Economic Methodology
Lecture 1
Economic methodology is the study of the methods and principles used
in economics to develop theories, build models, and analyze data. It
examines the philosophical foundations, assumptions, and tools
economists use to understand and predict economic behavior.
A statement about what economists do, or should do with these tools, by
contrast, is categorized as ‘methodology’.
The difference between positive and normative economic
methodology:
Positive: objective and fact-based, relying on data and evidence. It
aims to make testable statements about cause-and-effect
relationships.
Example: "Raising the minimum wage may lead to higher
unemployment among low-skilled workers."
Normative: subjective and opinion-based, influenced by ethical or
social preferences. It aims to make recommandaties or advocate
policy.
Example: "Reducing income inequality is a moral imperative."
Some typical methodological problems and questions:
What is economic knowledge?
What is a law in economics?
Is there progress in economics?
How is economics related to economic reality it studies?
What are economic models and what role do they play in
economics? Should economic models be realistic?
How is economic theory structured?
How do its conceptual and institutional structures interact?
How does economics communicate with other disciplines?
,Lecture 2
Case study 1: Can you define the discipline you study?
The definition of economics changed over time
It seemingly does not matter
Jacob Viner‘s ‘sociological‘/tautological definition is still popular
‘Economics is what economists do‘
Early definitions:
Adam Smith (1776): science of wealth
Jean-Baptiste Say (1803): the “science” that treats “the production,
distribution,
and consumption of wealth”
John Stuart Mill (1844): The science which traces the laws of such of the
phenomena of society as arise from the combined operations of mankind
for the production of wealth, in so far as those phenomena are not
modified by the pursuit of any other object. …
Then there was the movement from wealth to exchange. What is the
difference between wealth and exchange and why does it matter? There
was the shift in the underlying ontology (the idea of how the (economic)
world works).
Alfred Marshall‘s (1890) synthetic definition: Political Economy or
Economics (sic!) is a study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely
connected with the attainment and with the use of the material requisites
of wellbeing. … Thus, it is on the one side a study of wealth; and on the
other, and more important side, a part of the study of man.
Modern definition:
Lionel Robbins (1932) Economics is “the science which studies human
behavior as a relationship between ends and scarce means which have
alternative uses.”
very broad/abstract
very narrow in its broadness: the broader the boundaries, the
narrower the approach
emphasizing the approach, and not the subject matter
the perspective of Gary Becker: Economics of everything!
finally, via George Stigler, leading to Paul Samuelson‘s definition still
used today:
Economics is the study of how people and society end up choosing, with or
,without the use of money, to employ scarce productive resources that
could have alternative uses, to produce various commodities and
distribute them for consumption, now or in the future, among various
persons and groups in society. It analyzes the costs and benefits of
improving patterns of resource allocation.
Why does the definition of economics matter?
It defines and reproduces the boundaries of the discipline
It constrains the choices made by economists, the concepts,
techniques, and topics they normally employ
It matters for the interdisciplinary connections in economics
Portfolio Theory is an investment strategy that helps investors optimize
their portfolio by balancing risk and return, emphasizing diversification to
reduce overall risk. Developed by Harry Markowitz, it aims to create the
best possible combination of assets for a given risk level.
Case study 2: How did crisis of 2008 change economics?
David Colander et al.: crisis could not have been predicted, but economics
should change to be able to incorporate at least this possibility! Currently:
lack of modeling pluralism, over-reliance on too simplistic equilibrium
models
Academic researchers are mostly trained to build the models, and not to
choose among various models to be applied to policy.
Other criticisms:
Belief in markets and the virtues of ‘financial innovation’
Lack of knowledge of institutional details (to earlier detect the
problems of particular sectors)
But: The widespread views, or conventional wisdom ≠ the views of the
whole economics profession!
Case study 3: The Nobel Memorial Prize
2018 Prize was awarded to William D. Nordhaus "for integrating climate
change into long-run macroeconomic analysis" and Paul M. Romer "for
integrating technological innovations into long-run macroeconomic
analysis“
‘Endogenous’ growth theory: modeling how economic forces govern
the willingness of firms to produce new ideas and innovations.
