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1Â Â Â Introduction
In the 1966 film Blow-Up by Michelangelo Antonioni, a young photographer accidentally and unknowingly witnesses a murder. Taking pictures in a quiet park in the swinging London of the 1960s, he follows a couple, a woman and a rather older man, who are obviously in love. When the woman becomes aware of the photographer, she runs after him and demands his roll of film. The photographer refuses to give it to her, but on arriving home he finds she has followed him, still insisting he must hand over all the negatives. The photographer lets the woman in and, although he plays it tough, he promises to give her the film. By this point, he is so intrigued by her persistence that rather than letting her have the original roll, he switches it for another. After the woman has left, he develops the photographs in large format and hangs them up side by side in his studio. Only then does he notice that the woman looks tense, staring into the bushes. He marks the precise place she is looking at, blows it up (hence the name of the film) and sees that someone appears to be hiding in the shrubbery. Then he spots a revolver in the half-concealed personâs hand. Has he witnessed a murder? When the photographer returns to the park at night to check, there is indeed a body, but back in his studio he discovers that the prints and negatives have all been stolen. The next day there is no longer any trace of a corpse. What did he actually see? Has he simply imagined the whole thing?
The way the photographer in the film goes about his work is analogous to the method used by a scientist, including the kind of scientist this book is about, the economist. Driven by curiosity as to why the woman attaches such value to his photographs (what, in other words, their compromising character might be), the photographer deploys all the techniques and equipment at his disposal, determined to find out more. Investigating the clues in the material, he discovers he has actually witnessed a situation quite different from what he thought he was seeing. He discovers this not in the field but back at his studio, where he has a darkroom, lighting equipment and cameras available for use in puzzling out, in peace and quiet, what happened in the field. At this stage, he does not see the body directly, but his equipment enables him to produce a photograph of a photograph. Rather than direct observation, indirect observation, aided by instruments, leads him to the astounding conclusion that he may have been present at a killing. He draws this conclusion at home, well away from the scene, the way Sherlock Holmes might, although in this case based on photos, or on photos of photos. The original photograph serves as material or data for examination back at his studio. The confirmation he seeks in the park at night is worth little if he cannot corroborate it with evidence both accessible to and verifiable by a third party.
The photographer has a darkroom and all kinds of appliances that he can use to reveal unexpected evidence, just as the scientist has a dedicated workspace and apparatus with which to make his sometimes surprising observations about the world. It is after all unusual nowadays for a scientist to study nature in situ, in the field. This book is about the techniques and instruments that economists have developed to enable them to reveal connections in a complex reality in which they would otherwise remain hidden.
The techniques of the political economist were traditionally of a different character from those of the natural scientist. True, the natural sciences were held out to the economist from the start as an example to follow, but always on the understanding that he would inevitably have to manage without the instruments available to the physicist. Laboratories, experimentation and precise, scientifically quantified laws lay beyond the reach of the science of economics. The socio-economic reality was too complex, the factors that influence human behaviour too diverse, to allow for meticulous experimentation in laboratory conditions.
Instead of controlled experiments, economists have used all kinds of other techniques to help them comprehend economic reality and, where possible, to intervene in it. In the nineteenth century, the techniques of political economy consisted of combinatorial skills, plus pen and paper â the very techniques that historians relied upon. Using his own powers of judgement, the political economist combined his various sources of information to create a coherent picture, which was then placed at the service of political intervention in the public domain. In Britain especially, it was a short step from writing an article or book to raising questions in parliament. David Ricardo, one of the most important political economists of the early nineteenth century, was himself a Member of Parliament. John Stuart Mill, an enthusiastic proponent of Ricardoâs theories, was the editor of The Westminster Review, a magazine by and for political radicals in the House of Commons.
Not until the twentieth century did these techniques assume a form that economists, or the academics among them at least, took to be self-evident. Some experienced as a liberation the fact that not just economists but other scientists too, including meteorologists and astronomers, had come up against the limitations of the controlled experiment. All of them, economists included, now construct mathematical models that use mathematics and statistics to create a picture of reality. Economists use data sets from statistical bureaus (the CBS in the Netherlands, the Bureau of Economic Analysis in the US, the Office for National Statistics in the UK and so on) to compile visual representations of socio-economic reality that cannot be seen with the naked eye.
The introduction of the modelling approach into economics changed both the relationship between economics and the natural sciences and the relationship between political economists and the public domain. Towards the end of the nineteenth century, economists began to call themselves just that, rather than âpolitical economistsâ. They became wary of intervening too conspicuously in the public sphere. Although they continued to write newspaper columns and letters to the editor, such efforts were no longer regarded as the very essence of their work. The appropriate outlets for their writing were more specialized. New periodicals emerged to publish the work from which economists derive their status, which can now be found even in publications that focus on pure science, such as Nature and Science.
