Some proposals for a new methodology for economics

Some Proposals for a New Methodology for Economics

R A L P H W. P F O U T S *

Itistorically economists have given little attention to methodology. Papers and longer works relating economics and method have, of course, appeared sporadically, but it seems fair to say that methodology has not been a major concern of any sizable number of economists.

Yet there are indications of some current interest in methodology among economists. This is an encouraging sign for two reasons. First, method- olagy is an important part of the foundation of any empirical subject, a point which will be argued more fully below. Secondly, an interest in methodology by the experts in a field and the generation of controversies on specific methodological issues indicates that the field is approaching some level of maturity. Until a discipline has developed substance, its exponents will be concerned with substance rather than with the methodology that sup- ports it. Indeed until substance has been accumulated, there is no need for method because there is nothing for method to be applied to and nothing for it to explain.

Perhaps it is clear that we are using methodology in its philosophical rather than in its vulgar sense. Methodology refers to the principles that support the acquisition of knowledge. Or more precisely, it deals with the abstract principles of reasoning which can be

* U n i v e r s i t y of N o r t h C a r o l i n a a t C h a p e l Hill .

used to produce knowledge. Perhaps it would not be misleading to say that it is the logical theory of scientific method.

Why Methodology Is Needed

One might wonder whether it is necessary or even especially desirable for economists to give attention to methodology. Some economists, usually verbally rather than in writing, have expressed this skeptical view often pointing out that economics has made substantial advances without economists devoting much attention to methodology and often adding that the same state~ merit holds more strongly for physics and other sciences.

In spite of the general accuracy of these statements, it may be argued that a theory of method is indispensa- ble for an empirical subject. A comprehensive case for this view will not be undertaken, but instead some reasons will be offered which show the im, portance of a methodological basis for an empirical subject.

As a beginning point, it may be noted that methodology completes the logical structure of an empirical subject. The theory of the subject itself rests on one side and the empirical testing of the implications of the theory rest on the other. Methodology relates the two not by showing in an immedi- ate sense how the theory and testing may be joined, but rather by supplying the logical principles that in general

13

14 ATLANTIC ECONOMIC JOUR NAL

show how a suggested hypothesis may become accepted knowledge. This is a role of crucial importance in any empirical subject ; indeed it seems reason- able to say tha t until the methodological role is filled, the subject is seriously incomplete.

It seems to follow then tha t full understanding of an empirical subject requires tha t a view of method and methodology be present. Our grasp of the subjec t can not be complete if we permit a methodological void to exist. This in turn means tha t a philosophical element, perhaps even a metaphysical element, must be present if our grasp of the subject is to be complete. I t is, it would seem, unreasonable to adopt the tough a t t i tude that "philosophy is what they teach in Philosophy Hall" and the presumption tha t it has little to do with empirical science. To adopt such an at t i tude is to ignore an essential pa r t of ¢.he necessary logical s t ructure of any empirical science [5, pp. 215-36].

A fur ther argument for the necessity of methodology can be made. An empirical science is to some important extent characterized by its methods and the interpretat ion of them. To illustrate the point, if the methodological interpretat ions of a field are pre- dominantly positivistic, it would seem clear tha t practi t ioners of the field minimize explanation believing, very likely, tha t it is impossible to explain anything at least in a usual sense. This should not convey the impression tha t methodology determines the nature of a science. No doubt it is the other way around. But certainly it is t rue tha t the nature of a science and the methodological views of its pl~acti- t ioners are related; the scientist will

unquestionably see problems of method from the vantage point of his own field.

Thus if a methodological view were held by economis~ it would show us, and the rest of the world, something about the field tha t may not be evident or at least readily evident today. This would give us a basis for self-criticism that is not present today since, it is doubtful tha t there is a methodological view tha t is widely accepted and taken seriously by economists today.

Probably the most important reason for being interested in methodology and economics is tha t it represents an area tha t has not been fully explored. It is an inherent pa r t of the discipline but we have not given it much attention. Hence it represents a pa r t of our subject tha t lies outside of our knowledge; we should t ry to. bring it within our realm of understanding.

