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Bereket Kebede
School of International Development
University of East Anglia
London (UEA London)
10 December 2011
10:00 a.m. – 5:00 p.m.
An excursion into a history of economics
Dominant epistemologies
Mathematics and formalism
Observational data and econometrics
Experimental methods
1. An excursion into a history of
 Publication of A. Smith’s Wealth of Nations in 1776
(‘birth of economics’) and subsequent classical
economists (Ricardo, Malthus, Marx, Mill, etc.)
 Economics was not yet a really distinctive and
unified discipline (political economy, moral
philosophy, etc.)
 The marginalist revolution and the rise of neoclassical economics (Jevons, Menger, Walras,
Marshall) – dominant school after end of 19th century
1. An excursion into a history of
economics (cont’d)
 Economics as we know it, based on neoclassical
school, emerged after WWII (the ‘formalist
Hick, Value and Capital (1939)
Samuelson, Foundations of Economic Analysis (1947)
Arrow, Social Choice and Individual Values (1951)
von Neumann and Morgenstern, Theory of Games and
Economic Behaviour (1953)
 Debreu, Theory of Value (1959)
1. An excursion into a history of
economics (cont’d)
 With the dominance of modern conventional
economics, issues of methodology and epistemology
were left in the background
 Economic epistemologists (philosopher rather than
economists) separate from standard economists
 Recent revival of interest in epistemological and
philosophical problems of economics
 Development economics: a separate discipline or a
branch of main stream economics?
2. Dominant epistemologies
 Positivism: the application of methods of natural
sciences to the study of social reality (Bryman, 2004)
 Phenomenalism: knowledge confirmed by the senses
can genuinely be warranted
 Deductivism: theory to generate testable hypotheses to
identify laws; e.g., economic theory
 Inductivism: gathering of facts to provide basis for
laws; e.g., survey data and econometrics
 Objective: science should be conducted as value free
 Positive vs. normative: the latter prescriptive; e.g.,
efficiency vs. income distribution
2. Dominant epistemologies
 Post-positivism: knowledge based on probabilistic
propositions rather than certainty; approximate
truth; the ‘uncertainty principle’
 Methodological individualism – both an organising
strategy for neoclassical economics and an
ontological commitment
 Recent interest in alternative epistemological
approaches in economics: e.g., Lavoie, ed., Economics
and Hermeneutics
3. Mathematics and formalism
“Those who have handled sciences have been either men of
experiment or men of dogmas. The men of experiment are
like the ant, they only collect and use; the reasoners resemble
spiders, who make cobwebs out of their own substance. But
the bee takes a middle course: it gathers its material from
flowers of the garden and of the field, but transforms and
digests it by a power of its own … Therefore from a closer
and purer league between these two faculties, the
experimental and the rational (such as has never yet been
made), much may be hoped.”
Francis Bacon, 1620
3. Mathematics and formalism
The reasoners/spiders/theoretical
economists? – use simplified and formal
The bees/empirical economists? – use mainly
econometrics to analyse data testing theories
(Wo)Men of experiments/experimentalists? –
both random controlled trials (RCTs) and
experimental economics
3. Mathematics and formalism
 Modern mainstream theoretical economics uses
simplified, abstract, formal mathematical models
 Starting from simple axioms and assumptions
builds an internally consistent logical system
 Theoretical models are understood as simplified
representations of important real economic
 Idealisation as a price worth paying to
understand important economic relationships
(ontological problem?)
