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Realism in Economics: ontological indeterminism and methods of inquiry

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By Maria Alejandra Madi

[Editor’s note: This is an expanded version of an entry here on the WEA Pedagogy Blog]

  1. Introduction

A relevant feature of the current crisis in economic knowledge is the recurrence of the  Ricardian Vice. Joseph A. Schumpeter coined this term in his book History of Economic Analysis when he criticized the habit assigned to Ricardo to represent the economy by a set of simplified assumptions and to use tautologies to develop practical economic solutions. In Schumpeter’s own words :

His (Ricardo’s) interest was in the clear-cut result of direct, practical significance…, He then piled one simplifying assumption upon another until, …he set up simple one-way relations so that, in the end, the desire results emerged almost as tautologies. For example (if)… profits ‘depend upon’ the price of wheat. And under his implicit assumptions.., this is not only true, but undeniably, in fact trivially, so. Profits could not possibly depend upon anything else, since everything else is ‘given’, that is frozen. It is an excellent theory that can never be refuted and lacks nothing save sense. The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice. (Schumpeter, 1954: 472-73)

Indeed, Schumpeter rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because the  habit  known as the Ricardian Vice generates analytical unrealistic results that are irrelevant to solve the real-world economic problems.

Considering this background, this contribution seeks to reflect on the relationship between logical categories and ontological indeterminism of economic relations in order to develop a realistic theoretical understanding of the dynamic and evolving components of the economic relations in the real-world.

  1. Ontological realism

Economic theories are built on representations of economic experiences. However, all representations must pass the test of meeting the otherness of experience. Indeed, reality is a system of relations that imply existence. In other words, reality is revealed in existence as fact, as a phenomenon. Thus, the real is not what we think of it, it is not a creation of the human mind (Ibri, 1992).

Under an ontological point of view, realistic theories are built by constitutive achievements through a process of inference and interpretation (Peirce, 1975). In this attempt, it can be said that the phenomenology of economic relations is a pillar for an ontology of Economics in the framework of realistic theories about the behaviour of those economic relations as dynamic and evolutive objects. In truth, under this ontological point of view, the economic reality has foundations in the phenomenology of economic relations.

The real set of economic relations are not strictly causal and governed by a system of laws because the idea of a real-world governed by laws is a mere assumption, it’s not real. As a matter of fact, the ontological indeterminism of economic relations corresponds to a worldview where the economic facts could present deviations from the so called economic laws, or even where the world of economic experiences has elements of chance that are responsible for such deviations. In other words, the presence of chance and uncertainty makes room for discontinuities between the past and the future that add certain degree of indeterminacy to the evolution of economic relations. Thus, as the ontological indeterminism makes room for chance as a possibility not regular through time, the principle of chance has relevant implications for a realistic theoretical approach to the study of economic decisions and actions through the flow of time (Ibri, 2000).

As a result, the acceptance of a certain degree of indeterminacy in economic phenomena reinforces the importance of formulating economic theories that consider the changing features of their objects of research in their historical and evolutionary circumstances. In this way, realism in Economics should enhance a dialogue between theories and the complex economic phenomena that they intend to explain. As a result, the principles of economic theories should therefore be compatible with the properties inherent in the dynamic nature of the economic objects, as the only possible way to illuminate central features of the real-world.

  1. Realism and methods of inquiry

The ontological and the epistemological approaches to realism in Economics are inter-related. While rejecting the fundamental hypothesis of nominalism, ontological realism addresses the problem that economic relations cannot be seized under a Newtonian mechanics and deterministic world view as if all economic relations were governed by absolute laws.

Indeed, uncertainty is a key issue in the ontology of Economics since its research objects cannot be treated as crystallized facts, but facts in evolution through chronological time. As a result, the concept of uncertainty in the context of an ontology of economic relations has deep consequences for the evaluation of the methods of inquiry in Economics.

