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A discussion of some methodological issues

Víctor A. Beker*

University of Belgrano and University of Buenos Aires. Comments from Alfredo Canavese, Daniel
Heyman and Eduardo Scarano are gratefully acknowledged as well as those from attendants to the
II Symposium of Siame and to the XXXVI Annual Meeting of the Argentine Economic Association
where earlier versions of this paper were presented.

The aim of this article is to review some central ideas on economic methodology.
Many people doubt whether economics can be considered as science. This sort of
doubts does not exist, for instance, with respect to physics or chemistry.
The main conclusion is that economics is a science inasmuch as it formulates
falsifiable theories. However, the peculiarity that distinguishes it from, for instance, natural
sciences, is that theories, in most cases, cannot actually in practice be falsified.
Economists face very serious difficulties to test their theories because of the
complexity of the subject matter and because of the presence of a lot of disturbances. So,
as Hausman asserts, they are right in trusting more in the implications deduced from the
theory’s axioms than in the negative results which may emerge from empirical testing. It is
very rare to see a theory disregarded because of an apparent disconfirmation.
In economics there is, broadly speaking, nothing like a crucial experiment.
The relationship between explanation and prediction, the role of tests and
persuasion in economics, the use of mathematics, the relationship between economic
theory and applied economics as well as other methodological issues are reviewed.
Given economics’s peculiarities it does not seem reasonable to judge its scientific
character on the basis of its ability to use the methods and procedures of the experimental
sciences. It seems more reasonable to analyze how to satisfy the scientific method
requirements taking into consideration its particularities as a social science.

The aim of this article is to review some central ideas on economic methodology.
The subject is of interest not only for economists and philosophers of science1 but
also for those who suffer –or benefit from- the results of economists’ recommendations.
Two recent episodes before the U.S. courts are illuminating in this respect.
In one case, Stanford professor Robert Hall’s opinion was labeled by the St. Louis
federal appeals court as “mere speculation.”2
In 1999, Nobel Prize laureate Robert Lucas testified in a price-fixing case. A
Chicago court ruled that his testimony “failed every test of admissibility” because his
opinions were inconsistent with the evidence.3
Many people doubt whether economics can be considered as science. This sort of
doubts does not exist, for instance, with respect to physics or chemistry.
Of course, if there are doubts with respect to the scientific status of the so called
Queen of the social sciences one wonders what are the hopes left for the other studies of
Our analysis is focused on neoclassical economic theory. The reason is obvious. I
think nobody can doubt that neoclassical economics is nowadays –luckily or unluckily-
what Kuhn called “normal science.” It is what is taught in most departments of economics
around the world, what most contemporary economists employ in their work and what
inspires most of the research work in this field.
The main conclusion is that economics is a science inasmuch as it formulates
falsifiable theories. However, the peculiarity that distinguishes it from, for instance, natural
sciences, is that theories, in most cases, cannot actually in practice be falsified.
Economics, as happened in other disciplines, developed during very many years
without its scholars feeling the need of questioning themselves on methodological issues.
Only from time to time some of its practitioners made some incursion in that area. Senior,
Mill, Cairnes, Menger, Keynes (father), Robbins, Hutchison and Machlup form a non-
exhaustive list of those who were most interested in the subject of how economists do (or
should do) what they do.
If there was an influential work on methodological issues during the last 50 years,
without any doubt it was Friedman (1953). It became an outstanding point of reference in
the economic methodology debate as for his followers as for his critics
A dramatic change in work on economic methodology, however, took place in the
1980s, partly reflecting the parallel debates which took place in the philosophy of science
area. The decade opened, precisely, with Blaug’s The Methodology of Economics
(1980/1992), which placed Popper’s falsificationism at the center of economic discussion
in economics. During the 1980s the literature on economic methodology grew
exponentially. Authors came from the field of economics as well as from the philosophy of
science area. Among the latter, Hausman(1992) drew attention on what he called
methodological schizofrenia of contemporary economics, referring to the fact that
methodological pronouncements and practice regularly contradict one another. As a
matter of fact, Blaug (1992, xxvii)) had already drawn attention to the same double
standard , pointing out that economists do not practice what they preach, although Blaug’s
criticism, as we will see, was symmetrically opposed to Hausman’s.

