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Lecture Notes of the Economic Methodology plenary lectures
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Notes from the plenary lectures of the course Economic Methodology. Radboud University 2018/2019
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College aantekeningen Economic Methodology (6012B0454Y) Economic Methodology
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Summary Economic Methodology - ENDTERM UVA EBE (Grade: 9.5)
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Full exam summary for Economic methodology
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Lecture 28-11-2018
Case study 1: Can you define the discipline you study?
• The definition of economics changed over time
• It seemingly does not matter
• Jacob Viner’s ‘sociological’/tautological definition is still popular
o ‘Economics is what economists do’
Early definitions
• Adam Smith (1776): science of wealth
• Jean-Baptiste Say (1903): the “science” that treat “the production, distribution, and consumption of
wealth.”
• John Stuart Mill (1844): 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
Exchange-based definition
• What is the difference and why does it matter?
o When we focus on exchange, we do not focus on the product, but on the people wo
exchange and their behavior.
• The shift in the underlying ontology – the idea of how the (economic world works)
o Economy is no more just a collection of things, products, it is now a set of interacting agents,
human beings, who exchange goods and services with each other
▪ The shift from classical to neoclassical economics
Alfred Marshall’s (1890) synthetic definition:
Political Economy or Economics (sic!) is a study of mankind in the ordinary business of life; it examines that
part of individual and social action which is most closely connected with the attainment and with the use of the
material requisites of wellbeing… Thus it is on the one side a study of wealth; and on the other, and more
important side, a part of the study of man.
Marshall combined supply and demand in his economic analysis.
Modern definitions
Robbins (1932) Economics is “the science which studies human behavior as a relationship between ends and
scarce means which have alternative uses.”
→ Scarcity is crucial here
What can we say about this definition?
• Very broad/abstract
o Everything can be a scarce resource
• Very narrow in its broadness: the broader boundaries, the narrower the approach
o He focusses only on scarcity
• Emphasizing the approach, and not the subject matter
o Economics is defined by its approach
o The perspective of Gary Becker: Economics of everything!
Finally, via George Stigler, leading to Paul Samuelson‘s definition still used today: 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 various commodities and distribute them for consumption, now or
in the future, among various persons and groups in society. It analyzes the costs and benefits of improving
patterns of resource allocation.
1
,Why does the definition of economics matter?
• It defines and reproduces the boundaries of the discipline
• It constrains the choices made by economists, the concepts, techniques, and topics they normally
employ
• It matters for the interdisciplinary connections in economics
o When you define yourself in a specific way, you make explicit practices which are important
when you collaborate with other sciences. You have to know something about the other
disciplines to know what to expect from them.
Case study 2: How did crisis or 2008 change economics?
• Paul Krugman: Economists are mistaking beauty for truth and, because of the narrow-mindedness of
the profession, it did not help to see the global financial crisis of 2008 coming (and silenced those who
did foresee it).
• David Colander et al.: crisis could not have been predicted, but economics should change to be able to
incorporate at least this possibility! Currently: lack of modeling pluralism, over reliance on too
simplistic equilibrium models
• Academic researchers are mostly trained to build models, and not to choose among various models to
be applied to policy.
• Other criticisms:
o Belief in markets and the virtues of ‘financial innovation’.
o Lack of knowledge of institutional details (to earlier detect the problems of particular sectors)
• But: the widespread views, or conventional wisdom ≠ the views of the whole economics profession!
Did economics actually change over these years?
• Aigner et al. (2018) have looked at all the published papers in the field.
o Abstracts and keywords!
o Top-cited papers before and after the crisis (as a foundation of the rest of the papers)
Other findings
• The very word ‘crisis’ is missing in the list of 1000 most used words in the abstracts of top-cited
papers.
• Possible prevailing interpretation of the crisis as a temporary exogeneous shock, unforeseen due to
asymmetric information
o We did not know what was happening in the housing sector
o We could not know the asymmetric information phenomenon
• Slightly more attention is paid to the financial sector and uncertainty issues, but no major shift in the
discipline.
o We would expect a change, a revolution of the discipline.
Case study 3: The New Nobel Memorial Prize
• The Nobel Prize is the single most important award in economics demonstrating not just the current
priorities, but contemporary classics of the discipline.
o These people are rewarded for the contributions that are 20/30/40 years old.
• 2018 Prize was awarded to William D. Nordhaus “for integrating climate change into long-run
macroeconomic analysis” and Paul M. Romer “for integrating technological innovations into long-run
macroeconomic analysis”.
What is the idea behind Romer’s contribution?
