Economics, philosophy of
Economics, philosophy of
People have thought about economics for as long as they have thought about how to manage their households,
indeed Aristotle compared the study of the economic affairs of a city to the study of the management of a
household. During the two millennia between Aristotle and Adam Smith, one finds reflections concerning
economic problems mainly in the context of discussions of moral or policy questions. For example, scholastic
philosophers commented on money and interest in inquiries concerning the justice of ‘usury’ (charging interest on
money loans), and in the seventeenth century there was a great deal of discussion of policy concerning foreign
trade. Economics only emerged as a distinct field of study with the bold eighteenth- century idea that there were
‘economies’ - that is autonomous law-governed systems of human interaction involving production, distribution
and exchange. This view was already well developed in Adam Smith’s Wealth of Nations, from which much of
economics derives.
Economics is of philosophical interest in three main regards: it raises moral questions concerning welfare, justice
and freedom; it raises foundational questions concerning the nature of rationality; and it raises methodological or
epistemological questions concerning the character and possibility of knowledge of social phenomena. The
fundamental theory of standard orthodox economics is of particular epistemological interest because of its
resemblance to theories in the natural sciences coupled with its uneven empirical performance.
More than 150 years ago John Stuart Mill confronted the problem of how to reconcile his high regard for
economics (despite its empirical adequacies) with his commitment to empiricism. His solution, which was accepted
by most economists until the 1930s, held that the basic principles of economics are well established by
introspection or everyday experience. One can thus justifiably have confidence in economics, despite the
inexactness of its implications, which is only to be expected, since economics deals only with the most important
determinants of economic phenomena.
In the 1930s Mill’s views were rejected as too dogmatic and insufficiently empirical. But the views that succeeded
Mill’s during the generation after the Second World War, most notably the position of Milton Friedman and views
deriving from the work of Karl Popper and Imre Lakatos, were less able to deal satisfactorily with the empirical
inadequacies of economic theories than were Mill’s. Since the mid 1980s there have been several new approaches,
ranging from Donald McCloskey’s rejection of methodological assessment at one extreme to Alexander
Rosenberg’s conclusion that economics cannot be a successful empirical science at the other.
1 What is economics?
Contemporary economics is divided into many schools and branches. The main ‘orthodox’, ‘neoclassical’, or
‘neo-Walrasian’ school models economic outcomes as equilibria in which individuals have done as well for
themselves as they could given their preferences and the constraints on their choices. Common to all branches of
orthodox economics are standard assumptions concerning technological possibilities and individual choice.
Production is subject to diminishing returns to additional units of any given input, other inputs held constant, and
is assumed not to show increasing returns to scale. The rational choices of individual agents are constrained by
their initial endowment with resources and goods and by the technological possibilities. Agents are rational in the
sense that their choices are determined by their preferences, which are complete and transitive. An agent’s
preferences are complete if they can rank all alternatives. An agent’s preferences are transitive if for all
alternatives x, y and z, they prefer x to z, whenever they prefer x to y and y to z (and similarly for indifference).
Agents are typically assumed to want more consumption or leisure for their households and greater net returns for
their firms. In competitive markets it is assumed that firms and individuals cannot influence prices, but economists
and game theorists are also interested in strategic interactions, in which the rational choices of separate individuals
are interdependent.
Orthodox economics has four main branches and many sub-specialities. The view of economic phenomena as
equilibria resulting from constrained rational individual choice has a greater prominence in some branches and
subspecialities than in others. It is central in the most theoretical branch, which consists of microeconomics,
general equilibrium theory and game theory. Econometrics, in contrast, is as much statistics as economics. It uses
data and statistical techniques to determine the values of parameters and to test specific models. Macroeconomics,
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the third branch, is concerned with whole economies and particularly with the causes of the business cycle and
economic growth. In John Maynard Keynes’ General Theory (1936) its links with individual choice are tenuous.
Contemporary economists in contrast have defended alternative macroeconomic theories in which the view of
economic phenomena as equilibria resulting from constrained rational choices is central. The fourth branch,
consisting of orthodox work in ‘applied economics’ (which is what most economists do), is consistent with the
general theoretical picture of economic equilibrium, but applied theories make further simplifications to facilitate
application. Within particular sub-specialities, such as international trade theory, labour economics or financial
economics, one may find work lying along all of the four main branches.
There are also many other schools of economics. Austrian economists accept orthodox views of choices and
constraints, but they emphasize uncertainty and question whether one should regard outcomes as equilibria.
Institutionalist economists question the value of abstract general theorizing. They emphasize the importance of
generalizations concerning norms and behaviour within particular institutions. Applied work in orthodox
economics is sometimes very similar to applied institutionalist economics. Marxian economists traditionally
articulated and developed Karl Marx’s economic theories, but recently many Marxian economists have revised
traditional Marxian concepts and themes with tools borrowed from orthodox economic theory. There are also
socioeconomists, behavioural economists, chaos theorists, post-Keynesians, and neo-Ricardians. Within orthodox
economics itself, there are also many different schools or approaches, such as agency theorists, the Chicago
school, constitutional political economy, new institutional economics, and public choice theory. Economics is not
one homogeneous enterprise. This entry will focus on neoclassical economic theory because the orthodox
neoclassical school is the best known and most influential and because its central theory has attracted the most
philosophical attention.
2 Why is economics of philosophical interest?
Economics has been of philosophical interest in three main regards. First, it raises moral questions concerning
freedom, social welfare and justice. Although economists often deny that their theories have ethical content, they
are ready with advice about how to make life better. Markets, which are the central institutions with which
economics has traditionally been concerned, involve voluntary interactions, yet they are simultaneously
mechanisms that regulate individual activities and allocate goods to people. They thus raise intricate moral
questions concerning coercion, voluntary action, and social justice (see Economics and ethics). All of the leading
figures in contemporary social and political philosophy comment on and are influenced by work in economics
Hausman and McPherson (1996).