The issue was the subject of several articles published under the heading of “How scientific is
Economics?” in Methodus, vol. 3, No. 1, June 1991.
Forbes, September 3, 2001, p. 52.
Hausman points out that economists who adhere to falsificationism -either in its
Popperian or Lakatosian version-, and write on methodological issues, describe their
activity as if they were strictly following that approach. Economists would formulate
theories, deduce from them predictions and test the predictions. If the predictions were not
correct, theory would be dismissed or replaced by an alternative of higher degree of
Hausman points out that the practice of economists has nothing to do with this
description. What in fact they rightly do –according to Hausman- is to apply Mill’s
deductive method. Hausman argues that what economists do (regardless of what they
may say in methodological discussions) is to apply the following rules:4
1) Formulate credible and pragmatically convenient generalizations concerning the
operations of relevant causal factors.
2) Deduce from these generalizations, and statements of initial conditions, simplifications,
etc. predictions concerning relevant phenomena.
3) Test the predictions.
4) If the predictions are correct, then regard the whole amalgam as confirmed. If the
predictions are not correct, then compare alternative accounts of the failure on the
basis of explanatory success, empirical progress, and pragmatic usefulness.
Since economists are typically dealing with complex phenomena in which many
simplifications are required and in which many interferences may appear, it does not seem
rational to surrender a credible hypothesis because of predictive failure. When facing an
apparent disconfirmation, economists rely on what Hausman calls the “weak-link
principle”:5 when a false conclusion depends on a number of uncertain premises, attribute
the mistake to the most uncertain of the premises.
Economists face very serious difficulties to test their theories because of the
complexity of the subject matter and because of the presence of a lot of disturbances. So,
Hausman concludes, they rightly trust more in the implications deduced from the theory’s
axioms than in the negative results which may emerge from empirical testing. It is very
rare to see a theory disregarded because of an apparent disconfirmation.
In economics there is, broadly speaking, nothing like a crucial experiment. For
example, given a certain econometric result, in many cases it is enough to just include
another variable, or to slightly modify the model assumptions or the estimation method to
get different, and even opposite, results. There are many examples in the economic
literature in this respect. No matter how sophisticated the economic tools are and how
detailed the set of data one deals with very few robust relationships can be obtained.
McCloskey (1985) argues in the same direction. Economists, as other scientists, -
she says- try to persuade their colleagues. Persuasion in economics, however, does not
depend on empirical testing or successful prediction but on things like mathematical
virtuosity, arguments by analogy, symmetry and so on. Empirical statements about the
economy appear not to be regarded by economists as central to their field –in dramatic
contrast to the situation in the natural sciences (Bloor-Bloor, 1993).
In this respect, Blaug (1992, 243) points out that "mainstream neoclassical
economists … preach the importance of submitting theories to empirical tests, but they
rarely live up to their declared methodological canons. Analytical elegance, economy of
theoretical means, and the widest possible scope obtained by ever more heroic
simplification have been too often prized above predictability and significance for policy

