The philosophy of economics concerns itself with conceptual,
methodological, and ethical issues that arise within the scientific discipline
of economics.[1] The primary focus is on
issues of methodology and epistemology—the methods, concepts, and
theories through which economists attempt to arrive at knowledge about economic
processes. Philosophy of economics
is also concerned with the ways in which ethical values are involved in economic
reasoning—the values of human welfare, social justice, and the tradeoffs
among priorities that economic choices require. Economic reasoning has implications for justice and human
welfare; more importantly, economic reasoning often makes inexplicit but significant
ethical assumptions that philosophers of economics have found it worthwhile to
scrutinize. Finally, the
philosophy of economics is concerned with the concrete social assumptions that
are made by economists.
Philosophers have given attention to the institutions and structures
through which economic activity and change take place. What is a “market”? Are there alternative institutions
through which modern economic activity can proceed? What are some of the institutional variants that exist
within the general framework of a market economy? What are some of the roles that the state can play within
economic development so as to promote efficiency, equity, human well-being,
productivity, or growth?
The
dimension of the philosophy of economics that falls within the philosophy of
science has to do with the status of economic analysis as a body of empirical
knowledge. Primary questions
include: What is economic
knowledge about? What
kind of knowledge is provided by the discipline of economics? How does it relate to other social
sciences and the bodies of knowledge contained in those disciplines? How is economic knowledge justified or
evaluated? Does economic theory
purport to offer abstract theories of real social processes—their
mechanisms, dynamics, and institutions?
What is the nature of economic explanation? What is the relationship between abstract mathematical
models and theorems, on the one hand, and the empirical reality of economic
behavior and institutions, on the other?
What is the nature of the concepts and theories in terms of which
economic beliefs are formulated?
Are there lawlike regularities among economic phenomena? What is the status of predictions in
economics?
Philosophers
are not empirical researchers, and on the whole they are not formal
theory-builders. So what
constructive role does philosophy have to play in economics? There are several. First, philosophers are well prepared
to examine the logical and rational features of an empirical discipline. How do theoretical claims in the
discipline relate to empirical evidence?
How do pragmatic features of theories such as simplicity, ease of
computation, and the like, play a role in the rational appraisal of a theory? How do presuppositions and traditions
of research serve to structure the forward development of the theories and
hypotheses of the discipline?
Second, philosophers are well equipped to consider topics having to do
with the concepts and theories that economists employ—for example,
economic rationality, Nash equilibrium, perfect competition, transaction costs,
or asymmetric information.
Philosophers can offer useful analysis of the strengths and weaknesses
of such concepts and theories—thereby helping practicing economists to
further refine the theoretical foundations of their discipline. In this role the philosopher serves as
a conceptual clarifier for the discipline, working in partnership with the
practitioners to bring about more successful economic theories and
explanations.
So
far we have described the position of the philosopher as the “underlaborer” of
the economist. But in fact, the
line between criticism and theory formation is not a sharp one. Economists such as Amartya Sen and
philosophers such as Daniel Hausman have demonstrated that there is a very
constructive crossing of the frontier that is possible between philosophy and
economics; and that philosophical expertise can result in significant
substantive progress with regard to important theoretical or empirical problems
within the discipline of economics.
The cumulative contents of the journal Economics and Philosophy provide clear evidence of the productive engagements that are possible
when philosophy meets economics.
In
order to accomplish these goals, the philosopher of economics has a
responsibility parallel to that of the philosopher of biology or philosopher of
physics: he or she must attain a professional and rigorous understanding of the
discipline as it currently exists.
The most valuable work in the philosophy of any science proceeds from
the basis of significant expertise on the part of the philosopher about the
“best practice,” contemporary debates, and future challenges of the
discipline. Only through such
acquaintance will the philosopher succeed in raising topics that genuinely
engage with important issues in the profession.
Let us now consider a
sampling of philosophical questions about economics as an organized body of
knowledge. These questions by no
means exhaust the content of the philosophy of economics, but they serve to
give the reader of the types of questions that philosophers have posed to the
discipline of economics.
The concept of a “law of nature” has been central to our understanding of
the natural sciences. The
intellectual power of classical physics derived from the fact that it was
capable of advancing statements of physical laws that were simple and
universal—laws of gravitation and planetary motion, optics, electricity
and magnetism, etc. Is this an
essential feature of a successful empirical science? And does economics possess such laws? Several authors are affirmative on both
points (Kincaid 1996), (Rosenberg 1976). However, several points have emerged in recent discussions of the social
sciences that lead to doubt about the centrality of laws in the social
sciences—including economics.
