacies) with his commitment to empiricism. His solution, which was accepted by most economists until the 1930s, held that the basic principles of economics are well established by introspection or everyday experience. One can thus justifiably have confidence in economics, despite the inexactness of its implications, which is only to be expected, since economics deals with the most important determinants of economic phenomena.
In the 1930s Mill's views were rejected as too dogmatic and insufficiently empirical. But the views that succeeded Mill's during the generation after World War II, most notably the position of Milton Friedman and views deriving from the work of Karl Popper and Imre Lakatos, were less able to deal satisfactorily with the empirical inadequacies of economic theories than were Mill's. During the last decade there have been several new departures ranging from Donald McCloskey's rejection of methodological assessment on one extreme to Alexander Rosenberg's conclusion that economics cannot be a successful empirical science on the other.
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1 What is Economics?
2 Why is economics of philosophical interest?
3 Classic discussions of philosophical foundations
4 The main modern views
5 Directions of current research
1 What is Economics?
Contemporary economics is divided into many schools and branches. The main "orthodox," "neoclassical," or "neowalrasian" school models economic outcomes as equilibria in which individuals have done as well for themselves as they could given their preferences and the constraints on their choices. Common to all branches of orthodox economics are standard assumptions concerning technological possibilities and individual choice. Production is subject to diminishing returns to additional units of any given input, other inputs held constant, and is assumed not to show increasing returns to scale. The rational choices of individual agents are constrained by their initial endowment with resources and goods and by the technological possibilities. Agents are rational in the sense that their choices are determined by their preferences, which are complete and transitive. An agent's preferences are complete if the agent can rank alternatives. An agent's preferences are transitive if for all alternatives x, y, and z, the agent prefers x to z, whenever the agent prefers x to y and y to z (and similarly for indifference). Agents are typically assumed to want more consumption or leisure for their households and greater net returns for their firms. In competitive markets it is assumed that firms and individuals cannot influence prices, but economists and game theorists are also interested in strategic interactions, in which the rational choices of separate individuals are interdependent.
Orthodox economics has four main branches and many subspecialities. The view of economic phenomena as equilibria resulting from constrained rational individual choice has a greater prominence in some branches and subspecialities than in others. It is central in the most theoretical branch, which consists of microeconomics, general equilibrium theory, and game theory. Econometrics, in contrast, is as much statistics as economics. It uses data and statistical techniques to determine the values of parameters and to test specific models. Macroeconomics, the third branch, is concerned with whole economies and particularly with the causes of the business cycle and economic growth. In John Maynard Keynes' General Theory its links with individual choice are tenuous. Contemporary economists in contrast have defended alternative macroeconomic theories in which the view of economic phenomena as equilibria resulting from constrained rational choices is central. The fourth branch, consisting of orthodox work in applied economics (which is what most economists do), is consistent with the general theoretical picture of economic equilibrium, but applied theories make further simplifications to facilitate application. Within particular subspecialities, such as international trade theory, labor economics or financial economics, one may find work lying along all of the four main branches.
There are also many other schools of economics. Austrian economists accept orthodox views of choices and constraints, but they emphasize uncertainty and question whether one should regard outcomes as equilibria. Institutionalist economists question the value of abstract general theorizing. They emphasize the importance of generalizations concerning norms and behavior within particular institutions. Applied work in orthodox economics is sometimes very similar to applied institutionalist economics. Marxian economists traditionally articulated and developed Karl Marx's economic theories, but recently many Marxian economists have revised traditional Marxian concepts and themes with tools borrowed from orthodox economic theory. There are also socio-economists, behavioral economists, chaos theorists, post-Keynesians, and neo-Ricardians. Within orthodox economics itself, there are also many different schools or approaches, such as agency theorists, the Chicago school, constitutional political economy, new institutional economics, and public choice theory. Economics is not one homogeneous enterprise. This essay will focus on neoclassical economic theory because the orthodox neoclassical school is the best known and most influential and because its central theory has attracted the most philosophical attention.
2 Why is economics of philosophical interest?
Economics has been of philosophical interest in three main regards. First, it raises moral questions concerning freedom, social welfare and justice. Although economists often deny that their theories have ethical content, they are ready with advice about how to make life better. Markets, which are the central institutions with which economics traditionally has been concerned, involve voluntary interactions, yet they are simultaneously mechanisms that regulate individual activities and allocate goods to people. They thus raise intricate moral questions concerning coercion, voluntary action, and social justice. All the leading figures in contemporary social and political philosophy comment on and are influenced by work in economics. See Hausman and McPherson (1993) and ECONOMICS AND ETHICS.
Second, contemporary theoretical economics is largely a theory of rational choice. This may seem surprising, since economics is supposed to be an explanatory and predictive science of the actual interactions among people rather than a normative discipline studying how people ought rationally to choose, but it is indeed a fact. This fact joins the interests of economists to the interests of those philosophers concerned with rational choice. For more details concerning these philosophical aspects of economics, see RATIONAL CHOICE THEORY and SOCIAL CHOICE.
Third, economics raises important questions in philosophy of science. In part this is because all significant cognitive enterprises raise questions for epistemology or philosophy of science. But orthodox theory is of particular methodological interest for seven reasons.
1. (Positive and normative) The extent to which economics appears to be permeated with normative concerns raises methodological questions about the relationships between a positive science ("of what is") and a normative science ("of what ought to be"). The standard view is that the positive science of economics, like engineering, helps policy makers to choose means to accomplish their ends, but that it has no bearing on the choice of ends itself. This view is questionable, because economists have to interpret and articulate the incomplete specifications of goals and constraints provided by policy makers. See VALUE JUDGEMENTS IN SOCIAL SCIENCE and ECONOMICS AND ETHICS.
