The Foundations of Economic Method: A Popperian Perspective

Published by EH.NET (April 2005)

Lawrence A. Boland, The Foundations of Economic Method: A Popperian Perspective, second edition. London: Routledge, 2003. xx + 332 pp. $114.95 (cloth), ISBN: 0-415-26774-9.

Reviewed for EH.NET by O.F. Hamouda, Department of Economics, Glendon College, York University.

In an age when there is a tendency for many scholars to be so lazy as to rely on chatty internet exchanges for references and ideas about how to do research, those same are particularly vulnerable to becoming dependent on the self-proclaimed few who specialize in distilling the fundamental contributions and practices of theoreticians into sub-disciplinary textbooks designed to become short-cut reference tools. The task of the reviewer should become thus in part ever more devoted to rendering unto Caesar only that which is Caesar’s and recognizing its worth. Nowhere is this truer than in a subject of great interest to EH.NET readers: economic methodology.

One might imagine books in the field of economic methodology to be dry, distant, serious, and strict. The situation is, however, quite other. The most recent book on the subject, The Foundations of Economic Method: A Popperian Perspective by Lawrence A. Boland, is but one example. It is for its part so effusive of language, so blindingly enthusiastic, so ebullient of terminology, so gymnastically intricate, and so ambitious in grandeur that it lends itself not just to necessary multiple re-reads, but, to do it justice in review, veritable casting as a theatrical play.

Let’s set the one-act’s stage: at a recent academic gathering on economics, the neoclassical theoretician, Professor B, runs into the Philosopher, Lawrence Popper. Somewhere in the book-exhibitors’ crowd is the third character Larry, the decision-maker, busy talking with his publisher. At a profession cross-roads, the three characters are going to try, with some levity, to disentangle the real from the abstract, the rational from the absurd, the serious from the ridiculous, and the puzzling from the obvious.

Scene I: Professor and Philosopher come to terms

Professor B: So …, Lawrence. … Have you seen Larry’s second edition of Foundations?

Philosopher: As a matter of fact, I have. I was just going to ask you exactly the same question.

Professor B: Well …

Philosopher: Well, I am, I admit, pleased to know that Popperianism carries on and draws disciples.

Professor B: You might well be flattered to have a following, but as a neoclassical economist of note, I don’t know what to make of the book. I find it in fact very confusing …

Philosopher: Confusing indeed, and here I thought I was the master at confusing students. But, Larry has done me proud; I expect students will think they have met my match!

Professor B: You don’t really mean it?!

Philosopher: Of course, not. What I really meant is that, although Larry is really just rehashing the old debates about the method of decision-making in neoclassical theory, he does try to frame the discussion of methodology in a different manner because he believes for some reason that “the methodological questions currently facing model builders are different” …, even though he maintains that the core methodology that he “applied in the first edition is fundamentally the same” [p. xvii & p. xviii]. From what I can piece together, while his analysis is pushed a little bit toward the epistemological perimeter of economics and raises interesting questions here and there, in terms of making his views clear, the book is terribly muddled, and he seems to be firing in every direction.

Professor B: But, Lawrence, I simply don’t understand what all of Larry’s philosophical or other nonsense has to do with Economics. As a neoclassical theorist, I am just applying cost-benefit analysis to every conceivable situation where material and money is involved; I could really care less as to whether “in Popper’s terms, Schumpeter’s ‘methodological individualism’ should be called ‘psychological individualism’ and Blaug’s ‘methodological holism’ should be called ‘institutional holism,’ while Popper’s ‘methodological individualism’ should be called ‘institutional individualism'” [p. 32], and I care even less about Larry’s understanding of Aumann. Remember where he says, “it is still not clear what Aumann is advocating. Perhaps he is just being inconsistent since he seems to be arguing at the (research) methodology level that we should be Conventionalists but at a (philosophical) meta-level, he is advocating an Instrumentalist position to justify his choice of Conventionalism” [p. 28]? And who is this Blaug anyhow?

