The Methodology of Economics - Assignment Example

Critical assessment of two articles on the methodology of economics One important topic that is least discussed and that does not receive adequate attention in economics is that one on the methodology. By methodology, this paper refers to the fundamental approach taken by economics in building theories, hypothesis, and principles used in analyzing issues and formulating policy recommendations. Oftentimes, economics strongly asserts or assumes that the world behaves according to the models that it has developed and recommends policies based on models that do not adequately consider or factor in social and historical contexts. At the core of the concern for methodology in economics is a concern on how economics acquire knowledge on the world and what methodologies economics use to expand the frontiers of that knowledge. Also closely related to the concern is the discipline’s notion of what constitutes science and what knowledge can be considered as scientific or what knowledge can be considered as lacking a scientific basis or foundation. We review the work of Hausman (1989) and Thorn (1980) and then attempt to do an assessment of their works. Hausman’s “Economic methodology in a nutshell”1 According to Hausman (1989, p. 115), the literature on economic methodology is mainly concerned with confirmation or disconfirmation of theory and has usually revolved on whether a particular economics is good science. Milton Friedman had viewed that good economic theories provide correct and useful predictions while Paul Samuelson had upheld that economic theories must involve operational concepts that are equivalent to their descriptions (Hausman, 1989, p.115). For Hausman, however, these views are mistaken because many of economic theorizing have been conceptual explorations and theories do not necessarily offer empirical hypotheses. According to Hauman, the four approaches that have dominated the discussion on economic methodology are deductivism, positivism or Popperianism, predictionism, and eclecticism. Hausman (1989) associates deductivism with Johan Stuart Mill, the discussion on positivism or Popperianism with Mark Blaug, predictionism with Milton Friedman, and eclecticism with Donald McCloskey. Deductivism asserts that because so many causal factors can influence economic phenomena, experimentation is generally not possible and induction cannot be directly employed (Hausman, 1989, p. 116, 3rd paragraph). The deductivist solution is to derive inductively the psychological or technical laws and then deduce the economic implications from the laws that were discovered inductively (Hausman, 1989, p. 116, 3rd paragraph). Empirical tests are needed to check whether the empirically derived conclusions are applicable, whether the deductions are correct, or whether important variables were not taken into consideration. In response to positivist and Popperian discussions, Mark Blaug in 1980 argued that neoclassical economics do not meet Popperian or positivist standards on what can be considered as scientific (Hausman, 1989, p. 116, last paragraph). Earlier, in 1940, Frank Knight argued that positivistic views on science are inappropriate to economics (Hausman, 1989, p. 116). Some of the conditions that economics refer to are either non-observable or not fully specified and, thus, they are unfalsifiable. In the Popperian perspective, when a theory lacks potential falsifiability then it is not testable and therefore not amenable to scientific verification. For Milton Friedman, the goals of science fundamentally revolve around predictions and not around explanations (Hausman, 1989, p. 120). In Milton’s perspective, theories that are able to make reliable predictions are the good theories and simple theories that have a wider scope of applicability are the preferred theories (Hausmann, 1989, p. 120, 3rd paragraph). In the Miltonian perspective, the test for a good theory does not lie on the realism of its assumptions but only on the reliability of its predictions (Hausmann, 1989, p. 120). Hausman (1989, p. 122-124) claims that eclecticism in methodology has emerged in economics and economists can use their judgment and defend their rational standards in the practice of economics. In defending eclecticism2, Hausman pointed out that David McCloskey found that Paul Samuelson, a “giant” in economics, have used a variety of “rhetorical devises” in theorizing like “analogy”, “appeals to authority”, “relaxation of assumptions”, and “hypothetical toy economies”. In his concluding remarks, Hausman said that positivist or Popperian complaints on the methodology of economics continue, Friedman’s point of view on economic methodology continues to be both refuted and rehabilitated, and an eclectic approach emerged in response to the two. Thorn’s “The methodologies of economists: A survey” For Thorn (1980, p. 139), the function of methodology is to guide a researcher in the quest for knowledge as well as encourage his or her colleagues to accept the validity of research findings. At the same time, methodology is invoked to provide legitimacy to research findings. Thorn has correctly observed that formal studies of economic methodology have disappeared in many universities and discussion on them has been limited. Thorn correctly observed that many economists never studied economic methodology formally and many economists use the economic methodology of their predecessors that they have learned only informally or via observation. The methodologies they have acquired from their predecessors are deemed as “scientific” because their predecessors have considered