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On Economic Methodology: An Interview with Sheila Dow

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Sheila Dow is Emeritus Professor of Economics at the University of Stirling, Scotland, and Convener of the Scottish Centre for Economic Methodology. Her latest book ‘Foundations for New Economic Thinking’ is available from Amazon.com

Interview conducted by Philip Pilkington

Philip Pilkington: Your book is all about the importance of methodology in economics. Up until now methodology has largely been side-lined. I recall, for example, that Paul Samuelson made a comment to the tune of “Those who cannot do science do methodology”. That strikes me as being broadly the mainstream attitude to any discussions of methodology in economics. In the face of this why do you find methodology to be so important?

Sheila Dow: Methodology is about the way in which we do economics, what we think is a good or bad argument and how we choose between theories. It’s not just about whether to use this technique or that technique. Among other things, the methodology we use assumes a particular way of understanding how the economy works and what kind of knowledge is possible.

I think it is always important for economists to understand the basis of what they do, and to be able to justify their own choice of methodology. But it is particularly important now, when the financial and economic crisis is challenging much of what was in the mainstream of economic theory. Those who dismiss thinking about methodology are assuming that there is one best way of doing economics on which everyone agrees. But there are in fact different ways of understanding the economy and therefore different methodologies.

If any economist wants to be persuasive about the reasons in favour of her own approach to economics she needs some understanding of how others approach the subject. The first step for many economists therefore is to accept that there is more than one way of doing economics; this itself requires some methodological awareness.

PP: In the book you suggest that having an awareness of methodological issues allows us to distinguish between different schools of thought. Perhaps you could reflect on this a bit?

SD: I see each school of thought as being identified by its own methodology. Of course there are grey areas between schools of thought and individual economists who don’t fit neatly into any one school of thought. Nevertheless it seems to me that the notion of a school of thought is useful shorthand for categorising different ways in which economics is done.

Rather than making communication worse, I see such categorisations as improving communications. If someone calls themselves a Post Keynesian, for example, we have a good idea of how she understands the economy and what she regards as good arguments. Disputes between schools of thought really need to focus on this level. Members of different schools of thought arguing about theory won’t get far unless they recognise that they understand the economy differently, use concepts differently, use different styles of argument and so on.

We can also reduce talking at cross purposes if we recognise which bodies of theory are methodologically similar, and thus belong to the same school of thought, and those which are methodologically different. Thus I would categorise all forms of mainstream economics (rational expectations theory, New Keynesian theory etc.) as one school of thought with a shared basic methodological approach, while New Keynesian economics and Post Keynesian economics, for example, are methodologically very different.

PP: In the book you attribute great importance to issues of uncertainty and the dichotomy between rationality and irrationality. Could you talk about this and in particular how it impacts upon questions of methodology?

SD: Yes, this question illustrates why it is important to consider the methodological foundations of economic theory, not least because words like ‘uncertainty’ and ‘rationality’ mean different things in different schools of thought. Mainstream economists generally take uncertainty to mean risk, as in quantifiable risk. So they don’t take account of unquantifiable risk, which is what non-mainstream economists mean by uncertainty.

Because non-mainstream theorists understand the economy as an open, evolving system, they think that uncertainty is really important. Where risk can’t be quantified, expectations can’t be captured by a probabilistic statistical forecast, and so we need other guides to our behaviour, like conventional judgements, expert judgement or assuming that the future will be like the past. Uncertainty then is an indicator of how much confidence we have in any forecasts and in fact how far we are prepared to commit to forecasts at all. According to this view, economists themselves face uncertainty in their understanding of the economy, so their methodology is designed to deal with this.

The mainstream definition of rationality is based on the idea of individuals maximising their utility on the basis of full information (within probability distributions, sometimes with some particular information concealed). Anything else is defined as irrationality. But for non-mainstream economists, where uncertainty is the norm, this type of rationality isn’t feasible. We use reason along with evidence and the kind of conventions noted above in order to make judgements about the future. But sometimes uncertainty is so high that it is difficult to form any judgement. Emotion then plays an important part, for example in encouraging action in spite of uncertainty. This behaviour may be unreasonable if it flies in the face of evidence, but is not automatically classed as irrational.

