Lecture Notes I:
Introduction and overview
On economic methodology
Economics as social science:
The disciplinary separation of economics in the 1870s
Many questions shared with other social sciences
Distinction more by method than by topic
Key elements of methodology:
Abstract formal analysis
Economics as art: rational agents (individual decision-making)
Economics as science: empirical evidence and econometric modelling
Economics in the philosophy of science debate
1. Impact of logical positivism
2. Karl Popper’s critique
3. Problems with “falsificationism”
4. Thomas Kuhn - Scientific Revolutions
5. Imre Lakatos - Research Programmes
6. Deirdre McCloskey – Rhetorics of Economics
Impact of logical positivism (Vienna Circle) = group of philosophers and scientists
Modern empiricism: sense data and logic as basic (and only) ingredients
Meaningfulness ↔ possibility of verification
Prominent example: L. Robbins's essay (1932): Impersonal comparisons of utility are meaningless
= you can't compare or verify personal statements
Focus on economics as science
Normative economics (art of decision-making, advice to policy-makers) has been neglected.
Karl Popper (1902-1992) critique
Empirical theories cannot be verified
Meaningfulness ↔ possibility of falsification
Theories should be testable
Try to find falsifications, create new (better) theories based on the falsifications
Research is testing of theories, i.e. trying to falsify
There is a progress in science. Although our theories can never be qualified as true, they approach
a higher degree of 'truth-likeliness'
Many econometric models have been developed to test economic theories
According to Popper, it is never possible to “verify” a theory, since one cannot perform all possible
tests of the theory. The reigning theory will be the one that explains the widest range of empirical
observations and that has not yet been falsified.
Problems with 'falsificationism'
Empirical theories cannot be falsified
o There may be noise in the data (probabilistic evidence)
o Observation may be unreliable
Researchers do not try to falsify theories
Thomas Kuhn (1922-1996) Scientific Revolutions
Science is solving problems
Normal science: broadening the application of theories
Anomalies trigger search for alternative theories
Als ze niet opgelost kunnen worden gaan ze zoeken naar andere theorieën
Competing theories
Scientific revolution: shift to a new paradigm: the fundamental concept of the theory is different
Theory of value: what is important; keystone in economics. The shift to a new paradigm is a shift in
the theory of value.
Anomalies of decision theory
Anomalies in non-renewable resource markets
, A paradigm, as Kuhn uses the word, is a given approach and body of knowledge built into
researchers’ analyses that conforms to the accepted textbook presentation of mainstream scientific
thought at any given time.
Imre Lakatos (1922-1974) Research Programmes
There exists a non-tested (and non-testable) hard core of a theory
Normal research will never aim at falsifying the hard core
Only peripheral implications will be tested
Deidre McCloskey (1942) The Rhetoric of Economics
Economics is 'story telling', much more pluralistic
Economic Science is social, interest-laden, situated contextual and contingent
A plea for methodological pluralism
Contribution to cliometrics, an approach to history using economic and econometric methods
Colander: distinction between orthodox and mainstream (see ARM1)
Two examples of scientific revolutions in economics:
The marginalist revolution: in the early 1870s the same idea came up independently in minds of three
people in three different countries. Jevons (England), Menger (Austria) & Walras (France/Switzerland).
The idea caused a revolution in the theory of value.
Value is created on the demand side (and not the production side!) shift in the fundamentals of the theory
Precursor: Heinrich Hermann Gossen
Gossen's first law: deminisching marginal utility of consumpion
Gossen's second law: in an optimum, marginal utility of all consumption is equal
Measurability of marginal utility
Possibility of interpersonal comparisons
Implications of utiliarianism for distribution
The ordinalist revolution: in the 1930s the idea of measurability and interpersonal comparability has been
discarded.
