Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 9 May 2014

Economists and methodology

Where I argue that mainstream economics should think about the methodology of their subject more, but that to study this methodology it is much better to look at what economists actually do than to look at their (occasional) writing on the subject.

Methodology? Why should I worry about that? It’s what all those heterodox people do - lots of ‘isms’ and ‘ologies’ that are totally incomprehensible! Unlike those guys, I get on with doing real economics. After all, doctors do not spend large amounts of their time worrying about the methodology of medicine. So why should economists?

This is a caricature, but not far off the mark for many economists. (When I refer to just economists/economics from now on, I mean mainstream.) Perhaps more of a concern is that very few economists write much about methodology. This would be understandable if economics was just like some other discipline where methodological discussion was routine. This is not the case. Economics is not like the physical sciences for well known reasons. Yet economics is not like most other social sciences either: it is highly deductive, highly abstractive (in the non-philosophical sense) and rarely holistic. This is all nicely expressed in the title of what I think is one of the best books written on economic methodology: Dan Hausman’s ‘The inexact and separate science of economics’.

This is a long winded way of saying that the methodology used by economics is interesting because it is unusual. Yet, as I say, you will generally not find economists writing about methodology. One reason for this is the one implied by my opening paragraph: a feeling that the methodology being used is unproblematic, and therefore requires little discussion.

I cannot help giving the example of macroeconomics to show that this view is quite wrong. The methodology of macroeconomics in the 1960s was heavily evidence based. Microeconomics was used to suggest aggregate relationships, but not to determine them. Consistency with the data (using some chosen set of econometric criteria) often governed what was or was not allowed in a parameterised (numerical) model, or even a theoretical model. It was a methodology that some interpreted as Popperian. The methodology of macroeconomics now is very different. Consistency with microeconomic theory governs what is in a DSGE model, and evidence plays a much more indirect role. Now I have only a limited knowledge of the philosophy of science, and have only published one paper on methodology, but I know enough to recognise this as an important methodological change. Yet I find many macroeconomists just assume that their methodology is unproblematic, because it is what everyone mainstream currently does.  

This reluctance by economists to investigate their own methodology has a consequence which is the main subject of this post. It occurred to me when I recently re-read a methodology paper entitled “Two Responses to the Failings of Modern Economics: the Instrumentalist and the Realist” by Tony Lawson. The paper, written in 2001, starts on the first page with “There is little doubt that the modern discipline of economics is in a state of some disarray.” This is a strong claim. For example, I have previously written that the influence of economists within the UK government at that time may have been at an all time high, and as this account (pdf) shows, economics remains very influential within the civil service. Where is the evidence for the claim about disarray? The answer in this paper is a selection of quotes from economists writing about aspects of their subject. Now any economist would immediately wonder how representative these quotes were. But more fundamentally, are expressions of concern within a discipline equivalent to it being ‘in disarray’? (For example, see the first quote from a physicist here. Would this be a good basis for a paper that asserts than physics is in disarray?)

Even if we ignore these concerns, given the unfamiliarity of most economists with methodological discussion, it may be unwise to use what economists write about their discipline as evidence about what economists actually do.  The classic example of an economist writing about methodology is Friedman’s Essays in Positive Economics. This puts forward an instrumentalist view: the idea that realism of assumptions do not matter, it is results that count.

Yet does instrumentalism describe Friedman’s major contributions to macroeconomics? Well one of those was the expectations augmented Phillips curve. Before his famous 1968 presidential lecture, the Phillips curve had related wage inflation to unemployment, and if expectations about inflation were included (in some way), the coefficient on this expectations term was often empirically determined (see above) and was often less than one. Friedman argued that the coefficient on expected inflation should be one. His main reason for doing so was not that such an adaptation predicted better, but because it was based on better assumptions about what workers were interested in: real rather nominal wages. In other words, it was based on more realistic assumptions. (For a good discussion of the history of the ‘expectations critique’, see this paper by James Forder.)