This may appear to be a ra ther weak and non-specific reason for s tudying a problem, but it is really a very strong reason. One cannot tell in advance what the consequence of solving a p rob lem will be. The web of knowledge grows in unforeseeable ways and directions. This fact is generally un- derstood. As a result one mus t con- clude tha t pure or basic research is usually undertaken not because it will succeed or fail with reference to a part icular worldly goal but because there is a problem to be solved, fur ther knowledge and understanding to be gained. The situation of economists with respect to method falls in this category. We cannot say in any highly detailed way what the rewards of s tudying method and economics would be, bu t i t would surely extend our knowledge in some fashion.

P F O U T S : A N E W METHODOLOGY 15

The Prevailing Methodology in Economics

I t was suggested earlier tha t most economists have displayed little in- teres t in methodology and hence probably do not believe themselves to be committed to a part icular view of the subject. No doubt it is t rue tha t in this sense there is no prevailing methodology in economics; there is no view that is supported by a consensus of economists.

But there is a dominant view existing among economists who speak and wri te about methodology. The basic view accepted among economists who have spoken on the subject is positivistic. This view underlies the sometimes conflicting s ta tements of both Fr iedman and S amuelson and it would be difficult to deny tha t the methodological ideas of these two have received move at tention than those of any other economists.

Positivism, it may be recalled, is a doctrine tha t rejects explanation in science. Observations are to be explained only in te rms of other observations. The function of a science, under positivism, is the relating of one set of observations to another. The role of a science in other words is correlational; the role is tha t of connecting observations and deriving laws and relationships in these terms ra ther than in terms of explanations. Theo- retical terms are legit imate only to the extent tha t they aid in going from one set of observations to another.

There is little doubt tha t the views of both Friedman and Samuelson fall under the heading of positivism. I will examine each bl*iefly with the in- tention of pointing out their positivistic

natures. Fr iedman places grea t emphasis on

the ability of a theory to predict. If the theory does predict satisfactorily, it is acceptable; if it does not predict satisfactorily, it is not acceptable. The ability to predict is the sole methodological criterion [2, pp. 3-43].

The present purpose is not to evalu- ate Friedman's view bu t simp.ly to point out tha t his criterion is positivistic, a contention that he presumably would not contest. Fr iedman 's pre- diction criterion relates observations. This is the way in which predictions are made. We have knowledge of the numerical value of one or more variables, then through a system of equations or some other device we predict the value of some other variable or variables. We do not care about explanation, only about the ability to relate sets of observations. This is clearly a positivistic concept.

Samuelson's methodology is avowedly positivistic and appears to be influenced by the operationaIist views of Percy Bridgeman. In addition Samuelson has explicitly denied the possibility of explanation. Indeed he seems almost to equate explanation and description, viewing explanation as simply a bet ter description than was formerly available [8]. Again the purpose is not to evalu- ate Samuelson's views directly but simply to point out tha t his doctrines are positivistic.

We may note in passing tha t one economist 's voice has been raised against the positivistic dominance. Stanley Wong has criticized both Fried- man and Samuelson and has contended tha t a theory should be both descrip- tive and explanatory. Wong's emphasis is on the evaluation of Fr iedman and

16 ATLANTIC E;CONOMIC JOUR NAL

Samuelson and he tells us virtually nothing about the nature and I~roperties of an explanatory theory [ 10].

