Chapter III – The Methodological Status of ‘Common
Sense’ in Economic Theory
Author:
Lauchlan Mackinnon
PhD Student
Departments of Economics and Philosophy
The University of Queensland
St. Lucia Campus, Brisbane, Queensland, Australia
Contact
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Phone: 0402 141 131
This is a DRAFT of a chapter that is proposed for inclusion in my doctoral thesis.
All constructive comments and feedback very much appreciated
Copyright © Lauchlan Mackinnon 2005
Do not cite, excerpt from or use without prior written permission
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1
Chapter III – The Methodological Status of ‘Common Sense’ in Economic Theory ........ 1
Introduction..................................................................................................................... 3
Identifying a ‘Hume-Popper position’ on the methodological status of common
sense in science ........................................................................................................... 3
The Hume-Popper position as five tenets related to the discipline of economics ...... 6
Common-sense in Scottish common sense philosophy .................................................. 7
Common sense in the economics literature .................................................................... 9
Habitus and Hayek: the contextually located economic agent, well adapted to his or her
environment .................................................................................................................. 16
Common sense, practical sense, and economic sense................................................... 18
Common sense and intuition......................................................................................... 19
‘Economic sense’ or intuition as a link between economic theory and economic reality
....................................................................................................................................... 20
‘Against’ common sense ............................................................................................... 22
Common-sense integrates and processes a diverse range of real-world experiences... 24
Assessing the support for the ‘Hume-Popper position’ ................................................ 25
Three methodological principles suggested by the ‘Hume-Popper position’ ............... 26
The first methodological principle: common-sense acts as a guide ......................... 27
The second methodological principle: the more the premises or conclusions of an
argument diverge from common-sense, the greater the burden of proof required ... 29
The third methodological principle: any common-sense observation about the real
world should be theoretically ‘admissible’ ............................................................... 30
Conclusions ................................................................................................................... 32
Out-takes ....................................................................................................................... 32
References ..................................................................................................................... 33
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Introduction
As will be shown below, a number of economists, including J. S. Mill, Jevons, and
Marshall, have observed that a key feature of economic science is that its subject matter
is within the everyday experience of the ‘everyday man’ in the course of carrying out his
or her commercial activities. We all have direct experience of and form opinions and
beliefs about the economic world that we live in.
It is pertinent therefore to inquire what the methodological status of everyday, commonsense observations should be in relation to the claims or propositions of existing
theoretical frameworks, such as that of neoclassical economics. Suppose a common-sense
observation was made, that to an agent located in the economic system was simply selfevident and obvious, but yet clashed with the axiomatic premises or the predictions of the
neoclassical or mainstream economic framework. What epistemic status should be
assigned to the common-sense observation? Should a common-sense observation or
empirical fact ‘trump’ an unrealistic assumed axiom?
These considerations are extremely pertinent to the present thesis as, in the ensuing
chapters of the thesis a number of common-sense propositions will be put forward - such
as the fact that economists develop ideas or theories regarding economic systems, those
ideas are disseminated in society in various forms, and people adapt their behaviours
accordingly - and their consequences examined. The present chapter will provide a
methodological rationale for supposing that the common-sense propositions to be put
forward are methodologically at least as valid as the kind of abstract and unrealistic
assumptions routinely assumed in neoclassical economics, such as the existence of
maximizing individuals with unlimited computational ability and foresight.
Identifying a ‘Hume-Popper position’ on the methodological status of
common sense in science
Critical reflection regarding these issues may be greatly illuminated with reference to the
work of two highly regarded philosophers, namely David Hume in his Inquiry
Concerning Human Understanding (1748/1988) and Karl Popper in his Objective
Knowledge (1972).
Hume noted a problem with an analytic approach to philosophy1 :
It is easy for a profound philosopher to commit a mistake in his subtile reasonings; and while
one mistake is a parent of another while he pushes on his consequences, and is not deterred
from embracing any conclusion, by its unusual appearance, or its contradiction to popular
opinion. But a philosopher, who purposes only to represent the common sense of mankind in
more beautiful and more engaging colours, if by accident he falls into error, goes no farther;
but renewing his appeal to common sense, and the natural sentiments of the mind, returns
1
A problem that, arguably, might apply to mu ch of modern mainstream economics based on deductive
analysis !
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into the right path, and secures himself from any dangerous illusions. (Hume 1748/1988,
Section I, italics added)
Hume makes an even broader commitment to the role of common sense in developing
and guiding philosophy in suggesting that:
. . . philosophical discussions are nothing but reflections of the common life, methodised and
corrected. (Hume 1748/1988, Section XII, Part II)
Karl Popper, in his Objective Knowledge (1972), made similar observations regarding
common sense not only in philosophy but in science. Given its importance to the present
discussion, it is worth quoting the central statement of Popper’s position at length:
Science, philosophy, rational thought, must all start from common sense.
Not, perhaps, because common-sense is a secure starting point: the term ‘common sense’
which I am using here is a very vague term, simply because it denotes a vague and changing
thing – the often adequate or true and often inadequate or false instincts or opinions of many
men.
How can such a vague and insecure thing as common sense provide us with a starting-point?
My answer is: because we do not aim or try to build (as did, say, Descartes or Spinoza or
Locke or Berkeley or Kant) a secure system on these ‘foundations’. Any of our
commonsense assumptions – our commonsense background knowledge, as it may be called –
from which we start can be challenged and criticized at any time; often such an assumption is
criticised and rejected (for example the theory that the earth is flat). In such a case, common
sense is either modified by the correction, or it is transcended and replaced by a theory which
may appear to some people a for shorter or longer period of time as being more or less
‘crazy’. If such a theory needs much training to be understood, it may even fail for ever to be
absorbed by common sense. Yet even then we can demand that we try to get as close as
possible to the ideal: all science, and all philosophy, are enlightened common sense.
Thus we begin with a vague starting-point, and we build on insecure foundations. But we can
make progress: we sometimes can, after some criticism, see that we have been wrong: we can
learn from our mistakes, from realizing that we have made a mistake . . . My first thesis is
thus that our starting point is common sense, and that our great instrument of progress is
criticism (Popper 1972: 33-34, italics in the original)
Like Hume, Popper suggests that scientific knowledge essentially is refined, developed
common sense. Repeating Popper’s claim for emphasis :
. . . we can demand that we try to get as close as possible to the ideal: all science, and all
philosophy, are enlightened common sense (Popper 1972: 34)
I suggest therefore that it is possible to identify what might be called a ‘Hume-Popper
position’ on the relationship of common sense to scientific thought, distilled from the
positions of Hume and Popper quoted above, consisting of five related tenets or premises
namely:
(i)
(ii)
that the starting point of philosophical or scientific knowledge is in common
sense experience of, or beliefs about, the world,
that this common-sense knowledge can be criticized, tested, explored and
improved
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(iii)
(iv)
(v)
that which constitutes ‘common sense’ with regard to the domain of concern
may itself evolve as scientific or philosophical discussion and investigation
proceeds
that science and philosophy essentially consist of “enlightened” or articulated,
refined, developed and tested common sense
that common sense, and the real world context, is a guide to when theory
begins to lose real-world relevance, for example due to errors in the
assumptions used as premises, or due to subtle errors in the reasoning.
The position demarcated by Hume and by Popper finds many reverberations in
contemporary thought. For example, Popper’s view of common sense can also be related
to the well-known metaphor due to Otto Neurath:
. . . we have, as it were, to reform ordinary language while using it, as described by Neurath’s
metaphor of the ship we have to rebuild while trying to keep afloat in it. This indeed is the
situation of critical common sense, as I see it. (Popper 1972: 60)
John Coates (1996: 2) suggests that “the most influential account of common sense
derives from Otto Neurath’s metaphor” and, like Popper, suggests that “Common sense is
not a timeless body of truths, it is merely the current state of the theory, our inevitable
starting-points for further research, starting-points moreover from which we slowly
evolve.”
Philosopher Stephan Korner (1971) emphasises, like Popper, the role of common-sense
as a starting point:
. . . common-sense thinking is . . . the starting point for generalization and system by
theoretical scientists and systemic moralists. (Körner 1971: 2, italics added)
Philosopher David Lewis (1986) perhaps articulates a modern philosophical orientation
towards common-sense, articulating both a sympathy towards it and a willingness to
question it:
Common sense has no absolute authority in philosophy. It’s not that the folk know in their
blood what the highfalutin’ philosophers may forget. And it’s not that common sense speaks
with the voice of some infallible faculty of “intuition.” It’s just that theoretical conservatism
is the only sensible policy for theorists of limited power, who are duly modest about what
they could accomplish after a fresh start. Part of this conservatism is reluctance to accept
theories that fly in the face of common sense. (Lewis 1986: 134)
Coates (1996) formulates ‘clinging to common-sense until evidence confirming an
alternative arrives’ as a rational behaviour:
Common sense merely points to the rational procedure of tenaciously holding on to our
current beliefs until enough evidence is mustered to warrant their abandonment. (Coates
1996: 5)
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The methodological status of common-sense has been taken up in a range of disciplines.