First, there are significant differences between natural and social
phenomena that should make us dubious about the availability of strong “laws of
nature” describing social phenomena.
Second, it is clear that there are regularities within the discipline of
empirical economics—consumption usually rises when prices fall, trade
increases when transport costs fall, and infant mortality usually falls when
states devote more resources to public health. But these are fairly humdrum empirical regularities,
exception-laden and obvious. Are
there strong “economic laws” that have the force of Maxwell’s laws of
electromagnetic propagation?
Nothing in current economic theory provides reason to think that there
are such laws. The foundational
assumptions of economic theory plainly do not fall in the category of “laws of
nature.” And as we will see below,
the assumption of economic rationality does not constitute a universal
generalization about individual behavior.
Here, as is the case in other areas of social science, it is more
justifiable to seek out causal mechanisms rather than social laws.
Do economic theories and
hypotheses serve to describe unobservable economic mechanisms and
structures? Milton Friedman set
the stage for one answer to this question by arguing for an instrumentalist
interpretation of economic assumptions (Friedman 1953). On Friedman’s view, the value of a
theory is entirely expressed in its ability to predict observable phenomena;
the theory is an instrument of prediction. Instrumentalism, however, has generally faced strong
criticism from philosophers of science (Leplin 1984). This doctrine makes the empirical
success of a theory a source of mystery.
The best explanation of a theory’s having generally reliable predictions
about a range of phenomena is that the mechanisms that it postulates are in
fact true. So it is a deficiency
in a theory that the mechanisms it postulates are implausible or false. And economic theory would be
substantially undermined if we were to conclude that its premises are
profoundly inconsistent with the real underlying causal processes that
constitute a working economy.
Against this instrumentalist framework Daniel Hausman puts forward a
realist approach to economic theory (Hausman 1992). Within this approach, the goal for the
economist is to arrive at assumptions that are approximately true. (As we will see below, this
methodological principle suggests that economists ought to pay greater
attention to economic institutions, comparative economic analysis, and economic
history.)
Before we can ask whether a theory is testable, we have to have a clear
specification of its empirical content. This requires us to ask the question,
What is the theory intended to describe, predict, or explain? A theory has empirical content if it
makes assertions about causal processes underlying a domain of phenomena and
those assertions have consequences for observable states of the world. Under these circumstances it is possible
for us to perform experiments (arrange the world in a certain way, observe the
outcome, and compare with the theory’s predicted outcome), controlled
observations (collect “before-after” cases and compare the outcomes with the
theory’s predictions), piecemeal observations (examine elements of process in
order to assess whether the postulated causal processes did in fact occur), and
so on. Through these efforts we
can bring empirical evidence to bear on the task of assessing the truth of the
hypothesis. So the question before
us is this: does economic theory contain substantive assumptions about the
causal workings of the economic world that are intended to have implications
for future observable states of the economic world? And are we able to perform observations of states of the
world that confirm or falsify the theory (Hands 1992)? In principle, it is clear that the answer to this question
is affirmative. Consider a range
of theories of specific economic processes—economic growth, trade,
unemployment, wages, or discrimination.
Such theories have predictive consequences, and it is not especially
difficult to describe the observations that would need to be secured to test
these theories. The epistemic
difficulty comes later: most theories of complex phenomena are in fact
falsified—without necessarily being far from the mark in their
description of the underlying processes.
So how are we to distinguish among “falsified” theories to single out
the more likely from the less likely (Lakatos 1974)?
Alexander Rosenberg
makes a case for the formalist view of economic theory, having concluded that
economists have not succeeded in producing empirical theories or explanations
of real empirical phenomena (Rosenberg 1992: chapter
8). Rosenberg likens microeconomics to
Euclidean geometry rather than classical physics or evolutionary biology; the
“theory” is a set of abstract and non-empirical axioms, and the exercise of
“doing economics” is one of deriving theorems from these axioms. Is this a satisfactory way of
understanding the intellectual program of economics, however? It is not. The intellectual charge for the discipline of
economics—not always or successfully achieved—is to provide a
social-scientific basis for understanding, explaining, and, perhaps, predicting
economic phenomena. Why do
interest rates affect investment levels?