Hausman(1992, 222).
Ibid., 207.
This fact has driven Rosenberg (1992) to maintain that economics is not empirical
science at all; instead, it should be considered a branch of applied mathematics.
Economics does not seek or respond to empirical data in the way characteristic of an
empirical science. For example, general equilibrium theory –which plays such a central
role in economics- makes no predictions at all and has no empirical content. Economics is
more akin to Euclidean geometry than to empirical science, he concludes.6
For many years, Euclidean geometry was alternatively viewed as an axiomatic
system about abstract objects which was a priori true and as a body of claims about actual
spatial relations among real objects in the world. The general theory of relativity revealed
that, interpreted as a theory of actual spatial relations, Euclidean geometry is false. This
discovery left untouched its interpretation as a body of a priori truths implicitly defining the
terms that figure in it. Economics, according to Rosenberg, would have a similar cognitive
status. Although we know there are no Euclidean triangles in nature, Euclidean geometry
works properly when applied to small regions of space. In the same way, the laws of
supply and demand can be applied to real problems but this does not make economics an
empirical science. Worst of all, while we have in physics a theory to calculate the
divergence between any physical triangle and the Euclidean claims about it, in economics
we lack such a theory. In this respect one could argue that we are in economics in a
similar position as Euclidean geometry was before the general theory of relativity was
discovered and allowed us to measure and correct its errors.
Methodology discussion embraces a great quantity of issues. We will analyze some
of them taking as a premise that –as Jacob Viner said once- economics is what economist
do. This means that we are not abstractly defining what we believe economics is or should
be. We consider that economics is what economists do and have done since Adam
Smith’s times on.
The issues we consider here have to do with the so called “big-M methodology”,
such as the role of prediction in economics, its relationship with explanation, the
demarcation between science and non-science, the degree of progress of economic
thought, the use of mathematical tools, etc.
I will start with the subject of prediction in economics, its relationship with
explanation and with the possibility of testing and refuting hypotheses. Then I pass on to
McCloskey’s ideas; she argues that prediction is impossible in economics and emphasizes
persuasion above testing.
The doubts on the possibility of testing theories and predicting in economics lead
us to wonder if economics has made advances along time.
As most advances in economics consisted in improvements in the degree of
formalization, the role of mathematics in economic theory is discussed.
Mathematical models are just one type of models. Any model is based on analogy
reasoning. The use of models and analogies is analyzed.
The fact that any model means to take into consideration only some of the causal
factors of a phenomenon led J.S. Mill to regard economics as an inexact science.
Hausman rescues that concept and adds that economics is also a separate science. Both
concepts are analyzed together with its implications. Then, the relationship between
economic theory and policy is examined. In particular, the distinction between positive and
normative economics is discussed. Welfare economics allows me to explain the difficulties
of building a free-value discipline; finally, it is shown how economic ideas are context-

Rosenberg is not the first author in establishing a parallel between economics and geometry. Mill
(1836, 326) emphazised: “the conclusions of Political Economy…like those of geometry, are only
true…in the abstract, that is, they are only true under certain suppositions."
Prediction in economics

In his famous 1953 article, Friedman identified prediction as the ultimate goal of economic
theory. Theory is to be judged by its predictive power for the class of phenomena which it
is intended to explain, he remarked. “The only relevant test of the validity of a hypothesis is
comparison of its predictions with experience."7
However, prediction in economics offers particular difficulties. It hardly can reach a
level of precision comparable with what is usual in physics, medicine or even meteorology.
As a matter of fact, qualitative prediction –the change in sign- can be better defended than
quantitative prediction –its magnitude. In spite of the increasing use of sophisticated
econometric tools and of high impact computer programs the improvement in predictive
capacity has been meager.
This has led McCloskey to the conclusion that prediction is impossible in
economics. He quotes von Mises’s (1949, 867) assertion that predicting the economic
future is “beyond the power of any mortal man”.8 On average, she argues, the industry of
making economic predictions earns merely normal returns.

