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A foundational text introduces a paradigm, a school of thought, or a theory in a longer article. In our orientation section, you can learn about and compare ten different perspectives of Pluralist Economics in even more detail.
Authors: Milena Dehn, Ella Needler and Jessica Palka
A fundamental but often overlooked connection between economics and philosophy is in the work of Adam Smith. While Smith is most famous for The Wealth of Nations, he laid the philosophical groundwork for his economic text in The Theory of Moral Sentiments (Tribe, 1999). Smith not only focused on economics (then political economy) but also considered which moral ideas, such as justice and prudence, are necessary for society – and therefore the economy – to function. He understood that decisions about economic study and policy necessarily involve explicit or implicit value judgements about ethics, human behaviour and scientific inquiry, as we will come to discuss.
Stated generally, the Philosophy of Economics is the study of how or why we do economics the way we do it, and allows us to understand how the field of economics conducts itself today. While Smith was interested in the moral groundings of the economy, the Philosophy of Economics is more than just questions of ethics.1 Understanding the importance of philosophy in economics means acknowledging all the inputs that go into understanding economic theory: the history of ideas, core assumptions about human behaviour, ethical stances regarding economic outcomes, the role of value judgements in economic research, as well as the preferred methodologies and methods and what they tell us about how economists view the world. Since the work of Smith, and especially in the last four decades, new research areas have emerged in the Philosophy of Economics – far too many to cover here (see Kincaid and Ross, 2021; Hausman, 2021; Claveau et al., 2021). The goal of this foundational text is to provide a basic introduction to the vast number of topics in the Philosophy of Economics and provide stepping stones to learn more about each area that piques your interest.
First, we provide a glossary of key terms that may not be familiar to you as an economics student. We then provide a (very) brief overview of the History of Economic Thought and the central role it has played within the Philosophy of Economics in section 3. Next, we cover the field of ethics, a subfield of philosophy that influences normative economics. Section 5 considers how philosophical questions underpin the study of human behaviour and rational choice theory. In section 6 we discuss the Philosophy of Economic Science, also known as Economic Methodology, exploring the often obscured philosophical foundations of the way in which we conduct economic research. Section 7 provides an overview of the neoclassical and various heterodox subfields that have arisen within economics and how they differ regarding their philosophical underpinnings. Finally, we have collected a non-exhaustive list of further resources and materials for those who wish to continue their Philosophy of Economics learning.
Before we dive in, there are two characteristics of the study of the Philosophy of Economics that we must acknowledge. First, the research area in the Philosophy of Economics is not perfectly interdisciplinary. While there is some overlap, there are different strands of research topics and means of analysis between analytical philosophers (see Reiss and Heilman, 2021) and economists (see Ross and Kincaid, 2021).2 Nonetheless, since this foundational text aims to provide an overview of the Philosophy of Economics, the disciplinary differences between analytical philosophers and economists will not be elaborated on (see Claveau et al., 2021 for clarification).3
Second, recent reflection has characterised the Philosophy of Economics’ research agenda as having a mainstream bias (Mireles-Flores and Nagatsu, 2022). This means that research topics pursued in the Philosophy of Economics tend towards topics under the umbrella of mainstream economics4 and away from what is typically understood in heterodox economics (Hands, 2015). This mainstream trend may be noticed throughout this foundational text. While recent research in the Philosophy of Economics tends towards the mainstream, the Philosophy of Economics is highly relevant for pluralist views of economics. Section 7 therefore discusses how core topics and debates in the Philosophy of Economics appear in different schools of thought.
Ethics: the study of what is morally good and bad, what is right and wrong and how society ought to be structured
Methodology: a philosophical system of rules, principles and methods for organising and conducting scientific inquiries
Normative: what ought to be, based on values
Ontology: “What is reality?” A philosophical branch studying being, reality, existence, “what is”; belonging to the metaphysics branch of philosophy - questioning the fundamental nature of reality. Asks questions such as “What fundamentally exists? What do all entities (things that exist) have in common? How can we categorise entities?”
Philosophy of Science: “What is science?” Understanding the foundations, methods and implication of science. Asks questions such as “How is science distinguished from non-science? What is the purpose of science? What is a ‘good’ scientific explanation? How is scientific reasoning justified? What is the role of observation? What is the role of values?”
Positive: what is, based on facts
Scientific Instrumentalism: scientific theories are tools aiming at adequate predictions of what is observed (and given the purpose at hand), they should aim at answering questions and solving problems
Scientific Realism: Scientific theories are approximations of universal truths about reality, and should aim at the pursuit of truth
Understanding how we do economics today means understanding the historical progression of economic thought. As one example, economics today is characterised as having a mainstream view of thinking, however, this was not always the case as noted by Morgan and Rutherford (1998) who set out to understand the decline in pluralism in economics following the Second World War. The Philosophy of Economics is therefore also concerned with the movements and great thinkers which have shaped the field as it is these ideas and knowledge that forged the path of the field (see Heilbroner (2011)) for an overview of the great economic thinkers and Backhouse (2002) for a summary on the movement of ideas in the history of economics).
The history of economic thought can be summarised into a handful of key time periods, however it is worth recognising that ideas are fluid. While there are categorisations which can be used to understand the development of ideas in economics, it should be remembered that these classifications hold nuances. For example, while Carl Menger and Friedrich Hayek can both be classified as members of the Austrian school of thought, they have different approaches to economics (Hagemann, Nishizawa and Ikeda, 2010; Udehn, 2002). While this categorisation is not exhaustive, it is a good overview on the progression of modern economic thinking (Backhouse, 2002).5
16th - 18th century:
Pre-Classical e.g. John Locke, David Hume, Bernard Mandeville;
The Physiocrats e.g. Francois Quesnay; and
Classical e.g. Adam Smith, Jean-Baptiste Say, David Ricardo.
