Lecture 1: Introduction
A common definiton for Economic methodology is a set of methods in economics. But
in this course it is stated as the framwork of applying methods. The focus will be not
on the methods themselves, but on the framework of their application. One important
element of thus framework is a critical reflection on economics.
But, this course understands economic methodology as philosophy of (social) science
applied to economics. It is also understanding of sociology, anthropology, history and
politics.
We need to consider the economy as a whole. Economists need to look at problems
from two perspectives: inside their specific area of study and outside to see how it
fits with the broader world. This can be challenging because economics often doesn't
provide definitive answers, and the best approach may not always be clear.
Economists do discuss methodology, especially when evaluating the quality of
different arguments. For example, when two economists propose different solutions,
they debate how they gathered data, what assumptions they made, and which models
they used. In short, EM helps economists choose the best ways to think about and
analyze economic problems.
Positive economics explains what is/ what economists really do (facts, data,
and objective analysis).
Normative economics explains what should be/ what should economists
do? (value judgments and recommendations).
Lecture 2 – Doing methodlogy
Case study 1: can you define the discipline you study?
The definition of economics changed over time. But it seemingly does not matter.
Jacob Viner’s sociological/tautological definition is still popular: “economics is what
economists do”.
Adam Smith and Say defined economics as the science of wealth, the science that
treats the production, distribution and consumption of wealth. Mill said that we only
focus on one aspect in the life of an individual, namely economics.
,But there was a shift. The shift was lying in ontology – the idea of how (economic)
world works, the most general understanding of the world. The transition from a focus
on wealth to exchange marks a shift in how economists understand the world.
Marshall’s definition encapsulates this change, positioning economics as the study
of human action in the pursuit of material and social wellbeing, not just the study of
wealth itself. This broadens the discipline’s scope and connects it to human and social
realities.
Lionel Robbins (1932) defined economics as the study of human behavior in relation
to scarce resources with alternative uses. This broad definition focused on
the methodology of scarcity and choice, not specific topics like wealth or markets.
Gary Becker expanded this view, applying economic principles to areas like crime
and family life, calling it the "economics of everything."
Paul Samuelson’s definition (still in use today) combined Robbins' ideas with a
focus on resource allocation, emphasizing how societies choose to produce and
distribute goods for consumption, considering both current and future needs.
In short, economics has evolved from focusing on wealth to studying human choices
and resource use in all aspects of life
Harry Markowitz recalls how Milton Friedman once argued that his dissertation
on portfolio theory wasn’t "economics." At the time, it wasn’t part of the field, but
Markowitz notes that today, portfolio theory is a central part of economics. This
highlights how the boundaries of economics have expanded over time to include new
areas like financial theory.
Case study 2: How did crisis of 2008 change economics?
David Colander et al. argued that while crises couldn’t be predicted, economics
needs to adapt to better address such risks. The field currently relies too heavily on
simplistic equilibrium models and lacks modeling pluralism—economists are trained to
build models but not to choose the best one for policy. Other criticisms include an
overconfidence in markets and financial innovation and a lack of attention
to institutional details. The slide also points out that conventional wisdom doesn’t
represent all of economics, indicating more diversity within the field.
The prevailling interpetation of the crisis as a temporary exogeneous shock due to
assymetric information led to more attention o the financial sector and uncertainty
issues, but no major shift in the discipline. The shift was to DSGE (equilibrium)
modeling what is still the foundation of macroeconomic policy.
,Case study 3: the Nobel memorial prize
Some economic concepts, like positive externalities and increasing returns to scale,
were proposed long ago but couldn’t be easily formalized using earlier methods. Paul
Romer - endogenous growth theory, succeeded in formalizing them in modern
terms, particularly for knowledge-based growth.
But the critiques of romer is hat there is a too small distance between assumptions
and conclusions. There is also a lack of institutional context.
It raises the question: is this real progress? Foss (1998) argues it’s heuristic progress,
where better mathematical tools make research more appealing and allow economists
to tackle ideas that were previously difficult to model. Essentially, formalizing these
concepts helps economists understand them better and uncover new insights, but the
ideas themselves are not new.
74-75 Bouman and davis – Lecture 2 reading
The debate in economic methodology examines how useful economic models really are.
Statisticians like George Box and economists like Milton Friedman have noted that models
are simplified versions of reality and thus always "inaccurate". Friedman argued that models
should be judged by their predictive power (ability to foresee outcomes), a standard that
became common in economics. However, because economic systems are so complex, models
often predict poorly. This is worsened by "unmeasurable knowns" (things we know but cannot
measure), "known unknowns" (things we know we don’t fully understand), and "unknown
unknowns" (things we don’t realize we don’t know).
