DEVELOPMENT OF ECONOMIC SCIENCE-

MAIN METHODOLOGICAL PROBLEMS AND

RETROSPECTIVE APPROACH
I. Definition of economics as science
1. Economics as science about natural economic laws –
economics as a nomological science
Economics in the context of distinction: hart sciences versus soft
sciences
Point of reference: natural economic order (system)
Analogy to natural system and natural laws (laws of the nature; e,g
classical mechanics)
Laws of economics as laws of market and competition
Capitalism as the economy based on (1) market regulation (as
dominating system of allocation of scarce resources and distribution
of incomes resulting from effective use of those resources (2)private
ownership and (3) free entrepreneurship

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I. Definition of economics as science – cont.
Capitalism as the natural economic order; the so
called methodological monism
Capitalism versus other socio-economic orders
 Other orders as a „deviation” from natural order (e.g. socialism)
 Other socio-economic systems as embryonic phases in the
process of emerging of capitalism (e.g. feudalism)
 TINA concept, M. Thacher (There Is No Alternative in relation to
liberal capitalism): globalized capitalism, free markets and free
trade are the best ways to build wealth, distribute services and
grow a society's economy.
 The variety of capitalisms approach: capitalism may differ for
historical, cultural or geopolitical reasons
Hybrid socio-economic systems: the case of PR of China and
the question about the relation between political freedom (liberal
democracy) and efficiiency of economic system

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I. Definition of economics as science – cont.
2. Historical and institutional approach to economics as
science
Economics as sociology of economic life (phenomena and
processes) and socio-economic orders which change over time
(Marxian/Marxist economics, historical school in economics)
Economics as the theory of evolution of economic system:
institutionalism, classical (Veblenian) and
neo-institutional (post-Veblenian)
Common development factor: key role played by the science (in
Anglosaxon meaning of this word) and technology in the
economic development (technological determinism vs.
economic determinism)

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 I. Definition of economics as science – cont.
3. Lionell Robbins’ definition based on the category of
scarcity
 Point of reference: physical scarcity of resources and goods
vis-a-vis unlimited (endless) character of human needs
Features of resources (production factors, capital kinds) :
 Physical scarcity (not to be confused with economic rarity),

 Diversified productivity,

 Possibilities of alternative use

 Traditional (physical capital, labor and natural

resources/land) and „non-conventional” (modern) production
factors /capital kinds: social capital,human capital,
knowledge and technology, political capital, institutional
capital → they may also be scarce or limited

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 I. Definition of economics as science – cont.
3. Robbins’ definition based on the category of scarcity – cont.
Features of needs:
 Unlimited character,
 Full definiteness (needs as data) – we are able to identify all our needs (not to be
misled with fancies or whims) and we are fully acquainted wit their role in increasing our
individual welfare/wellbeing)
 Orderliness (consistency) of preferences as necessary for microeconomic rationality*

*microeconomic rationality implies that everyone strives for maximizing his/her utility and
makes choices or takes decisions which serves this
 Relative importance changing over time (owing to learning by doing or learning by
schooling)
Economics as an abstractive (pure) logics of choice, as science on alternative
manners of using scarce resources for producing goods which satisfy unlimited
(endless) needs
Economics deals exclusively with relations between unlimited goals (needs) and scarce
means serving to achieve those goals
Very important: economics as science is neutral to goals/needs

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I. Definition of economics as science – cont.
Implications of perceiving economics as an abstractive (pure)
logic of choice
 ignoring (undermining) social and institutional factors influencing the economic
development : not taking into account axiological values and social contextuality
in choosing goods (1) serving to meet our needs and/or (2) changing the
scignificance and strucures of needs
 New Institutional Economics: fundamental significance of those factors for
contemporary economies and societies; D.Acemoglu and J. Robinson, 2012: Why
Nations Fail. The Origins of Power, Prosperity and Poverty
 Ujnder those assumptions, economics is becoming a purely positive science, as a
science free of any axiology and value judgments „populated” with human entities
being perfect „calculators” of „costs” and „pleasures” and tyhis way maximizing their
utility (UMH. HOE)
 (1) Positive economics versus (2) normative economics
 (1) economics as a science deals only with testing hypothesis referring to
observable (empirical) reality in terms of „true” or „false”
 (2) with respect to mumerous social, axiological etc. factors influencing our
economic choices and decisions, normative analysis - value judgments - are
legitimate and necessary

