Realism vs. instrumentalism along the Friedman-Lucas-RBC line

Providing methodological analyses is a possible (and required) contribution to the historiography of modern business-cycle theories. As far as the Friedman-Lucas-RBC line of evolution is considered, it seems to be clear that as we approach the end of this story there is instrumentalism and nothing else in the commentaries. Today the only question is Friedman’s instrumentalism: there have been some intellectual efforts devoted to arguing for Friedman’s realism. Uskali Mäki’s ‘Unrealistic assumptions and unnecessary confusions‘ and Kevin Hoover’s ‘Milton Friedman’s stance. The methodology of causal realism‘ published in ‘The methodology of positive economics‘ are perhaps the most powerful initiations towards this direction. However, it is still the instrumentalist approach that seems to be the standard interpretation (see Paul Hoyningen-Huene’s very recent draft). Whether one focuses only on F53 or scrutinizes the text within Friedman oeuvre makes the difference. In the former case, Friedman can more easily be regarded as instrumentalist, whilst in the latter case there is a tendency for Friedman to be considered as a realist. This generalization, however, is problematic for it is not that difficult for us to find some works of Friedman in which it is instrumentalism that provides the principle of theorizing. Elsewhere I pointed out that Friedman’s Phillips curves are the manifestations of pure instrumentalism. In these models all the assumptions are designed in order that Friedman could achieve the desired theoretical outcomes.

As for Lucas, his instrumentalism seems to be unquestionable. As far as I can consider, the arguments for his instrumentalism are built upon some statements made by Lucas. Here are some examples:

Insistence on the ‘realism’ of an economic model subverts its potential usefulness in thinking about reality. […] On this general view of the nature of economic theory then a ‘theory’ is not a collection of assertions about the behavior of the actual economy but rather an explicit set of instructions for building a parallel or analogue system – a mechanical, imitation economy. A ‘good’ model, from this point of view, will not be exactly more ‘real’ than a poor one, but will provide better imitations. (Lucas 1980: Methods and problems in business cycle theory)


One can ask, for example, whether expectations are rational in the Klein-Goldberger model of the United States economy; one cannot ask whether people in the United States have rational expectations. (the Lucas papers, Box 13, Robert Barro folder)

The message common in these quotations is simple: features of the agents or environment designed in the models should not be looked for in reality. These are features of the model but not that of reality.

When Uskali Mäki started arguing for the realism in economics, he placed his arguments on the fact that it is possible for us to seize some aspects of reality via highly unrealistic models (Realistic realism about unrealistic models). Isolation leads to models which are not like reality, however, in some important aspects they can still bear resemblance to the depicted part of reality. To be perfectly honest, I am a bit confused when reading some analyses about Friedman, Lucas and modern macro. The realist interpretation of F53 seems to be rather weird. When Friedman is talking about the leaves of a tree modelled as if they were rational utility-maximizers, it is very difficult for us to argue for his realism, in spite of the abundance of technical details in his F53 that can easily be reconciled with a realist stance. But the real question is how far we can go along the argumantation for the realism of unrealistic models…? What does Lucas’ instrumentalism stand in? I think emphasizing his insistance on unrealisticness will not do in this respect – or if it will, then Friedman must be an instrumentalist too. All in all, focusing on the unrealistic features of economic models is not decisive in terms of the realist-instrumentalist debate. As Elay Shech emphasizes it in his ‘Scientific Misrepresentation and Guides to Ontology: The Need for Representational Code and Contents‘, misrepresentation is an endeavour when the modeller tries to distort some elements of reality whilst insisting on conveying some reliable information about the modelled system. Shech’s example is the political caricature.

So, I think, it is not enough to underline the distinction between models and reality. Both realist and instrumentalist models in the highly abstract neoclassical mainstream are not like reality. The decisive features of models must be found somewhere else. Now I am inclined to think that it is the purposes of the modellers that we need to study first and foremost. We cannot reach decisions about the realism and instrumentalism of models on the sole basis of the models themselves. Whilst they are important in this respect, we need to consider the modellrs’ intentions.


Michel De Vroey at Budapest Business School – A short summary

On 5-6th October Michel De Vroey visited Budapest Business School to give two lectures on the evolution of modern macroeconomics. Michel is a well-known historian of modern macroeconomics with a special interest in the theories of the business cycle; professor emeritus of the Catholic University of Leuven and a visiting scholar at a lot of prominent universities including the Sorbonne of Paris and Duke University of Durham, NC. He is the author of some widely read and acknowledged books written both in English and in French and a series of important papers.

Prof. De Vroey has earned the admiration of the professionals in the field of the history of economics by his enormous knowledge, by his outstanding ability to reorganize some well-known facts in strikingly new ways and by his courage to trigger new debates in which we can reopen some old questions in order to move towards a new consensus. His thought-provoking ideas pave the way for a more in-depth understanding of the history of our discipline. He is one of the few who have already realized that the history of economics can hardly be discussed without exploring the methodology of economics. In his recent book, The history of macroeconomics from Keynes to Lucas and beyond, the history of modern macro becomes an exciting story of revolutions along the way to a unified big picture of seemingly conflicting ideas. As I had the privilige of being his host during his staying, we could have discussions about a lot of exciting topics and I found myself in the delightful position of getting to know him personally while sipping coffee. He is a great arguer with firm and solid views on his field of interest… an experienced researcher with thorough insights on the socialisation conditions of theoretical economics and the history of economics as a discipline… and a powerful master of making science.

