CHAPTER TWO

Methodological Issues of
Economics
Economics as an Art and as a Science

 Science is not only the collection of facts, in reality, all

the facts must be systematically collected, classified and
analyzed.

There are the following characteristics of any

science subject, such as;

(i) It is based on systematic study of knowledge or facts;

(ii) It develops correlation-ship between cause and effect;

Economics as an Art and as a Science
(iii) All the laws are universally accepted

(iv) All the laws are tested and based on experiments;

(v) It can make future predictions;

(vi) It has a scale of measurement.

 Economics as a Science….
(i) Economics is also a systematic study of knowledge and
facts.
 All the theories and facts related with both micro and
macro economics are systematically collected, classified
and analyzed.
(ii) Economics deals with the correlation-ship between cause
and effect.
 For example, supply is a positive function of price, i.e.,
change in price is cause but change in supply is effect.
 Cont…
(iii) All the laws in economics are also universally accepted,
like, law of demand, law of supply, law of diminishing
marginal utility etc.

(iv) Theories and laws of economics are based on

experiments, like, mixed economy is an experimental
outcome between capitalist and socialist economies.
 Cont…
(v) Economics has a scale of measurement.
According to Prof. Marshall, „money‟ is used as the
measuring rod in economics.
However, according to Prof. A.K. Sen, Human
Development Index (HDI) is used to measure economic
development of a country.

Economics can divided in to positive and normative

economics.
 Cont…
 Positive economics concerns the forces that govern
economic activity.
 It asks such questions as:
 How does the economy work?

What are the forces that determine the distribution

of income?

The sole purpose of these inquiries is to obtain

understanding and only for the sake of understanding.
 Cont…
 Normative economics explicitly concerns questions of
“what should be”.
 It is the philosophical branch of economics that
integrates economics with ethics.

 The art of economics concerns questions of policy.

 It relates the science of economics to normative
economics and asks questions such as: If these are one‟s
normative goals, and if this is the way the economy
works, then how can one best achieve these goals?
 Cont…
 The distinction is important because positive
economics and the art of economics have quite
different methodologies.

 The methodology of positive economics is formal and

abstract; it tries to separate economic forces from
political and social forces.
 Cont…

 The methodology of the art of economics is more

complex because it concerns policy and must address
interrelationships among politics, social forces, and
economic forces.

 In it one must add back all the dimensions of a problem

that one abstracted from in positive economics.
The Importance of Empirical Verification
o How we go about answering the questions
o “What do we know?” and

o “How do we know that what we know is right?”

depends on the answer to the question

o “Is there an ultimate truth that scientists are in the

process of revealing (an absolutist view),

o or is there no underlying truth (a relativist position)?”

Cont…
 If there is ultimate truth, how do we find it?

 If there is none, are some propositions more truthful

than others?

 Methodologists past and present have failed to reach

consensus on these problems but have generated an
enormous amount of material on the subject.

 Believing that an ultimate truth exists leaves one with

the problem of deciding when one has discovered it.
Cont…
 The means by which the growing scientific world strove
to discover the truth involved trained empirical
observation as exemplified in the scientific method.

 This entailed the integration of reason with empirical

observation.

 Although this subject is far too complicated for us to

elaborate, verification is discussed in detail in the
writings of Kant, Hume, Descartes, and other
seventeenth- and eighteenth- century philosophers.
 Cont…
 We will simply define three terms that have played an
important role in the discussion, inductive, deductive,
and abductive.
 The first two terms are well known.
 Inductive reasoning is empirical, proceeding from
sensory perceptions to general concepts;
 Deductive reasoning (logic) applies certain clear and
distinct general ideas to particular instances.
 Because most philosophers believe that knowledge
derives from a mix of these, the debate usually centers
on the nature of the optimal mix.
Cont…
 “Abductive” is the name pragmatic philosopher Charles Peirce
gave to a particular mix of the inductive and deductive
approaches.