2. (Reasons and causes) It is of philosophical interest that orthodox theoretical economics is as much a theory of rational choices as it a theory that explains and predicts economic outcomes. Although economists are more interested in the aggregate results of individual choices than in the choices themselves, their theories offer both causal explanations for why individuals choose as they do and accounts of the reasons for their choices. Embedded within orthodox economics is a specific variant of "folk psychology", and orthodox economics provides a specific context in which to question whether folk-psychological explanations in terms of reasons can also be causal explanations. See PSYCHOLOGY, THEORIES OF, and EXPLANATION IN HISTORY AND SOCIAL SCIENCE.
3. (Naturalism) Of all the social sciences, economics most closely resembles the natural sciences. Economic theories have been axiomatized, and essays and books of economics are full of theorems. Of all the social sciences, only economics boasts a Nobel Prize. Economics is thus a test case for those concerned with the extent of the similarities and differences between the natural and social sciences. See NATURALISM IN SOCIAL SCIENCE.
4. (Abstraction and idealization) Economics raises questions concerning the legitimacy of severe abstraction and idealization. For example, economic models often stipulate that everyone is perfectly rational and has perfect information or that commodities are infinitely divisible. Such claims are exaggerations, and they are clearly false. Can good science make such false claims? See SCIENTIFIC REALISM AND SOCIAL SCIENCE.
5. (Ceteris paribus clauses) Because economists attempt to study economic phenomena as constituting a separate domain, influenced only by a small number of causal factors, the claims of economics are true only ceteris paribus -- that is, they are true only if there are no interferences or disturbing causes. What are ceteris paribus clauses, and when if ever are they legitimate in science? See SOCIAL LAWS.
6. (Causation) Many important generalizations in economics make causal claims. For example, the law of demand asserts that a price increase will (ceteris paribus) diminish the quantity demanded. Yet economists are wary of causal language because of its suggestion that outcomes have single causes and because of difficulties integrating talk of causation and talk of equilibrium mutual determination. Econometricians have also been deeply concerned with the possibilities for determining causal relations from statistical evidence and with the relevance of causal relations to the possibility of consistent estimation of parameter values. See CAUSALITY.
7. (Structure and strategy) During the past generation philosophers of science have been concerned to comprehend the larger theoretical structures that unify and guide research within particular research traditions or research programmes. Since orthodox economics is very systematically unified, though not in quite the way that Kuhn (1970) or Lakatos (1970) discuss,it poses interesting puzzles about what guides research. Since the success of orthodox economics is controversial, this "research tradition" also poses questions about how unified and constrained research ought to be. See PARADIGMS and RESEARCH PROGRAMMES.
These are the seven most significant philosophical issues concerning neoclassical economic theory, and many of these issues arise concerning all schools of economics.
3 Early discussions of philosophical foundations
Explicit methodological reflection on economics dates back to the 1830's to the work of Nassau Senior (1836) and John Stuart Mill (1836). See J.S. MILL. Their methodological reflections must be understood against the backdrop of the economic theory with which they were familiar. That theory ("classical economics") said comparatively little concerning the choices of consumers and supposed that people seek more wealth and are overly inclined to reproduce. With diminishing returns in agriculture and increasing population, the rate of return in agriculture (and, given the mobility of capital, elsewhere) will diminish, and the ultimate result will be a stationary state in which profits are low, workers receive subsistence wages, and landlords receive large rents. On account of this view of the future, economics was called "the dismal science". Classical economics, like contemporary theory, relied on bold simplifications, and it had empirical difficulties. Although population grew considerably, the rate of return in the 19th century did not fall sharply, and wages increased dramatically.
Mill was firmly committed to the economics of his day, yet he was a strict empiricist. See EMPIRICISM. Since economics faced such major empirical difficulties, it might appear that Mill would have to change his epistemology or disavow his economics. Call this conflict between empiricism and economics, which arises from the apparent disconfirmations of economics and the difficulty of testing it, "Mill's problem." Mill attempted to solve this problem by maintaining that the basic premises of economics are empirically well established by introspective psychology or by experimental testing of technical claims such as the law of diminishing returns. These well-supported premises state how specific causal factors operate. If the only causal factors influencing economic phenomena were those specified in these premises, then the predictions of economic theory would be correct. But economic phenomena depend on many causal factors that are left out of economic theories. Consequently, the implications are inexact. They are always imprecise, and when the factors left out are of particular importance, the predictions of the theories may be completely mistaken. This inexactness explains why the implications of economic theories are so poorly confirmed, and consequently the problems do not show that there is anything mistaken in the fundamental generalizations of economics. In Mill's view, the empirical confirmation of economic theories is indirect and "deductive." It derives from the confirmation of their premises. The inductive method of "specific experience" cannot be employed because of the multiplicity of causes. Furthermore, since there is no way to incorporate a much larger number of causal factors without destroying the "separateness" of economics and subsuming it into a general social science, this inexactness is an inevitable feature of economics as a distinct discipline. Economics is unavoidably a science of "tendencies" only.
Mill's view was tremendously influential until the 1930s, although there were always critics who argued for a more directly empirical approach to assessing economic theories. The most important methodological works of the late 19th century, J.E. Cairnes' The Character and Logical Method of Political Economy (1875), and John Neville Keynes' The Scope and Method of Political Economy (1917) defend Mill's view, and one can still find it clearly expressed in Lionel Robbins' classic, An Essay on the Nature and Significance of Economic Science (1935). Some have argued that Mill is in fact essentially right (Hausman 1992, ch. 8, 12). But by the 1940s most of those writing on economic methodology had repudiated Mill's view of economics as a separate and inexact science justified by a deductive method.
