Summary Philosophy of Economics: a contemporary introduction ©MvdW
Chapter 1: The why, what and how of philosophy of economics
1.1 Two Opposing Paradigms
The separation of economics and philosophy into two distinct disciplines has occurred fairly recently
and is to a large extent artificial. It has to do with the general trend towards greater specialization.
Modernism takes the view that (a) science investigates facts, and only facts; (b) factual knowledge is
exhausted on the basis of observations and experiments. David Hume is really radical in this sense.
What is (economists qua scientists) versus what ought to be (philosophers qua ethicists). Parallel
developments in these fields helped to overcome these dichotomies.
- distinction between so-called positive (or factual) and normative (or evaluative) economics;
- philosophers get informed by science and resemble science, e.g. in use of empirical
information, mathematical modelling and sometimes even experimental methods.
So: economics and philosophy have drawn closer to each other by economists asking questions that
were once considered philosophical and non-scientific and by philosophers having started to address
their questions in ways that resemble science more closely than traditional philosophy.
A cause of the financial crisis was that economic models were idealized to such an extent and in such
a way that they couldn’t be used for purposes such as predicting financial crises. Krugman 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 of science are interested in metaphysical and epistemological issues raised by sciences.
- Metaphysical issues are those applying to fundamental building blocks of nature and society.
E.g. objects, properties, individuals, and modality (possibility and necessity).
- Epistemological issues concern ways in which scientists find out about these in experiments,
measurements and observation.
1.2 The philosophy of economics: interpreting theory, methodology and ethics
Philosophers of economics are philosophers whose work focuses on the theoretical, methodological
and ethical foundations of economics.
1. The main theoretical framework in economics is given by theories of rational choice. To
examine foundations of rational-choice theory means to examine axioms and principles that
underlie such theories, to assess whether they are justifiable as axioms and principles of
rational choice and adequate as descriptive accounts of actual choice.
2. The second branch of philosophy of economics is methodology, which, as the name suggests,
looks at the methods economists employ in testing their theories and establishing facts, laws
and causal relations. Philosophers talk abstractly and are concerned about foundations.
There are observational and experimental methods. Observational methods generate data
passively. Experimental methods give economists a more active role.
3. The third branch of philosophy of economics comprises the ethical aspects of economics.
Welfare economics is the branch of economics that addresses normative questions.
1.3 The Aims of Economics and the Problem of Purpose
A statement of Carl Menger ascribes the tripartite goal of economics: explanation-prediction-control.
Economists also contribute to a number of normative discussions; to provide adequate normative
accounts of rationality, well-being and justice are among the aims of economics. Scientific practices
should be evaluated against a purpose, preferably pursued by scientists themselves and not imposed
from outside by a philosopher.
,Causal mechanisms are investigated for at least three purposes.
- to explain economic phenomena;
- often difficult to ascertain whether one economic variable causes another by means of
statistical analyses alone;
- to ascertain the generalizability of already established causal claims.
Chapter 2: Explaining economic phenomena
2.1 Explanation as an aim of economics
Some philosophers of the social sciences and methodologists would go as far as to claim that
explanation is the only aim of the social sciences. Others believe that explanation is not the only aim
but that it has a special status. Economists do, and should, pursue a variety of aims.
2.2 Phenomena
The Greek verb phainomai means “to appear”, so in the most general terms a phenomenon is an
appearance of sorts. To be a phenomenon something must be perceived by the senses, experienced
by an individual. Phenomena in this sense are contrasted with the reality behind the appearances. In
the contemporary philosophy of science literature, the term has lost its connection with the
immediacy of experience and is nowadays usually unobservable. A phenomenon is also something
significant, of scientific interest. A phenomenon is commonly an event or process of certain type that
occurs regularly under definite circumstances. Ian Hacking says that phenomena are events or
processes of a certain type, having regular features.
