Some Methodological Aspects of the Institutional-Mainstream Debate

As for the conclusions to be elaborated it is necessary to call attention to an important distinction. Even though both institutional economics and the main stream apply ideal-types, these concepts have different ontological status in each system. Perfect competition and oligopolistic competition, or price taker firms and price setting companies: they are all ideal-types. In spite of the fact that all of these concepts refer to something (as Putnam [1975] would put it, there are some real entities that approximately fit the descriptions given by these concepts[1]), they are used for miscellaneous purposes. In Mäki Uskali’s [1994] phrasing, some concepts are more de-idealized than others are. By constructing far more de-idealized concepts and mechanisms, institutionalists intend to give descriptions of agents and processes actually perceived in our socio-economic reality. Institutionalists following such an epistemological strategy can endow their concepts with considerable direct descriptive relevance. In other words, through institutional concepts reality can be described with a good approximation as we fellow men directly experience that. If highly abstract mainstream concepts and models are judged by the same standards, neoclassical orthodoxy avowedly incapable of providing direct descriptions will always prove to be a failure.

This distinction can be explained by referring to different schools of the economic thought following radically different conceptualizing principles. Every research tradition exhibits specific metaphysical and methodological commitments and is built upon a special ontology that is expected to serve as a catalogue of the entities the given research tradition concedes as existent (cf. Laudan [1977]: 78–79). While the central problem of the methodology of mainstream economics has been the following of the Menger–Weber methodology,[2] institutional economics has been under the influence of thinkers (such as Keynes or Marx) who are not even referred to as economists in the main stream sense of the word. No matter how compatible these methodologies actually are, careful accounts are hindered by the lack of tolerance.

It is not an overstatement to say that the institutional critique against mainstream economics is the result of institutional economists’ setting their own methodological requirements on the mainstream camp. This development seems to stem from a Kuhnian way of thinking. In order to enhance scientific progress the reigning paradigm with lots of anomalies accumulated needs to be subverted. But here is the rub: economics developing along a particular epistemic strategy is completely different from physics described by Kuhn [1970]. While in physics the significant theoretical systems have been built upon one another in a non-cumulative way with the consecutive paradigms being more and more comprehensive approximations to reality (Weinberg [2015]: Ch. 15), economics is selective, highlighting some facets of our socio-economic reality—facets which we as researchers are currently interested in (cf. Contessa [2007]). This is nothing but theoretical pluralism in which every participant argues for the supremacy of his own absolutized approach. It would be difficult to give a different account of how direct empirical evidence became the principle of conceptualization and building models in institutionalism. At the same time, the very indirect, abstraction-based relationship between mainstream models and reality is found inappropriate or of dubious value at least. The same suspicion is felt about the fact that falsification of mainstream theorems must be carried out via complex econometric methods, where numerical results of questionable value confirm the circumstance if a model under test succeeded in highlighting some of the mechanisms of reality.[3] The desire of totality will always feel tempted to question the relevance of fragmentariness. Hereby I argue that fragmentariness of the main stream is on purpose, so it does need institutional and other amendments. It stands to reason that mainstream ideal-types are not capable of direct description. However, it must be noted that along a different epistemic strategy such concepts may prove to be useful or even indispensable. Critiques highlighting the break between mainstream economics and reality can be refuted in two interrelated steps. First, abstract ideal-types are introduced as instruments used for grabbing (socio-economic) laws. And second, some light is casted on the theoretical importance of comparative studies between model and reality. Following this line of reasoning some mainstream efforts of dubious value in grabbing certain fundamental laws are also mentioned.

One can hardly win a debate between approaches equal in epistemic value and different only in purposes. The dissatisfaction with mainstream economics does not stem from anomalies but it is simple dissatisfaction of some authors with the scope of mainstream models. The hard core remains intact all along: instead of subversion, the dissatisfied following their own interests have proceeded by elaborating further models and theories. These new theories stand in a complementing relationship with the hard core, since they are aimed at answering questions which the mainstream camp is not interested in. In this context identifying the area covered by mainstream economics is of crucial importance which is definitely an act of methodological nature. Since any theory is built upon implicit and explicit methodologies and ontologies, understanding the positive theoretical content can only be carried out by taking this methodology and ontology into account. Strange as it is, while Kornai [1971] promised his critique would be of methodological character as well, the debate between mainstream economics and the rivalling approaches has never taken a methodological path—as a result, methodology still has rather an unfavourable status among economic sub-disciplines (cf. Weintraub [1989]). However, without clarifying the methodological foundations one can hardly reach beyond rehearsing dogmatically some unproductive critiques of the main stream, questioning relevance, mixing up the complex relationship between models and reality with a simple contradiction—and beyond some kind of obtuseness over why a critique ignoring methodological aspects remains neglected.[4]