Marginalist e.g. William Stanley Jevons;
Neoclassical e.g. Carl Menger, Alfred Marshall, Mary Paley Marshall; and
Marxian e.g. Karl Marx, Friedrich Engels, Rosa Luxemburg.
Early 20th century:
e.g. John Maynard Keynes, Jan Tinbergen;
Institutional e.g. Thorstein Veblen; and
Austrian e.g. Joseph Schumpeter, Friedrich Hayek.
Post WWII and 20th century to present:
Neoclassical Synthesis e.g. Paul Samuelson, John Hicks, Robert Solow;
Post-Keynesian e.g. Hyman Minsky, Joan Robinson;
Monetarist e.g. Milton Friedman, Anna Schwartz; and
New Keynesian e.g. Robert Lucas.
Many of the significant changes in economic thought which impact economics today occurred during the Neoclassical, Early 20th century and Post-WWII time periods. One of the most substantial shifts occurred following the Second World War, with a significant shift from historical and philosophical towards mathematical and statistical emphases (Backhouse, 2002). While there were a number of factors that influenced this turn, a few notable reasons may include the rise of the econometric society, an increase in statistical tools and knowledge following the World Wars (Guglielmo, 2008), and the introduction of mathematics into economics in the Cambridge University exams (Weintraub, 1999). This is also when scarcity-based definitions of economics took over and the discipline became increasingly delineated based on the economic methodology, rather than substantive definitions based on material welfare (Backhouse and Medema, 2009).
While the post-war period of economics saw a rise in the use of mathematics, many emerging conceptual debates were and still are grounded in philosophy. This includes the place of normative versus positive economics stemming from Friedman’s 1953 essay “The Methodology of Positive Economics”, the debate on the concept of Methodological Individualism between Hayek and John Watkins in the 1950s, and the divide between Post-Keynesian and Neoclassical Synthesis economists in the mid to late 20th century due to concerns of critical realism (see chapter 1-2 of Minsky (1975)).
Moreover, the increasing prominence of mathematical approaches distinct from philosophical considerations has resulted in a chasm between economics and philosophy, which has only more recently and partially begun to coalesce (albeit disjointedly) within what is now known as heterodox economics. Critiques of this estrangement can be found for example in feminist economics (e.g. Nelson (1995)), and we will briefly explore some heterodox sub-fields with explicitly philosophical bases in section 7. While we will explore the content of these debates later in this foundational text, it is necessary to acknowledge the core role that philosophy plays in understanding the debate, negotiation and evolution of economic ideas over time.
Due to the difficulties of interpersonal comparisons of welfare, mainstream economists rely purely on pareto-efficiency when comparing economic outcomes. As a normative criterion, pareto-efficiency essentially means that an outcome is efficient with respect to satisfying individual preferences and a society does not miss any opportunities to better satisfy some preferences. However, distribution or different weights for different preferences are not taken into account. If circumstances are improved for some parties but worsened for others, pareto-efficiency cannot be used as a guiding criterion either.
Pareto-efficiency is also the base for the two influential welfare theorems:
perfectly competitive markets yield equilibria that are pareto efficient, and
any pareto-efficient allocation, involving any desired level of redistribution, can be achieved as competitive equilibrium given the right initial distribution of endowments.
These theorems are sometimes used to justify economists’ reliance on competitive markets, for example in efficiency-based arguments for taxes rather than regulations that restrict pollution. The second theorem can also be interpreted in the sense that policy goals besides efficiency can be ensured by relying on perfectly competitive markets if one adjusts the initial endowments accordingly. However, when invoking the welfare theorems as standards for applied scenarios, it must be remembered that they are based on perfectly competitive markets. The redistribution required for the ‘right initial distribution’ in the second theorem implies additional practical problems. Furthermore, even if one disregards the schism between realistic and highly idealised conditions, the prioritisation of efficiency over other moral standards is in itself a value judgement since there may be other societal goals that we could deem more desirable, such as fairness. It is therefore possible that a policy goal would be best served by deciding for an outcome that is not pareto-efficient, for example when we as a society hold certain moral beliefs that body parts should not be marketed.
A potential argument for the permissibility of economists' primary concern with efficiency is that we should separate the question of efficiency (the size of the pie) and distributive justice (how to slice the pie, our focus in the next section). However, since endowments influence possible allocations, a strict separation is hard to defend (Hausman, McPherson and Satz, 2016). Predominant understandings of welfare and efficiency within economics therefore have at their essense inherently philosophical questions about what society values, our goals, and how we seek to achieve them through economic policy.
Welfare egalitarianism thus contends that we should aim for equality of welfare, rather than the aggregate maximisation of welfare. While this seems to be a logical extension of economists’ concern with welfare, it revives the problem of interpersonal welfare comparisons. Strict egalitarianism is also criticised for not being pareto-efficient and for disallowing performance incentives that could make everyone better off (Hausman, McPherson and Satz, 2016).
Resource egalitarianism argues that people should be equipped with equivalent resources. The idea is to disallow inequality based on unmerited characteristics, but to leave room for different outcomes based on individual ambitions. Core problems include how to measure equality of goods (the index problem) and the timeframe within which the equality principles should apply (see e.g. debates about intergenerational justice: Meyer, 2021; Roemer, 2009). Additionally, the distinction between resources and personal merit is often hard to draw. As people have different needs, such as when they have a disability (see Dworkin (1981)), strict equality of resources might also not be the best way of safeguarding the moral equality of people (Lamont and Favor, 2017). Lastly, even egalitarian initial endowments can lead to stark inequalities if agents can freely engage in transactions as suggested by Nozick’s Wilt Chamberlain example.