‘Positive externalities’: Knowledge produced by one firm is freely used
by all the others (spillover effects).
, Low costs of acquiring new knowledge make the production of
further knowledge cheaper and easier.
The idea that positive externalities and increasing returns to scale from
knowledge are a
foundation of growth dates back to Marshall (1890), Veblen (1914),
Young (1928), and
Abramowitz (1952). But economists could not formalize them neatly!
(Formalizing, for economists, = restating in terms of maximization and
equilibrium). But Romer could do that!
Heuristic progress in economics serves as a steppingstone toward more
sophisticated, mathematically rigorous approaches. Initially, heuristic
methods simplify complex problems, making them manageable and
offering insights or approximations. This progression transforms economic
research into a dynamic field capable of both inspiring new talent and
solving more ambitious challenges.
Lecture 3
Logical positivism is the first and most intuitive philosophy of science,
that is still held by many in natural and social science.
Logic: provides the formal framework (language) in which the
scientific claims are best to be put. All human knowledge of the
world is amenable to logical formalization
- It is raining in Nijmegen today. True or false?
In the formal logic, we just name this claim a ‘proposition‘ and
assign a value to it (1 – true; 0 – false)
Positivism / Empiricism: All scientific evidence and thus
knowledge is directly or indirectly derived from sensual data (our
direct experience of reality). Science is characterized by the ability
to formulate theories. Context of discovery vs. context of
justification (which is only of interest for logical positivist
philosophy of science). But what makes a theory scientific?
- The context of justification refers to the process of
evaluating and validating a scientific theory or hypothesis. It
focuses on testing, evidence, and logical reasoning to confirm
or refute claims, ensuring they are scientifically credible and
reliable. This contrasts with the context of discovery, which
deals with how ideas or theories are initially developed.
Demarcation problem: to separate science from non-science
(‘metaphysics‘).
Lecture 1
Economic methodology is the study of the methods and principles used
in economics to develop theories, build models, and analyze data. It
examines the philosophical foundations, assumptions, and tools
economists use to understand and predict economic behavior.
A statement about what economists do, or should do with these tools, by
contrast, is categorized as ‘methodology’.
The difference between positive and normative economic
methodology:
Positive: objective and fact-based, relying on data and evidence. It
aims to make testable statements about cause-and-effect
relationships.
Example: "Raising the minimum wage may lead to higher
unemployment among low-skilled workers."
Normative: subjective and opinion-based, influenced by ethical or
social preferences. It aims to make recommandaties or advocate
policy.
Example: "Reducing income inequality is a moral imperative."
Some typical methodological problems and questions:
What is economic knowledge?
What is a law in economics?
Is there progress in economics?
How is economics related to economic reality it studies?
What are economic models and what role do they play in
economics? Should economic models be realistic?
How is economic theory structured?
How do its conceptual and institutional structures interact?
How does economics communicate with other disciplines?
,Lecture 2
Case study 1: Can you define the discipline you study?
The definition of economics changed over time
It seemingly does not matter
Jacob Viner‘s ‘sociological‘/tautological definition is still popular
‘Economics is what economists do‘
Early definitions:
Adam Smith (1776): science of wealth
Jean-Baptiste Say (1803): the “science” that treats “the production,
distribution,
and consumption of wealth”
John Stuart Mill (1844): The science which traces the laws of such of the
phenomena of society as arise from the combined operations of mankind
for the production of wealth, in so far as those phenomena are not
modified by the pursuit of any other object. …
Then there was the movement from wealth to exchange. What is the
difference between wealth and exchange and why does it matter? There
was the shift in the underlying ontology (the idea of how the (economic)
world works).
Alfred Marshall‘s (1890) synthetic definition: Political Economy or
Economics (sic!) is a study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely
connected with the attainment and with the use of the material requisites
of wellbeing. … Thus, it is on the one side a study of wealth; and on the
other, and more important side, a part of the study of man.
