Download in the development of economic science

ROLE OF METHODOLOGY
IN THE DEVELOPMENT OF
ECONOMIC SCIENCE
 Existence of competing (or
complementary?) streams and
schools of economic thought
 1. Are we able to distinguish
scientific and non-scientific
theories ?
If yes
? What should be the criteria?
-
logical consistency
realism of assumptions
empirical testing
falsification (K. Popper)
predictions (M.
Friedman)?
If not
? What are the consequences?
- A plurality of scientific
approaches?
- An absolute relativism?
- A complementarity of
different approaches?
 2. Is a comparative approach to
different economic theories
plausible?
If yes
? What could be compared
and how?
? Could a methodological
approach be a solution?
If not
? Is ideology a solution or
what else?
 3. Is progress in economic science
possible?
If yes
? Is it of the same kind as in
natural sciences?
? Is it related to inner
evolution of single streams
and schools or is it of
a more general kind?
? Is the answer related to the
historical evolution of
society and national
economy?
If not
? Is ideology or religion the
answer?
 Methodology as the bases of
comparative economic theories
? How to understand methodology?
- methodology in a narrow sense =
methods of scientific work and their
application (which tools to use for
what purpose, within a particular
methodological approach)
- methodology in a broad sense =
framework within which
particular methods are chosen and
the way how methods of scientific
work are applied = a set of
principles for good science
Modes of thought - broader than
methodology
- the way in which arguments are
constructed, presented and
proved (tested)
 Two modes of thought
1. Cartesian-Euclidean mode of
thought (mathematical)
- built on axioms which are self
evident or true by definition,
abstract-deductive, closed systems
2. Babylonian tradition
- different approaches using several
strands of arguments which
reinforce each other using variety
of methods
(pragmatism, structuralism,
marxian dialectics, non-axiomatic
mathematical reasoning,
Babylonian Talmud, J.M. Keynes)
- it tends to be more applied.
“Argument in the Babylonian style is
… conditioned by the problem at
hand, employs a range of methods
suited to the problem and these
methods cannot be combined into one
formal deductive argument without
drastically changing their nature”
(Dow 1996, p. 13).
 Methodology of natural vs. social
sciences or sciences and moral
sciences
(Veblen, Keynes, Marx, von
Hayek)
Problem determined
methodological approach
- Keynes, Sraffa (philosophy of L.
Wittgenstein in its early phase)
Issues involved:
- Closed vs. open systems
(endogenous and exogenous
variables)
- Atomism vs. organicism
- Dualism vs. nondualism
- Uncertainty, probability and
expectations
- Time dimension - four
approaches
1. Mechanical time
2. Logical time
3. Historical time
4. Timelessness
? Should we consider the diversity of
present-day economics a sign of
scientific maturity or pre-scientific
nature of economics?
? If we accept a plurality of economic
science
- what are the reasons?
- what are the effects?
An economic theory can be
characterized as “Rays of light which,
we hope, illuminate at least part of
our target, leaving the rest of complex
reality in darkness. But we must be
sure to choose r theories well,
otherwise they may illuminate only
irrelevant objects” (Hicks 1983,
qouted from Dow 1996, p. 5).
 Can we receive a more accurate
knowledge by plurality of streams
of economic thought? Are different
approaches compatible enough?
 Should we look for another
explanation?
? Can philosophy of science provide a
solution to our dilemma?
Plurality and tolerance + logic of
evolution – a possible rational or
scientific way of choosing between
streams or schools of thought or
theories
Philosophy of science developments
1. T. Kuhn’s sociological approach a paradigm (The Structure of
Scientific Revolutions, 1962)
- “normal science” and
“revolutionary science”
“science is not validated by
“objective” positivistic norms but by
the collective judgements of
communities of scientists”
2. I. Lakatos - scientific research
programs (Criticism and the
Growth of Knowledge, 1970
- logic of appraisal (what
criteria can be used to
measure the progress of
science?)
- “hard core” (irrefutable
axioms) and “protective
belt” (auxiliary hypothesis)
- progressive vs. degenerative
research programs
? of scientific progress => research
programs should never be abandoned
too rapidly
3. L. Laudan
- problem solving orientation
- verification by long run
development of real economy
 Comparative economic theories –
methodological approach
? What shall we compare?
1. world view or ideology
2. methodological practices
3. main questions they are exploring
4. verification procedures
5. conclusions
Comparative approach to streams of
thought/scientific research programs
(A.G. Miller, D. Mair: A Modern
Guide to Economic Thought. An
Introduction to Comparative Schools
of Thought in Economics)
vs.
comparative approach to economic
concepts and partial theories
(Sh. Dow: The Methodology of
Macroeconomic Thought)
Selected economic theories:
Neo-Austrian Economics,
Neo-Keynesian macroeconomics,
Monetarism,
Post Keynesian Economics
and
selected topics:
Microeconomic foundations of
macroeconomics,
Equilibrium,
Expectations,
Money and monetary theory,
Economic policy advice.
