The Realism-Paper is Getting Read

Wow, some days after its publication my very recent realism-paper has been getting read. I hope it will find its way into the methodological corpus.

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Realism in Economics: The New Classical Case


For the last few decades, considerable attention has been paid to the methodology of mainstream economics. It is not mere chance that economics is surrounded by methodological debates. If its relevance is at stake, this can be either refuted or proven most effi ciently at a methodological level. Arguments for and against mainstream economics underline the methodological homogeneity of mainstream economics, while serious, though almost neglected, arguments can be found for a view according to which the long history of mainstream economics can be described as a sequence of methodological breaks. I argue, fi rstly, for a sharp demarcation by new classical macroeconomics from the Friedmanian instrumentalism and, secondly, for the realism of new classicals. I strive to identify the epistemological principles underlying Lucas’ models and to highlight the signs of that demarcation as well. I concentrate on the techniques by which new classicals could set their models into an indirect relationship with reality. It is also highlighted that the common terminology, according to which the assumptions of abstract economic models are uniformly regarded as “unrealistic”, actually refers to two different techniques. From these approaches, there is only one which can be justifi ably labelled as realist.

Keywords: new classical macroeconomics, unrealistic assumptions, instrumentalism, realism, empirical observations

JEL classification indices: B13, B22, B23, B41

The full text of the paper is available here.

 

 

How Can Methodology Improve Our Interpretation of Modern Business-Cycle Theory?

The ontological status of the models of the business cycles is widely debated. The fundamental question regards whether these models can give approximately true descriptions of the causal structures underlying the relevant sets of socio-economic phenomena—or they are useful instruments only capable of generating predictions with considerable empirical performance. This is the conflict that underlies the debate between economic realism and instrumentalism. Although Uskali Mäki provided efficient arguments for the realism of economics, according to the currently standard interpretation Friedman put economics on an instrumentalist track. Moreover, both Lucas’ and the succeeding RBC-theory are conceived as further steps along this line. This is a rather worrying interpretation that can deprive economics of the possibility of looking for the causes of macro-social phenomena (i.e. the possibility of understanding in a Weberian sense). This interpretation may delimit even the scope of economic policy applications.

Kevin D. Hoover made efforts to argue for Friedman’s realism along a more modest but tenable line of reasoning. Hoover highlighted Friedman’s causal realist achievements. For Hoover, Friedman set up instrumentalist agent-level assumptions in order that causal realism could be achieved at a macro-level. Due to his interpretation, the earlier debate between full-blown realism and instrumentalism could be set aside. According to the most careful interpretation currently available causal realism can be achieved by instrumentalist agent-level assumptions. However, our knowledge of a causal realism built on agent-level instrumentalism in economics is rather limited.

My ultimate purpose is to consider the plausibility of the mix mentioned above, to extend that to be a sensitive analytical framework in which a methodologically-oriented history of modern business-cycle theory can be outlined. The suggested framework is Epistemic Structural Realism (ESR) worked out by John Worrall and others. ESR describes the relations connecting entities (here: economic agents) so that the first-order properties of agents can remain hidden. Here almost everything is structure and structure is interpreted at the level of the structure itself. As causal mechanisms can work only along the relations that connect entities, ESR is the general philosophical framework in which it can be analysed whether structural/causal realism underpinned by entity-level instrumentalism is a viable option both as an interpretation for the history of economics and as a research strategy.

According to my hypothesis, the answer is negative. Chakravartty and others called attention to the fact that knowledge of a structure involves knowledge of the entities in the object-based ontology that characterizes the micro-foundations project of modern macroeconomics. It means that providing a realistic (verisimilar) description of a structure is not possible on the basis of assumptions that define the related entities in an instrumentalist manner. A given real causal structure is not compatible with an entity-ontology chosen arbitrarily. In this approach the “microfoundations project” will obtain a new meaning, since the relationship between the microfoundations and the macro-level knowledge can be clarified. Microfoundations are the instruments of connecting with reality. On the basis of the critically reconsidered ESR-based reconstruction we can judge which chapters of the theoretical evolution are anchored to socio-economic reality. Moreover, the methodological breaks that make the linear evolution a dynamic relationship with reality can also be revealed. Thanks to this analysis, our knowledge of the way some assumptions are set up will considerably improve. In the methodological corpus these assumptions are uniformly labelled as “unrealistic”. Whilst such assumptions have only limited empirical content, they can be created by different cognitive techniques. One of them is the “cooked-up” (instrumentalist) technique advocated by Friedman. This procedure is justified only by the empirical performance of the models, whilst the act of understanding is not supported here. In the other case, however, by performing careful abstraction we can preserve the relevant features (i.e. the structural properties) of the agents in order to analyse their macroeconomic/macro-level consequences. By performing this methodological analysis, I can describe the evolution that has modified the relevance of theories with respect to understanding socio-economic reality. Methodological considerations turn the story into a dynamic evolution interspersed with methodological breaks.

Milton Friedman

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Robert E. Lucas Jr.