Second, contemporary theoretical economics is largely a theory of rational choice. This may seem surprising, since
economics is supposed to be an explanatory and predictive science of the actual interactions among people rather
than a normative discipline studying how people ought rationally to choose, but it is indeed a fact. This fact joins
the interests of economists to the interests of those philosophers concerned with rational choice (see Rational
choice theory; Social choice).
Third, economics raises important questions in philosophy of science. In part this is because all significant
cognitive enterprises raise questions for epistemology or philosophy of science. But orthodox theory is of
particular methodological interest for seven reasons.
Positive and normative. The extent to which economics appears to be permeated with normative concerns raises
methodological questions about the relationships between a positive science (of ‘what is’) and a normative science
(of ‘what ought to be’). The standard view is that the positive science of economics, like engineering, helps
policy-makers to choose the means to accomplish their ends, but it has no bearing on the choice of ends itself. This
view is questionable, because economists have to interpret and articulate the incomplete specifications of goals and
constraints provided by policy makers (see Value judgments in social science).
Reasons and causes. It is of philosophical interest that orthodox theoretical economics is as much a theory of
rational choices as it is a theory that explains and predicts economic outcomes. Although economists are more
interested in the aggregate results of individual choices than in the choices themselves, their theories offer both
causal explanations for why individuals choose as they do and accounts of the reasons for their choices. Embedded
within orthodox economics is a specific variant of ‘folk psychology’, and orthodox economics provides a specific
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context in which to question whether folk-psychological explanations in terms of reasons can also be causal
explanations (see Psychology, theories of; Explanation in history and social science).
Naturalism. Of all the social sciences, economics most closely resembles the natural sciences. Economic theories
have been axiomatized, and essays and books of economics are full of theorems. Of all the social sciences, only
economics boasts a Nobel Prize. Economics is thus a test case for those concerned with the extent of the
similarities and differences between the natural and social sciences (see Naturalism in social science §2).
Abstraction and idealization. Economics raises questions concerning the legitimacy of severe abstraction and
idealization. For example, economic models often stipulate that everyone is perfectly rational and has perfect
information or that commodities are infinitely divisible. Such claims are exaggerations, and they are clearly false.
Can good science make such false claims (see Scientific realism and social science)?
Ceteris paribus clauses. Because economists attempt to study economic phenomena as constituting a separate
domain, influenced only by a small number of causal factors, the claims of economics are true only ceteris paribus
- that is, they are true only if there are no interferences or disturbing causes. What are ceteris paribus clauses, and
when if ever are they legitimate in science (see Social laws)?
Causation. Many important generalizations in economics make causal claims. For example, the law of demand
asserts that a price increase will (ceteris paribus) diminish the quantity demanded. Yet economists are wary of
causal language because of its suggestion that outcomes have single causes and because of difficulties in
integrating talk of causation and talk of mutual determination. Econometricians have also been deeply concerned
with the possibilities for determining causal relations from statistical evidence and with the relevance of causal
relations to the possibility of consistent estimation of parameter values (see Causation §3).
Structure and strategy. During the past generation philosophers of science have been concerned to comprehend the
larger theoretical structures that unify and guide research within particular research traditions or research
programmes. Since orthodox economics is systematically unified, though not in quite the way that Kuhn (1970) or
Lakatos (1970) discuss, it poses interesting puzzles about what guides research. Since the success of orthodox
economics is controversial, this ‘research tradition’ also poses questions about how unified and constrained
research ought to be.
These are the seven most significant philosophical issues concerning neoclassical economic theory, and many of
these issues arise concerning all schools of economics.
3 Classic discussions of philosophical foundations
Explicit methodological reflection on economics dates back to the 1830s to the work of Nassau Senior (1836) and
John Stuart Mill (1836). Their methodological reflections must be understood against the backdrop of the
economic theory with which they were familiar. That theory (‘classical economics’) said comparatively little
concerning the choices of consumers and supposed that people seek more wealth and are overly inclined to
reproduce. With diminishing returns in agriculture and an increasing population, the rate of return in agriculture
(and, given the mobility of capital, elsewhere) will diminish, and the ultimate result will be a stationary state in
which profits are low, workers receive subsistence wages, and landlords receive large rents. On account of this
view of the future, economics was called ‘the dismal science’. Classical economics, like contemporary theory,
relied on bold simplifications and it had empirical difficulties. Although populations grew considerably, the rate of
return in the nineteenth century did not fall sharply, and wages increased dramatically.
Mill was firmly committed to the economics of his day, yet he was a strict empiricist (see Mill, J.S.; Empiricism
§5). Since economics faced such major empirical difficulties, it might appear that Mill would have to change his
epistemology or disavow his economics. Call this conflict between empiricism and economics, which arises from
the apparent disconfirmations of economics and the difficulty of testing it, ‘Mill’s problem’. Mill attempted to
solve it by maintaining that the basic premises of economics are empirically well established by introspective
psychology or by experimental testing of technical claims such as the law of diminishing returns. These
well-supported premises state how specific causal factors operate. If the only causal factors influencing economic
phenomena were those specified in these premises, then the predictions of economic theory would be correct. But
economic phenomena depend on many causal factors that are left out of economic theories. Consequently, the
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implications are inexact. They are always imprecise, and when the factors left out are of particular importance, the
predictions of the theories may be completely mistaken. This inexactness explains why the implications of
economic theories are so poorly confirmed, and consequently the problems do not show that there is anything
mistaken in the fundamental generalizations of economics. In Mill’s view, the empirical confirmation of economic
theories is indirect and ‘deductive’. It derives from the confirmation of their premises. The inductive method of
‘specific experience’ cannot be employed because of the multiplicity of causes. Furthermore, since there is no way
to incorporate a much larger number of causal factors without destroying the ‘separateness’ of economics and
subsuming it into a general social science, this inexactness is an inevitable feature of economics as a distinct
discipline. Economics is unavoidably a science of ‘tendencies’ only.
