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Economic Methodology Summary
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Summary for the course Economic Methodology in the second year of Economics and Business Economics at Radboud University
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Economic methodology – SummaryLecture 1;
Economic methodology is a critical reflection on economics.
- Methodology = a statement about what economist do or should do with the tools.
- Method = a piece of research that suggests a tool economists might use.
- Economic methodology is a philosophy of (social) science applied to economics.
o Sociology of economics
o Anthropology of economics
o History of economics
o Politics of economics
- Positive economic methodology; what do economists really do?
o How is economics organized, what criteria are applied and what are the most significant tendencies
in the development of current economics?
Descriptive; describes
- Normative economic methodology; what should economists do?
o Criteria of ‘good’ science.
Prescriptive; prescribes (how it should be)
- We need economic mythology because;
o We need to understand what is happening in economics and how it relates to the real world of
policy and society.
o We need better organization of economic research and communication practices.
Some methodological problems/questions:
- What is economic knowledge?
- What is a law in economics? → defines objective science
- Is there progress in economics?
- How is economics related to the economic reality it studies?
- What are economic models and what role do they play in in economics? Should economic models be
realistic?
- How is economic theory structured?
- How do its conceptual and institutional structures interact?
- How does economics communicate with other disciplines?
Lecture 2;
The definition of economics changed over time. It seemingly does not matter. The difference is the shift in the
underlying ontology; the idea of how the (economic) world works.
Early definitions of economics;
- Adam smith; economics as a science of wealth
- Jean Baptiste Say; the ‘science’ that treats ‘production, distribution and consumption of wealth’.
- John Stuart Mill; the science which traces the laws of such of the phenomena of society as arise from the
combined operations of mankind for the production of wealth, in so far as those phenomena are not
modified by the pursuit of any other object.
- Jacob Viner’s ‘sociological’/tautological definition; economics is what economists do.
- Marshall; economics is a study of mankind in the ordinary business of life. It is a study of wealth and a study
of man.
Modern definitions;
- Lionel Robbins; economics is the science which studies human behavior as a relationship between ends and
scare means which have alternative uses.
o It is very broad and abstract
o It is very narrow in its broadness; the broader the boundaries, the narrower the approach.
o It is emphasizing the approach and not the subject matter.
- George Stigler & Paul Samuelson; economics is the study of how people and society end up choosing, with or
without the use of money, to employ scarce productive resources that could have alternative uses, to
, produce commodities and distribute them for consumption, now or in the future, among various persons and
groups in society. It analyses the costs and benefits of improving patterns of resource allocation.
The definition of economics matters because;
- It defines and reproduces the boundaries of the discipline.
- It constrains the choices made by economists, the concepts, techniques and topics they employ
- It matters for the interdisciplinary connections in economics.
Endogenous growth theory; modelling how economic forces govern the willingness of firms to produce new ideas
and innovations.
Positive externalities; knowledge produced by one firm is freely used by all the others (spillover effects);
- low costs of acquiring new knowledge make the production of further knowledge cheaper and easier.
Old wine in new bottles;
- the idea that positive externalities and increasing returns to scale from knowledge are a foundation of
growth. This dates back to Marshall (1890), Veblen (1914), Young (1928) and Abramowitz (1952).
o BUT, economists could not formalize (restating in terms of maximization and equilibrium) the idea
neatly. By formalizing, we get a better grasp of the idea, and actually can learn something new.
- Heuristic progress; once better mathematical techniques are at place, the research is more attractive for
future generations of economists and the research can accommodate the ideas that were impossible to
tackle in an older framework.
Lecture 3;
Logical positivism;
- The first and most intuitive philosophy of science, that is still held by many in natural and social science.
- Logical = logic: ‘theory of correct thinking’
o provides the formal framework (language) in which the scientific statements (propositions) are best
to be put.
o All human knowledge of the world is amenable (vatbaar) to logical formalization.
o Example; It is raining in Nijmegen today.
In formal logic, this is a proposition that has to be assigned a value of 0 (false) or 1 (true).