His Budapest lectures were grandiose assessments of the methodological and theoretical transitions of modern business-cycle theories during the 20th century. In his ‘Mainstream economics: Its rise and transformation’ speech (based on his recent working paper The rise of a mainstream in economics co-authored by Luca Pensieroso) Prof. De Vroey discussed and evaluated the process through which mainstream economics has emerged as a methodological standard. This assessment seems to be a novel approach to the mainstream–non-mainstream relationship, so the Hungarian audience deeply interested in institutional economics found the lecture highly stimulating.

Michel’s second lecture was focussed on his recent book mentioned above. Here Michel discussed the Keynes-Lucas and the Lucas-RBC transitions. The audience were guided through the dynamic evolution of modern macro starting with Lucas’ early years (an applied economist) and the Lucas-Rapping papers, through the emergence of neo-Walrasian macroeconomics and the new standards for a ‘good’ theoretical research to the outburst of Kydland and Prescott. The lecture was closed by an intense debate. I hope Hungarian professionals found the lectures as thought-provoking as I did.



Editorial: The methodology of contemporary macroeconomics

The Editorial Board of Economics and Business Review intended to devote this special issue to the emerging field of the philosophy of economics. This subdiscipline of our profession is rather in its youth, however, showing the signs of maturity. Philosophy or methodology of economics has several international organizations, leading journals and even book series—all of which serve only one purpose: to interlink those researchers who make considerable efforts to approach our traditional problems from a different point of view. As Polish researchers are particularly active in this field, the pleasure was mine when the EBR asked me to join this interesting project as a guest editor. I am really indebted to the Editorial Board for initiating me in the tough process of setting up this issue from the first occurrence of the idea. Thanks to our joint efforts, we could team up prominent and illustrious authors to share their thoughts regarding the sophisticated question of the methodology of contemporary macroeconomics. It is an additional source of pleasure for me that we really have an international cooperation of authors from the United Kingdom through the Netherlands and Poland to Hungary, where even the ages of our contributors show a great variety. It was an explicit editorial policy of ours to encourage the dialogue between researchers of different ages and countries. By having rejoinders to all our papers, we have both interesting pairs of senior and early-stage researchers and the hope of creating the possibility of new and burgeoning research links.

Why macro, you may ask. We are living in an age where the former myth of stable macroeconomies is dead once and for all. After severe world economic turbulences, macroeconomics faced serious challenges. Even though it is exactly such recurrent episodes of falls and rises in general macroeconomic performance that gave birth macroeconomics some decades ago, since 2008 there have been several voices claiming that modern macroeconomics, be it business-cycle theory or growth theory, has lost its relevance as to practical economic policy. Understanding business cycles has been a central topic in modern macroeconomics for decades. Business cycles are complex phenomena, so the underlying causal structure is difficult to disentangle. Different schools of the economic thought have attributed different causes to the same event. Neoclassical orthodoxy tries to address the problem in a choice-theoretic framework, while heterodox currents challenge this approach by emphasizing a multitude of possible social, institutional or even political causes. Due to these efforts, 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 indicated by the number of Nobel prizes awarded for the related achievements.

However, it is easy to realise that the difference between the approaches stems from the difference between the methodologies along which the traditions try to address their chosen problems. Locking away in their own methodologies has triggered a demarcation between the different schools. This process of sharpening demarcation has led to an unfavourable situation in which different schools cannot even communicate with one another, despite all of them contribute to the highly complex endeavour of understanding capitalist economies. This is the reason why I think that the understanding of methodologies must be the first step to the understanding and the reconciliation of the different thoughts in economics. By this special issue we tried to create a new platform for sharing ideas in order that at least our contributors could start new dialogues.

As guest editor I have the privilege of giving a short introduction of the six papers and rejoinders included in this special issue. There occurred some topics around which the contributions of our authors can be easily grouped. Such a topic was János Kornai’s oeuvre. Janos Kornai is still the most influential economist in Central Europe who devoted several magnum opuses to the understanding of the command economy. Thanks to him, we know a great deal about this episode of economic history today. However, his works are not only memories of the past. It is sad but true that Central European economies inherited several problems of the preceding socialist era. Our current macro-social problems can easily be traced back to the crisis phenomena of socialism. Corruption, the over-emphasized role of the state, poverty, wage tensions or inadequate education: all these challenges are rooted in the past and for the ultimate sources of our present-day problems stem from the past, we also need to look back on the past when it comes to formulizing our solutions. But for Kornai’s intellectual efforts, I am sure we would be hopeless at even realizing the problems, let alone seeking the answers. As Janos Kornai was awarded a Doctor Honoris Causa from Poznań University of Economics already in 1978, it was an explicit editorial policy to place emphasis on the assessment of his intellectual heritage and to render a tribute on occasion of his 90th birthday.

