Chapter 2

CHAPTER Two
History of Economic Thought-I (Econ3141)
Methodological Issues In
Economics
Outline
 Methodological Controversies in Economics and Evolution of Various

Methodologies
 Economics as an Art and as a Science
 The importance of Empirical Verification
 The Rise of Logical positivism
 From Logical positivism to falsificationism
 Falsificationism to paradigm
a. K. Popper and its Critics
b. Thomas Kuhn
 Recent developments in the Methodology of Economics
a. The Scientific revolution paradigm
samuel-ruga@wldu.edu.etb. Lakatos Research Program 2
Methodological Controversies in Economics and Evolution
of Various Methodologies
“What do economists know and how do they know that they know it?”
 Such questions belong to epistemology, the study of human knowledge; in
the philosophy of science they are included in the subject “methodology.”
 Methodology significantly influences what economists do, we will briefly
consider the evolution of methodological thinking and its influence on
economic thought.
Before this let us reflect on the following important points:
samuel-ruga@wldu.edu.et 3
Economics as an Art and as a Science
 what are the basic distinctions between the art of economics, positive
economics and normative economics?
Normative Economics
 It concerns with questions of what should be/ought to.
 It is the philosophical branch of economics that integrates
economics with ethics.
 It argues normative judgments should enter into the analysis as
as possible as it can.
Economics as an Art and as a Science…….
Positive Economics
 It concerns about forces that govern economic activity and asks

such questions as:
 How does the economy work?
 What are the forces that determine the distribution of income?
 The methodology of positive economics is formal and abstract; it

tries to separate economic forces from political and social forces.
 The sole purpose of these inquiries is to obtain understanding for the
sake of understanding.
Economics as an Art and as a Science…..
Art of Economics [Knowledge is science, Action is art]
 It concerns about questions of policy. It relates the science of
economics to normative economics and asks questions such as:

 If these are one’s normative goals, and if this is the way the economy works,
then how can one best achieve these goals?
 Its methodology is more complex because it must address
interrelationships among politics, social forces, and economic forces.

 In it one must add back all the dimensions of a problem that one abstracted from
in positive economics.
Economics as an Art and as a Science…..
 Which should be the primary focus of economics has prompted
unending debate in the HET.

 Drawing strength from the work of Adam Smith, The German historical
school and the English Marshallian school have advocated that primary
attention be given to the art of economics.
 Modern orthodox economists focus on positive economics and find
support for this position in the writings of David Ricardo
 Consistent with that view, most modern methodological writing has centered
on positive economics, and our methodological discussion in this chapter will
follow that focus.

The Importance Of Empirical Verification
 Is there an ultimate truth or no underlying truth that scientists
are in the process of revealing?

 Believing it exists leaves one with the problem of deciding when one has
discovered it.
 The means to discover the truth involved trained empirical

observation, which is require the integration of reason with
empirical observation.
This subject is far too complicated, verification is discussed in detail in the
writings of Kant, Hume, Descartes, and other 17th 18th century philosophers.
The Importance Of Empirical Verification……
We will simply define three terms that have played an

important role in the discussion:
 Inductive reasoning is empirical, proceeding from sensory perceptions
to general concepts.
 Deductive reasoning (logic) applies certain clear and distinct

general ideas to particular instances.
 Because most philosophers believe that knowledge derives from a

mix of these, the debate usually centers on the nature of the
optimal mix.
The Importance Of Empirical Verification……
 Abductive reasoning uses both deduction and

induction to tell a reasonable story of what happened.
 It combines history, institutions, and empirical study to gain
insight;
 However, it does not claim to provide a definitive theory,

because, when we are dealing with a complex system,
definitive theories are beyond our grasp.
The Rise of Logical positivism
 Logical positivism linked with deductive reasoning a positivist
desire to let the facts speak for themselves.
 It originated with a group known as the Vienna Circle
 The logical positivists argued that scientists develop a deductive
structure (a logical theory) that leads to empirically testable
propositions.
 The basic quest is to establish the truth using the methods.
The Rise of Logical positivism……
 A deductive theory is accepted as true, however, only after it has been
empirically tested and verified.