2.3 Why-questions, explanadum and explanans
In a scientific explanation, the why-question concerns the phenomenon of interest. Of course, not
every answer to a why-question is also an (scientific) explanation. We want explanation to be
connected to the phenomenon in the right way.
According to the so-called deductive-nomological model (or D-N model) of scientific explanation,
explanation falls into two parts:
- an explanandum (to be explained), a description of the phenomenon of interest;
- an explanans (the explaining).
Explanation is a logically valid argument: the explanans comprises the premises of the argument and
the explanandum its conclusion, and the conclusion cannot be false if all of the premises are true.
2.4 Scientific Laws
The logical positivists imposed two main conditions.
- First, the sentences in the explanans must be true or at least verifiable and verified.
- Second, the premisses must contain at least one scientific law non-redundantly. This
condition in fact comprises three requirements:
o at least one of the premisses must be a law;
o the law must be “scientific”;
o removing the law(s) from the set of premisses renders the argument invalid.
But what is a scientific law?
- A scientific law is a regularity or universal generalization;
- it also has to be contingent (not logically true), verifiable and supported by evidence;
- Various criteria have been proposed to distinguish between accidental and genuinely
nomological (law-like) generalization. All have failed.
Deductive-nomological model of explanation is not a good model for explanation in economics and
its various drawbacks have made us to search for alternatives.
, 2.5 The D-N Model and its discontents
The D-N model says the following: a scientific explanation is a logically valid and sound argument
(“deductive”) that contains at least one scientific law non-redundantly (“nomological”).
Here I will discuss only three criticisms that are relevant.
- First, philosophers have argued that human behavior does not fall under laws.
There are no psychological laws;
- Second, even generalizations that do not cite human motivations or beliefs are seldom
strictly universal, e.g. Ceteris paribus laws hold only under certain conditions.
Genuine laws are rare.
- Third, it is not clear whether laws qua regularities are explanatory at all.
Laws by themselves do not seem explanatory.
A good explanation in economics will therefore ask for the detailed causal process or mechanism that
is responsible for the phenomenon of interest.
Chapter 3: Rational-Choice theory
3.1 Folk Psychology
The view that human behaviour can and ought to be explained by citing beliefs and desires is called
folk psychology. Sometimes folk psychology is understood as the body of information people have
about the mind, which in turn is regarded as the basis for our capacity to attribute mental states and
to predict and explain actions. Although often treated as synonyms, it is useful to distinguish
between mere behaviour and action or choice. Not every movement of the body is also behaviour.
Decisions are somewhat in between beliefs/desires and actions. Decisions do not automatically lead
to choices, because one might fail to convert the decision into action, because of weakness of will,
forgetfulness or change of mind. Beliefs and desires are thus reasons for action.
There are two ideas built into the concept of “acting on a reason”. Besides the idea of rationality
there is also the idea of cause. He thinks that an explanatory reason is a rational cause. It is a cause in
that it helps to bring about the action.
3.2 Ordinal-Choice Theory
Preferences
Most fundamentally, preferences are comparative, desires are absolute. An advantages of explaining
action in terms of preferences rather than desires, and taking preferences to be “preferences on the
balance” is that preference all things considered goes a long way towards explaining her decision. A
desire is a particular state of mind, a mental entity. Mental states are unobservable to everyone but
the individual who has them, and therefore of dubious scientific value. Sometimes preferences are
identified with choices. The idea that preference and choice are synonymous and that consumption
theory can make do without non-choice data has become the “standard approach” to economic
analysis. Preferences are closely related to choices: preferences may cause and help to explain
choices, but to identify the two would be a mistake. And yet, counter-preferential choice is surely a
genuine phenomenon. People make all sorts of mistakes when they choose due to inattentiveness,
weakness of will or false beliefs.