Accordingly, László Csaba reviewed Kornai’s oeuvre from a unique point of view. For Kornai’s critique of the neoclassical orthodoxy is still relevant, László Csaba gave a detailed analysis of the relationship between formalized mainstream economics and Kornai’s comparative economics. This is the line along which Kornai’s lifework unfolds. In contrast, Prof. Peter Mihályi focused on one item of Kornai’s lifework. In 1972 Kornai published his most debated book under the title Anti-equilibrium which was supposed to be a grandiose mainstream-critique. Even though as a critique this work of Kornai could only moderately succeed overseas, in Europe and especially in Central Europe Anti-equilibrium triggered a completely new line of thinking. As a result a new standard emerged to address the relationship of macro-models to reality. A more direct relationship has become established recently which has led to the need of a dedicated European Economics. However, oftentimes Anti-equilibrium is still regarded as Kornai’s most influential book, having opened the avenue for new research initiatives. In this vein Peter Mihályi devoted his paper to a simple micro-level observation provoked by the Anti-equilibrium according to which there are some common symptoms both in command and competitive economies. Peter Mihályi’s paper proved to be a genuine example as to how to interconnect micro- and macro-levels outside the mainstream camp.

Following the problems of the micro-foundations project of modern macroeconomics, Michael Joffe turned his attention to a micro-founded theory of economic growth. As is well-known, the microfoundations make up one of the most problematic areas of modern macroeconomics. Not even the mathematical tractability of the project is often-questioned, but also the very idea of placing macroeconomics on a microeconomic footing is widely debated.  Michael Joffe takes a sceptical attitude towards mainstream growth theories for these models in his view fail to give account of even the main features of economic growth. His answer is to suggest a more comprehensive approach to include more factors than the commonly known growth theories. Michael Joffe’s paper proved to be a thought-provoking initiation in addressing a well-known problem from an ignored point of view.

It is time to say something positive about neoclassical orthodoxy and modern macroeconomics as such. It is Pawel Kawalec who undertakes this task which seems considerably difficult to complete in a day and age when counter-mainstream currents are growing in both strength and intensity. Very recently Paul Romer made an effective attack against DSGE-models on methodological grounds. Pawel Kawalec made efforts to dig deep in order to take up the quarrel of DSGE-models at the root of the problem. By so doing Kawalec turns to the history of economics, so his paper is part of a growing number of treatises that take the history of economics and economic methodology as two interconnected and closely related subdisciplines. Judged by scientific representation standards DSGE-models seem to meet the common epistemic standards of scientific research.

Jerzy Osiatyński, a former student of legendary Polish economist Michał Kalecki, outlines ways as to how Kalecki contributed to the evolution of Keynesianism in the decades after the publication of Keynes’ General theory. As Keynesianism, especially the Keynesian approach to large-scale macroeconomic fluctuations, has become an idea different from the mainstream business-cycle approach, these insights invite the reader to consider theoretical economics as a complex discipline. One could hardly find a better account of how different approaches complement each other in economics.

At the end of this editorial note, it is time for me to call upon our contributors to speak for themselves. I hope, this special issue will turn out to be a trigger for new lines of discussion and for a partnership of our authors.

Peter Galbács

Guest editor

Economics and Business Review 3(3) is online now.


Jerzy Osiatyński: Kalecki – a pioneer of modern macroeconomics;

László Csaba: Comparative economics and the mainstream;

Michael Joffe: Evidence and the micro-foundations of economic growth;

Paweł Kawalec: Perspectival representation in DSGE models;

Peter Mihályi: The motivation of business leaders in socialist and market-based systems (An essay to celebrate the 90th birthday of János Kornai);

Peter Galbács: Methodology…?! Why? Some methodological aspects of the controversy between mainstream economics and institutionalism;

Izabela Bludnik: Rejoinder to Kalecki – a pioneer of modern macroeconomics by Jerzy Osiatyński;

Melissa Vergara-Fernández: Rejoinder to Comparative economics and the mainstream by László Csaba;

Emma Hamilton: Rejoinder to Evidence and the micro-foundations of economic growth by Michael Joffe;

Marcin Kolasa: Rejoinder to Perspectival representation in DSGE models by Paweł Kawalec;

Mariusz Maziarz: Rejoinder to The motivation of business leaders in socialist and marketbased systems by Péter Mihályi;

Beata Stępień: Rejoinder to Methodology…?! Why? Some methodological aspects of the controversy between mainstream economics and institutionalism by Peter Galbács;

Zsófia Török Martina: Book review: Anthony Elson, The global financial crisis in retrospect;

Máté Szalai: B. Hámori, M. Rosta, (Eds.), 2016. Constraints and driving forces in economic systems – studies in honour of János Kornai.


Michel De Vroey at Budapest Business School: detailed program

On 5-6th October 2017 Prof. De Vroey gives two lectures on the general evolution of modern macroeconomics.