Mill’s view was tremendously influential until the 1930s, although there were always critics who argued for a
more directly empirical approach to assessing economic theories. The most important methodological works of the
late nineteenth century, J.E. Cairnes’ The Character and Logical Method of Political Economy (1875) and John
Neville Keynes’ The Scope and Method of Political Economy (1891) defend Mill’s view, and one can still find it
clearly expressed in Lionel Robbins’ classic An Essay on the Nature and Significance of Economic Science (1932).
Some have also argued that Mill is, in fact, essentially right Hausman (1992, chaps 8, 12). But by the 1940s most
of those writing on economic methodology had repudiated Mill’s view of economics as a separate and inexact
science justified by a deductive method.
Methodological challenges to Mill’s view before the 1930s came mainly from those working outside the orthodox
mainstream. The most important challenge came from the German Historical School in the nineteenth century and
from the American Institutionalists in the twentieth century. These critics argued that theories should apply more
directly to specific historical circumstances and should be tested more directly through these applications.
Members of the German Historical School also questioned whether it is possible to separate a positive economic
science from normative issues of policy making. Mill accepts the positive/normative division, though not in quite
its modern form, and it is explicit in later followers such as J.N. Keynes. Members of the German Historical
School wanted economic theorizing to be more explicitly normative and oriented toward specific historical
circumstances and policy recommendations.
Although these objections did not shake the views on theory assessment accepted by mainstream economists,
views which remained stable for the century after Mill, changes in philosophical conceptions did accompany the
significant changes that occurred during that century in economic theory itself. Neoclassical economics, unlike its
classical predecessor, focuses on individual choices, which unavoidably reflect subjective preferences and beliefs.
This fact disturbed critics of neoclassical economics, such as Thorstein Veblen, who saw it as a departure from the
general trend of science away from teleological concerns and towards objective causal relations ( 1898). Defenders
such as Frank Knight, Ludwig von Mises and Lionel Robbins agreed that the role of subjective factors sets
economics apart from the natural sciences. But they denied that the methodological distinctiveness of economics
demonstrates any methodological error. Indeed von Mises and his followers saw this peculiarity of economics as a
virtue that provides a special certainty to the conclusions of economics (1949). In their view (though not in the
view of other so-called ‘Austrian’ economists such as Hayek), the conclusions of economics are beyond rational
dispute, because they result from the privileged access people have to their preferences and beliefs or because they
derive from the meaning of rationality (see Certainty).
The neoclassical focus on individual choice also led to a redefinition of the discipline. Mill and the classical
economists had seen economics as concerned with specific causal factors - essentially acquisitive motives,
diminishing returns, and the propensity to reproduce - which preponderate in a specific domain of social life
(1836: 323). Robbins, in contrast, defined economics as ‘the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses’ (1932: 15). In Robbins’ view, economics
is not concerned with production, consumption, distribution or exchange as such. It is instead concerned with an
aspect of all human action. The causal factors with which economics is concerned - rational self-interest - have a
role in all human affairs. This vision of economics has been vindicated to some extent by applications of economic
models to matters such as decisions to marry Becker (1981) and by the development of game theory (see Decision
and game theory). To regard the subject matter of economics as an aspect of all human action is nevertheless an
exaggeration, since economists continue to focus on a particular domain of social phenomena and on causal factors
- such as diminishing returns - that are of particular importance only in that domain.
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The methodological reflections of Knight, Robbins, and the Austrians reinforced Mill’s views of economics as an
inexact science, whose conclusions are credible because they follow deductively from well-established premises.
Yet this view of theory assessment in economics, which was virtually unchallenged within mainstream economics
in 1930, was almost without defenders by the end of the 1950s. During this short period economists came to
believe that Mill’s view of confirmation was insufficiently empirical. Economics could be scientific only if its
theories were subjected to empirical testing, and its theories could be rationally acceptable only if they passed
these tests. It looks as if economists became familiar with the work of the logical positivists (see Logical
posivitism) and applied their views to economics. But there is little solid evidence that the methodological changes
were the result of the influence of logical positivism. The general changes in intellectual climate that gave rise to
logical positivism may have separately caused this revolution in economic methodology. Books by Lesley Fraser
(1937), Terence Hutchison (1938) and Felix Kaufmann (1944) made the case for such a methodological
reorientation. Hutchison’s was the most influential of these books (probably because of Frank Knight’s lengthy
attack on Hutchison’s views in the Journal of Political Economy (1940). Hutchison had studied in Germany and
was familiar with the work of the logical positivists and of Karl Popper, and he complained that statements
qualified with vague ceteris paribus clauses cannot be refuted.
Paul Samuelson’s work on the theory of revealed preference (1938) was especially influential. Samuelson showed
that if consumer choices in simplified models satisfy a consistency condition, then it is possible in principle to
construct from the choices a preference ordering over commodity bundles. His work thus suggested that it might
be possible to reformulate economic theory without relying on hard-to-test claims about subjective states of
choosers. In teasing out the ‘operationally significant’ content of economics from its mentalistic formulation, one
might be able to make economics conform to demanding empiricist strictures. Samuelson was himself more
influenced by the work of scientists such as Gibbs and Bridgman than by the logical positivists, and his own view
of methodology (1963), which essentially repudiates all generalizations that are not themselves separately and
directly testable, is more extreme than are the views of the logical positivists.
Whatever the cause, Mill’s views were eclipsed. Methodologists no longer defended them, although it is arguable
that economists continued to rely on them in practice. But Mill’s problem remained. Neoclassical economic
theory, like its classical predecessor, is hard to test and often apparently disconfirmed. Unless one is prepared to
reject the theory or to deny that theories ought to fit the data, one needs to provide some defence of the empirical
credentials of economics.
4 Milton Friedman’s views
Since the mid twentieth century a large literature devoted to economic methodology has emerged. That literature
explores many methodological approaches and applies its conclusions to many schools and branches of economics.