The 2008 financial crisis led to further scrutiny (examination) of economic models, as
economists had failed to foresee its timing and severity (seriousness). Alan Greenspan,
former Federal Reserve Chair admitted to being in "shocked disbelief" over flaws (mistakes) in
the basic models he trusted.
Some economists had actually warned of risks using other methods, like surveys and case
studies which provided insights into financial risks and rising debt. By combining these
knowledge sources, economists could have developed a fuller view of the economy.
In summary, the debate questions whether prediction alone should be the main way to judge
models, or if economists should use additional methods to better handle complex,
unpredictable realities.
, Lecture 3 – deduction and induction
What is scientific theory? The first modern systematic answer was given by logicial
positivism.
- Logic stands for providing the formal framework (languege) in which the
scientific claims are the best to be put. All human knowledge of the world is
amenable to logical formalization.
For example, it is raining in Nijmegen today > true of 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
indirect derived from sensual data (our direct experience of reality)
Science is characterized by the ability to formulate theories.
The logical positivist philosofy of science has a demarcation problem: to separate
science from non-science. But which propositions are scientific? We have 2 parts:
1. Analytic (1+1=2), the truth (2) is already included in the premises.
2. Synthetic. If they are confirmed by empirical research. As the empirical
research demonstrated, people value an object higher when they do not posses
it.
All other propositions are “metaphysical” and hence do not have any meaning for
science.
The task is thus to purify science from meaningless terms. The synthetic proposition is
meaningful, if it is empirically verifiable: you can verify whether it is true or false by
drawing on sense perception.
Theories should be formulated in a way that could make the observational data they
are based on, as well as their domain of application, clearly visible. Thus, theories are
best formulated as sets of sentences and they are described in the formal language
and rely on axioms.
Operationalization, means defining how theoretical concepts are measured in
practice through observational data. Some terms, like force (F) in F=m×a, can only be
understood through the theory itself, as they have no independent definition. Others,
like unemployment or inflation, can be measured in multiple ways depending on the
context, leading to different interpretations (e.g., including part-time workers in
unemployment or using different price indices for inflation). This shows that how we
measure concepts can shape how we understand and apply theories. We can go from
theoretical statement to observational statement and vice versa.
A common definiton for Economic methodology is a set of methods in economics. But
in this course it is stated as the framwork of applying methods. The focus will be not
on the methods themselves, but on the framework of their application. One important
element of thus framework is a critical reflection on economics.
But, this course understands economic methodology as philosophy of (social) science
applied to economics. It is also understanding of sociology, anthropology, history and
politics.
We need to consider the economy as a whole. Economists need to look at problems
from two perspectives: inside their specific area of study and outside to see how it
fits with the broader world. This can be challenging because economics often doesn't
provide definitive answers, and the best approach may not always be clear.
Economists do discuss methodology, especially when evaluating the quality of
different arguments. For example, when two economists propose different solutions,
they debate how they gathered data, what assumptions they made, and which models
they used. In short, EM helps economists choose the best ways to think about and
analyze economic problems.
Positive economics explains what is/ what economists really do (facts, data,
and objective analysis).
Normative economics explains what should be/ what should economists
do? (value judgments and recommendations).
Lecture 2 – Doing methodlogy
Case study 1: can you define the discipline you study?
The definition of economics changed over time. But it seemingly does not matter.
Jacob Viner’s sociological/tautological definition is still popular: “economics is what
economists do”.
Adam Smith and Say defined economics as the science of wealth, the science that
treats the production, distribution and consumption of wealth. Mill said that we only
focus on one aspect in the life of an individual, namely economics.
,But there was a shift. The shift was lying in ontology – the idea of how (economic)
world works, the most general understanding of the world. The transition from a focus
on wealth to exchange marks a shift in how economists understand the world.
Marshall’s definition encapsulates this change, positioning economics as the study
of human action in the pursuit of material and social wellbeing, not just the study of
wealth itself. This broadens the discipline’s scope and connects it to human and social
realities.
Lionel Robbins (1932) defined economics as the study of human behavior in relation
to scarce resources with alternative uses. This broad definition focused on
the methodology of scarcity and choice, not specific topics like wealth or markets.
Gary Becker expanded this view, applying economic principles to areas like crime
and family life, calling it the "economics of everything."
Paul Samuelson’s definition (still in use today) combined Robbins' ideas with a
focus on resource allocation, emphasizing how societies choose to produce and
distribute goods for consumption, considering both current and future needs.