- Positivism = empiricism: all scientific evidence and thus knowledge is directly or indirectly derived from
sensual data (our direct experience of reality by using our five senses).
o All science must be performance based on ‘sensual data’, if not, then it cannot be classified as
science.
- Context of discovery; context in which the theory emerges
o Irrelevant for logical positivists
- Context of justification; we take science as given and regard is as a body of knowledge.
o In interest of logical positivists
- Science is characterized by the ability to formulate theories (propositions).
o Demarcation problem; we have to separate science from non-science (meta-physics).
- Propositions are scientific when they are;
o Analytic 1 + 1 = 2; the truth (2) is already included in the premises (1 + 1).
This does not add something new to the scientific knowledge.
o Synthetic; if they can be confirmed by empirical research.
It is empirically verifiable; you can verify whether it is true or false by drawing on sense
perception.
! all other propositions are meta-physical and hence do not have meaning for science. Only if propositions
are either analytical or synthetic, they can be classified as science! According to the Logical Positivists, we
need to purify (zuiveren) science form meaningless terms; terms to which there is nothing in reality that
would correspond to that. These terms have to be banned from science.
- Theories should be formulated in a way that could make the observational data they are based on, as well as
their domain of application, clearly visible.
, o Thus, theories are best formulated as sets of sentences (propositions) for which you can approve
whether they are true or false. They are to be described in the formal language and rely on axioms
(statements that you accept as true (you do not check)).
Operationalization of theoretical terms;
- We need a correspondence between theoretical statements and observational statements. The thing you
observe could be described with the theory. Everything you state in your theory has to have an
observational counterpart.
- For some theoretical terms, there is no law-independent operationalization possible ór there are many ways
to operationalize them.
Explaining = answering a why question.
The easiest way to draw on observations to arrive at some kind of a theory is by using induction; the way of
reasoning from the specific to the general.
- Inductive interference; making a generalization.
Swan 1 is white, swan 2 is white, swan 3 is white .., so all swans are white.
o BUT, even if all the swans we have observed so far are white, there might appear another swan
which his black. Nothing could guarantee that at some point, no black swan would appear. This is
known as the Problem of induction; our empirical experience is limited (in time).
o BUT, future events are also not easily formalized in a standard logic of true or false statements.
John Stuart Mill
- Inductive logic; the usage of induction for stating something about the real world.
- He stated that there are more and less reliable inductive inferences.
- Causal inferences; in reality something is caused by something else.
o Suppose you want to find a cause for a certain phenomenon based on empirical evidence, then you
compare two situations that are exactly alike except that in one the phenomenon is present and in
the other it is absent. This is called the method of difference.
If the two situations differ with respect to some factor, than that factor is judged to be an
effect or a cause or indispensable part of the cause of the phenomenon.
This method does not distinguish between cause or effect!
Mill’s version for economics;
1. Borrow proven (tendency) laws concerning the operation of relevant causal factors.
o Tendency laws; regularities about human behavior that work as prevailing tendencies.
2. Deduce from these laws and statements of initial conditions, simplifications etc., predictions concerning
relevant phenomena.
3. Test the predictions.
4. If the predictions are correct, then regard the explanation as successful.
If the predictions are incorrect, then judge;
(a) whether there is any mistake in deduction (step 2)
(b) what sort of interferences (disturbing factors) occurred in step 1
(c) how central the borrowed laws (step 1) are (how major the causal factors they identify are and whether
the set of borrowed laws should be expanded or contracted)
Another way of explaining theories is through a deductive-nomological model;
- Deductive; deriving the thing you explain (explanandum) from a set of true statements (explanans)
- Nomological; the statements from which you deduce your conclusion have to include at least one law.
- Deduction; from the general to the specific.
Law; increasing money supply always leads to inflation.
Initial condition/true statement; a country B increased its money supply
So, there was an inflation in country B.
o BUT, how do we know that the statements in the explanans are actually laws? They should imply
universality (always, everybody etc.).
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