In psychology for example this issue has been addressed in the edited collection collated
by Jurg Siegfried (1994). In addition to mapping out contributions to a common-sense
viewpoint in psychology and in science, Siegfried identified that “common sense also
started to sail under different names in the social sciences,” including “natural
psychology,” “everyday beliefs,” “folk psychology,” “stock of knowledge,” and “natural
languages.” In sociology, a number of contributions such contributions in
ethnomethodology have put emphasis on the existing common-sense body of beliefs.
The ‘common sense’ position that may be identified from the writing of Hume and
Popper and found as a recurring theme in the philosophy of science and the philosophy of
the social sciences is, for convenience, here called the ‘Hume-Popper position’ on
conceptualizing the methodological status of common-sense.
The Hume-Popper position as five tenets related to the discipline of
economics
I propose that the tenets of the ‘Hume-Popper position,’ as identified above, may be
naturally translated to five claims regarding economic knowledge, namely:
(i)
(ii)
(iii)
(iv)
(v)
that the starting point of economic knowledge is our common sense
experience of, or beliefs about, the social and economic world,
that this common-sense knowledge can be criticized, tested, explored and
improved
that what constitutes ‘common sense’ with regard to the domain of concern
may itself evolve as economic discussion, debate and investigation proceeds
that economic theory should - and does - consist of and embody an ‘economic
sense’ that is rooted in but has evolved and diverged from a ‘lay’ commonsense regarding economic systems
that common sense, and the real world context, is a guide to when economic
theory begins to lose real- world relevance, for example due to errors in the
assumptions used as premises, or due to subtle errors in the reasoning.
The goal of the present chapter is to reflect on the applicability of the tenets of the
‘Hume-Popper position’ in the context of specifically economic science, and assess
whether they hold up and provide a reasonable account of the general relationship
between economic science and common-sense. The chapter will proceed by initially
reviewing some of history of the concept of common-sense in Scottish common sense
philosophy, before referring to some of the history and literature of economic science to
attempt to establish that economic science started from a starting point of common-sense
and proceeded to evolve and refine common-sense propositions through the medium of
critical engagements and reconstructions in the literature. The chapter will then consider
some potential objections in the literature to common-sense and show that the ‘HumePopper position’ deals easily with these objections. Finally, some methodological
principles arising from a reflection on common-sense knowledge and beliefs in relation to
theoretical knowledge will be presented for consideration.
6
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Common-sense in Scottish common sense philosophy
A detailed historical review of the concept of common-sense in philosophy or any other
discipline is beyond the scope of this thesis. Such reviews have been undertaken
elsewhere (see for example Coates 1996; Allen 2001), and in any case such a detailed
review is unnecessary for the present purposes. For the present purposes, all that is
needed is an introduction of the ‘Hume-Popper position’ as has already been presented in
the introduction to the chapter, together with reference to relevant material from the
history of economic thought and other relevant academic literature.
It is however useful to briefly mention the concept of common-sense as used by Thomas
Reid (1764/1983; 1785/1983) in Scottish common sense philosophy, and the evolution of
the idea of common sense as taken up by some of his intellectual successors. This
material has, again, been considered in detail elsewhere (see for example Davie 1976;
Coates 1996; Comim 2002) and it is only necessary to emphasize a few key points here.
Reid (1764/1983), in the context of an ongoing philosophical debate with Hume (e.g. see
Comim 2002: 97), introduced a concept of common sense as follows:
Such original and natural judgments are, therefore, a part of that furniture which Nature hath
given to the human understanding. They are the inspiration of the almighty, no less than our
notions or simple apprehensions. They serve to direct us in the common affairs of life, where
our reasoning faculty would leave us in the dark. They are part of our constitution; and all of
the discoveries of our reason are grounded upon them. They make up what is called the
common sense of mankind. (Reid 1764/1983: 118)
Reid is widely - and probably quite fairly - interpreted to have taken common sense to
consist of “a body of indubitable and natural beliefs” (Coates 1996: 1) which do not
change to any great or significant extent. A number of later philosophers however
specifically interpreted common-sense as evolving:
. . . while the Scottish school held that there was a timeless core of commo n sense beliefs,
[Sidgwick and C. S. Peirce] saw this core as undergoing a slow process of evolution due to
the progress of science. More importantly, they saw philosophy as having a role in criticizing
and changing these beliefs. (Coates 1996: 18)
For example, Peirce thought that much of our common-sense knowledge is instinctual
and has ‘always’ been with us, but that does not mean to say it cannot evolve:
This raises the question of the reas ons for holding our original beliefs. We tend to think that
there is some reason for holding them, one that we might have lost sight of. But if we
consider them closely, said Peirce, we discover that belief habits have always been with us,
unquestioned and fathomless. They are “of the general nature of instincts”; alternatively, they
are “ultimate premise[s] . . . held without reference to precise proof.” The instinctual nature
of common sense Peirce shared with the Scottish school, but against it he pointed out that
man can outgrow the primitive forms of life in which these instincts had their origin. With
the development of technology we are put into situations where our ancient beliefs offer us
little direction, and in this case criticism is required. (Coates 1996: 20)
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It is immediately apparent from the quotations reproduced earlier in this chapter to the
effect that Hume took philosophy to be “reflections of the common life, methodised and
corrected,” that Hume allowed for an evolution or change in scientific or philosophical
ideas under philosophical reflection. It does not appear that Reid was opposed to Hume’s
view in this respect. Comim (2002 ) noted that:
Reid’s general opinion of Hume’s work is ambivalent. On the one hand, he strongly criticizes
Hume’s associationist epistemology and everything related to it. On the other hand, he is
complacent about all other aspects of Hume’s theory. Because of this ambivalence it is
important to distinguish between the different parts of Hume’s theory as discussed by Reid.
(Comim 2002: 98 n4)
In particular, the notion that philosophy starts with and evolves from common-sense
would appear to be an area in which Hume and Reid seemed to be in substantial
agreement. Reid wrote:
In this unequal contest betwixt Common Sense and Philosophy, the latter will always come
off both with dishonour and loss. But, on the other hand, Philosophy has no other root but
the principles of Common Sense; it grows out of them, and draws its nourishment from them.
(Reid 1764/1983: 7, italics added)
As an aside (it is not especially relevant for the present discussion), the “contest betwixt
Common Sense and Philosophy” Reid refers to may be traced back in Scottish commonsense philosophy to tensions between Berkeley and Hutcheson, leading to what has been
termed the “central problem of Scottish philosophy” (Davie 1976). Berkeley suggested
that the “instincts of the farmer” should be set aside in favour of the “sophistication of the
philosopher” and that we should “think with the learned while we talk with the vulgar.”
On the other hand, “Hutcheson’s sympathy for Shaftesbury’s common sense intuitionism
led him to advocate that ‘we are to respect the instincts of the farmer against the
sophistication of the philosopher and initiate a sort of dialogue between the vulgar and
the learned, instead of talking down to the farmer from the standpoint of the
philosopher.’” Davie (1976) comments:
In course after course of lectures, professor after professor – Reid, Stewart, Brown,
Hamilton, Ferrier, and Adam Smith . . . sought to overcome the tension between the common
sense of Hutcheson and the paradoxes of Berkeley by producing a system that would
harmonize the standpoint of the vulgar with the standpoint of the learned in a moderate
philosophy of modern progress. (Davie 1976: 61-62)
For the present purposes it is important to note that later writers taking their inspiration
from the Scottish common-sense school of thought have tended to consider philosophy or
science to have started from common-sense and consist of evolved and ‘corrected’
common-sense. Sidgwick (1905) for example held a view prior to but analogous to
Popper’s, that:
Common sense organised into science continually at once corrects and confirms crude
common sense. (Sidgwick 1905: 414)
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Common sense in the economics literature
The ‘tenets’ of the proposed ‘Hume-Popper position’ suggested above, and translated to
the context of economic science, were:
(i)
(ii)
(iii)
(iv)
(v)
that the starting point of economic knowledge is our common sense
experience of or knowledge about the social and economic world,
that this common-sense knowledge can be criticized, tested, explored and
improved
that what constitutes ‘common sense’ with regard to the domain of econo mics
may itself evolve as economic discussion, debate and investigation proceeds
that economic theory should - and does - consist of and embody an ‘economic
sense’ that is rooted in but has evolved and diverged from a ‘lay’ commonsense regarding economic systems
that common sense, and the real world context, is a guide to when economic
theory begins to lose real- world relevance, for example due to errors in the
assumptions used as premises, or due to subtle errors in the reasoning.
It is appropriate therefore to begin with demonstrating that the starting point of economic
knowledge lies in common-sense experience of, or knowledge of, the social and
economic world. Fortunately, this tenet of the ‘Hume-Popper position’ is fairly easy to
establish by referenc e to the history of economic thought.
