Twentieth-Century Economic Methodology

4 TWENTIETH-CENTURY ECONOMIC METHODOLOGY PETER J. BOETTKE George Mason University he birth of the discipline of political economy is mystery of the mundane life around them that led these often dated to the eighteenth-century Scottish thinkers to study the economic system. In other words, a TEnlightenment philosophers such as David Hume human practice was in operation that needed explanation. and Adam Smith. Of course, there were recognized Economists did not invent economic life—whether as antecedents dating back to Aristotle, the Spanish evidenced by the organization of the household, the Schoolmen of Salamanca, and the French Physiocrats. harvesting of crops, the rise of manufacturing, or the free Even the core idea of how private interest can be recon- trade of goods and services across borders. Economic life ciled with public benefit through competition had a prede- happens, philosophers try to understand the manifestations cessor in Bernard Mandeville. But it was the Scottish of it—the changes in prices, the life and death of philosophers who provided the foundation of classical enterprises, the complexity of the division of labor, and the political economy in the eighteenth century. wealth and poverty of nations. The systematic study of political economy begins with From the beginning of the discipline there have been the recognition of two seemingly contradictory observa- debates concerning the methods used by thinkers to gain tions about commercial life. The first observation is that philosophic insight into these matters. One way to recon- individuals pursue their self-interest and do so as effec- struct Adam Smith’s critique of the mercantilists is as a tively as they are capable of doing. The second observation methodological critique of their understanding of the is that commercial society exhibits a strong tendency to wealth of nations. Following the twentieth-century econo- produce outcomes that enhance the public welfare in terms mist Fritz Machlup, this chapter will make a distinction of material progress and betterment of the human condi- between methods and methodology, where methods refer tion more generally. Squaring these two observations is to the various techniques that economists employ in think- how the discipline was born. ing about a problem and offering an explanation, and methodology refers to the philosophic study of those methods and their epistemological status. Methods of The Methodology of Economics and analysis have constantly evolved throughout the history of Political Economy: An Overview the discipline, and methodology has shifted as well with changes in epistemology. In other words, the positivism of Before we go further, I think it wise to stop and reflect on the Vienna Circle placed criteria on what constitutes sci- something unique about this disciplinary origin. Political ence that were different from the criteria that were under- economy and economics began with a reflection on an stood during the age of British empiricism. As the criteria already existing set of practices in the world. It was, in this shift, so does the understanding of what is a good question sense, in the quest to gain philosophical insight into the to ask as well as what would be a good answer. Methods 33 34–•–SCOPE AND METHODOLOGY OF ECONOMICS of analysis are adopted if they help the explanation meet Vision and analysis are both important parts of the the currently fashionable criteria and discarded as relics of narrative on the evolution of economic method and an older unscientific age if not. methodology in the twentieth and twenty-first centuries. Beginning in the late nineteenth and continuing The historical experience of economic disruption due to throughout the twentieth century, the discipline of political technological change, the devastation of war and depres- economy was transformed into the science of economics as sion, and the consequences of ideologically inspired rev- the methods employed by economists to study the econ- olutions also shaped twentieth-century economics. Just omy more closely approximated the methods employed by as the experience of the collapse of socialist ideological those in the hard sciences, such as physics. Whether the aspirations of the twentieth century shaped economic methods developed in the sciences of nature were appro- thought, the tragedy of less development, the fear of priate for the sciences of man was hotly contested through- manmade global disaster such as irreversible climate out the twentieth century and continues to be the subject of change, the tensions of globalization, the fear of terror- intense debate into the twenty-first century. But it must be ism and religious fanaticism, demographic trends toward stated that most work-a-day economists do not see this as aging populations and the unsustainable public eco- a debatable issue. Science is measurement, and the tools nomic obligations that were made in the past, and the employed must satisfy that goal if science is to be done. global financial crisis are in the process of shaping The philosophical reflection on contemporary practice, let twenty-first-century economics. So we must be mindful alone the entire enterprise of economics and political econ- of how visions frame the questions asked, how ideas of omy, is found in a specialized community of academics in what constitutes science frame both what is considered a philosophy, intellectual history, and economics who study good question and good answer, how methods chosen the history of economic thought and methodology, as well will be a function of the question asked and the form an as sometimes among the elderly of elite economists as they acceptable answer is expected to take, and, finally, how reflect back on their careers. In the discipline of econom- all of this is subject to change due to shifting philoso- ics proper, it is the very rare case (and professionally ill- phies of science, empirical puzzles that are thrown up in advised) that a younger scholar will venture into the field the world, and innovations in techniques of calibration of method and methodology. that appear to permit measurement where it was seemingly But this does not mean that the methods of economics impossible to get measurement before. are stagnant either in past century or today. No, they are The toolkit of general competitive equilibrium, for constantly evolving as the problems that attract the atten- example, that was developed in the late nineteenth century tion of economists shift. However, the central disciplinary (Walras) and throughout the twentieth century (culminating puzzle remains of explaining how through the self-inter- in the Arrow-Hahn-Debreu model of the 1960s–1970s) ested behavior of individuals a social order can result that sought to provide mathematical rigor to Adam Smith’s serves the public interest. The assessment of the truth value “invisible hand” proposition. Smith’s proposition came to of this statement shifts with the times, as well as the nor- embody in the mind of the economist a claim about the self- mative assessment of economic exchange and the market regulating nature of markets through relative price adjust- economy. But every economist who has practiced the dis- ments; the complex interdependency of economic life as cipline since the eighteenth century would recognize the evidenced by the division of labor, specialization, and proposition that the market economy was self-regulating as exchange; and the efficiency of the market economy in pro- central whether they agreed with it or not. duction (least cost technologies) and exchange (gains from Joseph Schumpeter (1945), in his History of Economic trade realized) through the guiding function of relative Analysis, makes a distinction between “vision” and “analy- prices and the lure of pure profit and the penalty of loss. sis” and argues that “vision” is a necessary component of The incentives and information provided by clearly defined the advancement of scientific analysis. The simple reason and enforceable private property rights; free movement of is that “vision” is a preanalytic cognitive act that provides prices to reflect changing circumstances of tastes, technol- the raw material for the scientist to analyze. As a mere mat- ogy, and resource availability; and profit and loss account- ter of description of the way the human sciences operate, ing, which induces entry of promising enterprises and the economist must have a “vision” (a set of eyeglasses) weeds out failed enterprise, are enough to ensure that the that helps to clarify the questions that are to be raised. market economy will satisfy the welfare criteria established Visions are not neutral, however, with respect to the meth- by the theory of general competitive equilibrium. At least ods one uses to analyze a problem in the social world. that is what elementary economics taught in the first chap- Science may indeed be measurement, but the scientist has ters of Marshall’s (1890/1972) Principles of Economics, as to know first what it is that must be measured and possess well as in the first chapters of Stiglitz’s (1993) Economics, the measuring devises required for that task. Without either and for the most part every major textbook in between. an idea of what to measure or the means for measuring, the From at least the time of John Stuart Mill’s (1909/1976) intellectual enterprise can devolve quickly into nonsense Principles of Political Economy, economists always have rather than science. admitted that there were ample situations where the Twentieth-Century Economic Methodology–•–35 “invisible hand” of the market would be hindered in its macroeconomics and the transformation of the welfare operation. The problem of monopoly was mentioned properties in microeconomics. Every area of economics, throughout the classical literature (though the source of circa 1950 and 1960, was touched by Paul Samuelson. monopoly was not seen in the natural tendencies of the After Samuelson, the method and methodology would be market by many).

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