the theories as such (“scientific”). Writing in 1980, Thorn said that the literature on economic methodology had not been surveyed adequately and, thus, his work. He identified, categorized, and described four methodological approaches: a priorism, conventionalism, falsification and positive economics, and pragmaticism. Thorn considered the four as non-competing methodologies because “there are probably few economists who have not employed all four methodologies at some time (sometimes in the same article) to justify their hypotheses and their validity” (p. 141). Thorn further justified his view by saying that “while there are methodological schools, there are no school of economics corresponding to these methodological divisions” (p. 141). At the outset, Thorn defined theory as “a group of logically connected statements, at least one of which is related to some observable phenomenon” (p. 141). At the same time, Thorn defined a hypothesis as a “statement about the real world derived either from a theory or by some other means, such as intuition or observation” (p. 141). For Thorn, a theory can contain observational statements that can testable and which can be subjected to empirical tests but it is not required for every theoretical statement of a theory to be testable “for a theory to have empirical content” (p. 141). For Thorn, a priorism is the assumption of rationality for describing human action and its philosophical roots can be traced to Aristotle and Kant (p. 141). At the same time, Thorn also said that a priorism hold that “logically derived statements which are deduced from fundamental postulates about human behaviour can produce valid hypotheses about the real economic world” (p. 142). When empirical data are unable to confirm a priori hypotheses, assuming there are no errors of logic, a priorists can claim one or both of the following: the a priori theory is not applicable to the phenomena or the observation may not be accurate. Further, Thorn said that in an a priori theorizing the basic postulates of the theory can be revised to cover an empirical anomaly (p. 142). Conventionalism holds that one fact can be explained by several or an infinity of theories (Thorn, 1980, p. 143). Because postulates are arbitrary anyway since postulates are adopted based on the particular form of analysis that one chooses to engage, one can rely on conventions for basic assumptions as conventions do not have to be true realistic for a theory to be useful for explanation and prediction (p. 143-144). The conventions are acceptable regardless of whether they are true and theorizing can be viable as conclusion from therein will be valid provided conclusions logically follow from conventional premises or postulates. According to Thorn, conventionalists hold that “a theory does not stand or fall by a single refutation of one of its hypotheses but must be judged as a whole in terms of its acceptability as a comprehensive description of economic reality” (p. 145). The emergence of positivism and Popperian views on economic methodology arose as complaints grew that many of the theorems of economics are not designed to be refuted by empirical evidence. Positivistic and Popperian influences held that when a theory is more potentially falsifiable then the theory is the better theory and theories of this type that are not yet falsified are very good theories (Thorn, 1980, p. 146). In pragmaticism, the decisive test for a good theory is whether a theory is able to solve problems for which it was designed to address. Thorn attributes the origin of the methodology to work of Charles Peirce and William James as popularized by John Dewey. In conclusion, Thorn pointed out that choosing the appropriate methodology or methodologies can be a problem but stresses that what is more important is to go back to the purpose of methodology itself. Critical assessment Perhaps a valid assessment of the two articles is that the methodologies that Hausman and Thorn have illustrated are humanity routes for advancing the frontiers of knowledge in economics. Prediction and explanations are both the goals of theorizing in economics. Things that are able predict reliably are good theories but theories that are able to predict as well as explain are better theories. The way towards expanding knowledge has many routes but theories that can predict and explain and constructed based on reasonable postulates and logic are the better theories. It is true that a good number of theories in economics contain postulates that are unrealistic. However, rather than being a weakness, this is actually a strength of economics. Through its “unrealistic” assumptions it can create a totally new world that is different from the present. Thus, it can anticipate problems even before a problem emerge and devise possible solutions to problems even the problems emerge. This is the case, for example of the Mundell-Fleming model. The Mundell-Fleming model assessed the effectiveness of fiscal and monetary policy under fixed and flexible exchange rates in a world of perfect capital mobility. Surprisingly, the theory was developed during a time in which perfect capital mobility was impossible. Thus, unrealism of assumption should not be a criterion for a theory to be called scientific but rather the theory’s capability of making prediction and explanation, assuming of course that the construction of theory is also logical. Bibliography Hausman, D. (1989) Economic methodology in a nutshell. Journal of Economic Perspectives, 3(2), 115-127 Thorn, R. (1980) The methodologies of economists: A survey. Eastern Economic Journal, 6(2), 139-152. Read More