If we look at early writers in political economy, we find a wealth of statements explicitly
linking the starting point of economic analysis with common-sense understandings of the
socio-economic world. Jean-Baptiste Say (1803/1964) for example wrote that:
A treatise on political economy will then be confined to the enunciation of a few general
principles, not requiring even the support of proofs or illustrations; because these will be but
the expression of what every one will know, arranged in a form convenient for
comprehending them, as well in their whole scope as in their relation to each other. (Say
1803/1964, section I.30, italics added)
Nassau Senior (1836) similarly suggested that the political economist’s
. . . premises consist of a very few general propositions, the result of observation, or
consciousness, and scarcely requiring proof, or even formal statement, which almost every
man, as soon as he hears them, admits as familiar to his thoughts, or at least as included in
his previous knowledge (Senior 1836, italics added)
The pragmatist philosopher Charles Peirce explicitly characterised the political economy
of Smith and Ricardo as being grounded in common-sense:
The analytic economics of Adam Smith and of Ricardo were examples of [the sort of science
that is founded upon the common experience of all men]. The whole doctrine in its totality is
properly termed the Philosophy of Common Sense, of which analytic mechanics and
analytical economics are branches. (Charles Peirce, quoted in Hoover 1994: 295)
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There is a wealth of literature on the role of common-sense in Adam Smith’s thought. For
example, Schumpeter suggested that Smith
. . . disliked whatever went beyond plain common sense. He never moved above the heads of
even the dullest readers. He led them on gently, encouraging them by trivialities and homely
observations, making them feel comfortable all along. (Schumpeter 1954: 185)
Later literature, taking into account Smith’s comments in his Lectures on Rhetoric and
Belles Lettres (unavailable to Schumpeter at the time of his writing) accepted that Smith
had a more sophisticated rhetorical and discursive strategy than Schumpeter gave Smith
credit for. Support remains however for the notion that Smith’s writing was largely
philosophically rooted in common-sense notions. Comim (2002) for example developed a
coherent and forceful argument to the effect that “a notion of common sense was behind
Smith’s view of science . . . it could perhaps be said that Adam Smith provides a good
illustration of the use of the notion of common sense in economics and that common
sense may be interpreted as an epistemological foundation for the [economic] claims of
the Scottish tradition.” In any case, it is clear that Smith’s Wealth of Nations is peppered
with common-sense examples familiar to and understandable by the lay man, and in
introducing even relatively sophisticated concepts like his ‘invisible hand,’ Smith roots
his discussion in readily understood common-sense propositions, such as for example the
activities of the baker.
J. S. Mill and John Elliott Cairnes argued that the basic facts of economic life were
immediately available to common intuition, a position endorsed by William Stanley
Jevons:
The science of economics, however, is in some degree peculiar, owing to the fact, pointed out
by J. S. Mill and Cairnes, that its ultimate laws are known to us immediately by intuition, or,
at any rate, they are furnished for us ready made by other mental or physical sciences.
(Jevons 1871/1888: 18, italics added)
Walras’s position in relation to common-sense is readily identified from his Elements
(1877/1954):
. . . the pure theory of economics ought to take over from experience certain type concepts,
like those of exchange, supply, demand, market, capital, income, productive services and
products. From these real-type concepts the pure science of economics should then abstract
and define ideal-type concepts in terms of which it carries on its reasoning. The return to
reality should not take place until the science is completed and then only with a view to
practical applications. (Walras 1877/1954: 71, italics added)
Clearly, in seeing the starting point of pure economics in ‘taking over from experience’
type concepts that may be of value for analysis, Walras is seeing the starting point of
economics in common experience or, equivalently, in terms that are consistent with
viewing the starting point of economic theorising with common-sense. Walras however
rapidly diverges thereafter from the ‘Hume-Popper position’ as he denies a role for
common experience in testing and validating the conclusions of the theoretical analysis,
and indeed seems to exemplify the kind of analytic reasoner that Hume finds likely to
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“commit a mistake in his subtile reasonings; and while one mistake is a parent of another
while he pushes on his consequences” and that is not “deterred from embracing any
conclusion, by its unusual appearance, or its contradiction to popular opinion. ” Walras
seems to explicitly advocate that, as far as pure economics is concerned, once the type
concepts are taken over then whether the conclusions of pure reasoning jar with common
experience or not is to be taken as irrelevant.
The first tenet of the ‘Hume-Popper position’ - that “the starting point of economic
knowledge is our common sense experience of or knowledge about the social and
economic world” - clearly, therefore, finds widespread - and eminent - support in the
writing of a diverse range of eighteenth and nineteenth century political economists, from
Adam Smith through to Léon Walras. It is unnecessary for the present discussion to
further multiply examples.
It is however worth noting that each significant contributor to political economy (and,
later, economic science) viewed themselves as somehow improving on the commonsense observations in some manner. For example, Say (quoted above) noted that the
fundamental principles of economic science are not only “what everyone will know,” but
“arranged in a form convenient for comprehending them, as well in their whole scope as
in their relation to each other.” The common-sense knowledge has been refined,
elaborated and organised.
Henry George (1897) nicely articulated the notion of political economists refining and
improving the material available to common-sense into a more systematically developed
and articulated theory:
In proposing to my readers to go with me in an attempt to work out the main principles of
political economy , I am not asking them to think of matters they have never thought of
before, but merely to think of them in a careful and systematic way. For we all have some
sort of political economy..... (George 1897, italics added)
Alfred Marshall (1890) similarly saw economic science as an articulation of commonsense, refined by “organized analysis and general reasoning”:
We have seen that the economist must be greedy of facts; but that facts by themselves teach
nothing. History tells of sequences and coincidences; but reason alone can interpret and draw
lessons from them. The work to be done is so various that much of it must be left to be dealt
with by trained common sense, which is the ultimate arbiter in every practical problem.
Economic science is but the working of common sense aided by appliances of organized
analysis and general reasoning, which facilitate the task of collecting, arranging, and
drawing inferences from particular facts. Though its scope is always limited, though its work
without the aid of common sense is vain, yet it enables common sense to go further in
difficult problems than would otherwise be possible. (Marshall 1890: Book 1, Ch 4, italics
added)
While economic theory started from observations drawn from common-sense, i.e. from
the same subject material as laymen naturally had opinions of and understandings of,
political economists systematically analysed and refined these common-sense
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observations into a body of theory that began to evolve away from and became distinct
from common-sense. This body of theory was in turn itself refined, criticised and
improved.
The proposition that political economists tried to improve their body of knowledge and
that the mechanism of progress was critical interaction within the discipline is probably
rather uncontentious. It is pertinent however to note that if political economists and
economic scientists had not tried to improve their body of knowledge beyond the level of
common-sense knowledge and intuitions, economics would have little claim to being a
discipline offering significant authority over and above lay knowledge or common-sense.
For example, Richard Jenkins (2002) has taken up this issue in sociology, and noted that
the ability of the field (of sociology) to differentiate itself from raw common-sense is
pivotal to the existence of the field:
If any kind of sociology is to be worth having, it must offer something other than common
sense, and it must be able to justify what it offers as valuable, if not preferable. (Jenkins
2002: 28)
The situation is hardly different in economics. The body of theory, once started, must be
refined and improved, and as noted by Popper, the instrument of progress is critical
engagement. It is not considered necessary here to go into an exhaustive listing of critical
engagement after critical engagement by theorist after theorist in the history of political
economy (and, later, economic science) to establish the point that economists do actually
critically engage with each other, and that on one level or other some refinement of the
theory ensues as a result 2 . Examples abound in the literature and such critical engagement
is readily apparent from even a casual reading of the history of economic thought. Any
number of examples could be given: to pick a couple of historical examples at random,
the methodenstreit or the social calculation debate could be mentioned.
One would naturally expect that an economist trained and ‘socialised’ into the
sophisticated body of theory and the general perspectives and core commitments of the
modern economic science profession might begin to see the real world differently from
the layman. The point that the body of theoretical understanding in economics has in the
course of time diverged substantially from a common-sense understanding of economic
reality may be brought home forcefully by an observation made by economist David
Henderson (1986), who commented on his time serving on committees in Whitehall:
. . . the use of conventional economic ideas often set me apart from other committee
members, who revealed themselves as having quite different ways of viewing economic
aspects of the issues under discussion . . . I asked myself where these committee table ideas
had originated. They did not come from past university economics courses, which in any case
few of the officials concerned had attended. Nor were they derived from the present-day
writings of economists outside the official machine . . . Finally, there were very few cases in
which these ideas could have been picked up from economists within the departments
2
It is of course more contentious whether, after the neoclassical ascendency, orthodox economics has
meaningfully responded to and significantly adapted to forceful critical engagement, but that is a separate
issue beyond the scope of the present concerns.
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concerned . . . It was apparent that economists, whether past or present, inside or outside,
were simply not involved. The doctrines that I was now encountering were intuitive and selfgenerated: those who held them thought that they were saying plain common sense, which
needed no prompting or authority . . . What I had identified, and perceived as being
widespread and influential in Whitehall, was do-it-yourself economics (DIYE for short).
(Henderson 1986: 9-10, italics added)
Henderson thereby highlights both the existence of a kind of evolved ‘common-sense’
understanding of economic issues in contemporary society and, contrasted with it, an
entirely different ‘economic’ way of viewing and understanding economic issues,
through the lens of a formal economic training.