Methodological challenges to Mill's view before the 1930s came mainly from those working outside the orthodox mainstream. The most important challenge came from the German Historical School in the 19th century and from the American Institutionalists in the 20th. These critics argued that theories should apply more directly to specific historical circumstances and should be tested more directly through these applications. Members of the German Historical School also questioned whether it is possible to separate a positive economic science from normative issues of policy making. Mill accepts the positive/normative division, though not in quite its modern form, and it is explicit in later followers such as J.N. Keynes. Members of the German Historical School wanted economic theorizing to be more explicitly normative and oriented toward specific historical circumstances and policy recommendations.
Although these objections did not shake the views on theory assessment accepted by mainstream economists, views which remained stable for the century after Mill, changes in philosophical conceptions did accompany the significant changes that occurred during that century in economic theory itself. Neoclassical economics, unlike its classical predecessor, focuses on individual choices, which unavoidably reflect subjective preferences and beliefs. This fact disturbed critics of neoclassical economics, such as Thorstein Veblen, who saw it as a departure from the general trend of science away from teleological concerns and toward objective causal relations (1898). Defenders such as Frank Knight, Ludwig von Mises, and Lionel Robbins agreed that the role of subjective factors set economics apart from the natural sciences. But they denied that the methodological distinctiveness of economics demonstrates any methodological error. Indeed von Mises and his followers saw this peculiarity of economics as a virtue that provides a special certainty to the conclusions of economics (1949). In their view (though not in the view of other so-called "Austrians" economists such as Hayek), the conclusions of economics are beyond rational dispute, because they result from the privileged access people have to their preferences and beliefs or because they derive from the meaning of rationality.
The neoclassical focus on individual choice also led to a redefinition of the discipline. Mill and the classical economists had seen economics as concerned with specific causal factors--essentially acquisitive motives, diminishing returns, and the propensity to reproduce--which preponderate in a specific domain of social life (1836, esp. p. 323). Robbins, in contrast, defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses" (1932, p. 15). In Robbins' view, economics is not concerned with production, consumption, distribution or exchange as such. It is instead concerned with an aspect of all human action. The causal factors with which economics is concerned--rational self-interest--have a role in all human affairs. This vision of economics has been vindicated to some extent by applications of economic models to matters such as decisions to marry (Becker 1981) and by the development of game theory. To regard the subject matter of economics as an aspect of all human action is nevertheless an exaggeration, since economists continue to focus on a particular domain of social phenomena and on causal factors--such as diminishing returns--that are of particular importance only in that domain.
The methodological reflections of Knight, Robbins, and the Austrians reinforced Mill's views of economics as an inexact science, whose conclusions are credible because they follow deductively from well-established premises. Yet this view of theory assessment in economics, which was virtually unchallenged within mainstream economics in 1930, was almost without defenders by the end of the 1950's. During this short period economists came to believe that Mill's view of confirmation was insufficiently empirical. Economics could be scientific only if its theories were subjected to empirical test, and its theories could be rationally acceptable only if they passed these tests. It looks as if economists became familiar with the work of the logical positivists (see LOGICAL POSITIVISM) and applied their views to economics. But there is little solid evidence that the methodological changes were the result of the influence of logical positivism. The general changes in intellectual climate that gave rise to logical positivism may have separately caused this revolution in economic methodology. Books by Lesley Fraser (1937), Terence Hutchison (1938), and Felix Kaufmann (1944) made the case for such a methodological reorientation. Hutchison's was the most influential of these (probably because of Frank Knight's lengthy attack on Hutchison's views in the Journal of Political Economy (1940)). Hutchison had studied in Germany and was familiar with the work of the logical positivists and of Karl Popper, and he complained that statements qualified with vague ceteris paribus clauses cannot be refuted. Paul Samuelson's work on the theory of revealed preference (1938) was especially influential. Samuelson showed that if consumer choices in simplified models satisfy a consistency condition, then it is possible in principle to construct from the choices a preference ordering over commodity bundles. His work thus suggested that it might be possible to reformulate economic theory without relying on hard-to-test claims about subjective states of choosers. In teasing out the "operationally significant" content of economics from its mentalistic formulation, one might be able to make economics conform to demanding empiricist strictures. Samuelson was himself more influenced by the work of scientists such as Gibbs and Bridgman than by the logical positivists, and his own view of methodology (1963), which essentially repudiates all generalizations that are not themselves separately and directly testable, is more extreme than are the views of the logical positivists.
Whatever the cause, Mill's views were eclipsed. Methodologists no longer defended them, although it is arguable that economists continued to rely on them in practice. But Mill's problem remained. Neoclassical economic theory, like its classical predecessor, is hard to test and often apparently disconfirmed. Unless one is prepared to reject the theory or to deny that theories ought to fit the data, one needs to provide some defence of the empirical credentials of economics.
4 The main modern views
The past half century has witnessed the emergence of a large literature devoted to economic methodology. That literature explores many methodological approaches and applies its conclusions to many schools and branches of economics. Most of the literature focuses on the fundamental theory of mainstream economics--the theory of the equilibria resulting from constrained rational individual choice. This section focuses on three views of theory appraisal in economics that have been particularly influential. Two particularly significant alternatives not discussed here can be found in Machlup (1978) and Samuelson (1963).