Topic 1. Microeconomic foundations
of macroeconomics
? of relationship between theory
expressed in terms of aggregates
(macroeconomic) and the behavior of
agents (households, firms)
Fallacy of composition
- behavior common to large numbers
of agents generates a different
outcome from what each of them
intended
(maximization of profits and the
Sisyphus model; general increase in
propensity to save may result in
recession and decrease of absolute
level of savings)
 ? of co-ordination of individual
behavior and fulfillment or
frustration of individual
expectations
Answers:
1. Activities at microeconomic level
generate macroeconomic outcomes idea of compatibility (Say’s Law)
2. Microeconomics and
macroeconomics are separate field of
enquiry (keynesian macroeconomics,
macroeconomic co-ordination failure
vs. microeconomic co/ordination
success ( Leijonhufvud, Shackle)
=>
Importance of methodological
practice of different schools of
economic thought
 Neo-Austrian School
- individual behavior as the starting
point of analysis => problem with
building macroeconomic theory on
this bases
- unintended consequences of human
purposeful behavior
- macroeconomic aggregates have no
independent existence as they do not
enter individual decision-making
- market process viewed as
harmonious (government
intervention creates disharmony)
- macroeconomics that could enter
the government decisions only has
no socially useful function
 analysis should concentrate on
market process which generates
aggregates (not the other way
round)
= evolution in historical time,
qualitative changes, uncertainty,
unintended consequences of
purposeful human actions, learning
process, information and knowledge,
role of prices, alertness
 Neokeynesian macroeconomics
(mainstream theory until 1970s)
J. M. Keynes did not root his
macroeconomics in individual
behavior
 a solution needed
- neoclassical synthesis
- micro-macro inconsistency (Clower,
Leijonhufvud)
Reductionism = all results should be
derived from axioms about individual
agents’ behavior => macroeconomic
outcomes must be derived from those
axioms as well
 difficulties to accept involuntary
unemployment (an anomaly)
 equilibrium vs. disequilibrium
debate
Discussions about micro-foundations
of keynesian macroeconomics –
irrationality, inconsistency etc.
- perfect competition (Walrasian and
non-Walrasian equilibrium context)
vs. imperfect competition issue
- price adjustment vs. quantity
adjustment processes
- axioms of agents behavior
neoclassical but constraints are of a
different nature => Walrasian, nonWalrasian general equilibrium vs.
new keynesians
 Post Keynesian Economics
Holistic approach (practiced by J. M.
Keynes)
- logically consistent combination of
micro and macro analysis
- macroeconomics refers to
aggregation of the outcomes of
individual actions
- to analyze behavior in terms of
aggregates is legitimate without
necessity to “ground it” in
individual agents’ behavior
(reductionism is not applicable)
- micro/macro relationship analyzed
in context of logical distinction of
the two levels of analysis
- social dimension of individual
behavior (classes, groups and their
behavior and interests)
 aggregates “govern” the behavior
of individuals
 problems of co-ordination seen as
co-ordination among groups
Individual behavior under
uncertainty - conventions relying on
group behavior
(Keynes in The GT adopted holistic
approach to human behavior and
rejected a dualistic approach based
on the rational/emotional dualism)
Oligopolistic market structures and
their behavior
- two approaches:
- short-run analysis stress the role of
uncertainty, money, financial assets
and capital goods in explaining
business cycles and involuntary
unemployment - more directly
related to individual behavior
- long-run analysis in classical
traditions (neoricardian) – stress on
class behavior
- a synthetic approach (J. Robinson,
N. Kaldor etc.)
Topic 2: EQUILIBRIUM
♣ Equilibrium
= an important organizing concept
used to analyze the interdependence
of behavior of individuals and
groups
- imposes order on complex
relationships (= point of rest arising
in different ways)
- used in variety of ways
(depends on what has been abstracted
from – determines which factors can
disturb and which can induce a
return to equilibrium)
- depends on the theoretical
framework in which it is employed
♣ Equilibrium is intrinsically
connected with the treatment of
time
- historical time vs. mechanical
time/N. Georgescu-Roegen (1971)
and J. Robinson (1978)
- logical time/V. Termini (1981)
= denominator of causal sequence,
rather than time sequence
- expectational time /G.L.S. Shackle’s
subjective perception of time, an
atemporal construct in human mind
(1968)
- distinction between endogenous and
exogenous variables (different
meaning in partial and general
equilibrium)
- a notional construct vs. actual state
of the economy
 Neo-Austrian School
- somewhat confused
= reliance on different notions of time
(stress on historical time, evolution of
institutions, market process vs.