In short, economics has evolved from focusing on wealth to studying human choices
and resource use in all aspects of life
Harry Markowitz recalls how Milton Friedman once argued that his dissertation
on portfolio theory wasn’t "economics." At the time, it wasn’t part of the field, but
Markowitz notes that today, portfolio theory is a central part of economics. This
highlights how the boundaries of economics have expanded over time to include new
areas like financial theory.
Case study 2: How did crisis of 2008 change economics?
David Colander et al. argued that while crises couldn’t be predicted, economics
needs to adapt to better address such risks. The field currently relies too heavily on
simplistic equilibrium models and lacks modeling pluralism—economists are trained to
build models but not to choose the best one for policy. Other criticisms include an
overconfidence in markets and financial innovation and a lack of attention
to institutional details. The slide also points out that conventional wisdom doesn’t
represent all of economics, indicating more diversity within the field.
The prevailling interpetation of the crisis as a temporary exogeneous shock due to
assymetric information led to more attention o the financial sector and uncertainty
issues, but no major shift in the discipline. The shift was to DSGE (equilibrium)
modeling what is still the foundation of macroeconomic policy.
,Case study 3: the Nobel memorial prize
Some economic concepts, like positive externalities and increasing returns to scale,
were proposed long ago but couldn’t be easily formalized using earlier methods. Paul
Romer - endogenous growth theory, succeeded in formalizing them in modern
terms, particularly for knowledge-based growth.
But the critiques of romer is hat there is a too small distance between assumptions
and conclusions. There is also a lack of institutional context.
It raises the question: is this real progress? Foss (1998) argues it’s heuristic progress,
where better mathematical tools make research more appealing and allow economists
to tackle ideas that were previously difficult to model. Essentially, formalizing these
concepts helps economists understand them better and uncover new insights, but the
ideas themselves are not new.
74-75 Bouman and davis – Lecture 2 reading
The debate in economic methodology examines how useful economic models really are.
Statisticians like George Box and economists like Milton Friedman have noted that models
are simplified versions of reality and thus always "inaccurate". Friedman argued that models
should be judged by their predictive power (ability to foresee outcomes), a standard that
became common in economics. However, because economic systems are so complex, models
often predict poorly. This is worsened by "unmeasurable knowns" (things we know but cannot
measure), "known unknowns" (things we know we don’t fully understand), and "unknown
unknowns" (things we don’t realize we don’t know).
The 2008 financial crisis led to further scrutiny (examination) of economic models, as
economists had failed to foresee its timing and severity (seriousness). Alan Greenspan,
former Federal Reserve Chair admitted to being in "shocked disbelief" over flaws (mistakes) in
the basic models he trusted.
Some economists had actually warned of risks using other methods, like surveys and case
studies which provided insights into financial risks and rising debt. By combining these
knowledge sources, economists could have developed a fuller view of the economy.
In summary, the debate questions whether prediction alone should be the main way to judge
models, or if economists should use additional methods to better handle complex,
unpredictable realities.
, Lecture 3 – deduction and induction
What is scientific theory? The first modern systematic answer was given by logicial
positivism.
- Logic stands for providing the formal framework (languege) in which the
scientific claims are the best to be put. All human knowledge of the world is
amenable to logical formalization.
For example, it is raining in Nijmegen today > true of 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
indirect derived from sensual data (our direct experience of reality)
Science is characterized by the ability to formulate theories.
The logical positivist philosofy of science has a demarcation problem: to separate
science from non-science. But which propositions are scientific? We have 2 parts:
1. Analytic (1+1=2), the truth (2) is already included in the premises.
2. Synthetic. If they are confirmed by empirical research. As the empirical
research demonstrated, people value an object higher when they do not posses
it.
All other propositions are “metaphysical” and hence do not have any meaning for
science.
The task is thus to purify science from meaningless terms. The synthetic proposition is
meaningful, if it is empirically verifiable: you can verify whether it is true or false by
drawing on sense perception.
Theories should be formulated in a way that could make the observational data they
are based on, as well as their domain of application, clearly visible. Thus, theories are
best formulated as sets of sentences and they are described in the formal language
and rely on axioms.
Operationalization, means defining how theoretical concepts are measured in
practice through observational data. Some terms, like force (F) in F=m×a, can only be
understood through the theory itself, as they have no independent definition. Others,
like unemployment or inflation, can be measured in multiple ways depending on the
context, leading to different interpretations (e.g., including part-time workers in
unemployment or using different price indices for inflation). This shows that how we
measure concepts can shape how we understand and apply theories. We can go from
theoretical statement to observational statement and vice versa.