 Thus, the role of the scientist, they said, is to develop these logical theories
and then to test them.
 To evaluate their results, objective criteria for acceptance or rejection
can be established.
 Analytic statements, namely those concerning abstract theoretical
reasoning, are either tautological, i.e. logically implied in the assumptions,
or self-contradictory, i.e. they contain logical inconsistencies.
 In the former case, the analytic statement is accepted, in the latter
rejected.
 Synthetic statements, i.e. those concerning the empirical world
 are either confirmed or contradicted by evidence, and hence accepted or
rejected for ‘objective’ reasons.
 All other statements for which no analogous criteria of acceptance or
rejection can be found are termed metaphysical and are considered external
to the field of science.
 Each successive generation of economists contributes new
analytic or synthetic propositions to the common treasure of
economic science,
 which – as a science – is univocally defined as the set of ‘true’
propositions concerning economic matters.
 New knowledge is thus added to that already available, and in
many cases – whenever some defect is identified in previously
accepted statements – substitutes it.
CHAPTER Two
History of Economic Thought-I (Econ3141)
Methodological Issues In
Economics
.
From Logical positivism to Falsificationism
 The belief that purpose of science is to establish “truth” stared to
experience attacks in the 1930s, especially from the writings of Karl
Popper.
 According to Popper, it is never possible to “verify” a theory, since one
cannot perform all possible tests of the theory.
 Popper asserts, that the goal of science should be to develop
theories with empirically testable hypotheses and then to try to
falsify them, discarding those that prove false.
From Logical positivism to Falsificationism……
 His ideas are composed of two separate theses:
 On demarcation (demarcating science from non-science)
 On methodology (how science should be practiced)
The demarcation thesis is that:
 For a theory to be scientific it must be at least potentially falsifiable
(PF) by empirical observation, that is there must exist one empirical
basic statement which is in conflict with the theory.
Methodology involved in Falsificationism:
 1st. Theoretical model is constructed to explain a phenomena
 A system of hypotheses in which we introduce only such elements or factors
as can be considered essential.
 2nd. Using the model we derive predictions or conjectures on the
phenomena to be explained
 3rd. Then we see whether conjectures obtained from the model can
explain the behavior of the phenomena actually observed by
compering its least likely consequences with the empirical data.
 Finally, if the implications of the theory is not consistent with the
evidence, then the conjecture is falsified and replaced by a new one

which is not ad hoc relative to the original.
 If the theory is not falsified by the evidence then it is considered
corroborated and it is accepted provisionally.
Falsificationism to paradigm [Criticism on Falsificationism]
 It would be nice if methodological problems could be
resolved as neatly as Popper’s approach suggests, but
methodological debates are anything but neat.
 The modern rejection of Popper’s theory is not without
grounds: falsifcationism has several serious problems:
 First, empirical predictions of some theories cannot be tested because the
technology to test them does not exist. What should one do with such
theories?
 Second, it is difficult to determine when a theory has or has not been
falsified.
 For example, if an empirical test does not produce the expected results, the
researcher can and often does attribute the failure to shortcomings in the
testing procedure or to some exogenous factor. Therefore, one negative
empirical test often will not invalidate the theory.
 A third problem arises from the mindset of researchers, who may fail to
test the implications of an established theory, assuming them to be true.

 Such a mindset can block the path to acceptance of new and possibly more
tenable theories.
Falsificationism to paradigm [Scientific Revolution]
 According to Kuhn, the history of science is not the history of
continuous conjectures and refutations á la Popper.

 It is marked by long periods of steady refinement, normal science
or problem-solving activity in the context of an accepted
theoretical framework, a paradigm, interrupted on occasion by
scientific revolutions, discontinuous jumps from one ruling
paradigm to another, with no bridge for communicating between
them.
Falsificationism to paradigm [Scientific Revolution]….
 The intuition behind it is as follows:
 First there is some scientific community in a period of normal
science trying to solve puzzles posed or practicing regular work
of scientists theorizing, observing and experimenting with in a
framework of the existing paradigm.

 A paradigm, as Kuhn uses the word, is a given approach and body of
knowledge built into researchers’ analyses that conforms to the
accepted textbook presentation of mainstream scientific thought at
any given time.

 Paradigms help scientific communities to bound their discipline
in that they help the scientists to create avenues of inquiry , Formulate

questions, select methods within which to examine questions and so on and so
forth. They have the following CX’S:

 They are incommensurable among themselves
 They constitutes a different key for interpreting reality
 They are necessarily based on a specific set of simplifying assumption, many
of them remain implicit.
 In the process of the normal science novelties of facts and theories
start to occurs and reoccur which challenge the existing paradigm.