Most of the literature focuses on the fundamental theory of mainstream economics - the theory of the equilibria
resulting from constrained rational individual choice. This section focuses on Milton Friedman’s extremely
influential views. Two particularly significant alternatives to Friedman not discussed here can be found in
Machlup (1978) and Samuelson (1963).
In his 1953 essay, ‘The Methodology of Positive Economics’, Friedman argued that the only relevant test of an
economic theory is its success in predicting the phenomena that economists are concerned with. He believes that
standard microeconomic theories and the quantity theory of money pass such tests well. He responds to criticisms
of theories that point out that they contain ‘unrealistic assumptions’ (such as the assumption that firms are profit
maximizers) by arguing that the criticisms presuppose mistakenly that theories can be tested by their assumptions.
In Friedman’s view, Mill’s problem evaporates as soon as one recognizes that scrutinizing the realism of
assumptions is a methodological mistake.
Friedman begins his essay by distinguishing sharply between positive and normative economics (see Economics
and Ethics §5). He dismisses the possibility of rational argument concerning values, but maintains that
disagreements about economic policy result more from disagreements concerning the consequences of alternative
policies than from disputes about values. The goal of positive economics is, in Friedman’s view, exclusively
predictive: ‘The ultimate goal of a positive science is the development of a "theory" or ‘‘hypothesis" that yields
valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed’ (1953: 7). Friedman thus
defends an instrumentalist view of science. Note that ‘predictions’ here are simply implications of a theory whose
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truth is not yet known.
Friedman’s central claim that the realism of ‘assumptions’ is irrelevant to the assessment of a theory does not
follow from a standard instrumentalist perspective, in which the correctness or incorrectness of all the observable
consequences of a theory bear on its acceptability. For the assumptions of economics (for example that firms
maximize profits) are testable, and a standard instrumentalist would not dismiss apparent disconfirmations as
irrelevant. To make sense of Friedman’s position, one must recognize that he rejects a standard instrumentalist
concern with all the predictions of a theory. Friedman denies that the goal of economics is predictive success in
general. The practical point of an economic theory is correct prediction only for ‘the phenomena it purports to
explain’ (1953: 30). A good tool need not be an all-purpose tool. The fact that survey results are inconsistent with
predictions derived from the hypothesis that firms are profit maximizers is irrelevant, because survey results are
not among the phenomena that the theory of the firm is intended to explain.
From his thesis that the goal of economics is such ‘narrow’ predictive success, Friedman jumps to the conclusion
that narrow predictive success is the only relevant test. Although tempting, this inference is a mistake. It is like
arguing that the only relevant way to check a computer program is to run it and see whether it does what it is
supposed to. If it is possible to tell for sure by running a program whether it will always do what it is supposed to,
then there is indeed no point to studying the code (though studying the code might be cheaper and easier than
investigating what happens when one runs the program). But with economic theories, as with complicated
computer programs, one can only look at a small sample of their performance, and success in the sample is no
guarantee of success in general. One cannot look and see how well the theory performs with respect to the full
range of phenomena it was designed to account for. Indeed, the point of a theory is precisely to provide guidance
when one does not yet know how the theory’s predictions come out. Just as one can assess computer programs by
studying their code or examining how they work in uninteresting applications, so one can assess theories by
examining their assumptions and attending to the success or failure of uninteresting predictions. Such scrutiny of
the ‘realism of assumptions’ is of particular importance when extending a theory to new circumstances or when
modifying a theory in the face of predictive failure.
Friedman’s narrow view of the goals of economics is also contestable. Even though economics has a crucial policy
mission, many economists are concerned to explain economic phenomena, and many simply want to know the
truth about various aspects of economies. Those economists obviously cannot accept Friedman’s view that the
realism of assumptions does not matter. The argument above shows that economists who accept Friedman’s
narrow view of the goals of economics cannot dismiss criticisms of the realism of assumptions either. Friedman
does not solve Mill’s problem.
5 Popperian perspectives
A second modern approach to Mill’s problem derives from Karl Popper’s philosophy of science and is more
critical of economics (see Popper, K. §§2-3). Popper defends a ‘falsificationist’ methodology. Scientists should
formulate theories that are ‘logically falsifiable’ - that is, inconsistent with some possible observation reports.
‘All crows are black’ is logically falsifiable, since it is inconsistent with (and would be falsified by) an observation
report of a red crow. Second, Popper maintains that scientists should subject theories to harsh tests and should be
willing to reject them when they fail the tests. Third, scientists should regard theories as, at best, interesting
conjectures. Passing a test does not confirm a theory or provide one with reason to believe it. All it does is to
justify continuing to employ it (since it has not yet been falsified) and devoting increased efforts to attempting to
falsify it (since it has thus far survived testing). Popper has also written in defence of what he calls ‘situational
logic’ (which is basically rational choice theory) as the correct method for the social sciences. There appear to be
serious tensions between Popper’s falsificationism and his defence of situational logic, and his discussion of
situational logic has not been as influential as his falsificationism. For discussion of this aspect of Popperian
economic methodology, see Hands (1985).
Given Popper’s philosophy of science, there seems little hope of solving Mill’s problem without rejecting
contemporary economic theory and condemning its practitioners as behaving in scientifically illegitimate ways.
For specific economic theories are rarely logically falsifiable. When they are, they are rarely subjected to tests, let
alone harsh tests. When they fail the tests, they are rarely repudiated. Worst of all, economic theories, which have
not even been well tested, are taken to be well-established, perhaps even unquestionable guides to policy, rather
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than merely conjectures. Some critics of neoclassical economics have made these criticisms Eichner (1983). But
most of those who have espoused Popper’s philosophy of science have not repudiated mainstream economics and
have not been harshly critical of its practitioners.