Economists do not think enough about their own methodology. This means economists are often not familiar with methodological discussion, which implies that using what they write on the subject as evidence about what they do can be misleading. Yet most methodological discussion of economics is (and should be) about what economists do, rather than what they think they do. That is why I find that the more interesting and accurate methodological writing on economics looks at the models and methods economists actually use, rather than relying on selected quotations.

Afterthought

There is a nice self-conformational element to this post. Someone is bound to tell me that, in my comments on Freidman, I do not really understand what instrumentalism means. And that, of course, just goes to make my point that you should not rely on what economists say about their own methodology!


41 comments:

  1. A useless bit of pickiness - the Friedman address was given on the 29th December 1967, but put into The American Economic Review Volume LVIII in MARCH 1968.

    Krugman's blog via DeLong on Allan Meltzer May 8 'Predictions and Prejudice' made me think, as this blog post has done, of the term 'realpolitik' coined in 1853 and described by the late John Burrow as an attempt by those using it at the time to discard ideas in the quest for German national unification by utilising real social and political forces. And Burrow then says the term fell into general Machiavellian uses.

    'Realeconomik' looks really ugly on the page, doesn't it?

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    1. Regarding Meltzer and Republican party economics:

      Willard: They told me that you had gone totally insane, and that your methods were unsound.

      Kurtz: Are my methods unsound?

      Willard: I don't see any method at all, sir.

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    2. "'Realeconomik' looks really ugly on the page, doesn't it?"

      Well..., the German word for 'economics' (as 'science') is 'Volkswirtschaft' or 'Wirtschaftswissenschaft'.
      Would 'Realvolkswirtschaft' or 'Realwirtschaftswissenschaft' look any better?

      The interesting thing about the word 'Wirtschaft' (and its equivalent but rarely used in Dutch 'huishoudkunde') is that it refers to 'how to run a household'.
      In other words: 'Volkswirtschaft' is 'the art of running the houshold of a people ['Volk'] as a whole'.
      (So, German also has 'Betriebswirtschaft' for 'business economics'.)
      'Wirtschaftswissenschaft', the science about how people run their households, can then be neatly distinguished from 'Wirtschaft' itself.

      THE problem with 'economics' as 'that which economists do' (especially macro-economists in this case) seems to me that it is not sufficiently distinguished (let alone separated) in 'running national households' and 'studying how (other) people run national households'.
      In other words: economists are constantly interfering in their field of study, because 'running a national household' depends so much on economic debate and on the 'language' that is constantly being shaped and reshaped by that debate.
      That also results in 'economics' being hardly separable from 'politics', that other 'art of running the affairs of a nation (or other social aggregate)'...

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    3. "THE problem with 'economics' as 'that which economists do' (especially macro-economists in this case) seems to me that it is not sufficiently distinguished (let alone separated) in 'running national households' and 'studying how (other) people run national households'."

      But Keynesian economics is all about why they are quite different!

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    4. "Keynesian economics is all about why they [economics as art and science] are quite different!"

      Can you please explain?
      Does that imply that you DO recognise the problem in other schools of economic thought?
      (DO you recognise schools of economic thought within the mainstream after all?!)
      Do you refer to a 'Keynesian way of running national households' or to a 'Keynesian way of studying running national households'?
      HOW does Keynesian economics (or Neo-Keynesian economics?) in any of these senses avoid that problem?
      Because of the role it assigns to governments?
      But national households aren't run by governments alone, are they?
      What role do you see and recognise for economists and the 'language' they develop (metaphors, visualisations, models; with the 'market' concept as the most obvious case) in running national households?

      If Keynesian (or any other type of) economics is about why running households differs from studying how people run households, wouldn't that imply and require that (Keynesian or other) economists are reflecting on what they are doing quite a bit more than your blogpost describes?

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    5. "If Keynesian (or any other type of) economics is about why running households differs from studying how people run households, wouldn't that imply and require that (Keynesian or other) economists are reflecting on what they are doing quite a bit more than your blogpost describes?"

      The extent to which households and nations differ is a substantive, rather than methodological, question. It's not true that Keynesians don't reflect at all on their substantive conclusions.

