Chapter Two

Methodological Issues of Economics

Compiled by:

Mihret, D
Debre Tabor University, CoBE, Department of
Economics

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 Methodological Issues of Economics
In thinking about the history of the discipline, one
is naturally led to ask, “What do economists know
and how do they know that they know it?" Such
questions belong broadly to epistemology, the
study of human knowledge; in the philosophy of
science they are included in the subject
“methodology“
We present a few methodological issues that have
arisen in the philosophy of science from the ancient
Greeks to modern-day thinkers
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 2.1.1.Economics as an art and as a science
Perhaps the most important distinctions in
economic thought are those between the art of
economics, positive economics, and normative
economics.
Positive economics concerns the forces that govern
economic activity.
It asks such questions as: How does the economy
work? What are the forces that determine the
distribution of income? The sole purpose of these
inquiries is to obtain understanding for the sake of
understanding.
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 Con’t……….

Normative economics explicitly concerns

questions of what should be.
It is the philosophical branch of economics that
integrates economics with ethics.
The art of economics concerns questions of
policy.
 It relates the science of economics to normative
economics and asks questions such as: if this is
the way the economy works, then how can one
best achieve these goals?
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Positive and normative under art of economics

Identify positive /normative?

A. When the value of Birr falls, imported products into our
country become more expensive.
B. If the price of oil increases relative to all other prices, then the
amount that people will buy will fall.
C. We need to try to lower the value of Birr in order to discourage
the importation of foreign goods into this country.
D. If the price of oil goes up, people will buy less of it, therefore,
we should not allow the price to go up.
The question is whether economics is theoretical in nature or it has
some practical side too.
 The question is whether economics is theoretical in
nature or it has some practical side too.
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 Con’t----
Science means a systematic body of
knowledge relating to some aspect of nature
and based on fact.
 In science we assemble some facts, then
observe it and then experimented, from which
certain laws, principles rules etc. are derived
that are generally correct and are commonly
followed in everyday life.

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 Con’t……..
Economics is well disciplined body of knowledge
and based on facts.
 These facts are carefully collected observed and
analyzed and from these facts economic laws
principles are drawn.
The methodology of positive economics is formal
and abstract; it tries to separate economic forces
from political and social forces.

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 Con’t……..
The methodology of the art of economics is more
complex because it concerns policy and must
address interrelationships among politics, social
forces, and economic forces.
Whether positive economics or the art of
economics should be the primary focus of
economics has prompted unending debate in the
history of economic thought.
 The German historical school and the English
Marshallian school have advocated that primary
attention be given to the art of economics
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 Relativist and Absolutist approach
Can one formulate a theory to explain the
development of economic theory -a sociology of
knowledge for economics? How does economic
theory arise? There are two approaches to answer this
question: the relativist approach and the absolutist
approach.
Relativist historians concern themselves
1. with the historical, economic, sociological, and
political forces that brought men and women to
examine certain economic questions and
2. with the ways in which these forces shape the content
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 Con’t …….
They hold that history plays a part in the development
of every economic theory.
• A relativist would emphasize, for example, the
relationships between the emergence and content of
classical economics and the industrialization of
England, between Ricardian economics and the
conflict between English landlords and
businessmen, and between Keynesian economics
and the Great Depression of the 1930s.
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 Con’t …….
Absolutist writers
1. Stress internal forces, such as the increasing
professionalism in economics, to account for the
development of economic theory.
2. They claim that the progress of theory does not
merely reflect historical circumstances but depends
on the discovery and explanation of unsolved
problems or paradoxes by trained professionals.

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 Con’t …….
 According to this view, it is possible to rank
theories absolutely according to their worth; the
most recent theory is likely to contain less error
and be closer to the truth than earlier theories.
 Neither the absolutist nor the relativist
position is convincing in and of itself.
A more fruitful approach is to view the history of
economic thought as a dynamic process of interaction
between forces external and internal to the discipline
that bring about new theoretical developments.
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 2.1.2. Importance of Empirical Verifications
How we go about answering the questions “What do
we know?" and “How do we know that what we
know is right?“ depends on the answer to the
question “Is there an ultimate ‘truth’ that scientists
are in the process of revealing (an absolutist view)
 Verificationism is a theory of knowledge which
asserted that only statements verifiable through
empirical observation are cognitively meaningful

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 Con’t……..
 The central idea behind vericationism is linking
some sort of meaningfulness with (in principle)
confirmation
Inductive inferences have observations as
premises and theories as conclusions.
 They are notoriously invalid but often are
deemed unavoidable.
 Critical rationalism views them as unnecessary.