One important resource-egalitarian approach is John Rawls’ Theory of Justice and his difference principle. Rawls argues that under a veil of ignorance, (i.e. where people do not know anything about their own position, race, gender etc.) they would decide that (1) all people have a set of equal basic rights and (2) inequalities are permissible only if (a) they are attached to positions open to all agents and (b) they benefit the members in society that are worst-off. The difference principle (2b) relies on the maximin criterion rather than maximisation or strict equality and acknowledges that some level of inequality and the related incentives might make everyone – especially the worst-off – better off. Rawls’ account has been criticised for referring only to the absolute and not the relative situation of the worst-off (not sufficiently egalitarian) and for restricting personal liberty too much (too egalitarian) (Rawls, 2001; Rawls, 1999; Lamont and Favor, 2017). In particular, Rawls' liberal egalitarian account of “justice as fairness” has been contrasted with Robert Nozick whose theories can be understood as “justice as entitlement”.
The libertarian Robert Nozick argues that the commitment to an end result of equality inappropriately restricts agents’ liberties. He argues that any distribution of goods is just if it is brought about by free exchange among consenting adults from a just starting position (Nozick, 1974). Justice thus means respecting individual rights and Nozick’s theory must be understood as a theory of procedural (or historical) rather than patterned distributive justice. Based on the thesis of self ownership, Nozick argues that people have the right to use their powers for personal benefit and that they also have the right to claim any external resource that is not yet owned - as long as others are not rendered worse off than when the resource was unowned. While a strict interpretation of the self ownership principle implies counterintuitive consequences (e.g. the permissibility of voluntary slavery), the very vague criterion of justifiable property appropriation can be criticised as arbitrary (van der Vossen, 2019).
It can also be argued that the problem of inequality is not inequalities per se, but the situation of the worst-off people. Sufficientarianism, as an alternative pattern of justice, thus contends that what is important is essentially not equality, but that all people have enough. Therefore, those people that have not reached a given threshold of resources and welfare must be given priority (Benbaji, 2006). This line of thought is based on a wave of doubts about egalitarianism, put forward for example by Frankfurt (1988), Parfit (1995), and Anderson (1999).
Lastly, while concerned with equality, Amartya Sen’s Capability Approach is based neither on evaluating purely material goods nor welfare. It instead refers to capabilities, or the set of “functionings” that an individual has the capacity to reach. A functioning is any doing or being, for example reading or being healthy. While the account emphasises freedom of choice over different functionings, it centres on the actual capacity to reach a functioning of wellbeing. Compared to resource approaches, Sen’s approach is able to consider the different life circumstances people face. For example, a pregnant mother might need more calories to realise the capability of being well-nourished than other people. Additionally, Sen explicitly endorses interpersonal utility comparisons and thus moves beyond some of the formerly mentioned limitations of welfare economics. Furthermore, contrary to welfare approaches, Sen stresses the capability (e.g. literacy) over any functioning (e.g. reading). Core problems of the account are the index problem, assigning weights to the capabilities, and the debate about prioritising capabilities or achieved functionings. Despite its stark deviation from mainstream economics, Sen’s (and Martha Nussbaum’s) account is well-known among economists and is highly influential as a substantive alternative to the welfare concept, having influenced the Human Development Index (Sen, 1985; Nussbaum, 2001; Robeyns and Fibieger Byskov, 2021).
One such topic is the philosophical debate of exploitation, from for example a Marxian or feminist perspective. Exploitation refers to taking unfair advantage of another person through a specific transaction (e.g. in the context of sweatshop labour or surrogacy) or structurally through institutions (with Marx’ theory of exploitation being the most influential theory). While most philosophers agree that the exploiter gains some benefit from the exploitation, there exists a debate about purely harmful exploitation and cases of exploitation that benefit the exploited person to some extent. The moral case against exploitation can generally be approached from the different angles of justice outlined above, such as from an egalitarian or sufficientarist perspective. One important debate in the context of exploitation centres on whether Marx’s assessment of employment relationships under capitalism as exploitative can be defended without relying on the labour theory of value (Zwolinski, Ferguson, and Wertheimer, 2022; Roemer, 1982; Fleurbaey, 2022).
Philosophers have also examined the moral limits of markets using examples such as a market for kidneys or buying votes. Moral arguments for limiting markets can for example be based on the vulnerability of agents who have a limited choice space because of their position and on the weak agency of poorly informed individuals (Satz, 2010). This debate generally emphasises that organisational forms and allocation mechanisms have to accommodate different goods that are valued in different ways (Anderson, 1995; Herzog, 2021). It can also be argued that markets may efficiently satisfy the wants of people while also shifting them to preferences that can easily be satisfied within markets. Markets could thereby change our preferences, our relation to goods, and to other human beings (see for example Jaeggi (2014) on alienation).
Other strands of literature focus on structural injustice in relation to class, race and gender (Balibar and Wallerstein, 1991). Cicerchia (2021) for example asks how class can illuminate the broader field of domination, arguing that class domination harms a diverse group both in spite and because of differences among group members. Bright et al. (2022) analyse the connection between race and capitalism and more explicitly how features of race as social construct facilitate stable, inequitable distributions of resources. There are also theorists analysing the normative underpinnings and consequences of the institutional frameworks that shape our economy. Fraser and Jaeggi (2018) for example analyse capitalism as a social form and carve out the underlying institutional separations, for example between economy and polity or production and social reproduction. Anderson (2017) analyses the workplace and argues that employers can be conceptualised as ‘private governments’ with wide-reaching authoritarian power over the lives of workers.
Finally, it should be mentioned that there is an increasing focus on analysing climate change policies (Heath, 2021) and the wider field of climate justice (Caney, 2020) as a core ethical issue within economic research and policy design. Climate change entails questions about the responsibilities of current generations in relation to future generations, which actors have which responsibilities to address climate change (for example countries in the Global South and North), how the limited “greenhouse gas budget” should be distributed, and how we should make trade-offs between competing principles of climate justice, especially given high levels of non-compliance (Caney, 2020).
