Economics for Real: the Place of Truth in Economics and Why It Matters

Economics for real: the place of truth in economics and why it matters Editors: Aki Lehtinen, Jaakko Kuorikoski and Petri Ylikoski

At the turn of the 1990’s, realism was launched as a metatheoretical approach in economic methodology more or less simultaneously by Tony Lawson and Uskali Mäki. Although both are waving the flag of realism, their philosophical approaches are fundamentally different. Lawson’s realism derives its inspiration from Roy Bhaskar’s critical realism and uses it as a platform for criticizing mainstream economics, whereas Mäki’s realism is more neutral with respect to methodological issues both in mainstream and heterodox economics. Although critical realism has a prominent position in the methodology of the social sciences and economics, among professional philosophers of science, it is merely a particular strand of realism, a strand which is seldom discussed and espoused. Mäki’s realism is closer to the mainstream realism within philosophy of science even though it, too, has its peculiarities that mostly derive from his attempt to formulate an encompassing realist position that fits economics. Mäki is the only scholar who has tried to provide a comprehensive account of mainstream realism in economics. Furthermore, his forays to areas such as rhetoric, economics of science and science studies spring from his realist position. One of Mäki’s key ideas has been that unrealistic assumptions in economic theories are compatible with scientific realism. According to him, we have to look at methodological purposes that these assumptions serve before we make judgments about their acceptability. In some notable cases unrealistic assumptions are necessary for isolating what is important from the various irrelevant issues, and for thereby capturing truths about economic reality. This idea has not lost its relevance. Given that economics is increasingly criticised for its use of unrealistic assumptions both by the other social scientists and by the general public, it is important to understand their proper role in economic methodology. It is possible to make a realistic assessment of the current state of economic science only by understanding the real economic methodology. This is the basis for the continuing relevance of Mäki’s philosophy of economics. Mäki has been a prolific writer in economic methodology, but he has mostly published in specialised journals. In contrast, Lawson’s version of realism is readily available of through the monographs by Lawson (1997, 2003) and several anthologies (Fleetwood (ed.) 1999, Cruickshank (ed.) 2003, Lewis (ed.) 2004, Fullbrook (ed.) 2008). Indeed, Routledge has a whole book series devoted to critical realism. Mäki’s views are thus not equally accessible for the more general audience of philosophers and economists. The proposed volume will correct this situation by providing a first comprehensive account of Mäki’s realist vision of economics. Realism has implications for various methodological topics. The set of such topics discussed in this volume include unrealistic assumptions and truth in economics, unification and interdisciplinary relations as well as economics imperialism, the method of isolation, commonsensibles, and the implications of realism for economic modelling. In a true realistic spirit, the style of the articles will be that of critical engagement rather than outright advocacy. The authors, who all are well known names in the field of philosophy of economics, take on various aspects of Mäki’s realist philosophy of economics. Collectively, they give provide a lively and detailed account of the realist position that has influenced philosophy of economics via Uskali Mäki’s many writings. The audience. The book will be of interest to methodologically minded economists and social scientists, philosophers of economics, and philosophers more generally. It is also relevant for anyone reflecting on the nature of economic science. The book also can be used in teaching methodology of economics for undergraduate and graduate students. Thus, potentially the market for this book is quite large. The competition. The book is not directly competing with any specific volume. It will continue in the tradition of two philosophy of economics anthologies edited by Uskali Mäki: The Economic World View (2001, Cambridge University Press) Fact and Fiction in Economics (2002, Cambridge University Press). However, these two volumes are collections of classic and contemporary articles in philosophy of economics and they do not focus systematically on the issues related to realism in economics. Thus they are not in direct competition with current volume. All the papers for the volume are already at hand and are currently going through a round of reviewing both by the editors and the assigned referees. The final versions will be ready in January 2011. The total length of the volume will be around 118 000 words.

Table of contents 0 Aki Lehtinen (Univ. of Helsinki): Introduction: Uskali Mäki’s realist philosophy of economics – 14000 words This introductory chapter provides an overview of Mäki’s contributions. It covers all the realism-related topics that Mäki has written about. The topics considered include an account of Mäki’s realist meta-philosophical views; explanation as redescription; commonsensibles; unification; essences; the method of isolation; truth; realisticness; and models. This chapter does not provide a full overview of Mäki’s work, however, because his contributions on rhetoric and social studies of science are discussed only cursorily.