Mark Blaug (1992) and Terence Hutchison (1938), who are the most prominent Popperian methodologists,
criticize particular features of economics, and they both call for more testing and a more critical attitude. But both
understate the radicalism of Popper’s views and take his message to be merely that scientists should be critical and
concerned to test their theories. Blaug’s and Hutchison’s criticisms have sometimes been challenged on the
grounds that economic theories cannot be tested, because of their ceteris paribus clauses and the many subsidiary
assumptions required to derive testable implications Caldwell (1984). But this response ignores Popper’s
insistence that testing requires methodological decisions not to attribute failures of predictions to mistakes in
subsidiary assumptions or to ‘interferences’. For views of Popper’s philosophy and its applicability to economics,
see de Marchi (1988) and Caldwell (1991).
Applying Popper’s views on falsification literally would be destructive. Not only neoclassical economics, but all
known and probably all imaginable economic theories would be condemned as unscientific, and there would be no
way to discriminate among economic theories. One major problem is that one cannot derive testable implications
from theories by themselves. To derive testable implications, one also needs subsidiary assumptions or hypotheses
concerning distributions, measurement devices, proxies for unmeasurable variables, the absence of various
interferences, and so forth (see Duhem, P.; Quine, W.V. §1). These problems arise generally and Popper proposes
that they be solved by a methodological decision to regard a failure of the deduced testable implication to be a
failure of the theory. But in economics the subsidiary assumptions are extremely uncertain and in many cases
known to be false. Making the methodological decision that Popper requires is unreasonable and would lead one to
reject all economic theories.
Imre Lakatos (1970), who was for most of his philosophical career a follower of Popper, offers a broadly
Popperian solution to this problem (see Lakatos, I.). Lakatos denies that one tests individual theories. When
theories face empirical difficulties, as they always do, one attempts to modify them. Scientifically acceptable (in
Lakatos’ terminology ‘theoretically progressive’) modifications always have some additional testable implications
and are thus not purely ad hoc. If some of the new predictions are confirmed, then the modification is
‘empirically progressive’ and one has reason to reject the unmodified theory and to employ the new theory,
regardless of how unsuccessful, in general, either theory may be. Though progress may be hard to come by,
Lakatos’ views do not have the same destructive implications as Popper’s. Lakatos appears to solve Mill’s problem
by arguing that what matters is empirical progress or retrogression rather than empirical success or failure. It is
thus easy to see why Lakatos’ views have become more widespread among economic methodologists than
Popper’s. Developing Kuhn’s notion of a ‘paradigm’ (1970) and some hints from Popper, Lakatos also developed
a view of the global theory structure of whole theoretical enterprises, which he called ‘scientific research
programmes’. Lakatos emphasized that there is a ‘hard core’ of basic theoretical propositions that are not to be
questioned and that substantial heuristics guide members of a research programme in the articulation and
modification of specific theories. These views were also attractive to economic methodologists, since theory
development in economics is so sharply constrained and directed, and since economics appears at first glance to
have a hard core. The fact that economists do not give up basic theoretical postulates that appear to be false might
be explained and justified by regarding them as part of the hard core of the neoclassical research programme.
Yet Lakatos’ views do not provide a satisfactory solution to Mill’s problem. For it is questionable whether the
development of neoclassical economic theory has demonstrated empirical progress. For example, the replacement
of ‘cardinal’ utility theory by ‘ordinal’ utility theory in the 1930s, which is generally regarded as a major step
forward, involved the replacement of one theory by another that was strictly weaker and which had no additional
empirical content. Furthermore, despite his emphasis on heuristics as guiding theory modification, Lakatos still
emphasizes testing. Science is for Lakatos a much more empirically driven enterprise than is contemporary
economics Hands (1991). It is also doubtful whether research enterprises in economics have hard cores (Hoover
1991; Hausman 1992, ch. 6). For attempts to apply Lakatos’ views to economics, see Latsis (1976) and Weintraub
(1985). As is apparent in de Marchi and Blaug (1991), writers on economic methodology have in recent years
become increasingly disenchanted with Lakatos’ philosophy.
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There is a second major problem with Popper’s philosophy of science, which plagues Lakatos’ views as well. Both
defend the startling thesis that there is no such thing as empirical confirmation. Popper and Lakatos deny that the
results of testing can give one reason to believe that statements are true, and both deny that results of tests can
justify relying on statements in practical endeavours or in theoretical inquiry. They would accordingly regard as
mistaken any claim that there is better evidence for one unfalsified proposition than for another. Someone who
questions whether there is enough evidence for some proposition to justify relying on it in theoretical studies or for
policy purposes would be making the methodological ‘error’ of supposing that there can be evidence in support of
hypotheses. With the notable exception of Watkins (1984), few philosophers within the Popperian tradition have
faced up to this radical consequence.
6 Contemporary directions in economic methodology
The failure of Friedman’s, Popper’s, and Lakatos’ views to solve Mill’s problem has had little impact on most
economists, who are little concerned with methodology and who, when pressed, typically defend a position like
Friedman’s. But those specifically concerned with methodology have turned in many new directions, of which
only three will be discussed here. Especially notable among the projects not discussed here are Lawrence Boland’s
neo-Popperian views (1989), Bruce Caldwell’s ‘methodological pluralism’ (1982), Uskali Mäki’s realist
philosophy of economics (1990), Phillip Mirowski’s exploration of the metaphorical structure of economics
(1990), and E. Roy Weintraub’s social constructivism (1991). There has also been a substantial effort to apply
structuralist views of scientific theories to economics Stegmüller et al. (1982; Balzer and Hamminga (1989), and
recently there have been some discussions of economics from feminist perspectives Ferber and Nelson (1993).
One radical reaction to the failure to solve Mill’s problem is to deny that it can be solved. In Alexander
Rosenberg’s view (1992), economics can only make imprecise ‘generic’ predictions, and it cannot make progress,
because it is built around folk psychology, which is a mediocre theory of human behaviour which (owing to the
irreducibility of intentional notions) cannot be improved. Complex economic theories ought to be valued as
applied mathematics, not as empirical theory. Since economics, despite its many well-trained practitioners, does
not show the same consistent progress as the natural sciences, one cannot dismiss out of hand Rosenberg’s
suggestion that economics is an empirical dead end. But his view that it has made no progress and that it does not
permit quantitative predictions is hard to accept. For example, it seems that contemporary economists can do a
much better job of predicting the revenue consequences of a change in tax rates than could economists of even a
century ago.