Fleurbaey (2022) provides an overview of other relevant topics in ethics and economics, such as cost-benefit analyses, social choice theory, fair allocation of resources, happiness studies, reciprocity and altruism and multidimensional poverty measurement.
Decision theory has become a large area of research in the Philosophy of Economics over the past few decades (Claveau et al., 2021) which is why it holds its own section in this foundational text. However, as mentioned in the introduction, many of the core research areas in the Philosophy of Economics rest upon mainstream assumptions. Decision theory is a core example of this since it is primarily based on ideas of methodological individualism rather than methodological holism. Methodological individualism, which is widely accepted by the mainstream, is the idea that we should understand and model our economic world by starting with the individual actor (see the section 6.2.1 on Methodological Individualism for more).
Over the years, Decision Theory has evolved into core topics and fields, such as Rational Choice Theory and then behavioural economics, which challenges the preconceived notion that individuals are rational. In the last decade, additional topics including neuroeconomics and social preferences have risen to further challenge and understand our views of human behaviour. These areas of study necessarily incorporate philosophical considerations into economic research since beliefs about how humans behave and what motivates their behaviour underpin economic modelling at the micro- and macro-levels. This section will provide a brief overview of these fields and how they incorporate or reflect philosophical considerations.
There are two main models of Rational Choice Theory that determine under which conditions a choice is considered as rational in economics: Ordinal Utility and Cardinal Utility. Ordinal Choice Theory is a model of decision making under certainty. Cardinal Choice Theory is a model of decision making under risk (Reiss, 2013). In addition, game theory is about understanding individuals' decision making in strategic situations with other players. The different assumptions we make about the context of decision making (e.g. certainty or strategy) is of philosophical concern because of the normative question at the core of how individuals ought to choose (for more see Sugden (1991)).
While this research movement is broadly considered as a leap towards understanding humans’ non-rational tendencies, Karen Hoff and Joseph Stiglitz suggest it is only a “quasi-rational” step and just the “first wave” of modelling non-rational behaviour (2016). Hoff and Stiglitz suggest we are now facing a second wave in behavioural economics that goes beyond the individual and looks to understand how social norms, cultures, situational contexts, and other social determinants of behaviour may impact decision making.
This section will be split in two sections to discuss how philosophical questions are inherent to the methodology of economics. First, we introduce the distinction between positive and normative economics and what different stances on the role of value judgements imply for economic research. Second, we introduce some of the most relevant methodological debates and their ontological and epistemological underpinnings. This includes methodological individualism and related ontological and methodological considerations and what the different epistemologies of scientific instrumentalism and realism imply for economics. We then examine the challenge of ceteris paribus laws and highly idealised models as forms of analysis in economics. Lastly, we introduce the topic of causation and the philosophical issue of trying to infer causal links.
Before we dive into the details, it’s worth acknowledging that economic methodology is perhaps the area in which divergences between contemporary analytical philosophy and economics have most arisen. Some philosophers criticise that economic methodology is heavily influenced by outdated philosophical discourse6 and that the disciplines have become increasingly detached since the post-war period (as discussed above in section 3). One reason for this may be the essential differences between philosophers’ and economists’ goals, which result in a theory-praxis gap. A theorist may not always be aware of or interested in a practical problem, while practitioners may not know of or understand a theory well enough to use it:
Philosophers want to understand knowledge acquisition in economics mainly because of their general interest in the possibilities and limits of human knowledge and because of their general interest in human agency. Economists want to understand knowledge acquisition in economics, mainly because they want to streamline and to improve the process and to reveal the blunders of those who pigheadedly adhere to a different approach to economic theorizing. (Hausman, 1992a p. 231)
Economics therefore often focuses on critiquing and improving the tools and techniques of economic scholarship, while philosophers typically debate the epistemic value of economic theories and methods.
In the following section, we first outline arguments discussing whether one can strictly separate positive and normative economics. We then move on to the debate of whether positive economics can and should be free of any moral values.
Friedman’s highly influential The Methodology of Positive Economics (1953) misrepresented JN Keynes by only distinguishing between normative and positive economics, and this binary thinking has (as expected by JN Keynes) essentially persevered in mainstream economics. Today many economists thus separate normative economics - as a small and readily distinguishable subfield focused on normative questions - from the main field of positive economics that is considered to be free of any moral values (Mongin, 2006) (for more on this distinction in contemporary economists see Atkinson (2009)). In the following section, we outline arguments discussing whether one can indeed separate positive and normative economics. We then move on to the debate of whether positive economics can and should be free of any moral values.
Hausman (2016) for example argues that economists hardly ever get purely technical questions and that it will often be necessary to elaborate on unclear moral specifications because there will always be a normative element of what is the best answer. When advising on the imposition of tariff barriers, politicians might for example give a partial moral specification in the sense that they want to increase revenues but think that some goods have to be excluded from tariffs due to moral consideration. However, economists will have to understand in more detail what the government actually intends in order to translate this into an economic problem. Should they for example focus on evaluating the effects of tariffs in terms of the life of an average citizen, an average voter, subgroups affected specifically by a tariff on specific goods, or potentially the effect of the tariff on average people in other countries? Even if economists do not share the moral values of policy makers, they must therefore understand at which place moral values come into play and how to fill any gaps in line with the policy makers’ goals. It thus seems as if economists would need quite a sophisticated understanding of ethics even in their role as technical advisors (Hausman, McPherson and Satz, 2016).