The modern econo mics profession quite clearly and deliberately attempts to cultivate in
economics students – through the media of theoretical and explicitly mathematical
models and through consideration of case examples - a specifically ‘economic’ sense or
intuition for how economic systems will behave that may well be different from lay
common sense. For example, Stanley Fischer comments that:
We teach our incoming graduate students the IS-LM model and I don’t think there is a better
model for getting the intuition of the short-run adjustment of the economy right. (Fischer
1994: 35)
Fischer suggests that formal mathematical models are necessary for most students to
develop a good economic intuition:
I think that the way the profession works is that there is a small group at the top, who have
fantastic intuition and after their initial training can operate without formal models. Then you
have the great bulk of the profession who have to be taught to think within a formal model.
The Phillips curve was very important in formalizing price adjustments, but the intuition was
around. (Fischer 1994: 35)
Paul Samuelson articulated a similar point of view. Samuelson reflected on the role of
common sense for economists (see for example Samuelson 1959/1966; 1962/1966), and
suggested that:
Economists use terribly complicated jargon: long words, fine definitions, cabalistic
mathematical symbols and graphs, and complicated statistical techniques. Yet, if they have
done their job well, they end up with what is simple common sense. (Samuelson 1959/1966:
185)
so that “common-sense economics may indeed be all that anyone must use in the end”
(1962/1966: 15). Samuelson however immediately qualified his position to quite some
extent :
The non-economist must naturally ask: Was that trip really necessary? Apparently yes.
Nothing is so rare as common sense – i.e., the relevant common sense. (Samuelson
1959/1966: 185, italics added)
Similarly,
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But it takes the most uncommon sense and wisdom to know just which part of the filing case
of the muddled notions that men call common sense is relevant to a particular problem.
(Samuelson 1962/1966: 15-16, italics added).
Samuelson therefore advocated an economist’s evolved economic sense over lay common
sense in making sense of economic phenomena. Samuelson went on to elaborate his
viewpoint:
While it is true that few with advanced training in economics can be trusted to use commonsense economics, fewer still, and maybe no one, without advanced training in economics, can
be trusted to use common-sense economics. Don’t ask me why this is so. I have puzzled over
the phenomenon for years and years and never been able to satisfy myself as to the reason . . .
Though I can’t explain why, experience does show that the best economic policy-makers
have spent years studying economics and doing scientific research. The alleged exceptions
almost invariably turn out to be flukes. (Samuelson 1962/1966: 16, italics added)
Samuelson does however point very clearly to an answer to his conundrum, in suggesting
that “Common sense, and folklore generally, lack empirical content.” If the “best
economic policy- makers have spent years studying economics and doing scientific
research,” it stands to reason that it is exactly such economists who have been immersed
in the data pertaining to real world systems and furthermore maintained an interest in the
dynamics and behaviour of the real system over an extended period of time begin to
develop and refine a useful ‘economic sense.’ That is, such economists are in a position
to and do begin to develop and evolve their economic sense about the behaviour and
dynamics of the economic system. The economic theories that such an economist will
frame and see the economic issues through may or may not be ‘correct,’ but either way
will give the economist a ‘lens’ to study the complex and evolving economic world
through and the experience required to begin to develop and evolve their understanding
and views. In the ‘Hume-Popper position,’ such a device - whether it is common sense
theory or the lens of existing theory - is useful as a starting point to focus theoretical
inquiry, which is then further progressed through means such as critical interaction,
empirical research, and practical experience. The economist’s evolved ‘economic sense’ which in turn can filter which theories, policies and so on that are relevant to the
presenting real world economic policy situations – becomes as or more important to the
ability of the economist to put forward useful practical advice as the economist’s mastery
of a range of particular technical theories and models.
In his Nobel prize acceptance speech, Paul Samuelson (1970) related mathematical and
theoretical formalism to economic intuition:
. . . Although my intuition is poor enough in three dimensional space, I can assert with
confidence on the basis of the above that raising any input’s price while holding all
remaining inputs’ prices constant will definitely reduce the amount demanded of that input
by the firm - i.e. dvi /dpi < 0. Such a commonsense result might be expected by anyone who
performed an act of empathetic introspection, “Suppose I were a jack-ass of an entrepreneur,
what would I do to adjust to the dearness of an input in order to conserve as much profit as
possible?” Here the commonsense and advanced mathematics happen to agree. But we all
know the Giffen pathology according to which an increase in the price of potatoes to Irish
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peasants, who must depend heavily on potatoes when they are poor, may itself impoverish
them so as to force them into buying more rather than less potatoes. In this case common
sense recognizes itself only under the search-light of mathematics.
With the assistance of mathematics, I can see a property of the ninety-nine dimensional
surfaces hidden from the naked eye. If an increase in the price of fertilizer alone always
increases the amount the firm buys of caviar, from that fact alone I can predict the answer to
the following experiment which I have never seen performed and upon which I have no
observations: an increase in the price of caviar alone will increase the amount the firm buys
of fertilizer. (Samuelson 1970)
As noted above, Hendersen (1986) had observed during his time in Whitehall that
individuals without any economic training had formed ‘do it yourself’ economic theories,
which Hendersen termed ‘Do It Yourself Economics’ (DIYE). It is pertinent therefore to
ask what other individuals in the economic system may have formulated their own DIYE
theories? For example, do businessmen and CEOs in the course of their business
activities, consultants in the course of their work, and perhaps even the factory floor
worker formulate their own DIYE economic theories based on their experience?
One answer comes from Walter Heller (1975), during his AEA presidential address.
Heller suggested that the public had “put economists in bad repute” and “thwarted” good
economics, because economic ideas and prescriptions go against lay common sense:
. . . much of our economic analysis and the uncommon sense growing out of it fly in the face
of “common sense,” for example, that budget deficits need not spell inflation, nor national
debt a burden to our grandchildren; that thriftiness can be a mixed virtue; that while
exploding oil prices inflate costs, they deflate demand; that in an overheated economy,
greater taxes can be the lesser evil; and so on. (Heller 1975: 5)
Heller accounted for this by suggesting that individual real-world economic actors each
possess a lay ‘common sense’ economic theory:
Behind every false dictate of common sense lies a primitive and misbegotten economic theory
– and for all our pains to correct it, we can expect to get the back of everyman’s hand. (Heller
1975: 5-6, italics added)
Heller’s account is clearly biased: there is no plausible reason to suspect that all common
sense dictates must be “false” and “misbegotten. ” Naturally the possibility exists that a
common sense lay economic theory may indeed have a greater or lesser degree of merit.
Putting this aside however for the moment, it is pertinent to note that that Heller has
identified in the general public the existence of lay economic theories of the sort
identified in civil servants and business representatives by Hendersen during meetings in
Whitehall.
Such lay theories have been taken very seriously academically in the psychological and
sociological literature. A pertinent example of the development of lay theories in
psycho logy is found with the work of Adrian Furnham. Furnham (1988) presents an
exploration of lay theories not only in psychology, but also in other fields such as
medicine, law, education – and economics. With regard to economics, Furnham suggests
that:
15
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Although economists appear to hold views about how individuals and more particularly
groups of individuals behave in the economic world, they appear to have little interest in lay
people’s views of the economic world. Psychologists have been more interested in lay
people’s economic beliefs and behaviours . . . These methods have been employed to
investigate lay “theories” in economics. (Fu rnham 1988: 128)
Furnham identifies three streams of thought in the in the literature on lay theories in the
psychology of economics:
The first is to look at statistics on buying, saving, consumption, etc., and to attempt to infer
belief patterns or assumptions from them. The second is to investigate, through large scale
surveys, attitudes and expectations and to attempt to assess consumer sentiment. The third
method is, through smaller scale studies, to look at the structure and determinants of lay
people’s beliefs or theories about the economy. (Furnham 1988: 128)
Furnham (1988, Ch. 6) surveys that literature, and it is both beyond the scope of the
present discussion and un-necessary to detail the results here. The key point for the
present discussion is that not only is it intuitively reasonable to expect that lay individuals
have such ‘DIYE’ lay theories of economics, but that this expectation is in fact supported
by a substantive academic literature.
Habitus and Hayek: the contextually located economic agent,
well adapted to his or her environment
In considering that agents have their own understanding of the economic system that they
are located in, it is important to note that the issue is not the extent to which agents may
have directly or indirectly and tacitly or explicitly acquired some knowledge of ‘proper’
economic theory (for example, from reading newspapers or other media that publish
economic analysis) or something that approximates it. The present question is rather:
What kind of know-how does the individual located in a specific context within the
economic system in the conduct of his or her ‘business of every day life’ (Marshall 1890)
possess a ‘sense’ regarding the behaviour of the system the agent is participating in, and
how does that ‘practical sense’ relate to common sense?
A convenient way to cast the issues of present concern is through Pierre Bourdieu’s
concept of habitus3 and Friedreich Hayek’s (1945) arguments regarding the importance
of local and contextual knowledge, available to the individual agent but not to any central
planner.
