Lecture One
Epistemology and Economic
Methodology
Epistemology
Questions:
• Does an objective reality exist that is
independent of our thinking?
• Do ultimate truths describe that reality?
Epistemology
Propositions
• Realism: Yes, objective reality exists
– Absolutism: Yes, ultimate and unchanging truths
describe that reality
– Relativism: Objective reality may exist, but truths
describing it are relative to circumstances
– Example of difference: Usury debate
• Subjectivism, Postmodernism: No, reality is not
independent of our individual or social thinking
Methodology
Defined:
• Technique for discovery of knowledge. Assumes
that an objective reality does exist, and it can be
explored.
Methodological questions:
• What is science? What are the proper roles of
scientists?
• What mix of empirical observation, logical
analysis, and intuitive insight is best used to
strengthen our understanding of reality?
Methodological Approaches
Deductive Method
• General propositions (positive or normative) lead to
specific logical implications
• Connected to Rationalism – the belief that reason is
the chief source and test of knowledge
Early Practitioners/Proponents:
• Aristotle (400 BC)
• René Descartes (1596–1650)
• Immanuel Kant (1724–1804)
• David Ricardo (1772-1823)
Methodological Approaches
Inductivism, Empiricism
• From specific observations, rooted in experience, to
general conclusions
Proponents: Francis Bacon (1561-1626)
• John Locke (1690)
• David Hume (1772)
• Auguste Comte (1822)--(Positivism)
• Carnap & “Vienna Circle” (1920s-30s)--Logical
Positivism
• Karl Popper (1902-1994)—Falsificationalism
• Thomas Kuhn (1962)--Scientific Revolutions
Hume’s Empiricism
David Hume, An Inquiry Concerning Human
Understanding, (1772)
“Nothing, at first view, may seem more unbounded than
the thought of man… but … it is really confined within
very narrow limits. All this creative power of the mind
amounts to no more than the faculty of compounding,
transposing, augmenting, or diminishing the materials
afforded us by the senses and experience… When a
child has felt the sensation of pain from touching the
flame of a candle, he will be careful not to put his hand
near any candle… If you assert, therefore, that the
understanding of the child is led into this conclusion by
any process of argument or ratiocination, I may justly
require you to produce that argument…”
Positivism & Logical Positivism
Positivism (Comte, Hume, J.S. Mill, 19th Century)
• Science can rise above superstition by specializing in
the description and analysis of observable phenomena,
leading to discovery of natural laws.
Logical Positivism (Moritz Schlick and Rudolf Carnap,
1930s)
• Science progresses toward truth by observation,
formulation of hypotheses, empirical verification,
leading to additional hypotheses
• Distinction between positive (scientific) and
normative (unscientific) questions
Karl Popper: What is a Science?
• Philosopher, raised in Vienna during collapse of
Austro-Hungarian empire (1912-1919)
• Once convinced, then disillusioned by Marxist
theory of history
• Characterizes these, psycho-analysis, astrology, etc.
as “pseudo-science”
• Posed question: “'What is wrong with Marxism,
psycho-analysis...? Why are they so different from
physical theories...?' ... these ... theories, though
posing as sciences, had ... more in common with
primitive myths than with science...” [Conjectures &
Refutations]
Karl Popper: What is a Science?
• Rejected conventional explanations (empirical inductive
method) because pseudo-sciences (e.g. astrology) are
heavily “empirical.”
• Noticed characteristic of pseudo-sciences: confirmation
– “admirers ... were impressed ... by their apparent
explanatory power. These theories appeared to be able
to explain practically everything that happened within
the fields to which they referred…”
– “A Marxist could not open a newspaper without
finding ... confirming evidence for his
interpretation of history; ... in the news, ... its
presentation …and especially of course in what
the paper did not say.”
Karl Popper: What is a Science?
• Argued that confirmation meaningless: “every
conceivable case could be interpreted in the light of
[the relevant] theory”: they could not be refuted
• Therefore, by exclusion, a true scientific proposition
is one which could be refuted.
• Every 'good' scientific theory is a prohibition: it
forbids certain things to happen...
• Every genuine test of a theory is an attempt to falsify
it, or to refute it...
Popper’s Continuing Influence: George Soros
• “Popper showed that totalitarian ideologies like
communism and Nazism have a common element:
they claim to be in possession of the ultimate truth, . . .
juxtaposed with . . . another view of society, which
recognizes that nobody has a monopoly on the truth;
different people have different views … and there is a
need for institutions that allow them to live together in
peace..”
• Reflexivity: “Why does nobody have access to the
ultimate truth? … We live in the same universe that
we are trying to understand, and our perceptions can
influence the events in which we participate.”
• “Whether the theory is valid or not, it has turned out to
be very helpful to me in the financial markets.”
Popper’s Continuing Influence: George Soros
• “A dominant belief in our society today … is a belief in the
magic of the marketplace. The doctrine of laissez-faire
capitalism holds that the common good is best served by the
uninhibited pursuit of self-interest. Unless it is tempered by the
recognition of a common interest that ought to take precedence
over particular interests, our present system -- which, however
imperfect, qualifies as an open society --is liable to break
down.”
• “I am not putting laissez-faire capitalism in the same category
as Nazism or communism. Totalitarian ideologies deliberately
seek to destroy the open society; laissez-faire policies may
endanger it, but only inadvertently… Nevertheless, because
communism and even socialism have been thoroughly
discredited, I consider the threat from the laissez-faire side
more potent today than the threat from totalitarian ideologies.”
Thomas Kuhn: Paradigms
• Scientific community wedded to its view of the world--its
paradigm
• Anomalies--things which contradict theory--at first
resisted
• Failure to resolve leads to revolution--often from outside
• Switch to new paradigm involves total change in “world
view”
• Imre Lakatos: Methodology of Scientific Research
Programs (MSRP)
– Theories have “hard core” which adherents do not
attempt to falsify
– Hard core surrounded by “protective belt” of
hypotheses which may be adjusted to defend hard core
What is a Good Theory?
• Milton Friedman (supported by Fritz Machlup)
– Proper test of a theory is by its predictions
– All theory is abstraction. Good theory “abstracts from
reality in a useful way.”
– “Realism” of assumptions irrelevant:
• “the more significant the theory, the more unrealistic the
assumptions… a hypothesis is important if it ‘explains’ much
by little”
• “as if” assumptions--firms behave “as if” maximizing
expected returns, etc.--valid even if firms do not consciously
do so.
• Paul Samuelson: Good theories are based on reasonable
assumptions—against the “F-Twist”