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I. Definition of economics as science – cont.
4. Economics as a domain of applied mathematics
L.M.E. Walras’ approach
Economics as the theory of general economic
equlibrium seeking for prices and quantities of goods and
production factors (and other economic assets) which balance
demand and supply on individual markets or generał markets (consumer/final goods, production factors,
intermediate goods (either for resale or for further production in the same year) , financial assets) →
mathematical task
Definition of T. Koopmans (activity analysis)
Economics as science dealing with optimal distribution (allocation)
of scarce resources which are at the disposal of enterprises
Definition of P.A. Samuelson
Economics as science on (1) conditions of equlibrium and
conditions of stability of economic systems (in other words:
(1) economic statics and (2) economic dynamics)
• mathematical economics: a way of studying economic issues based on mathematical reasoning and
modelling

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 I. Definition of economics as science – cont
. 5. Attempts at widening the research domain of economis
as science (the so called economic imperialism)
„Old” imperialism: each sphere of social life is subject to market-
type performance and economic manner of human behavior – e.g.
family, religion, philantropy and charity (G. Becker, Nobel Prize winner
in economics, 1993) – and is characterized by the same motives
(drivers) of action as purely economic choices: selfishness, greed,
propensity to defraud (cheat), utility maximization
Also called „deep” imperialism
Under conditions of economic and political freedom we take such
deciions and choices merely which contribute to maximization our
utility → axiomatic character of rartionality

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 I. Definition of economics as science – cont
• 5. Attempts at widening …. (the so called economic
imperialism)
„New” imperialism : (Mäkki, 2000): appriopriating by the
science of economics of domains (research areas) which are
specific for other social sciences; e.g. new institutional
economics
Also called „broad” (or outward) imperialism: economic
theory of law, state, politics, democracy and others)
Economic imperialism vs. cooperation with other social and
natural sciences (behavioral economics and finance,,
evolutionary economics, ecological economics, physico-
economics, psychological economics and others)

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II. Neo-classical concept of economic science –
main components of methodological paradigm*
1. METHODOLOGICAL INDIVIDUALISM
Behavioral dimension (concept of homo economicus , utility
maximization hypothesis; UMH)
References of Hoe/UMH concept to important streams in economics and
philosophy
 Philosophical roots: hedonism, utilitarianism
J. Bentham: our life ever consists in hedonic calculus of pleasures and pains in
order to maximize the utility
 Historical roots : selfishness and greed as main common instincts (drivers) of
human social, including economic ones, actions; A. Smith (1759, Theory of Moral
Sentiments), ”founding father” of economics a science)
 Smirth: selfishness, greed and other main instincts (procreation, safety, social
recognition etc.) as both (1) innate and (2) socially determined instincts of the
people
 Smithonian dualism in perceiving the human nature: selfishness and greed versus
emphathy and altruism
*(1) methodological individualism, (2) concept of equilibrium, (3) critical rationalism

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II. Neo-classical concept of economic science…
1. Methodological individualism (cont.)
Cognitive dimension: necessity to identify (to seek for) microeconomic
foundations of all economic phenomena and processes
 relation: microeconomics – macroeconomics (macroeconomic categories not
having a solid microeconomic base are not „scientific”)
 Cognitive individualism vs.
1. cognitive holism,  focussing on systems as a whole rather than on
individuals and
2. cognitive realism (or critical realism – Lawson, complexity economics):
there are various social structures „between” individual economic agents and the
„economic universe” in which we live and act and which impact our economic
choices and decisions resulting from H.Oe.-HMU related motives of behaviour
Ideological dimension of MI (economic freedom, Hayek),
 economic freedom is fundamental for (1) microeconomic rationality, (2) overall
efficiency of market economy and (3) effectiveness of market as a regulatory
mechanism

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 II. Neo-classical concept of economics – cont.
1. Methodological individualism – cont.
• General neoclassical model of microeconomic
behavior: optimization of human beings’
economic activitties
A. Conditional maximiztion of objective function
(utility function)
B. Choice of best alternative from available and
effective solutions
• Static and dynamic optimization – economic
statics and economic dynamics

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 II. Neo-classical concept of economics – cont.
1. Methodological individualism – cont
Criticism of homo oeconomicus concept and its
modifications in contemporary economics
(A. Sen, J.K. Arrow, H.Simon and others)
 Generally: criticism of methodological individualism (MI):
MI versus methodological holism and cognitive realism, as
in many other social sciences
 UMH does not have a satisfactory empirical foundation
(intentional character of UMH, intentional versus actual
rationality)
 UMH versus a common occurrence of non-selfish behaviors
and activities (both individual and within social groups,
especially smaller ones)