 The abductive concept is important for economics and other

studies of complex systems.

 Abductive reasoning uses both deduction and induction to tell a

reasonable story of what happened.

 It combines history, institutions, and empirical study to gain insight;

however, it does not claim to provide a definitive theory,
because, when we are dealing with a complex system, definitive
theories are beyond our grasp.
 The Rise of Logical Positivism
 The methodology of science moved into the twentieth century with the

development of logical positivism, which provided the scientific method

with philosophical foundations.

 It established a working methodology expressing the empirical and non

empirical, or rational.

 Logical positivism linked with deductive reasoning a positivist desire to let

the facts speak for themselves. It originated with a group known as the
Vienna Circle, which attempted to formalize the methods of scientists by
describing the methods scientists actually followed.
 Cont…
 The logical positivists argued that scientists develop a
deductive structure (a logical theory) that leads to
empirically testable propositions.

 A deductive theory is accepted as true, however, only after

it has been empirically tested and verified.

 The role of the scientist, they said, is to develop these

logical theories and then to test them.
 Cont…
 Although there was debate among the logical positivists as to what
constituted truth, all concurred that it would be discovered through
empirical observation.

 Logical positivism reigned in the philosophy of science only from

the 1920s through the 1930s, but its influence in economics
continued much longer.

 It was logical positivism that formalized the distinction between

normative and positive economics, first made by Nassau Senior in
1836 and later by J. S. Mill and John Neville Keynes.
 From Logical Positivism to Falsificationism

 Logical positivism represented a culmination of the belief that the

purpose of science is to establish “truth.”

 The methodology of science has since progressively removed itself

from that view.

 The first departure resulted from a concern about the

“verification” aspect of logical positivist theory.
 Cont…
 This concern is best expressed in the writings of Karl Popper,
who argued in the 1930s that

 empirical tests do not establish the truth of a theory, only its

falsity—which is why Popper‟s approach is sometimes called
falsificationism.

 According to Popper, it is never possible to “verify” a theory,

since one cannot perform all possible tests of the theory.
 Cont…
 For example, assume that a theory predicts that when the
money supply increases, prices will increase by an equal
percentage.

 Then assume that in an appropriate experiment the predicted

result does in fact occur.

 According to Popper, this indicates only that the theory has not
yet been proved false.

 The theory may or may not be true, since the next experiment
may produce a result that is not consistent with the theory‟s
prediction.
 Cont…
 Popper asserts, therefore, that the goal of science should be to
develop theories with empirically testable hypotheses and
then to try to falsify them, discarding those that prove false.

 The progression of science, according to Popper, depends upon

the continuing falsification of theories.

 The reigning theory will be the one that explains the widest
range of empirical observations and that has not yet been
falsified.
 From Falsification to Paradigms
 It would be nice if methodological problems could be resolved as
neatly as Popper‟s approach suggests, but methodological debates
are anything but neat.

 More recent developments have moved methodology progressively

away from such neat distinctions.
 The modern rejection of Popper‟s theory is not without grounds:
falsifcationism has several serious problems.

 First, empirical predictions of some theories cannot be tested

because the technology to test them does not exist. What should
one do with such theories?
 Cont…
 Second, it is difficult to determine when a theory has or has not
been falsified.

 For example, if an empirical test does not produce the expected

results, the researcher can and often does attribute the failure to
shortcomings in the testing procedure or to some exogenous
factor.

 Therefore, one negative empirical test often will not invalidate the
theory.
 Cont…
 A third problem arises from the mindset of researchers, who may
fail to test the implications of an established theory, assuming them
to be true. Such a mindset can block the path to acceptance of new
and possibly more tenable theories.

 Partly in response to these problems, Thomas Kuhn, in The

Structure of Scientific Revolutions (1962), moved methodology away
from falsifcationism by introducing the concept of the paradigm
into the debate.
 Cont…
 A paradigm, as Kuhn uses the word, is a given
approach and body of knowledge built into researchers‟
analyses that conforms to the accepted textbook
presentation of mainstream scientific thought at any
given time.

