Lecture One

1
Lecture One

• Epistemology and Economic Methodology

2
Epistemology

• Questions
• Does an objective reality exist that is
  independent of our thinking?
• Do ultimate truths describe that reality?

3
Epistemology

• Propositions
• Realism Yes, objective reality exists
• Absolutism Yes, ultimate truths describe that
  reality
• Relativism Objective reality may exist, but
  truths describing it are relative to
  circumstances
• Example of difference Usury debate
• Subjectivism, Postmodernism No, reality is not
  independent of our individual or social thinking

4
Methodology

• Defined
• Technique for discovery of knowledge. Assumes
  that an objective reality does exist, and it can
  be explored.
• Methodological questions
• What is science? What are the proper roles of
  scientists?
• What mix of empirical observation, logical
  analysis, and intuitive insight is best used to
  strengthen our understanding of reality?

5
Methodological Approaches

• Deductive Method
• General propositions (positive or normative) lead
  to specific logical implications
• Early Practitioners/Proponents
• Aristotle (400 BC)
• David Ricardo (1817)

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Methodological Approaches

• Inductivism, Empiricism
• From specific observations, rooted in experience,
  to general conclusions
• Proponents
• John Locke (1690)
• Auguste Comte--(Positivism)
• Carnap Vienna Circle (1920s-30s)--Logical
  Positivism
• Karl Popper (1902-1994)Falsificationalism
• Thomas Kuhn (1962)--Scientific Revolutions
  Competing Paradigms

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Positivism Logical Positivism

• Positivism (Comte, Hume, J.S. Mill, 19th Century)
• Science can rise above superstition by
  specializing in the description and analysis of
  observable phenomena, leading to discovery of
  natural laws.
• Logical Positivism (Moritz Schlick and Rudolf
  Carnap, 1930s)
• Science progresses toward truth by observation,
  formulation of hypotheses, empirical
  verification, leading to additional hypotheses
• Distinction between positive (scientific) and
  normative (unscientific) questions

8
Karl Popper What is a Science?

• Philosopher writing at time of collapse of
  Austro-Hungarian empire (1912-1919)
• Once convinced, then disillusioned by Marxist
  theory of history
• Characterises these, psycho-analysis, astrology,
  etc. as pseudo-science
• Posed question 'What is wrong with Marxism,
  psycho-analysis...? Why are they so different
  from physical theories...?' ... these ...
  theories, though posing as sciences, had ... more
  in common with primitive myths than with
  science... Conjectures Refutations

9
Karl Popper What is a Science?

• Rejected conventional explanations (empirical
  inductive method) because pseudo-sciences (e.g.
  astrology heavily empirical)
• Noticed characteristic of pseudo-sciences
  confirmation
• admirers ... were impressed ... by their
  apparent explanatory power. These theories
  appeared to be able to explain practically
  everything that happened within the fields to
  which they referred
• A Marxist could not open a newspaper without
  finding ... confirming evidence for his
  interpretation of history ... in the news, ...
  its presentation and especially of course in
  what the paper did not say.

10
Karl Popper What is a Science?

• Argued that confirmation meaningless every
  conceivable case could be interpreted in the
  light of the relevant theory they could not
  be refuted
• Therefore, by exclusion, a true science was one
  which could be refuted
• Every 'good' scientific theory is a prohibition
  it forbids certain things to happen...
• A theory which is not refutable by any
  conceivable event is non-scientific...
• Every genuine test of a theory is an attempt to
  falsify it, or to refute it...

11
Poppers Continuing Influence George Soros

• Popper showed that totalitarian ideologies like
  communism and Nazism have a common element they
  claim to be in possession of the ultimate truth,
  . . . juxtaposed with . . . another view of
  society, which recognizes that nobody has a
  monopoly on the truth different people have
  different viewsand different interests, and there
  is a need for institutions that allow them to
  live together in peace..
• Reflexivity Why does nobody have access to the
  ultimate truth? The answer became clear We live
  in the same universe that we are trying to
  understand, and our perceptions can influence the
  events in which we participate. If our thoughts
  belonged to one universe and their subject matter
  to another, the truth might be within our grasp
  we could formulate statements corresponding to
  the facts, and the facts would serve as reliable
  criteria for deciding whether the statements were
  true.
• Whether the theory is valid or not, it has
  turned out to be very helpful to me in the
  financial markets.

12
Poppers Continuing Influence George Soros

• Insofar as there is a dominant belief in our
  society today, it is a belief in the magic of the
  marketplace. The doctrine of laissez-faire
  capitalism holds that the common good is best
  served by the uninhibited pursuit of
  self-interest. Unless it is tempered by the
  recognition of a common interest that ought to
  take precedence over particular interests, our
  present system -- which, however imperfect,
  qualifies as an open society --is liable to break
  down.
• I want to emphasize, however, that I am not
  putting laissez-faire capitalism in the same
  category as Nazism or communism. Totalitarian
  ideologies deliberately seek to destroy the open
  society laissez-faire policies may endanger it,
  but only inadvertently. Friedrich Hayek, one of
  the apostles of laissez-faire, was also a
  passionate proponent of the open society.
  Nevertheless, because communism and even
  socialism have been thoroughly discredited, I
  consider the threat from the laissez-faire side
  more potent today than the threat from
  totalitarian ideologies.

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Poppers Continuing InfluenceBaylor Controversy

• http//www.houstonpress.com/issues/2000-12-14/feat
  ure2.html/printable_page
• Is Intelligent design theory a science?
• William Paley (18th-century British natural
  theologist) Living organisms are more
  complicated than watches "in a degree which
  exceeds all computation," therefore we too must
  be the products of some grand watchmaker, an
  intelligence.
• Dembski Science of revealed intelligencecomplexi
  ty and specificity
• Charles Weaver "You can always look at
  something and say, "That's something that God
  did,' " says Weaver. "Well, what can I do to
  prove you wrong? If I can't prove your theory
  incorrect, it doesn't necessarily mean that it's
  wrong, but it means it's not science."

14
Thomas Kuhn Paradigms

• Scientific community wedded to its view of the
  world--its paradigm
• Anomalies--things which contradict theory--at
  first resisted
• Failure to resolve leads to revolution--often
  from outside
• Switch to new paradigm involves total change in
  world view
• Lakatos Methodology of Scientific Research
  Programs (MSRP)
• Theories have hard core which adherents do not
  attempt to falsify
• Hard core surrounded by protective belt of
  hypotheses which may be adjusted to defend hard
  core

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What is a Good Theory?

• Milton Friedman
• Proper test of a theory is by its predictions
• All theory is abstraction. Good theory abstracts
  from reality in a useful way.
• Realism of assumptions irrelevant
• the more significant the theory, the more
  unrealistic the assumptions a hypothesis is
  important if it explains much by little
• as if assumptions--firms behave as if
  maximising expected returns, etc.--valid even if
  firms do not consciously do so.
• Paul Samuelson Good theories are based on
  reasonable assumptionsagainst the F-Twist