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II. Neo-classical concept of economics – cont.
 H.Oe. and UMH in the light of informational and
cognitive/mental constraints (limited abilities of
humans to perceive, understand and process
information)*
 H.Oe. and common occurrence of co-operative
activities (H.Oe. versus Homo cooperativus –
selfishness and competition versus co-operation
and the concept of co-opetition)
 H.oe. versus empathy, charity etc. (emphathy and
charity in the context of extended understanding of
rationality; Becker’s economnic imperialism)
*Standard interpretation of H.Oe. concept takes for granted that
there occur no such constraints which implies that choices we make
and decicions we take ever maximize our utility (G.Becker,
M.Friedman) – axiomatic character of economic rationality

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II. Neo-classical concept of economics – cont.
 H.oe./UMH versus behavioral and psychological
economics:perspective theory: D.Kahneman
(Nobel Prize winner in 2002)/A. Tversky)
 Utility ever depends on the point of reference
(perspective), ambigous character of utility and
process of its maximization
 Aversion to loss and risk as main driver of
human economic actions (loss hurts more than the
gain enjoys
 Jensen/Meckling: Pain Avoiding Man (PAM)
and Sociological Model (Hierarchy of Needs
Model)

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II. Neo-classical concept of economics – cont.
Main modifications of HOe concept
 H.Oe. as cognitive concept having the stochastic
character only (numerous „exceptions from the rule)
 H. Simon- concept of bounded rationality
(satisfycing instead of maximization or optimization
behavior, rationality as a scalar value)
 H. Leibenstein – a selectively rational men
(„efficiency gap” and its sources);
 Jensen/Meckling: REMM - resourceful and
evaluating homo oeconomicus (maximizing men)
 Evolutionary economics – routine vs. optimal
choice (routine and change/innovation as social
counterparts of genotype and mutation)

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 II. Neo-classical concept of
economics – cont.
 Homo sustinens (Siebenhüner): hypothesis of
survival of human species and sustainability of
human civilization vs. UMH. HS as a
microeconomic foundation of Sustainable
Development theory and ecological economics
 Homo oeconomicus vs. socially embedded
human being (microeconomic rationality in the
approach of new economic sociology)
 (M. Granovetter) social embededdness means that
relations between economic subjects are embedded in actually
existing social nets and not in abstractive ideal markets
 social embededdness concept as a reaction to economic
imperialism

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 II. Neo-classical concept of economics –
cont.
2. Equlibrium concept in NCE
Equlibrium as heuristic (cognitive) fiction and a real feature of
economic phenomena and proceses
Equilibrium versus tendency to equilibrium
Economic statics and dynamics vs. static and dynamic
equilibrium
Microeconomic and macroeconomic equilibrium
Macroeconomic equlibrium versus macroeconomic stabilization
1. low and controlable inflation,
2. full employment,
3. equlibrium of public finance,
4. external equlibrium

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 II. NCE concept of economics – cont.

2. Concept of equilibrium in NCE– cont.

Market equilibrium: partial and general (on final
goods markets, intermediate goods and production
factors markets, financial markets)
General equilibrium: static and dynamic
(equlibrium growth)
Equlibrium vs. disequlibrium (controverses
between NCE and Keynesian economics)
Equlibrium as a stochastic category

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 II. Neoklasyczna koncepcja ekonomii c.d.
3. Critical rationalism (C. Popper)
Genesis: – philosphy of positivism as a commonly
accepted general methodology of science
Positivism: observation of empirical reality as the
only source of true knowledge and reliable base
of scientific cognition
Critical realism (falsyphicationism) as criterion for
appraisal of „scientific character” of generalizations
(hypothesis, models, theories etc.) of economic
science

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III. Criteria of progress/development of
economic science
 1. Criterion of capability to explain the nature of
economic phenomena and processes (criterion of
the so called scientific realism)
 2. Social utilitarity criterion
 3. Criterion of predictivitness power (Friedman)
 4. Mongin’s – Laudan’s criterion of effectiveness
(the so called instrumental realism): criterion of
higher (increasing with respect to „competitive
theories” ) effectiveness in solving scientific
problems

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IV. Main criteria of distinguishing streams
(schools) in economics