L. Robbins (1932): An Essay on the Nature of Significance of Economic Science
J. Hicks and R. G. D Allen (1934): A Reconsideration of the Theory of Value
, Lecture Notes II: Adam Smith
Inkomen per hoofd stijgt door de eeuwen heen, vanaf 1000 een klein beetje, vanaf 1800 een economische
boom
Economic life in the Middle Ages (500-1500)
Three pillars: Church, Nobility (adel), Peasants (gewoon volk)
Land was the dominant production factor, not capital
Labour: lord - vassal - serf (the self-sufficient manorial system)
No markets; prices and production were ruled by custom and traditions
Stationary conditions; life was focussed on the hereafter
Trading, saving, enterprising was sinful, as was earning profit or interest
Things gradually changes after the year 100:
Population starts to grow; an agrarian surplus arises (windmill, horse ploughing, crop rotation)
Large powerful and independent towns appear; trade expansion; new crafts; law & order enables
more travelling
Enclosure movement (individualization of common lands, including buying and selling)
eigendomsrechten, productiviteit omhoog van land (rond 1300)
Money circulation starts, supported by the inflow of gold and silver
New weaponry (gunpowder support the formation of nation-states)
The Reformation (Calvin, Luther) provides a capitalist-friendly underpinning (Weber!)
Katholieke kerk verkoopt aflaten, rijkdom van de kerk
A short history of economic thought between 1500-1800
Merchant capitalism developed in Western Europe during the 15th century. Agrarian economies
increased their trade through an alliance between government and business
1500-1750: the economic school of mercantilism.
o (International) trade as a zero-sum game
o The wealth of a nation depends on its amount of gold
o A central role for the state to support international trade, trying to get a surplus >
protectionist policies to support the merchant and the nation
1750-1780: the French school of Physiocracy lead by Francois Quesnay
o Natural laws govern the economy
o The origin of wealth lies in agriculture
o The interrelatedness of the economy seen as a circular flow
o No role for the state: laissez faire, laissez passer
The classical period: 1776-1890: three main contributions
1. Adam Smith
2. David Ricardo
3. John Stuart Mill
Characteristics:
For the first time, a complete systematic analysis of the economy
The economy seen as a harmonious system even though it is governed by individual self-interest
Personal and political freedom is good in itself, but also promotes the efficiency of markets and
economic growth (foundation of liberalism)
Focus on the long run
A concern for economic growth, trough using a much broader approach than modern
macroeconomists
A concern for the income distribution and its development over time
Skepticism towards the wisdom of intervening politicians as compared with the working of the
market mechanism
A labour (or production cost) theory of value
Adam Smith (1723-1790)
An inquiry into the nature and causes of the wealth of nations (1776)
Topic: what determines economic growth? How can we promote economic - growth?
Broad interdisciplinary, encyclopaedic approach
Introduction and overview
On economic methodology
Economics as social science:
The disciplinary separation of economics in the 1870s
Many questions shared with other social sciences
Distinction more by method than by topic
Key elements of methodology:
Abstract formal analysis
Economics as art: rational agents (individual decision-making)
Economics as science: empirical evidence and econometric modelling
Economics in the philosophy of science debate
1. Impact of logical positivism
2. Karl Popper’s critique
3. Problems with “falsificationism”
4. Thomas Kuhn - Scientific Revolutions
5. Imre Lakatos - Research Programmes
6. Deirdre McCloskey – Rhetorics of Economics
Impact of logical positivism (Vienna Circle) = group of philosophers and scientists
Modern empiricism: sense data and logic as basic (and only) ingredients
Meaningfulness ↔ possibility of verification
Prominent example: L. Robbins's essay (1932): Impersonal comparisons of utility are meaningless
= you can't compare or verify personal statements
Focus on economics as science
Normative economics (art of decision-making, advice to policy-makers) has been neglected.
Karl Popper (1902-1992) critique
Empirical theories cannot be verified
Meaningfulness ↔ possibility of falsification
Theories should be testable
Try to find falsifications, create new (better) theories based on the falsifications
Research is testing of theories, i.e. trying to falsify
There is a progress in science. Although our theories can never be qualified as true, they approach
a higher degree of 'truth-likeliness'
Many econometric models have been developed to test economic theories
According to Popper, it is never possible to “verify” a theory, since one cannot perform all possible
tests of the theory. The reigning theory will be the one that explains the widest range of empirical
observations and that has not yet been falsified.
Problems with 'falsificationism'
Empirical theories cannot be falsified
o There may be noise in the data (probabilistic evidence)
o Observation may be unreliable
Researchers do not try to falsify theories
Thomas Kuhn (1922-1996) Scientific Revolutions
Science is solving problems
Normal science: broadening the application of theories
Anomalies trigger search for alternative theories
Als ze niet opgelost kunnen worden gaan ze zoeken naar andere theorieën
Competing theories
Scientific revolution: shift to a new paradigm: the fundamental concept of the theory is different
Theory of value: what is important; keystone in economics. The shift to a new paradigm is a shift in
the theory of value.