The first and by far the most influential account of theory appraisal in economics is Milton Friedman's. In his 1953 essay, "The Methodology of Positive Economics," Friedman argued that the only relevant test of an economic theory is its success in predicting the phenomena that economists are concerned with. He believes that standard microeconomic theories and the quantity theory of money pass such tests well. He responds to criticisms of theories that point out that they contain "unrealistic assumptions" (such as the assumption that firms are profit maximizers) by arguing that the criticisms presuppose mistakenly that theories can be tested by their assumptions. In Friedman's view, Mill's problem evaporates as soon as one recognizes that scrutinizing the realism of assumptions is a methodological mistake.
Friedman begins his essay by distinguishing sharply between positive and normative economics. He dismisses the possibility of rational argument concerning values, but maintains that disagreements about economic policy result more from disagreements concerning the consequences of alternative policies than from disputes about values. The goal of positive economics is, in Friedman's view, exclusively predictive: "The ultimate goal of a positive science is the development of a "theory" or "hypothesis" that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed" (1953, p. 7). Friedman thus defends an instrumentalist view of science. See INSTRUMENTALISM. Note that "predictions" here are simply implications of a theory whose truth is not yet known.
Friedman's central claim that the realism of "assumptions" is irrelevant to the assessment of a theory does not follow from a standard instrumentalist perspective, in which the correctness or incorrectness of all the observable consequences of a theory bear on its acceptability. For the assumptions of economics (for example that firms maximize profits) are testable, and a standard instrumentalist would not dismiss apparent disconfirmations as irrelevant. To make sense of Friedman's position, one must recognize that he rejects a standard instrumentalist concern with all the predictions of a theory. Friedman denies that the goal of economics is predictive success in general. The practical point of an economic theory is correct prediction only for "the phenomena it purports to explain" (1953, p. 30). A good tool need not be an all-purpose tool. The fact that survey results are inconsistent with predictions derived from the hypothesis that firms are profit maximizers is irrelevant, because survey results are not among the phenomena that the theory of the firm is intended to explain.
From his thesis that the goal of economics is such "narrow" predictive success, Friedman jumps to the conclusion that narrow predictive success is the only relevant test. Although tempting, this inference is a mistake. It is like arguing that the only relevant way to check a computer program is to run it and see whether it does what it is supposed to. If it is possible to tell for sure by running a program whether it will always do what it is supposed to, then there is indeed no point to studying the code (though studying the code might be cheaper and easier than investigating what happens when one runs the program). But with economic theories, as with complicated computer programs, one can only look at a small sample of their performance, and success in the sample is no guarantee of success in general. One cannot look and see how well the theory performs with respect to the full range of phenomena it was designed to account for. Indeed, the point of a theory is precisely to provide guidance when one does not yet know how the theory's predictions come out. Just as one can assess computer programs by studying their code or examining how they work in uninteresting applications, so one can assess theories by examining their assumptions and attending to the success or failure of uninteresting predictions. Such scrutiny of the "realism of assumptions" is of particular importance when extending a theory to new circumstances or when modifying a theory in the face of predictive failure.
Friedman's narrow view of the goals of economics is also contestable. Even though economics has a crucial policy mission, many economists are concerned to explain economic phenomena, and many simply want to know the truth about various aspects of economies. Those economists obviously cannot accept Friedman's view that the realism of assumptions does not matter. The argument above shows that economists who accept Friedman's narrow view of the goals of economics cannot dismiss criticisms of the realism of assumptions either. Friedman does not solve Mill's problem.
A second modern approach to Mill's problem derives from Karl Popper's philosophy of science and is more critical of economics (see POPPER, KARL). Karl Popper defends a "falsificationist" methodology. Scientists should formulate theories that are "logically falsifiable"--that is, inconsistent with some possible observation reports. "All crows are black" is logically falsifiable, since it is inconsistent with (and would be falsified by) an observation report of a red crow. Second, Popper maintains that scientists should subject theories to harsh test and should be willing to reject them when they fail the tests. Third, scientists should regard theories as at best interesting conjectures. Passing a test does not confirm a theory or provide one with reason to believe it. All it does is to justify continuing to employ it (since it has not yet been falsified) and devoting increased efforts to attempting to falsify it (since it has thus far survived testing). Popper has also written in defense of what he calls "situational logic" (which is basically rational choice theory) as the correct method for the social sciences. There appear to be serious tensions between Popper's falsificationism and his defense of situational logic, and his discussion of situational logic has not been as influential as his falsificationism. For discussion of this aspect of Popperian economic methodology, see Hands (1985).
Given Popper's philosophy of science, there seems little hope of solving Mill's problem without rejecting contemporary economic theory and condemning its practitioners as behaving in a scientifically illegitimate way. For specific economic theories are rarely logically falsifiable. When they are, they are rarely subjected to test, let alone harsh test. When they fail the tests, they are rarely repudiated. Worst of all, economic theories, which have not even been well tested, are taken to be well-established, perhaps even unquestionable guides to policy, rather than merely conjectures. Some critics of neoclassical economics have made these criticisms (Eichner 1983). But most of those who have espoused Popper's philosophy of science have not repudiated mainstream economics and have not been harshly critical of its practitioners.