In cooperation with the Institute of Economics and Methodology of Budapest Business School we invite you and your colleagues to Michel De Vroey’s lectures as the opening event of the new BGE Workshop series ‘Contemporary Thinkers in Economics’.
MICHEL DE VROEY, a celebrated and emblematic figure of the historiography of modern macroeconomics, is a professor emeritus at the Université catholique de Louvain and a visiting scholar at Sorbonne University (Paris) and Duke University (Durham, NC). Prof. De Vroey’s research area covers the history of economic analysis and the 20th century theories of the business cycle, in particular the history of macroeconomics. His recent book ‘A History of Macroeconomics from Keynes to Lucas and Beyond’ (Cambridge University Press, 2016) has become a widely acknowledged account of the history of modern business-cycle theory.


Prof. Peter Mihályi is a leading figure of the Hungarian academic life in economics and a researcher of the heterodox critique against modern macroeconomics. Currently Prof. Mihályi is the head of the Department of Macroeconomics at Corvinus University of Budapest and a visiting scholar at Central European University.



5 October, 17:00pm

Mainstream economics. Its rise and transformation
6 October 10:00am

The Lucas/Kydland and Prescott transformation of macroeconomics: An assessment
Location: Lotz-room, Budapest Business School, H-1055 Budapest, 29-31 Markó Str.


Lars Syll’s ‘elegant’ fantasies

Yesterday I came across one of the lates blog posts of well-known mainstream critic Lars Syll. Prof. Syll is a very interesting figure of modern economic thinking, even if I cannot appreciate his rather passive and destructive critique. I think I can understand his most fundamental claim: neoclassical orthodoxy is irrelevant to real-world economic problems, thus we should drop the whole consruct as completely useless. The reason why I find his critique troublesome and destructive is that he discredits something without suggesting a more approriate framework. It is okay that neoclassical economics was aimed at imitating Newtonian physics. It is okay that Newtonian physics – similarly to neoclassical economics – as a direct description of reality is erroneous. But to say that neoclassical economics and Newtonian physics are failures is something different. Admittedly, the connection between these theories and reality is complex and subtle and one needs to perform a careful analysis in order to assess this relationship. This is the analysis Prof. Syll refuses to carry out. Instead, he draws his conclusions without building a solid footing. Why is economics a failure in understanding reality? Prof. Syll fails to underpin even his own ideas. Philosophy of science and philosophy of physics have been analysing this relationship for centuries. Modern methodology of economics in the realist tradition is in a favourable position for philosophers have a plethora of arguments for the relevance of abstract mathematical sciences such as physics or economics. Any counterarguments that miss considering these powerful philosophical foundations are troublesome . Prof. Syll’s arguments have only one basis: his insistance on the claim that mainstream economics describes nothing. This is almost nothing.

Now let me turn my attention to his current topic, the DSM-theorem.

DSM-theorem (referred to as SMD-theory sometimes) can be regarded as really disturbing, but it rather concentrates on the contradicting relationship between micro- and macroeconomics and not on the (micro-level) postulates of neoclassical. However, it would be a huge mistake to play down the significance of the DSM-theorem (named after the elaborators, Gérard Debreu, Rolf Ricardo Mantel, and Hugo Freund Sonnenschein), since, eventually, it questions the justification of the microfoundations of macroeconomics. The fundamental problem was posed by the relationship between individual and aggregate excess demand functions. As aggregate-level excess demand functions are important for macroeconomics, huge efforts were made to ground these functions at a micro-level. The seminal papers on this topic (Sonnenschein 1972, 1973; Mantel 1973; Debreu 1974) called attention to the fact that however precise we are in specifying the micro-level characteristics, the excess demand function for an economy is not restricted at all by these features. A consequence of the mathematical demonstration of the DSM-theorem was that the general equilibrium of a multi-market macro-system is not necessarily unique (the lack of uniqueness), i.e., we can find multiple price vectors that guarantee equilibrium and the emerging equilibrium states may be unstable in dynamic terms (Giraud 2009). It seems as if DSM-theorem could have dealt mainstream economic theory a final and destroying blow. The relation of mainstream economics to DSM-theorem is portrayed well by the Handbook of Monetary Economics (B. Friedman and Hahn 1990), in which the achievements underlying the theorem were not mentioned even in the References. Mainstream economics disregarded DSM-theorem the same as the inconsistency from the quantity theory and Walras’ law. Frank Hahn (1975) was one of the few who regarded DSM-theorem as the most dangerous critique of mainstream economics. It is understandable somehow, if we consider that the object of the critique, viz. mainstream economics, is an economic theory—while DSM-theorem (however impressive it is) is a mathematical demonstration. Even if we admit that the mathematical grounds of mainstream economic theory are wrong in some respects, the theory was still successful in resolving a lot of economic problems—while DSM-theorem could hardly support us in such a context. The prevailing paradigm is not required to be perfect at all but only to give solutions to several scientific problems. After all, mainstream theory performed well in these terms, and it is also sure that DSM-theorem is never going to help us (say) establish the theoretical grounds for the best operative monetary policy or finding the ultimate causes of cyclical fluctuations to found countercyclical economic policies.