Part I Isolating Truth in Economic Models 1 Frank Hindriks (Univ. of Groningen): Saving Truth for Economics – 13400 words Two strategies for defending realism for economics have been proposed by Alan Musgrave and Uskali Mäki respectively. These are ‘the truth-of-paraphrase strategy’ and the ‘significant-truth strategy’. Both strategies allow for non-negligible falsehoods, which compromise the realist ideal of true theories. This chapter argues that these strategies can be replaced by two other strategies that come closer to the realist ideal in that they do not require us to make such a compromise. These are here called ‘the future-truth strategy’ and ‘the truth-of-the-counterfactual strategy’. These strategies are illustrated using examples both from physics and economics. Regarding the latter, these strategies help us to see that there may be more truth in economics than meets the eye.

2 Ilkka Niiniluoto (Univ. of Helsinki): The verisimilitude of economic models – 6300 words It is argued in this chapter that the concept of truthlikeness or verisimilitude is a useful tool in the defence of a realist position about theories and models in science. The difference between analogical models and idealized models is emphasized: the former are surrogates and simulations which allow direct analogical inferences to a real target system from the model, the latter include counterfactual assumptions and lead to realistic conclusions only by concretization. These considerations help to assess Uskali Mäki’s MISS account of economic models and Robert Sugden’s account of models as credible fictional worlds. Niiniluoto provides support for Mäki’s realism-inspired thesis that models must represent some actual target systems.

3 Daniel Hausman (Univ. of Wisconsin-Madison): Mäki’s MISS – 6400 words Mäki’s view of Models-as-Isolations-and-Surrogate-Systems (MISS) concedes and indeed explains the enormous diversity of models, while at the same time offering a specific analysis of the notion. This chapter compares Mäki’s account to the author’s preferred account of theoretical economic models as theoretical predicates and discusses what the differences imply to what and how we learn with models.

4 Till Grüne-Yanoff (Univ. of Helsinki): Models as isolators: for and against – 6500 words This chapter argues that during the last two decades Mäki has proposed three different notions of isolation that have different functions in his overall philosophical project, and that they are to be evaluated and criticised by bearing these differences in mind. The early 1990’s was characterised by ‘essential isolation’ where isolation was supposed to apply only to some particular kinds of theories. When isolation became ‘formal’, this restriction was dropped, and in the latest work on models, isolation has become ‘minimal’ in the sense that the only substantial property is that the product of isolation is never itself idealised.

5 Jack Vromen (Erasmus University Rotterdam): Isolated economic mechanisms: motivational crowding, multi-argument utility-functions and mixing mechanisms – 10000 words Mäki argues that idealizing and simplifying assumptions are made in order to be able to study the workings and effects of one mechanism in isolation. Theoretical disputes about some theory in a discipline are typically ignited by critiques of such theoretical isolations. De- isolation consists of supplementing items in the original set with new ones (which thus amounts to extending the set), whereas in re-isolation, an explanatory variable in the original set is replaced or substituted by another one. This chapter argues that Mäki’s notion of de- isolation neatly captures the dynamics of the dispute over the deficiencies of standard price theory in explaining the so-called crowding-out phenomena.