Prediction and explanation

The traditional point of view in science has been that its main purpose is explanation.
Nagel (1961, 4), for instance, maintains that it is the desire of getting an explanation what
lies in the origin of science. However, the accent placed by Friedman on prediction leads
to question if it is not prediction –instead of explanation- which should be considered the
distinctive characteristic of scientific thought.
One answer to this question may be that there is no difference between prediction
and explanation. This is the well known symmetry thesis, stated by Hempel and
Oppenheim (1948). It asserts that the operation called “explanation” involves the same
rules of logical inference as the operation called “prediction”, the only difference being that
explanations come after events and predictions before events. Explanation would simply
be prediction written backwards.
However, prediction only requires a correlation, but the existence of a correlation is
not sufficient to explain a given phenomenon. One thing is to say “if A, then B” and a very
different one to explain how A causes B.
There are many examples of respectable theories which predict without providing
an explanation. Newton’s theory of gravity is a distinguished case. It tells us how bodies
attract each other but it fails to identify the mechanism responsible of the motion of bodies.
There are no less distinguished cases of theories which explain without making any
prediction. Darwinian theory has been identified as a typical case of an explicative theory
which provides no prediction at all.
However, one may object that the theory of evolution provides some type of
prediction; for instance, it predicts that species never reappear. In any case, they are just
generic predictions9, as Rosenberg (1992, 46) is ready to concede. It is also a predictive
theory if “prediction” is interpreted –as Friedman does- as any implication of a theory
whose truth is not yet known, even if it is concerned with the past.

Friedman (1953, 8) (emphasis is mine).
McCloskey (1998, 151).
Predictions that tell us that some change will happen some time and some place, without ever
telling us when and where and how much of a change will occur. Rosenberg (1994, 217).
Anyway, I think that it is clear that explanation and prediction are quite different
If a theory predicts, it provides a new knowledge. It allows us to tell what will
happen or what could have happened. If it also explains why, it provides an even better
On the other hand, if a theory just explains, it helps to understand a phenomenon.
If, additionally, it predicts, it will be more useful.
That is why it seems rather misleading to reduce the value of a theory to its
predictive power, even using this term in the wide sense in which it is used by Friedman. A
scientific discipline’s value cannot be measured just according to its ability to make
In science we find an ample variation of cases, which run from theories that only
explain to theories that only predict, with a great variety of intermediate situations. To
make prediction the summum bonum of science is to forget that the essence of scientific
activity is to find an answer to the multiple questions that mankind pose11. When an
answer is not available, prediction is a good second best, but it is never a first best.