Debreu G (1974) Excess demand functions. J Math Econ 1(1):15–21

Friedman BM, Hahn FH (1990) Handbook of monetary economics. North-Holland, Amsterdam

Giraud G (2009) From non-tâtonnement to monetary dynamics within general equilibrium theory. The limit-price exchange process. CNRS–Paris School of Economics, Paris

Hahn F (1975) Revival of political economy–the wrong issues and the wrong argument. Econ Rec 51(135):360–364

Mantel RR (1973) On the characterization of aggregate excess demand. J Econ Theory 7(3):348–353

Sonnenschein H (1972) Market excess demand functions. Econometrica 40(3):549–563

Sonnenschein H (1973) Do Walras’ identity and continuity characterize the class of community excess demand functions. J Econ Theory 6(4):345–354

Gérard Debreu


Hugo Sonnenschein


Rolf Mantel


On a methodologically underpinned history of business-cycle theories

Understanding business cycles has been a central topic in modern macroeconomics for decades. Business cycles are complex phenomena, so it is difficult to disentangle the underlying causal structure. The phenomenon itself is the only clear thing: capitalist economies suffer from recurrent episodes of falls and rises in general macroeconomic performance. Different schools of the economic thought have attributed different causes to the same event. Neoclassical orthodoxy tries to address the problem in a choice-theoretic framework, whilst heterodox currents challenge this approach by emphasizing a multitude of possible social, institutional or even political causes. Due to these efforts, by now we have had several explanations each of which highlights some selected facets of the business cycles. As a result, our understanding of the business cycles is made up of partial truths, and such partial truths oftentimes seem to contradict one another. However, a synthesis is possible, thus partial truths as building blocks can form a coherent big picture. Such a synthesis requires us to understand how selective models connect to reality, that is, how models represent the selected parts of our socio-economic reality. Understanding the way models connect to reality requires a methodological analysis, thus the understanding of the different methodologies must be the first step to the understanding and the reconciliation of the different thoughts in economics.

Today multiple disciplines regard modern business-cycle theories as their centres of interest. First, history of economics reconstructs the theoretical content and evaluates the economic policy consequences. However, the analysis of the methodological background is only of marginal importance here. Studies regarding methodological analysis as a crucial constituent has appeared only very recently. These efforts ought to be regarded as pathbreaking initiations; for the most important item, see (De Vroey, 2016). Blaug (1992) is also one of the exceptions. Second, modern philosophy of economics has put the study of modern business-cycle theories under the general interest in economic methodology. The discourse here addresses the methodology of economics as such rather than the methodologies of individual currents. One of the few exceptions (Mäki, 2009) analysed the methodological recommendations of Friedman’s business-cycle theory. This is the book that opened the avenue for a methodological analysis of modern business-cycle theory. However, it is still a question whether its ideas can be extended to the post-Friedmanian achievements.

Today these two approaches (the history of economics and the methodology of economics) constitute two distinct directions. Considering methodological aspects in the history of economics is further hindered by the fact that initially the historiography of economics treated methodology as troublesome and void (Weintraub, 1989). One of the most worrying consequences of this situation is that new insights occurring in methodology cannot or can only slowly and superficially build into the historiographical narratives. A methodologically underpinned history of modern business-cycle theories can fill this lacuna.

The positive content of a theory is inseparable from its methodological background. What we conceive of the possibility of accumulating knowledge of the surrounding reality; of the roles our assumptions 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. How we know something determines what we can know and whether we know something at all (Epstein, 2015). It is particularly true of modern business-cycle theories. When new classical macroeconomics (Lucas, 1972) assumed voluntary unemployment, it seemed as if Lucas and his followers had cancelled the study of involuntary unemployment from the agenda. By contrast, their purpose was to scrutinize whether the workers’ decision to reject job offers contributes to unemployment dynamics. In other words, whether there is a voluntary component in unemployment. Simply put, their focus was on only one component of unemployment dynamics. Unless we clearly recognize this selective strategy, it would seem as if modern business-cycle theory by assuming voluntary unemployment placed the blame on the workforce for remaining unemployed. However, modern business-cycle theory succeeded in revealing how the real structure of the economy without any inference from the institutional environment can lead to large-scale macroeconomic fluctuations. Methodology is crucial for us even to evaluate the economic policy consequences. If only particular mechanisms are selected from the complex causal structure, these particular approaches, if taken at face value, necessarily contradict one another. A thorough methodological analysis will lead to a consensus in which all the rival approaches can find their adequate scopes.

The way business-cycle models connect to reality is unclear. The fundamental question regards whether these models can give approximately true descriptions of the causal structure—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. Realists make efforts to argue for the truth of models, while for instrumentalists, models are only constructs for predictive purposes. However, an instrumentalist model fails to teach us anything about the underlying causes: this leads to no knowledge in the strict sense. Although Mäki (2009) provided strong arguments for the realism of economics, according to the standard interpretation Friedman put economics on an instrumentalist track. Both Lucas and the succeeding RBC-theory are conceived as further steps along this line, so today modern business-cycle theory is regarded as useless in terms of creating true knowledge of the economy. This is a rather worrying interpretation that can deprive economics of the possibility of understanding the causes of business cycles. This interpretation may delimit even the scope of economic policy applications (Elson, 2017).