 This accumulated anomalies are either unexplained or require
for their explanation a growing heavy load of ad hoc
assumption.
 Thus a shift in professional commitment to shared assumptions takes
place when an anomaly subverts the existing tradition of a scientific
practice, Kuhn describe it as scientific revolution.

 Note: the existence of such anomalies is not sufficient to overthrow the reigning
paradigm—only an alternative paradigm that is better able to deal with the
anomalies can do so.
 This marks the beginning new stage of normal science
(paradigm), with in which research proceed without calling

into question the underlining paradigm.
 Therefore we can conclude that
 ‘Kuhn does not consider the succession of different paradigms as

a logical sequence characterized by a growing amount of
knowledge.’
 Scientific revolution is a description of the path actually followed

by different sciences.
 The application of Kuhn’s theory in history of economic thought has
encountered a series of difficulties;
 Because of ambiguous Kuhn's definition of paradigm
 Because of its origin in the history of natural science.
 Even if it is with controversy Kuhnian revolution in the HET can be
identified in Keynesian revolution.
 some new economic facts crisis, depression, price rigidity, mass
unemployment…) and other accumulated anomalies served for the
new revolution.
From Paradigms to Research Programs [MRSP]
 It is a halfway house between Popper and Kuhn
 Literatures on Lakatos in economics has been two types:
 Historical: it attempts to reconstruct some particular episode in
the HET along Lakatonsian lines.
 Philosophical: it attempts to apprise Lakatos’s methodology of
scientific research programmeas an economics methodology and
or compare it to another philosophies such as Kuhn and
Popperian Falsificationism.
From Paradigms to Research Programmes [MRSP]……
Notions
 The primary unit of appraisal in a science is the research programme
rather than the scientific theory.
 A research programme is an ensemble consisting of
 A hard core: - which is composed of the fundamental metaphysical
presuppositions of the programme

 it defines the programme
 and its elements are treated as irrefutable by the programme’s practitioners.
 Accepting a programme is to accept and be guided by the hard core .

For example: in Weintraub’s Lakatosian reconstruction of the neo-
Walrasian research programme in economics, the hard core consists
prepositions such as:
 Agents have preference over outcomes and agents act
independently and optimize subject to constraints.
 The positive and negative heuristics: - are instructions about
what should and should not be pursued in developing a research
programme, and these are:
 Positive heuristics guides the researcher to the right questions
and the best tools to use answering those question.
 Negative heuristics indicates what questions should not be
pursued and what tools are inappropriate.

 Again using Weintraub’s analysis of neo-Walrasian programme as
example, the positive heuristic contains injunctions such as
construct theories were the agent optimize, while the negative
heuristics implores researchers to avoid theories involving
disequilibrium.
 We can take the heuristics as a set of working rules for both critique
and construction of theories.

 Finally the protective belt: consists of the programmes actual
theories, auxiliary hypotheses, empirical conventions and the
(evolving) body of the research programme.
 Thus the major activity occurs in this part of the programme and the
activates are due to the interaction of the hard core, the heuristics and
the programme’s empirical record.
 For Weintraub’s neo-Walrasian programme the protective belt includes
almost all of the applied microeconomics.
 Let us note that scientific research programs are not competing
theories but competing series of changing theories.

 Each study derives a set of peripheral implications from the hard
core and then attempts to falsify them.
 Falsifcation of a single peripheral implication will not require
rejection of the theory but will occasion a reconsideration of the
logical structure and, perhaps, an ad hoc adjustment.
 Lakatos called research programs progressive if the process of
falsifying the peripheral implications was proceeding,
degenerative if it was not.
 Lakatos’s work has two significant features:

 (1) It recognizes the complexity of the process whereby a theory is
falsified;
 (2) whereas earlier analyses required that one theory predominate,
Lakatos provides for the simultaneous existence of multiple workable
theories whose relative merits are not easily discernible.
 The historical development of economic theories is not a unidirectional
progression toward the truth and the currently influential theory is not
necessarily superior, in every respect, to past theories, which have been
neglected so far .
 With a new protective belt theory, even a currently hibernating research
program can make a triumphal return.
 The outmoded ideas of such a research program are, however, not well
reflected in the currently dominating economic theories, so that one cannot
understand the possibility of the return of the former ideas simply by studying
the latter theories only. This is why we should study the history of economics.
Social and Rhetorical approaches to Method
 Here we widely departure from previous methodological
philosophies
Pual Feyeradend argues that:
‘The acceptance of any method limits creativity in problem solving and that
the best science is therefore to be confined to no method—in other words,
anything goes.”
 `This idea brought into economics by McCloskey (1985, 1994) albeit
with some changes.
Social and Rhetorical approaches to Method….
Theses
 Earlier approaches acknowledged the difficulty of discovering truth, they did
not question the Platonic vision of truth as absolute.
 The rhetorical and sociological approaches refuse to assume the existence of
an ultimate and inviolable truth, they search out other reasons to explain why
people believe what they believe.
The rhetorical approach to methodology emphasizes the persuasiveness of
language, contending that