underlying assumption of coordination success based on priceadjustment processes which suggests
a mechanical time. Subjective
methodology stresses the role of
expectational time)
Definition by Hayek (Economics and
knowledge. Economica 1937):
equilibrium is a situation where all
individuals’ plans are mutually
consistent
vs.
basic Austrian tenet, that the
individual behavior is unpredictable
 no equilibrium possible
(individuals learn from mistakes
but unsystematically)
= there cannot be a systematic
movement to equilibrium
independent of human action
(implied by market process
understood as an outcome of
individual action)
= contrary to entrepreneurial
behavior understood as the driving
force of market economy
(alertness, creative activities)
= understood as a notional concept
- as a reference point – Mises,
Kirzner, Rizzo
vs.
Lachmann who stressed subjective
notion of expectational time
(influenced by Shackle)
- understood as a tendency of market
process in historical time, which
never reaches an end point due to
human creativity
(a tendency in time like in the
classical political economy)
“…neo-Austrian use of the
equilibrium concept implying the
successful market co-ordination
…can be derived neither from
observation nor from logical
deduction from the axiom of human
purposefulness; it can only rest on a
view of how economies work held
independently of the theoretical
structure.” (S. Dow p.116).
 Neokeynesian macroeconomics
(mainstream theory until 1970s)
Equilibrium - primary organizing
concept of mainstream theory
(a hard-core of mainstream
economics = general equilibrium)
 explanation of interdepemdemces
and possibility of natural harmony
result of self-interested actions of
agents
- mechanical and logical time
- unrealistic assumptions
- behavioral assumptions are at best
“as if” representations of actual
behavior
- a Cartesian/Euclidean mathematical
framework requiring strict dual
between endogenous and exogenous
variables
- the more all-encompassing the
model (the more variables are
endogenised), the less explanatory
power the model has
- the main function of the model = to
prove the existence and uniqueness
of a stable equilibrium
- exogenous variables lead to
disturbances, and a movement from
one equilibrium to another is
modeled
- trial to incorporate pathdependency (hysteresis)
 disequilibrium explanations of
non-market clearing;
new equilibrium is jointly determined
by the exogenous shock and the
(deterministically modeled)
adjustment path (Phelps 1972)
- spot and future markets
(? whether all the future markets
exist and clear – Hahn)
 equilibrium understood as a state
when all plans are met
- stochastic processes and
probability solutions
“general equilibrium theory does not
attempt to describe reality” (Hahn
1973)
 Post Keynesian Economics
- Historical time, uncertainty and
non-ergodicity (Davidson)
- post Keynesian equilibrium analysis
- rejects mechanical time and a
narrow concept of logical time
required by an axiomatic
framework
- Classical equilibrium concept
(notional, cannot in general be
observed)
“The concept of equilibrium in
historical time can …isolate
particular parts of the system for
study in partial equilibrium
analysis,..” (Dow, p.124).
Topic 3: EXPECTATIONS
♣ Incorporation of time as a
temporal concept
→ expectations of the future play an
important role in governing
behavior from one period to the
next
- expectations may be connected with
introduction of historical or
mechanical time (both used in
macroeconomics)
(there is a special concept
based on Shackle’s expectational
time (formation of expectations at
the individual level)
- individual capacity to formulate
expectations intrinsically connected
with the ability to make predictions
- creative behavior generating new
knowledge implies impossibility of
full knowledge of the future
? how to model behavior based on
incomplete knowledge
- important role of hypothesis of
market stability or instability and
understanding of equilibrium
♣ Neo- Austrian economics
Expectations did not play important
role in the past and only recently
were introduced by some neoAustrians (Lachmann)
In Hayek (after 1948) expectations
subsumed under the incompleteness
of knowledge
Economics understood as a study of
unintended consequences of
purposeful human behavior
→ expectations must be usually
frustrated
→ economists may have excess to a
special a priori knowledge
extending beyond individual
agents
- emergence of the neo/Austrian
theory of expectations during 1970s
- HRO + Shackle’s kaleidics
connected with the expectational
time as inspiration (Lachmann,
hawever heretic for majority of neoAustrians)
- convergence of outcomes require
institutions, expectations are
diverging (Lachmann)
 Mainstream economics
- adaptive expectations - the first
method of incorporating
expectations into mainstream
economics
- existence of lagged adjustment in
expectation formation to emergence
of new information (cobweb
theorem)
 Cagan (1956), Friedman
(permanent income
hypothesis, natural rate of
unemployment)
(contradicting the rational economic
man, impossibility of interpretation
in the context of the basic axioms of