Tests and refutations in economics

We have already seen that, according to Friedman, the validity of a hypothesis emerges
from the comparison of its predictions with experience.
Now, if a theory does not predict or if its predictions, when compared with the
available information, do not allow to categorically assert that either it has been refuted or
it has not been refuted, which is the validity criterion for a theory? How should we choose
between alternative hypotheses?
Friedman provides an answer to the last question. If we have to choose among
hypotheses which are equally consistent with the available information –he says- the
decision will be somewhat arbitrary, although there is a general agreement that the
relevant criteria are suggested by the qualities of simplicity and fruitfulness. But if the
general rule in economics is consistency with the existing information –in the sense that
very seldom it falsifies some hypothesis- shall we accept those criteria?
The main difficulty economics faces –as well as the rest of the social sciences- is
the impossibility –in most cases- of making controlled experiments12. But even in the case
of controlled experiments it is possible to argue that no individual hypothesis is
conclusively falsifiable, because we always test the particular hypothesis in conjunction
with auxiliary statements. Therefore, if prediction does not agree with the data it is always
possible to cast the blame on any of these propositions and save the central hypothesis
(the so-called Duhem-Quine thesis). Of course, this argument is much stronger in the case
of non-controlled experiments, where no command exists on the conditions of the
experiment. Therefore, there is always an ample margin to argue that any discrepancy
between predictions and data should be attributed to the fact that some circumstances
under which the hypothesis is valid did not occur. Then, there are no such things as crucial
"The ultimate goal of a positive science is the development of a "theory" or "hypothesis" that
yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed."
[Friedman (1953, 7)]. (emphasis is mine).
In this respect it is worth while mentioning that the predictions made by the Ptolemaic astronomy
are as good as those made by the Copernican one.
Somebody may point out to experimental economics but for the time being the range of its
experiments is very narrow and the validity of its conclusions for the real world is at least under
Does this mean that in economics theories are never refuted? Not necessarily, but
refutation does not come through the empirical tests learnt in the statistics and
econometrics courses but through what I call “big social experiments.” They are the “big
events” alluded by Tobin (1996) which discredit ideas and replace them with new ones.
The Great Depression in the 1930s, for instance, discredited the idea that full
employment of resources could be automatically reached. Today, no reasonable
economist in the United States would cast doubts about the role of the Federal Reserve
and its monetary policy in stabilizing the economic cycle.
In the same way, for many years the role of monetary policy in inflationary
processes was discussed. Moreover, even non-monetary inflation theories were
developed. But the processes of high inflation of the 1970s and the cases of hyperinflation,
like the Argentinean one in the late 80s, left no doubts on the necessary existence of a
monetary component in these processes and on the need to resort to the monetary policy
to control them.
The 1987 stock market crash persuaded more economists to put aside efficient-
market theory than any econometric result.
This is the kind of refutation that historically has taken place in economics.
However, with the exception of this sort of cases, it is still valid what Hahn (1987, 110)
once said, “it is not easy to think of a proposition in economics that all reasonable
economists agree to have been decisively falsified by the evidence.”
While Blaug (1992, XV) maintains that the remedy to the problem is just to try
harder to apply Popperian falsificationism to economics, Hausman’s conclusion is just the
Blaug argues that there is at least a methodological reason in favor of
falsificationism: the only way to know that a theory is true or rather not false is to make a
prediction about acts, states or events that follow from this theory and see if they are
falsified or not. However, already Kuhn (1962, 79) pointed out that no process discovered
up to now by the historical study of scientific development resembles the methodological
stereotype of falsification through the direct comparison with nature. He added (77), “The
decision to reject one paradigm is always simultaneously the decision to accept another,
and the judgment leading to that decision involves the comparison of both paradigms with
nature and with each other.”13 For this author, a change of paradigm is essentially a
change of approach: it means a change in the instruments as well as in the places where
to search.
For Hausman, the fact that economists seldom practice the falsificationism they
preach only certifies that it is not a feasible methodology in economics.
According to Hausman (1992, 1) confidence in the implications of economics
derives from confidence in its axioms rather than from testing their implications.
“Given the multitude of “disturbing causes” in economics and the difficulty of
performing controlled experiments to weed these out, it seems that little can be learned
from experience” Hausman (1992, 305). Testing a hypothesis –he adds- involves deriving
a prediction from a conjunction of many propositions, of which the hypothesis is only one.
One can always save any given hypothesis by casting the blame on some other claim.
Therefore, economists are right in placing their confidence in axioms. Given that in
economics the basic propositions are reasonable approximations based on everyday
experience or introspection14, it would not be rational to put aside a hypothesis because of

Lakatos (1970) agrees that falsification is not a sufficient condition for the rejection of a theory. It
is necessary to have an alternative theory to replace it.
For instance, utility maximization by consumers or profit maximization by firms.
an apparent disconfirmation, especially if we take into account the difficulties of testing in
This may sound very surprising to people who identify scientific activity with the
formulation of hypotheses, confrontation of its implications with data and dismissal of those
which are falsified. However, Kuhn (1962, 128/9) points out that even when facing serious
and persistent anomalies, scientists generally do not renounce the paradigm that has led
them into crisis. On the contrary, they devise numerous articulations and ad hoc
modifications of their theory in order to eliminate any apparent conflict. To evoke a crisis,
an anomaly must usually be more than just an anomaly. “Normal science” is not directed
to call forth new sorts of phenomena; it focuses on solving the anomalies that pop up
rather than on testing the theory. Normally, scientists are not devoting their efforts to invent
a new theory and usually they show no tolerance for those who try.
The persistence of economists in defending the basic postulates of economic
theory even in the presence of empirical results which may question them does not differ
from what Kuhn characterizes as the common attitude of scientists in defense of the
respective paradigm in other fields of knowledge. A paradigm is declared invalid only if an
alternate candidate is available to take its place, he remarks. As we have already seen,
Lakatos agrees on this point.
As I argued before, with the only exception of what I have called the big social
experiments, there are no conclusive refutations in economics. More often, theories or
models are dismissed for methodological reasons. For instance, because they imply that
people can make systematic errors making them lose all the time, or because they use ad-
hoc arguments, or because of the lack of microfoundations.15
Another reason for the dismissal of theories is a change in the way of looking at the
economy or a change in the questions considered relevant to ask.16
But, in general, theories and models accumulate and remain available inside a big
toolbox to be used according to the case under analysis and the analyst’s expertise. Very
seldom they are rejected as a result of empirical confrontation.