Some Arguments Against Positivism

Instead of evaluating the views of part icular authors who have espoused positivism, arguments will be advanzed against the basic concepts and implications of positivism. There are serious defects in positivistic thought and these should be considered in deciding whether it is relevant for ~ economics,

First , it may be noticed tha t positivism offers one of two choices. Ei ther one may contend tha t correlation, in a general not n~essa r i l y a statistical meaning, is explanation or one may contend tha t correlation can exist but explanation cannot. Regardless of which one chooses, the outcome is the same. In the f i r s t instance one equates correlation and explanation, and simply contends tha t there is no explanation beyond correlation. This, I think, is the view that Samuelson has taken. If one chooses the second alternative he is simply s ta t ing tha t the word explanation should be expunged f rom the language since it represents a concept tha t does not exist. Since the word is in good standing and common usage, it is clear tha t the la t ter view implies tha t millions o.f people accept a false concept. Denial of the validity of explanation beyond correlation is contrary to the intuitive beliefs and behavior of most people.

In a similar fashion we may observe tha t positivism forces a peculiar meaning on the question "Why?" This question cannot be answered in the usual way if we acc~p~ positivism. If we ask "'Why did variable x change?" the only valid type of explanation un-

der positivism is o~ the type "Because variable y changed." There can be no explanation in the sense of delineating cause and result; only the relation of variables is valid. Again such a state of affa i rs is cont rary to our pre~ conceptions. One may question the validity of a doctrine tha t denies seem- ingly natural and widely accepted ideas.

A ra ther different type of argument can also be made against positivism. The grea t emphasis tha t it places on relatioas between data and on the denial of explanation is something of a blind alley. EXplanation:s are never final or ul t imate; there is always room for a fuller or more accurate explanation; this is an essential charac- teristic of explanation. Yet positivism by denying the existence of explana, tions necessarily denies this "open- ended" character of explanation. Thus the motive for improvement is not an integral par t of the positivistic view. No doubt a motive for fu r the r improvement can be added to positivism but it does not appear there automati- cally as i t does in a methodology which is based on exp,lanation [5, pp. 50-6, pp. 246-50].

A related line: of argument against positivism can also be advanced. Posi- tivism at least in some forms, gives little if any attention to the problem of establishing necessary and sufficient conditions. This line of criticism can legitimately be advanced agains t Fried- man bu t not against Samuelson as the F- twis t a rgument which is concerned with necessary and sufficient conditions shows [8].

It has often been pointed out tha t there may be more than one explanation for a verifiable proposition. Sup- pose, to be specific, that a proposition

PFOUTS : A N E W METHODOLOGY 17

P has necessary and sufficient conditions embodied in a theory T~ but not in theory Tz. It may be possible to amend Tz while still retaining its main features so tha t it also provides necessary and sufficient conditions for P. Do we then have a contradiction in the sense of being in possession of two di f ferent sets of necessary and sufficient conditions? The ,answer is no. Both T1 and Tz contain a good deal more than the necessary and sufficient conditions [1, pp. 271-2]. This point was made tong ago. by Bertrand Russell when he wrote, " . . . a hypothesis which accounts with a minute exactitude for all known relevant facts mus t not be regarded as certainly true, since it is probably only some highly abstract aspect of the hypothesis that. is logically neaessary in the deductions which we make f rom it to observable phenomena" [6, p. 67].

The point being made is tha t positivism does not express a concern for necessary and sufficient conditions. The emphasis on correlational relationship is an emphasis on suff icient conditions only. Necessary and sufficient coaditions are not inherent ly a par t of the process of relating observations. I t is quite true, as Samuelson's methodology shows, tha t a concern for necessary and suff icient conditions can be added to pos:itivism jus t ~s a concern for improvement can be added, but again this concern is not an inherent part of positivism.

It will now be contended tha t all phenomena have necessary and sufficient conditions. The motive for this contention is to support an explanatory methodology to be introduced later. I t will be argued t h a t discovery of conditions which embody neces~sary and

sufficient conditions, when this can be done, is very helpful in providing explanation.

To contend t h a t all phenomena en- tail neoessary and sufficient conditions, we invoke the principle of causality. The principle of causality asserts tha t every event has a cause. This is clearly an assumption, but the fact is tha t it is widely believed and accepted. Be- yond doubt i t has provided a motiva- tion for a grea t deal of research in both the physical and social sciences. I f one believed tha t no events had causes or that only some events had causes, the motive to seek causes or explanations would be seriously diminished [9, pp. 74-5].