PP: In the book you discuss what you refer to as a “Babylonian method” for doing economics. In my understanding you associate this method with Keynes and the Post-Keynesians and contrast it with the “dualistic” approach generally followed by the mainstream. Could you outline the differences between these methodologies and explain why you think the Babylonian method superior?

SD: The Babylonian mode of thought is a way of thinking. It is based on an understanding of the social system as being open and evolving, so that any knowledge is inevitably partial (and subject to uncertainty). It picks up on Feynman’s account of Babylonian mathematics, which allowed for different starting points for different chains of reasoning, depending on the problem at hand. It is a pluralist approach in that it allows for a range of methodological approaches, focusing on different aspects of a complex system. It also implies that each methodology should be pluralist, in the sense of employing a range of methods. Babylonian thought is not atomistic, i.e. it doesn’t require that all arguments be built up from a common starting point of isolated individuals. Rather it is organicist, allowing for and addressing complex interactions and evolutions. Nor is it dualist. There can be degrees of uncertainty and interactions between reason and emotion, for example, and variables can be endogenous to one chain of reasoning while exogenous to another chain, depending on the problem at hand.

The mainstream mode of thought is based on a closed-system approach, requiring all arguments to be built up on microfoundations expressed in terms of atomistic individuals. The resulting methodology is monist: there is one best methodology, which is formal deductive mathematical reasoning. It is a dualist mode of thought, since a closed system only allows for certainty or ignorance and rationality or irrationality, for example, and defines variables as always either endogenous or exogenous.

I prefer the methodology implied by the Babylonian approach since it fits the way I understand the economy. In other words I put realism ahead of the internal elegance of the mainstream approach. The Babylonian mode of thought itself describes how I think, but this is not something I consciously choose. Mainstream economists evidently feel comfortable thinking in a different way. I’m not qualified to say why this is so, but I can point out the damaging consequences, e.g. of uncertainty denial.

PP: In the book you also discuss the use and abuse of mathematical formalism in economics. Perhaps you could talk a bit about mathematical formalism and how it is misused in economics?

SD: By mathematical formalism I mean the insistence on theory being expressed in formal mathematics. In mainstream economics this takes the particular form of deductive mathematics, i.e. deriving everything deductively from a common set of principles about rational optimising individuals. Behaviour is shown as being based on rational calculation with respect to information which is normally known with certainty. This allows definitive results to be derived using deductive mathematics. At the same time, when mainstream economists consider any behaviour which does not fit this pattern, mathematical formalism limits how it can be treated, if at all.

All models are closed systems, but this methodological approach means that the economy itself is treated as a closed system. So, as a methodological position, it is coherent only if you can accept that the economy is indeed a closed system. This is not my own belief, but I suspect that many mainstream economists would also find it hard to support.

But it is not a simple matter of everyone choosing one methodology or the other, because the mathematical formalist approach includes the view that it is settled that this is the best way of doing economics. This view lies behind a lot of the mainstream refusal to discuss methodologies other than mathematical formalism, or indeed methodology in general. So, not only is mathematical formalism contestable in terms of limiting how far economics can apply to an open-system economy, but it is also contestable in claiming to rule out other methodologies.

This is not at all an argument against the use of mathematics – it’s an argument that economics should not be exclusively mathematical. An open-system approach (based on the Babylonian mode of thought) can include mathematical argument as a partial contribution to an overall theory along with other types of argument. Mathematical formalism can be appealing because it involves a strict application of rules and yields definite conclusions. Alternative methodologies may be less appealing because the conclusions are less definitive and can vary from context to context. Nevertheless they are, in my view, more rigorous in terms of taking account of the nature of the subject matter.

PP: It seems to me that the use of mathematical formalism limits an economist’s ability to take into account institutions and institutional structures. Perhaps you can say something about this – especially given its importance after 2008.