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 Con’t……..
Verification is discussed in detail in the writings of
Kant, Hume, Descartes, and other seventeenth-
and eighteenth century philosophers.
 We will simply define three terms that have played
an important role in the discussion, inductive,
deductive, and abdicative.
 Inductive reasoning is empirical, proceeding from
sensory perceptions to general concepts(from
specific to general ) may be true

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 Con’t …….
Deductive reasoning (logic) applies certain
clear and distinct general ideas to particular
instances(from general to specific) always
true
“Abductive" is the name pragmatic philosopher
Charles Peirce gave to a particular mix(neither
of the two) of the inductive and deductive
approaches(from available information to best
prediction) may be true
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 2.1.3. 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 which attempted to formalize the methods
of scientists by describing the methods scientists
actually followed.
It was logical positivism that formalized the
distinction between normative and positive
economics, first made by Nassau Senior in 1836
and later by J. S. Mill and John Neville Keynes.
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 Con’t….
• The Vienna Circle of Logical Empiricism was a group of
philosophers and scientists drawn from the natural and social
sciences, logic and mathematics who met regularly from 1924
to 1936 at the University of Vienna, chaired by Moritz Schlick.
• The mathematician Hans Hahn, the physicist Philipp Frank,
the social scientist Otto Neurath, his wife, the mathematician
Olga Hahn-Neurath, the philosopher Viktor Kraft, the
mathematicians Theodor Radacovic and Gustav Bergmann .
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 Con’t….
Logical positivism is the direct result of the
revision of positivism through the year.
 The operational definition of Logical
positivism is “the philosophy of science
according to which theoretical concepts are
admissible if the are tied to the observable
world trough operational definition”

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2.1.4 From logical positivism to falsificationism

Logical positivism represented a culmination

of the belief that the purpose of science is to
establish “truth.’’
The methodology of science has since
progressively removed itself from that view.
The first departure resulted from a concern
about the “verification" aspect of logical
positivist theory.

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 Con………
This concern is best expressed in the writings of
Karl Popper, who argued in the 1930s that empirical
tests do not establish the truth of a theory, only its
falsity-which is why Popper's approach is
sometimes called falsificationism.
 According to Popper, it is never possible to
“verify" a theory, since one cannot perform all
possible tests of the theory.

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 Con………
Popper asserts, therefore, 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.
The progression of science, according to Popper,
depends upon the continuing falsification of
theories.
The reigning theory will be the one that explains
the widest range of empirical observations and that
has not yet been falsified.

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2.1.5. From Falsificationism to paradigm
The modern rejection of Popper's theory is not without
grounds: falsificationism has several serious problems.
 First, empirical predictions of some theories cannot
be tested because the technology to test them does
not exist.
 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
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 Con’t…..
 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(acceptable) theories.
 Partly in response to above problems, Thomas Kuhn,
in the Structure of Scientific Revolutions (1962),
moved methodology away fro falsificationism by
introducing the concept of the paradigm into the
debate.

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 Con…..
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.
 Paradigm: All the theories ,concepts, methods ,and
so on ,that a scientific discipline takes for granted and
that direct research in the discipline.
In revolutionary science First the existing paradigm is
rejected by part of the scientific community, and then
the old and the new paradigms begin to compete and
communication between researchers in the opposing
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 Con’t…….
Ultimately, if the revolution is successful, new
questions will be posed within the new
framework and a new normal science will
develop.
Whereas in Popper's view “truth" (or the closest
we can get to truth) will win out, in Kuhn's view
a superior theory might exist but not be adopted
because of the inertia favoring the existing
paradigm.
Hence the reigning theory is not necessarily the
best.
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 Con………
Those who disagreed with mainstream theory
quickly adopted Kuhn's analysis, because it
suggested that the paradigm they preferred might
prove to be superior to, and thus able to displace,
the mainstream view.
Moreover, Kuhn's work suggested that changes
occur by revolutions; it offered hope that change,
when it came, would come quickly.
Methodological discussions throughout the 1970s
and 1980s were peppered with the term paradigm.

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 2.1.6 Recent developments in the Methodology
of Economics
a. The Scientific revolution paradigm
Kuhn’s phases of science
 Pre-paradigmatic phase:-a period before a scientific
consensus has been reached.
 Normal science:-the day-to-day research that scientists
conduct in order to fill in the gaps in scientific knowledge
that are found within the dominant paradigm.
 Crisis :-scientist start doubt their own paradigm
 Scientific revolution:- one paradigm is abended and the
other is accepted
Kuhn said this ” paradigm shift” e.g Darwin’s revolution
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 b.
b. Lakatos Research Program
The view that the existing theory might not embody the
truth was extended by Imre Lakatos during the late 1960s
and 1970s.
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 where by a
theory is falsified; and
2. whereas earlier analyses required that one theory
predominate, Lakatos provides for the simultaneous
existence of multiple workable
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theories whose relative
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 Summary Exercise
• Explain the approaches used to understand
history of economic thought
• Discuss whether history of economic thought is an
art or a science
• Explain the concepts of empirical verification,
logical reasoning, falsification, etc with respect to
the methodological issues
• Examine the recent methodological approaches
on the view points of scientific revolution and
Lakatos program
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