Part II The Commonsensical Basis of Economics

6 D. Wade Hands (Univ. of Puget Sound): Realism, Commonsensibles, and Economics: The Case of Contemporary Revealed Preference Theory – 9700 words Mäki argues that the entities and relationships involved in economic theory are not new, but rather are part of the "commonsense furniture of the human world”, and that the problem of realism is different in economics from that of physics. This chapter challenges Mäki's argument from commonsensibles by offering a case study from contemporary microeconomics – contemporary revealed preference theory – where terms like "preference," "utility," and to some extent "choice," are radical departures from the common sense meanings of these terms. On the other hand, Hands ends up arguing that in this particular case, the incompatibility between Mäki’s realist account and the contemporary revealed preference theory speaks in favour of the former rather than the latter. 7 Francesco Guala (Univ. of Milan): Are Preferences for Real? Choice Theory, Folk Psychology, and the Hard Case for Commonsensible Realism – 8300 words This chapter challenges some of Hausman’s and Mäki’s arguments for commonsensible realism. It argues that commonsensible realism is an unstable philosophical position, with a tendency to collapse into forms of behaviourism (such as revealed preference theory). In fact, behaviourism may turn out to be the only defensible interpretation of rational choice theory that avoids explicit reference to unobservable theoretical entities. However, the price to pay for this return to the old orthodoxy is to deny that preferences have a causal role in the explanation of action, and to sever the connection between the economic theory of choice and research in psychology and cognitive science.

Part III The proper domain of economics

8 Don Ross (Univ. of Cape Town): Mäki’s realism and the scope of economics – 10 300 words Mäki has recently articulated, with fresh directness, for a wider conception of what economics is about. This chapter argues that Mäki’s philosophy of economics, and his notion of commonsensibles in particular, leads to mis-identification of the scope of the discipline, and therefore fails to shed accurate light on the relationships between economics and other disciplines. The criticism focuses specifically on the borderland where economics meets psychology and neuroscience and on Mäki’s claim that economics differs from physics in beginning from consideration of manifest, as opposed to ‘deep’, aspects of reality. Ross argues that putting the emphasis on successful reference to commonsensibles provides a misleading picture of the interdisciplinary relations between economics, psychology and neuroscience. Each of them has a relevantly different notion of choice and preference.

9 John Davis (Univ. of Amsterdam): Mäki on Economics Imperialism – 8200 words Arguably one of the most important Mäki’s many contributions to the realist philosophy of economics is his research on the phenomenon of economics imperialism. John Davis’ chapter looks at the development of a whole new set of research programs within economics that bear the imprint of other disciplines. These developments have produced approaches in economics that significantly depart from the post-war neoclassical economics paradigm. With this further ‘data point’ in mind, Davis then asks whether Mäki’s argument produces a successful account of the phenomenon of disciplinary imperialism. He argues that Mäki’s three constraints for imperialism (the ontological, the pragmatic and the epistemological) are not likely to be satisfied.

Part IV Rethinking Realism(s)

10 Kevin Hoover (Duke University): Pragmatism, Perspectival Realism, and Econometrics – 7400 words There appears to be a tension in the methodological thinking of econometricians: They are pulled sometimes in the direction of constructivism and others in the direction of realism. This chapter suggests that Ronald Giere’s perspectival realism provides a starting point for that charitable interpretation and resolution of this tension. It also argues that perspectival realism is ultimately a form of pragmatism. The chapter draws on the original pragmatism of Charles S. Peirce, which supports an account of realism that both enriches Giere’s account and suits the metaphysical attitude of econometrics.

11 Petri Ylikoski and Jaakko Kuorikoski (Univ. of Helsinki): Getting Real with the Critical Realists – 8000 words Critical realism shares many central tenets of Mäki’s realist vision of economics such as the emphasis on truth and the importance of finding causal mechanisms. Yet, whereas Mäki’s philosophical project has been to formulate a form of realism which renders economic modeling compatible with scientific realism, critical realists believe that economic modelling is not compatible with their methodological stance. The aim of this chapter is to upgrade critical realism with the current tools of philosophy of science and thus bring it into discussion with Mäki’s philosophy. The focus is on the central positive critical realist proposal for a more fruitful economic methodology, viz. contrastive explanation. The chapter uses Akerlof’s market for lemons, just like a recent paper by Tony Lawson, as a case for a successful exercise in contrastive explanation.

12 Jesús Zamora-Bonilla (UNED, Madrid): Realism, conversation and inference – 8900 words The ‘rhetoric of science’ debate between McCloskey and Mäki has left some very important questions unanswered. Why are some persuasion strategies successful? What is the connection between the use of certain rhetoric strategies and the actual attainment of other goals? Why is a rhetoric strategy more successful in certain circumstances than in others? This chapter relates the author’s game theoretic attempts to answer these questions to the framework of Mäki’s realism.