Download Methodology

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