Philosopher: Oh! Professor, not so fast! (He pretends to grab a set of reins.) Surely, Larry would say that those cost-benefit analyses are carried out by individuals and involve human behaviour …

Professor B: But, Lawrence, of course I know that, but I still don’t understand what all these philosophical issues that Larry mentions have to do with the way I do economics?

Philosopher: Let me clarify few things. First of all, this is not Philosophy as practiced by philosophers, which if properly contextualized might indeed shed some light on the behavioral foundations of economics. In the context of Larry’s type of book, it is merely methodology masquerading in philosophical jargon, or at best, logic. Furthermore, economic methodologists have created an in-house adaptation of terminology and a way of arguing which makes even the well-intentioned philosopher-listener lost. From my perspective as a philosopher, I too find a few things, all be it different ones, rather disturbing. Larry keeps confusing my ideas with those of Agassi, a student of mine; that just irritates me personally! Two, his definition of methodology, “– a study of methods of assessing information and of changing knowledge –” [p. 2], is, to say the least, rather intriguing. And third, take, for example, his general assertion: “The eighteenth-century philosophers’ advocating logic as the only acceptable means of convincing an audience is merely one example of rhetoric but not one that is discussed by the rhetoric of economics advocates today” [p. 287]. Did one in the eighteenth-century really advocate logic as rhetoric? Did those philosophers use logic because they saw it as the only acceptable means of convincing an audience?? His reading of Hume [p. 50], Aristotle [p. 51], and many other philosophers is sometimes bizarre, sometimes pedestrian.

Professor B: Lawrence, do I understand you well? Are you telling me that Larry is struggling with logic …?

Philosopher: How shall I say … ? Hmmmm … Let me put it this way: in the context of the foundational issues of economics he raises and the required level of inquiry needed to tackle them …, his understanding of logic is not up to the task; it is rather that of an elementary textbook. What I found most remarkable is his method of argumentation. In page after page, one finds sweeping general assertions, from which he seems to wander at ease, interpreting them according to the ubiquitous researcher here, the philosopher there, imputing his own explanation to other authors, and above all, lining up citation after citation, often as if they speak for themselves in relation to his text. Now, let me give you a concrete example …

Professor B: But where does all this leave us???

Philosopher: That is good question. I should be thankful to Larry for letting the economics profession know that Popper respected economists and also for his promoting Popperian economics. Let’s leave Larry’s methodology aside for a moment, if we can … Help me, please, Professor, understand Larry’s economics. After all, the strength of his book, if any, should, I presume, be found in the area of his expertise, i.e., economics. I must admit his breath-taking analysis bringing in almost every who-is-who-in-economics, every who-has-said-anything-about-anything-in-economics is rather impressive. One might say, like a vacuum cleaner, he has siphoned up every bit of elementary economics under the sun to shed light on his arguments about neoclassical economics.

Professor B: Remember, vacuum cleaners collect only dust …

Philosopher: (not amused) Professor, let us not be too philosophical here …

Professor B: Well, although I can’t speak to his history of economic thought, a topic of minor relevance to me and about which I know very little, it seems to me that you are generous in attributing to him this grandiose and sweeping perspective …

Philosopher: Let’s leave the relevance of the history of economic thought to Paul Samuelson … What I meant here was really that Larry gives the impression that he has read a lot. That’s all I meant …

Professor B: The issue here is not how much he cites, but what his understanding of economics is, in the context of his so-called methodological inquiry of individualism in neoclassical economics. Just before I turn to explaining my attempts to understand his economics, there is one more methodological issue which is still left hanging. Perhaps, you could clarify it for me. Here is another of Larry’s definitions: “by the term ‘methodology’ I mean the economists’ view of the relationship between their theories and their methods of reaching conclusions about the nature of the real world using those theories” [p. 1]. Is it compatible with that other one you just cited? And then, there is also this statement: “a proper study of methodology should be concerned with the actual role of methodology as manifested in the nature of neoclassical theories, models and research agenda.” [p.1]

Philosopher: Yes, puzzling, hmmmm, there seems be a bit of shift there! Are you neoclassical economists really interested in the nature of the real world?