 Kuhn argued that most scientific work is normal

science, in which researchers try to solve puzzles posed
within the framework of the existing paradigm.

 Cont…
 This work often leads to the discovery of anomalies that
the paradigm fails to account for, but the existence of
such anomalies is not sufficient to overthrow the
reigning paradigm—only an alternative paradigm that is
better able to deal with the anomalies can do so.

 Once such a superior paradigm is developed, a scientific

revolution becomes possible.
 Cont…
 In revolutionary science, first the existing paradigm is
rejected by part of the scientific community, and then the
old and the new paradigms begin to compete and
communication between researchers in the opposing
camps becomes difficult.

 Ultimately, if the revolution is successful, new questions

will be posed within the new framework and a new
normal science will develop.
 Cont…
 Whereas in Popper‟s view “truth” (or the closest we can get
to truth) will win out, in Kuhn‟s view a superior theory
might exist but not be adopted because of the inertia
favoring the existing paradigm.

 Hence the reigning theory is not necessarily the best.

 Cont…
 Those who disagreed with mainstream theory quickly adopted Kuhn‟s
analysis, because it suggested that the paradigm they preferred might
prove to be superior to, and thus able to supplant, the mainstream
view.

 Moreover, Kuhn‟s work suggested that changes occur by revolutions;

it offered hope that change, when it came, would come quickly.
Although Kuhn focused on the natural sciences, he had a significant
influence on the social sciences, such as economics.

 Methodological discussions throughout the 1970s and 1980s were

peppered with the term paradigm.
 From Paradigms to Research Programs
 The view that the existing theory might not embody the
truth was extended by Imre Lakatos during the late
1960s and 1970s.

 He tried to grasp and articulate the procedures good

scientists were actually following; he observed that
scientists are engaged in the development of competing
research programs, each of which involves analyzing
and attempting to falsify a set of data but also involves
unquestionably accepting a set of hard-core logical postulates.
 Cont…
 Each study derives a set of peripheral implications from the
hard core and then attempts to falsify them.

 Falsification of a single peripheral implication will not

require rejection of the theory but will occasion a
reconsideration of the logical structure and, perhaps, an
adhoc adjustment.

 Only if “sufficient” peripheral implications are falsified will

the hard-core assumptions be reconsidered.
 Cont…
 Lakatos called research programs progressive if the process of
falsifying the peripheral implications was proceeding,
degenerative if it was not.
 Lakatos‟s work has two significant features:
(1) It recognizes the complexity of the process whereby a theory
is falsified; and

(2) Whereas earlier analyses required that one theory

predominate, Lakatos provides for the simultaneous
existence of multiple workable theories whose relative merits
are not easily discernible.
From Research Programs to Sociological
and Rhetorical Approaches to Method
 A much more radical departure from previous
methodology can be found in Paul Feyerabend‟s Against
Method: An Outline of an Anarchistic Theory of Knowledge
(1975).

 Feyerabend argues that the acceptance of any method

limits creativity in problem solving and that the best
science is therefore to be confined to no method—in
other words, anything goes.
 Cont…
 Though his radical argument at first seems crazy, he has
provided some new perspectives on knowledge that
throw light on the rhetorical and sociological approaches that
have influenced recent developments in the methodology
of economics

 Although earlier approaches acknowledged the difficulty

of discovering truth, they did not question
the Platonic vision of truth as absolute.

 Cont…
 The rhetorical and sociological approaches do just that.
Since they refuse to assume the existence of an ultimate and
inviolable truth, they search out other reasons to explain why
people believe what they believe.

 The rhetorical approach to methodology emphasizes the

persuasiveness of language, contending that a theory may be
accepted not because it is inherently true but because its
advocates succeed in convincing others of its value by means of
their superior rhetoric.