As a result, economists like todayâs Paul Krugman, whose influence stems to a great degree from his column in The New York Times rather than directly from his status as a winner of the Nobel Prize for Economics, create an almost tangible sense of unease among academics, since they do not fit the cherished image of the economist as a pure scientist who writes difficult mathematical articles for important but little-read international journals. In the first decade of the twentieth century, when economics as a discipline adopted the language of mathematics and identified quantitative statistical facts as the only data admissible in empirical research, the economist seemed to have thrown off for good the image (particularly prevalent in Britain) of public intellectual and critical interventionist in the public debate, an image that had been so pronounced in the case of John Stuart Mill or John Maynard Keynes. The âtelevision economistsâ we see and read of today are regarded with a mixture of scorn and envy for having abandoned the truly scientific work.
It is no coincidence that one of the founders of social statistics, a Belgian called Adolphe QuĂ©telet (1796â1874), was director of the astronomical observatory in Brussels. With his arrival on the scene, the character of the economist, his âpersonaâ as it is called nowadays in the history of science, changed to become a hybrid between natural scientist and social scientist. QuĂ©telet described his use of social statistics as physique sociale, as if he had found a way to train his telescope on society. Just as observatories were built higher and higher in the mountains, so the economist withdrew from the front line of public debate and was able to use mathematical models, supported by statistics, to influence socio-economic policy at least as effectively as he had done in earlier years.
What are the rules that economists abide by in their research and how do those rules of the game determine the character of a good economist? These questions recall a book by Joop Klant, a historian and methodologist of economics, that was published in Dutch over forty years ago with the title Spelregels voor economen (Rules of the Game for Economists, 1972). Klant was writing in a period when the philosophy of science was promising to provide rules for economists to adhere to in their actual research. There was an expectation that prescriptive or normative methodology, as it was known, would improve the quality of economic studies. Klantâs book was extremely readable and informative, applying to economics the philosophy of science as it then stood, but it did not explain why economists, who after all are pretty smart people, use different rules in practice from those he advocated. Klantâs Spelregels defined how economics must be practised if it is to be and remain a sound science. It also defined the persona of the economist: an academic who tests theories as part of a quest for objective knowledge. The Dutch edition of the book you are now reading was published with a title intended as a pun on Klantâs, namely Spelregels van economen (Economistsâ Rules of the Game). It seeks to explain the actual rules as applied by economists now and in the past, and it was written in the conviction that rules governing research are not timeless but historical, developed over many years and continuing to develop. To borrow from the title of Bruno Latourâs landmark work, Science in Action (1987), this is a book about economists in action.
So here you will read about changes in the methods and techniques that economists have used to analyse reality, and about the accompanying changes in the nature of the scientific and public role of the economist. I aim to show both sides of the coin. By examining the history of economics, we can trace changes both to the instruments of economic science and to the character of the economist as a scientist. Which methods are right and what, therefore, constitutes good economics? These are not established matters of fact. My approach, taking its lead from the history of science, might be described as historical epistemology. I do not attempt to provide rules for economists but instead to describe the rules by which they have been governed and which they have developed for themselves.
The idea that an economist is like a photographer brings to mind a book by Donald MacKenzie published in 2006, in which he analyses the origins and development of the economics of the financial markets: An Engine, Not a Camera. The title is taken from a remark by economist Alfred Marshall about the nature of economic models. In the 1950s, Chicago economist Milton Friedman used the same notion to defend his own concept of economic science, claiming that Marshall believed such models functioned as engines rather than cameras in that they did not depict reality but were instruments that could be used to change it.
The modelling approach is unquestionably dominant in contemporary economics, so an important part of this book is about the origins and development of modelling as a twentieth-century research instrument, but we cannot be certain that Friedman is right to claim that models are machines for investigating and changing reality, rather than ways of representing it. The example of the film Blow-Up suggests that models are in fact both instruments and representations.
Does an economic model indeed function in the same way as a photographerâs camera or an astronomerâs telescope? Or is it the other way around? Should we see such a model as the real economy on a smaller scale? If such a comparison holds true, then where is the economistâs dark room? How and where are the pictures developed? How can he know that the image he has created by using his instruments does in fact reflect reality?
These are the questions I address in this book. What kind of instruments do economists use to enable them to understand and intervene in the world? How have these instruments developed over time? How have changes to the available instruments changed the persona of the economist? How in turn has the social playing field changed, in other words the terrain on which the economist moves?