Suppose that p represents a subset of conditions contained in a universe of discourse indicated by U. If we say

p - * q ,

we have stated tha t p implies q or that the conditions indicated by p are Suf- ficient to generate q. In other words p represents sufficient conditions for q to occur.

I f we now say ~ - ~ ,

where the superior bar indicates non- occurrence of the conditions, we have said tha t the non-occurrence of p implies the non-occurrence of q or tha t

q ~ p ,

that is p can occur on~ly when q occurs. Thus we have the if and only if re- quirements o~ necessity and sufficiency. As a consequence we may say tha t p contains necessary and sufficient conditions for q.

Suppose tha t p' represents sufficient conditions. Then p'~ p and p e U. Hence by extending the sufficient conditions we can, in principle, always obtain

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necessary and sufficient conditions. We encounter a problem only when p=U that is when everything in the universe of discourse is required for sufficiency and necessity. But presumably the implication of this is simply that a ra ther nar row universe of discourse has been chosen. If it were desirable to do so, the universe of discourse could be widened.

It should be s ta ted explicitly tha t very often it is not possible to obtain necessary and sufficient conditions for an empirical proposit ion or even to ob- t a i n conditions that include among others the necessary and sufficient conditions. Does this mean tha t necessary and sufficient conditions are of little consequence in methodology?

If and only if condit ions are, i f the a r g u m e n t above is accepted, an essential ~laart of the: logic of empirical propositions, then to ignore them is to ignore a n essential of methodology. Nor does the fac t tha t it may be very difficult to find necessary and sufficient conditions give us license to ignore them. At the very minimum they represent a goal tha t should be sought. But in addition they point out: to us tha t so long as they are not known our knowledge and understanding of a proposition is not complete.

Fur the r i t can be contended tha t necessary and sufficient conditions contribute to explanation and understanding. I t would be incorrect to equate them to understanding, for example one may know necessary and sufficient conditions for a proposition without having a full intuitive or heuristic understanding or grasp of the Proposition, But if and only if conditions do contain essentials of a proposition and thus may be of use in ob-

taining explanation or understanding. Perhaps it should be noted in passing

tha t Wong chides Samuelson for ac- cepting logical equivalence or necessary and sufficient conditions as the final goal of research. (This is Wong's view of Samuelson's methodology bu t not mine.) The exact nature of Wong's arguments are not completely clear. At one point he seems to be suggest ing that logical equivalence is not especially relevant o,r possibly he suggests tha t it is undesirable [10, pp. 316-7]. This is clearly in disagreement with the arguments given above.

At a subsequent point he a t tacks the positivistic view that theories are simply redescriptions suggest ing tha t theories must involve unrestr icted universal s ta tements [10, pp. 318-23]. This a t tack is in agreement with the spirit of the present paper. But one might wish for a more complete discussion of explanation than tha t offered by Wong.

The upshot of this very limited critique of posit ivism is tha t co~es- pondence and correlational evidence are seriously incomplete. They tend to ignore the full na ture of research and role of explanation. Yet as was suggested earlier, posi t ivism dominates such views of methodology as have found expression among economists. It seems evident tha t economists should give their at tention to methodologies tha t are more complete in their statements of logical s t ructure and more generous in assigning a role to explanation.

Some Suggestions for a Methodology that Emphasizes Explanations

Very likely mos t people have a special respect for exp~lanations. One


is t aught f rom childhood to learn why something is true ra ther than learning only how to make use of it. Dis- tinctions are drawn between learned and non-learned professions on the basis of a knowledge of " W h y ? "

Consequently, it is easy to welcome a non-positivistic methodology; we are conditioned to respect explanation. But if we are to accept such a methodology, we mus t be able to define explanation. It does not do to assume tha t every- one knows what explanation is; we must be able to tell anyone what explanation is.