Mark Blaug (1992) and Terence Hutchison (1938), who are the most prominent Popperian methodologists, criticize particular features of economics, and they both call for more testing and a more critical attitude. But both understate the radicalism of Popper's views and take his message to be merely that scientists should be critical and concerned to test their theories. Blaug's and Hutchison's criticisms have sometimes been challenged on the grounds that economic theories cannot be tested, because of their ceteris paribus clauses and the many subsidiary assumptions required to derive testable implications (Caldwell 1984). But this response ignores Popper's insistence that testing requires methodological decisions not to attribute failures of predictions to mistakes in subsidiary assumptions or to "interferences." For views of Popper's philosophy and its applicability to economics, see de Marchi (1988) and Caldwell (1991).
Applying Popper's views on falsification literally would be destructive. Not only neoclassical economics, but all known and probably all imaginable economic theories would be condemned as unscientific, and there would be no way to discriminate among economic theories. One major problem is that one cannot derive testable implications from theories by themselves. To derive testable implications, one also needs subsidiary assumptions or hypotheses concerning distributions, measurement devices, proxies for unmeasurable variables, the absence of various interferences, and so forth. See QUINE-DUHEM PROBLEM. These problems arise generally, and Popper proposes that they be solved by a methodological decision to regard a failure of the deduced testable implication to be a failure of the theory. But in economics the subsidiary assumptions are extremely uncertain and in many cases known to be false. Making the methodological decision that Popper requires is unreasonable and would lead one to reject all economic theories.
Imre Lakatos (1970) (see LAKATOS, IMRE), who was for most of his philosophical career a follower of Popper, offers a broadly Popperian solution to this problem. Lakatos denies that one tests individual theories. When theories face empirical difficulties, as they always do, one attempts to modify them. Scientifically acceptable (in Lakatos' terminology "theoretically progressive") modifications always have some additional testable implications and are thus not purely ad hoc. If some of the new predictions are confirmed, then the modification is "empirically progressive" and one has reason to reject the unmodified theory and to employ the new theory, regardless of how unsuccessful in general either theory may be. Though progress may be hard to come by, Lakatos' views do not have the same destructive implications as Popper's. Lakatos appears to solve Mill's problem by arguing that what matters is empirical progress or retrogression rather than empirical success or failure. It is thus easy to see why Lakatos' views have become more widespread among economic methodologists than Popper's. Developing Thomas Kuhn's notion of a "paradigm" (1970) and some hints from Popper, Lakatos also developed a view of the global theory structure of whole theoretical enterprises, which he called "scientific research programmes." Lakatos emphasized that there is a "hard core" of basic theoretical propositions that are not to be questioned and that substantial heuristics guide members of a research programme in the articulation and modification of specific theories. These views were also attractive to economic methodologists, since theory development in economics is so sharply constrained and directed and since economics appears at first glance to have a "hard core." The fact that economists do not give up basic theoretical postulates that appear to be false might be explained and justified by regarding them as part of the "hard core" of the neoclassical research programme.
Yet Lakatos' views do not provide a satisfactory solution to Mill's problem. For it is questionable whether the development of neoclassical economic theory has demonstrated empirical progress. For example, the replacement of "cardinal" utility theory by "ordinal" utility theory in the 1930's, which is generally regarded as a major step forward, involved the replacement of one theory by another that was strictly weaker and which had no additional empirical content. Furthermore, despite his emphasis on heuristics as guiding theory modification, Lakatos still emphasizes testing. Science is for Lakatos a much more empirically driven enterprise than is contemporary economics (Hands 1991). It is also doubtful whether research enterprises in economics have "hard cores" (Hoover 1991, Hausman 1992, ch. 6). For attempts to apply Lakatos' views to economics see Latsis (1976), Weintraub (1985). As is apparent in de Marchi and Blaug (1991), writers on economic methodology have in recent years become increasingly disenchanted with Lakatos' philosophy.
There is a second major problem with Popper's philosophy of science, which plagues Lakatos' views as well. Both defend the startling thesis that there is no such thing as empirical confirmation. Popper and Lakatos deny that the results of testing can give one reason to believe that statements are true, and both deny that results of tests can justify relying on statements in practical endeavours or in theoretical inquiry. They would accordingly regard as mistaken any claim that there is better evidence for one unfalsified proposition than for another. Someone who questions whether there is enough evidence for some proposition to justify relying on it in theoretical studies or for policy purposes would be making the methodological "error" of supposing that there can be evidence in support of hypotheses. With the notable exception of Watkins (1984), few philosophers within the Popperian tradition have faced up to this radical consequence.
5 Contemporary Directions in Economic Methodology
The failure of Friedman's, Popper's, and Lakatos' views to solve Mill's problem has had little impact on most economists, who are little concerned with methodology and who, when pressed, typically defend a position like Friedman's. But those specifically concerned with methodology have turned in many new directions, of which only three will be discussed here. Especially notable among the projects not discussed here are Lawrence Boland's neo-Popperian views (1989), Bruce Caldwell's "methodological pluralism" (1982), Uskali Mäki's realist philosophy of economics (1990), Phillip Mirowski's exploration of the metaphorical structure of economics (1990), and E. Roy Weintraub's social constructivism (1991). There has also been a substantial effort to apply structuralist views of scientific theories to economics (Stegmüller et al. 1981, Balzer and Hamminga 1989), and recently there have been some discussions of economics from feminist perspectives (Ferber and Nelson 1993).
One radical reaction to the failure to solve Mill's problem is to deny that it can be solved. In Alexander Rosenberg's view (1992), economics can only make imprecise "generic" predictions, and it cannot make progress, because it is built around folk psychology, which is a mediocre theory of human behavior and which (owing to the irreducibility of intentional notions) cannot be improved. Complex economic theories ought to be valued as applied mathematics, not as empirical theory. Since economics despite its many well-trained practitioners, does not show the same consistent progress as the natural sciences, one cannot dismiss out of hand Rosenberg's suggestion that economics is an empirical dead end. But his view that it has made no progress and that it does not permit quantitative predictions is hard to accept. For example, it seems that contemporary economists can do a much better job of predicting the revenue consequences of a change in tax rates than could economists of even a century ago.
