A Research Program

Background

The relationship between economic theory and socio-economic reality attracted the increased attention of academics some decades ago. The methodology of economics, as the most important sub-discipline studying this connection, supposes this relationship to be mainly one-sided. In this approach, economic theory is considered as a scheme used to interpret socio-economic reality. In the vast literature of the methodology of economics, researchers use the following question as a starting point: do entities, their features, and their economic behavior exist independently of economics when they are investigated through the lens of economic theory? According to the common standpoint, these entities and the findings regarding them depend on economics and the beliefs entertained by economists. However, in a non-scientific attitude, we may expect this relationship to be a reciprocal connection. Theoretical knowledge and reality reflect upon each other, instead of providing a one-directional connection from theory towards reality.

The constrained view outlined above, according to which our theories shape reality, has some extreme consequences. If reality is formed by our theories, the possibility of relying on our experience as the source for modifying our theories is completely ruled out. However, this connection seems to exist. For instance, the world economic crisis of 1929–33 has significantly contributed to the modification of the accepted economic theory. As a result, this crisis has established the way we consider the functioning of macroeconomic systems even today.

As some recent theoretical works assert, the elements of our socio-economic environment, such as social institutions, social practices, and our social norms and beliefs are all shaped by sciences, from physics to sociology. This must be true for economic theory as well. This view is not surprising at all; rather it strengthens the commonly known characteristics of science, namely, that it is expected to help us to understand and to govern the world. In other words, economic theory has various consequences for the economy and even for everyday business life (for example, recall how mainstream economics guides public policies).

Despite these views, there is a constant effort in economics to describe its own evolution in a context that also takes account of certain milestones in public policy and history in order to find the events that triggered the modifications of the reigning economic theory from time to time. This effort has recently culminated in some monographic works (e.g. Dadkhah, Kamran [2009]: The Evolution of Macroeconomic Theory and Policy), but detailing some individual chapters of the history of economic thought in relation to macroeconomic policies has always been a commonplace in economics (e.g. Hicks, John R. [1974]: The Crisis in Keynesian Economics). These approaches (often implicitly) set the history of mainstream economics in the conception outlined by Thomas Kuhn (in his seminal work The structure of scientific revolutions [1962]) on the notion of scientific progress.

Objectives

However, there are problems in applying the Kuhnian approach in its rough form to economics. Kuhn outlined his concept in order to understand and to explain the evolution of sciences such as physics or chemistry–while human and social sciences definitely make up a different case. These disciplines are all of interpretative nature, so there is no clear basis for evaluating the relationship between economic theory and socio-economic reality. The central problem is the case of paradigm shifts, when this relationship breaks down. Because of the interpretative character of social sciences, we have no definite and ultimate basis to recognize this case. Mainstream economics, as it is often argued, is a pure theory, similar to geometry or Newtonian physics. These disciplines only consider theoretical circumstances which are clearly different from the reality we are directly living in. So, economics is able to generate predictions that cannot be applied to reality in a direct way: these predictions are only loose guidelines to direct macroeconomic policies towards the desired ways or to understand our reality in a comparison to these guidelines. Mainstream economics as a whole is only a collection of broad hypothesis on the nature of the fundamental economic laws, so a careful evaluation is needed.

Michael Polanyi was the first philosopher who has recognized (in his Personal knowledge [1958] and other essays) how significantly this subtle relationship between theories and reality can and should change our understanding of the evolution of a particular discipline. However (similarly to Kuhn), he also  outlined his conception within the realm of natural sciences, so our knowledge on how his work concerns the interpretation of the history of the economic thought is considerably underdeveloped. I strongly believe this interdisciplinary approach is the most justifiable from the perspective of a more complete understanding of the evolution of economics.

So, I would like to broaden Polanyi’s approach to economics. Polanyi succeeded in highlighting the importance of the personal contribution carried out by the understanding and interpreting individual to the creation of knowledge. However, it is not detailed yet how this exactly happens in economics: how can we describe the route from creating the first conceptions of a new theory and the recognition of the inadequacy of the former theoretical framework through interpreting reality with this new theory to the phase when proponents of the new approach try to make other professionals take over the new system of thinking. The philosophy of Michael Polanyi helps us to break open the black box of paradigm shifts in economics. Considering the role of personal commitments and the contributions of the individual to creating knowledge will help us with the deeper understanding of turning points in the history of economic thought. Personal knowledge is the key to evaluate properly how our theories reflect to changes in socio-economic reality.