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Finn E. Kydland

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Edward C. Prescott

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Charles Plosser

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A Methdologically Underpinned Histotry of Economics

Having triggered a lot of debates, the theory of business cycles is the most oft-cited branch of modern macroeconomics. Since the middle of the 20th century (i.e. Milton Friedman’s monetarism showed up) extremely important research activity has been initiated at some high-flying universities in the U.S. Due to these efforts our understanding of the causes of the macro-economic fluctuations that come upon capitalist societies time and again has considerably improved. What is more, by now we not only have known a great deal about the nature of business cycles but also about the possible ways of treatment. The high importance of these theories is clearly indicated by the large number of Nobel prizes awarded for the related achievements.

What today is regarded as the modern theory of the business cycle ought not to be taken as a monolith, but rather as a sophisticated system consisting of the succeeding stages of a multidecade-long evolution. This progress comprehends important changes even in terms of both the fundamental questions and the answers provided. Whilst Friedman and Lucas were interested in the cyclical effects of changes in the money supply, theorists in the RBC-movement studied the effects of some real variables that had previously been sorted to the territory of growth theories. This change of interest was facilitated by a neutral monetary policy in the U.S. against the background of which studying real business cycles was not interfered with some erratic changes in monetary policy. As far as the assumptions of the theories are considered (e.g. adaptive expectations vs. rational expectations; or money-economy vs. barter economy), they show an even higher degree of diversity.

For the time being multiple disciplines regard the modern theory of the business cycles as belonging to their fields of interest. Historians of the economic thought are engaged in the reconstruction of the theoretical content and oftentimes in the evaluation of the economic policy consequences. Here the analysis of the methodological background is only of marginal importance. Studies that reckon methodological analysis as a crucial constituent in the theoretical reconstruction has appeared only very recently. These efforts ought to be regarded as pathbreaking initiations (for the most important item, see: De Vroey, M. [2016]: A History of Macroeconomics from Keynes to Lucas and Beyond. Cambridge: Cambridge University Press). By contrast, modern philosophy of economics has put the study of modern macroeconomics under the general interest in economic methodology. It means that the methodological peculiarities specific to modern business-cycle theories cannot receive special attention. The discourse here is about the methodology of “economics” as such rather than about the methodology of one of its element worth of interest. One of the few exceptions picked as its subject the methodological recommendations of an emblematic chapter of business-cycle theory (Mäki, Uskali [2009]: The Methodology of Positive Economics. Cambridge: Cambridge University Press). It is still a question whether these ideas can be extended to the post-Friedmanian achievements.

According to the present stage of our discipline, these two approaches (the history of the economic thought and the methodology of economics) are two distinct directions. Considering methodological aspects in the history of economics is further hindered by the fact that methodology as a subdiscipline started out as being treated by the historiography of economics as troublesome and void (Weintraub, E. Roy [1989]: Methodology Doesn’t Matter, But the History of Thought Might, Scandinavian Journal of Economics, 91(2): 477-493). One of the most worrying consequences of this situation is the fact that new insights occurred in methodology cannot or can only slowly and superficially build into the historiographical narratives. A methodologically oriented history of modern business-cycle theories can fill this lacuna. The mere existence of this lacuna refers to the problem that the positive content of a theory can hardly be separated from the methodological foundations on which it was created. What we conceive of the possibility of accumulating knowledge of the surrounding reality; of the roles our assumptions underlying our models play; or of the relationship between our theory and the rival approaches: these considerations require solid methodological footing that may change how we interpret the very theoretical content. It is enough to refer to the enduring debates around the use of some fundamental concepts such as voluntary unemployment. If one does not pay attention to the fact that modern business-cycle theories made enquiries into the nature of the voluntary component of unemployment, she will think that these theories regarded unemployment as purely voluntary. However, recognizing this peculiarity requires us to clarify the relation of models to reality—which amounts to a methodological analysis.

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A Methodologist on a Summer Holiday

It is summertime, so I try to spend my days in a fine mix of working and being on holiday. As sport meaning running has been an essential part of my life for decades, it is quite easy for me to take some time off work on a daily basis. I live in a wonderful area, with mountains rising in the distance… and pretty near as well. Actually, it takes me not more than 10 minutes to get to the hills. On foot! So this is a nice place to live. Cycling, my all-time love, is back again, so after two years of sole running, I am becoming an ironman again. I try to spend as much time on my bike as possible, making even 5-6 hour-long circles at a considerable pace. Training is training and I love pushing myself. On my rest days I can devote myself to work and preparing for the INEM 2017 conference. The outline of my lecture is ready, it is about an interpretation of F53 and the Lucasian island models on an Epistemic Structural Realist basis.

Occasionally I head to the hills, just for the sake of an easy walk and recovery. A severe natural disaster hit the mountains in April. Torrential rain, extremely strong wind and cold. Due to the cold weather the rain got frozen on the leaves very quickly, so the trees needed to bear heavy weights…. under such circumstances it was really easy for the strong wind to uproot an enormous number of trees. Approximately 5-10% of the trees are reported to have been hit by the storm. Small mountain villages were cut off and it took the rescue teams days to get there, to connect these small communities back to life. Above the altitude of 500 m, spring needed to come back again, since due to the late frost all the leaves were frozen… brown and golden leaves were falling. As if Autumn had come back again. As the roads and hiking routes were cloased for weeks, I could re-enter my mountains just now. Here are some pictures what I have found there. Sometimes it was really sad to see such ruined landscapes…