3. Mathematics and formalism
 “Ultra-empiricism”- postulates, assumptions,
axioms and basic principles in economic models
should be testable
 Friedman (1953) – “ultra-empiricism” would
eliminate much useful theorising
 Basic assumptions of theoretical models neither
should be true nor testable
 Usefulness of models depends on predictive reliability
(pragmatism, instrumentalism, indirect empiricism)
 Judged on fit with parallel theorising
3. Mathematics and formalism
 Formalism: an approach (mathematical or otherwise)
to theorising that aims at making explicit the logical
structure of a theory; set-theoretic formalism widely
accepted in economic theory
 Formal models as simplified representation of
economic reality; also remember Friedman
 Formal models as training tools; improves perception
and analytical skills of economists
3. Mathematics and formalism
 Formalism and mathematics still important in recent
critiques of conventional economics
 New Institutional Economics: instead of individual
agency the role of institutions emphasised; a dominant
part of the school retains and prioritises formalistic
 Behavioural Economics: using insights from psychology,
relaxes the assumption of the hyper-rational economic
agent of conventional economics; mostly widened the
scope of formal economic models
3. Mathematics and formalism
 Complexity and computational economics: economic
interactions are too complicated for capturing in neat
closed models
 E.g., agent-based computational economics: economies as
dynamic systems of interacting agents; agents can
range from active data-gathering decision-makers
with sophisticated learning capabilities or as passive
with no cognitive functioning
 Difficult to analytically solve the outcome of these
complex interactions; left for computer algorithms
including artificial intelligence
4. Observational data and
Most empirical analysis in economics in
general and development economics in
particular uses observational rather than
experimental data – need for quasiexperimental method, mainly econometrics
‘Recreating’ an experimental set-up without
experimental data – controlling for
confounding variables and orthogonal
4. Observational data and
econometrics (cont’d)
Tension between theory-led and data-led
econometrics (the LSE school); difference on
how knowledge is to be attained rather than
ontological differences in economic entities
Single econometric tests rarely make
significant changes; accumulated weight of
evidence is required to bring paradigm shift
(a la Lakatos)
5. Experimental methods
 Economics considered as non-experimental
discipline at least until the 1980s
 Recent trends:
 Randomised control trials (RCTs): identifying
project/treatment effects by randomising
 Lab experiments (experimental games): ‘players’ making
decision under incentivised and controlled situation
5. Experimental methods (cont’d)
 Increasing interest in the epistemology of experimental
economics (e.g., Santos, 2010)
 The social epistemology of experiment (SEE):
 Experimental facts generated through material and social
 Material processes: ‘phenomenal model’ (experimenter’s
view of how the world works), ‘instrumental model’ (view
on how the experimental apparatus works), ‘material
procedure’ (actually how the experimental apparatus
 Social processes: the experimental subjects and the
5. Experimental methods (cont’d)
 The direct participation of human subjects is the
major source of epistemic value; but participants
may ‘resist’ expectations of economists
 Experimental games are amenable to scrutiny by
wide audience
 SEE pays special attention to scientists
predisposition to obtain confirmation of prior beliefs
(‘confirmation bias’)
 Boettke, Peter J.; Christopher J. Coyne; John Davis; Francesco Guala; Alain
Marciano; Jochen Runde and Margaret Schabas. 2006. "Where Economics and
Philosophy Meet: Review of the Elgar Companion to Economics and
Philosophy with Responses from the Authors." Economic Journal, 116(June),
 Bryman, Alan. 2004. Social Research Methods. Oxford: Oxford University
 Davis, John B.; Alain Marciano and Jochen Runde eds. 2004. The Elgar
Companion of Economics and Philosophy. Cheltenham, UK, Northampton,
MA, USA: Edward Elgar.
 Friedman, Milton. 1953. Essays in Positive Economics - the Methodology of
Positive Economics. Chicago: University of Chicago Press.
 Hoover, Kevin D. 2006. "The Methodology of Econometrics," T. C.
Mills and K. Patterson, Palgrave Handbook of Econometrics:
Econometric Theory: Econometric Theory. New York: Palgrave
 Hoover, Kevin D. 2010. "Pragmatism, Perspecitval Realism and
Econometrics," Durham, NC: Duke University,
 Lavoie, Don ed. 1990. Economics and Hermeneutics. London and
New York: Routledge.
 Sagal, Paul T. 1977. "Epistemology in Economics." Journal for
General Philosophy of Science, 8(1), 144-62.
 Santos, Ana Cordeira dos. 2010. The Social Epistemology of
Experimental Economics. London and New York: Routledge.
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