On the importance of economic methodology

13 September, 2012 at 13:41 | Posted in Economics, Theory of Science & Methodology | Leave a comment

Sheila Dow is interviewed by Philip Pilkington on her latest book – Foundations for New Economic Thinking:

Sheila Dow: Methodology is about the way in which we do economics, what we think is a good or bad argument and how we choose between theories. It’s not just about whether to use this technique or that technique. Among other things, the methodology we use assumes a particular way of understanding how the economy works and what kind of knowledge is possible.

I think it is always important for economists to understand the basis of what they do, and to be able to justify their own choice of methodology. But it is particularly important now, when the financial and economic crisis is challenging much of what was in the mainstream of economic theory. Those who dismiss thinking about methodology are assuming that there is one best way of doing economics on which everyone agrees. But there are in fact different ways of understanding the economy and therefore different methodologies.

PP: In the book you attribute great importance to issues of uncertainty and the dichotomy between rationality and irrationality. Could you talk about this and in particular how it impacts upon questions of methodology?

SD: Yes, this question illustrates why it is important to consider the methodological foundations of economic theory, not least because words like ‘uncertainty’ and ‘rationality’ mean different things in different schools of thought. Mainstream economists generally take uncertainty to mean risk, as in quantifiable risk. So they don’t take account of unquantifiable risk, which is what non-mainstream economists mean by uncertainty.

Because non-mainstream theorists understand the economy as an open, evolving system, they think that uncertainty is really important. Where risk can’t be quantified, expectations can’t be captured by a probabilistic statistical forecast, and so we need other guides to our behaviour, like conventional judgements, expert judgement or assuming that the future will be like the past. Uncertainty then is an indicator of how much confidence we have in any forecasts and in fact how far we are prepared to commit to forecasts at all. According to this view, economists themselves face uncertainty in their understanding of the economy, so their methodology is designed to deal with this.

The mainstream definition of rationality is based on the idea of individuals maximising their utility on the basis of full information (within probability distributions, sometimes with some particular information concealed). Anything else is defined as irrationality. But for non-mainstream economists, where uncertainty is the norm, this type of rationality isn’t feasible. We use reason along with evidence and the kind of conventions noted above in order to make judgements about the future. But sometimes uncertainty is so high that it is difficult to form any judgement. Emotion then plays an important part, for example in encouraging action in spite of uncertainty. This behaviour may be unreasonable if it flies in the face of evidence, but is not automatically classed as irrational.

PP: In the book you discuss what you refer to as a “Babylonian method” for doing economics. In my understanding you associate this method with Keynes and the Post-Keynesians and contrast it with the “dualistic” approach generally followed by the mainstream. Could you outline the differences between these methodologies and explain why you think the Babylonian method superior?

SD: The Babylonian mode of thought is a way of thinking. It is based on an understanding of the social system as being open and evolving, so that any knowledge is inevitably partial (and subject to uncertainty). It picks up on Feynman’s account of Babylonian mathematics, which allowed for different starting points for different chains of reasoning, depending on the problem at hand. It is a pluralist approach in that it allows for a range of methodological approaches, focusing on different aspects of a complex system. It also implies that each methodology should be pluralist, in the sense of employing a range of methods. Babylonian thought is not atomistic, i.e. it doesn’t require that all arguments be built up from a common starting point of isolated individuals. Rather it is organicist, allowing for and addressing complex interactions and evolutions. Nor is it dualist. There can be degrees of uncertainty and interactions between reason and emotion, for example, and variables can be endogenous to one chain of reasoning while exogenous to another chain, depending on the problem at hand.

The mainstream mode of thought is based on a closed-system approach, requiring all arguments to be built up on microfoundations expressed in terms of atomistic individuals. The resulting methodology is monist: there is one best methodology, which is formal deductive mathematical reasoning. It is a dualist mode of thought, since a closed system only allows for certainty or ignorance and rationality or irrationality, for example, and defines variables as always either endogenous or exogenous.

I prefer the methodology implied by the Babylonian approach since it fits the way I understand the economy. In other words I put realism ahead of the internal elegance of the mainstream approach. The Babylonian mode of thought itself describes how I think, but this is not something I consciously choose. Mainstream economists evidently feel comfortable thinking in a different way. I’m not qualified to say why this is so, but I can point out the damaging consequences, e.g. of uncertainty denial.

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