Scientific Theories in Economics

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

 

In an exchange on an Internet Forum today, I was asked: 

"In your view, how do you form real scientific theories in economics?"

My answer follows.

Gunnar

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That is a very good question!

Indeed, the history of economic thought during the past 250 years reduces to an account of how leading economists have sought to answer that question - but it remains an open one.

The following are key aspects of my own answer.

1. Theoretical economics cannot be reduced to sets of axiomatic propositions for purposes of prediction in the manner of theoretical physics.

2. Yet, our minds cannot do rigorous analytical reasoning - as in, say, physics, mathematics, or chess - without some given set of axioms serving as point of departure.

3. How, then, can theoretical economics combine (i) analytical rigor and (ii) empirical relevance?

4. In 1922, Keynes summarized his own answer - as well as that of classical economists of first rank - as follows:

"The Theory of Economics does not furnish a body of settled conclusions immediately applicable to a policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions."

5. I agree with this definition of 'The Theory of Economics', which implies that the scope for the application of analytical rigor to the task of the economist - as distinct from such common sense as he/she may bring to bear - is far more limited than most modern economic scholars seem prepared to accept.

6. Indeed, I regard the dismal state of modern economics as an off-shoot of misguided attempts by academic economists to formulate analytically rigorous theorems or models as if the conclusion in 1. above was either incorrect or doubtful.

7. And, by attempting to apply their theorems or models to pressing problems in the field of world monetary arrangements - the one field where, in my view, old-fashioned analytical rigor can help identify structural weaknesses and appropriate corrective measures - I believe that contemporary academic economists are, quite literally, fiddling while Rome burns.