Admittedly, the full-blown realism of economics seems untenable for some apparent instrumentalist tendencies in modern times. However, Kevin Hoover (2009) made efforts to argue for Friedman’s realism along a more modest line of reasoning. For Hoover, Friedman set up instrumentalist agent-level assumptions to achieve causal realism at a macro-level. However, our knowledge of a causal realism built on agent-level instrumentalism in economics is rather limited.

The main purpose is to consider the plausibility of this mix and to suggest a framework for a methodological history of modern business-cycle theory. This framework is Epistemic Structural Realism (ESR) suggested by John Worrall (1989). In the general philosophy of science Anjan Chakravartty (2007) and Stathis Psillos (2006) clarified structuralist ideas. ESR describes the relations connecting entities (in economics: agents) so that the structure is described at the level of the structure, whilst ignoring the entity-level properties. As causal mechanisms work 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 for economics.

According to my hypothesis, the answer is negative. Knowledge of the way economic agents connect with their fellows requires knowledge of the properties of the agents. Individuals and their features are prior to the structure, so the structure is derived from the individuals. In economics, the microfoundations carry the macro-level. Providing a realistic description of a structure is impossible through assumptions that abandons the idea of realistic descriptions of individuals. Thus, the proposed project clarifies the relationship between the microfoundations and the macro-level, thus the microfoundations will turn out to be our instruments of connecting with reality. Based on the critically reconsidered ESR, we can judge which chapters of the theoretical evolution are properly anchored to socio-economic reality.

To sum up, the purpose is to analyse how modern theories of the business-cycle have changed in terms of their relation to reality. Through this methodological analysis, I can offer a narrative of the changes in the relevance of theories to understanding socio-economic reality. This narrative can be the first step to a deeper understanding of the relationship of the rival theoretical approaches of the business cycle.


Blaug, M. (1992). The methodology of economics. Cambridge: Cambridge University Press.

Chakravartty, A. (2007). A metaphysics for scientific realism. Knowing the unobservable. Cambridge: Cambridge University Press.

De Vroey, M. (2016). A history of macroeconomics from Keynes to Lucas and beyond. Cambridge: Cambridge University Press.

Elson, A. (2017). The global financial crisis in retrospect. New York: Palgrave Macmillan.

Epstein, B. (2015). The ant trap. Oxford: Oxford University Press.

Hoover, K. (2009). Milton Friedman’s stance. The methodology of causal realism. In U. Mäki (Ed.), The methodology of positive economics (pp. 303-320). Cambridge: Cambridge University Press.

Lucas, R. E. (1972). Expectations and the neutrality of money. Journal of Economic Theory, 4(2), 103-124.

Mäki, U. (Ed.). (2009). The methodology of positive economics. Cambridge: Cambridge University Press.

Mäki, U. (2009). Unrealistic assumptions and unnecessary confusions. Rereading and rewriting F53 as a realist statement. In U. Mäki (Ed.), The methodology of positive economics (pp. 90-116). Cambridge: Cambridge University Press.

Psillos, S. (2006). The structure, the whole structure, and nothing but the structure? Philosophy of Science, 73(5), 560-570.

Weintraub, E. (1989). Methodology doesn’t matter, but the history of thought might. The Scandinavian Journal of Economics, 91(2), 477-493.

Worrall, J. (1989). Structural realism. The best of both worlds? . Dialectica, 43(1-2), 99-124.


INEM 2017 Conference, Day 3

INEM 2017 conference has just ended on a rainy afternoon. I am full of memories and happy to have some new friends. It was another long day actually, so I need to focus on my overall feelings and insights instead of providing a detailed summary of the day. However, there were some very impressive presentations. Just to mention one, Max Düsterhöft and Thomas Schädlich analyse central bank communication in a language philosophical framework. They have some tricky aspects: clarity, for instance, measured in terems of the length of the sentences or grammatical simplicity. The authors digged down even to Wittgenstein’s language philosophy. It was really a thought-provoking presentation and I was so happy to see how thorough these guys are. Or to mention another talk, Caterina Marchionni in her talk outlined a program along which the achievements in economics can be made horizontal instead of following the common vertical pattern. New models in economics and oftentimes in science as such do not overwrite each other making the former constructs inadequate, but address new questions the preceding models did not pose at all. In my context these thoughts are really relevant for they are in support of my ideas about the complementarity of ‘rival’ theories. In Hungary there are intense debates around the relationship between mainstream economics and institutionalism, regarding the former as irrelevant because of its highly abstract nature. In my view the relationship is of complementing nature (each theory explains something), and this is the reason why I was so happy to listen to Caterina’s presentation.

Today I could gather a lot of general insights why methodology of economics is so important. John Davis in his talk devoted to agent-based modelling called attention to a thought of Brian Epstein according to which how we know something determines what we can know and whether we know anything at all. At the bottom line every discipline is methodology. This is a clear message.