Why are inflation and unemployment related? Why is economic growth more rapid in the context of one set
of institutions than another? What
are the causal links that secure connections among economic variables? These are the sorts of questions that
economists are charged to answer.
And the approach to economic theorizing that stipulates that the
discipline is purely formal will not aid in shedding light on these real,
though unobservable, economic mechanisms.
On this line of thought, the persistent mathematization of economics
ought to be construed as a means to an end rather than the end itself. The formal or mathematical machinery of
economics is intellectually valuable only insofar as it contributes to a better
understanding of real, empirically given economic processes, causes, and systems.
The concept of economic
rationality is foundational within economic theory, and especially so within
neoclassical economics. So a
special concern for philosophers of economics has been to provide critical
examination of the theory of economic rationality. Philosophers have raised a series of important issues
concerning the theory of economic rationality. Taken together, these criticisms have led to a substantial
enhancement in our understanding of the concept of rationality. First, philosophers have devoted a
great deal of attention to the gap between a theory of utility and a theory of
individual preference. Second,
they have taken issue with the assumption of egoism or rational self-interest
that is presupposed in the pure theory (Sen 1987), (Anderson 2000). Third, philosophers and others have
pointed out that real psychological actors reason in ways that are at odds with
the pure theory of economic rationality (Simon 1983), (Kahneman, et al. 1982). Fourth, philosophers and others have
devoted significant attention to the assumptions underlying game theory. Finally, some philosophers have
undertaken to study the characteristics of “economic rationality” in real human
persons through experiment (Schmidtz 1991). For example, Robert Axelrod has used
experimental settings to examine how real human reasoners deal with prisoners’
dilemmas; he finds that experimental subjects are frequently able to achieve
cooperation rather than defection, contrary to the prediction of two-person
game theory (Axelrod 1984). The results of this
research suggest that real reasoners behave intelligently—but differently
from the axioms of the theory of pure economic rationality.
Economists often portray
their science as “value-free”—as a technical analysis of the demands of
rationality in the allocation of resources rather than a specific set of value
or policy commitments. On this
interpretation, the economist wishes to be understood in analogy with the civil
engineer rather than the transportation policy maker: he or she can tell us how
to build a stable bridge, but not where, when, or why to do so. It is for citizens and policy makers to
make the judgments about the public good that are needed in order to decide
whether a given road or bridge is socially desirable; it is for the technical
specialist to provide design and estimate of costs. This description of the discipline of economics fails in
several important respects, however.
Economic theory contains a family of substantive presuppositions about
the nature of the good—individual and social—that directly
influence the policy recommendations to which economic theory gives rise. For example, the assumption of rational
egoism is inconsistent with several of the values of communitarianism; the
assumption that equity is subordinate to efficiency is inconsistent with an
egalitarian political philosophy; and the assumption that a bundle of
commodities constitutes individual “wellbeing” is inconsistent with a more
Aristotelian conception of the good human life (Nussbaum 2000). So the premises and assumptions of
economics are substantially intertwined with normative assumptions about the
good human life and the good society.
This is not a deficiency, but it needs to be recognized so that we can
recognize the workings of the unstated value assumptions. And it certainly invalidates the
assumption of “value-free” social science. In general, it seems fair to say
that the ethical assumptions that neoclassical economics presupposes fall
together into a family of normative ideals that privilege individualism,
inequality, and the minimal exercise of public policy.
Once it is recognized
that economics has ethical content, it becomes apparent that we need to examine
the content of these ethical premises in detail, and offer critique when we
find them wanting. In particular,
economics is obliged to confront issues of distributive justice much more
explicitly than it has to date. A
market economy implies some degree of inequality, of various kinds: inequalities
of outcomes (wealth and income), inequalities of opportunity, inequalities of
power and influence, inequalities of levels of well-being (health, longevity,
education). What sorts of
inequalities are morally acceptable in a just society? How extensive can inequalities be
before they create differences among citizens that interfere with their human
dignity and the preconditions of democracy? Throughout the past thirty years philosophers have made
substantial contributions to our understanding of these issues of distributive
justice and the moral status of inequality; (Rawls 2001), (Nozick 1974), (Elster 1992). There is more to be done.
What sort of social
world does economic theory presuppose?
