Summary
Lectures + Book + Quizzes
Lecture 2
How to do research in economic methodology? How to pose a methodological question?
3 case studies;
1) Defining economics
2) Current priorities; understanding the influence of the global financial crisis on economics
3) Progress and canon; reflecting on the recent Nobel Memorial Prize in economic sciences
Case study 1; Can you define economics as a science?
The definition of economics changed over time
- The definition of economics is not always been the one that you read in your textbooks
It seemingly does not matter
Jacob Viner’s ‘sociological’/tautological definition is still popular
- ‘Economics is what economists do’
- It defines its discipline by itself
Early definitions
Adam Smith (1776); economics is a science of wealth
- By wealth he understood mostly material goods (commodities) produced by labor
Jean-Baptiste Say (1803); economics is the ‘science’ that treats ‘the production, distribution,
and consumption of wealth’
John Stuart Mill (1844); economics is 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
- He says that there are so many things happening in society, and people act on so many
different ways, following so many different values/motivations/etc. But we abstract from
them only those motivations/phenomena which are related to the production of wealth
(nothing else)
- We know that people are much more complex, but we narrow down our analysis only to
this material production elements of their lives. We call this science; economics
- The production sector was important, material production was the major subject matter
of economics. It was what economics was actually about.
The movement from wealth to exchange;
What is the difference between wealth and exchange and why does it matter?
The shift in the underlying ontology (the idea of how the (economic) world works)
- What happened is that the picture of the world economics had as the economy (the
picture of what economics actually is) changed once economists moved from their idea of
production/wealth to their idea of exchange
- The focus moved from the production of a product, to the interaction of individuals
1
,Alfred Marshall’s (1890) synthetic definition;
Political Economy or Economics is a study of mankind in the ordinary business of life; it
examines that part of individuals 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
- So economics is not the study of the product which is produced, but the study of human
behavior (people and the relations of individuals)
Modern definitions;
Lionel Robbins (1932); Economics is ‘the science which studies human behavior as a
relationship between ends and scarce means which have alternative uses’.
- Very broad/abstract
- Very narrow in its broadness; the broader the boundaries, the narrower the approach
- Once you move the boundaries broader and say that everything counts as economic
behavior, then you need to define this behavior in a very narrow way
- Emphasizing the approach, and not the subject matter
- The perspective of Gary Becker; Economics of everything!
- Can be applied to any kind of subject matter
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.
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
Claim; ‘This is not economics’
- Friedman argued that portfolio theory was not part of economics
- But now it is
Finance was long not part of economics, now it is
2
,Case study 2; How did crisis of 2008 change economics?
Paul Krugman published a paper in 2009 (How did economists get it so wrong?) and it formed
a huge debate.
John Cochrane said; “how did Paul Krugman get it so wrong?”
- Cochrane said; economists are mistaking beauty for truth and because of the narrow-
mindedness of the profession, it did not help see the global financial crises 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
- In the theories, we have at least to assume the possibility of the global crisis, we have to
use lots of models (in that time used only a few models) and there was over-reliance on
too simplistic equilibrium models
Academic researchers are mostly trained to build the models, and not to choose among
various models to be applied to policy
Other criticisms;
Belief in markets and the virtues of ‘financial innovation’
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 economic
profession!
- Economics is much more complex and there are a lot of different views. So we have to be
realistic about economics as well
Did economics actually change over these years?
Aigner at all (2018) have looked at all the published papers in the field.
They looked at abstract and keywords of those papers.
- Thus everything that has been published in economics over these years (2008 – 2018) was
an empirical basis of this research.