SD: Yes, I agree. There is some scope for analysing institutions in a formal mathematical way as a partial analysis of a particular context. It is the deductivist structure of mainstream mathematical formalism and its exclusivity which are the problem. Mainstream theory can only include institutions as constraints or as the outcome of rational optimising behaviour by atomistic agents.

The financial crisis has exposed these limitations. Mainstream money-macro theory did not include banks, for example. Because mainstream methodology doesn’t provide room for uncertainty – or the role of institutions in helping us cope with uncertainty – it was difficult to address the crisis. It was particularly difficult to address the breakdown of markets, as when the interbank market froze. Further, a calculative account of choice ignores the importance of confidence and trust for the financial system (including central banks) and provides little guidance as to how to restore them when they are lost.

A non-mathematical non-mainstream analysis of the evolution of banking systems and of behaviour under uncertainty in contrast provided an explanation for the crisis and guidance as to how to address it.

PP: You mention in the book that postmodernism has had some influence on economics. Could you briefly describe how much influence it has had and on what areas?

SD: Postmodernism had its most obvious impact on economics through its critique of modernism, an approach which had had important influences on mainstream methodology. In particular postmodernism challenged the idea that it was possible to establish general theories, tested against independent facts. Unfortunately the critique was understood by many people in dualistic terms to imply that no knowledge was possible. Much of my work has been designed to explore the middle ground, of knowledge which is uncertain but still provides a basis for action.

But postmodernism had a less obvious but more pervasive influence within mainstream economics. At one level it encouraged the withdrawal from policy activism. At another level it encouraged a subjectivist approach to knowledge which allowed mainstream economists to continue to avoid addressing uncertainty. It was assumed that individuals subjectively estimate probabilities, even if they cannot do so objectively because of the open nature of the real world. Of course this still does not address uncertainty (which refers to varying degrees of confidence in estimates or a complete unwillingness to commit to making an estimate).

PP: Finally, let’s talk about alternatives. In the book you favour a “structured pluralistic” methodology. Could you explain what this means and why you think it is the type of methodology economics should pursue?

SD: The term ‘structured pluralism’ is intended to signal a difference from a pure form of pluralism; this pure form is the ‘anything goes’ position. At the level of methodological pluralism, structured pluralism means that we can roughly categorise a finite range of approaches (or schools of thought). These schools are communities, with shared understandings of the real world and of how best to build knowledge about it. As a socio-epistemic activity, therefore, economics has to be structured within groupings, and there is a logistical limit to how many schools can function effectively within the discipline. This limited range of schools helps us be methodological pluralists in the sense of allowing us to recognise and learn about other schools of thought than our own.

At the level of methodology itself, each school of thought uses a range of methods suited to its view of the world and its view of knowledge, so in this sense a pluralist methodology is also structured.

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23 comments

  1. David Lentini

    This discusion reminds me of Ian Shapiro’s book “The Flight From Reality in the Human Sciences”, which expresses similar views about the need for a more pluralistic approach to methodologies in the humanities and social sciences. Shapiro points out how different methodolgical schools become captive to the methodology, ultimately ignoring reality in order to justify the methodology.

  2. polistra

    We don’t need a compromise between methods, because all methods developed in academia are false.

    Instead, we need to pay attention to facts, observe reality and avoid all theories.

    A well-constructed graph and a solid sense of history will tell you everything you need to know about trends.

    1. alex

      “A well-constructed graph”

      If you extrapolate or interpolate that graph, or use some observation about its shape, you’ve constructed and are using a theory.

    2. Newtownian

      “We don’t need a compromise between methods, because all methods developed in academia are false. Instead, we need to pay attention to facts, observe reality and avoid all theories. A well-constructed graph and a solid sense of history will tell you everything you need to know about trends.”

      Polistra while I understand where you are coming from this proposal is simply not enough to judge be the experiences of the natural sciences.

      If I may explain using two illustrations.