Instead of the ideal of economists as engineers, DeMartino (2011) uses the analogy of a medical physician. A physician is regarded as an expert in their field but their expertise does not warrant an absolute disregard for the patient's autonomy or their right to understand, ask questions or give permission for any given option. In this context, DeMartino argues for an oath that economists swear by upon graduation, including to respect the autonomy and agency of any community with/for/on which an economist works as well as to anticipate the potentially harmful consequences of any interventions and to attempt to mitigate such effects.
Another form of defending the positive-normative split posits that there are some cases in which economists should make value statements themselves, but that these cases are few and easy to delineate (Mongin, 2006).
The Value-Free Ideal holds that positive economics is and should be free of contextual values, as these values distort judgments and endanger scientific objectivity (Hausman, McPherson and Satz, 2016). The value-free ideal normally implies that only non-epistemic values must be excluded (Douglas, 2013), while epistemic values like accuracy and simplicity are considered truth-conducive. Such values are therefore viewed as unrelated to political agendas in that they relate only to choosing empirically adequate theories (Longino, 1996; Kuhn, 1979).
Nonetheless, some philosophers question if it is possible or even desirable to exclude non-epistemic values from economics. Longino for example argues that epistemic values can be laden with socio-political values. The epistemic value of simplicity leads economists to choose a unitary theory of the family over a bargaining model (if both are consistent with the evidence) and is thus prone to conceal gendered inequalities and to import non-feminist values (Longino, 1996). Furthermore, Mongin (2006) examines if it is even possible to make a clear split between positive and normative statements. Thick concepts like ‘just’ or ‘rational’ always involve both descriptive and evaluative aspects and can hardly be disentangled. Additionally, he criticises that it is important to acknowledge the difference between evaluative judgments and normative prescriptions (Mongin, 2006).
Douglas (2009) argues that one must distinguish a direct role of values, if which they directly determine scientists’ choices, and an indirect role. If economists evaluate whether a type I error or a type II error would have worse consequences before deciding for an appropriate significance level for their hypothesis test, they use values indirectly. Douglas argues that the indirect role is justifiable and desirable in order to ensure good science (Douglas, 2009).
Given the difficulties of excluding all value judgements, some philosophers argue that objectivity is not necessarily achieved by excluding value-judgements but rather that any normative biases must be mentioned explicitly (Alexandrova, 2018). Some subfields of economics, especially more socio-historical or critical traditions, also embrace non-objectivity in claiming that biases are realistically unavoidable. Critical social sciences oppose the epistemological idea that scientific theories and methods can ever be neutral or independent from the social processes within which they are generated or performed. Furthermore, they espouse actively identifying ideologically impaired theories and practices in order to transform unjust social relations (Habermas, 1971). The argument is that only an explicit commitment to emancipatory values can reveal how dominant power structures and implicit values shape and limit knowledge creation. Explicit value acknowledgement and commitment is therefore crucial to see beyond predominant ideologies and power structures, to provide emancipatory knowledge and, eventually, to improve the living conditions of the worst-off (de Melo-Martín & Intemann, 2018; Ng, 2015).
Despite these debates within philosophy of science, the value-free ideal remains so influential in economics that Hausman, McPherson and Satz, (2016) frame it as the “standard view” of economics.
A famous example is the Black-Scholes-Merton option-pricing theory. Traders used the formula to compare the market price of stock options to the hypothetical price of the model before making a purchasing decision. In the end, the purchasing behaviour led the market prices to converge to the model prices (MacKenzie, 2008). There are also studies suggesting that studying economics might make students more selfish, as economists constantly focus on self-interested rational choice theory rather than other models of behaviour (Frank, Gilovich and Regan, 1993). This is significant as economic research can — and materially does — impact the lives of millions of people across wide and sometimes unknowable geographies and timescales.
Additionally, performativity can disallow economic models from being predictively accurate over time. Lucas for example criticised large-scale macroeconometric forecasting models for capturing transitory correlations that would not remain stable in the face of policy changes (the Lucas Critique). He argues that policies based on macro-economic forecasts must fail because people will adapt to the new policy and not stick to their former behaviour – which will change the resulting macroeconomic outcomes and invalidate the model (Lucas, 1976). This calls into question whether economists can accurately predict and effectively model dynamic behaviour over time, and what this lack of certainty implies for their own performance as policy-designers and -makers.
Methodological individualism is a concept in social science which states that social phenomena can be best understood as the sum of individual decisions and should be explained by showing how they result from individual actions. For example, in economics, strict methodological individualism (or microfoundations) entails that one should not merely study that an increase in supply leads to increasing prices, but that this conclusion should be understood through an underlying individual-level mechanism (Reiss, 2013). This is a generally accepted definition, but it should be recognised that there are varying understandings of methodological individualism concerning its relation between individuals, institutions, and social groups as well as on the ontological and methodological uses of the concept (Udehn, 2002; Hodgeson, 2007).
The idea of methodological individualism began with Carl Menger who argued that “reducing complicated phenomena to their elements” would allow conceptual gains (Menger, 1987, p. 93). Additionally, Max Weber put forward a different rationale for methodological individualism: only individuals possess intentional states, which is the only possible base for understanding the resulting macro-structures. The concept was first termed by Joseph Schumpeter in his 1909 essay, On the concept of social value. The idea was not popularised until debates arose in the 1950s between Friedrich von Hayek and John Watkins on the ontological and epistemic nature of methodological individualism. There was another surge in the topic in the 1980s, when Jon Elster critiqued that the functional explanations of Marxian theory overlook collective action problems, for example in a socialist revolution. He thus argued for methodological individualism from an analytical Marxist perspective (Heath, 2020).