They also looked at the top-cited papers before and after the crisis (as a foundation of the
rest of the papers)
- Somehow this top-cited papers decide about the others; those others decide the top-cited
papers
- They are the focus of attention for the whole discipline
3
,Other findings;
The very top word ‘crisis’ is missing in the list of 1000 most used words in the abstract of
top-cited papers
- This tells us something about the priorities of the research
Possible prevailing interpretations of the crisis as a temporary exogenous shock,
unforeseen due to asymmetric information
- The crisis was a temporary exogenous shock, that we did not foresee
Slightly more attention is paid to the financial sector and uncertainty issues, but no major
shifts in the discipline
Case study 3; the new Nobel memorial prize
The Nobel Memorial Prize is the single most important award in economics demonstrating
not just the current priorities, but contemporary classics of the discipline
In 2018 the Prize was awarded to William D. Nordhaus ‘for integrating climate change into
long-run macroeconomic analysis’ and Paul M. Romer ‘for integrating technological
innovation into long-run macroeconomic analysis’.
Is the Nobel Prize important for economists?
Yes it is!
- Nordhaus received the price in 2018, and what happens in 2019? A famous climate
economists committed suicide (at 77 years). One of the reasons of this suicide was that he
did not receive that Nobel price.
- Thus you can see that Nobel prices are very important!
What is the idea behind Paul M. Romer’s contribution?
Knowledge and innovation as factors of growth
‘Endogenous growth theory; modeling how economics 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.
Typical critiques;
Too small distance between assumptions and conclusions
Lack of institutional context (would the institutions perhaps explain additional
accumulation of knowledge?)
4
,And another issue; Old win in new bottles?
The idea that positive externalities and increasing returns to scale from knowledge are a
foundation of growth dates back to Marshall, Veblen, Young and Abramowitz
- This idea was already around, it is a quite old idea
But; economists could not formalize them neatly
- This idea, that was already around, could not be formalized in a good way
- This formalization was lacking, it was not around before Romer. All the other economists
(Marshall, Veblen, etc. had the idea, so they understood that innovation creates increasing
returns to scale and economic growth, but they could not build a model in which this
would be demonstrated)
Formalizing, 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?
- What does it mean that Romer’s contribution is a progress of economics?
Foss (1998); Heuristic progress; once better mathematical technique are at place, the
research
- Is much more ‘sexy’ and attractive for future generations of economists
- Can accommodate the ideas that were impossible to tackle in an older framework
- Heuristic progress; new framework for the old idea
It is thus assumed that by formalizing, we get a better grasp of the idea, and actually can
learn something new.
- Thus no new idea, but a better formalization of the idea
So, what have we learned;
Methodological methodology often implies an informed critique of economics, both
external and internal (but not just complaints!)
It incorporates a variety of approaches, ranging from historical and empirical to more
abstract and conceptual
For example, methodology seeks to understand;
1) How economics defines itself (case study 1)
- It defines itself as a method, not as a study of economies (it not about what we study, but
how we study that)
2) 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 radical shift in emphasis
highly unlikely
3) What counts as a progress in the discipline of economics
- It values the formalization and reformulation of established truths in a more familiar
formal framework
5
,QUIZ 0
1) Choose a question related to economic methodology
a) What are the factors explaining economic growth?
b) Which policy measures are the be taken in order to boost economic growth?
c) Which data would be best to use in the existing model of economic growth?
d) Are the existing models of economic growth realistic
2) Choose a question related to normative economic methodology
a) Why is empirical analysis more popular in economics today than a theoretical one?
b) How to decide which model is better in explaining a specific phenomenon?
c) How do economists explain the reason why economic models are based on unrealistic
assumptions?
d) Which concepts of rationality are used in current economic research?
3) A tautological definition of economics
a) Refers to the community of economists
b) Does not describe the subject matter of economic theories
c) May change with time
d) All off the above
4) What was the difference between the classical and contemporary understanding of
economics?
a) The classical definition on the subject matter, while the contemporary one is focused
on the method of economic research
b) The classical definition dealt with exchange, while the contemporary one focuses on
wealth
c) The classical definition deals with human behavior, while the contemporary one is
interested in the production sector
d) None of the above
5) After the crisis in 2008, economics was criticized for
a) Too abstract equilibrium models
b) Too specific models
c) Too dynamic models
d) All of the above
6) An ‘heuristic progress’ in economics means that
a) Old ideas are formulated in a new way, so that they may be developed further
b) We introduce radically new ideas and use new heuristic to formulate them
c) We keep old formulations and use them for new ideas
d) None of the above
6
,Lecture 3 (Chapter 1)
Logical positivism; a broad philosophical movement that originated in Berlin and Vienna in the
1920s and was to last into the 1950s in the US.