 a theory may be accepted not because it is inherently true but because its
advocates succeed in convincing others of its value by means of their superior
rhetoric.
 The sociological approach examines the social and institutional
constraints influencing the acceptability of a theory.

 Funding, jobs, and control of the journals may have as much influence on
which theory is accepted as the theory’s ability to accurately explain
phenomena.
 Those who adhere to the sociological approach contend that most
researchers are interested less in whether the theories they advance are
correct than in whether they are publishable.
 What the two theories most notably share is skepticism about one’s
ability to discover truth, or even whether truth exists at all.
 According to these approaches, a theory has not necessarily evolved
because it is the closest to the truth; it may have evolved for a variety
of reasons, of which truth—if it exists—is only one.
Conclusion
 Methodological arguments in economics have generally lagged far
behind those in epistemology and the philosophy of science.
 Formalists are more likely to use logical positivism or falsificationist
methodology and believe in absolute approach.
 Nonformalists most likely to use a sociological or rhetorical approach
and believe in relativist approach.
End of chapter

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CHAPTER Two

History of Economic Thought-I (Econ3141)

 Methodological Controversies in Economics and Evolution of Various

 Such questions belong to epistemology, the study of human knowledge; in

the philosophy of science they are included in the subject “methodology.”

 Methodology significantly inﬂuences what economists do, we will brieﬂy

consider the evolution of methodological thinking and its inﬂuence on

Before this let us reflect on the following important points:

economics and normative economics?

 It concerns with questions of what should be/ought to.

 It is the philosophical branch of economics that integrates

economics with ethics.

 It argues normative judgments should enter into the analysis as

 It concerns about forces that govern economic activity and asks

 The methodology of positive economics is formal and abstract; it

Art of Economics [Knowledge is science, Action is art]

 It concerns about questions of policy. It relates the science of

economics to normative economics and asks questions such as:

then how can one best achieve these goals?

 Its methodology is more complex because it must address

interrelationships among politics, social forces, and economic forces.

 Which should be the primary focus of economics has prompted

unending debate in the HET.

attention be given to the art of economics.

 Modern orthodox economists focus on positive economics and find

support for this position in the writings of David Ricardo

on positive economics, and our methodological discussion in this chapter will

follow that focus.

 Is there an ultimate truth or no underlying truth that scientists

are in the process of revealing?

 The means to discover the truth involved trained empirical

We will simply define three terms that have played an

 Deductive reasoning (logic) applies certain clear and distinct

 Because most philosophers believe that knowledge derives from a

 Abductive reasoning uses both deduction and

 However, it does not claim to provide a definitive theory,

 Logical positivism linked with deductive reasoning a positivist

desire to let the facts speak for themselves.

 It originated with a group known as the Vienna Circle

 The logical positivists argued that scientists develop a deductive

structure (a logical theory) that leads to empirically testable

 The basic quest is to establish the truth using the methods.

empirically tested and verified.

 To evaluate their results, objective criteria for acceptance or rejection

reasoning, are either tautological, i.e. logically implied in the assumptions,

or self-contradictory, i.e. they contain logical inconsistencies.

 In the former case, the analytic statement is accepted, in the latter

 Synthetic statements, i.e. those concerning the empirical world

 are either confirmed or contradicted by evidence, and hence accepted or

rejected for ‘objective’ reasons.

 All other statements for which no analogous criteria of acceptance or

to the field of science.

 Each successive generation of economists contributes new

analytic or synthetic propositions to the common treasure of

propositions concerning economic matters.

 New knowledge is thus added to that already available, and in

many cases – whenever some defect is identified in previously

accepted statements – substitutes it.

History of Economic Thought-I (Econ3141)

experience attacks in the 1930s, especially from the writings of Karl

cannot perform all possible tests of the theory.

 Popper asserts, that the goal of science should be to develop

theories with empirically testable hypotheses and then to try to

falsify them, discarding those that prove false.