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, non- Walrasian 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 co-
ordination success based on price-
adjustment 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 path- dependency (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 neo- Austrians (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 neo- Austrians)
- 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, micro-
foundations, 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