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    6. Dear Willam Peden,

      "The extent to which households and nations differ is a substantive, rather than methodological, question."

      I follow the Dutch and German language convention in which nations are a type of household: the sum total of smaller households of a nation plus the way in which they are linked (or not linked) and otherwise organised.
      So please re-read my quote as 'If ... economics is about why running a national economy differs from how people run national economies, wouldn't that imply and require that ... economists are reflecting on what they are doing quite a bit more than your blogpost describes?'

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  2. That's an important point about Friedman. One could add that the permanent income hypothesis is useful because it emphasises an important genuine tendency in human behaviour (consumption smoothing) and Friedman's 1956 reworking of Keynes's liquidity preference theory is an improvement because it's based on more realistic assumptions i.e. an economy with not just bonds and money, but also equities, consumer durables etc.

    As Daniel Hausman put it, if you looked purely at the methodological writings of Friedman and Samuelson, you'd be amazed that they won a Nobel Prize. On the other hand, while they had methodological faults in practice as well as in theory, one can learn a lot of good methodological points by actually looking at how Samuelson and Friedman did economics.

    I also agree that the philosophy of economics can be very misleading re: the state of economics. Naturally, the discipline attracts those discontented with the way that economics is actually done. On the other hand, the AUTHORITY of economics is definitely weak (and this is not very new) as can be seen by the fact that microeconomics carries very little, if any, weight when it comes to the rights and wrongs of price controls over rents, energy prices etc. Or whether having a subsidisation scheme for a housing market with excess demand and a lack of supply is a good idea. The lack of esteem given to what economists have to say (outwith a few narrow and politically boring areas) costs jobs and lives.

    A possible point of disagreement-

    "Consistency with microeconomic theory governs what is in a DSGE model, and evidence plays a much more indirect role."

    While I think that microfoundations can be taken too far (I tend to think that consistency is all that should be required, and even then empirically successful macro theories that are inconsistent with micro theory can be stimuli for further micro research) this indirect role of evidence in macro can have a lot of benefits. Micro is much more readily testable than macro (since there are obviously far more households and businesses than economies) and so testing macroeconomic theories via their consistency with well-founded microeconomic theories is a good way of subjecting them to the evidence. Note that I'm not saying that micro is all correct and macro is all wrong; rather, micro is easier to test, and consistency/implication from micro is thus a very good way of testing macro theories.

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    1. Thanks for making the point that my remarks could equally apply to other major contributions from Friedman - my first draft said as much but it was too long. I also think you make an important point about the authority of economics, which is something different from influence. What I am less sure about is whether this is inevitable given its social and political content. I also suspect that economics has more authority among policy makers than the public, which may explain its influence. Interesting.

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    2. Economists shirk methodological work.

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    3. The best essay of my masters portfolio was basically arguing that Friedman was a great economist in spite, not because, of his methodology.

      It's not always that way, though. Stretching "methodology" very broadly to include a lot of general philosophy of science, there are actually several cases of great economists who were also great philosophers of science. David Hume is the most obvious example, but also Adam Smith's "History of Astronomy" was really ahead of its time in terms of its stress on fallibility and that the history of science is not always straightforwardly cumulative. And if Keynes had died in 1922, he would have still published a great book: in its programme (though not its details) his "Treatise on Probability" is one of my favourite books. One philosopher of science was only slightly exaggerating when he said that philosophers of science can be divided into (i) followers of Hume's Treatise and (ii) followers of Keynes's Treatise. Naturally, such cross-disciplinary brilliance is rare in an age of specialisation, but I think the mindsets of the two subjects (especially analytic philosophy and theoretical economics) are similar, with skills like abstraction, imagination and logical reasoning being central.