Modern definition:
Lionel Robbins (1932) Economics is “the science which studies human
behavior as a relationship between ends and scarce means which have
alternative uses.”
very broad/abstract
very narrow in its broadness: the broader the boundaries, the
narrower the approach
emphasizing the approach, and not the subject matter
the perspective of Gary Becker: Economics of everything!
finally, via George Stigler, leading to Paul Samuelson‘s definition still
used today:
Economics is the study of how people and society end up choosing, with or
,without the use of money, to employ scarce productive resources that
could have alternative uses, to produce various commodities and
distribute them for consumption, now or in the future, among various
persons and groups in society. It analyzes the costs and benefits of
improving patterns of resource allocation.
Why does the definition of economics matter?
It defines and reproduces the boundaries of the discipline
It constrains the choices made by economists, the concepts,
techniques, and topics they normally employ
It matters for the interdisciplinary connections in economics
Portfolio Theory is an investment strategy that helps investors optimize
their portfolio by balancing risk and return, emphasizing diversification to
reduce overall risk. Developed by Harry Markowitz, it aims to create the
best possible combination of assets for a given risk level.
Case study 2: How did crisis of 2008 change economics?
David Colander et al.: crisis could not have been predicted, but economics
should change to be able to incorporate at least this possibility! Currently:
lack of modeling pluralism, over-reliance on too simplistic equilibrium
models
Academic researchers are mostly trained to build the models, and not to
choose among various models to be applied to policy.
Other criticisms:
Belief in markets and the virtues of ‘financial innovation’
Lack of knowledge of institutional details (to earlier detect the
problems of particular sectors)
But: The widespread views, or conventional wisdom ≠ the views of the
whole economics profession!
Case study 3: The Nobel Memorial Prize
2018 Prize was awarded to William D. Nordhaus "for integrating climate
change into long-run macroeconomic analysis" and Paul M. Romer "for
integrating technological innovations into long-run macroeconomic
analysis“
‘Endogenous’ growth theory: modeling how economic forces govern
the willingness of firms to produce new ideas and innovations.
‘Positive externalities’: Knowledge produced by one firm is freely used
by all the others (spillover effects).
, Low costs of acquiring new knowledge make the production of
further knowledge cheaper and easier.
The idea that positive externalities and increasing returns to scale from
knowledge are a
foundation of growth dates back to Marshall (1890), Veblen (1914),
Young (1928), and
Abramowitz (1952). But economists could not formalize them neatly!
(Formalizing, for economists, = restating in terms of maximization and
equilibrium). But Romer could do that!
Heuristic progress in economics serves as a steppingstone toward more
sophisticated, mathematically rigorous approaches. Initially, heuristic
methods simplify complex problems, making them manageable and
offering insights or approximations. This progression transforms economic
research into a dynamic field capable of both inspiring new talent and
solving more ambitious challenges.
Lecture 3
Logical positivism is the first and most intuitive philosophy of science,
that is still held by many in natural and social science.
Logic: provides the formal framework (language) in which the
scientific claims are best to be put. All human knowledge of the
world is amenable to logical formalization
- It is raining in Nijmegen today. True or false?
In the formal logic, we just name this claim a ‘proposition‘ and
assign a value to it (1 – true; 0 – false)
Positivism / Empiricism: All scientific evidence and thus
knowledge is directly or indirectly derived from sensual data (our
direct experience of reality). Science is characterized by the ability
to formulate theories. Context of discovery vs. context of
justification (which is only of interest for logical positivist
philosophy of science). But what makes a theory scientific?
- The context of justification refers to the process of
evaluating and validating a scientific theory or hypothesis. It
focuses on testing, evidence, and logical reasoning to confirm
or refute claims, ensuring they are scientifically credible and
reliable. This contrasts with the context of discovery, which
deals with how ideas or theories are initially developed.
Demarcation problem: to separate science from non-science
(‘metaphysics‘).