We cannot say tha t an explanation explains or tha t it tells you " W h y ? " ; such "definitions" only lead to fu r ther questions. We must be able to say what the characterist ics or essential propert ies of explanation are. The discussion as a result begins to take on a metaphysical character perhaps a psychological character. One may begin to feet t ha t an objective definition of explanation is not possible. One's en- thusiasm for explanation may begin to wane.

The charm of positivism is tha t we do not need to worry about explanation. Science doesn' t explain anything. We can avoid adding metaphysical and psychological components to our discussion if we embrace positivism. There is a temptat ion to react toward posi- t ivism when faced with the problem of explaining explanation.

Nevertheless the problem of defining explanation is not hopeless. Two definitions of explanation which have been put forward by methodologists will be examined.

The f i r s t of these is Popper 's definition of causal explanation. Popper

says tha t causal explanation of an event exists if it is possible to deduce the event using as a basis for the de- duction a universal law and certain singular s ta tements which he calls initial conditions. Popper makes use of an example to clarify his meaning. If a thread with a tensile s t rength of one pound has a two pound weight put on it, the thread will break. The event to be explained is the breaking of the thread. The universal rule or law is tha t a thread holding a weight greater than its tensile s t rength will break. The initial conditions or singular s ta tements are the one pound tensile s t rength of the thread and the two pound weight [5, pp. 59-62].

Popper states fu r ther tha t the initial conditions are the cause of the event. Thus the two pound load in connection with a tensile s t rength of one pound caused the thread to break, and it may be argued fur ther tha t the universal rule is in a meaningful sense the explanation of the event. Certainty we accept laws of nature as explanation of events.

In a purely formal sense, it is difficult to re jec t Popper 's definition. Uni- versal rules do offer explanations and contrary to Samuelson's view they are not merely descriptions. To revert to Popper 's example, suppose we let a be the weight in pounds to be at tached to the thread and let b represent the tensile s t rength in pounds of the thread, and c represent the event of the thread breaking. A description of the ex- periment would simply say

(a > b) . e .

That is the weight was grea ter than the tensile s t rength and the thread broke. But a universal rule would state

20 ATLANTIC ECO,NO~MIC J O U R N A L

a ~ b - - > e ,

a < b ~ c .

In this lat ter ease not only is there a more inclusive s ta tement made, but there is also an implication of causation which is not present in the fo rmer ease.

Even though Popper 's definition of explanation is sat isfying in a formal sense, I find it less than fully satis- factory. It seems to me that explanation is, at least in part, a psychological matter . An explanation is the result of a psychological process on the par t of the individual receiving the explanation. He understands the explanation and understanding is certainly a psychological process I find it impossible to separate explanation and understanding and thus I believe that explanation must have a psyehologieal element.

In a psychological sense, explanation means the offering of understanding. This p u t s us in the position of being forced to define or in some way make clear the nature of understanding. In doing this, I shall rely heavily on the work of R. HarrY. Harr6 contends that understanding can be obtained in ei ther of two w a y s : F i rs t by finding in the hi therto unexplained phenomenon an analogue to a phenomenon already un- derstood or by revealing "a hidden mechanism" whose working always yields the phenomenon tha£ was to be explained [3, p. 82].

The f i rs t of these, the analogue method says in effect if the, phenomenon to be explained is similar to an existing explanation then by analogue w e have at hand an explanation of the previously unexplained p h e n o m e n o n . Thus basically the same explanation

applies to both. In economics, the noted analogue between the theory of util i ty and the theory of production is an example. Thus a "new" explanation is not required.

In the case of the discovery of the hidden mechanism, a "new" explanation is required. In providing an explanation through a hidden mechanism we must identify cause and result. We must show how we know tha t one event is the cause and the other the result. I t seems clear tha t to describe such a process as simply a be t te r description of relationships is wildly inaccurate [4, p. 23].

To pursue the point by means of an example f rom economics, one may observe tha t if the price of a good in- creases an individual will usually buy less of it than formerly, bu t in the case of some goods he may buy more. (In other words, the Marshallian law of demand "usually" holds, bu t not always.) This is a description of cause and ef fec t events.