An equally radical but opposite reaction is Donald McCloskey's. He would solve Mill's problem by repudiating methodology. In McCloskey's view, the only relevant and significant criteria for assessing the practices and products of a discipline are those accepted by the practitioners. Apart from a few general standards such as honesty and a willingness to listen to criticisms, the only justifiable criteria for any conversation are those of the participants. The pretensions of philosophers to judge the discourse of scientists are arrogant and may be dismissed. Mill's problem dissolves when economists recognize that philosophical standards of empirical success may be safely ignored. Those who are interested in understanding the character of economics and in contributing to its improvement should eschew methodology and study instead the "rhetoric" of economics -- that is, the means of argument and persuasion that succeed among economists.
McCloskey's studies of the rhetoric of economics have been valuable and influential (1985, esp. ch. 5-7), but much of his work consists not of such studies but of philosophical critiques of the pretensions of methodology. These are more problematic, because the position sketched in the previous paragraph is hard to defend and potentially self-defeating. It is hard to defend, because epistemological standards for good science have already infected the conversation of economists. The standards of predictive success which give rise to Mill's problems are already standards that economists accept. Mill's problem can be dissolved only if economists can be persuaded to surrender the standards that gave rise to it. But the position sketched in the previous paragraph makes it difficult to argue for any changes in standards. Furthermore, as Alexander Rosenberg has argued, it seems that economists would doom themselves to irrelevance if they were to surrender standards of predictive success, for it is upon such standards that policy decisions are made. McCloskey does not, in fact, want to preclude all "external" criticisms, which maintain that economists are sometimes persuaded when they should not be or are not persuaded when they should be. For he criticizes the conflations of statistical significance with economic importance, which are, as he documents, nevertheless extremely common (1985, ch. 9). Sometimes McCloskey characterizes rhetoric descriptively as the study of what in fact persuades, but sometimes he characterizes it normatively as the study of what ought to persuade (1985, ch. 2). And if rhetoric is the study of what ought to persuade, then it is methodology, not an alternative to methodology. Mill's problem cannot be conjured away.
A third approach is to return to Mill's own solution. Many of the basic principles of economics are plausible and are borne out in everyday experience. Although such plausibility does not place these principles beyond question, it does provide some warrant for them and some warrant for what may be deduced from them. Given the weakness of tests involving market data, in which there is an uncontrolled multiplicity of causal factors, it may be reasonable to hang on to orthodox theory in the face of disconfirmation. This thought can be rigorously supported in terms of Bayesian confirmation theory (Hausman 1992, ch. 12). See CONFIRMATION THEORY.
Yet this restoration of something like Mill's solution is in many ways as close to Rosenberg's and McCloskey's views as it is to Mill's. For the recognition that market tests will generally be too weak to shake the initially plausibility of the basic principles is simultaneously a recognition that there is little to be learned from market data. Although not quite as hostile to the empirical claims of economics as is Rosenberg's position, this view holds out few hopes for major improvements in economics. (By seeking higher quality data from observational studies and particularly experiments (see Roth 1988), economists may however be able to find a way out of this impass.) On the other hand, in its insistence that one study the specific problems and constraints that economists face, this view joins McCloskey's in calling for less philosophically blinded studies of the rhetoric of economics (although it does not, of course, accept McCloskey's condemnation of epistemology).
Contemporary economic methodology is in turmoil. It has become an active area of research engaging major efforts by dozens of economists and a small group of philosophers. Economics presents a tantalizing list of puzzles, with Mill's problem at the core. And these problems have a special philosophical interest because of the connections between economics and ethics and between economics and the theory of rationality. There is much that is unknown and puzzling about how much people can learn about the character of their interactions and about what methods are most likely to help them to learn more. Economics is one exciting venue in which these general problems can be raised, but it has not as yet provided any easy solutions.
References and further reading
Backhouse, R., ed. (1994) New Perspectives on Economic Methodology, London: Routledge. (An accessible collection of recent essays.)
*Balzer, W. and B. Hamminga, eds. (1989) Philosophy of Economics, Dordrecht: Kluwer-Nijhoff. (Contains mainly applications to economics of the structuralistic view of theories; cited in §5.)
*Becker, G. (1981) A Treatise on the Family, Cambridge, Mass.: Harvard University Press. (Applications of economic theory to the family; cited in §3.)
*Blaug, M. (1992) The Methodology of Economics: Or How Economists Explain, Cambridge: Cambridge University Press. Second Edition. (An influential discussion from a Popperian perspective cited in §4.)
*Boland, L. (1989) The Methodology of Economic Model Building: Methodology after Samuelson, London: Routledge. (One of a series of books developing a distinctive neo-Popperian view of economic methodology, cited in §5.)
Buchanan, J. and V. Vanberg (1991) 'The market as a creative process', Economics and Philosophy 7: 167-86. (A classic statement of an 'Austrian' perspective)
*Cairnes, J. (1875) The Character and Logical Method of Political Economy, 2nd. ed. reprinted 1965. New York: A. M. Kelley. (One of the major 19th-century works on economic methodology by a follower of John Stuart Mill; cited in §3.)