individual behavior)
- HRO 1970s (Muth 1961)
(stress on rationality of rational
economic man, future oriented)
- both used in the context of
mechanical time and a result of
modeling efforts (econometric
gadgets)
 Post Keynesian Economics
- Expectations formed in the context
of historical time, uncertainty and
non-ergodicity (Davidson)
- determine behavior in the context
of a perpetual absence of
equilibrium
- rejects mechanical time and a
narrow concept of logical time
required by an axiomatic
framework
- an inherent feature of post
Keynesian analysis (even if we
suppose that expectations are given)
based on Keynes’ approach in The
GT (short run vs. Long run
expectations)
- different understanding of
uncertainty in the mainstream and
in post Keynesian analysis
- decisions to invest on the bases of
animal spirits
- possibility to study expectations on
group or individual level
- stress on entrepreneurs and
investment decisions
- outcome of the combination of
animal spirits and short run
expectations in financial markets
determines the level of investment,
and effective demand
Topic 4: MONEY and MONETARY
THEORY
♣ Conceptual framework and
differences among schools of
thought stressed
- interdependence with conceptual
treatment of time, microfoundations, equilibrium and
expectations
- origin and nature of money
- role of money in business cycle
analysis (different treatment in
schools of thought)
- money and its role in production
and exchange
Major historical traditions in the
theory of money:
1. Quantity theory of money
- since Bodin, Locke and Hume
- Fisher and the Cambridge school
- Friedman, Don Patinkin
- neutrality of money in the long-run
 dichotomy of monetary and real
variables (or between theory of
value and theory of money)
= real variables determined
independently of the stock of
money
=>
M  P
= long-run equilibrium result
2) endogenous nature of money
- banking school
- Marx
- Schumpeter
- Wicksell (in the QTM framework)
- Keynes (1937)
- post keynesian economics
- mutual interdependence of real and
monetary factors
- money created and destroyed within
economic processes developing in
historical time
♣ Neo- Austrian economics
- Menger - money as institution,
monetary economy seen as the
unintended result of purposeful
human actions
(development of roundabout methods
of exchange as a reaction to the need
of liquidity in the context of
uncertainty)
- neo-Austrian rejection of the QTM
(QTM is valid in the mechanical
time only; money supply and price
level do not have any operative
meaning, do not enter into
individual decision-making)
- financial institutions and
transactions habits develop in
response to individual behavior
=> no need to develop demand for
money theory at the macroeconomic
level
- the role of money is almost
exclusively concerned with the public
sector’s responsibilities (Austrian
business cycle theory, theory of
inflation)
 Mainstream economics
- efficiency argument for monetary
exchange instead of barter
(transactions demand for money)
Neokeynesian interpretation of
Keynes
- exogeneity of money
- stress on real factors (IS-LM
analysis)
- liquidity preference theory
developed as demand for money
theory (Baumol, Tobin etc.)
- liquidity trap
- QTM does not hold ( velocity of
money and money multiplier are
unstable, no unique causal chain)
- anti-cyclical monetary policy
Monetarism
Don Patinkin - real balance effect
M. Friedman – QTM restatement
- short-run non-neutrality of
money
(in the framework of adaptive
expectations and money illusion)
- monetary policy “matters”
 monetary rule = neutralizing
money in the short run
Rational expectations school
(Lucas)
- neutrality of money in the short run
- monetary rule and credibility
 Post Keynesian Economics
- ? nature of monetary economy
- money as integral feature of a
monetary economy
( emphasis on production developing
in historical time)
- money as institution
- money as a tool against uncertainty
- money as a specific asset (low
degree of substitutability, low
carrying costs, supply elasticity
must be low)
- endogeneity of money supply (absolute,
relative, structural)
Modern money = bank money or credit created
for needs of production
Money cannot be neutral in the short-run and
long-run, as well
- money supply determined by factors
operating at the demand side
(demand for money and credit)
- causality from the price level to the
money stock i the economy
- money supply endogenous, interest
rate partly exogenous
1. Absolute endogeneity
(horisontalism)
= an automatic adjustment of the
money supply to the „needs“ of
production
( money supply curve does not exist)
B. Moore, N. Kaldor, S. Weintraub
2. Relative endogeneity
= money supply adjusts but
important limits exist due to
commercial banks‘ behavior
( credit rationing, interaction of the
Central bank and commercial
banks
(money supply curve exists and its
shape changes during the business
cycle)
Sh. Dow, M. Wolfson
3. Structural, institucional
endogeneity
= liquidity or its part is outside the
control of the Central Bank
(money multiplier instability, ve;ovity
of money instability, new products in
the money market)
P. Davidson, L. R. Wray, H. Minsky