Lecture One

1
Lecture One

• Epistemology and Economic Methodology

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Epistemology

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

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Epistemology

• Propositions
• Realism Yes, objective reality exists
• Absolutism Yes, ultimate and unchanging 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?

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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)
• David Hume (1772)
• Auguste Comte (1822)--(Positivism)
• Carnap Vienna Circle (1920s-30s)--Logical
  Positivism
• Karl Popper (1902-1994)Falsificationalism
• Thomas Kuhn (1962)--Scientific Revolutions

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Humes Empiricism

• David Hume, An Inquiry Concerning Human
  Understanding, (1772)
• Nothing, at first view, may seem more
  unbounded than the thought of man but it is
  really confined within very narrow limits. All
  this creative power of the mind amounts to no
  more than the faculty of compounding,
  transposing, augmenting, or diminishing the
  materials afforded us by the senses and
  experience When a child has felt the sensation
  of pain from touching the flame of a candle, he
  will be careful not to put his hand near any
  candle If you assert, therefore, that the
  understanding of the child is led into this
  conclusion by any process of argument or
  ratiocination, I may justly require you to
  produce that argument

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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

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Karl Popper What is a Science?

• Philosopher, raised in Vienna during collapse of
  Austro-Hungarian empire (1912-1919)
• Once convinced, then disillusioned by Marxist
  theory of history
• Characterizes 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

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Karl Popper What is a Science?

• Rejected conventional explanations (empirical
  inductive method) because pseudo-sciences (e.g.
  astrology) are 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.

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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 scientific
  proposition is one which could be refuted.
• Every 'good' scientific theory is a prohibition
  it forbids certain things to happen...
• Every genuine test of a theory is an attempt to
  falsify it, or to refute it...

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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 views 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? We live in the same universe
  that we are trying to understand, and our
  perceptions can influence the events in which we
  participate.
• Whether the theory is valid or not, it has
  turned out to be very helpful to me in the
  financial markets.

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Poppers Continuing Influence George Soros

• A dominant belief in our society today 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 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
  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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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 (supported by Fritz Machlup)
• 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
  maximizing expected returns, etc.--valid even if
  firms do not consciously do so.
• Paul Samuelson Good theories are based on
  reasonable assumptionsagainst the F-Twist