Considering this background, deductive economic reasoning as the privileged method of inquiry in Economics does not cope with the dynamic and evolving nature of the set of real economic relations. Indeed, there is a danger that the Cartesian deductive method of inquiry could lead to a concept of economic reality that is solely a creation of the human mind because its representation of reality lacks existence, lacks economic facts.

As Keynes warned in his analysis about the dynamics of the uncertain real-world monetary economies, the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the  study of other fields of knowledge- such as History and Philosophy. In his own words:

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician. (Keynes, Collected Writings, vol. X: Essays in Biography)

Today, Schumpeter’s and Keynes’s criticism could be certainly addressed to those economists whose beliefs ultimately privilege the deductive method of inquiry in Economics. Due to these beliefs,  mainstream economists favour the adoption of a nominalist approach where concepts are not anchored in the real-world economic phenomena. And as a consequence, the current challenge in Economics is that the dialogue between economic theories and the economic reality turns out to be abandoned not only in academic research but also in the policy making process.

This dialogue is complex and should be considered in any attempt to build realistic economic theories, as Keynes warned. Indeed, the changing environment of real-world markets through time -that is irreversible-  refers to a certain degree of ontological indeterminacy that should be considered in realistic economic theories and in the study of Economics.

 

References

Descartes, R. (1973). Discurso do Método. Coleção Os Pensadores. São Paulo: Abril Cultural, 1973.

Ibri, I. A. (1992). Kósmos Noētós: A Arquitetura Metafísica de Charles Peirce. São Paulo: Perspectiva.

Ibri, I. A (2000). Sobre a Incerteza, Trans/Forma/Ação, São Paulo, 23: 97-104, 2000.

Keynes, J. M. (1933). The Collected Writings of John Maynard Keynes, Vol. 10: Essays in Biography. London and Basingstoke: Macmillan.

Madi, M. A. C. (2017). Realism in Economics. Retrieved from https://weapedagogy.wordpress.com/2017/04/17/realism-in-economics/

Peirce, C. S. (1975). Semiótica e Filosofia. São Paulo: Cultrix.

Schumpeter, J. A. (1954). History of Economic Analysis. Oxford: Oxford University Press.

From: pp.6-7 of WEA Commentaries 7(2), April 2017
http://www.worldeconomicsassociation.org/files/Issue7-2.pdf

Download WEA newsletter Volume 7, Issue No. 2, April 2017 ›

1 response

  • Carmine Gorga, Ph.D. says:

    I am in total agreement with Maria Alejandra Madi—especially on the issue of relevance (Gorga, C. 2009. “Concordian Economics: Tools to Return Relevance to Economics.” Available at http://www.pelicanweb.org/solisustv11n02page4.html).

    Hailing from the other side of the mountain in Southern Italy where Grazia letto-Gillies was born, once I got my hands on the General Theory, after studying economics under Robert Mundell, I had to satisfy one urge: I needed to understand what is Investment and how does it occur.

    What a shock. The GT told me everything about Saving and not one definition of investment, apart from “Saving equals Investment.” When I finally reached p. 328 of the GT, rather than an explanation, I was assaulted by an insult, couched in a dogma, obscured by a declaration of intellectual surrender: The conception “that saving and investment can be unequal… (has) no foundation at all apart from confusion of mind.”

    Fuming, I went back to p. 63 of the GT, and wrote: “Investment = Income – Hoarding.” Then and there, in the far away Summer of 1965, I found myself in an intellectual world that I am still exploring. A new model of the economic system was born. (Full disclosure: The first burst was to write “Investment = Income – Saving.”)

    In the presence of two equally consistent mathematical models, I had to discover a new methodology as I went along, in order to justify the validity of “my” model and understand its inner characteristics. This experiment in learning-by-doing is recorded in The Economic Process: An Instantaneous Non-Newtonian Picture (2002, 2009, 2016).

    Reading this précis on methodology, I have reached some additional understanding of why the subtitle of my work is wholly appropriate: The economic process is nondeterministic.

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