During lunch I found myself in the delightful position of having a chat whit Brian Epstein. I know some works of his, moreover, some panelists directly referred to his thoughts during the conference. He is a real gentleman. At lunch suddenly turned to me and triggered a conversation about his ideas and my ideas and took the trouble to clarify his suggestions about modern business cycle theories. His point is very provocative. For him, the problem is not whether some elements of real-world social systems can be ommitted or not. It is widely believed in the physicalist reconstruction of economics that we have some fundamental laws and there are factors, mechanisms and the like in addition that disturb the working of these laws. For clarity, we oftentimes leave these factors out of the picture in order to focus on the consequences of the fundamental laws. Brain takes a sceptical stance. In his opinion, the microfoundations project is erroneous for such factors are also ommitted that make essential or constituent part of the phenomenon under scrutiny. So in the microfoundations project not only some factors of marginal importance are left out but some essential features of the social universe. This is the reason why the knowledge provided by the microfounded cycle models seem to be so distorted and indadequate.

It is a shocking experience. I think this critique is very effective – it is as destructive as the DSM-theorem. Bearing in mind the social logic of mainstream economics, these thoughts will be ignored for mainstream authors cannot block them.

But the talk with Brian convinced me of a very serious thing. Economists are really naive as far as methodology is considered. Brian could set up an effective critique because he is a philosopher. So, all in all, economics is in need of far more methodological considerations to make its fundaments more consistent. All of us, fellow economists, need to become methodologists first and foremost since it is the methodological circles, debates and the resulting considerations that can really strengthen our science… It is my strong belief.

It is time to say goodby to San Sebastian. I had wonderful four days. I hope we can continue discussing…


INEM 2017 Conference, Day 2

I had a superb view of the ocean from my window at the conference. Is it really a wonder that from time to time I got disorganized and was not able to pay attention to the presentations…? It is a shame, I know…


It was day 2. It was the longest day of the conference with panel presentations from as early as 9:30 up to 19:30. I was listening to so much talks that I need to select somehow or rather focus on my overall feelings and insights instead of a detailed and thematic descriptions of the sessions.

The first block of the day was devoted to experimental economics. There were some interesting points. For instance, Sreeja Jaiswal from India gave a talk about a practical application in which fileld experimental methods were used to evaluate the environmental impacts of some large-scale railroad investment activities. But it was Don Ross who took the morning and made my day. It was an old desire of mine to meet him in person and to attend one of his lectures. Today he presented some brand new (meaning really new) results regarding bundle sequences of choices. This issue may seem complicated at first sight, but at the bottomline you can easily take it in. People have a tendency not to regard some choices invididually and in separated form but they treat them in bundles. Don took an illustrative example: if my problem on a rainy Monday morning regards to have a jog or not to have, I will address the issue in a different way. I will ask myself: am I a serious runner? – and if so, I will go out for a run. It is my attitude towards running that is tested and not my temporary mood. Don and his collaborators created a very effective framework for testing this hypothesis. We the audience were proud to attend the presentation of these results.

After listenig to the majority of today’s preesentations I got under the impression that contemporary philosophy of economics despite its young age reached a post-modern phase. What am I talking about…? Researchers are working on well-defined topics and problems, but these projects are so closed that this closeness somehow hinders the possibility of mutual understanding. A research topic turns some researchers on but the remaing part may be completely ignorant of even the basic terms and problems. This is not an objection rather a concern. Even Jonathan Perraton’s lecture on Piketty’s book calls attention to this surmise. Jonathan underlied that Piketty made some troublesome or arbitrary methodological decisions, but his book is a hit notwithstanding. How is it possible? We live in a day and age when science shows the symptoms of industrial production. This process has its own explanation… Processing or even finding the relevant literature becomes more and more difficult and demanding, so it is no wonder that researchers are prone to work in intellectual isolation. This is the reason why research communities such Rotterdam’s EIPE or Helsinki’s TINT are so precious.

Actually, I am disapponted somehow by the fact that the dissemination of new ideas is rather slow. It is weird that in 2017 mainstream economics is still blamed for its selectivity. It is a fact of life I think. All sciences need to make selections, but I cannot understand why we should squeeze everything into economics. Economics is not political science. Economics is not ethics. Economics is not sociology – so I am wondering at the idea of making economics as a totalist discipline. We have several complementing disciplines. We should let them do their job.

So it was day 2. The grand lunch is on the way, the company are meeting at 20:30 at Palacio Miramar to have the lunch together, to go on discussing and to say goodby to the conference. Tomorrow is the final day.


INEM 2017 Conference, Day 1

An evening of a long and busy day. Day 1 of INEM 2017 is over, and for it is raining cats and dogs at the moment, I can spend some time writing this post. After having a wonderful breakfast I was heading to the conference centre. San Sebastian is situated in the Western area of the time zone, so at 6 AM when I usully wake up it is pitch black, while at 8 PM you can go for a walk in broad daylight. Funny. But anyway, the Palace is within easy reach, it takes only 15 minutes to get there. A light walk on the shore… an ideal start for the day. I love to watch animals walking up and down next to me. I can still picture myself at Duke University watching the large squirrel population. I named one of the squirrels ‘Brian’… here I met some seagulls. They are the local Bryans.


