boland. the foundations of economic method

8212019 Boland the Foundations of Economic Method

httpslidepdfcomreaderfullboland-the-foundations-of-economic-method 1110

983209 Lawrence A Boland 1982

First published by George Allen and Unwin 1982 and reprinted 1984

The Foundations of This version reset and reprinted at Simon Fraser University 1992 and publishedon internet 1998

Economic MethodAll rights reserved No part of this book may be reprinted orreproduced or utilized in any form or by any electronicmechanical or other means now known or hereafterinvented including photcopying and recording or in anyinformation storage or retrieval system without permission in

LAWRENCE A BOLAND writing from the author

Simon Fraser University Burnaby British Columbia Canada

Publication data for 1982 edition

British Library Cataloguing in Publication Data

Boland Lawrence AThe foundations of economic method1 EconomicsndashMethodologyI Title33001rsquo8 HB 131

ISBN 0-04-330329-5 (hardcover)ISBN 0-04-330328-3 (paperback)

Library of Congress Cataloguing in Publication Data

Boland Lawrence AFirst published byThe foundations of economic method Bibliography pGEORGE ALLEN amp UNWINIncludes indexLondon Boston and Sydney1 EconomicsndashMethodology I TitleHB131B64 330072 82-4100

ISBN 0-04-330329-5 (hardcover)983209 Lawrence A Boland 1982 1992 1998ISBN 0-04-330328-3 (paperback)



TO MY FAMILY

Contents Brenna Alana and Irene

Acknowledgements page v

Preface vi

Introduction Understanding the Methodology of Economics 1

Part I THE lsquoHIDDEN AGENDArsquo OF

NEOCLASSICALECONOMICS

1 The Problem of Induction vs the Problem

with Induction 13 2 The Explanatory Problem of Individualism 27

Part II METHODOLOGY IN NEOCLASSICAL

ECONOMIC THEORY

3 Psychologism vs Disequilibrium Models 47

4 Expectations and Theories of

Knowledge 66

5 The lsquoNecessityrsquo of Microfoundations for

Macroeconomics 79

6 Time and Economic Theory 95Part III CONVENTIONALIST METHODOLOGY

IN ECONOMICS

7 Positive Economics as Optimistic

Conventionalism 115

8 Analytical Theory as Defeatist

Conventionalism 129

9 Instrumentalism as a Rejection of

Conventionalism 141

Part IV THE FOLLY OF AN ALL-PURPOSE METHODOLOGY

10 Contemporary Methodology vs Popperrsquos

Philosophy of Science 155

11 Putting Popper on the Agenda 174

12 Problem-Dependent Methodology 188

Bibliography 197

Names Index 205

Subject Index 207















PART I

THE lsquoHIDDEN AGENDArsquo OF NEOCLASSICAL ECONOMICS



983209 Lawrence A Boland

1The Problem of Induction vs theProblem with Induction

Scientists never lsquoexplainrsquo any behavior by theory or by anyother hook Every description that is superseded by a lsquodeeperexplanationrsquo turns out upon careful examination to have beenreplaced by still another description albeit possibly a moreuseful description that covers and illuminates a wider area Ican illustrate by what everyone will agree is the single mostsuccessful lsquotheoryrsquo of all time I refer to Newtonrsquos theory of universal gravitation

Paul Samuelson [1964]

All theory depends on assumptions which are not quite trueThat is what makes it theory

Robert Solow [1956]

Some Background

The Problem of Induction

Since the time when Adam Smithrsquos friend David Hume observed thatthere was no logical justification for the common belief that much of our

empirical knowledge was based on inductive proofs [Hume 1739Russell 1945] methodologists and philosophers have been plagued withwhat they call the lsquoProblem of Inductionrsquo The paradigmatic instance of the Problem of Induction is the realization that we cannot provide aninductive proof that lsquothe sun will rise tomorrowrsquo This leads many of usto ask lsquoSo how do we know that the sun will rise tomorrowrsquo If it isimpossible to provide a proof then presumably we would have to admitthat we do not know Several writers have recently claimed to havesolved this famous problem [Popper 1972 Hollis and Nell 1975] ndashwhich is quite surprising since it is impossible to solve Nevertheless

what it is and how it is either lsquosolvedrsquo or circumvented is fundamental tounderstanding all contemporary methodological discussions

