The traditional way of using ideal-types is comparison underlined by Menger–Weber. On the contrary, using ideal-types for direct description is something different, even though such efforts were present even in his Weber’s time due to the Marxian way of theorizing.[5] Thus, there is a neoclassical methodology of applying ideal-types. Its technical details and epistemological principles are very different from the institutional purposes of direct description, so judging the relevance of mainstream economics is reliant on analysing methodology. Only one question has stood in the centre of the debates around mainstream economics for decades: if models are not suitable for the purpose of direct description, then what are they suitable for at all? This paper is aimed at calling attention to a relationship that still seems to be strong between the neoclassical founding masters and modern business-cycle theorists. Achieving this purpose provides an answer to this question.

Notes

[1] As for the interpretation of mainstream economics, it is of crucial importance to analyse how some concepts such as the homo oeconomicus can refer to real entities while no economic men possessing the neoclassical characteristics are in existence actually.

[2] Several items in the history of economics underline the fact that both neoclassical economics and mainstream economics rooted in that are considerably heterogeneous and today’s main stream has reached far from the original neoclassical fundaments. At the same time, the norm of the relationship to reality has not changed. It is exactly the thing that can serve as a single line for the 150-year-long history of mainstream economics.

[3] In this regard, the debate between Lucas and Rees is particularly interesting. At a point, the debate turned out to be unfruitful, which was an additional item to the factors urging the main stream to withdraw into their ivory tower. Lucas and Rapping’s hypothesis according to which a voluntary component was an effective constituent in the unemployment under the Great Depression was carelessly confused with the utterance never stated that unemployment is voluntary.

[4] Weeks [1989] is perhaps the best example for how demanding a rivalling theoretical approach stops one even from considering the relevance of the neoclassical main stream. John Weeks passes a sentence upon neoclassical economics not even mentioning the big questions of neoclassical epistemology and completely neglecting the results of 19–20th century philosophy of science (especially the Vienna Circle). It is much more troublesome that he overlooks all the methodological aspects and consequences of the neoclassical, monetarist and new classical texts, even if Lucas dug into meta-theoretical reflections as for the problem of relevance deeper than anyone else did before. Colander [2009]: 8 gives judgement against the main stream along the same strategy. Everybody is free to decide whether neglecting an aspect, which is of primary importance as for the critique, undermines the critique itself.

[5] Without any attempt to provide even a superficial methodological critique of institutional economics, it is worthwhile to suggest that Weber [1949]: 93–94 found it troublesome to squeeze infinitely complex reality into ideal-types, which cannot be regarded as comparison but direct description.

References

COLANDER, D. [2009a]: How Economists Got It Wrong: A Nuanced Account. Middlebury College, Middlebury.

CONTESSA, G. [2007]: Scientific Representation, Interpretation, and Surrogative Reasoning. Philosophy of Science, 74. 48–68.

KORNAI, J. [1971]: Anti-equilibrium. North-Holland, London.

LAUDAN, L. [1977]: Progress and Its Problems—Toward a Theory of Scientific Growth. University of California Press, Los Angeles.

MÄKI, U. [1994]: Reorienting the Assumptions Issue. Megjelent: Backhouse, R. (szerk.): New Directions in Economic Methodology. Routledge, London.

PUTNAM, H. [1975]: What is “Realism”? Proceedings of the Aristotelian Society, 76. 177–194.

WEBER, M. [1949]: The Methodology of Social Sciences. The Free Press, Glencoe.

WEEKS, J [1989]: A critique of neoclassical macroeconomics. Macmillan, London

WEINBERG, S. [2015]: To Explain the World. Harper Collins, New York.

WEINTRAUB, E.R. [1989]: Methodology Doesn’t Matter, but the History of Thought Might. The Scandinavian Journal of Economics, 91. 477–493.

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New Books in Economics (Jan. 2017)

Among the books in economics published very recently one deserves further attention.This is Prof. John Heim’s Crowding Out Fiscal Stimulus (Springer).

Crowding out refers to the circumstance when demand-enhancing efforts of expansionary budgetary policy crowd out private investments by increasing the rates of interest. With a given cost structure and a level of expected sales revenues, an increase in the rates of interest on credits naturally makes some investment programs unprofitable. This is the brief summary of a well-known macro-economic phenomenon.

In this book Heim using modern econometric methods analyses if US government stimuli over the last fifty years worked at all. His answer is negative. The key could be found in the well-known Crowding Out Effects. No matter how hard a government tries to start the engine of his economy through tax cuts and spending booms, these actions only tend to crowd out as many private investment activities as the government itself intended to initiate.