Debates on methodological individualism can be based on methodological or ontological considerations (Hodgeson, 2007). Methodologically, the question is whether explanations that refer only to the macro level have some value or might even be more appropriate in some circumstances (Reiss, 2013). At the ontological level, it can be debated whether individuals and their behaviour are really the only entities that exist, or if there are macro entities (e.g. money, institutions, norms) that go beyond aggregated individuals and are causally effective because they for example influence the behaviour of individuals (Durkheim, 1982). In this context emergence means that macrophenomena can have properties that are qualitatively different from, and thus irreducible to, the properties of their constitutive micro phenomena; and emerge only through the interaction of the micro particles. Tornados can for example not be reduced to any specific underlying composition of micro-entities, even though they certainly contain micro particles (O’Connor, 2021). Neurosciences have also popularised the concept of supervenience: if mental states supervene on brain states it means that the same configuration of neurons will always lead to the same mental state, but the same mental state can occur for different configurations of brain states (McLaughlin and Bennett, 2021). This idea can be applied to economics as well if one argues that macroeconomic states supervene on microeconomic actors and their decisions, but are not reducible to microeconomics as the mapping is not one-to-one (Hoover, 2001). Methodological individualism is thus controversial from both a technical and a philosophical point of view, making it a key area of contention within the philosophy of economic science.
One alternative approach to methodological individualism is methodological holism which can be understood as taking into account social phenomena and the views or aims of the collective. Methodological holism has seen little favour amongst economists over the last century because of the ontological question on if it is even possible for the collective to have an aim and the methodological concern on how to measure that aim (see Zahle (2021)).
Hausman (1992c) criticises Friedman’s argument using the analogy of testing a used car. Even if one agrees that a car is good if it drives safely, economically, and comfortably, most people would reject that the only useful test of the car should be a road test. Instead, it seems useful to open the hood and to check separate components of the car; especially if one wants to use the car in new circumstances, wants to assess if it will likely work well in future, or if it has broken down before. Analogously, it seems like a very narrow test of a theory's qualities if one only considers the current predictive success and denies the relevance of assumptions and any predictions outside the initial scope, even if one agrees with the instrumentalist approach.
Additionally, instrumentalism is not the only way to legitimise unrealistic assumptions as explored for example by Usali Mäki (see section 6.2.4 on models).
Lawson (1997) also argues for a realist approach to economics, also understood as critical realism. Based on the work of Bhaskar (1975), Lawson criticised that mainstream economics focuses merely on identifying observable surface regularities. This places causality at the level of events rather than mechanisms and reduces what is considered as real (ontology) to what we can know (epistemology). Instead, science should acknowledge the underlying mechanisms that produce regularities even if they are revealed only partly in observable relations. Both Mäki’s and Lawson’s accounts therefore reject the purely instrumentalist approach of Friedman and agree that underlying causal mechanisms are relevant.
This topic was already discussed in John Stuart Mill’s (1836) highly influential essay “On the Definition and Method of Political Economy”, in which he argues that the scientific method starts by breaking down complex phenomena and inductively determining the laws that govern individual causal factors. The combined consequences of various laws are then deduced. In this context, Mill justifies inexact predictions as laws can be disrupted by various interferences in the real world. While the law of prices may only be accurate under perfect conditions, this does not mean that one cannot make any predictions under imperfect conditions. Rather, the tendency of prices to react to changing supply will remain intact. Consequently, one can test the law in a non-ad-hoc way by testing it under different conditions that approximate the ceteris paribus conditions to different extents and falsify it by deciding between permissible and impermissible reasons for it not to hold (Kincaid and Harold, 1996; Reiss, 2017). Additionally, it can be argued that even physical laws are not actually universally valid and exceptionless (Cartwright, 1983). Instead, they are untrue in a strict empirical sense because they are highly idealised in order to be widely applicable. Strictly speaking, they would thus also require a ceteris paribus clause.
Nonetheless, these accounts do not necessarily solve the problem of inexactness but rather suggest a shift from laws to tendencies. Tendencies can however only be used and cumulated successfully if causal factors combine mechanically, and never react like chemical elements that form a new element when added together (Reutlinger, Schurz and Hüttemann, 2017; Kincaid and Harold, 1996; Mill, 1843). The debate about the use of laws in the social sciences and economics thus remains a philosophically relevant topic.
Uskali Mäki argues that unrealistic models can be useful for understanding and predicting real-world economic phenomena and that every science needs to apply isolation, which means that an entity is sealed off from the influence of other factors. Isolation comprises two factors: idealisation over certain factors (e.g. assuming perfect calculation skills) and omission over factors thought not to impact the economic phenomena under investigation. Isolative models are ‘unrealistic’ as they are necessarily incomplete and contain falsehoods. However, instead of justifying this through instrumentalism (like Friedman, see section 6.2.2), Mäki argues that isolation can be compatible with the pursuit of truth “if it correctly represents the isolated essence of the object” (Mäki, 1992:344). Important conditions are that the causal factors that the model refers to are real, that they are indeed causally relevant for the phenomena that one wants to explain, and that they are causally relevant based on the mechanism that is posited in the model. However, overall effects can only be derived from isolated causes if causes combine mechanically, while economic models which postulate factors that do not exist in reality cast doubt on Mäki’s account (Wimsatt, 2007).
Robert Sugden for example asserts that economic modellers do not start from real-world phenomena and proceed by isolating specific features. Rather, they construct models as credible counterfactual worlds that parallel real-world targets. This can be illustrated by Schelling’s checkerboard model, which claims that a preference to not be heavily outnumbered by neighbours of a different race can lead to completely segregated neighbourhoods. The basic elements of this model are not realistic and do not comply with Mäki’s conditions of isolation since people are modelled as coins in two colours living on a 8x8 checkerboard. Nonetheless, the model is applied to explain real effects through real causes. Sugden argues that the necessary inference between model and world must be grounded in the credibility of the model-world: only if the model and the real world are similar in some significant way (e.g. individuals holding mildly segregationist preferences), do we have reasons to believe that the causal relationship established in the model will also hold in the real world (Sugden, 2000). Nonetheless, credibility of a model is only necessary but not sufficient to justify inductive inferences from the model to the real world (Weisberg, 2006).
