Economic Methodology

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Economic Methodology

Economic methodology is concerned with how economic knowledge is pursued. It covers a range of issues: Can we establish rules for good economic analysis, and if so what are they? If we cannot establish rules, are there principles for guidance? What principles do economists use in practice? How are we to understand the evolution of the discipline? How separate is economics from other social sciences, and to what extent should economic methodology be discussed independently of the methodology of other social sciences?

The term methodology is often used incorrectly, to refer to methods. Methodologists use the term to refer to the approach taken to building knowledge (and the status of that knowledge), which provides among other things the basis for choosing methods. Some also draw the distinction between Methodology and methodology, the former being prescriptive (setting rules) and the latter descriptive (providing an account of methodology in practice). We will see that the balance has shifted over the last few decades from Methodology to methodology (see further Sheila Dow’s introductory Economic Methodology [2002], and D. Wade Hands’s more specialized Reflection without Rules [2001]).

Economic methodology is now a large specialist field in its own right. Before the 1980s, it was examined from a philosophical perspective only by a limited number of texts, drawing directly from the philosophy of science, or was discussed in the context of historical discussions of past methodological disputes. When it was discussed, as in the introductions to textbooks, it tended to be associated with a positivist philosophy of science, with an emphasis on testing theory against objective facts, and a distinction of positive from normative statements. Indeed, this was the approach taken by Milton Friedman (1953) in what for a long time was the most famous piece of methodological writing in economics. Friedman argued that the purpose of theory was to predict, regardless of the realism or otherwise of assumptions; theory was thus simply “instrumental.” This sparked heated debates with those (ranging from Samuelson to Kaldor) who saw the primary purpose of theory to be explanation, and thus considered the realism of assumptions to be important. Indeed, Friedman had drawn distinctions too sharply: In order to predict, there has to be some understanding of causal mechanisms, along with the capacity this provides to adapt theories to changing economic structures. Thus theory content is still important. Nonetheless, the boldness of Friedman’s challenge forced dissenters to formulate their methodological positions more explicitly.

Beginning with the publication in 1980 of Mark Blaug’s authoritative The Methodology of Economics, there has been a tremendous increase in interest in economic methodology, which led to the setting up of the International Network for Economic Methodology, with its Journal of Economic Methodology and Web site www.econmethodology.org—which in turn have generated even more interest and activity, among both specialist methodologists and practitioners. The growth in the field also no doubt reflects a need to understand debates in economics at a deeper, foundational, level. The wide range of topics now covered by economic methodology is evident from the Handbook of Economic Methodology (1998).

Blaug’s text appeared at a time when new developments in the philosophy of science had challenged the whole idea of establishing a single set of independent rules for good practice (monism). Blaug called on economics to build on Karl Popper’s idea that, even if we cannot be certain that we have identified a true explanation, we can at least be certain of identifying a false explanation, if the evidence contradicts the theory (falsificationism). While Popper had advocated exposing all elements of theory to empirical testing, he made an exception for the axioms of rational individual behavior from which mainstream economic theory was built. These axioms specified the basis for individual choice, which in turn was the basis for the optimal allocation of scarce resources. They were necessary for setting economic theory up as a deductive logical structure, generating hypotheses that could be tested against empirical evidence (the methodology presented for many decades in introductory economics textbooks).

In the tradition of seeing methodology as prescribing good practice, Blaug drew attention to how economists’ practice fell short of Popper’s principles, due to a reliance (if at all) on evidence that confirmed theory—namely, verificationism. Indeed, such an approach was supported by the priority given by many to explanation over prediction. But in the meantime a divide had grown between pure theory, which was not generally tested, and applied economics, which had little impact on theory. Other methodologists shifted attention to understanding why this was so, drawing on the philosophy of science of Thomas Kuhn. In the absence of any absolute rules for good scientific practice, Kuhn had analyzed science in terms of activity within scientific communities, each of which has its own methodology and understanding of reality. Because of the latter state of affairs, we cannot think in terms of an independent set of “facts” against which theory is tested in any absolute sense.

Kuhn’s ideas encouraged the development of what came to be known as constructivism, based on the idea of knowledge being “constructed,” rather than established by facts. This development encompassed postmodernism (the denial of any general knowledge), rhetoric (the focus on techniques of persuasion other than methodological principle), and the sociology of scientific knowledge (the sociological study of scientific communities). Within constructivism, “Methodology” has no role, only “methodology” as a descriptive device. A high proportion of methodological work now falls into this category.

Kuhn had also encouraged the legitimation of a range of heterodox schools of thought, which proceeded to define themselves in terms of methodological differences from the mainstream. The differences started from a rejection of the whole idea of founding theory on axioms of rational choice (or indeed any deterministic account of behavior), as such axioms did not mesh with heterodox understandings of reality. Methodological awareness is thus wider spread in heterodox economics, playing a more central role in debate. Current leading topics focus at the levels of reality and of mode of thought, that is, below the methodological level: Is reality an open system (and what does that mean), and does such a system require an open system of knowledge, and what does that imply for methodology? Should there be a plurality of methodologies, and should methodology be pluralist (employing many methods)? How far does realism allow us to specify methodological principles after all? The realism debates have moved well beyond the old debates about the extent to which assumptions should be realistic.

In the meantime, there have been new developments in mainstream economics that require methodological discussion. Experimental and survey evidence contradicting the rationality assumptions, for example, is now encouraging theoretical change. Nevertheless the change is in the direction of a more complex account of rational individual choice, maintaining the traditional logical structure of mainstream theory, with its methodology of deducing arguments by logic from axioms, to be tested against facts. Within the mainstream, economics continues to be defined by this methodology, which requires fully specified individual behavior.

Current methodological discussion is thus both diverse and wide-ranging. Much of it is “micro” in the sense of examining particular developments in economics in methodological terms. At the “macro” level, it is concerned much less with principles to guide practice and much more with principles by which to understand the discipline.