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Lecture Seven Scientific & Economic Methodology Is Economics a Science? • Economics textbooks use Robbins definition of economics – "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternatives uses" (Lionel Robbins 1932: 16). • Begs the question: “what is a science?” – At most basic level, science is about knowledge – In pre-Enlightenment Europe, “knowledge” came from reading “The Great Works” • Bible • Aristotle • Ptolemy, etc. What is a science? • Science as attempt to gain knowledge from observation, theory, experiment, flourished during Renaissance – Frequently contradicted “Great Works” – Greatest clash between Science & “Great Work” was between • “Earth-centric” view of universe – Religion, Aristotle & Ptolemy • “Sun-centric” view of universe – Copernicus, Galileo & Tycho Brahe • “Great Work” knowledge – Bible, Aristotle, Ptolemy on nature of universe • Psalm 93:1, Psalm 96:10, and Chronicles 16:30 – "the world is firmly established, it cannot be moved.“ What is a science? • “Science” knowledge – Observe planets, develop explanation that fitted observation – Sun had to be centre of universe • Earth orbits the Sun • Galileo, etc., persecuted for beliefs, but ultimately prevail • Ultimate success of Copernican approach led to sciencedominated rather than religion-dominated worldview • In 18th & 19th century, position that science meant “observation first, explanation second” dominant: • Empirico-inductive method seen as essence of science: – observe first, find explanation for observation later… Popper: What is a Science? • Karl Popper challenged this in early 20th century – Argued that essence of science is “conjecture and refutation” • Philosopher writing at time of collapse of AustroHungarian empire (1912-1919) – Once convinced, then disillusioned, by Marxist theory of history • Characterises these, psycho-analysis, astrology, etc. as “pseudo-science” – Posed question: “'What is wrong with Marxism, psychoanalysis...? Why are they so different from physical theories...?' ... these ... theories, though posing as sciences, had ... more in common with primitive myths than with science...” [Conjectures & Refutations] Popper: What is a Science? • Rejected conventional explanations (empirical inductive method) because pseudo-sciences (e.g. astrology heavily “empirical”) • Noticed characteristic of pseudo-sciences: confirmation – “admirers ... were impressed ... by their apparent explanatory power. These theories appeared to be able to explain practically everything that happened within the fields to which they referred…” • “A Marxist could not open a newspaper without finding ... confirming evidence for his interpretation of history; ... in the news, ... its presentation …and especially of course in what the paper did not say.” Popper: What is a Science? • Argued that confirmation meaningless: “every conceivable case could be interpreted in the light of [the relevant] theory”: they could not be refuted • Therefore, by exclusion, a true science was one which could be refuted • Developed 6 principles to – distinguish science from pseudo-science – distinguish good from bad scientific behaviour Popper: What is a Science? • “Confirmations should count only if they are ... risky ..., if, unenlightened by the theory ..., we should have expected an event which ... would have refuted the theory. • Every 'good' scientific theory is a prohibition: it forbids certain things to happen... • A theory which is not refutable by any conceivable event is non-scientific... • Every genuine test of a theory is an attempt to falsify it, or to refute it... • Confirming evidence should not count except when it is ... a serious but unsuccessful attempt to falsify the theory… Popper: What is a Science? • ...re-interpreting the theory ad hoc in such a way that it escapes refutation... is always possible, but ... rescues the theory from refutation only at the price of ... lowering, its scientific status.” • In summary: – “the criterion of the scientific status of a theory is its falsifiability...” Popper: How does a Science develop? • The pre-history of a science is myth – “historically speaking all—or very nearly all—scientific theories originate from myths ...” • How to draw the line between myth & science? – to be … scientific, must be capable of conflicting with possible, or conceivable, observations” • Myths may be important: – “a myth may contain important anticipations of scientific theories” – How do myths originate? Popper: How does a Science develop? • Humans seek “regularities”, explanations for reality: theory precedes observation • Myth provides theories (conjectures) about the world • We test theories by experience; some experiences contradict myth (refutations) • Science develops out of myth by conjectures & refutations – “scientific theories were not the digest of observations, but ... inventions—conjectures boldly put forward for trial, to be eliminated if they clashed with observations; with observations which were rarely accidental but as a rule undertaken with the definite intention of testing a theory by obtaining, if possible, a decisive refutation.” Popper: The