 Cont…
 The sociological approach examines the social and
institutional constraints influencing the acceptability of a
theory.

 Funding, jobs, and control of the journals may have as much

influence on which theory is accepted as the theory‟s ability
to accurately explain phenomena.

 Those who adhere to the sociological approach contend that

most researchers are interested less in whether the theories
they advance are correct than in whether they are
publishable.
 Cont…
 What these two theories most notably share is a
skepticism about one‟s ability to discover truth, or even
whether truth exists at all.

 According to these approaches, a theory has not

necessarily evolved because it is the closest to the truth; it
may have evolved for a variety of reasons, of which
truth—if it exists—is only one.


 Post rhetorical Methodology
 Where does this leave us with respect to methodology?
 In a somewhat muddled state, but being muddled is not
unusual for methodology.

 Following the progress of epistemology through the past

few decades, we have seen the answers to questions
about how and what we know become progressively
vaguer until methodology is all but annihilated: the most
persuasive researchers win out regardless of the value of
their work.
 Cont…
 Fortunately, however, we need not accept such a view as
total reality.
 Although such extreme viewpoints provide interesting
insights, they clearly need to be tempered by common
sense.
 Even admitting the social and rhetorical influences on
the direction of science, one need not accept that
Feyerabend‟s “anything goes” attitude necessarily
follows.
 Cont…
 Methodology, moreover, is not going to end here.

 A post rhetorical methodology will probably combine

insights such as Feyerabend‟s with more workable
approaches and emphasize abduction rather than
deduction or induction.
 Cont…
 Although researchers may never know with certainty
whether a given theory is true or false, they must accept
the most promising ideas as tentatively true working
hypotheses.

 They may revert to certain elements of logical positivist

and falsifcationist methodology to do this.

 They may even accept all the arguments of the rhetorical

and sociological schools and still behave as they
always have toward the truth or falsity of their
research.
 Cont…
 The difference will be in perspective: post rhetorical
economists will be more skeptical of their knowledge,
less likely to dismiss an argument as false before they have
closely considered it, and more likely to “let 1,000 flowers
bloom.”

 A post rhetorical economist will scrutinize the incentives of

researchers to study particular theories and will view with
skepticism the results of studies that coincide with the
researcher‟s own interests or preconceived beliefs.
 Cont…
 Finally, a post rhetorical economist will be much more likely
than a logical positivist or a falsificationst to follow Bayesian,
rather than classical, statistics.

 Bayesians believe one can discover higher or lower degrees

of truth in statements, but not ultimate truth.

 The Bayesian influence will engender a reinterpretation of

classical statistical tests, rendering them less exact, less
persuasive, and not independently representative of a
specific confidence level.
 Cont…
 In the methodology of the future, information about the
researcher as well as the research will probably be a necessary
component of statistical reporting.

 For both the Bayesian and the rhetorical economists,

understanding ultimately rests on faith.
 Recognizing that, one must proceed cautiously in the
search for understanding, realizing that too skeptical a
mindset stymies creativity.

 Cont…
 Thus, rhetorical methodology should provide only a meta
methodology that, once accepted, little affects the day-to-
day work of economists.
 They do what they do.
 Conclusion on Methodology
 Methodological arguments in economics have generally lagged far
behind those in epistemology and the philosophy of science.

 According to most economics textbooks, the reigning methodology in

economics is still logical positivism, which was long ago declared
dead in other fields, as well as in the methodologically oriented
economics journals.

 But occasionally the economics profession goes through a

methodological spasm, looking inward and asking, “Is this what we
should be doing?”
 Cont…
 It never fully answers this question but goes on as before, though
equipped with slightly updated methodological views.

 Even though methodology is seldom discussed, ultimately it is

methodology that accounts for many of the deference's among
economists.

 Formalists are more likely to use a logical positivist or

falsifcationist methodology and believe in an absolutist approach;
non - formalists are more likely to use a sociological or rhetorical
approach and believe in a relativist approach.