If we now analyze the s i tuat ion more closely, we can deduce the presence of subst i tut ion and income effects and we can give an empirical meaning to each. We can now go fur ther and say tha t if the income effec t is positive, a price increase will cause less of the good to be purchased. But we can add that if the income effect is negat ive and of sufficiently large absolute amount, a price increase will cause more of the good to be purchased. F u r t h e r we can add an explanation in behaviorist ic terms (the case of Giffen's Irish peas- ants, for example).

Now it seems totally irrational to say tha t the la t ter is nothing bu t a redescription of the s ta tement that the Marshallian law usually works,


bu t does not always do so. New con-

cepts ( the income and substi tut ion ef-

fects) have been added, cause events

and result events have been identified

and the relation between them has been

established. Surely a hidden mechan-

ism which offers understanding and

consequently explanation has been ex-

posed.

I t would appear tha t Harr6 's views emphasizing explanation and thus having a psychological component are more sat isfying than the more formal definitions of Popper, bu t no doubt this is in pa r t a mat te r of individual taste.

An Alternative View of Theories

Harr6 also has pu t forward a view of the nature of theories tha t seems to be both more comprehensive and more discerning than the traditional views tha t have been held in economics. He contends tha t there are two types of theories, those offering minimal explanation and those offer ing a maximal sense of explanation [4, pp. 8-20].

The f i r s t of the two types are theories tha t connect up facts making use of a conceptual connecting relationship. Harr~ refers to theories of this kind as reticular theories. A network of relationships between sets of observations is developed but no or little sense of causation is developed. Funda- mentally this means tha t a cause event can be observed and an effect event can be observed, but the connection relation cannot be observed and hence is a purely conceptual relationship. We observe a serial change and assume in the Humean fashion tha t the former event is the cause of the latter. This

clearly is a minimal sense of explanation.

Explanatory theories on the other hand offer a maximal explanation. Theoretical concepts are developed to explain as well as to form relationships. The earlier reference to the theory of util i ty is an example of an explanatory theory. In such a theory cause and ef fec t are not merely mat- ters of serial occurrence, bu t mat te rs of explanation. The agents of cause are revealed and it is explained how the mechanism works.

I t would seem tha t most economic theories are explanatory theories. In- deed economists have been inclined to view reticular theories as non-theories. But this la t ter is too narrow a view because there are unexplained regu- larities in the economy tha t are of in- teres t and tha t are useful even though they cannot be explained.

I f the conjecture tha t economics is rich in explanatory theories is correct, it seems strange, to say the least, tha t the dominant, expressed methodological view is a positivistic one, which denies the possibility of explanation. A fur ther conjecture may be ventured. As economists become more aware of the need for methodology and as their views on the subject mature, they will abandon the positivistic approach in favor of a methodology tha t features explanation in an important way.

REFERENCES

fl] M. R. Cohen and E. Nagel, An In- troduction to Logic and Scienti f ic Method, New York, 1934.

f2] M. Fr iedman, Essays in Posit ive Eco- nomics, Chicago, 1953.

f3] R. HarrY, An Introduction to the Logic 05 the Science, London, 1960.

22 A T L A N T I C E~CONOMIC J O U R N A L

[47 , Matter and Method, Lon- don, 1964.

[5] K. R. Popper, The Logic o] Scientific Discovery, New York, 1968.

[61 B. Russell, The Scientific Outlook, New York, 1931.

[7] P .A. Samuelson, "Problems of Method- ology - - Discussion," American Eco- nomic Review Proceedings, 53, 1963, 231-6.

[8] , , "Theory and Realism: A Reply," American Economic Review, 53, 1964, 736-9.

[9] G. Schlesinger, Method in the Physical Sciences, London, 1963.

J10] S. Wong, "The F-Twist and the Method- ology of Paul Samuelson," American Economic Review, 63, 1973, 312-25.

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Some proposals for a new methodology for economics