1. Interpretation of economic categories and laws

2. Market and state as mechanisms of economic
coordination and optimization (in macroeconomic
scale)
3. Manner of interpretation of utility/value/price of
goods, of sources (origins) of social welfare and
economic growth factors

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IV. Main criteria of distinguishing streams
(schools) in economics
1. Interpretation of economic categories and laws
a) Natural vs. historical (natural economic system vs. systems
changing over time)
    b) Deterministic vs. stochastic
    c) Causal vs. functional
  d) Economics as a science dealing with economic models and
theories describing and explaining in a still better way economic
reality and not searching for objective economic laws or principles
e) Economics as a science constructing subsequent research
paradigms (T. Kuhn) and programs (I. Lakatos) – „scientific
revolutions” as changes in research paradigms (e.g. marginalist
revolution Keynesian revolution, neoliberal revolution)
Market and state as regulation mechanisms:
paradigm of market vs. paradigm of state
The nature of paradigm of market
1. Economic entities take decisions based (mostly) on the
observation of changing market prices and their
impacts on utility functions of those entities
2. Markets are characterized by the feature of allocative
efficiency
3. There occurs a constant tendency to market
equilibrium
4. Providing that the equlibrium is effective, there takes
place the maximization of social welfare (Pareto
optimum)

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 Market and state – cont.
Paradigm of market– perfectly competitive (ideal) market as
the point of reference
Real economic life: occurence of numerous market failures
(market is not a perfect mechanism in terms of allocation of
resources and distribution of incomes)
The very nature of market failures: impairing (distortion) of
conditions of (1) perfect competition and (2) system of
private property rights (not entirely disjunctive citeria)
Most important and common types of market failures:
monopolies /oligopolies, external effects, public goods,
imperfect information (knowledge), uncertainty and risk
General and sector-specific market failures
Market failures vs. state failures

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 Market and state … – cont.
Market failures – the need for public regulation
Public regulation as direct impact of the state upon individual
economic entities
Public regulation and other domains of state economic activities:
macroeconomic policies, structural policies and others
Public regulation does not contradict the paradigm of
market since:
It serves to minimize the scope of market failures and/or
to reduce their negative economic and social outcomes
to increase this way actual effectiveness and efficiency of market as
institutional mechanism of (1) alocation of scarce resources and (2)
distribution of revenues earned through the use of those resources
Economic regulation versus social regulation (natural
environment, work safety and hygiene standards, health)

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 Market and state … – cont.
Normative and economic interpretation of public
regulation
 Normative interpretation: ultimate (superior) objective of public
regulation is the increase in actual level of social welfare
 Economic: public regulation is regarded as an „economic play”
which implies the existence of supply of and demand on regulation
(political market of regulation). This approach also assumes the
diversification of utility function of particular groups of players
(politicians as law/regulation suppliers, regulators – officers of
regualtory bodies, regulated economic subjects
 Examples of regulation thoeries/models: captutre theory of
regulation, ecclectic theory of regulation
Diversification of market failures results in the necessity of
diversifying methods and instruments of public regulation
(regulation of real economy sector versus regulation of
financial secor)

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 Market and state … - cont.
Point of departure for the paradigm of state: permanent
incapability of market mechanism to maximize the social
welfare due to (among others) :
1. Lacking tendency towards the general (Keynesianism) or partial (neo-
Keynesianism) equlibrium
2. Need for direct defining and implementing by the state of important social
objectives : e.g. in such spheres as: education, social safety or
environment and natural resources (institutionalism, historical school,
mercantilism, Marxist economics)
3. Tendency towards „anarchy of production” and waste of economic
resources (mercantilism, Marxist economics)
4. State regulation as quasi-market
 An important question: can the state be as effective and efficient regulatory
mechanism as the market
 The concept of enterpreneurial state (Mazzucato)
 Market capitalism versus state capitalism

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 Market and state … - cont.
levels (domains) of state economic activity
1. public regulation;
2. macroeconomic policies (fiscal, monetary and trade) and macroeconomic
stabilisation (balanced/equlibrium economic growth, full employment, low and
controllable inflation rate, external equlibrium of economy)
3. sectoral policies (industrial, R&D/innovation, agricultural, transport and other)
and horizontal policies (ecological, regional, educational, cohesion/social and
other );
4. microeconomic policies, i.e. instruments designed to improve the effectiveness
of economic legislature and to enhance the system of property rights;
5. institutional policies (sensu stricte).
Regulative state vs. active pro-growth state policy
Market and state and not competitive but complementary regulatory
mechanisms

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