      I haven't done a detailed study, but my impression is that politicians tend to listen to economists when (a) there's no strong political gain either way and the main issue is getting the policy right rather than appeasing the right groups or (b) they want to do something very politically difficult and need all the help they can get. So I think that economists did make a positive difference in the Great Recession in the UK in terms of providing a rationale for fiscal stimulus/QE, and while I acknowledge that it was "too far too fast", the UK disinflation of the 1980s would have probably been an even more drawn out and botched affair without economists convincing politicians that there was no long-term tradeoff between inflation and unemployment. That also reminds me of how important economically literate non-economists can be: Peter Jay was hugely influential in UK macroeconomic history, but he was a consumer and publiciser rather than a producer of ideas.

      I also think that Friedman's old observation about economists and agreement holds true: where economists tend to agree (free trade, price controls, harm reduction vs. prohibition etc.) they tend to be ignored, whereas economists are often asked their opinions on issues on which they disagree the most, like macroeconomic policy.

      Sandwichman,

      That can be a strength as well as a problem. The division of labour applies to economists as much as anyone else, and even the most pluralistic scholar only has 24 hours in their day. Social science that gets bogged down in methodology can be a very ugly sight: just look at the first part of Mises's Human Action. I think Simon Wren-Lewis has the right idea: economists should be aware of methodological issues, even if it's not something that every economist (or even most economists) should work on.

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    4. Yes, 'the authority of economics' versus its 'influence' is an important distinction.
      It can be further clarified by distinguishing the authority and influence of economiSTS.
      The point that I would like to add is that the main influence AND authority of economists does not refer to
      - how to ACT (or refrain from action) in economics (as government, big private actor, opinion leader etc.),
      but to
      - what economics (understood as the art of running -in this context primarily- our national and global households) is about,
      - what the beastie 'national/global household' alias 'economy' looks like,
      - to what extent it has a character (and characteristic behaviour alias 'laws') of its own that can be studies independent of intervention by influential economic actors and
      - how to depict and describe it (e.g. whether the 'market' metaphor is any good in doing so).
      The answers to those questions very much shape the way in which people run their households (also their sub-national households).

      That is comparable to the authority and influence of physicists (especially physics teachers, who don't tend to include the latest insights of quantum physics and string theory in their curricula) in making people think about reality in terms of atoms and molecules rather than (or only partially amended with) waves and 3 dimensional probability distributions.

      It is also comparable to the theory (that I was taught while studying heterodox didactics) that the 'hidden agenda' of the school system (sit relatively still on a chair for a relatively long time, do as you are told, accept the judgement/mark of your superiors etc.) has far more influence (on the type of jobs they fit people for and on society as a whole) than school curricula.

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  3. Coming at economics from a pretty unrelated discipline (although the biological economics of nitrogen fixation are visible in grocery stores which price carbohydrates lower than proteins - not published AFAIK, but it's there), the structure of economics papers has thrown me sometimes for two reasons. There is no methodology section, which is standard in much of science, and most equations don't define terms, which is standard in most disciplines. I think this increases the ability of papers to obfuscate and hide critical matters.

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  4. Macroeconomics seems to have strived very hard to achieve a standardised methodology. I guess this was an attempt to define the discipline a certain way and keep out eccentricity.

    The costs though have been high. A lot of valuable knowledge has been shut out. Knowledge in other disciplines is also not really taken seriously. It also makes it very prone to orthodoxies hegemonies of knowledge and group think. Also I have also seen many people associate analytical rigour with mathematical rigour.

    I think a more eclectic approach is the answer. In particular everyone needs to take a course on the history of economic thought that refers to key foundational texts - Marx, Keynes, Smith, to get a basic breadth of perspective.

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    1. I do not think economics students should be made to read Smith, Marx or even Keynes. They can get a breadth of perspective in better ways.

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    2. While obviously deferring to your better knowledge of today's economics students, I do think that it is essential for anyone trying to be serious about economics today to have an idea of these foundational ideas (possibly adding in Marshall or Walras or someone - I'm hazy too) to get some appreciation of where market ideas come from.

      Not necessarily reading the original texts - they are perhaps for a subset - but at least a 'reader' in the development of economic ideas and principles seems to me an essential grounding to get to grips with today's debates and 'cutting edge'.

      But you say there are better ways to get a perspective. I would be genuinely interested to know what you recommend.