Nancy Cartwright (2009) criticises that there are serious obstacles to making inferences from credible world models to the real world, especially in economics. She argues that even analogous world models generally serve as isolating tools: we suppose that we can learn something about a more complex world with many operating factors by studying a sparse model with only one preference – such as a weakly segregationist preference - operating in isolation. This modelling approach is problematic because economics has few uncontroversial principles to base such models on. The consequence is that mere segregationist preferences together with the fundamental principle of maximisation under constraints will cause nothing unless we add structural assumptions for the neighbourhoods and some dynamics that imply action on the preferences. The result of weak segregationist preferences thus depends on exogenous structural assumptions – which leads Cartwright to argue that economic models are often overconstrained and conclusions will differ based on these constraints. Furthermore, given the issues of mechanistic addition, Cartwright concludes that even robustness tests might not be able to establish that our model results will hold across a variety of structural changes. Instead, robustness tests can help us to understand how circumstances shape the contributions that economic factors make, and this must be the base for extrapolation from model worlds.
Mary S. Morgan (2001) focuses on narrative techniques/stories as bridging the gap between real world and abstract models, in part built upon the account of economic metaphors by McCloskey (1990). Morgan argues that one must use and manipulate models, for example by answering ‘what happens if” questions. Using the example of the supply and demand curve model, Morgan illustrates that this process involves narrative methods. The model can for example be applied to see what happens if a consumer’s income increases, even though income is not a part of the model set-up. The ‘what if’ question is the starting point for a story that connects a change in consumer’s income to a change in the model, which is then used to deduce what will happen as a result. It is thus “only by asking questions and telling stories that we explore and demonstrate the full range of features and outcomes compatible with the [model]” (Morgan, 2001, p.370). Stories connect abstract models and their unrealistic assumptions to the real world by building an “intervening level between complete and exhaustive detail and complete generalisation” (Morgan, 2001, p. 379). Narratives must therefore be considered as an essential part of modelling - they sit between theory and reality and thereby help us to understand the world. For more, see The world in the model: How economists work and think (2012), in which Morgan discusses various case studies of historically significant economic models and analyses them from a philosophical perspective.
It is straightforward to observe correlation between two variables, but much trickier to determine a causal link. But what exactly is causality from the philosophical perspective? Causation is a philosophical issue since it entails ontological and epistemic questions on determining what must be present to make a causal inference true. Judea Pearl, a computer scientist and philosopher, is a pioneer on the philosophical understanding of causal inference with his work on the backdoor principle which is a visual approach for understanding omitted or confounding variables (see chapter 3 of Cunnningham (2021)).
Many econometric models aim to determine causal links. These include an independent variable (IV), difference-in-difference, regression discontinuity design (RDD), synthetic control method (SCM), and Randomised Control Trials (RCT). Each model is said to allow the economist to make a causal inference about the interaction between two variables. However, there are philosophical debates amongst these models. For example, with RCTs there are questions about determining the external or internal validity of a causal inference made. External validity can be understood as how well the results of a study can be generalized to another context and internal validity is understood as how accurate, primarily unbiased, the causal inference is within the context of a study. For example, if a randomised control trial is used to understand the effectiveness of a policy intervention in Kenya, external validity questions whether the causal inferences made on the policy intervention in Kenya will be applicable if the same policy is implemented in Bangladesh since the culture, institutions, and other factors may lead to different outcomes between Kenya and Bangladesh (White and Masset, 2007; Pelletier et.al., 2005). Whereas questions of internal validity would be how strong the causal inference is about the policy intervention in Kenya itself. For the case of RCTs, internal validity is usually strong because many elements of the study can be controlled. However, this is not always the case for other causal models.
In addition to the issue of external validity in making a causal inference, there are mathematical concerns such as the practices of data mining, data fitting, and extrapolating results. Edward Leamer in his 1983 paper “Let’s take the Con Out of Econometrics” voiced many of these concerns by calling out econometric practices for being biased and inaccurate, sparking a debate echoing the reasonableness of objectivity. Leamer’s paper led a handful of economists to pursue improving the research designs of empirical economics in order to make conclusions more reliable. These economists include Joshua Angrist, Steven Pischke, Alan Kreuger, David Card, Guido Imbens, and others who formed what came to be known as the credibility revolution. Anrgrist, Card and Imbens won the Nobel Prize in Economics in 2021 for their work on causal methods, suggesting that these efforts to improve the credibility and philosophical robustness of econometric methods is a relevant and impactful topic in the field of economics.
"Less well charted is the coincidence of this development with a severing of ties with philosophy, ties that once bound economics to active negotiation of the set of assumptions and presuppositions about the world that underwrite its approach to phenomena." (Mehta, 2008, p. 75)
Mainstream economics, and primarily neoclassical thinking, adhere to theories of methodological individualism and rational choice when making assumptions about human decision making and behaviour. The assumption of pure rationality was challenged by the rise of behavioural economics which originally started outside the mainstream of thinking but within the last two decades has slowly grown to become accepted by many mainstream economists.
However, one of the most striking characteristics about mainstream economics is their avoidance of any explicitly philosophical investigation in an attempt to be viewed as an objective science (Atkinson, 2009). As discussed above, while mainstream economics has aimed to be viewed as an objective science with little to no value judgements or normative statements acknowledged, economists do - and most often implicitly - make assumptions about which values and normative views to uphold. This opens space for critique from alternative schools of thought which are often broadly grouped together as heterodox.