Professor B: I don’t like the words ‘real world’; I’m afraid I’ll have to leave that one to you to figure out. Now, as far as Larry’s economics is concerned, he is quite clear: his main concern is neoclassical economics. By that he means the economics which is “based on a view that the economy being explained is the result of decisions made by people acting individually in the pursuit of their own interest” [pp. 1-2]. The hidden agenda of this dominant neoclassical economics is “the primary focus of the discussion” in his book [p. 2]. Furthermore, in order to discuss the methodological issue of individualism he restricts the sphere of his domain to modern economics, and by that he means specifically and “primarily the economics taught today in the first-year economics principles courses and textbooks found in almost all universities and colleges in North America and most of Britain and continental Europe” [p. 1].

(Standing nearby, a conference participant, presumably from the Southern hemisphere, having overheard the conversation, pipes up loudly, “What do you think the Australians are teaching?!)

Philosopher: (continuing obliviously) It looks like Larry is using this simplified and vulgarized version of economics as his basic backdrop, upon which, by throwing in some references from original sources here and there, he builds up his argument. Have I got it?

Professor B: Frankly, I’m not quite sure what he’s done. You know what I find surprising is not so much his contrasting all the old economists with our well-established elementary economics, but his imputing to me imprecision, carelessness, and even my having lost sight of the meaning of the Lagrange multiplier and my attributing real-world significance to the mathematical symbol of the Keynesian marginal propensity to consume [pp. 292-3]…. For example, I was unaware that, “Since Alfred Marshall’s time, economists have tended to use ‘rationality’ and ‘maximization’ interchangeably” [p. 53], or that “Economists are particularly sloppy when discussing the notion of equilibrium. Usually what is called an equilibrium is merely a balance. That is, when demand equals supply, this is a balance and not necessarily an equilibrium. A simple equality (e.g., between demand and supply) is a static notion but the idea of an equilibrium implies a dynamic notion” [p.60] …, or that “Modern textbooks mistakenly lead students to think that the long run refers to some point of time in the future” [p. 93]!

Philosopher: Professor, just like you, I am a bit put off by the distractions of the clutter. I think that you just shouldn’t be drawn too much into the technical issues of the book. It would seem that most of them are simply a garnish; I suspect that the book would have been clearer if most of them had simply been left out. The real catch-terms here are ‘time,’ ‘abstraction,’ ‘reality,’ … What Larry seems to be after is to bring out a distinction between two types of economists: those whose economics is, or is not, compatible with his type of individualism. Look at it this way: you are on a beach, there is one type, the ‘short-runners,’ out riding the waves, and the type, the ‘long-runners,’ chasing after the pot of gold, way at the edge of the horizon … But for the moment, let’s just be Popperians, shall we?

Professor B: But, Lawrence, if all these technical aspects of economics are irrelevant, then what’s left for me?

Philosopher: I didn’t say they are irrelevant, period. I meant they are of secondary importance as far as Larry’s methodology is concerned. I’m afraid we have to stick first to understanding the language to get to the foundational premises of behavior pertinent to economics. You cannot escape this, if you want to debate with Larry.

Professor B: As you know, Lawrence, as a neoclassical, I am used to expressing my theories in mathematical forms, that is to say, in equations and symbols, Excitement for me comes from finding the right specifications, choosing the appropriate variables, counting the number of unknowns, and above all, from finding solutions to mathematical puzzles. The ultimate, of course, would be to have my name associated to theorem, even better to an inequality, like Tchebysheff. As one of my surrogates puts it, the real world is but a special case, and it is so difficult that we assume it to be an uninteresting case. We simply leave it aside and stick to our simple maximization principle. But now Larry muddles the waters, by connecting our ‘maximization’ and us with ‘metaphysics.’ “Putting maximization beyond question merely demonstrates that maximization is the neoclassical economist’s metaphysics” [p. 56]. I tried to understand what he means, but he goes on hysterically about metaphysics: “… every research program has its metaphysics. … It is easy to say that every science can be defined by what it puts beyond question – this is its metaphysics. … confusion of metaphysical statements with tautologies is a common mistake. The error is due to not recognizing that a tautology is a statement which is true regardless of the meaning of the non-logical words used (e.g., the tautological statement ‘I am here or I am not there’ is true regardless of who ‘I’ am or where ‘here’ is). A tautological statement is one for which we could never conceive of a counter-example. That is, a tautology is not conceivably false. This is not true of a metaphysical statement. .. a metaphysical statement can be false (which is why it is put beyond question). Clearly, the assumption that all decision-makers are maximizers is conceivably false – particularly whenever one also specifies what is supposedly being maximized.”[pp. 56-57].