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    3. A problem solving approach could do this. The 'problem' can be historically located, the initial ideas on how to solve it set out, then present the modern approach and alternatives.

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    4. The 'problem' can be historically located,

      This would be an excellent approach. People would then understand why the problem has come to be looked at a certain way.

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    5. possibly adding in Marshall or Walras

      These are important for understanding methodologies. But I think it is more the fundamental (and very contrasting) ideas about how an economy works that need to be brought out first. That is why I would say it is more about the debate between ideas rooted in Marx, Keynes and Smith.

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  5. In methodology one should distinguish between "what economists actually do" (descriptive) and "what they should do or how they should proceed" (normative). The second aspect is much more demanding than the first one.

    According to Popper (and Lakatos) elements or hypotheses of a theory that have been falsified or are conceptually or logically deficient have to be eliminated from the dicipline. However, look at the production function. It has been proven logically deficient and empirically it is at best a statistical artefact. It was expatriated from the body of economics even by theorists like Frank Hahn and Samuelson who, actually were quite orthodox. And what happend a few years later, after the gun smoke of the capital controversy had dissolved? The macro production function reappeared like the Flying Dutchman who perished many times but obviously can or will not die. It indicates to me that economics still retains elements of alchemy or astrology: A lot of math and statistics on a shaky grounding.

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    1. OK, let me ask this. What does something like Y=F(K,L) actually do in most macro models that is so wrong? It captures the idea that if investment goes up, the amount that the economy can produce increases. Is that wrong? It can be used to imply that if the real interest rate falls, firms invest more. Is that wrong? Whenever anyone criticises any element of a model, I want to ask how would you do it differently, and what difference would this make?

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    2. What is your definition of K?

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    3. It is normally K(t)=delta*K(t-1)+I(t)

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    4. @SW-L
      a) If the real rate of interest falls, firms invest more ... only iff the demand function for capital is well behaved, i.e. there are no perverse Wicksell effects. If we have a concave factor price frontier (Samuelsons concept), the capital demand falls with a rising real rate of interest (reverse capital deepening).

      b) I would tell my students that K is corn and Y is corn, and I would tell them that this is a special case and not a general case. Given this, students understand the quality and scope of such models.

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    5. Right, so the Bank of England should actually raise interest rates in a recession, and cut them in a boom.

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    7. "What does something like Y=F(K,L) actually do in most macro models that is so wrong? It captures the idea that if investment goes up, the amount that the economy can produce increases. Is that wrong?"

      Yes, Y=F(K,L) combined with K(t)=delta*K(t-1)+I(t) and Y=C+I captures the idea that investment raises future production.
      That idea, however, is already contained in the distinction between C and I (investment being that part of what we produce that meets future rather than present needs).
      A model like that, when tested and further defined with the help of datasets and regression analysis, therefore does little more than ... prove that the datasets have properly distinguished C and I...
      It has little explanatory value.

      It unfortunately does more than that:
      It introduces a hard cut between C and I, between producing for present and future needs, thereby obfuscating that human efforts tend to serve present and future needs simultaneously.
      Because L is only treated as cost/input of production it also obfuscates that work and the social status and influence attached to it are not only 'costs', but also serve direct needs.
      It solidifies and creates an economy in which a lot of economic behaviour and choices become unthinkable and invisible.

      Generalising back to philosopy of science (Popper, Lakatos etc.):
      Falsification of theories in economics understood as 'science' is not a valid model, because economic theories and the concept enshrined in them are in large part self-fulfilling.
      A model that distinguishes 'consumers' and 'producers' creates people that behave as such and that do not think of themselves anymore as people that could strive for shared goals or neighbours that could share their 'possessions' because they trust each other with them.
      We also tend to forget that this model was historically created as alternative for the model in which citizens empower a government to act on their behalf and organise the satisfaction of their needs (after disempowering rulers that act contrary to their needs).

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    8. Wim Nusselder,

      "Falsification of theories in economics understood as 'science' is not a valid model, because economic theories and the concept enshrined in them are in large part self-fulfilling."