- In the first half of the 20th century, the logical positivists dominated thinking about
philosophy of science
- It was the first and most intuitive philosophy of science
- Much of the current direction in philosophy of science is, in important respects, a reaction
against the views of the logical positivists
- The difficulties of the logical positivists program are generally still faced by scientists today
What is a scientific theory?
The first modern systematic answer was given by logical positivism
Logicism; all scientific language, including mathematics, is an extension of logic
Provides the formal framework (language) in which the scientific claims are best to be put
Logic is the theory of ‘correct’ thinking, which gives a language in which we could translate
all scientific claims
All human knowledge of the world is amenable to logical formalization
Logical formalization; the way to translate the scientific claims into a logical form
Example; “it is raining in Nijmegen today”
True or false?
- In the formal logic, we just name this claim a ‘proposition’ and assign a value to it
1 = true, 0 = false
Positivism (empiricism); the idea that knowledge arises out of sense experience
All scientific evidence and thus knowledge is directly/indirectly derived from sensual data
- All we know in science (all scientific evidence) is in one way or another derived from what
they call sensual data (thus what we can see/hear/taste/touch/smell by our senses)
- All science should be based on sensual/empirical data. If it is not based on empirical
reality, then it is not a science
- This sounds logic, but the logical positivists were the first who formulated it in this way
Importantly, science is characterized by the ability to formulate theories
- Theories are essential for science, there is no science without theories
The main aim of the logical positivist program was to demarcate scientific knowledge
To distinguish science from pseudo-science
To remove any kind of metaphysical or imagined content from scientific knowledge
Metaphysical; a set of meaningless propositions (non-science)
Demarcation problem; to separate science from non-science
7
,The logical positivists demarcation criterion rule was to accept only analytic and synthetic a
posteriori propositions/statement as scientific knowledge;
1) Analytic propositions
Analytic propositions are tautological; they are true by definition.
- Example; “All bachelors are unmarried males”
- Moreover, valid mathematical and logical propositions are analytic
- Example; “1 + 1 = 2” and “A --> A” (--> means ‘implies’)
- Example; “given the assumptions of the Ricardian model, international trade is
mutually beneficial”
- It has assumptions and you get a result, you get this result because it is contained
in the assumptions (you don’t get anything new in a sense, the assumptions lead
to those conclusions). Thus, this proposition is analytic according to the logical
positivists
All other, non-analytic, propositions are called synthetic
2) Synthetic a posteriori proposition
These propositions are shown to be true by empirical research (produce something new)
- Example; “My neighbors’ dog is aggressive”
- Example; “The color of the coffee I am drinking is light brown”
- Example; “As the empirical research demonstrates, people value an object higher when
they do not possess it”
- They are true in light of our experience of the real world. They could be proven by
empirical research
Immanuel Kant also introduced a third category of propositions whose truth is not shown by
empirical and are not true by definition
Synthetic a priori propositions
- Kant regarded these propositions as being universally true
- According to Kant, this category included propositions such as Newton’s laws and the
proposition that the geometry of our space is Euclidean
- Logical positivists denied the existence of synthetic a priori propositions
However, Kant’s assertion that such propositions were universally true was to be challenged
by developments in mathematics and physics at the end of the 19th and the beginning of the
20th century. First it was shown that non-Euclidean geometries are mathematically possible
and, subsequently, contrary to the teaching of Newton, Einstein’s general relatively theory
assumed a curved physical space.