Philosopher: I think maybe Larry has a point, however, let’s just say, delicately (avoiding the issue), about his discussion of metaphysics that he does not place the relationship of exogenous and endogenous disciplinary arguments in their usual philosophical relationship. Don’t you, however, think that maximization indeed is the soul of neoclassical economics?

Professor B: I thought economics had reached the status of science by doing away with a soul. Mind you, it now has ‘soles’ (laughs) and indeed the Maximization Principle is one of them. Oh, and Rationality is another, a different one. And, (getting hysterical himself) within that framework, there too are variants on ‘sole’: we assume, for example, some economic agents prefer their sole raw, like in sushi, and others prefer it fried, in fish and chips. (sobering) Of course, what is important here is that each agent will go on consistently eating his sole the way he likes it, adhering to his preference. You know, we do believe that our agents are consistent, even in their expectations …

Philosopher: So, that’s how you distinguish maximization from rationality, and by rationality you only mean consistency?

Professor B: Yes, for me, at least. That is what I always understood rationality to be, but now, Larry disturbs things, bringing in history again, for an issue we thought was well established by consensus. He says that was not always the case: “rationality in the eighteenth century was more a matter of prescription than explanation. That is, those promoting rationality when talking about social policy were often recommending that people be rational or at least saying that if people were rational they would always avoid making mistakes. One could easily argue that the French Revolution was a direct outcome of the belief in the power of rational thought. Specifically, many ‘rationalists’ of the eighteenth century were in effect saying ‘kill the king and get rid of the priests.’ And the basis for this advocacy was that it was the rational thing to do” [p. 53].

Philosopher: Yes, I remember that curious passage. It would have been enlightening to have had a few philosophers’ names attached to context … Ah, hot coffee is served! I think I need some refreshment, and some fresh air. Let’s walk over to the Exhibitors. (to himself) Economists have really perfected the art of confusion …

Scene II: Decision-maker pipes up

Professor B: Oh, there is Larry himself, talking to his publisher …

Philosopher: Hello, Larry! The Professor and I have just been discussing your latest book …

Larry: You ought to! Everybody should be reading my book. It should be the quintessential reference for every first-year student of economics, or any social science philosophy course.

Professor B: Is it selling?

Larry: Under the circumstances, it is doing well, but it would sell better if you guys only realized how methodology can make you better understand what your practices in economics really are in relation to what you’re preaching.

Professor B: When you say ‘you guys,’ who do you mean?

Larry: I mean you neoclassical economists.

Professor B: Let us leave the neoclassical economists aside for the moment. From what I gather, you already have some listening ears in many subgroups: economics methodologists, historians of thought, post Keynesians, evolutionary economists. I gather there are now conferences and journals where your kind of ideas are discussed …

Larry: Professor, you do not understand, those “so-called heterodox alternatives such as institutional, Austrian, or Marxist are regrettably marginal. Modern economics is instead dominated by neoclassical economics” [p. 1]. That is where the big market is. In fact, everybody is doing “big-M methodology,” and I am trying to steer the profession away from that approach and bring it to practice “small-m methodology.” I am afraid, however, that the heterodox guys wander all over outside the boundaries of their profession because they understand little of economics, which is the reason why they busy themselves with ‘big-M methodology.’ It is different for the neoclassicals …

Professor B: Wait a minute, Larry … What is all this about Big and Small methodology?