Applying this new perspective to new classical macroeconomics, which is somehow the culmination of the evolution of mainstream economics, is the theoretical background of my proposed work as a whole. This project has the promise to enhance my previous knowledge on new classical macroeconomics, summarized in a recent monograph. On the practical and operative side, I would like to map macrosocial changes that governed economic theory towards new problems and questions. This line of inquiry could improve our knowledge on the way theories are formed in economics. For example, in monetarism, presuming rational expectations had significant consequences on economic policy. It was a theoretical development that cannot be understand if we leave the concept of personal knowledge outlined by Polanyi out of account. Views on the efficiency of economic policy have radically changed and, as a result, the playing field for activist policies has significantly narrowed. The question naturally arises: What were the social and economic developments that forced representatives of high economic theory to radically curtail the scope of activist economic policy control? Theory both influences our actions and reflects upon the problems of societies. This was the case, for example, when inflation (instead of unemployment) came up as the primary concern of societies or political elites, giving the opportunity for monetarism to crowd out Keynesian theory. In order to better understand the way economists theorize, we need to identify the parallels and inconsistencies between the problems of societies and their economic theories.

Significance

First of all, the greatest benefits of this project shall be realized within the methodology of economics and theoretical economics. There is an old debate on whether economics is a realist or a mere instrumentalist science. If the former, mainstream economics helps us to understand and to govern socio-economic reality, while if the latter, then any interpretative efforts in economics are completely in vain and useless since, in this case, nothing is said about the causal structure of socio-economic reality. This project can contribute to this debate through arguing for the realist position: we will have a clearer understanding of how concepts and theories are formed in economics, creating a pure science which is, notwithstanding, definitely realist. This widely accepted though often debated realist program will be further elaborated through this project resulting a detailed view on the way how economists grab the essence of reality in order to understand it. Moreover, the history of economic thought will be enriched with a special narration which utilizes the recent developments emerged within the methodology of economics.

This line of inquiry seems to be particularly interesting and illuminating in the case of Hungary. Traditionally, public policy in Hungary lacks a solid and well-defined theoretical basis. Economic policies of the succeeding governments in Hungary were characterized by sudden and erratic changes and can only be described only as passive and ungrounded reactions to some unexpected shifts in the world economic environment. During the era of socialism, dominated by the Marxian political economics, all the theoretical advancements of the West were hidden behind the Iron Curtain, so, later, policy makers in Hungary could hardly rely on (mainstream) economics when searching for some adequate answers to the macrosocial and macroeconomic problems. In the 1990s and the early 2000s, this lack of theoretical knowledge was mainly implicit and something to hide, but after 2010, this has been made explicit and sorted under the populist label of ‘unorthodox economic policies’ with the clear intention of crossing any well-known and traditional public policy recommendations. Today, this denial of mainstream economics and any modern economic policy suggestions is extreme, grown to be an apocalyptical opposition of Hungary and the Western world.

In addition, economic policy makers in Hungary are not supported by experienced and open-minded professionals: interpreting this situation as a sociological problem, they are either outsiders to the political elite or they have already abandoned the sound theoretical considerations in order to be insiders. To sum up, economic policy makers in Hungary, first, are not familiar with applying economic theory as a basis for adequate and efficient economic policy actions and, second, do not have considerable experience in starting from actual macrosocial and macroeconomic problems as a ground for directing economic theory towards these new problems. So, this proposed research holds the promises of highlighting the mutual relationship between theory and socio-economic reality even in Hungary.

For me personally, this work holds the promise to elevate my knowledge to a higher level. I have expertise in the subject area, having published some significant and synthesizing works on the methodology of mainstream economics. I also have the ability to apply a new aspect in order to scrutinize the way theoretical economics has been evolving, and this program would enable me to extend my previous knowledge by exploring a territory with the help of a new theoretical background. 

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