      The first is quick and can be found at DYSON, F. 2004. A meeting with Enrico Fermi. Nature, 427, 297-297. Dyson a great scientist in his own right describes how he did what you propose – came up with lots of lovely plots supporting his existing prejudices. Fermi then proceeded to demolish them because there was no underlying genuinely mechanistic and coherent theory. Dyson went back to the drawing board but he benefitted enormously. The point here is genuine theory grounded in reality (as distinct from post modern narrative) which illuminates the unexpected is what real science provides. You know when you get a real theory because the barriers between schools of thought dissolve. Correlation analyses like you propose can give insights – but they wont give you the big advances that change the rules of the game – two familar examples – relativity and quantum mechanics were such theories without which technologically we’d still be in an Edwardian style world.

      The second example is a story/narrative that every student of the history of science learns in high school and seems seems to offer an analogy to the present malaise in economics. When learning reemerged in Europe after the Dark Ages the Church took control of theory management and locked itself into neoPlatonism. Now this theory wasnt useless by any means. Astrologers used it all the time to predict the future and make lots of money and the rulers of the time accepted its truth along with witches and similar stuff – and Epicycle theory could tell you what the planets were doing and when an eclipse was likely which was really impressive and still is.

      And then came the Renaissance and a bunch of revolutionary theorists among whom were Copernicus and Galileo Galilei. Galileo had so many aspects of physics nailed in spades yet did the religous thought leaders award him the then equivalent of a Nobel? No they put him through the Inquisition and forced him to deny reality. And the church locked itself into that denialism for the next 300 years outside of some Jesuits.

      Fortunately the year Galileo died a worthy successor was born – Newton who with many other enlightenment thinkers in northern Europe began to flesh out reality with government support because the latter in part could see the commercial and military significance in understanding physics better and they probably figured it would annoy the Vatican terribly.

      The lesson this story suggests to me is that modern economics like pre Galilean physics is locked into a semiworkable/logical/maths based system which is not exactly wrong but nevertheless a theoretical dead-end which social and political drivers are preventing it leaving.

      Reading NCs pages, Phillips interviews and Prof Dow’s position suggests that this impasse and the need for revolutionary theories is now well recognised. But can change occur within the West? If the example of the Vatican is anything to go by it wont happen here but rather in the emerging powers – the BRICs probably – my bet would be India given their history of remarkable lateral thinking over the centuries.

  3. craazyman

    this is good stuff. you can be a philosopher of economics by philosophizing about other philosophers of economcics. and, you can be a peanut gallery philosopher of economics, by philosophizing about philosophers of economics who philosophize about other phil0sophers of economics. it’s hard to know when to stop philosophizing and to start the actual economics. at least it is for me. at what point does the philosophizing stop and when will we know where that point is? I don’t know because that requires another philosopher. somebody else can do that, because I’m too busy philosophizing about philosophers philosophizing and it’s football season in America, which means there’s a lot less time for this sort of thing than there is in the spring or summer.

    -Profeser Delerious Tremens, NFL, GED
    Philosopher of Philosophizing
    University of Magonia

      1. craazyman

        I like the way they dressed in your time. I could see getting duded up in Hamlet-like tight pants and a pointy hat to wander around in. Mostly beer drinking and woman chasing in the woods. No economics at all.

        Just having fun Phil. I do appreciate the interview and the need to philosophize about this stuff. Because if we don’t, somebody else will. What’s that old saying: “if you’re not at the table, you’re on the menu”?

        1. Robin Hood

          Yup. And we didn’t even know we were unemployed or underemployed.

          I’m of a mixed mind about fashion, however. Friar Tuck always wears that dirty brown robe, and if you ever get a peak up it whilst he is climbing a tree, it is a sight to curdle your blood.

          Then the Scots wear a skirt and half the time the Welsh and the Irish wear nothing at all!

  4. Glenn

    I really like these interviews PP does and encourage him and Yves to continue.

    Either I’am missing something or there is a typo. In the third paragraph of the answer to the second question ‘New Keynesian’ seems to be on both sides of two methodological approaches. Can someone help me out?