      Actually, this isn't an issue unique to economics in contrast to the natural sciences, nor is it a problem for testing. Inquirers can have a causal effect on what they observe and study, but this is a mere possibility and insufficient to prove that it is impossible to test a theory; it is a problem insofar as we cannot always detect or measure observer effects, but even this difficulty is often surmountable.

      You make the further assertion that such effects DO happen in economics, which is certainly true to some extent. However, the fact that we are aware of observer effects in economics means that they can simply be fed into our background knowledge when testing economic theories.

      (Falsificationism is a bad model for all sciences, but that's another issue, so I've stuck to the question of the possibility of a testing-based model, which is a necessary requirement of falsificationism but does not require falsificationism.)

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    9. Dear William Peden,

      You are right that my criticism of a falsification model of scientific progress does not only apply to economics.
      'Not valid' can of course be read as 'not valid without proper care and correction'.
      I hope you do agree that in economics such problems are relatively substantial because of the strong links between politics understood as 'who gets what, when and how' and economics understood as choice in the face of scarcity.
      The history of economic thinking and of economic concepts, models and methodology is strongly rooted in political history.

      I described a specific 'observer effect' (or rather 'observation tools availability effect') that can be extended to the effect on economic thinking of the availability of specific datasets (like national accounts, taxpayers data etc.) and non-availability of other data.
      Can you cite examples of such effects being corrected for when testing economic theory?

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    10. A fairly simple case would be the theory -> policy -> policy effects relationship in macro. A theory, by (for example) changing a country's monetary policy from a highly discretionary policy to a fiercely rules-based policy may alter the economy, e.g. increasing the demand to hold base money due to lower inflation expectations. Macroeconomists now have expectations-adjusted theories, to take into account the effect of changes in policy (which have their roots in changes in economic theory) on relationships between economic phenomena.

      I don't think that the political aspect of economics is important in this context. Observer effects would be a methodological challenge even if economists had no political influence, e.g. Kahneman has changed the way some people behave quite apart from his political influence..

      Also, observer effects aren't a problem with falsificationism as such: the reasons why falsificationism isn't a good methodological model has nothing to do with observer effects.

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    11. Dear William Peden,

      I asked: "Can you cite examples of such effects being corrected for when testing economic theory?"
      You replied: "A fairly simple case would be the theory -> policy -> policy effects relationship in macro."

      That is a far to simple case to be comparable to the type of effects that I referred to.
      More comparable is the case that economists teach that monetary policy (determination of M in order to influence P in MV=PT or in M=PT) is decided upon and implemented by central banks, while M is actually for 95% or more autonomously determined by private banks.
      As central banks have actually no or very limited direct influence on the decisions by private banks to make loans and thereby create bank money, the only way in which the central bank influences P is BECAUSE of those expectations, based on economic theory: inflation falls because people hold more money rather than spending it when they expect inflation to fall because of some magic by the central bank.

      Please be aware that I didn't refer to observer effects.
      You erroneously interpreted as such the quite different type of effects that I describe.
      The effects I refer to are better understood as the effects economists have on the economy by providing economic actors with a more or less arbitrary way of understanding the economy.

      You can only state that 'the political aspect of economics' in not important in this context, because you erroneously limit 'the political aspect of economics' to the political influence economists have when their advice (rather than their theories) are being taken serious by politicians.
      I referred to for instance Eugen von Böhm-Bawerk creating his theory of the functioning of a horse market and generalising that into a general theory of the determination of prices in order to counter a theory of the determination of prices by exploitation of labourers.

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  6. It is normally K(t)=delta*K(t-1)+I(t)

    Thanks for answering.

    I guess many non-economists might wish to be assured that K and other chosen variables for analysis are epistemologically justified before proceeding to the mathematics. I have found that people in other social sciences worry a lot about intellectual monopolies and are concerned about the justification of an adopted methodology on the basis of "well that is how standard/mainstream/conventional etc economics does it" and are then subjected to two intersecting lines or a mathematical proof as the basis of an argument.

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  7. "Whenever anyone criticises any element of a model, I want to ask how would you do it differently, and what difference would this make?"