Crowding out has always been of central importance in the hand of neaclassicals when arguing against Keynesian macro-policies. This book can shed light on the core of this debate on the basis of numerical results.

How to Be a Super Researcher?

I came across this tiny booklet at Duke’s Rubenstein Library a couple of month ago. Then I happened to completely forget about it, but today… This was the second time I found it. Duke librarian Ms. Kelly Wooten took the trouble to make up this compilation of pieces of practical  advice. Since the booklet is both funny and useful it is worth quoting in full length. Here it is! Study and be a super researcher.

Lucas on Method

Mainstream economics more or less has always been methodology as well. It is not typical of any other school of the economic thought (as far as the main stream can be regarded as a homogenous set of thinkers at all) that theorizers have laid down strict methodological rules in order to complement their economic theorems and to help the community to achieve correct interpretations. It is not an overstatement to say that the history of mainstream economics is the history of methodology as well.

Interpreting the methodology of the main stream as a battle of realism and instrumentalism is a popular trend in contemporary philosophy of economics. In the last few decades, there have been some significant changes in this narrative as a direct consequence of some recent developments occurred in general philosophy of science. While the F-twist was traditionally interpreted as a consummation of instrumentalism, reflecting Ian Hacking’s Experimentation and Scientific Realism or Nancy Cartwright’s How the Laws of Physics Lie today modern macroeconomics is described as a mixture of realism and instrumentalism. A result of these efforts is Uskali Mäki’s realist Friedman-interpretation. However, according to other commentaries on the history of science (e.g. Ernan McMullin’s The Goals of Natural Science or Steven Weinberg’s To Explain the World) that regard science as a basically realist effort instrumentalist deviations emerging from time to time can be accepted as temporary compromises at best. This interpretation can help us a great deal to understand the case of the Klein–Goldberger-model for example, since here due to the exaggerated emphasis on empirical performance a model built up along realist purposes turned into being of instrumentalist character.

So it stands to reason that both realist and instrumentalist elements can be found in the methodology of mainstream economics. Mainstream economics is really a special mixture of realism and instrumentalism. However, one is not bound to regard mainstream economics and its subset, contemporary macroeconomics analysed in this lecture, as something that has contained realism and instrumentalism at quite a stabile ratio. Following this line of reasoning, we can get to a narrative that preserves the encounter between realism and instrumentalism well-known from the history of physics and that, however, does not force us to seek realist or instrumentalist efforts even where there have been no such endeavours. As Gabriele Contessa puts it in his Representation, Interpretation, and Surrogative Reasoning, models highlight certain aspects of the surrounding world, but this epistemological purpose does not involve either an inherently realist or instrumentalist stance. Moreover, Michel DeVroey in his A History of Macroeconomics from Keynes to Lucas and beyond unambiguously interprets the emergence of RBC-model as a victory of instrumentalism. This break can easily be conceived as a victory over realism, similarly to the victory of Niels Bohr’s instrumentalism over Einstein’s realism (c.f. Popper’s Three Views Concerning Human Knowledge).

In this analysis, with the aim of clarification, I give some hints on the role Lucas played in this long process. New classical macroeconomics led by Lucas is introduced as a consummation of economic realism and, as a consequence, the culmination of contemporary realist macroeconomics. Abundantly citing from the Lucas fragments that have remained mainly undiscovered by researches in methodology I argue for Lucas’ being realist through the methodological guidelines he laid down and followed. In his methodological papers, the explicit desire to understand socio-economic reality occurs from time to time, but this ambition of his could hardly be reconciled with the mere empirical focus of instrumentalism. I pay special attention to the role Lucas intended for empirical performance in judging his own models, since this is the aspect that is traditionally suggested as an argument for his instrumentalism. However, Lucas maintained a subtle balance according to which he really took notice of empirical performance, however, he has never abandoned his realist ambitions in favour of better econometric results. On this showing, RBC-theory with its models roughly fine-tuned in a Weinbergien sense is built up along a radically different set of ideas, and a portray of a realist Lucas will show up against this high-contrast background.

“Reassessing Contemporary Macroeconomics…” in the Top 10 Papers at SSRN

Social Science Research Network (SSRN) announces the Top 10 papers for its eJournals on a regular basis. I am very proud to say that my Duke HOPE Working PaperReassessing Contemporary Macroeconomics on Methodological Grounds” is in the recent Top 10 papers of the History of Economics eJournal for all papers first announced in the last 60 days (1 Nov 2016 through 31 Dec 2016). What an amazing start of the new year!

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