3
It is beyond the scope of the present discussion to give a serious introduction to or critical analysis of
Bourdieu’s theory: see Jenkins (1992), Swartz (1997), and Bourdieu and Wacquant (1992) for an
introduction and overview, and Bourdieu (1977; 1990) for the key works in the original (translated into
English). Essentially the ‘field’ is a dynamically evolving social system containing a number of actors in
structured relationship to each other and a greater or lesser degree of institutional structure, while each
individual’s relationship with the field is internalised into the agent’s ‘habitus’ or – putting it roughly –
their habitualised know-how and dispositions for interacting with that social world. The concepts of habitus
and field will therefore be used in the present discussion in the sense suggested in this brief summary: the
key concept is that the agent’s patterns of interaction and experience are internalised into his or her habitus.
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Bourdieu’s framework entails conscious or tacit lay theories on the part of the economic
individual:
As good a place as any to start thinking about Bourdieu’s development of a theorised model
of social practice is with the notion of theory itself. Every society, every culture, every group
of people who recognise themselves as a collectivity, has theories about the world and their
place in it: models of how the world is, of how the world ought to be, of human nature, of
cosmology. (Jenkins 1992: 69)
In Pierre Bourdieu’s articulation of the theory of the field and the habitus (Bourdieu
1977; 1990), the agent is well adjusted to and has an internalised working knowledge of
and effective relationship to his or her environment. The habitus is “an acquired system
of generative schemes objectively adjusted to the particular conditions” in which the
agent operates (Bourdieu 1977: 95) so that the individual, located in a “field,” will
accommodate and adjust to that field. The habitus entails a “practical sense” of how to
operate in the world.
Similarly, Hayek (1945) made it very clear that he intended to emphasise that an
economic individual is located in a local institutional and historical context and that such
individuals are typically well adjusted to those circumstances by virtue of possession of
practical contextual knowledge and know-how. Hayek wrote that:
. . . there is beyond question a body of very important but unorganized knowledge which
cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge
of the particular circumstances of time and place. It is with respect to this that practically
every individual has some advantage over all others because he possesses unique information
of which beneficial use might be made . . . We need to remember only how much we have to
learn in any occupation after we have completed our theoretical training, how big a part of
our working life we spend learning particular jobs, and how valuable an asset in all walks of
life is knowledge of people, of local conditions, and of special circumstances. To know of
and put to use a machine not fully employed, or somebody's skill which could be better
utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of
supplies, is socially quite as useful as the knowledge of better alternative techniques. And the
shipper who earns his living from using otherwise empty or half-filled journeys of tramp steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary
opportunities, or the arbitrageur who gains from local differences of commodity prices, are
all performing eminently useful functions based on special knowledge of circumstances.
(Hayek 1945, italics added)
For Hayek therefore, the economic individual adapts to his or her specific contextual
environment and has detailed explicit and tacit knowledge of its how to interact with it.
The individual has adjusted to the environment that the individual works in, both by
developing a conscious conceptual model of that world which may have a greater or
lesser degree of merit, and by developing habitualised and internalised patterns of
interaction and practical sense, knowledge and intuition for understanding the events and
relationship in that world.
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Common sense, practical sense, and economic sense
It is pertinent to now distinguish between common sense, practical sense, and economic
sense. Clearly, ‘common sense’ is a term with no precise technical meaning (unless, of
course, one is explicitly ascribed to it). The word itself may mean many things to many
people, and certainly has done so in the past.
The issue naturally arises therefore of what exactly is meant by common sense. Is there a
single ‘common sense’ of an epoch and a culture, reflecting what is familiar and taken for
granted by the people in it? Is common sense timeless and unchanging, or does it evolve?
Does every individual in society possess their own individual and unique common sense,
that is (if only slightly) different to what is common sense for any other person? Or is it
possible to steer some kind of middle course, and find that there is a common sense set of
understandings for society, yet still room to allow for individual variation of what is
taken as common sense and obvious?
It is not the place of the present discussion to offer any definitive resolution to these
questions. Clearly, if there is such a thing as ‘common sense’ then there must be
something ‘common’ about it – the tenets of common sense must be ‘obvious’ to any
reasonably intelligent and well adjusted person in society. Equally clearly, common sense
is not the same for everyone. What one person finds to be ‘obvious’ and ‘common sense’
may not appear at all so to another person.
An attempt might be made however at clarifying these issues to some degree using
Bourdieu’s framework of habitus and field 4 . The agent, through his or her socialisation,
education and experience develops a habitus and practical sense regarding the social,
physical and biological world that he or she lives in. Presumably, since we are all living
in the same physical world and experience much of social reality in similar ways, in the
formation of our individual habiti5 , we are subject to many of the same conditioning
constraints, and it is therefore not unreasonable to expect that we share many aspects of
our ‘practical sense’ with others. It is possible to suggest that ‘common sense’ constitutes
those common and shared elements of our practical sense that any reasonable and well
adjusted person would ascribe to by virtue of the common conditioning and experience
that leads to our functional adjustment to the physical, social and biological world.
‘Common sense’ is thereby directly related to individuals’ ‘practical sense.’ This
viewpoint not only allows for commonalities in the development of the habiti in any
given group in society or epoch, and therefore to a shared component of ‘practical sense’
which to any well adjusted and functional member of society or the world becomes
simply ‘obvious’ – the development of common sense – but also allows or any given
4
The arguments presented here concerning common sense in relation to assimilated experience and
consequent development of ‘practical sense’ could be developed located in terms of other scholarly
frameworks, such as for example Oakley’s (2002) reconstruction of the economic agent along ontological
lines with reference to Schutz’s ‘life world.’ Bourdieu’s fra mework however is richly evocative, and
presents a convenient framework for developing the notion of common sense in terms of practical sense.
5
Being unsure of the plural of ‘habitus’ and being forced to choose between habituses and habiti, I made a
somewhat arbitrary choice for the latter.
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individual the development of a related flexible, individual and unique ‘practical sense’
as any given individual’s habitus develops and accommodates to the particular
circumstances and challenges the individual faces.
The individual may of course continue to further develop his or her practical sense,
through experience and reflection or other means. In particular, the agent may be
socialised into a highly sophisticated intellectual environment, such as in the physical
sciences or indeed into economics, and may engage in critical debate and focused
research within the context of that field. The individual is firstly socialised into the
existing state of the field through their education (thus shaping a significant component
of the individual’s ‘economic habitus’), but the individual continues to learn and evolve
and shape his or her thinking, beliefs and knowledge in critical reflection and interaction
and through research and policy work in the field. That is, the individual may begin to
develop a highly specific ‘technical sense’ that may perhaps radically differ from lay
understanding in the field and constitute a technically refined ‘specialist sense.’ For
economists, of course, this may be readily referred to as an ‘economic sense.’ It should be
noted that exactly the same devices may be applied as for the ‘lay’ man to articulate a
difference between a shared ‘economic sense’ in the field of economics in general, and
the particular evolving economic senses of particular economists as they develop their
understanding and intuition through ongoing work in the field.
It has been noted above that ordinary individuals in the ‘business of every day life’, as
well as trained economists, develop some kind of economic sense. In the former case this
lay ‘Do It Yourself Economics’ theory arises from practical real world experience and
information, in the latter case by immersion in a sophisticated and evolving intellectual
field and experience of the economic system through some kind of focused research. In
either case, the result is a refined and evolving economic sense.
Common sense and intuition
Clearly, the notion of ‘practical sense’ as conceived above may be readily related to the
‘intuition’ of individuals working in a given field. The mathematician, scientist and
philosopher Henri Poincaré perhaps offered the classic example, writing (1908/1952) of
an ‘aesthetic sense’ guiding the development of mathematics: a
. . .feeling of mathematical beauty, of the harmony of numbers and forms, of geometrical
elegance. This is a true esthetic feeling that all real mathematicians know, and surely it
belongs to emotional sensibility . . . This harmony is at once a satisfaction of our esthetic
needs and an aid to the mind, sustaining and guiding. And at the same time, in putting under
our eyes a well-ordered whole, it makes us foresee a mathematical law . . . this special
sensibility . . . all mathematicians know, but . . . the profane are so ignorant as often to be
tempted to smile at it. (Poincaré 1908/1952)
Wilder identifies such a sense as an ‘intuition’ guiding the direction of research in
mathematics:
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The role of intuition in research is to provide the “educated guess” which may prove to be
true or false; but in either case, progress cannot be made without it and even a false guess
may lead to progress. Thus intuition plays a major role in the evolution of mathematical
concepts. The advance of mathematical knowledge periodically reveals flaws in cultural
intuition; these result in “crises,” the solution of which results in a more mature intuition.
Clearly, it is but a short step from an evolving ‘practical sense’ to an evolving ‘intuition’
about the system or subject matter under consideration. In the case of economists, this
leads naturally to an evolving intuition about the behaviour of the economy.
‘Economic sense’ or intuition as a link between economic theory
and economic reality
Economic theory is well known - and indeed has been widely criticised - for theory or
models starting from unrealistic assumptions 6 .