nature of science • Dogmatism & criticism are polar opposites • Some dogmatism needed to avoid early abandonment of theories; but – science is critical (attempts to refute theories), psuedo-science is dogmatic (attempts to verify) – science develops by “conjecture and refutation .. boldly proposing theories; ... trying ... to show that these are erroneous; ... accepting them tentatively if our critical efforts are unsuccessful.” Popper: The nature of science • Evolutionary basis to science: “our conjectures, suffer in our stead in the struggle for the survival of the fittest.” • Linear nature of science: progresses from myth to science to better science • Incremental nature of progress: can never attain complete truth but each conjecture/refutation brings us closer to it • Novel & useful perspective on science; – But some obvious problems with Popper’s view… Popper: Problems • Argues that theory precedes observation; but – Proposes that scientists more wedded to observation than theory (which they attempt to refute) • Schizophrenic view of behaviour of scientists • In practice: hard to delineate between myth & science – Example (shortly): was Ptolemy’s theory of astronomy myth or science? • Failure of Popper’s Positivism as guide to History of Science led to Kuhn’s Paradigms – Thomas Kuhn, The Structure of Scientific Revolutions • Developed alternate theory of science to Popper because found difficult to delineate between “myth” and “science”: – Paradigms, normal science and “scientific revolutions” Paradigms • Scientific community wedded to its view of the world—its paradigm • Theory selects observations which tend to confirm it • Paradigm develops by extending range of phenomena it can explain: “normal science” • Paradigm embodied in texts—previous paradigms ignored/forgotten/judged from point of view of dominant paradigm • Anomalies—things which contradict theory—at first resisted • At limits of paradigm, only anomalies left to resolve • Failure to resolve leads to revolution—often from outside Paradigms • Paradigm includes: – Widely accepted explanation of relevant phenomena (physics, chemistry, etc.) • Often embodied in textbooks of discipline – Set of unresolved puzzles • Problems research students get PhDs by solving – “Normal science” as process of resolving these puzzles – Paradigm starts to break down when some puzzles fail to be resolved: key anomalies – Switch to new paradigm involves • Not merely incremental addition to previous knowledge • But total change in “world view” Kuhn vs Popper on nature of progress • Popper – Incremental • Science as a process – Scientists wedded to “conjecture & refutation” process, not current theory • Each new discovery extends what we know • Kuhn – Incremental with periodic upheavals • Science as history – Scientists wedded to current paradigm, attempt to extend its application • Ultimately anomalies lead to failure of paradigm • New approach develops which transcends previous ideas—not merely extending knowledge but change in world view An example: Astronomy • Theory of the cosmos from Aristotle to Copernicus – Aristotle: theory of ordered universe • 2 parts: the earth & the heavens – Earth the place of change – Heavens the place of perfection • 5 elements: Earth, Water, Air, Fire, Aether – Earth heaviest, thus earth at centre (explains gravity) – Aether lightest, thus in heavens (explains orbits) – Heavenly bodies on circular orbits in concentric spheres around earth in order of Moon, Mercury, Venus, Sun, Mars… stars Astronomy: Aristotle/Ptolemy • Universe finite, compact – Spheres fit tightly together – Fixed stars on outer sphere – Beyond the stars, nothing: the Void • 2 sets of rules – On earth, decay/change: a stone falls to earth... – In heavens, eternity: heavenly bodies rotate forever – Fits with religious view: Earthly corruption & Heavenly perfection Astronomy: Aristotle/Ptolemy The Void The Elements The Heavens Moon Sun Stars Earth Water Air, Fire Aether Astronomy: Aristotle/Ptolemy • Aristotle’s system couldn’t be maintained – Not all orbits circular – Planets reversed direction • sometimes moved to east across the sky, other times to west • Paradigmatic “puzzle”: how to resolve observed behaviour of planets to core of paradigm that earth is centre of universe • Ptolemy solves puzzle with Excentric, epicycle, and equant motion: Astronomy: Aristotle/Ptolemy Reversal of direction possible Centre of rotation Eccentricity of orbits explained Universal centre Earth • Core of paradigm maintained • “Puzzle” now to accurately place heavenly bodies on spheres Astronomy: Aristotle/Ptolemy • Ptolemaic view breaks down by Renaissance – Astronomical tables lose accuracy – Navigation by mariners relies upon but also contradicts Ptolemaic celestial predictions – Calendar becoming inaccurate • Equinox moved from 21st to 11th Jan/July • Copernicus proposes alternative paradigm – Sun centre of universe (1st proposed by Archimedes, 212BC!) – Earth & planets have circular orbits around it – Stars fixed at great distance (given parallax effect) – Alternative tables slightly more accurate than Ptolemaic – But explanation involves complete shift in viewpoint: Astronomy: Copernicus