    This makes sense. I think we should always ask how things can be done differently and why things are done the way they are.

    Presumably K is capital which would include human capital, money, trucks and what else (?) In order to determine what is knowable about K and the relationship with the knower we can start by eliminating what K is definitely not.

    Would be great if there are a few people who know about deductive reasoning and deconstruction who could help out.

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  8. I want to second the plug for Hausman's book. I read it recently and found it illuminating. I found his comments on the First Welfare Theory were particularly interesting. And I just started his "Preference, Value, Choice, and Welfare."

    One problem with economists writing about methodology is that they are highly unlikely to do it as well as Hausman. Believe it or not, philosophy is a field separate from economics that has its own expert methods. Indeed, Philosophy of Economics is now a recognized subfield of Philosophy. It even has its own journal.

    I say this from some experience; although not a professional, I once spent three years studying Philosophy of Science. As a result, I find reading most of what economists say about methodology painful. The comments are typically worse.

    Bottom line: read Hausman to see how analysis of methodology is done by someone who knows what he's doing. And while you're at it, forget about Popper. If you want to know why you should forget about Popper I refer you to (for example) "Progress and Its Problems" by Larry Laudan. It's an oldie but a goodie.

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  9. Thanks for the kind words about my Inexact and Separate Science of Economics, which unfortunately does not tackle the special problems of macroeconomics.

    I would take issue with the afterword: you understand Friedman's instrumentalism perfectly. The example shows clearly how much the realism of assumptions (that is the plausibility of the basic behavioral claims) in models mattered to Friedman in practice. To know what to revise when a model flops or when to rely on a model in a new application, there is no good substitute for examining the model's assumptions. Friedman wanted to protect the fundamental axioms of microeconomics from superficial empirical critiques and wound up endorsing an implausible, unworkable (yet extremely convenient and popular) denial that one need pay attention to anything other than the price and quantity implications of models.

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    1. Thank you for that reassurance. After reading the Tony Lawson paper, which seems to equate all mainstream economics with instrumentalism, I was beginning to doubt myself.

      I do not know if you would agree, but I think it would have been much better (for himself and subsequent discussion) if Friedman had focused on his alternative defence: the well known analogy with the billiard player.

      I’m glad you pointed out how remiss you were not to have covered macroeconomics in your book. Luckily for you macro was becoming just like micro as you were writing it, but that in itself is both interesting and perhaps problematic. Anyway you clearly should rectify this omission at some point. How about this for the title: The Changing and Peculiar Methodology of Macroeconomics.

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  10. I think you are thinking of the methodology of mainstream macroeconomics. I will go on replacing "mainstream economists" with "mainstream macroeconomists."

    Friedman's argument was not at all controversial at the time. Paleo Keynesians were perfectly willing to use adaptive expectations as proposed by Friedman (he did not propose assuming rational expectations) see this talk by paleo Keynesian James Tobin
    http://cowles.econ.yale.edu/P/cd/d03a/d0315.pdf

    You correctly argue that Friedman's contribution was based on theory and not on evidence. His impact however, was clearly based on evidence. Here I stress as always Krugman's recollection of a lunchtime conversation http://krugman.blogs.nytimes.com/2013/12/16/more-paleo-keynesianism-slightly-wonkish , the Wiki on the Phillips curve http://en.wikipedia.org/wiki/Phillips_curve and "Zombie Economics " http://www.amazon.com/Zombie-Economics-Ideas-Still-among/dp/0691154546

    The occurance of stagflation in the 1970s was considered proof that Friedman had been right and his intellectual opponents wrong. I think that exactly this episode convinced most macroeconomists that macroeconomics needed a methodological revolution. However, the episode provided no useful information relevant to the debate at all. Friedman had no prominent opponents who asserted that stagflation was impossible. It is perfectly consistent with expected inflation being a constant less than one times lagged inflation.