Persuading instead of testing?

McCloskey agrees that neither empirical testing nor successful prediction are
important. For her, science is persuasion and rhetoric plays a key role in that.
She quotes Booth (1974, xiii) who defines rhetoric as “the art of probing what men
believe they ought to believe, rather than proving what is true according to abstract
methods.” According to McCloskey, science is an attempt to persuade other scientists, in
our case, economists.
As an example, McCloskey identifies eleven arguments economists use to
persuade themselves of the law of demand17. McCloskey points out that out of these
eleven reasons only three are scientific; the rest are artistic and literary. Moreover, the
latter are the most convincing, she adds. For instance, it will be a rare teacher who relies
much on the econometric results to persuade her students. Much of her argument will rely
on introspection –what would you do if the price of beef doubles?- or on the analogy with

About ad hocery in new classical theory, see Mayer (1993, 95/97). On the need of
microfoundations, Blinder (1987, 135) points out, however, that “thermodynamics and chemistry, for
example, have done pretty well without much micro theory.”
This behavior is not different from what happens in the rest of the sciences according to Kuhn
(1962, Chapter X).
The example is not the best one because the demand function is precisely one of the cases
where econometric estimations have been more succesful.
well-known cases as the oil price increase of the 1970s. The final product of science, the
scientific article -she concludes- is a performance, a literary performance.
However, I think McCloskey mistakes the research report for the object of research.
The final product of a research in physics is not a paper but, for instance, the discovery of
the nuclear chain reaction. This should not be mistaken with the article where it is
explained that when an atom of uranium is bombarded by neutrons, the uranium atom
sometimes is split, or fissioned, emitting additional neutrons which become available for
further reaction with other uranium atoms, arising the possibility of a chain reaction, similar
in certain respects to the reaction which is the source of the sun's energy.
In the same way, one thing is a theory on the Big Bang’s causes and a quite
different one the article in which the physicist tries to persuade her colleagues that her
theory about the Big Bang is the right one.
This confusion leads her to maintain that, given that the final product of science is a
scientific article and given that the latter is a literary performance, economics is
simultaneously scientific and literary. By this she means that we can talk of it in ways that
sound like the things people say about drama, poetry or novels18. Hence, her proposal to
do a rhetorical analysis of economics.
However, the confusion has its root in a real reason. In economics, the immediate
product of a research is normally an article in which the researcher tries to persuade her
colleagues about her findings and conclusions. The rhetoric analysis of economic writings
would allow us to study the arguments used in this endeavor for persuasion. But the final
product one expects from an economic research is not just a paper but a new knowledge
which should change our approach to a certain phenomenon and which should give way to
new policies in this respect.
Neither in economics nor in any other science the final product of a research is a
paper. The main purpose of science is not the production of articles or papers but the
production of scientific knowledge; papers, reports, articles, are only instruments in order
to achieve that final purpose.
Why, then, an economist –not a physicist, not a chemist- happens to think that the
final product of science is an article where she explains her findings? Just because results
in economics are never quite conclusive, the ability to persuade her colleagues of their
validity plays a decisive role in this discipline.
On the contrary, in physics the eloquence in one’s presentation is not so important.
It is sufficient to describe the experiment so anyone can reproduce it and check its
conclusions. Of course, in doing so she will be persuading her colleagues but surely she
will not even notice that she is doing it.
To convince one’s colleagues in economics is perhaps more difficult than getting a
new result in one’s research. Persuasion in economics requires a bigger effort than in
other disciplines because of the doubts and ambiguity which always surround any result.
This is quite true; but this does not authorize to mistake means for ends. It is true that the
success of the General Theory would not have been the same if the author had not had
the eloquence, vivacity and, at the same time, the obscurity of Keynes. But I seriously
doubt that the rhetorical analysis McCloskey proposes may be a proper substitute for the
methodology of economic analysis, as she suggests.