Completely different view of universe Not a linear change from previous view (as in Popper) but a complete change in vision: a “paradigm shift” Astronomy: Copernicus Explanation for why stars don’t move completely different: Not “on a fixed sphere” but “at a great distance” No apparent parallax for stars Must be at enormous distance from earth Astronomy: Copernicus • Lukewarm to hostile initial reception • Clashed with Ptolemaic world view – How would stones fall to earth if it wasn’t centre of universe? – How can stones thrown straight up fall in same place if earth rotates/moves? – Why is there a Void between Saturn & the stars? – Clashes with bible, etc. • Initial tables less accurate and as complicated as Ptolemy’s • But became dominant after 25-50 years Paradigms vs Positivism • Ptolemaic view based on myth (religious view of universe) • But were Aristotle et al “unscientific”? – Complex model of universe, accurate tables, acute observations… • Did they attempt to refute theory? – No, Ptolemy’s revised orbs maintains earth-centric view • Was Copernicus hailed as refutation of Ptomely’s conjecture? – No, strong resistance • Paradigm approach regarded as more accurate model of scientific behaviour The Paradigm develops • Later work by Feyerabend, Lakatos, extends/modifies concept of paradigm • Lakatos: Methodology of Scientific Research Programs (MSRP) – Theories have “hard core” which adherents do not attempt to falsify – Hard core surrounded by “protective belt” of hypotheses which may be adjusted to defend hard core – “Positive heuristic” (like Kuhn’s puzzles & normal science) where most development effort of program occurs • An MSRP can be “progressive” (positive heuristic) or “degenerative” (negative heuristic—adjusting “protective belt” to save “hard core” from attack) Positivist v Paradigm view of Economics • Positivist view of incremental progress: – In favour: Refinement of economic theory from Physiocrats to neoclassicals… Apparent linear progress – Against: concepts like utility as “irrefutable” • “Why did the chicken cross the road? To maximise its utility”. Explains everything & therefore explains nothing • Paradigm/MSRP view – History: Sequence of paradigms, each with own “world view”, puzzles to solve, anomalies... • Mercantilist; Classical; Keynesian; Neoclassical… – Today: Competing MSRPs, part progressive, part degenerative • Neoclassical • Post Keynesian • “Econophysics” Is Economics a Science? • What is the status of economics as a science? – Lacks some features of “hard” sciences • E.g., Absence of controlled experiment – Has some problems they don’t • E.g., Impact of observer on data – Is economics a “science” in same sense as physics, astronomy? • Point of debate between economists • Has own “methodology of scientific economics” as well – Commences with Robbins’ definition – Key modern argument given by Friedman Within Economics: Instrumentalism • Friedman: An “instrumental” vision of economics – Proper test of a theory is by its predictions – “Realism” of assumptions irrelevant: • “the more significant the theory, the more unrealistic the assumptions… a hypothesis is important if it ‘explains’ much by little” • “as if” assumptions—firms behave “as if” maximising expected returns, etc.—valid even if firms do not consciously do so. – Reason for paper: to counter “perennial criticism of ‘orthodox’ economic theory as ‘unrealistic’” • Friedman’s argument: a good theory explains very much using very little; therefore its assumptions will be “unrealistic”: Within Economics: Instrumentalism • “Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense)… • A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. • To be important, therefore, a hypothesis must be descriptively false in its assumptions; it takes account of, and accounts for, none of the many other attendant circumstances, since its very success shows them to be irrelevant for the phenomena to be explained.” Within Economics: Instrumentalism • “To put this point less paradoxically, – the relevant question ask about the “assumptions” of a theory is not whether they are descriptively “realistic,” for they never are, – but whether they are sufficiently good approximations for the purpose in hand. – And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions. – The two supposedly independent tests thus reduce to one test.” (Friedman 1953: 14-15) Within Economics: Instrumentalism • Friedman thus “rules out” evaluating theory on basis of its assumptions. Paraphrasing Friedman: – “Perfect competition assumes an infinite number of firms?