Philosophy of Economics

A Contemporary Introduction

Julian Reiss

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136763397
• Edition: 1
• Topic: Filosofía
• Subtopic: Filosofía social

Philosophy of Economics: A Contemporary Introduction is the first systematic textbook in the philosophy of economics. It introduces the epistemological, metaphysical and ethical problems that arise in economics, and presents detailed discussions of the solutions that have been offered.

Throughout, philosophical issues are illustrated by and analysed in the context of concrete cases drawn from contemporary economics, the history of economic ideas, and actual economic events. This demonstrates the relevance of philosophy of economics both for the science of economics and for the economy.

This text will provide an excellent introduction to the philosophy of economics for students and interested general readers alike.

1 The Why, What and How of Philosophy of Economics

• Overview

• Two Opposing Paradigms

• The Philosophy of Economics: Interpreting Theory, Methodology and Ethics

• The Aims of Economics and the Problem of Purpose

• Study Questions

• Suggested Readings

Overview

The philosophy of economics is at the same time an ancient and a very recent discipline. It is ancient in that the world's greatest economists beginning with Aristotle were also or mainly philosophers, and many of their contributions should be classified as contributions to the philosophy of economics rather than the science of economics, narrowly understood. With the increasing specialization and professionalization of academic disciplines that occurred in the nineteenth century, economics was separated from philosophy and developed, especially after the Second World War, a mainstream paradigm that was hostile to philosophical refection. At the same time, philosophers of science were mainly interested in natural science and thus tended to ignore economics and other social sciences. It is only in the last 30 or so years that we can once more experience a mutual interest and exchange, and witness the development of academic institutions that focus on the intersection of economics and philosophy. In that sense, then, the discipline is a novel one. This chapter will explore why philosophy of economics is a subject worth studying, explaining its various branches and the overall approach and narratives in evidence in this book.

Two Opposing Paradigms

When I am being introduced to someone I haven't met before and my new acquaintance asks me what I am doing, they often look at me in surprise, puzzlement or sheer disbelief when I tell them that I am a “philosopher of economics.” Aren't philosophy and economics two completely different kettles of fish? Isn't economics a science that deals in facts which can be expressed in figures and equations, and isn't philosophy a discipline belonging to the humanities, more akin to the arts than the sciences, and dealing with ideas rather than data? Somewhat more provocatively, aren't economists cold-hearted proponents of free markets and individual responsibility and philosophers naive believers in idealistic principles and the human good?

No doubt there is something to these stereotypes. Observing economists and philosophers at their respective academic conferences gives some evidence beyond the platitudes that the two fields are indeed dominated by quite different cultures. But to some extent both disciplines have become more open to ideas from the outside, and values other than their own now play a role in each discipline. To give just a couple of examples of sub-disciplines of economics and philosophy where untypical attitudes have a great influence on the debate, take happiness economics and formal ethics. Happiness economics studies the causes and effects of subjective well-being. It is highly interdisciplinary and often combines economic analysis with work from other fields such as psychology, sociology and philosophy. It is different from traditional welfare economics in that it rests on a radically different concept of well-being (see Chapter 12 for details). Whether this or that concept of well-being is adequate is of course one of the major issues any philosopher working on ethical theory has to address. Formal ethics, in turn, is a branch of philosophy that addresses traditional philosophical issues using tools drawn from economics such as rational-choice theory and game theory. The values of rigor and mathematical elegance, formally more characteristic of economics than of philosophy departments, surely influence the debate in no small measure.

The separation of economics and philosophy into two disciplines has in fact occurred fairly recently and is to a large extent artificial. Indeed, many of the world's greatest economists were also, or even mainly, philosophers: Adam Smith, David Hume, John Stuart Mill, Karl Marx, William Stanley Jevons, to some extent John Maynard Keynes and more recently Amartya Sen. Aristotle is often said to be the first economist, but of course he is better known as one of the greatest philosophers of all time.

The separation into distinct disciplines has to do with the general trend towards greater specialization that all sciences have experienced and continue to experience but also with a more specific stance towards science, including social science. This stance, sometimes called “modernism” (McCloskey 1983), takes the view that (a) science investigates facts, and only facts; (b) factual knowledge is exhausted by what can be ascertained on the basis of observations and experiments.

Both clauses (a) and (b) serve to separate the science of economics from other kinds of inquiry. Science, we are told, examines facts, or what there is, and not values, or what ought to be. According to this view, the economist qua scientist abstains from value judgments. Objective, scientific knowledge is value-free. Value judgments are a problem for ethicists. Moreover, in order to be objective, our knowledge has to be based on observable features of the world. Science deals with verifiable states of affairs, not with speculations that go beyond what is accessible to the senses. A classic statement of this perspective stems from the greatest of the empiricists, David Hume:

When we run over libraries, persuaded of these principles, what havoc must we make? If we take in our hand any volume; of divinity or school metaphysics, for instance; let us ask, Does it contain any abstract reasoning concerning quantity or number? No. Does it contain any experimental reasoning concerning matter of fact and existence? No. Commit it then to the fames: For it can contain nothing but sophistry and illusion.