Larry: If you can only open your eyes, you will realize that I am addressing you not them. You neoclassical economists just do not get it. By ‘big-M methodology’ I mean that part of methodology which concerns itself “with just the timeless questions that have bothered philosophers of science for decades or centuries” [p. xvii]. … In fact, without knowing it, you neoclassical economists practice this very big-M methodology; it is simply a part of your hidden agenda. Do you follow…? You understand what I mean…? I’m advocating ‘small-m methodology’; it’s about “issues that affect the decisions economic model builders make everyday. And those decisions differ year-by-year, decade-by-decade. Consequently, the various applied topics of concern … will be those found in today’s economic literature” [p. xvii].

Philosopher: Larry, Larry … Not so fast. I am now really lost in your definitions of methodology.

Professor B: Wait, Lawrence, (interjecting) I, as the neoclassical representative, I feel that I am being targeted here. I demand some clarification. What does your methodological discussion have to do with us?

Larry: Well, I am a little bit angry with you neoclassical economists because you do everything to avoid or suppress methodology and you do not practice what you preach. If you allow me to digress for a moment … You pretend that you are trying, in your theories, to solve and remove imperfections, so the market mechanism can work smoothly. Yet, in everyday practice, in your teaching environment, you are constantly interfering in a way contrary to …

Professor B: Larry, what, what are you getting at???

Larry: What I am getting at is, “in the mainstream of the economics profession, economic methodology is a sideshow that leading economics departments in North America would never accommodate by including methodology courses in their curricula,” denying methodological research forever the chance “to make a significant contribution to neoclassical economics.” And, Professor, don’t refute it. Methodology “is always prohibited” [p.222]! You are denying me input and on top of it, quite a market …

Professor B: Larry, let us, for a moment, be scientific here. Give me one slight bit of evidence that neoclassical economists have or are trying to suppress methodology, or as matter of fact the study of the history of economic thought in our curricula.

Larry: Please don’t mix up my methodology with the work of all those historians of economic thought. Second, you are asking me to give evidence. You know quite well that that is absurd. This case is not an empirical one, but rather an ideological one.

Professor B: What?!

Larry: Yes, you know quite well that methodology as a course offering is never discussed at all in departmental meetings; it is just part of your unconscious hidden agenda.

Professor B: Larry, there seems to be an impasse in communication here. Let’s be rational …

Philosopher: You mean by that, let’s come to our senses …?

Professor B: Yes, the crucial thing for us is to understand what was the point in your writing the book … Let us suppose, for a moment, that all three of us have difficulties with your understanding of methodology and what you think its purpose is, and further, with your understanding of economics and what the purpose of economics is. Since the Philosopher’s mind is already wandering, I suspect his stomach is growling. I would suggest, we take a break for lunch, and after sushi or fish and chips, when we come back for coffee, you could perhaps help us by explaining in general terms, perhaps in one or two sentences, or even better in mathematics or diagrams, what the main goal of book is. OK?

Philosopher: I like the idea of sushi. Let’s go!

Scene III: The Anticlimax

Larry: (over coffee)You are asking me to give you the main objective of my book, while you show little patience with my framework. That seems to me a bit inconsequent. Anyway, let me try: I truly believe that the individualism foundation of economics is constantly threatened and that a strong push for its abandonment, or an attempt to sneak in other ideological alternatives, is always being tried. There is a danger here for the survival of economics as a science! For my part, “a rejection of individualism would be tantamount to the advocacy of a denial of intellectual freedom” [p. 31]. Scientific counterattack, based on the sound methodology I am advancing, is the only way of preserving that freedom, and neoclassical economics is the only economics that can guarantee that freedom. I do therefore certainly agree with North that “To abandon neoclassical theory is to abandon economics as a science” [p. 295].

Philosopher: That seems to me reasonable …

Professor B: Yes, Larry, I couldn’t agree with you more. Why didn’t you come straight out with it?

Larry: I don’t think we really agree here. We do not have the same neoclassical economics in mind. Your version is entirely built on “psychologistic individualism”; mine rejects it.