Roger Backhouse (1999) and Robert Sugden (2000) each consider the relationship of
formal and abstract economic models to economic reality7 , and have each in their own
way forcefully advocated that intuition is the link between an unrealistic model and what
happens in the real world. Backhouse begins by discussing
. . . a way of constructing an argument that is very common in economics. The central
arguments are based on theoretical models, but conclusions relating to the real world are
drawn without any intervening ‘empirical’ model. (Backhouse 1999: 283)
In such models, Backhouse suggests that
. . . the role played by the model is to guide or train the reader’s intuition . . . The bridge
between models and the real world is the economist’s intuition (Backhouse 1999: 296, italics
added)
Sugden (2000: 1) takes the “starting point . . . that model-building in economics has
serious intent only if it is ultimately directed towards telling us something about the real
world.” Sugden considers two explicitly “abstract and unrealistic” models, George
Akerlof’s ‘market for lemons’ and Thomas Schelling’s ‘checkerboard city,’ and inquires
how it is that each of these abstract and unrealistic models tell us something about the
real world. Sugden (2000: 27) notes that neither of the models makes an explicit
connection between the model world and the real world. Sugden ultimately suggests that
. . . Akerlof and Schelling are engaged in a kind of theorizing the usefulness of which
depends on inductive inferences from the world of models to the real world . . . it should not
be surprising if economists leave gaps in their explicit reasoning at those places where
6
for a small sample of views on the realism of assumptions, see the comments by various eminent
economists in Klamer (1984), by Krugman (1999), or the paper by Rappaport (1996)
7
There is a range of literature exploring the theme of the relationship of the model world to the real world
such as for example through the model world acting as a metaphor (McCloskey 1990) or a caricature
(Gibbard and Varian 1978).
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inductive inferences are required, and rely on their readers using their own intuitions to cross
those gaps. (Sugden 2000: 28, italics added)
The motivation for the reader making such inferences is that the model worlds are
intuitively plausible, they are credible worlds:
On this account, models are not internally consistent sets of uninterpreted theorems; but
neither are they simplified or abstracted or exaggerated descriptions of the real world. They
describe credible counterfactual worlds. This credibility gives us some warrant for making
inductive inferences from model to real world. (Sugden 2000: 28)
Alex Viskovatoff (2003) identifies a potential vicious cycle in this process of abstraction,
where
Economists’ intuition guides the assumptions that economists build into their models, while
the models in turn form economists’ intuition. Given that intuition can point economists in a
different direction than empirical evidence, this can lead to a self-reinforcing, self-referential
dynamic in which intuition becomes further and further removed from reality, potentially
without limit (Viskovatoff 2003: 407)
This cycle may be represented graphically:
Figure 1 – existing theory and intuition frames what is considered important for framing
the next generation of models
Viskovatoff finds support for the notion that sometimes “intuition ends up trumping
experience” in Dennis O’Brien’s notion (1998) of a “detour ” in the literature, by which
O’Brien means a case when “economists have been led astray by a theoretical model that
not only lacks empirical support but makes assumptions that are directly contradicted by
empirical experience that has been available for many years” (Backhouse 1999: 281). As
Viskovatoff notes, O’Brien provides four examples: the neoclassical literature on
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research and development initiated by Kenneth Arrow; the colonization of industrial
economics by game theory; Pigou’s welfare economics and its lack of interest in actual
legal institutions; and the treatment of the Great Depression by Hayek and Robbins.
Viskovatoff’s argument is particularly interesting for the present discussion. Firstly, it
highlights the evolution of an economic intuition that may become rather far removed
from the intuition and common sense of people in the field familiar with the system being
modelled. Secondly, and even more importantly, if Viskovatoff and O’Brien are correct
in their portrayal of the possibility of economic intuition progressively removing itself
from concern with empirical reality then the appropriate ‘circuit breaker’ for the vicious
cycle identified by Viskovatoff is clearly exactly that proposed in the fifth tenet of our
‘Hume-Popper position,’ namely that:
common sense, and the real world context, is a guide to when theory begins to lose realworld relevance, for example due to errors in the assumptions used as premises, or due to
subtle errors in the reasoning
Common-sense observations highlighting that the assumptions or intuitions of the model
world are beginning to diverge from empirical reality would play a useful role in bringing
the model world back into usefully modelling and empirically real and significant issues.
‘Against’ common sense
Common-sense, or at least a lay understanding of economic issues, has been criticised by
economists. For example, Charles Bean, chief economist at the Bank of England, made
some remarks (2003) commemorating a century of economics teaching at the London
School of Economics. Bean first noted that
. . . the subject matter of economics is probably of more immediate relevance to the man in
the street than that of almost any other social science . . . But it has to be said that many noneconomists, including many politicians, take a somewhat jaundiced view of the potential
contribution of economics. In part that is because the conclusions of economic reasoning
often seem to offend common sense. And in part it reflects the supposed tendency of
economists to disagree . . . (Bean 2003: 106, italics added)
Bean continued however, to argue:
But ‘common sense’ is frequently a poor guide to the right answer in economics. While
sometimes sufficient for assessing the immediate effect of some change in the economic
environment, ‘common sense’ is often not so helpful at tracing through all the consequential
adjustments and interactions in a coherent fashion. As a consequence, many ‘common sense’
nostrums are often fallacious. (Bean 2003: 106, italics added)
David Henderson (1986) argued along similar lines:
Two advantages of an economics training are the readiness and ability to think in terms of
interdependence and system effects, and a concern with quantitative evidence and ways of
interpreting it. In both these respects . . . [common-sense economics] is typically and
unknowingly deficient. (Henderson 1986: 108)
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In considering this argument, it is pertinent to consider to what extent the ontologies and
relationships in the model correspond to the ontologies and relationships in the real
world. Very often in economic models, as has been noted in the previous section, they do
not: the assumptions and premises of an economic model may be explicitly abstract and
unrealistic and may be made for the sake of analytic convenience and tractability rather
than realism. This begs the question, as identified by Backhouse and Sugden, of to what
extent one should take the intuition generated by the abstract and unrealistic model as
being in any way indicative of what may happen in the real world. The intuition of the
model may be inapplicable or wrong in the real world, and furthermore by shaping the
lens in which the economist sees real world issues through, may be misleading and blind
the economist to significant real economic dynamics. A false intuition may retard the
development of a valid and useful one.
In any case, the objection raised by Bean and by Henderson to common-sense
understandings of economic situations are easily accommodated by the ‘Hume-Popper
position.’ That “‘common sense’ is often not so helpful at tracing through all the
consequential adjustments and interactions in a coherent fashion” or that the lay person
may not “think in terms of interdependence and system effects” is neither here nor there
as far as the ‘Hume-Popper position’ is concerned. The ‘Hume-Popper position’ takes
common-sense as a starting point, a position from which to improve our existing
knowledge. If common-sense knowledge or existing theory can be improved it should be,
and if interdependence or system effects in the real world can be better understood in
terms of a model highlighting their dynamical relationships and consequences in a
relevant manner, then they should be. Such criticisms of common-sense knowledge by
economists are not damaging to the ‘Hume-Popper position,’ because the ‘Hume-Popper
position’ only insists that the body of economic knowledge started from common-sense,
not that any particular common-sense understanding or expectation must be correct.
An additional argument against common sense knowledge might be made, that economic
methodology tends to place great value on theories that make novel or interesting
predictions, predictions which run against what uneducated common-sense or existing
economic theory might predict, but which nevertheless may be confirmed empirically.
This orientation might be related to at least two significant streams of thought in
economic methodology. Firstly, Milton Friedman in his methodological contribution
(1953) suggested that the
. . . ultimate goal of a positive science is the development of a theory or ‘hypothesis’ that
yields valid and meaningful . . . predictions about phenomena not yet observed. (Friedman
1953: 7)
As D. Wade Hands (2001) phrases it, for Friedman:
Predicting a novel fact – evidence not yet observed – is the key determinant of a successful
economic theory. (Hands 2001: 55, italics added)
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The second strand of methodological thought in the philosophy of economics placing
value on theories making novel or interesting predictions is due to Imre Lakatos (1970)
and the assimilation of his views on the philosophy of science into the methodology of
economics. Lakatos (1970: 116-118) introduces a notion of a scientific research program
progressing when new theories have more theoretical content and at least some of the
new content is corroborated empirically, so that the new theory contains something novel
in relation to the old body of knowledge.
It is beyond the scope of the present discussion to critically engage with Friedman’s
methodological position or the assimilation of Lakatos’s position into the methodology of
economics. The appeal of this argument against common sense is that a useful theory
should be able to offer something more, something above and beyond what might be
inferred from plain common sense. This argument however is not problematic for the
‘Hume-Popper position,’ which simply takes common sense as a starting point.
According to the ‘Hume-Popper position,’ if the present theory may be improved through
critical or empirical engagement, it should be. If novel and interesting predictions can be
made that reliably receive some level of empirical support and are not accounted for in
terms of the existing theory, then from the point of view of the ‘Hume-Popper position,’
then critical and empirical engagement with the current theoretical starting point has
taken place, and the body of theoretical understanding can and should be improved and, if
necessary, the ‘economic sense’ of the discipline evolved further accordingly.