*Caldwell, B. (1982) Beyond Positivism: Economic Methodology in the Twentieth Century, London: Allen & Unwin. (An extremely influential introduction to economic methodology cited in §5.)
*------ (1991) 'Clarifying Popper', Journal of Economic Literature 29: 1-33. (A major summary of Popper's views as applicable to economics; cited in §4.)
Caldwell, B. ed. (1984) Appraisal and Criticism in Economics, London: Allen & Unwin. (A useful collection of roughly positivist or Popperian essays on economic methodology; cited in §4.)
------. The Philosophy and Methodology of Economics, Cheltenham: Edward Elgar, 1993. (A three-volume collection of essays on economic methodology.)
*De Marchi, N., ed. (1988) The Popperian Legacy in Economics, Cambridge: Cambridge University Press. (Contains essays and debate concerning Popperian economic methodology; cited in §4.)
------., ed. (1992) Post-Popperian Methodology of Economics: Recovering Practice, Boston: Kluwer. (A recent collection with examples of new directions in economic methodology)
*de Marchi, N. and M. Blaug, eds. (1991) Appraising Modern Economics: Studies in the Methodology of Scientific Research Programs, Edward Elgar. (A collection devoted to essays appraising Lakatosian economic methodology; cited in §4.)
Dugger, W. (1979) 'Methodological differences between institutional and neoclassical economics', Journal of Economic Issues 13: 899-909. (A further discussion of the character of institutionalist economics, which is mentioned in §3.)
*Eichner, A. (1983) 'Why economics is not yet a science', in A. Eichner, ed. Why Economics Is not yet a Science, Armonk, New York: M.E. Sharpe, pp. 205-41. (An example of a Popperian critique of orthodox economics cited in §4.)
*Ferber, M. and J. Nelson, eds. (1993) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. (A collection of essays examining economics from a feminist perspective; cited in §5.)
*Fraser, L. (1937) Economic Thought and Language. A Critique of Some Fundamental Concepts, London: A & C Black. (Calls for a more positivistic view of economics; cited in §3.)
*Friedman, Milton (1953) 'The methodology of positive economics', in Essays in Positive Economics, Chicago: University of Chicago Press, pp. 3-43. (The most influential single essay on economic methodology, discussed in §4.)
*Hands, D. (1985) 'Karl Popper and economic methodology', Economics and Philosophy 1: 83--100. (A discussion of the relevance of Popper's situational logic to economic methodology; cited in §4.)
*------ (1991) 'The problem of excess content: economics, novelty and a long Popperian tale', in de Marchi and Blaug (1991), pp. 38-75. (A discussion of empirical emphasis in Lakatos' philosophy of science; cited in §4.)
*Hausman, D. (1992) The Inexact and Separate Science of Economics, Cambridge: Cambridge University Press. (A general account of the philosophy of economics that defends a reformulation of J.S. Mill's views; cited in §§4,5.)
Hausman, D., ed. (1984) The Philosophy of Economics: An Anthology, Cambridge: Cambridge University Press. (A collection of both classic and recent essays in the philosophy of economics.)
*Hausman, D. and M. McPherson (1993) 'Taking ethics seriously: economics and contemporary moral philosophy', Journal of Economic Literature 31:671-731. (A survey of work on economics and ethics; cited in §2.)
*Hoover, K. (1991) 'Scientific research program or tribe? A joint appraisal of Lakatos and the new classical macroeconomics', in de Marchi and Blaug (1991), pp. 364-94. (A discussion of the structure of new classical economics with a critique of Lakatos' philosophy of science; cited in §4.)
*Hutchison, T. (1938) The Significance and Basic Postulates of Economic Theory, reprinted 1960 with a new Preface. New York: A.M. Kelley. (Probably the most important methodological work calling for a more positivistic or Popperian view; cited in §3.)
*Kaufmann, F. (1944) Methodology of the Social Sciences, London: Oxford University Press. (Call for a more positivistic approach; cited in §3.)
*Keynes, J. N. (1917) The Scope and Method of Political Economy (4th edn.) (1st edn. 1891) reprinted 1955, New York: A. M. Kelley. (A classic work on economic methodology heavily influence by J.S. Mill; cited in §3.)
Klamer, A., D. McCloskey and R. Solow, eds. (1988) The Consequences of Economic Rhetoric, New York: Cambridge University Press. (Essays containing further discussion of McCloskey's views on the rhetoric of economics discussed in §5).
*Knight, F. (1940) 'What is "truth" in economics?' Journal of Political Economy 48: 1--32. (An influential review of Hutchison (1938) that defends an old-fashioned Millian view of economic methodology; cited in §3.)
Koopmans, T. (1957) Three Essays on the State of Economic Science, New York: McGraw-Hill. (The most important book on economic methodology of the 1950's; defends a moderate empiricist position.)
*Kuhn, T. (1970) The Structure of Scientific Revolutions, 2nd. ed. Chicago: University of Chicago Press. (A recent classic in philosophy of science defending the importance of 'paradigms'; cited in §2.)
*Lakatos, I. (1970) 'Falsification and the methodology of scientific research programmes', in Lakatos, I. and A. Musgrave, eds. 1970. Criticism and the Growth of Knowledge, Cambridge: Cambridge University Press, pp. 91--196. (The major statement of Lakatos' philosophy of science; cited in §§2,4.)
*Latsis, S., ed. (1976) Method and Appraisal in Economics, Cambridge: Cambridge University Press. (A collection of essays applying Lakatos' philosophy to economics; cited in §4.)
Leijonhufvud, A. (1973) 'Life among the Econ', Western Economic Journal 11: 327-37. (A humorous commentary on economic methodology.)