Philosopher: But, since individualism is also for you a corner stone of the foundation of economics, I presume you must have your own assumption of what individualism means?

Larry: Yes, I do! I think it is time for economists to avoid assuming “psychologistic individualism”, “the (narrow) version of individualism which identifies the individual with his or her psychological state” [p. 33] as the only individualism, and further, to recognize the inherent limitations of Inductivism and Conventionlism and to adopt “real-time individualism in the short run”: “that is the view that only individuals make decisions” combined with “situational analysis, that is, rational-decision making” [p. 259]. That’s it!

Professor B: Larry, what really distinguishes these two versions of neoclassical economics?

Larry: Without vulgarizing too much, let’s imagine the field of economics as a seaside playground. All our economists are there having fun, either building models in the sand, mining for data, riding the merry-go-round (counting the ‘ups’ and ‘downs’) or simply watching the crowd. Let me call all of them to the giant see-saw and ask each one to jump on the one end or the other, according to whether his/her economics is compatible or not with my ‘real-time individualism.’ One should not be surprised that at the blue end would be lined up together the Keynesians, the Walrasians, all the neoclassical macro- and microtheorists who dispense with time but rely on psychologism, all the evolutionarists, i.e., all the ‘long-runners,’ and any one of such ilk. On the other, the red end would be the ‘real short-runners,’ like Marshall, Hayek, and their neoclassical disciples. It is obvious that critical mass is on the side of the blue, especially as the Walrasians are part of it through their blind adherence to ‘psychologism individualism.’ My simple suggestion, inspired by Popper: will make the see-saw tilt back to the ‘red’ side, when the critical mass adopts ‘real-time individualism in the short run’ as its foundational premise; by the same token, we will have dispensed “with the ideological motivation to suppress at all cost any chance of encouraging methodological holism” [p. 45]. Neoclassical economics will then have become real-problem specific.

Professor B: (to himself) Although Larry’s main contention is with the foundations of economics, neoclassical economics is flexible enough to accommodate his ‘real-time individualism in the short run.’ I can’t understand why he is jumping up and down … (aloud) Are you saying that we are all now Marshallians?

Larry: Yes, but only if you blend in “the Popper-Hayek Program to knowledge recognition in models of neoclassical economics” [p.268]. Take me as an example, since I act accordingly as I preach. A decision-maker, I act on the maximization principle; I am rational, in that my methodology is consistent and in my decision making, I am problem-oriented and learn from my mistakes. Just look at the second edition of my book. It contains seventy percent new material [p. xvii]. I learned from experience and from my critics. In fact, as a result of your very challenging comments, I shall give my Foundations more thought and speak to my publisher right away letting him know that my third edition is now in the making. Neoclassical economics has to come to grips with such reality. It must accept that while we are all like as homines economici, confronting however different situations as individuals, we are not all the same.

Philosopher: (pondering) Larry, are you sure you are going to have the needed critical mass on the red end? Aren’t you more likely to find yourself all alone on that end of the plank?

Professor B: Oh, I didn’t realize how late it has gotten! Well, it was very stimulating talking to you both. Bye.

Philosopher: (moving slowly) Yes, indeed, it is time to go … (mumbling to himself) … long over-due. Well, Don Quixote seems intent on taking his own Road to Serfdom … but this is the Open Society … After all, I think Larry’s heart is in the right place. He certainly raises fundamental questions. Whether they have been tackled properly should, in the end, I suppose, be beside the point. I hope he wasn’t offended by our questions, since they really were directed to economic methodologists in general. … All of them will eventually have to face the same music, if they want to make a difference, and as a philosopher, I have only to think of Wittgenstein to remind myself that the task of a thinker is never easy.

THE END

O.F. Hamouda is Chair of the Economics Department of Glendon College, York University (Toronto). Managing Editor of the Journal of Income Distribution, Hamouda is currently at work on money and cyclical production, inflation and deflation, and credit management in Wicksell, Keynes, Hayek and Hicks and in the process of co-authoring a book on Clement Juglar’s business cycle.