PART II

METHODOLOGY IN NEOCLASSICAL ECONOMIC THEORY




3Psychologism vsDisequilibrium Models

it really is assumed that what you see when you look outthe window is an economy in ordinary general equilibrium

This view has obvious (and intended) affinities tonineteenth-century economic thought Sayrsquos Law and allthat Like that tradition the new equilibrium school faces abasic problem how can it account for the lsquoobviousrsquo large-scale divergences from equilibrium that we think we seeespecially in prolonged depressions

Robert Solow [1979 p 341]

Every explanation of economic crises must include theassumption that entrepreneurs have committed errors But themere fact that entrepreneurs do make errors can hardly beregarded as a sufficient explanation of crises Erroneousdispositions which lead to losses all round will appearprobable only if we can show why entrepreneurs should allsimultaneously make mistakes in the same direction Theexplanation that this is just due to a kind of psychologicalinfection or that for any other reason most entrepreneursshould commit the same avoidable errors of judgement does

not carry much conviction It seems however more likelythat they may all be equally misled by following guides orsymptoms which as a rule prove reliable Or speaking moreconcretely it may be that the prices existing when they maketheir decisions and on which they had to base their viewsabout the future have created expectations which mustnecessarily be disappointed In this case we might have todistinguish between what we may call justified errors causedby the price system and sheer errors about the course of external events

Friedrich Hayek [193339]















































94 THE FOUNDATIONS OF ECONOMIC METHOD 983209 Lawrence A Boland



expectations concerning the future and those expectations cannot beinductively proven hence decision-makers must make mistakes Thisview has been admirably developed by George Shackle [eg 1972]

We see then that Keynes accepted both the psychologism and the

6Inductivism upon which neoclassical theory is founded Some of hisdefenders may say that this is all the better because he was able to refuteneoclassical theory on its own terms But to criticize neoclassicaleconomics by basing the critique on the logical consequences of accepting psychologism and Inductivism presumes that psychologism Time and Economic Theoryand Inductivism are necessary for lsquorationalrsquo decision-making We willargue below that neither is necessary hence the matter of the success of

economic problems arise always and only in consequence of the Keynesian revolution is still an open question change [T]he economic problem of society is mainly one

of rapid adaptation to changes in the particular circumstances

of time and placeFriedrich Hayek [194548 pp 82-3]

Economics is concerned with decisions decisions come inas the intermediate stage in most of its causal processes Theimmediate cause of an economic effect is nearly always adecision by someone or it may be the combination of decisions that were made by different people But it is notenough in economic analysis to refer to the decision we arealso concerned with the reasons for the decision the causesof the decision

All causative analysis depends on theory If we think thedecisions to be obvious that can only mean that we aretaking the theory for granted

John Hicks [1979 pp 88 67]

Often in the writings of economists the words lsquodynamicrsquo andlsquostaticrsquo are used as nothing more than synonyms for good andbad realistic and unrealistic simple and complex We damnanother manrsquos theory by terming it static and advertise ourown by calling it dynamic

Paul Samuelson [194765 p 311]

1Time in Economics vs Economics in Time

For many it must seem obvious that any discussion of the need toexplain any disequilibrium must also entail the need to explain thedynamics of such an economy since by definition disequilibriumimplies changes over time But not much progress has been madetowards a development of a neoclassical theory of a dynamic economy

The reason according to some critics of neoclassical economics partic

















PART III



PART III

CONVENTIONALIST METHODOLOGY IN ECONOMICS


7



7

Positive Economics asOptimistic Conventionalism

The venerable admonition not to quarrel over tastes iscommonly interpreted as advice to terminate a dispute when

it has been resolved into a difference of taste presumablybecause there is no further room for rational persuasionTastes are the unchallenged axioms of a manrsquos behavior

On the traditional view an explanation of economicphenomena that reaches a difference in tastes between peopleor times is the terminus of the argument On our preferredinterpretation one never reaches this impasse the economistcontinues to search for differences in prices or incomes toexplain any difference or changes in behavior

George Stigler and Gary Becker [1977 p 76]

Attacking any theory is easy enough since none is perfectBut the wide class of empirical observation that is explainedby economic theory should caution one against sweeping thattheory aside and setting up new ad hoc theories to explainonly or primarily those events the standard theory will notexplain What is wanted is a generalization of economictheory to obtain an expanded scope of validity withouteliminating any (or lsquotoo muchrsquo) of the class of events forwhich it already is valid