Leontief, W. (1971) 'Theoretical Assumptions and Nonobserved Facts', American Economic Review 61: 1-7. (An influential critique of the abstractness and empirical weakness of contemporary economics.)
Little, D., ed. (1993) On the Reliability of Economic Models: Essays in the Philosophy of Economics, Boston: Kluwer. (A recent collection of essays on economic methodology.)
*McCloskey, D. (1985) The Rhetoric of Economics, Madison: University of Wisconsin Press. (This contains the major statement of McCloskey's views; cited in §5.)
*Machlup, F. (1978) Methodology of Economics and Other Social Sciences, New York: Academic Press. (A collection of Machlup's essays on economic methodology; cited in §4.)
Marx, K. (1973) Grundrisse, tr. M. Nicolaus. New York: Random House. (The introduction contains Marx's most extensive discussion of economic methodology.)
*Mäki, U. (1990) Studies in Realism and Explanation in Economics, Helsinki: Suomalainen Tiedeakatemia. (Essays clarifying notions of realism and defending its importance in understanding economics; cited in §5.)
Menger, C. (1883) Problems of Economics and Sociology, ed. L. Schneider, tr. F. Nock. Urbana: University of Illinois Press, 1963. (A critique of the views of the German Historical School discussed in §3.)
*Mill, J. S. (1836) 'On the definition of political economy and the method of investigation proper to it', reprinted 1967 in Collected Works of John Stuart Mill, vol. 4. Toronto: University of Toronto Press. (The first presentation of Mill's influential views on economic methodology; cited in §3.
*------ (1843) A System of Logic, London: Longmans, Green & Co., 1949. (Book VI contains a significant reworking of Mill's views on economic methodology; cited in §3.
*Mirowski, P. (1990) More Heat Than Light, Cambridge: Cambridge University Press. (A recent discussion of the history and methodology of economics that emphasizes the use of analogies to physics; cited in §5.)
*Mises, L. von. (1949) Human Action. A Treatise on Economics, New Haven, Yale University Press. (Mises' major work, which defends a view of the basic principles of economics as known a priori; cited in §3.)
Morgan, M. (1990) History of Econometric Ideas, Cambridge: Cambridge University Press. (A historical account of econometrics that highlights its methodological problems.)
Popper, K. (1968) The Logic of Scientific Discovery (rev. edn.) London: Hutchinson & Co. (Popper's major work discussed in §4.)
Redman, D. (1989) Economic Methodology: A Bibliography with References to Works in the Philosophy of Science, 1860--1988, New York: Greenwood Press. (A useful source for further references.)
*Robbins, L. (1932, 1935) An Essay on the Nature and Significance of Economic Science, London: Macmillan. (One of the most important books on methodology; cited in §3.)
Roscher, W. (1874) Geschichte der National-oekonomik in Deutschland, Munich: R. Oldenbourg. (One statement of the views of the German Historical School mentioned in §3.)
*Rosenberg, A. (1992) Economics--Mathematical Politics or Science of Diminishing Returns. Chicago: University of Chicago Press, 1992. (Denies the possibility of empirical progress in economics; cited and discussed in §5.)
*Roth, A. (1988). 'Laboratory experimentation in economics: a methodological overview', Economic Journal 98: 974-1031. (A survey emphasizing methodological issues; cited in §5.)
Samuels, W., ed. (1980) The Methodology of Economic Thought: Critical Papers from the Journal of Economic Thought [Issues], New Brunswick: Transaction Books. (A collection of methodological essays from an institutionalist perspective.)
*Samuelson, P. (1938) 'A note on the pure theory of consumer's behavior', Economica 5: 61--71. (An influential presentation of revealed-preference theory that led economists to take a more positivistic view of economic methodology; cited in §3.)
*------ (1963) 'Problems of methodology--discussion', American Economic Review Papers and Proceedings 53: 232--36. (A presentation of Samuelson's views on economic methodology; cited in §4.)
*Senior, N. (1836) Outline of the Science of Political Economy, reprinted 1965, New York: A. M. Kelley. (Contains one of the first discussions of economic methodology. Senior's position is similar to Mill's and cited in §3.)
*Stegmüller, W., W. Balzer, and W. Spohn, eds. (1982) Philosophy of Economics: Proccedings, Munich, July 1981, New York: Springer. (Applications of the structuralist view of scientific theories to economics; cited in §5.)
*Veblen, T. (1898) 'Why is economics not an evolutionary science?' Quarterly Journal of Economics 12: 373--97. (A classic institutionalist critique of neoclassical economics.)
*Watkins, J. (1984) Science and Scepticism. Princeton: Princeton University Press. (A sophisticated account of philosophy of science in the Popperian tradition; cited in §4.)
Weber, M. (1975) Roscher and Knies: The Logical Problem of Historical Economics, tr. G. Oakes. New York: Macmillan. (A discussion of the German Historical School; cited in §3.)
*Weintraub, E. (1985) General Equilibrium Analysis: Studies in Appraisal, Cambridge: Cambridge University Press. (An influential application of Lakatos' philosophy of science; cited in §4.)
*----- (1991) Stabilizing Dynamics, Cambridge: Cambridge University Press. (A history of recent work on dynamics defending post-modern, social constructivist views.)
Essays on economic methodology are conveniently indexed in The Journal of Economic Literature and in the Index of Economic Articles in Journal and Collective Volumes under the number, 036 prior to 1991 and under the number B4 since then. Redman (1989) is annotation bibliography of essays on economic methodology published before 1988.