- These scientific breakthroughs were crucial events for the logical positivists
- As a result of these scientific developments, the logical positivists denied the existence of
synthetic a priori propositions in science, and asserted that all propositions that are not
true by definition should be subjected to investigation by empirical research
- Their intention in doing so was, as mentioned above, to purify science of all ‘metaphysical’
or philosophical claims about the world that were neither analytic nor synthetic a
posteriori
8
,Logical positivists wanted to purify science from meaningless terms (metaphysical)
- Logical positivists thought that science was full of terms that refer to nothing, which did
not have any real reference, who were neither analytic nor synthetic a posteriori. These
concepts were thought to be irrelevant in logical positivism and needed to be removed
- Once they got rid of those meaningless terms/propositions, science becomes ‘real’
The logical positivists drew on the work of earlier philosophers, in particular David Hume and
Ernst Mach. These two thinkers had stressed the importance of empiricism, which is the view
that experience, especially from the sense, is the only source of knowledge.
For the logical positivists, empiricism consisted of two related theses;
1) All evidence bearing on synthetic statements derives from sense perception
- In contrast to analytic statements which are true by definition
2) Predicates are meaningful only if it is possible to tell by means of sense perception
whether something belongs to their extension
Predicates must be empirically verifiable.
- Example; “This tomato is red”
- The proposition is meaningful because by looking at it, one can see that this proposition
is true
So, the logical positivist’s interpretation of empiricism was that synthetic statement must be
meaningful
A synthetic statement is meaningful if it can be judged to be true/false by sense
perception, or in other words, when it is empirically verifiable.
This criterion for meaningfulness was called the verifiability principle
- Note that as a result of this principle, various statements in ethics and religion must be
considered meaningless in science
- For example; ‘God created the world in 6 days’ has no scientific meaning
The ultimate goal of the Vienna Circle was to purge science of all propositions that contain
terms that are not meaningful. They believed that the only aspect of the world about which
we can acquire scientific knowledge are those that are directly accessible by sense perception
(that lie on the ‘surface’ of things). They therefore felt that scientific theories should be
formulated so that the bearing of empirical evidence is precise and transparent (the ‘purity
and clarity’ that they are aiming for). The logical positivists thus regarded scientific knowledge
as possible only insofar as sensory experiences are systematically related to one another.
9
, In their investigations of particular scientific propositions, the logical positivist drew a clear
distinction between syntactics and semantics.
Syntactics; deals with the formal relations between signs or expressions in abstraction from
their signification and interpretation (the logical structure of the theory)
An approach which cares about the relation between sentences and not about the
meaning
It is not about what is behind the sentence, but about the relations from the sentences
Semantics; deals with the signification and interpretation of the signs or expressions
Cares about the meaning of sentences (what is behind the sentences)
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
This is a basic requirement for a scientific theory, according to logical positivists
- Thus, theories are best formulated as syntactic sets of sentences
- They are best described in the formal language and rely on axioms
- Example; P = “it rains in Nijmegen”
If P = 1, then it indeed rains in Nijmegen, when P = 0 then it does not rain in Nijmegen
- We gave the proposition a logical formalization
The distinction between syntactic notions such as well-formed statements, proof, or
consistency and semantic notions such as truth and meaning was important to the logical
positivists. They saw formal logic as liberating empiricism from psychological and
metaphysical garb and as permitting one to distinguish analytic statements, which are
tautological, from synthetic statements thus must pass the test of observation. The logical
positivist view of the task of the philosophy of science was to clean up various conceptual
messes inherited from past science by pointing out what were, and what were not, meaningful
propositions in a properly formulated empirical science.
The aims of the logical positivists can therefore be summarized as follows;
1) To formulate precisely such central philosophical notions as a criterion of meaningfulness
(the verifiability principle) and the distinction between analytic claims (that are true by
definition) and synthetic claims (that must be testable)
2) To develop precise definitions of central scientific notions such as theory, explanation,
confirmation, etc.
The logical positivists also made a distinction between what they termed the context of
discovery and the context of justification.
- Context of discovery; the way in which a theory is discovered (which could be for a variety
of accidental reasons)
- Context of justification; involves a rational reconstruction of the theory according to the
tenets of logical positivism for the purpose of its justification
10
