WP: Structuralism in modern business-cycle theory

Structuralism in modern business-cycle theory

A framework for a structuralist reconceptualization

Abstract: In this tiny paper, a possible framework for a structuralist analysis of modern
business-cycle theory is considered. In order to respond to the debates around the realist and instrumentalist interpretations of the works of Friedman I will provide a framework in which the tension between the opposite standpoints can be overcome. Based on epistemic structural realism, firstly, I will identify Friedman’s stance as a mix of agent-level instrumentalism and macro-level causal realism and, secondly, I will scrutinize the consistency of this epistemic strategy. I will argue that causal realism requires one to be realist regarding the assumptions defining agents as well.

Keywords: structural realism, entity realism, business-cycle theory, unrealistic assumptions

JEL codes: B22, B41

The full text is available here. Any comments are warmly welcome.

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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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On the Lookout for Causality along the Distinction between Entity Realism and Structural Realism

The question of fundamental importance is whether a real causal structure can really be discovered by omitting the real properties of the entities standing in relations.

The intuitive answer is negative. Causal realism built up without entity realism means that we try to describe some causal connections underlying reality while conceiving the related things as having only secondary importance. According to the idea of structural realism, describing a structure is possible by effacing the real nature of the related things. In this context, Chakravartty (1998: 400–402) calls attention to the circumstance that knowledge of the structure involves knowledge of certain properties of the entities standing in relations—properties that are important in terms of facilitating such relations and the behaviour entities show there. Psillos (1995) draws similar conclusions when he suggests the notion of “structural properties”. Structures are underpinned by certain properties of the related entities; that is, knowing of the structures necessitates our knowing of those properties of the entities that are crucial with regard to relations. Relations contains information about entities. Such information describes what characteristics the related entities have in terms of relations and interaction. A given structure is compatible only with certain entities (those it conjoins), so a structure is not indifferent to the (nature of) entities. In other words, the description of a real causal structure cannot be built on entities the properties of which are not abstracted from the nature of real agents. As describing a causal structure requires us to specify some entity-level assumptions too, entity realism as to the relevant properties is the prerequisite for causal realism. The properties of entities are not transcendent relative to structure. In his critique on structural realism, Psillos (1995: 31–32) highlights that a description of a structure is nothing but a description of the way entities are related and the way they behave in the context of such relations. The causal roles and causal properties of entities are not over and above the details that can be described in terms of structure. As a consequence, if we intend to describe a real structure, we are in need of (approximately) true entity descriptions. However, if our entities are not like their real counterparts in terms of the relevant aspects, then our knowledge can be negative at best. The surrounding world evidently works in a way other than our ideas.

References

Chakravartty, Anjan (1998): Semirealism. Studies in the History and Philosophy of Science, 29(3): 391–408.

Psillos, Stathis (1995): Is Structural Realism the Best of Both Worlds? Dialectica, 49(1): 15–46.

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Incommensurability in Economics?

Highlighting the lack of mutual understanding in particular approaches to reality makes up a crucial constituent in Kuhn’s (1970) commentaries on paradigm shifts. Theories are separated logical and conceptual schemes between which the transitions during paradigm shifts are not smooth but rather saltatory. Differences between accepted theoretical frameworks appear even at the level of experiences, so it is not an overstatement to say that researchers working within different traditions observe different worlds. This is particularly true of the equilibrium–disequilibrium approaches in economics to socio-economic reality. Incompatible theoretical frameworks are incommensurable: scientists scrutinizing the one and only reality in different ways are not talking of the same thing. Even if there is an intersection of the phenomena recognized as problems, scientists within individual approaches make efforts to solve the puzzles while following their own particular methodological guidelines. For example, the Lucas-critique can be regarded as the mainstream solution to the problem of macro-social changes. Kuhn (1987: 83) describes paradigm shifts during which there are changes in the way how terms attach to reality—and, moreover, there are changes in the set of entities and phenomena to which such terms attach. On this showing, the ongoing controversy between institutionalism and mainstream economics is the still effective aftermath of a non-fulfilled paradigm shift. Both systems have advantages, their own problems to investigate and even norms. However, on account of selectivity and their complementary character of fundamental importance, none of them can solve the problems to which the rivalling approaches can effectively elaborate answers, respectively. Genuine albeit different ways of turning to reality preserve both approaches within the realist tradition, offering a marvellous example for the circumstances accentuated by Lewens (2005: 569). Approaches to reality are not only shaped by reality itself but also the conventions and the theoretical concepts any scientist shares with his fellow researchers indoctrinated in the same paradigm. The result is a set of theories which are mutually incompatible while true[1] at the same time.