An equally radical but opposite reaction is Donald McCloskey’s. He would solve Mill’s problem by repudiating
methodology. In McCloskey’s view, the only relevant and significant criteria for assessing the practices and
products of a discipline are those accepted by the practitioners. Apart from a few general standards such as honesty
and a willingness to listen to criticisms, the only justifiable criteria for any conversation are those of the
participants. The pretensions of philosophers to judge the discourse of scientists are arrogant and may be
dismissed. Mill’s problem dissolves when economists recognize that philosophical standards of empirical success
may be safely ignored. Those who are interested in understanding the character of economics and in contributing
to its improvement should eschew methodology and study instead the ‘rhetoric’ of economics - that is, the means
of argument and persuasion that succeed among economists.
McCloskey’s studies of the rhetoric of economics have been valuable and influential (1985, esp. ch. 5-7), but much
of his work consists not of such studies but of philosophical critiques of the pretensions of methodology. These are
more problematic, because the position sketched in the previous paragraph is hard to defend and potentially
self-defeating. It is hard to defend, because epistemological standards for good science have already infected the
conversation of economists. The standards of predictive success which give rise to Mill’s problem are standards
that economists already accept. Mill’s problem can be dissolved only if economists can be persuaded to surrender
the standards that gave rise to it. But the position sketched in the previous paragraph makes it difficult to argue for
any changes in standards. Furthermore, as Alexander Rosenberg has argued, it seems that economists would doom
themselves to irrelevance if they were to surrender standards of predictive success, for it is upon such standards
that policy decisions are made. McCloskey does not, in fact, want to preclude all ‘external’ criticisms, which
maintain that economists are sometimes persuaded when they should not be or are not persuaded when they should
be. For he criticizes the conflations of statistical significance with economic importance, which are, as he
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Economics, philosophy of
documents, nevertheless extremely common (1985, ch. 9). Sometimes McCloskey characterizes rhetoric
descriptively as the study of what in fact persuades, but sometimes he characterizes it normatively as the study of
what ought to persuade (1985, ch. 2). And if rhetoric is the study of what ought to persuade, then it is
methodology, not an alternative to methodology. Mill’s problem cannot be conjured away.
A third approach is to return to Mill’s own solution. Many of the basic principles of economics are plausible and
are borne out in everyday experience. Although such plausibility does not place these principles beyond question,
it does provide some warrant for them and some warrant for what may be deduced from them. Given the weakness
of tests involving market data, in which there is an uncontrolled multiplicity of causal factors, it may be reasonable
to hang on to orthodox theory in the face of disconfirmation. This thought can be rigorously supported in terms of
Bayesian confirmation theory Hausman (1992, ch. 12).
Yet this restoration of something like Mill’s solution is in many ways as close to Rosenberg’s and McCloskey’s
views as it is to Mill’s. For the recognition that market tests will generally be too weak to shake the initial
plausibility of the basic principles is simultaneously a recognition that there is little to be learned from market data.
Although not quite as hostile to the empirical claims of economics as is Rosenberg’s position, this view holds out
few hopes for major improvements in economics. (By seeking higher quality data from observational studies and
particularly experiments (see Roth 1988), economists may however be able to find a way out of this impasse.) On
the other hand, in its insistence that one study the specific problems and constraints that economists face, this view
joins McCloskey’s in calling for less philosophically blinded studies of the rhetoric of economics (although it does
not, of course, accept McCloskey’s condemnation of epistemology).
7 Conclusions
Contemporary economic methodology is in turmoil. It has become an active area of research engaging major
efforts by dozens of economists and a small group of philosophers. Economics presents a tantalizing list of
puzzles, with Mill’s problem at the core. And these problems have a special philosophical interest because of the
connections between economics and ethics and between economics and the theory of rationality. There is much
that is unknown and puzzling about how much people can learn about the character of their interactions and about
what methods are most likely to help them to learn more. Economics is one exciting venue in which these general
problems can be raised, but it has not, as yet, provided any easy solutions.
See also: Guanzi; Social science, history of philosophy of
DANIEL HAUSMAN
References and further reading
Backhouse, R. (ed.) (1994) New Perspectives on Economic Methodology, London: Routledge.(An accessible
collection of recent essays.)
Balzer, W. and Hamminga, B. (eds) (1989) Philosophy of Economics, Dordrecht: Kluwer.(Contains mainly
applications to economics of the structuralistic view of theories; cited in §6.)
Becker, G. (1981) A Treatise on the Family, Cambridge, MA: Harvard University Press.(Applications of
economic theory to the family; cited in §3.)
Blaug, M. (1992) The Methodology of Economics: Or How Economists Explain, Cambridge: Cambridge
University Press, 2nd edn.(An influential discussion from a Popperian perspective; cited in §5.)
Boland, L. (1989) The Methodology of Economic Model Building: Methodology after Samuelson, London:
Routledge.(One of a series of books developing a distinctive neo-Popperian view of economic methodology;
cited in §6.)
Buchanan, J. and Vanberg, V. (1991) ‘The Market as a Creative Process’, Economics and Philosophy 7: 167-86.
(A classic statement of an ‘Austrian’ perspective.)
Cairnes, J.E. (1875) The Character and Logical Method of Political Economy, New York: A.M. Kelley, 2nd edn,
1965.(One of the major nineteenth-century works on economic methodology by a follower of John Stuart Mill;
cited in §3.)
Caldwell, B. (1982) Beyond Positivism: Economic Methodology in the Twentieth Century, London: Allen
& Unwin.(An extremely influential introduction to economic methodology; cited in §6.)
(ed.) (1984) Appraisal and Criticism in Economics, London: Allen & Unwin.(A useful collection of roughly
positivist or Popperian essays on economic methodology; cited in §5.)