    One might say (and I have so written) that the very simple constant times lagged CPI inflation failed because over time the estimated constant increased significantly I finally decided to test the null that the relationship between US wage growth and US lagged CPI inflation as estimated with pre Friedman Presidential address data (pre 1968) is inconsistent with post 1968 data. This is a very crude simple test -- I just look at the coefficient on lagged cpi inflation times a post 1968 dummy.

    Regression with Newey-West standard errors Number of obs = 259
    maximum lag: 3
    |
    ldqwinf | Coef. . t
    unem -.3776157 -3.30
    infcpi .5516583 2.68
    infcpia68 .0089793 0.05
    _cons .0527488 6.42

    I think this is the main evidence that the old methodology was not ideal.

    Now the revolution was based on evidence at the time and not data up till now. I ran a few regressions with quarterly data. I didn't find an interval such that the old pre-Friedman formula is rejected by the data. This is what you expect when testing a null which happens to be true. Recall, I don't think any prominent paleo Keynesian bet his or her reputation on the failure to reject that null. The informal impression that the data showed the null was no good is, I think, the storming of the Bastille of the rational expectations revolution.

    I believe there was no good reason at the time to consider the new approach promising & that subsequent evidence strongly supports the view that the then new approach is not promising.

    I think the actual methodology which actually influenced macroeconomic thought is the straw man rhetorical trick. I am quite sure that macroeconomists were generally convinced that neglect of micro foundations had caused someone prominent to be sure that stagflation was impossible and so macroeconomists should base macroeconomics on microfoundations to avoid such errors in the future. I think that this was a completely unsound method of attempting to find a good method based on the use of fictional intellectual history.

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    Replies
    1. While your efforts to emphasise what economists actually wrote and what the data actually suggests on the Phillips curve are very important, I think I would take issue with how important this all was in the success of the microfoundations revolution. I think two other things were very important.

      First, the fact that something like rational expectations was consistent with how microeconomics seemed to operate. Second, a loss of faith in conventional time series econometrics. Now these thoughts have no more status than Paul Krugman's remembered conversation, but I would be interested in whether you thought these other factors were not important.

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  11. "First, the fact that something like rational expectations was consistent with how microeconomics seemed to operate. "

    A fair enough question. But for macroeconomics people seem to forget about whether this matters at all when we are really worried about whether such things are consistent with how the economy operates. I think the marginalisation of people who were concerned about defining a state or a national economy as an aggregation of markets was a pity. I many ways I feel that macroeconomics, and particularly macroeconomic policy, is not so much about a national market, it is more about the role of the state. Thought this way its natural counterpart is political science, not micro-economics.

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  12. My post today is on this topic. It used to be impossible to model dynamic systems. Now we can accurately predict superstorm Sandy. Econ is using 19th century math despite computing power that reveals that equilibrium analysis is useless.

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  13. Methodological retards
    Comment on ‘Economists and methodology’

    You write “Economists do not think enough about their own methodology. This means economists are often not familiar with methodological discussion, which implies that using what they write on the subject as evidence about what they do can be misleading.”

    The core problem of economics is the scientific incompetence of economists since Adam Smith. The defective methodology is merely an epiphenomenon.

    (i) The first thing one has to realize is that economics is a failed science, see blog post ‘How the intelligent non-economist can refute every economist hands down’
    http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

    (ii) Economic methodology is on the same abysmal level as economic theory itself, see blog post ‘Towards the true economic theory’
    http://axecorg.blogspot.de/2015/12/towards-true-economic-theory.html

    and ‘How economists became the scientific laughing stock’
    http://axecorg.blogspot.de/2015/12/how-economists-became-scientific.html

    (iii) In order to make economics a science there is no other way than to retire both orthodox and heterodox economists, see blog post ‘Free the academy from economics’
    http://axecorg.blogspot.de/2015/11/free-academy-from-economics.html

    The big question of economic methodology is Sherlock Holmes’s Hound-of-the-Baskervilles question, that is, why did methodologists not debunk and reject what is so easily identifiable as a proto-science or what Feynman called cargo cult science. Clower seems to be the one exception.

    “Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (1994, p. 809)

    Egmont Kakarot-Handtke

    References
    Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.

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