A Review Paper of “Popper and Lakatos in Economic Methodology” by D. Wade Hans
This paper reviews the chapter “Popper and Lakatos in Economic Methodology” by Wade Hans published by Daniel M. Hausman in “The Philosophy of Economics” in 2008. The main purpose of this paper is to critically asses Karl Popper’s and Imre Lakatos’s methodological framework for economists consisting of both Popperian falsificationism and Lakatos’s ‘methodology of scientific research programmes’ (MSRP). The Popperian philosophy of science and its direct influence on the work of Imre Lakatos will be explicitly examined in terms of its influence and role in economic theory only, even though Popper’s philosophy of science and Lakatos’s MSRP were intended for science in general.
During his years in Vienna, Popper published his first theory of science as “Logik der Forschung” in 1934, which was a distinct critique of the verifiability principle in scientific methodology and its supporters thereof, i.e. logical positivists, as well as a solution to the problem of induction. In his work, Popper introduced the term falsification, by which he means an act of disproving a theory with at least one contradicting empirical observation. Thereby, Popper distinguishes between the demarcation of science from non-science and the methodology of science. A minimum requirement in order to tell if a theory is scientific, is that it must be logically possible to falsify the theory. However, for economists his methodology plays a more important role. In scientific practice his methodology suggests that a scientist starts with a simple conjecture which might be the first step in developing a theory. The next step is the rigorous testing of this conjecture by comparing the most likely consequences with real world empirical data. If the theory does well and complies with the data, it is provisionally accepted until a different researcher or new data succeed in proving the theory wrong. If this does not happen, the theory is provisionally accepted forever. However, the theory is neither verified nor is it definitely true. Popper’s idea was that it is impossible to verify a theory because there is always the chance that new, not yet found, evidence can contradict the theory, which was the original requirement for a scientific theory. If a conjecture is not in line with the data, it is falsified and must be replaced.
The analogy of a black swan is often used to illustrate the problem of induction and the idea of falsification (Poser 2012, pp. 115). Before William de Valmingh went to Australia in 1697, everybody in Europe had only seen white swans and therefore concluded from their observation that all swans must be white. Their conjecture was then falsified by the discovery of black swans in Australia. The problem of induction also occurs when making predictions about the future. In 1738, David Hume already wrote that is logically impossible to verify reasons for the future with similarity to the past through experiences, since these similarities are in themselves a prerequisite for these reasons (Hume 1904, pp. 178ff).
Even though economists advocate for falsification as a normative premise for economic methodology, the discussion in economic academia revolved only around this normative premise and not on whether it as actually been practiced. Wade Hans discusses four criticisms of falsification as an economic methodology.
The first one is the so-called Duhemian problem, which is concerned not with the consequences of a theory, but with the simplifying assumptions and initial conditions. In the economic theory of household behavior some assumptions are false, logically unfalsifiable and practically unfalsifiable, e.g. the infinite divisibility of commodities, diminishing returns and completeness in preferences. Since these assumptions are barley testable, a found contradiction cannot be traced back to the single problematic element in a set of auxiliary hypotheses. In addition, there is sometimes disagreement about the empirical data basis in economics leading to arguments over what was objectively observed. Independent of the last two points, in social sciences there is always the chance that the testing of the theory itself will alter the initial conditions.
The second critique concerns the qualitative comparative statics technique, which makes it difficult to falsify a theory due to the low empirical content. The reason for this is that predictions, using this widely accepted technique, only report on whether a certain variable increases or decreases, but say nothing about the magnitude.
The third critique is regarding Popper never developing an adequate theory of verisimilitude in order to reconcile the method of falsification with scientific realism. Since scientific realism aims to establish true theories, it could make sense to develop a theory of verisimilitude allowing scientists to ordinally rank several theories in order to choose the better theory and therefore come closer to the truth. This would not only give the Popperian philosophy an epistemic justification, but would also solve practical problems in actually choosing between e.g. a bold falsified theory and a modest corroborated one.
Fourth, progress in economic theory is often more complex than in Popper’s descriptions, since progress in economics also means explaining known phenomena with fewer restrictions or finding new explanations for long known facts, which is not part of Poppers falsificationism. Wade Hans even goes so far as to say that a strict application of falsification would destruct every economic theory.