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(1991) ‘Clarifying Popper’, Journal of Economic Literature 29: 1-33.(A major summary of Popper’s views as
applicable to economics; cited in §5.)
(ed.) (1993) The Philosophy and Methodology of Economics, Cheltenham: Edward Elgar.(A three-volume
collection of essays on economic methodology.)
Dugger, W. (1979) ‘Methodological Differences between Institutional and Neoclassical Economics’, Journal of
Economic Issues 13: 899-909.(A further discussion of the character of institutionalist economics; mentioned in
§3.)
Eichner, A. (1983) ‘Why Economics is not yet a Science’, in A. Eichner (ed.) Why Economics Is not yet a
Science, Armonk, NY: M.E. Sharpe, 205-41.(An example of a Popperian critique of orthodox economics; cited
in §5.)
Ferber, M. and Nelson, J. (eds) (1993) Beyond Economic Man: Feminist Theory and Economics, Chicago, IL:
University of Chicago Press.(A collection of essays examining economics from a feminist perspective; cited in
§6.)
Fraser, L. (1937) Economic Thought and Language. A Critique of Some Fundamental Concepts, London: A. & C.
Black.(Calls for a more positivistic view of economics; cited in §3.)
Friedman, M. (1953) ‘The Methodology of Positive Economics’, in Essays in Positive Economics, Chicago, IL:
University of Chicago Press, 3-43.(The most influential single essay on economic methodology; discussed in
§4.)
Hands, D. (1985) ‘Karl Popper and Economic Methodology’, Economics and Philosophy 1: 83-100.(A discussion
of the relevance of Popper’s situational logic to economic methodology; cited in §5.)
Hands, D. (1991) ‘The Problem of Excess Content: Economics, Novelty and a Long Popperian Tale’, in N. de
Marchi and M. Blaug (eds), Appraising Modern Economics: Studies in the Methodology of Scientific Research
Programs, Cheltenham: Edward Elgar, 38-75.(A discussion of empirical emphasis in Lakatos’ philosophy of
science; cited in §5.)
Hausman, D. (1992) The Inexact and Separate Science of Economics, Cambridge: Cambridge University Press.(A
general account of the philosophy of economics that defends a reformulation of J.S. Mill’s views; cited in §§5,
6.)
Hausman, D. (ed.) (1984) The Philosophy of Economics: An Anthology, Cambridge: Cambridge University Press.
(A collection of both classic and recent essays in the philosophy of economics.)
Hausman, D. and McPherson, M. (1996) Economic Analysis and Moral Philosophy Cambridge: Cambridge
University Press.(An introduction to work at the boundaries of economics and ethics; cited in §2.)
Hoover, K. (1991) ‘Scientific Research Program or Tribe? A joint Appraisal of Lakatos and the New Classical
Macroeconomics’, in N. de Marchi and M. Blaug (eds) Appraising Modern Economics: Studies in the
Methodology of Scientific Research Programs, Cheltenham: Edward Elgar, 364-94.(A discussion of the
structure of new classical economics with a critique of Lakatos’ philosophy of science; cited in §5.)
Hutchison, T. (1938) The Significance and Basic Postulates of Economic Theory, New York: A.M. Kelley, repr.
with a new preface, 1960.(Probably the most important methodological work calling for a more positivistic or
Popperian view; cited in §3.)
Kaufmann, F. (1944) Methodology of the Social Sciences, London: Oxford University Press.(Call for a more
positivistic approach; cited in §3.)
Keynes, J.M. (1936) The General Theory of Employment, Interest and Money, London: Macmillan.(The work that
announced the Keynesian revolution in economics; cited in §1.)
Keynes, J.N. (1891) The Scope and Method of Political Economy, New York: A.M. Kelley, 4th edn, 1917.(A
classic work on economic methodology heavily influenced by J.S. Mill; cited in §3.)
Klamer, A., McCloskey, D. and Solow, R. (eds) (1988) The Consequences of Economic Rhetoric, New York:
Cambridge University Press.(Essays containing further discussion of McCloskey’s views on the rhetoric of
economics; discussed in §6).
Knight, F. (1940) ‘What is "Truth" in Economics?’, Journal of Political Economy 48: 1-32.(An influential review
of Hutchison (1938) that defends an old-fashioned Millian view of economic methodology; cited in §3.)
Koopmans, T. (1957) Three Essays on the State of Economic Science, New York: McGraw-Hill.(The most
important book on economic methodology of the 1950s; defends a moderate empiricist position.)
Kuhn, T. (1970) The Structure of Scientific Revolutions, Chicago, IL: University of Chicago Press, 2nd edn.(A
recent classic in philosophy of science defending the importance of ‘paradigms’; cited in §2.)
Lakatos, I. (1970) ‘Falsification and the Methodology of Scientific Research Programmes’, in I. Lakatos and A.
Musgrave (eds), Criticism and the Growth of Knowledge, Cambridge: Cambridge University Press, 91-196.
(The major statement of Lakatos’ philosophy of science; cited in §§2, 5.)
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Latsis, S. (ed.) (1976) Method and Appraisal in Economics, Cambridge: Cambridge University Press.(A collection
of essays applying Lakatos’ philosophy to economics; cited in §5.)
Leijonhufvud, A. (1973) ‘Life Among the Econ’, Western Economic Journal 11: 327-37.(A humorous
commentary on economic methodology.)
Leontief, W. (1971) ‘Theoretical Assumptions and Nonobserved Facts’, American Economic Review 61: 1-7.(An
influential critique of the abstractness and empirical weakness of contemporary economics.)
Little, D. (ed.) (1993) On the Reliability of Economic Models: Essays in the Philosophy of Economics, Boston,
MA: Kluwer.(A recent collection of essays on economic methodology.)
McCloskey, D. (1985) The Rhetoric of Economics, Madison, WI: University of Wisconsin Press.(This contains the
major statement of McCloskey’s views; cited in §6.)