In considering this type of question, philosophers begin to move into
substantive debates about the nature of the empirical phenomena under study. The discussion falls under the rubric
of “criticism,” in that it focuses on blindspots that can be discerned within
the visual field of economic theorizing.
Economists make assumptions about the institutions that constitute the
framework of economic transactions, and these assumptions are sometimes inflexible
and unrealistic. It is therefore
worthwhile for philosophers to devote attention to the shortcomings of the
social institutional assumptions that economists often make. The new institutionalism in the social
sciences has focused substantial interest on the specifics of the institutions
within which social activity takes place (Brinton and Nee 1998), (Powell and DiMaggio
1991). Institutions matter; so a more refined
account of the economic institutions of a particular market economy may lead to
better understanding of the phenomena that we witness. For example, incorporation of
transaction costs and asymmetric information between buyer and seller has
significantly changed our understanding of market institutions. One strand of philosophical criticism
comes from the level of abstractness of typical economic theories. Greater empirical detail may well
change the inferences we draw about the workings of the institution. Market “imperfections” may be the rule
rather than the exception—so it is important to incorporate some of these
empirical characteristics into our theories of economic institutions.
Economic activity within
a modern society requires institutions that define the use, management, and
enjoyment of resources; the deployment and management of labor; and the
management of enterprises.
Neoclassical economics presupposes private ownership of capital; “free”
workers who do not own property; and states that have minimal economic
influence. Are there other
institutions through which economic activity might be conducted within a modern
and productive society (Elster and Moene 1989)? For example, what is the economic logic
of workers’ cooperatives? How
could worker-controlled pension funds be used to enhance democratic
equality? Is there more to be
learned from the experience of market socialism, state ownership, or workers’
control of industrial processes?
Are alternative institutions feasible? Are they efficient?
Are they equitable?
Economic development has proceeded in very different ways in different
nations and regions since the emergence of modern technologies and economic
institutions. Market institutions
developed very differently in Britain, France, and the United States during the
19th and 20th centuries. Collectivized economies followed different institutional
trajectories in Yugoslavia, the USSR, and China. What can we learn about economic processes and dynamics by
studying and comparing national economies in significant detail? For example, what do the parallel yet
different experiences of China and India since 1945 teach us about alternative
pathways of economic development (Drčze and Sen 1989)? Does this sort of comparative economic research provide a
“post cold war” basis for analyzing the political economy of development? As economists come to confront the
intellectual challenge of providing realistic causal accounts of economic
systems, they will be able to arrive at significant new insights through
comparative economic analysis.
Re-examination of the history of European capitalism suggests that there
were feasible alternative paths of economic development besides mass
manufacture and specialized production (Sabel and Zeitlin 1997). Mass manufacture and mass unskilled labor represented one
important alternative, but there were other historically feasible
alternatives. As Sabel and Zeitlin
demonstrate, another feasible system of industrial production involves highly
skilled workers, flexible production, and flexible tools and production
processes (Sabel 1985). Once again, the moral for the discipline of economics is an
important one: It is possible to
arrive at more empirically satisfactory economic theories when we consider the
range of institutions through which economic activity and growth has taken
place.
The
philosophy of economics serves as a source of sympathetic yet rigorous critique
of the science of economics, broadly construed. It raises familiar questions about the epistemology of this
branch of the social sciences—questions about theory structure, theory
confirmation, explanatory adequacy, and the like. It questions the implicit normative assumptions that
economics contains. It raises some
of the ethical questions that economics is almost forced to confront—but
rarely does. And it suggests the
value of a broader and more eclectic approach to economic
theorizing—making more extensive use of alternative theoretical
approaches, incorporating more study of economic institutions, paying more
attention to comparative economic trajectories, and giving more rigorous
attention to economic history.
Economics will be a more successful social science when it embraces more
of the role it often played in the 19th century as a seminal social
science—an area of social inquiry that was equally interested in the
concrete social and economic institutions that constituted a “modern” economy,
interested in the ethical implications of the social phenomena with which it
was concerned, and willing to consider a variety of theoretical models in
aspiring to the goal of achieving a scientific understanding of economic
processes, institutions, and outcomes.
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[1] The philosophy of economics is now a well-established sub-discipline within philosophy. Significant contributions to the discipline include (Buchanan 1985), (Hausman 1984), (Hausman 1992), (Hausman and McPherson 1996), (Little 1995), (Sen 1987), and (Rosenberg 1992). See also the journal Philosophy and Economics.