Philosophical Realism in Economic Science An integrative study on the comparative nature between post- Keynesian critical-realism and Austrian causal-realism “Even if heterodox economics were not able to supplant the mainstream, a more realistic goal would be to aim for a new spirit of tolerance within economics, such that heterodox research was given due acknowledgement, and economics teaching covered a range of approaches.” - Sheila Dow (2011, p. 1164) Written by Lasse Kristensen: 20134821 _______________________________ Submitted master’s thesis for the degree of MSc in Economics Aalborg University Thesis Advisor: Mogens Ove Madsen January 5th, 2021 Aalborg University Lasse Kristensen 20134821 Abstract This master thesis is a study into the present fragmentation in economic science about what ideas constitute a realism-based philosophical approach and foundation for the science. With ideas for realist foundations found in both the post-Keynesian critical-realist philosophy and in the Austrian causal-realist philosophy, two independently developed strands of realist economic thought, these two are examined comparatively, to ascertain, and to make explicit, where these share intersections, complementarities, and/or differences. The aim is to identify these, to then open up for new avenues towards a philosophical integration and greater synthesis between economists on what realism is in the economic science. The method adopted towards this aim is an ontologically reflexive pluralism (Bigo & Negru, 2008), by which critical-realism and causal-realism are examined, starting with their respective ontologies, and then moving on to their epistemologies and methodologies. Given the present lack of both explicitness and awareness of realist ideas between the economic paradigms, a result of a past absence of integrative work, this present state of the economic science assigns a high relevancy to engaging with the type of integrative philosophical research. This thesis applies common definitions and understandings of philosophical terms including those of realism and nonrealism, and of broader definitions of economic ontology, epistemology, and methodology. Critical-realism is examined on its ideas of open-system theorizing; social entities in science; structured reality; determinism and non-determinism; fundamental uncertainty; structured pluralism; Babylonian mode of thought; human agency; and abduction. Causal-realist philosophy is then examined on its ideas of open-system theorizing; mental entities in science; determinism and non-determinism; ultimate givens; epistemological dualism; the logical structure of the human mind; human action; and praxeological deduction. From these examinations several comparative intersections, and also some complementarities and differences, are identified. First is shown the intersection in the shared critical-realist and causal-realist commitments to ontological world-realism and to epistemological process truth realism. Second is their similar critiques of the neo-classical mainstreams logical-positivist philosophy, critically its epistemological monism and its closed-system mathematical deductivist mode of thought. Third is then their intersection in commitments to open-system theorizing, and of recognizing social and/or mental entities as legitimate scientific objects in economic science analysis. Fourth is their intersection on the view that economic reality is a highly non-deterministic and a fundamentally unpredictable process. Fifth is their intersection of adopting an epistemological dualism between natural science and social science. Sixth is their intersection of focusing on descriptive and qualitative explanations as economic science ideals in contrast to the neo-classical focus on prescription and quantitative prediction. Seventh is their intersection on considering human agency/action as the analytical starting point for economic analysis when grounded in a realist foundation. Finally is also discussed their methodological differences, where post-Keynesian critical-realism champions the method of abduction, and where Austrian causal-realism champions that of praxeological deduction. To operationalize these philosophical findings, a case-review is finally made of the critical-realist and causal-realist argued causes and cures for the 2008 financial crisis, where the philosophical differences between the post-Keynesian concept of animal spirits as producing inherently unstable market outcomes is contrasted with the Austrian concept of entrepreneurial discovery which is seen as producing inherently stable market outcomes. This theoretical contrasts between the two is shown to be grounded in origins at the philosophical level, resulting in different business cycle theories due to contrasting reasonings on the long-term economic outcomes of human agency/action. Page 2 of 104 Master Thesis in Economic Science Aalborg University Lasse Kristensen 20134821 Table of Content 1. Introduction ........................................................................................................................ 5 Research Questions ..................................................................................................... 8 Thesis Structure ........................................................................................................... 8 Research Relevancy .................................................................................................. 10 Research Data ............................................................................................................ 13 2. The Post-Keynesian Critical-Realist Paradigm ............................................................... 14 Critical-Realism ........................................................................................................ 14 2.1.1 Neo-Classical Logical-Positivism and Critical-Realist Critiques ...................... 15 Critical-Realist Ontology .......................................................................................... 20 2.2.1 Open-System Theorizing ................................................................................... 20 2.2.2 Ontological Entities and Structured Reality ...................................................... 21 2.2.3 Economic Determinism ..................................................................................... 23 Critical-Realist Epistemology ................................................................................... 24 2.3.1 Epistemological Uncertainty .............................................................................. 24 2.3.2 Epistemological Dualism and Structured Pluralism .......................................... 25 Critical-Realist Methodology .................................................................................... 26 2.4.1 Babylonian Mode of Thought ............................................................................ 26 2.4.2 Abduction ........................................................................................................... 27 2.4.3 Human Agency .................................................................................................. 29 3. The Austrian Causal-Realist Paradigm ............................................................................ 32 Causal-Realism.......................................................................................................... 33 3.1.1 Neo-classical Logical-Positivism and Causal-Realist Critiques ........................ 34 Causal-Realist Ontology ........................................................................................... 35 3.2.1 Mental Entities in Social Science ...................................................................... 35 3.2.2 Open-System Theorizing ................................................................................... 37 3.2.3 Economic Determinism ..................................................................................... 39 Causal-Realist Epistemology .................................................................................... 41 3.3.1 Ultimate Givens in Science ................................................................................ 41 3.3.2 Epistemological Dualism ................................................................................... 43 3.3.3 The Logical Structure of the Human Mind ........................................................ 45 Causal-Realist Methodology ..................................................................................... 46 3.4.1 Human Action .................................................................................................... 46 Page 3 of 104 Master Thesis in Economic Science Aalborg University Lasse Kristensen 20134821 3.4.2 Praxeological Deduction .................................................................................... 48 4. Discussion – Comparing Critical-Realism and Causal-Realism ..................................... 54 Comparing Critical-Realist and Causal-Realist Ontology ........................................ 55 Comparing Critical-Realist and Causal-Realist Epistemology ................................. 57 Comparing Critical-Realist and Causal-Realist Methodology .................................. 58 5. The 2008 Financial Crisis – A Philosophical Case-Review ............................................ 61 Critical-Realism and the 2008 Financial Crisis ........................................................ 61 Causal-Realism and the 2008 Financial Crisis