Common-sense integrates and processes a diverse range of
real-world experiences
An additional point might be made regarding objections to common-sense knowledge
such as those raised by Bean and Henderson, above. While it may be the case that a
formal theory may be of help in understanding and working through interdependencies
and system effects in a complicated system, such models by their nature are typically, if
not always, an extremely simplified ‘version’ of reality. In addition, they may or may not
be well abstracted, and may or may not correspond with economic reality. They typically
do not and cannot take into account all real world factors and contingencies. It is by no
means a ‘given’ that the intuitions generated by such models will be ‘correct’ intuitions in
relation to economic reality – and may even potentially mask or blind economists to
identifying features and dynamics of real economic systems. On the other hand, an
educated and experienced practical sense may well be able however to assimilate and
process vast amounts of information and arrive at useful intuitions about systems’
behaviours.
Consider for example the following anecdote regarding the installation of a forecasting
system at the Reserve Bank of England 8 . At the time [1980’s?] the Reserve Bank of
This anecdote was told to me by Professor John Foster of the University of Queensland, Australia. I am not
sure I have recorded the details as told to me correctly, and I have not been able to independently check the
facts. The story should therefore be taken in the present context entirely purely as anecdotal. Before final
inclusion of this anecdote in this chapter in the thesis or as a paper I intend to ask Professor Foster for his
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England had invested substantial amounts of money [millions of pounds?] in the
hardware, software, and personnel to run a sophisticated financial modelling system to
make predictions regarding [movements in the currency markets?]. After installing and
fine-tuning the system however, the results from the system were less than remarkable. It
emerged that an elderly gentleman who worked in another floor of the building, over a
lifetime of taking an interest in the financial markets and reading the Financial Review
each morning on the train on the way to work, had developed a sophisticated intuition
into the behaviour of the financial markets that in fact significantly outperformed the
multi- million dollar forecasting system. A pragmatic solution was eventually found, by
modifying the multi- million pound forecasting system to take the intuitive predictions of
this gentleman each morning as he arrived from work as an additional input, and the
predictions of the system improved remarkably.
I think that the message behind this anecdote would be acceptable to many economists.
Familiarity and experience with a system breeds an intuition that may be broader, more
flexible, deeper and more integrative of various complexities than a formal model may
be, and the more complicated the system the more valuable a well developed intuition
based on real experience is likely to be. This does not preclude of course the possibility
that an economist with sophisticated models and extens ive experience with the real world
system, might develop the best intuition of all regarding the behaviour of the real world
systems. The value of the economist is not due to only the theories and models of
economists, but also to the insights and intuitio ns they acquire while working with real
world systems and data.
Assessing the support for the ‘Hume-Popper position’
In the preceding discussion, the first tenet of the proposed ‘Hume-Popper position’ has
been considered and reinforced with reference to the history of economic thought.
Turning now to the second and third tenets,
(ii)
(iii)
that this common-sense knowledge can be criticized, tested, explored and
improved
that what constitutes ‘common sense’ with regard to the domain of economics
may itself evolve as economic discussion, debate and investigation proceeds
the second tenet is fairly clearly supported with even a casual glance through the history
of economic ideas. With regard to the third tenet, it is also clear that economists
deliberately try to develop an ‘economic intuition’ or ‘economic sense’ in their students,
a sense or intuition regarding real economic phenomena that is different to (and hopefully
an improvement on) the layman’s common-sense intuitions and understandings. It is
fairly clear that with theory development, ‘economic sense’ began to diverge from
common-sense, and in the teaching of economics some care is taken to instil this
permission to recount his story, to check that I have substantially remembered the details correctly, and as
far as possible check and further articulate the facts from external sources.
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economic sense in students. It seems clear therefore that the third tenet also receives
substantial support by means of reference to the literature of economics.
This leaves only the fourth and fifth tenets:
(iv)
(v)
that economic theory should consist essentially of “enlightened” or
articulated, refined, developed and tested common sense
that common sense, and the real world context, is (or at least should be) a
guide to when economic theory begins to lose real- world relevance, for
example due to errors in the assumptions used as premises, or due to subtle
errors in the reasoning.
Clearly, the first three tenets are the more ‘positive’ ones, describing how economics is
(according to the ‘Hume-Popper position’s’ model), while the fourth and particularly the
fifth begin to take on a more ‘normative ’ and methodological tone, describing how the
discipline of economics should be (according to the ‘Hume-Popper position’).
As has already been seen, the fourth tenet has received explicit support from Alfred
Marshall in his Principles. In addition, if one accepts that that the useful intuitions about
the real world may be ‘stored up’ in explicitly abstract and unrealistic – but sufficiently
theoretically ‘credible’ - model worlds, then much of the economics profession would
agree that modern economics consists of developing an enlightened intuition, stored up in
explorations of such unrealistic but ‘credible’ model worlds, that is relevant for
understanding the way that the real world will behave. While the fourth tenet of the
Hume-Popper position is unlikely to find universal support in the economics discipline
(Debreu for exa mple insists that his explorations in pure economics have no relationship
at all to the real world but nevertheless are useful intellectual explorations), there are
certainly several currents of thinking that can be mustered in its support. Perhaps Henri
Poincaré’s summation captures the situation in this regard:
. . . the majority of witnesses confirm my conclusions; I do not say all, for when the appeal is
to universal suffrage, unanimity is not to be hoped. (Poincaré 1908/1952)
Turning to the fifth tenet of the Hume-Popper position, Samuelson expressed support in
suggesting that “If economics does not agree with common sense, then it is not good
economics” (in Samuelson's Economics, 16th edition, quoted in Isa 2003). In addition, if
the arguments put forward by O’Brien (1998), Backhouse (1999), Sugden (2000), and
Viskovatoff (2003) are correct, then common-sense arising from practical engagement
with and experience of the real- world systems being examined clearly plays a potentially
pivotal role in bringing the constructions of the model world and the resulting intuitions
arising from the model worlds back into greater relevance with regard to empirical
reality.
Three methodological principles suggested by the ‘HumePopper position’
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The major purpose of the body of this chapter so far has been to attempt to establish that
the ‘Hume-Popper tradition’ is a reasonable framework from which to view the history
and current state of economic theorising.
From the considerations in this chapter and the literature reviewed, I hope that the reader
will agree that the proposed ‘Hume-Popper position’ is a reasonable and interesting
framework through which to view the history and current state of economic science. In
particular, I hope that readers will be inclined to agree that economics did indeed start in
the eighteenth and nineteenth centuries as a development from common-sense
observations about the socio-economic system and human nature; that economists did
indeed critically engage with and refine and reconstruct those initial works to produce a
systematically worked out and sophisticated body of knowledge; and that as this work of
theory construction and reconstruction proceeded, economists developed an ‘economic
sense’ that progressively diverged from a lay common-sense set of understand ings and
expectations concerning economic phenomena to the extent that modern economic theory
and models incorporates just such an ‘economic sense’ that is forcefully taught to
incoming economics students. In addition I hope that the reader will find it a reasonable
proposition that if ‘economic sense’ or intuition arising from an immersion in economic
theory and models begins to diverge to any significant extent from empirical reality, then
common-sense and empirical observations regarding that reality are a useful tool to
highlight the divergence and to begin the process of reconstructing the model worlds to
bring their intuitions back into greater empirical relevance.
It has been noted that the majority of ‘tenets’ proposed for the ‘Hume-Popper position’
are more positive than normative in character. They do not proscribe to any great extent
any normative recommendations on how economics should be done. In the concluding
sections of this chapter, the aim is to motivate three normative methodological principles
that might be suggested arising from a consideration of the ‘Hume-Popper position.’
While it would be quite possible and fruitful to further explore these suggested principles
in relation to existing economic literature, unfortunately such a detailed exploration is
beyond the scope of the present discussion and the present discussion will confine itself
to only a brief discussion of each suggested principle and a few selected examples.
The first methodological principle: common-sense acts as a guide
The first methodological principle arising from the ‘Hume-Popper position’ is, of course,
exactly the fifth tenet of the ‘Hume-Popper position,’ the suggestion that common sense
acts as a guide to when a theory might be going off track or losing empirical relevance.
Clearly there are a few senses in which this can be interpreted.
Firstly, following Lewis (quoted above) in philosophy, this first methodological principle
may be interpreted as a call for “theoretical conservatism” on the part of economic
theorists, suggesting that a theory that flies in the face of lay common-sense
understandings of empirical reality should trigger warning bells and critical concern, and
call for an extensive critical consideration of whether the theory is actually articulating
27
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and offering a deeper and better understanding of the empirical reality through a refined
economic sense, or whether instead the theories and models the economic sense is
developed in and through have themselves diverged somewhat from empirical reality and
relevance and need reconsideration, reworking, and redirection.
The economist Hal Varian (1999) illustrates this lines of thought in discussing the
process of choosing ideas to model in economic model construction:
So let’s assume (a favorite word of economists) that you have an idea. How do you know it’s
any good? The first test is to try to phrase your idea in a way that a non-economist can
understand. If you can’t do this, it’s probably not a very good idea. If you can phrase it in a
way that a non-economist can understand, it still may be a lousy idea, but at least there’s
hope. (Varian 1999: 258, italics added)
In other words, an idea that diverges radically from making ‘common-sense’ sense is less
likely to be a ‘good’ idea than one that makes some sort of sense or is intelligible in some
manner in common-sense terms.