    Glenn

    1. JurisV

      Here’s how I read that paragraph: the New Keynesian approach is part of mainstream economics and has roots in the particular methodology of mainstream economic thought. A Post Keynesian approach, however is based on a very different methodology; hence the virulent debates between the two camps. Examples fairly recently have been the “debates” between Steven Keen (a Post Keynesian) and Paul Krugman, and with Brad DeLong (both being New Keynesians). They may as well be from two different worlds as Sheila Dow has explained. Personally, I am with Steve Keen and the Post-Keynesians in the Babylonian universe of methodologies.

      1. Glenn

        JurisV, thanks for your reply.

        Your interpretation corresponds with what I expected it to read leading me to believe that there is some sort of typo in the noted paragraph as the term ‘New Keynesian’ is mentioned on both sides of the word ‘while.’

        So a literal reading of that paragraph using your example would be Keen, Krugman & Delong versus Krugman & Delong.

        Regards Glenn

        1. JurisV

          Mind the parentheses Glenn !
          They are critical to making sense of that paragraph. The two mentions of New Keynesian are separated by one of those parentheses.

          A literal reading would actually be:

          Mainstream economics = (rational expectations theory and New Keynesian theory, etc)= one school of thought with a common methodology

          WHILE

          Post Keynesian and New Keynesian theories are methodologically different

          It would have been less clumsy if she had said mainstream economics theories have a different methodology than Post Keynesian theories, but if you pay attention to the parentheses the same meaning is fairly clear.

          1. JurisV

            Forgot to add:

            It’s not “So a literal reading of that paragraph using your example would be Keen, Krugman & Delong versus Krugman & Delong.”

            It is (Krugman and DeLong) VERSUS Keen!

  5. Cosmo10

    Different schools of thoughts bring different views. For instance, for the neoclassical economists, labor is totally flexible, which is true over a generation period. For the Keynesians, there are barriers to labor flexibility, which is absolutely true in a short period of time. For instance, one cannot be a doctor one day and a lawyer the next one! A lot of economic theories have their own merits and limitations.

    1. monday1929

      Greenspan proved you can be a failed, ass-kissing businessman one day and the head of the Fed the next……

  6. jake chase

    The only economic methodology is to identify the charlatans by name. Then hurl pies at them. I don’t sense that Sheila has a strong enough throwing arm.

  7. psychohistorian

    So here you have an insider admitting that all economics systems are closed and as such bear little resemblance to reality. She goes on further to admit that within these unreal closed systems the focus seems to be on the math rather than the method.

    Where are the economic methodologies that start from the reality of the global inherited rich and their ongoing inheritance fueled accumulation of control of capital, property, finance and governments?

    All this bottom up economic bullshit theory is worthless myth, IMO, given the social and financial control being exercised by the global inherited rich from the top down.

  8. JimZ

    Just finished reading Prof. Dow’s book. Immensely helpful to me in understanding many issues surrounding economics and methodology. Will translate to more informed discussions with students in my classroom.

  9. econ

    There are several comments made that relate to the corporations vs democratic government, social and financial control by the top 1% in the global context vs the sheeple and the need to come to grips with an economic reality of this fact. The only economics that even approached the reality of economic life of the owner of the means of production and their workers was that of Karl Marx. Aside from this, the culture and social organization of capitalist societies avoid totally who has power and who has not. How can the study of economics account for power relationships in this milieu? This is a far greater issue to resolve than the methodological. Part of the USA demise is the lack of a counter-balance power (of a workers group) to that of the billionaire %1.

    1. craazyman

      For me, the greatest economist who ever lived was Joseph Conrad, even though he did not call himself an economist.

      If you want a theory of the firm, a theory of labor, a theory of regulation (or lack thereof), an analysis of supply/demand in a commodity market, really anything having to do with the essence of economic activity, you need look no farther than “Heart of Darkness”.

      Clearly Conrad was not big into mathematical models, that much is true. But his methodology was no less rigorous, in fact, it was sound (haha no pun intended, you’d have to read it to get it) — he looked. Yes, he looked. Imagine that!

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