Machlup, F. (1978) Methodology of Economics and Other Social Sciences, New York: Academic Press.(A
collection of Machlup’s essays on economic methodology; cited in §4.)
Mäki, U. (1990) Studies in Realism and Explanation in Economics, Helsinki: Suomalainen Tiedeakatemia.(Essays
clarifying notions of realism and defending its importance in understanding economics; cited in §6.)
Marchi, N. de (ed.) (1988) The Popperian Legacy in Economics, Cambridge: Cambridge University Press.
(Contains essays and debate concerning Popperian economic methodology; cited in §5.)
(ed.) (1992) Post-Popperian Methodology of Economics: Recovering Practice, Boston, MA: Kluwer.(A collection
with examples of new directions in economic methodology.)
Marchi, N. de and Blaug, M. (eds) (1991) Appraising Modern Economics: Studies in the Methodology of
Scientific Research Programs, Cheltenham: Edward Elgar.(A collection devoted to essays appraising
Lakatosian economic methodology; cited in §5.)
Marx, K. (1857-8) Grundrisse, trans. M. Nicolaus, New York: Random House, 1973.(The introduction contains
Marx’s most extensive discussion of economic methodology.)
Menger, C. (1883) Problems of Economics and Sociology, ed. L. Schneider, trans. F. Nock, Urbana, IL:
University of Illinois Press, 1963.(A critique of the views of the German Historical School discussed in §3.)
Mill, J.S. (1836) ‘On the Definition of Political Economy and the Method of Investigation Proper to it’, in
Collected Works of John Stuart Mill, vol. 4, Toronto, Ont.: University of Toronto Press, repr. 1967.(The first
presentation of Mill’s influential views on economic methodology; cited in §3.)
Mill, J.S. (1843) A System of Logic, London: Longmans, Green & Co., 1949.(Book VI contains a significant
reworking of Mill’s views on economic methodology; discussed in §3.)
Mirowski, P. (1990) More Heat Than Light, Cambridge: Cambridge University Press.(A recent discussion of the
history and methodology of economics that emphasizes the use of analogies to physics; cited in §6.)
Mises, L. von (1949) Human Action. A Treatise on Economics, New Haven, CT: Yale University Press.(Mises’
major work, which defends a view of the basic principles of economics as known a priori; cited in §3.)
Morgan, M. (1990) History of Econometric Ideas, Cambridge: Cambridge University Press.(A historical account
of econometrics that highlights its methodological problems.)
Popper, K. (1968) The Logic of Scientific Discovery, London: Hutchinson & Co, rev. edn.(Popper’s major work
discussed in §5.)
Redman, D. (1989) Economic Methodology: A Bibliography with References to Works in the Philosophy of
Science, 1860-1988, New York: Greenwood Press.(A useful source for further references.)
Robbins, L. (1932) An Essay on the Nature and Significance of Economic Science, London: Macmillan, 1935.
(One of the most important books on methodology; cited in §3.)
Roscher, W. (1874) Geschichte der National-oekonomik in Deutschland (The History of the National Economy in
Germany), Munich: R. Oldenbourg.(One statement of the views of the German Historical School mentioned in
§3.)
Rosenberg, A. (1992) Economics - Mathematical Politics or Science of Diminishing Returns?, Chicago, IL:
University of Chicago Press.(Denies the possibility of empirical progress in economics; cited and discussed in
§6.)
Roth, A. (1988) ‘Laboratory Experimentation in Economics: a Methodological Overview’, Economic Journal 98:
974-1031.(A survey emphasizing methodological issues; cited in §6.)
Samuels, W. (ed.) (1980) The Methodology of Economic Thought: Critical Papers from the Journal of Economic
Thought (Issues), New Brunswick, NJ: Transaction Books.(A collection of methodological essays from an
institutionalist perspective.)
Samuelson, P. (1938) ‘A Note on the Pure Theory of Consumer’s Behavior’, Economica 5: 61-71.(An influential
presentation of revealed-preference theory that led economists to take a more positivistic view of economic
methodology; cited in §3.)
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Samuelson, P. (1963) ‘Problems of Methodology - Discussion’, American Economic Review Papers and
Proceedings 53: 232-6.(A presentation of Samuelson’s views on economic methodology; cited in §4.)
Senior, N. (1836) Outline of the Science of Political Economy, New York: A.M. Kelley, repr. 1965.(Contains one
of the first discussions of economic methodology. Senior’s position is similar to Mill’s and cited in §3.)
Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, Oxford: Oxford University
Press, 1976.(One of the most important economics books ever written; cited in introduction.)
Stegmüller, W., Balzer, W. and Spohn, W. (eds) (1982) Philosophy of Economics: Proceedings, Munich, July
1981, New York: Springer.(Applications of the structuralist view of scientific theories to economics; cited in
§6.)
Veblen, T. (1898) ‘Why is Economics not an Evolutionary Science?’, Quarterly Journal of Economics 12:
373-97.(A classic institutionalist critique of neoclassical economics.)
Watkins, J. (1984) Science and Scepticism, Princeton, NJ: Princeton University Press.(A sophisticated account of
philosophy of science in the Popperian tradition; cited in §5.)
Weber, M. (1975) Roscher and Knies: The Logical Problem of Historical Economics, trans. G. Oakes, New York:
Macmillan.(A discussion of the German Historical School; cited in §3.)
Weintraub, E. (1985) General Equilibrium Analysis: Studies in Appraisal, Cambridge: Cambridge University
Press.(An influential application of Lakatos’ philosophy of science; cited in §5.)
Weintraub, E. (1991) Stabilizing Dynamics, Cambridge: Cambridge University Press.(A history of recent work
on dynamics defending postmodern, social constructivist views.)Essays on economic methodology are
conveniently indexed in The Journal of Economic Literature and in the Index of Economic Articles in Journal
and Collective Volumes under the number, 036 prior to 1991 and under the number B4 since then. Redman
(1989) is an annotated bibliography of essays on economic methodology published before 1988.)
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