Choice problems
An economist must formalize a given situation into a choice problem. The way this is done
determines the branch of choice theory relevant to the problem, and how the problem is to be
solved. The seemingly same act can be a variety of different things, depending on whether there are
more choices but also on the social norms that are in place when the decision is being made and
Chapter 1: The why, what and how of philosophy of economics
1.1 Two Opposing Paradigms
The separation of economics and philosophy into two distinct disciplines has occurred fairly recently
and is to a large extent artificial. It has to do with the general trend towards greater specialization.
Modernism takes the view that (a) science investigates facts, and only facts; (b) factual knowledge is
exhausted on the basis of observations and experiments. David Hume is really radical in this sense.
What is (economists qua scientists) versus what ought to be (philosophers qua ethicists). Parallel
developments in these fields helped to overcome these dichotomies.
- distinction between so-called positive (or factual) and normative (or evaluative) economics;
- philosophers get informed by science and resemble science, e.g. in use of empirical
information, mathematical modelling and sometimes even experimental methods.
So: economics and philosophy have drawn closer to each other by economists asking questions that
were once considered philosophical and non-scientific and by philosophers having started to address
their questions in ways that resemble science more closely than traditional philosophy.
A cause of the financial crisis was that economic models were idealized to such an extent and in such
a way that they couldn’t be used for purposes such as predicting financial crises. Krugman 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 of science are interested in metaphysical and epistemological issues raised by sciences.
- Metaphysical issues are those applying to fundamental building blocks of nature and society.
E.g. objects, properties, individuals, and modality (possibility and necessity).
- Epistemological issues concern ways in which scientists find out about these in experiments,
measurements and observation.
1.2 The philosophy of economics: interpreting theory, methodology and ethics
Philosophers of economics are philosophers whose work focuses on the theoretical, methodological
and ethical foundations of economics.
1. The main theoretical framework in economics is given by theories of rational choice. To
examine foundations of rational-choice theory means to examine axioms and principles that
underlie such theories, to assess whether they are justifiable as axioms and principles of
rational choice and adequate as descriptive accounts of actual choice.
2. The second branch of philosophy of economics is methodology, which, as the name suggests,
looks at the methods economists employ in testing their theories and establishing facts, laws
and causal relations. Philosophers talk abstractly and are concerned about foundations.
There are observational and experimental methods. Observational methods generate data
passively. Experimental methods give economists a more active role.
3. The third branch of philosophy of economics comprises the ethical aspects of economics.
Welfare economics is the branch of economics that addresses normative questions.
1.3 The Aims of Economics and the Problem of Purpose
A statement of Carl Menger ascribes the tripartite goal of economics: explanation-prediction-control.
Economists also contribute to a number of normative discussions; to provide adequate normative
accounts of rationality, well-being and justice are among the aims of economics. Scientific practices
should be evaluated against a purpose, preferably pursued by scientists themselves and not imposed
from outside by a philosopher.
,Causal mechanisms are investigated for at least three purposes.
- to explain economic phenomena;
- often difficult to ascertain whether one economic variable causes another by means of
statistical analyses alone;
- to ascertain the generalizability of already established causal claims.
Chapter 2: Explaining economic phenomena
2.1 Explanation as an aim of economics
Some philosophers of the social sciences and methodologists would go as far as to claim that
explanation is the only aim of the social sciences. Others believe that explanation is not the only aim
but that it has a special status. Economists do, and should, pursue a variety of aims.
2.2 Phenomena
The Greek verb phainomai means “to appear”, so in the most general terms a phenomenon is an
appearance of sorts. To be a phenomenon something must be perceived by the senses, experienced
by an individual. Phenomena in this sense are contrasted with the reality behind the appearances. In
the contemporary philosophy of science literature, the term has lost its connection with the
immediacy of experience and is nowadays usually unobservable. A phenomenon is also something
significant, of scientific interest. A phenomenon is commonly an event or process of certain type that
occurs regularly under definite circumstances. Ian Hacking says that phenomena are events or
processes of a certain type, having regular features.
2.3 Why-questions, explanadum and explanans
In a scientific explanation, the why-question concerns the phenomenon of interest. Of course, not
every answer to a why-question is also an (scientific) explanation. We want explanation to be
connected to the phenomenon in the right way.