• Knowledge and innovation as factors of growth
• ‘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
effect); low costs of acquiring new knowledge make the production of further knowledge cheaper and
easier.
o Creates increasing returns to scale
o The growth depends on the human capital in the R&D industry
2
,Typical critiques:
• Too small distance between assumptions and conclusions
o Romer’s model assumes that knowledge causes growth and demonstrates it
• Lack of institutional context (would the institutions perhaps explain additional accumulation of
knowledge?)
And another issue: Old wine in new bottles?
• The idea that positive externalities and increasing returns to scale from knowledge are a foundation of
growth dates back to Marshall (1890), Veblen (1914), Young (1928), and Abramowitz (1952).
• But: economists could not formalize them neatly!
o Economists could not accommodate the increasing returns in an equilibrium model, because
increasing returns are incompatible with free competition.
• Formalization, for economists, = restating in terms of maximization and equilibrium
• But Romer could do that
• The question is: what kind of progress are we talking about?
• Foss (1998): heuristic progress: once better mathematical techniques are at place, the research:
o Is much more ‘sexy’ and attractive for future generations of economists.
o Can accommodate the ideas that were impossible to tackle in an older framework.
• It is thus assumed that by formalizing, we get a better grasp of the idea – and actually can learn
something ‘new’!
So, what have we learned?
• Methodological inquiry often implies an informed critique of economics – both external and internal
(but not just complaints!).
o External: from non-economists
o Internal: from economists themselves within economics
• It incorporates a variety of approaches – ranging from historical and empirical to more abstract and
conceptual.
• For example, methodology seeks to understand:
o How economics defines itself (case study 1)
▪ It defines itself nowadays as a method, not a study of economies
o How economists react to the serious challenge for the legitimacy of their discipline (case
study 2)
▪ They do it in a very conservative way, making the scenario of a very radical shift in
emphasis highly unlikely
o What counts as a progress in the discipline of economics (case study 3)
▪ It values the formalization and reformulation of established truths in a more
familiar formal framework
3
, Lecture 3
13-11-2018
Why bother?
• Logical positivism is the first and most intuitive philosophy of science.
o These explanations do not always work, because they are very intuitive.
• Still held by many in natural and social sciences.
• The difficulties of the logical positivist program are generally still faced by scientists today.
What is a scientific theory?
= A question for logical positivists.
• The first modern systematic answer was given by logical positivism.
• Wiener Kreis: restore EVEN TERUGKIJKEN
• Logic: provides the formal framework (language) in which the scientific claims are best to be put. All
human knowledge of the world is amendable to logical formalization.
o Logic informalizes the correct thinking.
o All scientific thought can be reconstructed with the method of logic.
• How do we formalize things?
o Is a statement true or false?
o In the formal logic, we just name this claim a ‘proposition’ and assign a value to it:
▪ 1 – true; 0 – false.
o Eventually, all sciences can be reduced to a set of statements.
• Positivism/Empiricism: All scientific evidence and thus knowledge is directly or indirectly derived from
sensual data.
o There is a reality out there, we can get knowledge through our senses: most reliable
knowledge there is.
• Importantly, science is characterized by the ability to formulate theories.
o If there is no theory, there is no science.
o Context of discovery vs. context of justification (which is only of interest for logical positivist
philosophy of science
▪ They are not interested in the context of discovery: we don’t care how scientists
arrive at scientific theories or how they formulate them.
▪ After theories are formulated, we are analyzing the results.
- What matters is the body of knowledge.
• What makes a theory scientific?
o The main goal of logical positivists.
Logical positivist philosophy of science
• Demarcation problem: to separate science from non-science (‘metaphysics’).
o Main task of logical positivists.
• Which propositions are scientific?
o Analytic (1+1=2), the truth (2) is already included in the premises (1+1).
▪ The proposition tells us something of the world, and can be true or false.
▪ Analytic propositions are always true. It is in essence a tautology.
▪ Analytic propositions in economics: Given the assumptions of the Ricardian model,
international trade is mutually beneficial.
- You do not learn something new about the world
o Synthetic, if they are confirmed by empirical research (synthetic a posteriori propositions)
▪ Only after empirical confirmation, we can think the proposition is true or false.
▪ As the empirical research demonstrates, people value an object higher when they do
not possess it.
- You learn something new about the world.
o What about synthetic a priori propositions (suggested by Kant)? Logical positivists denied
their existence.
▪ Epistemology: the existence of knowledge
• All other propositions are ‘metaphysical’ and hence do not have any meaning for science.
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