As I have already indicated, my approach to these questions is a historical one. I use a number of historical snapshots or case studies to build up a picture of the way in which the methods used by economists have developed over time, and to make clear the problems and opportunities they encountered along the way. I do not intend to offer a linear history with the current situation as its triumphant culmination, although clearly an approach using mathematical models dominates economics as currently practised. With the exception of a short outing to the German language area in Chapter 3, I take my examples from the Anglo-Saxon countries and my home nation, the Netherlands. This is a deliberate choice, made in the light of the specific themes I have chosen to address in the book.
In Chapter 2, I look at an essay by nineteenth-century British political economist and philosopher John Stuart Mill about the definition of political economy and its methods. Millâs essay is still an important reference point in discussions about methodology. He highlights three themes that are important throughout this book: the complexity of economic reality; the specific, indeed unique character of economics as a science; and the role of the economist in society. We will look at how economists have attempted to deal with the problem of complexity, examining the implications of those efforts for the relationship between economics and other disciplines, and for the profile of the economist as a scientist.
Chapter 3 shows how any shift in the nature of the instruments used by an economist to tackle complex reality changes the persona of the economist himself. He is transformed from a public debater into a hybrid expert, a combination of engineer and social scientist, working behind the scenes to develop ways of creating as objective a picture of economic reality as possible. At one time a science among other social sciences, economics has become a branch of learning that shares with disciplines such as astronomy and meteorology a particular stress on mathematics and statistics.
The mathematical and statistical approach to economics began to dominate the discipline from the Second World War onwards, and in Chapters 4 and 5 I look at what this meant in practice. I describe the rise of economic modelling and show how the philosophical approach seen in Keynes and his predecessors gave way to an approach in which mathematics and statistics were used to build miniature versions of real-world economies, known as models.
Chapters 6â9 all deal in one way or another with models. What kind of instruments are they? Do they serve to predict the course of events without any need for us to worry about the specific structure of the model itself, or is the whole point of models that they offer us insight into the mechanisms that we can justifiably assume to be operating in reality? These chapters fall somewhere between the radical position of Milton Friedman (Chapter 6), who argues that the assumptions at the root of models are irrelevant, and positions that in one way or another support the notion that those assumptions are true, as in Chapter 9. In the former case, the value of models lies primarily in their predictive power, in the latter case in their capacity to simulate reality.
Chapter 7 looks at the work of Paul Samuelson, showing that models can also facilitate thought experiments. In contrast to modelling exercises that link model and world directly, thought experiments hinge on paradoxes that undermine common tenets of our understanding of the economy. One might say that thought experiments test common sense and therefore indirectly show how the world functions differently from the way we believe it does. Chapter 8 is about material experimentation in economics. It describes a fundamental shift in both thought and action, the consensus among economists having previously been that their particular science did not lend itself to experimentation. We shall see how, since the 1960s, economists have laid aside a number of standard arguments against the feasibility of experimentation, not simply by arguing that it is feasible but by actually going ahead and experimenting.
With the exception of Chapter 2, which looks at John Stuart Millâs essay, each of the chapters addresses one or more examples of economic research, and these in turn dictate the subjects treated. To that extent, this book differs from other introductions to the philosophy and methodology of economics, which take their lead from the philosophy of science. I certainly do not intend to suggest this tradition is irrelevant to attempts to understand economics, but it is not my aim to show how the classic concerns of the philosophy of science arise when we think about economics as a science. Rather, I intend to demonstrate how economists themselves have expressed and attempted to solve the problems they come up against in practice. The book can therefore be read alongside either a more traditional introduction to the philosophy of science or an introduction to economics. Of course, it can also simply be read for its own sake.
In the concluding chapter, I return to the character of economics as a science and what it implies for the persona of the economist. A historical approach to the methodology of economics demonstrates that its rules cannot be expressed as timeless truths. Nor is the persona of the economist as a scientist stable and fixed. Both the rules of the game and the character of its players change as the context and methods of economics change. Although still a participant in public debates, to an important degree the economist has become an instrument maker. Yet despite this, he remains a player. Indeed, his opinion may actually have a greater influence on public policy as a result.
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2 Economics
Inductive or deductive science?
2.1 Introduction
In 1836, British political economist John Stuart Mill (1806â73) published an essay entitled âOn the Definition of Political Economy; and on the Method of Philosophical Investigation in that Scienceâ in The Westminster Review, the magazine of Britainâs radical political reformers. His analysis enabled economics, as a science, to rise above the social and political battle of which it was part. Mill was certainly not alone in undertaking this task, but his attempt was the most successful. Along with the final volume of his A System of Logic, published in 1843, which looks at the methods of what were then called the âmoral sciencesâ, his essay continues to shape our thinkin...