According to the so-called deductive-nomological model (or D-N model) of scientific explanation,
explanation falls into two parts:
- an explanandum (to be explained), a description of the phenomenon of interest;
- an explanans (the explaining).
Explanation is a logically valid argument: the explanans comprises the premises of the argument and
the explanandum its conclusion, and the conclusion cannot be false if all of the premises are true.
2.4 Scientific Laws
The logical positivists imposed two main conditions.
- First, the sentences in the explanans must be true or at least verifiable and verified.
- Second, the premisses must contain at least one scientific law non-redundantly. This
condition in fact comprises three requirements:
o at least one of the premisses must be a law;
o the law must be “scientific”;
o removing the law(s) from the set of premisses renders the argument invalid.
But what is a scientific law?
- A scientific law is a regularity or universal generalization;
- it also has to be contingent (not logically true), verifiable and supported by evidence;
- Various criteria have been proposed to distinguish between accidental and genuinely
nomological (law-like) generalization. All have failed.
Deductive-nomological model of explanation is not a good model for explanation in economics and
its various drawbacks have made us to search for alternatives.
, 2.5 The D-N Model and its discontents
The D-N model says the following: a scientific explanation is a logically valid and sound argument
(“deductive”) that contains at least one scientific law non-redundantly (“nomological”).
Here I will discuss only three criticisms that are relevant.
- First, philosophers have argued that human behavior does not fall under laws.
There are no psychological laws;
- Second, even generalizations that do not cite human motivations or beliefs are seldom
strictly universal, e.g. Ceteris paribus laws hold only under certain conditions.
Genuine laws are rare.
- Third, it is not clear whether laws qua regularities are explanatory at all.
Laws by themselves do not seem explanatory.
A good explanation in economics will therefore ask for the detailed causal process or mechanism that
is responsible for the phenomenon of interest.
Chapter 3: Rational-Choice theory
3.1 Folk Psychology
The view that human behaviour can and ought to be explained by citing beliefs and desires is called
folk psychology. Sometimes folk psychology is understood as the body of information people have
about the mind, which in turn is regarded as the basis for our capacity to attribute mental states and
to predict and explain actions. Although often treated as synonyms, it is useful to distinguish
between mere behaviour and action or choice. Not every movement of the body is also behaviour.
Decisions are somewhat in between beliefs/desires and actions. Decisions do not automatically lead
to choices, because one might fail to convert the decision into action, because of weakness of will,
forgetfulness or change of mind. Beliefs and desires are thus reasons for action.
There are two ideas built into the concept of “acting on a reason”. Besides the idea of rationality
there is also the idea of cause. He thinks that an explanatory reason is a rational cause. It is a cause in
that it helps to bring about the action.
3.2 Ordinal-Choice Theory
Preferences
Most fundamentally, preferences are comparative, desires are absolute. An advantages of explaining
action in terms of preferences rather than desires, and taking preferences to be “preferences on the
balance” is that preference all things considered goes a long way towards explaining her decision. A
desire is a particular state of mind, a mental entity. Mental states are unobservable to everyone but
the individual who has them, and therefore of dubious scientific value. Sometimes preferences are
identified with choices. The idea that preference and choice are synonymous and that consumption
theory can make do without non-choice data has become the “standard approach” to economic
analysis. Preferences are closely related to choices: preferences may cause and help to explain
choices, but to identify the two would be a mistake. And yet, counter-preferential choice is surely a
genuine phenomenon. People make all sorts of mistakes when they choose due to inattentiveness,
weakness of will or false beliefs.
Choice problems
An economist must formalize a given situation into a choice problem. The way this is done
determines the branch of choice theory relevant to the problem, and how the problem is to be
solved. The seemingly same act can be a variety of different things, depending on whether there are
more choices but also on the social norms that are in place when the decision is being made and