… This is unrealistic, therefore theory false? • Irrelevant; only question is whether theory makes realistic predictions…” – Don’t need to ask businessmen how they behave – “Monetarism treats money as bits of paper ‘dropped from helicopters’ and concludes that inflation is caused by printing money” … This is unrealistic, therefore theory false? – Irrelevant; only question is whether theory makes realistic predictions…” • Don’t need to know actual process of money creation… Within Economics: Instrumentalism • Problems with Instrumentalism – Friedman’s defended his economics with instrumentalism – But how have his predictions fared? • Friedman championed “monetarism” – Control inflation by controlling rate of growth of money supply • Adopted by UK Thatcher, USA Reagan governments, plus many others in 1980s • Eventually abandoned after continual failures to meet monetary growth targets • Monetarism therefore an empirical failure; – But mainstream money theory hasn’t changed a great deal from monetarism… Within Economics: Instrumentalism • Friedman describes assumptions as simplifying – Ignore unnecessary detail to focus on what matters – But some assumptions not “simplifying” but “counterfactual” • E.g., assumption of rising marginal cost essential to model of perfect competition – Empirical research finds most firms have falling marginal costs • “The overwhelmingly bad news here (for economic theory) is that, apparently, only 11 percent of GDP is produced under conditions of rising marginal cost.” (Blinder et al., Asking About Prices, 1998: p. 102) Within Economics: Instrumentalism • Blinder’s survey of firms: – only 11% have rising marginal costs – 89% have falling or constant marginal costs • Perfect competition can’t work if marginal cost falls – So how can assumption be “irrelevant” if theory depends on it? • Economic theory often fails instrumental test… • But instrumentalism has its own problems… Within Economics: Instrumentalism • Instrumentalism doesn’t describe how economists actually behave (including Friedman himself): – All schools of thought do judge other theories on the basis of their assumptions • Development of macro driven by desire to make macro consistent with assumptions micro – Neoclassical economists criticise assumptions of other theories (Marxian, Post Keynesian, etc.) – (Conventional Marxian) assumption of labor theory of value criticised by everyone from Bohm Bawerk to Samuelson – Papers submitted to journals often criticised for not making conventional assumptions (rationality, etc.) • If “assumptions don’t matter”, these criticisms would be invalid… Within Economics: Instrumentalism • Logical consistency of assumptions has been challenged (Sraffa), not just realism (future lecture) • Sciences do attempt to build theories which are essentially descriptions of reality • Musgrave argues Friedman’s “significant theory, unrealistic assumptions” position invalid • Classifies assumptions into 3 classes – Negligibility assumptions – Domain Assumptions – Heuristic Assumptions Within Economics: Instrumentalism • Negligibility Assumptions – Assert that some factor is of little or no importance in a given situation • e.g., Galileo’s experiment to prove that weight does not affect speed at which objects fall – dropped two different size lead balls from Leaning Tower of Pisa – “assumed” (correctly) air resistance “negligible” at that altitude for dense objects, therefore ignored air resistance • Domain assumptions – Assert that theory is relevant if some assumed condition applies, irrelevant if condition does not apply Within Economics: Instrumentalism • e.g., Newton’s theory of planetary motion “assumed” there was only one planet – if true, planet follows elliptical orbit around sun. – if false & planets relatively massive, motion unpredictable. Poincare (1899) showed • there was no formula to describe paths • paths were in fact “chaotic” • planets in multiple planet solar systems therefore have collisions • present planets evolved from collisions between protoplanets • “evolutionary” explanation for present-day roughly elliptical orbits Classes of assumptions • forward movement of train • sideways movement of passenger +passengerThen says: “We shall see later that this result … cannot be maintained; in other words, the law that we have just written down does not hold in reality. For the time being, however, we shall assume its correctness.” (Einstein 1916) + 0.9 c 0.9 c train • Heuristic – assumption known to be false, but used as stepping stone to more valid theory – e.g., in developing theory of relativity, Einstein assumes that distance covered by person walking across a train carriage equals trigonometric sum of Within Economics: Instrumentalism • Sun/planets example of the right way to use assumptions: – Assume influence of other planets negligible • Then earth will follow elliptical orbit around sun – Other planets (Jupiter, Saturn) not negligible • Then elliptical orbit only applies in solar systems without large planets (domain assumption) – Drop assumption of non-impact • assumption heuristic device on way to more general theory – “3-body” problem: no general solution possible • Chaos theory explanation for planet orbits • More realistic assumption, more accurate theory… Classes of assumptions • Friedman’s “instrumentalism” only valid with respect to negligibility assumptions, but – often used by economists to defend domain assumptions – or presented to students as if heuristic assumptions • i.e., implied that more sophisticated models remove “restrictive” assumptions, • when in fact more sophisticated models can involve even more restrictive assumptions – example: Sharpe’s Efficient Markets Hypothesis Key assumptions of Efficient Markets • “In order to derive conditions for equilibrium in the