I need to remind myself about not forgetting about the conference… The day started at 10:30 with Julian Reiss’ talk. First, he gave us some practical sugesstions… where to eat, what to see, where to stay.. and the like. Then he had his presidental address under the title ‘Against epistocracy’. In this talk, Julian responded to some recent books (one of them is Jason Brennan’s ‘Against democracy’) about the challenges modern democracies face. In particular, the social role of scientists and experts should be strengthened, say the books. Why…? Laymen’s decisions are troublesome. So, according to Brennan and others, it is time for us to switch to epistocracy as epistocracy is likely to result in better decisions. This is simple instrumentalism. Epistocracy is better for it leads to better decisions.

We have some implicit assumptions at this point. There exists higher-order political knowledge that entails higher-order knowledge of the society and, what is more, this higher-order social knowledge is objective. This is not a necessity, however. There are values in the game with complex trade-offs among them. It is, too, very dubious to apply values to some situations. But the most fundamental question regards the alleged irrationality of the voters. According to Brennan, voters are ignorant, arrogant, misinformed nationalists (don’t dell them, please… they may feel offended). However, this portray is dependent on the notion of rationality we apply. The point is science, social science, does not necessarily lead to a consensus – or if so, this is only ‘accidentally’, resulting from some common biases of the sciences. Seeking a consensus is not the best way of solving a social problem. Maybe it is a wrong theory or a wrong methodology or some selective biases or even wrong social values that underlie a consensus. However, this answer seems as problematic as the basic question itself. One can reach such a conclusion only by depriving science of the ability of self-reflection. I think science can correct its own mistakes. But for Julian, there is no need for us to prefer science to non-scientific decision-making processes. He takes a sceptical view.

Brian Albrecht and Brian Kogelmann regarded models as foils. It is an interesting new way of addressing an age-old problem. We have descriptive models for sure, but we have models the best use of which is making contrast. They serve as the basis for comparison, so it is a virtue of them if they are NOT like reality. Some examples from literature were listed: foils are often applied in novels in order to highlight some characteristics of a protagonist. But I think something is still missing from this account. Is this enough to set up a model that is different from reality on purpuse…? I don’t think so. Suppose, I have a model according to which it is the storks that bring the new-born babies. Is such a model different from reality? Naturally. How can it help us understand reality? By making a contrast, we can know for sure that it is NOT the storks that bring the babies: reality is necessarily different from our model as we failed to use reality as the matter for our bricks to build models. There is a difference between unrealisticness and unrealisticness. Cooked-up assumptions are useless, they can have instrumentalist benefits at best.

Then Melissa Vergara Fernández talked about what philosophical theories say about model failure. Her point is interesting: even if we know the criteria for model success, these criteria cannot be used as a measure of theory fail. We need further criteria, for example expectations. It is expectations that make the difference between success and failure.

Matti Heinonen gave a talk about evidential looping effect which is a special form of feedback effects. However, there are serious differences. The way one classifies something will have an effect on the behaviour of the classified thing. For instance, if GDP-dynamics is regarded as of recession, it will have an effect on the investment decisions of private companies. On financial markets similar feedback effects are in the game: events are brought about individual agents with intentions and there are concepts the application of which have effects on behaviour and outcomes. For instance, a financial institution will change its behaviour in case it is reported as insolvent. In other words, using models and making predictions have effects on the behaviour of the analysed thing. I think this framework is an interesting new way of addressing the problem of self-fulfilling prophecies and spirals: if a recession is reported and the central bank cuts the rate of interest, private sector agents may regard this as a symptom of recession and will act accordingly by cutting investment activity. This may result in a spiral.

One more lecture deserves attention. It is Olga Koshovets and Taras Varkhotov’s ‘Neuroeconomics’. It is a very recent attempt to reconceptualize economics in biological terms. Maybe our very concepts can be replaced by biological notions. Maybe talking about neurotransmitters and biochemistry may be an effective framework to describe economic processes. For me, the most strinking thing was the consequence of this reasoning: economics will be a natural science. So, what proved imposissible to complete on physical grounds may be completed on biological grounds. Shocking. Neuroeconomics makes it possible to trace subjectivity back to neurophysiological predeterminacy. On these grounds neuromarketing has emerged very recently. Neuromarketing aims to understand the neurophysiological reactions of customers on the basis of their eye-movements or even mimicry. Filmmaking has already benefited from these striking results. Neuroeconomics is so recent that neuroeconomists now prefer publishing in biological-medical-biochemical journals for physically grounded economics may be averse to such achievements and theoretical developments.

I cannot resist to mention Margaret Schabas’ talk on Hume’s proto-statistical methods. In this lecture, Margaret made some really interesting points. For instance, she called attention to how extensively Hume used statistical data and how close he was to some modern concepts such as variance or regression.

It was day 1. It is time to go to sleep for tomorrow’s program is heavier than today’s schedule. Moreover, I am leaving the hotel on Thursday morning (my flight departs at 7:30) and it is problematic to get to the airport that ‘early’. Nonsense. I need to plan my way home… that I intended to be a light process. It’s a pity… Good night!