Armen Alchian [1965]

To abandon neoclassical theory is to abandon economics as ascience

Douglass C North [1978]

Our discussions in the previous six chapters have centered on the hiddenagenda of neoclassical economic theory our evidence was the nature of






































Moreover as we have shown [Boland 1979a] Lakatos is wrongInstrumentalism on its own terms is devoid of the alleged elementarylogical errors



Some Words of Caution

Now before one jumps to the conclusion that the real choice is betweenInstrumentalism (ie Friedmanrsquos methodology) and Conventionalism(ie the methodology of Samuelson or Lucas) and worse that if onerejects Conventionalism one must then embrace Instrumentalism for allof economics let us add some further advice Instrumentalism is alwayslimited to short-run practical problems If one is looking for a moreuniversal lasting understanding of the workings of the economy ndash that

is a true theory of economics ndash then Instrumentalism will never dosince it ignores the truth of theories Of course Conventionalism failshere too since it denies any truth status to theories If a true theory of theeconomy is our objective then we will just have to look beyond thedispute over methodology between Friedmanrsquos Instrumentalism and theConventionalism of Samuelson or Lucas

PART IV



THE FOLLY OF AN ALL-PURPOSE METHODOLOGY




10Contemporary Methodology vsPopperrsquos Philosophy of Science

No assumptions about economic behavior are absolutely trueand no theoretical conclusions are valid for all times and

places but would anyone seriously deny that in the matter of techniques and analytical constructs there has been progressin economics

Mark Blaug [1978 p 3]

we look upon economic theory as a sequence of conceptualmodels that seek to express in simplified form differentaspects of an always more complicated reality

Tjalling Koopmans [1957 p 142]

progress in a discipline is better described by a sequence of

theories or models not by a study of individual theories Alsquoresearch programrsquo is the organizing conception to describeit is to characterize the various sequences of models that havefamily resemblance

E Roy Weintraub [1979 p 15]

So far we have examined the effects of the hidden agenda on neoclassi-cal theoretical problems and research programs now we wish to ex-amine its effect on the neoclassical views of methodology Generallyspeaking methodology is rarely discussed in the leading journals We

need to examine this empirical fact before we examine the more subtlequestions of lsquorealismrsquo lsquousefulnessrsquo and the meaning of a lsquosequence of modelsrsquo

Methodology and the Hidden Agenda

Methodology is not considered an urgent topic for neoclassical researchprograms simply because methodology has historically been concernedonly with the nature of the items on the hidden agenda Being concerned

















































204 THE FOUNDATIONS OF ECONOMIC METHOD

Weisskopf W [1979] lsquoThe method is the idealogy from a Newtonian to aHeisenbergian paradigm in economicsrsquo Journal of Economic Issues 13 869-84

Weintraub E [1977] lsquoThe microfoundations of macroeconomics a criticalsurveyrsquo Journal of Economic Literature 15 1-23

Weintraub E [1979] Microfoundations (Cambridge Cambridge Univ Press)Wisdom J [1963] lsquoThe refutability of irrefutable lawsrsquo British Journal for the

Philosophy of Science 13 303-6Wong S [1973] lsquoThe F-twist and the methodology of Paul Samuelsonrsquo



Wong S [1973] The F twist and the methodology of Paul Samuelson American Economic Review 63 312-25

Wong S [1978] The Foundations of Paul Samuelsonrsquos Revealed PreferenceTheory (London Routledge amp Kegan Paul)


Names Index

Agassi J 6 14 24ndash5 29ndash30 32 36 59 165 171ndash2 184 193 195ndash6 198ndash989 116 158ndash9 166 168 170 173 197 202

Albert H 1 5 28 197Alchian A 7 54 115 197 Gardiner M 25 199



Alchian A 7 54 115 197 Gardiner M 25 199Allen RGD 8 200 Gellner E 174 199Archibald CG 21 197 203 GeorgescundashRoegen N 102 199Arrow K 6 31 50ndash2 101 132 197 Gordon D 51 86 102 199

Grossman H 101 197Barro R 101 197 Grossman S 199Bartley W 23 170 197Baumol W 86 197 Haavelmo T 149 200Becker G 7 34 99ndash100 106 115 197 Hahn F 52 200