Marxian economists generally reject the idea of value-neutrality. Instead, a critical social science needs explicit value commitments to generate knowledge that can emancipate the oppressed (Ng, 2015). Despite methodological differences, Marxian economists share general value commitments in the sense that capitalism as an economic and social system is considered to be flawed and that a non-capitalist alternative would be preferred. Topics of exploitation and alienation relate back to those ethical issues discussed in section 4 (Leopold, 2022).
One important philosophical tenet of Marxian economics is that most theoreticians reject the suitability of methodological individualism. Marxian political economy generally focuses on class rather than the individual as the dominant unit of analysis and stresses the dialectic relationship between modes of production and social relations of production; essentially disallowing reductionism to the individual level. Additionally, Marxian economics relies on functional explanations, meaning that something that has an effect is explained in terms of its effect. In the subfield of analytical Marxism, functional explanations are defended for example by Joshua Cohen and criticised by Jon Elster (Leopold, 2022; Heath, 2020).
Additionally, many Post-Keynesians rely on holistic approaches rather than strict methodological individualism and reject that macro phenomena are reducible to individual actions. And even newer models that rely on microfoundations often reject microfoundations in terms of formal constrained-optimisation models.
Moreover, Austrian economics tends to be sceptical of formal methods in economics including the use of mathematical modelling, statistics, and econometrics in its economic reasoning. Linsbichler (2021) suggests the main reason for this hesitation is that many Austrian economists believe human behavior is imprecise and so the means of representing that should be realistic and thus it is impractical to use formal modelling. Moreover, there are pragmatic reasons for Austrian economists to avoid formal modelling because many of their beliefs, assumptions and concepts would be difficult to formalise including radical uncertainty and the place of institutions. This approach to representing the world also explains why Austrian economists align with a weaker form of methodological individualism as they recognize the place of institutions and social relations. Austrian economists desire to create realist representations of the economy.
Institutional economics (we focus here on original and not new institutionalist economics) aims to understand how institutions impact human behaviour (Mirowski, 2019). Thorstein Veblen, originally trained as a philosopher, was a sociologist who is regarded as the founding father of institutional economics for his critique of the economy as dynamic and socially embedded. The starting point is thus not the individual or any particular conception of human behaviour, but the social structures that will shape individuals and their decisions. While individuals also shape institutions, institutions are conceptualised as emergent macro phenomena that cannot be reduced to individual action (Elsner, 2007).
Institutionalists proceed inductively rather than deductively and prioritise research methods with a high degree of detail and contextualisation over the idea of universal and ahistorical laws. Knowledge creation is considered as situated, and the value-free ideal is thus rejected by most (Milonakis and Fine, 2009). This conception of research can also break down a strict separation of science and other forms of practice: institutionalists have for example relied on participatory research approaches that involve immersing oneself into the practices that are being studied and many are involved actively in politics (Elsner, 2006).
The situatedness of knowledge implies that the systematic exclusion of women from the field of economics (both as research subjects and practitioners) should be examined to understand how it has influenced the evolution of the discipline. Feminist economists have for example examined the discipline’s blind eye regarding social reproduction and unpaid care work or whether specific methods or epistemic values import non-feminist values, for example in theories of discrimination or models of the family (Longino, 1996). Additionally, the discipline’s concern for rigour, objectivity and detachment can be analysed from the perspective of gendered attributes and a gendered devaluation of attributes like connection and qualitative research (Nelson, 1995).
We want to conclude this foundational text with a few additional resources including the links to other articles on Exploring Economics which relate to the Philosophy of Economics, as well as relevant journals and institutions who engage in this research or offer programs for bachelors and masters students. First, if you would like to understand some of these concepts more in depth from the philosophical perspective, the Stanford Encyclopedia of Philosophy (SEP) is a useful source for any topic that may have a philosophical nuance. Each entry in the database provides a comprehensive overview of the given topic and is typically written by a knowledgeable member of the field.
London School of Economics and Political Science
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1 It is worth noting that within the discipline of philosophy, the area of study for the Philosophy of Economics is a subfield of analytical philosophy; not continental philosophy. Analytical philosophy is generally concerned with the analysis of thought, language, logic, and knowledge and often uses arguments and proofs similar to those used in mathematics and logic. Continental philosophy addresses “large questions in a synthetic or integrative way” (Prado, 2003:10) and uses more wide-reaching methods that are often less formal. The study of Philosophy of Economics is about understanding the knowledge and logic of the discipline of economics and thus from the philosophical side is viewed as a subfield of analytical philosophy. The focus of our overview is thus also analytic philosophy.
2 A recent citation analysis mapped two separate branches of research of the topics and concerns most often covered in the Philosophy of Economics field (Claveau et al., 2021). One cluster focuses on specialised philosophical topics, typically pursued by analytical philosophers, including moral philosophy, decision theory, behavioural economics and methodology, and is highly concentrated in the Journal of Economic Methodology and the Journal of Economics and Philosophy. A second cluster, which focuses on topics such as critical realism, institutional economics, political economy, the history of economic thought and methodology, is found across an array of economic journals and is more frequently pursued by economists.
3 We’d like to acknowledge that this piece may tend towards highlighting the philosophical views because of the way most Philosophy of Economics courses are taught and our own personal education.
4 Mainstream or orthodox economics are those usually neoclassical theories which are most commonly accepted and taught in universities worldwide. An expanded umbrella was characterised by D. Wade Hands as being “pluralist mainstream” and includes the topics of experimental economics, behavioural economics, neuroeconomics, and other related subfields (Hands, 2015).
5 Economic thinking dates back to the time of Plato and Aristotle. However, for our purposes we only address economics from Smith onwards. To learn more about the early years of economic thinking see chapters 1 through 4 of Backhouse (2002).
6 As for example Friedman’s (1953) defence of instrumentalism is influential within economics, but criticised by most philosophers (see section 6.2.2).