Anomalies of decision theory
Anomalies in non-renewable resource markets
, A paradigm, as Kuhn uses the word, is a given approach and body of knowledge built into
researchers’ analyses that conforms to the accepted textbook presentation of mainstream scientific
thought at any given time.
Imre Lakatos (1922-1974) Research Programmes
There exists a non-tested (and non-testable) hard core of a theory
Normal research will never aim at falsifying the hard core
Only peripheral implications will be tested
Deidre McCloskey (1942) The Rhetoric of Economics
Economics is 'story telling', much more pluralistic
Economic Science is social, interest-laden, situated contextual and contingent
A plea for methodological pluralism
Contribution to cliometrics, an approach to history using economic and econometric methods
Colander: distinction between orthodox and mainstream (see ARM1)
Two examples of scientific revolutions in economics:
The marginalist revolution: in the early 1870s the same idea came up independently in minds of three
people in three different countries. Jevons (England), Menger (Austria) & Walras (France/Switzerland).
The idea caused a revolution in the theory of value.
Value is created on the demand side (and not the production side!) shift in the fundamentals of the theory
Precursor: Heinrich Hermann Gossen
Gossen's first law: deminisching marginal utility of consumpion
Gossen's second law: in an optimum, marginal utility of all consumption is equal
Measurability of marginal utility
Possibility of interpersonal comparisons
Implications of utiliarianism for distribution
The ordinalist revolution: in the 1930s the idea of measurability and interpersonal comparability has been
discarded.
L. Robbins (1932): An Essay on the Nature of Significance of Economic Science
J. Hicks and R. G. D Allen (1934): A Reconsideration of the Theory of Value
, Lecture Notes II: Adam Smith
Inkomen per hoofd stijgt door de eeuwen heen, vanaf 1000 een klein beetje, vanaf 1800 een economische
boom
Economic life in the Middle Ages (500-1500)
Three pillars: Church, Nobility (adel), Peasants (gewoon volk)
Land was the dominant production factor, not capital
Labour: lord - vassal - serf (the self-sufficient manorial system)
No markets; prices and production were ruled by custom and traditions
Stationary conditions; life was focussed on the hereafter
Trading, saving, enterprising was sinful, as was earning profit or interest
Things gradually changes after the year 100:
Population starts to grow; an agrarian surplus arises (windmill, horse ploughing, crop rotation)
Large powerful and independent towns appear; trade expansion; new crafts; law & order enables
more travelling
Enclosure movement (individualization of common lands, including buying and selling)
eigendomsrechten, productiviteit omhoog van land (rond 1300)
Money circulation starts, supported by the inflow of gold and silver
New weaponry (gunpowder support the formation of nation-states)
The Reformation (Calvin, Luther) provides a capitalist-friendly underpinning (Weber!)
Katholieke kerk verkoopt aflaten, rijkdom van de kerk
A short history of economic thought between 1500-1800
Merchant capitalism developed in Western Europe during the 15th century. Agrarian economies
increased their trade through an alliance between government and business
1500-1750: the economic school of mercantilism.
o (International) trade as a zero-sum game
o The wealth of a nation depends on its amount of gold
o A central role for the state to support international trade, trying to get a surplus >
protectionist policies to support the merchant and the nation
1750-1780: the French school of Physiocracy lead by Francois Quesnay
o Natural laws govern the economy
o The origin of wealth lies in agriculture
o The interrelatedness of the economy seen as a circular flow
o No role for the state: laissez faire, laissez passer
The classical period: 1776-1890: three main contributions
1. Adam Smith
2. David Ricardo
3. John Stuart Mill
Characteristics:
For the first time, a complete systematic analysis of the economy
The economy seen as a harmonious system even though it is governed by individual self-interest
Personal and political freedom is good in itself, but also promotes the efficiency of markets and
economic growth (foundation of liberalism)
Focus on the long run
A concern for economic growth, trough using a much broader approach than modern
macroeconomists
A concern for the income distribution and its development over time
Skepticism towards the wisdom of intervening politicians as compared with the working of the
market mechanism
A labour (or production cost) theory of value
Adam Smith (1723-1790)
An inquiry into the nature and causes of the wealth of nations (1776)
Topic: what determines economic growth? How can we promote economic - growth?
Broad interdisciplinary, encyclopaedic approach