203 Hanson N 19 130 200Bennett R 127 198 Hattiangadi J 171 200Blaug M 5 15 28ndash9 32 40ndash1 48 90 Hayek F 28 47 58 64 67ndash8 95 105ndash6

155 162 164ndash5 169 171ndash3 193 195 169 178 180ndash1 184ndash5 196 198 200198 Hearnshaw LS 43 200

Bohm-Bawerk E 99ndash100 106 198 Hemple C 23 25 200Boland L 8 18 21ndash2 24 31ndash2 38 50 Hicks J 8 37 80ndash2 84 95ndash7 99ndash100

52 74 90 97ndash8 100ndash1 103ndash4 111 105 107ndash11 160 177ndash8 200119ndash22 132 135ndash6 142ndash3 149ndash52 Hirshleifer J 70 181 200170ndash1 173 178 181 183ndash4 198 202 Hollis M 13 15 137 200

Buchanan J 51 198 Hughes R 130 200Hume D 13 15ndash16 24 37 108 142 149

Caldwell B 21 150 199 203 200Chamberlin 61 197 199 Hutchison T 23 200Chipman J 8 199 Hynes A 51 199Clower R 7 51 80ndash1 92ndash3 199Coase R 59 63 163 199 Jarvie I 34 200Coddington A 17 199

Kaldor N 100 200Davidson P 106 199 Kamin LJ 43 200Davis L 51 199 Keynes JM 79ndash84 88ndash94 96 107ndash10Debreu G 99 199 198ndash200Devany A 64 199 Keynes JN 142 151Dingle M 163 199 Klein L 90 201

Dorfman R 90 199 Koopmans T 51ndash2 86ndash7 99 129 131Duhem P 15 142 199 148ndash9 155 158 163 201

Kuhn T 7 35 132 158 161 165 173Eatwell J 57 202 201Eddington A 15 142 199Einstein A 1 189 199 Lachmann L 105 201

Lakatos I 7 90 151ndash2 165 173 201Frazer W 171 198 Lancaster K 39 201Friedman B 66ndash7 76 199 Latsis S 9 17 109 158 201Friedman M 21 126 141ndash6 148ndash52 156 Leibenstein H 7 62 201







TO MY FAMILY

Contents Brenna Alana and Irene

Acknowledgements page v

Preface vi

Introduction Understanding the Methodology of Economics 1

Part I THE lsquoHIDDEN AGENDArsquo OF

NEOCLASSICALECONOMICS

1 The Problem of Induction vs the Problem

with Induction 13 2 The Explanatory Problem of Individualism 27

Part II METHODOLOGY IN NEOCLASSICAL

ECONOMIC THEORY

3 Psychologism vs Disequilibrium Models 47

4 Expectations and Theories of

Knowledge 66

5 The lsquoNecessityrsquo of Microfoundations for

Macroeconomics 79

6 Time and Economic Theory 95Part III CONVENTIONALIST METHODOLOGY

IN ECONOMICS

7 Positive Economics as Optimistic

Conventionalism 115

8 Analytical Theory as Defeatist

Conventionalism 129

9 Instrumentalism as a Rejection of

Conventionalism 141

Part IV THE FOLLY OF AN ALL-PURPOSE METHODOLOGY

10 Contemporary Methodology vs Popperrsquos

Philosophy of Science 155

11 Putting Popper on the Agenda 174

12 Problem-Dependent Methodology 188

Bibliography 197

Names Index 205

Subject Index 207















PART I









Robert Solow [1956]

Some Background





































PART II



























































































PART III



PART III



7



7






















































PART IV














































































Names Index



































PART I









Robert Solow [1956]

Some Background





































PART II



























































































PART III



PART III



7



7






















































PART IV














































































Names Index




























Robert Solow [1956]

Some Background





































PART II



























































































PART III



PART III



7



7






















































PART IV














































































Names Index





















































PART II



























































































PART III



PART III



7



7






















































PART IV














































































Names Index














































































































PART III



PART III



7



7






















































PART IV














































































Names Index























PART III



7



7






















































PART IV














































































Names Index























7






















































PART IV














































































Names Index
































































PART IV














































































Names Index


































































































Names Index





















boland. the foundations of economic method

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