(Hume 1999 [1748]: 211; original emphasis)

Less radical thinkers of this orientation would perhaps stop short of Hume's call to arms but they'd nevertheless agree that there is a clear separation between science, which is based on numbers and observable facts, and metaphysics, which is based on hypothesis and speculation.

We are therefore facing a dichotomy: what is versus what ought to be; and what is ascertainable by observation versus what is speculative. According to this view, then, economists qua scientists stay on the safe side of these dichotomies. By contrast, philosophers qua ethicists deal with value judgments and what ought to be; philosophers qua metaphysicians deal with speculations about the ultimate constituents of reality.

Parallel developments in both economics and philosophy in the second half of the twentieth century have helped to overcome these dichotomies. On the one hand, at least some economists, while still emphasizing the distinction between so-called positive (or factual) and normative (or evaluative) economics have come to realize that they cannot shy away from value judgments altogether. Especially through the work of Amartya Sen it has transpired that an economist qua scientist needs to engage in ethical query (e.g., Sen 1987). On the other hand, economists have stopped insisting that economic knowledge is exhausted by what is observable. To give one example, economists now actively participate in discussions concerning the notion of cause, a concept once deemed too metaphysical for scientists (Hoover 2009). To give another, the notion of “revealed preference,” once endorsed by the profession because it allows economists to avoid making assumptions concerning unobservable states of affairs, has come under severe attack (Hausman 2012).

Philosophy as a discipline has changed, too. While continuing to deal with traditional ethical questions such as those concerning the nature of the good and principles of justice, as well as traditional metaphysical questions such as those concerning the nature of causality and laws of nature, philosophers do so in ways increasingly informed by and continuous with science. Much of recent philosophy therefore resembles science to some extent, for example in the use of empirical information, mathematical modeling and sometimes even experimental methods.

In other words, economics and philosophy have drawn closer to each other by economists having started to ask questions that were once considered philosophical in the pejorative sense of “non-scientific,” and by philosophers having started to address their questions in ways that resemble science more closely than traditional philosophy. A consequence of this convergence is that a lot of work that is now being done in economics and philosophy departments, discussed at academic conferences and published in economics journals or philosophy journals resists straightforward categorization as either “straight economics” or “straight philosophy.” It is work at this intersection of economics and philosophy that this book is concerned with.

The recent (2008–) financial crisis provides an independent reason why philosophy of economics is an area of research of potentially very high significance, both academic and practical. Many commentators, among them Nobel prize-winning economists, have blamed the crisis on a failure of economics as a discipline. Here are some prominent voices:

Of all the economic bubbles that have been pricked [since 2008], few have burst more spectacularly than the reputation of economics itself.

(The Economist 2009)

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy.

(Krugman 2009a)

The main cause of the crisis was the behavior of the banks—largely a result of misguided incentives unrestrained by good regulation….

There is one other set of accomplices—the economists who provided the arguments that those in the financial markets found so convenient and self-serving. These economists provided models—based on unrealistic assumptions of perfect information, perfect competition, and perfect markets—in which regulation was unnecessary.

(Stiglitz 2009)

Paraphrasing Krugman and Stiglitz, we might say that among the causes of the financial crisis were economic models that were idealized to such an extent and in such a way that they couldn't be used for salient purposes such as predicting financial crises like the present one and underwriting policy interventions such as banking regulation. But are these critics justified in their allegations? Are they right in their rejection of current mainstream models and in blaming the crisis on these models? An unsympathetic observer might point out that both Krugman and Stiglitz have axes to grind. Specifically, both are supporters of alternative economic paradigms. Krugman's article pursues an unashamed Keynesian agenda; Stiglitz is well known for his advocacy of models of imperfect and incomplete information (which have, of course, different regulatory implications).

Krugman and Stiglitz thus criticize mainstream economics for using bad theories—theories that make assumptions about markets that are unrealistic, theories that do not allow for “catastrophic failure” despite its apparent empirical reality. Krugman's article points to another aspect. In his analysis of what went wrong Krugman writes, “A s I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth” (Krugman 2009a). Krugman, in other words, criticizes economists for using bad methodology: pursuing mathematical elegance rather than truth leads to models that both fail to predict significant economic events and fail to provide good policy advice.

Philosophers, or more specifically philosophers of science, think about questions concerning theory assessment and scientific methodology professionally. More generally speaking, philosophers of science are interested in metaphysical and epistemological issues raised by the sciences. Metaphysical issues are those pertaining to the most fundamental building blocks of nature and society such as objects, properties, individuals, laws of nature, social norms, causality and modality (possibility and necessity). Epistemological issues concern the ways in which scientists find out about these in experiments, measurements and observation. If philosophers of science are any good at their jobs, the tools, concepts and theories they come up with should help us judge whether Krugman's and Stiglitz's points concerning theory assessment and methodology are as compelling as they make them seem.

There is a third aspect. Some have argued, like Stiglitz, that the behavior of the banks was one of the main causes of the crisis. But unlike him, they do not see the failure in unrealistic idealizations but rather in inappropriate moral foundations of the economics future bankers are taught at business schools. An article in the British newspaper The Guardian argues:

It is business schools, after all, which flooded the banking world with graduates of their prestigious MBA courses. They then helped the economy to nosedive.

One US website recently dubbed business schools the “academies of the apocalypse” and named and...