The approach set in the crossfire of the institutionalist critique has not been extinct since the newly emerged theory cannot provide answers to the problems the old one can successfully analyse—and vice versa. What is more, none of them can realise the problems of their counterparts. Due to selectivity, a “crowding out” effect can hardly be a plausible scenario, since right because of the selectivity none of the approaches can outrival their counterparts. This is one of the peculiarities of the history of the economic thought. Each incompatible theoretical system has its own language, so a change in the scientific dictionary must facilitate the occurrence of new observational accounts and their interpretations set on rough-hewn paths. Languages themselves that interconnect the members of each distinctive tradition are the primary causes of locking up in one’s own doctrines. In the case of economics, recognizing this demarcation occurring even at the level of languages may help us to interpret why our debates have stagnated.

References

Kuhn, T. (1970): The Structure of Scientific Revolutions. Chicago: The University of Chicago Press.

Kuhn, T. (1987): What Are Scientific Revolutions? In: Patton, L. (ed.) (2014): Philosophy, Science, and History. A Guide and Reader. London: Routledge. pp. 71–88.

Lewens, T. (2005): Realism and the Strong Program. British Journal for the Philosophy of Science, 56(3): 559–577.

[1] Here, of course, true refers to approximate truth interpreted according to ones’ own epistemological guidelines.

Pictorial: Thomas Kuhn (via alchetron.com)

Thomas Kuhn

If It’s August, This Must Be Spain

Finally the organisers sent us the first information e-mail with regard to INEM’s 2017 conference. I could hardly wait for these instructions. This is going to be an exciting event and I am eager for August to come. The registration is now open – everything is carried out on-line. This is very modern, I must say. According to the Preliminary Programme, we have lots thought-provoking lectures and interesting panelists – lots of the faces familiar from Rotterdam. We are going to have a very heavy schedule: all the days start early in the morning and last until the evening. Yes, even 10-hour-long, busy workdays. 5930761917_233493219c_b

The conference is held at the beautiful Palacio Miramar, a palace built for the Spanish Royal Family at the end of the 19th century. We have the opportunity to continue the discussions even during the lunches, as the conference lunches are served right at the palace. This is not the only option, as there is a refectory in the building itself and there are a couple of restaurants within walking distance – however, I will opt for the official conference lunches in order to spend lunchtime in a good company. Moreover, my temporary residence is also within walking distance from the Palace. I think I will fly Iberia through Madrid. This is going to be a nice journey and an exciting intellectual adventure, of course.

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Structural Realism vs. Entity Realism

In the literature there can be found a widely applied distinction between entity realism and structural realism. On its face value, structural realism does not involve entity realism—the only problem is whether there is a minimum requirement as for the construction of the theoretical entities through assumptions in our theories. In other words, is it possible to complete a structurally realist program through models built up in an instrumentalist way? Can our assumptions be simply cooked-up?

I got the most important impulse for scrutinizing this problem from Kevin Hoover’s Milton Friedman’s Stance: The Methodology of Causal Realism (2009). On this present occasion it is not possible to look into the alleged instrumentalism of Friedman, so here I can only drop a hint to my surmise. According to this, the most problematic part of F53 is the long paragraph where Friedman writes about the assumption of leaves rationally maximizing their utility. For Hoover, the way the assumptions regarding entities are constructed is subordinated to the purpose of causal realism. The assumptions underlying a model must be designed in order that the resulting theory could be capable of highlighting the relevant causal mechanisms. Elsewhere (in Galbács 2017, forthcoming in Acta Oeconomica, 67(2)) I called attention to the fact that presumptions generally sorted under the label of “unrealistic assumptions” may actually come from two distinct strategies, from which the one is purely instrumentalist and the other is the type that Max Weber assigned to neoclassicals. The latter are those ideal-types that are instrumental in highlighting some lines of the real causal structure and that bring to the fore those causal mechanisms the analysis of which is traditionally covered by the neoclassical orthodoxy. However, it is doubtful whether both are compatible with the idea of causal/structural realism, or successful causal realism needs a certain degree of entity realism as a prerequisite. Richard Boyd in his On the Current Status of Scientific Realism supports a naturalistic theory of reference in a similar vein. Its primary purpose is to underlie our strategies of building assumptions as to entities. Accordingly, the contents of our concepts are to reflect the real features of actual entities—which is still not the case of direct descriptive relevance. Even though one may set as a prerequisite the idea that our concepts must refer to the actual attributes of real-world entities, this is not an argument for entity realism involved by structural realism. Is it possible to map the real causal structure even by neglecting the real attributes of the related entities?

The intuitive answer to the question is negative. Distinguishing entity realism and structural realism as a first step and arguing that structural realism requires entity realism as a second step is a remarkable way of highlighting Friedman’s instrumentalism and Lucas’ realism. Doing so, Lucas can be introduced as a structural realist, interested in revealing the causal structure underlying macro-economic phenomena. Dropping adaptive expectations hypothesis and using rational expectations hypothesis instead, Lucas, this is my surmise, opted for entity-realism-based structural realism, since structural realism does not seem to be achievable by an instrumentalist strategy as for entities.