capital market we invoke two assumptions. • First, we assume a common pure rate of interest, with all investors able to borrow or lend funds on equal terms. • Second, we assume homogeneity of investor expectations: investors are assumed to agree on the prospects of various investments—the expected values, standard deviations and correlation coefficients described in Part II. – Needless to say, these are highly restrictive and undoubtedly unrealistic assumptions. • However, since the proper test of a theory is not the realism of its assumptions but the acceptability of its implications, – and since these assumptions imply equilibrium conditions which form a major part of classical financial doctrine, • it is far from clear that this formulation should be rejected— especially in view of the dearth of alternative models leading to similar results.” – (Sharpe 1964; emphases added) Just where are markets efficient? • The Efficient Markets Hypothesis: assume – All investors have identical accurate expectations of future – All investors have equal access to limitless credit • Negligible, Domain or Heuristic assumptions? • Negligible? No: if drop them, then according to Sharpe “The theory is in a shambles” (Sharpe 1970) • Heuristic? No, EMH was “end of the line” for Sharpe’s logic: no subsequent theory developed which – replaced risk with uncertainty, or – took account of differing inaccurate assumptions, different access to credit, etc. Within Economics: Instrumentalism • Some “assumptions” can be challenged for validity – Risk as proxy for uncertainty (Keynes) • Domain validity of Arrow-Debreu general equilibrium with risky but not uncertain future – cannot apply in this universe – Nature of fixed capital (Sraffa) – Internal consistency of marginal productivity theory of income distribution (Sraffa/Garengani) – Equilibrium as normal state of economy – Statics equilibrium as long-run outcome of dynamic processes – Linearity as valid approximation to nonlinear processes Within Economics: Instrumentalism • Logic aside, Friedman’s Instrumentalism still dominant in economics – From critics point of view, simply a way to defend neoclassical theory from criticism – From Lakatos’s point of view, can be seen as “protective belt” hypothesis to shield “hard core” of neoclassicism from criticism • Economics also has other schools of thought – With different approaches to economic methodology… • Two main strands: – Post Keynesian “methodological pluralism” – Critical Realism Other Methodologies • Post Keynesian School (Political Economy 200065) – Reject neoclassical method in general; however – Methodological pluralism – “Horses for courses” – Realism • Insist assumptions of models must be realistic • Critical Realism (Political Economy 200065) – Emphasises open nature of economic & social systems – Hard sciences based on “closed systems” • Experiments can be replicated – Social systems “open”—evolve over time • Social science must be more historical & inductive in economic thinking – versus neoclassical ahistorical, deductive approach Postscript: Even physics has its problems… • Physics the essence of “hard science” • But issue of “what is science?” occasionally arise • Generally only one paradigm – Newton – Newton/Maxwell • But for whole of 20th century, two paradigms – Einstein 1: relativity—large scale – Einstein 2: quantum mechanics—minute scale • Models disagree at extremes • Physics driven by desire to unite two – Major issue: general relativity gives theory of gravity (warping of time-space continuum) – Quantum mechanics has no theory of gravity Postscript: Even physics has its problems… • About 20 years ago, new “paradigm” emerged: “string theory” – Matter not point-like with “wave-particle duality” (quantum mechanics, “standard model”), but – “Strings” of vibrating energy far smaller than fundamental particles – Different “harmonies” of string give different perceived particles – Strings “vibrate” in 11-dimensional space… • Problems – Energy levels needed to test theory enormous (billions of times current power levels) – Attempt to replace “messy” Standard Model with 8 parameters resulted in String Theory with 150 parameters Postscript: Even physics has its problems… • Enormous number of potential “universes” predicted by theory (10 followed by between 500 and 2000 zeros…) • No testable hypotheses after 20 years of theory… • Now there are critics asking “Is this science?”: Postscript: Even physics has its problems… • “… More than twenty years of intensive research by thousands of the best scientists in the world producing tens of thousands of scientific papers has not led to a single testable experimental prediction of the theory. • This unprecedented situation leads one to ask whether one can really describe superstring theory research as scientific research in the field of physics…” (p. 208) – So even Physics can have • Different schools of thought (competing Scientific Research Programs—Lakatos) • Crises • Disputes over whether what one school does is a science… – Emphasises importance of empirical testing in science Other Methodologies • Next week, the oldest non-neoclassical School of economic thought: Marxian economics