Roger Backho use (1988) implicitly makes this argument for mainstream economic theory
in general:
To a certain extent economics deserves the criticism heaped upon it. Economists have clung
on to out-of-date theories, claimed more than they were justified in claiming and have
become carried away with abstract arguments to the detriment of common sense.
(Backhouse 1988: 194)
A second sense in which to understand and operationalise this methodological principle is
in terms of the economist’s own evolving sense of economic reality. An economist
working in a field is very likely to be exposed to the empirical reality through an
immersion in it (for example through reading relevant background material and literature,
contact with significant participants in the field, amassing and analysing releva nt
statistics and data, etc.). With this real world experience and exposure, the economist will
develop his or her economic sense beyond the intuitions available in the models, and this
developed economic sense will be able to take into account a diverse range of
institutional factors and inter-related variables and externalities that may not be explicitly
accounted for in the model. The second manner, therefore, in which this methodological
principle may be taken into account is in a call for the economist to develop his or her
economic sense in a given field of endeavour and, on occasions where the individual
economist’s (or a group of economists’) economic sense jars with the received theory and
models, to take the recognition of that divergence seriously as grounds for further inquiry
and, where necessary refinement, improvement or reconstruction of the model or theory.
This principle may of course find eminent support in the economics literature, notably
from Marshall, as considered above.
Kohn (2004) takes the mathematical economic theory ensuing from Hicks’s and
Samuelson’s (let alone Arrow and Debreu’s!) contributions to have led to very little
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concrete advancement in relation to practical issues, and suggests that substantive areas
of economics such as economic policy and economic development are led by, in practice,
not theory but largely or primarily by an evolving economic sense on the part of the
economists involved:
Most disappointingly, the Hicks-Samuelson program has done virtually nothing to assist in
the formulation of economic policy. On the great issues of the day, it has been virtually
silent. The major improvement in the management of the domestic monetary system that
occurred in the 1980s was the result of trial and error on the part of practitioners: economic
theory had contributed virtually nothing. On transition and economic development, modern
economic theory has again had nothing useful to say . . . This is not to suggest that
economis ts as individuals have made no contribution. However, their advice has relied more
on economic common sense than on high theory. It is difficult to see how a 19th century
economist, or even one from the 18th century, would have made a less useful policy advisor
than a tooled-up modern economist. (Kohn 2004: 306)
While Kohn’s assessment of the merits and contributions of economic theory is of course
open to debate, it does however frame a highly pertinent question: what role should an
evolving practical economic sense play in relation to both economic theory and policy?
A third dimension to this methodological principle may be identified in noting that
economic advice is received by economic policy makers, business men, and others who,
while they may have had some training in economics, are not professional economists.
Nevertheless, they may have gained extensive specific contextual experience in the field
and may have evolved a ‘sense’ of how the system works in the areas they are familiar
with. The first methodological principle in this case would therefore be a call for people
to filter the claims and proclamations of economic scientists relative to their contextual
needs and situations, through the filter of their own evolved and evolving experiential
practical sense.
The second methodological principle: the more the premises or
conclusions of an argument diverge from common-sense, the greater
the burden of proof required
A second methodological premise that might be proposed arising from the ‘Hume-Popper
position’ that may be pursued would be to suggest that an argument, premise or
theoretical position that diverges from and clashes with common-sense should entail a
greater burden of justification than an argument , premise or proposition that does not.
For example, if one was to take as axiomatic the proposition or premise that ‘people act,’
which is a self-evident common-sense proposition, there would be a lower onus of
responsibility for proving it than for asserting the premise that ‘people are always and
everywhere rational utility maximisers.’ The more unrealistic and against common-sense
the premise, the greater should be the burden of proof and indeed the greater should be
the scepticism regarding conclusions based on the use of that premise.
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Clearly, the more patently unrealistic or absurd the premise or conclusion, the greater
should be the burden of responsibility on the person proposing it to justify his or her
audience accepting it.
This methodological premise has, of course, eminent antecedents in economics. Keynes
for example suggested that:
It is for those who make highly special assumption to justify it rather than for those who
dispense with it to prove a general negative. (Keynes, quoted in Davidson 2003)
It should be noted of course that the ‘Hume-Popper position’ does not claim that all
common-sense premises or theoretical positions are correct, or that a seemingly absurd
premise or theory may not in fact be correct (in which case, it is common-sense itself that
must adapt and evolve). Indeed, Popper explicitly argues that common-sense positions
are to be taken only as a starting point, to be refined and developed through the engine of
critical or empirical enquiry, while on the other hand occasionally such refinement and
development does overturn existing common sense (such as for example in finding that
the world is round or re-evaluating the nature of space-time in Einstein’s relativity).
Adopting this methodological premise might appear to have the ‘downside’ of
invalidating the process of creating models of the sort discussed by Sugden (2000) that
are based on deliberately abstract and unrealistic assumptions and attempt to transfer their
relevance to the real-world via intuition. According to this interpretation, flagrantly
unrealistic assumptions should not be allowed, and should be rejected in favour of
‘sufficiently’ realistic assumptions used in building the model. The adoption of this
premise in this context would significantly restrict the freedom of model makers in
constructing thought-experiments in model worlds, or at least in inferring that results
arising in model worlds should (without an additional level of explicit argumentation)
transfer to real worlds.
This is not exactly the case however. Such a stricture is not forced upon model builders
by this methodological premise. Rather, it would suggest that model builders can create
whatever imaginary worlds they like, subject to the constraint that if they want someone
to take the conclusions of the model – including the intuitions generated by the model –
as being of significance for the real world, then there is a greater burden of justification
on the modeller to justify the relevance of the model to the real world. That is, there is no
constraint on the activities of the modeller as engaging in essentially an exercise in
economic ‘pure mathematics’ or a ‘thought experiment’: the onus of justification should
however apply when the modeller wants anybody else to take the model seriously as
having any sort of relationship to the real world.
The third methodological principle: any common-sense observation
about the real world should be theoretically ‘admissible’
A third and final methodological premise that should be suggested that arises naturally
from consideration of the ‘Hume-Popper model’ is that any common-sense observation
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about the real world system should be ‘admissible’ in the sense that it should be taken
seriously, investigated and, where the common-sense observation is found to be of some
substance, it should call for an explanation from either the existing body of theory. Where
existing theory cannot account for it, theory should be extended or reworked and
reconstructed to account for – or at least be made consistent with - real world
observations arising from empirically supported common-sense.
While it is may be the case that economic theory has provided frameworks to quite
deeply explain economic phenomena, it has unfortunately also often been the case that
quite common-sense observations have been marginalised and ignored by the majority of
the profession for extended and significant periods of time. Examples include the
significance of institutions in understanding economic systems, which was highlighted by
the German historical school and the old institutionalists in the nineteenth and early
twentieth centuries (but for a significant period of time marginalised by the neoclassical
school before these issues began to be reconsidered seriously in a manner compatible
with the neoclassical tradition by new institutional economists); the role of true
uncertainty (as opposed to risk) as highlighted by John Maynard Keynes, G.L.S. Shackle,
and the Post-Keynesians; or the limits to rational maximizing as the central intellectual
apparatus to economics as highlighted by numerous contributors including Herbert
Simons and Kahneman and Tversky.
The road from a common-sense observation to fully developed theory taking the
common-sense observation into account may be a long one in economics. Transaction
costs provide an illustrative example. The fact that transaction costs exist is commonsense. Anyone involved with arranging transactions must be aware of a range of explicit
and implicit transaction costs. The theoretical consequences of transaction cost concepts
to neoclassical economics are however significant, for example:
It gives a serious blow to the neo–classical continuous optimisation
hypothesis, both for producers and consumers. They may stick to an
inefficient input mix or consumer basket because it costs too much to alter
the combination. (Martens 1996: 15)
In particular, transaction costs have significant implications for the operation of markets
and the relationship of firms and their governance structures to markets.
It was not enough however to make a common-sense observation: it took explicit
arguments by Coase (1937/1993) and further development and articulation by
Williamson to bring transaction cost considerations into the mainstream. Williamson
(1993) commented:
That the state of transaction cost economics in 1972 was approximately
where Coase had left it in 1937 is largely attributable to the failure, for
thirty-five years, to operationalise this important concept. That this flat
trajectory has been supplanted by exponential growth during the past
fifteen years is because recent students of transaction cost economics have
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insisted that this approach meet the test of refutable implications . . . this
literature is broadly corroborative. (Williamson 1993: 90)
Clearly it would have been useful to the progress of the discipline of economics if this
common-sense observation could have been assimilated by and processed by economics
simply on its common-sense value.
The final proposition arising from the ‘Hume-Popper position’ therefore is that commonsense propositions regarding economic systems should be admissible and taken seriously
by the economics profession. If a common-sense proposition or observation cannot be
dealt with by the existing body of theory, then perhaps this should be considered as a call
for reconsidering and reconstructing that body of theory.
Conclusions
Out-takes
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