Is there any progress in economics?

McCloskey (1998, 23).
Perhaps it is now time to make a pause and have a look at the historical evolution
of economic thought to see what we can learn from it. In what aspects or in what direction
has economic theory made changes? What can we learn from them?
Some people argue that economic theory has made no significant progress along
time. For instance, F. Fisher (1989), maintains that game theory has enabled us to say
almost nothing about the working of oligopolistic markets that could not be said on the
basis of earlier theory.
Rosenberg (1994, 228) argues that since 1800 advances in economics have
consisted in improvements of deductive rigor, economy and elegance of expression, in
better axiomatization and in the proofs of more and more general results, without much
concern as to the usefulness of these results; specifically, our ability to predict consumer
behavior –he adds- is not any better than Adam Smith’s.
Emphasis on formal aspects –formalism- implies for Blaug (1994, 131) that “any
correspondence to the real world is sacrificed for the sake of analytical tractability. The
final aim is to provide the aesthetic pleasure of a beautiful theorem, to solve academic
exercises that we have constructed because they are soluble by existing analytical
techniques, and not to provide substantive insights into observable behavior.”
Blaug (ibid., 116) himself quotes a list of twelve basic innovations in economics
between the years 1900 and 1965, selected with the advice of a number of prominent
economists and published in Deutsch et al (1986, 374-84). The interesting point is the
dominance of analytical instruments in the list (social welfare functions, game theory,
national income accounting, linear programming, input-output analysis, econometrics)
instead of substantive advances as well as the close interrelation among some of them.
There seems to be a consensus in pointing out as the main advances in economics
the availability of new instruments to analyze the (same?) problems instead of pointing out
to new results.
In this respect, I think there is a remarkable difference with the sort of list that we
could get in physics or in chemistry. And it is also very different from what the woman or
man in the street expects from this discipline. Rather, she or he expects to read news like:
- A method to eradicate poverty was found.
- A path to sustainable economic growth was announced.
-The causes of cyclical fluctuations are known and a method to control them was
In the same direction, it is hard to believe that physicists might have devoted a
whole generation –as economists did- to elaborate purely mathematical proofs of the
existence, uniqueness and stability of an empirically vacuous theory as the general
equilibrium theory, which only allows to present in a rigorous and elegant way what Walras
already postulated one century before, as Blaug (1994, 125) and McCloskey (1991) point

The use of mathematics in economics

The fact that the main advances in economics seem to lie on a greater degree of
formalization, rigor and elegancy rather than in novel results leads us to consider the use
of mathematics in economics. This is an issue which was broadly discussed in the 1940’s
and 1950’s but which periodically reappears.
As already mentioned, for a philosopher of science who has spent a great part of
his academic career studying economic methods like Alexander Rosenberg, economics is
a branch of mathematics somewhere on the intersection between pure and applied
axiomatic systems.
Rosenberg (1994, 223) arrives at this conclusion after pointing out that our
discipline does not seek or respond to empirical data in the way characteristic of an
empirical science. The persistence of economists in pursuing their theoretical approach
even in the presence of empirical data that cast doubts on that approach would be a proof
that economics is not an empirical science.
Economists follow what Rosenberg (1992, 231) calls an extremal strategy in the
sense they postulate that systems always act to maximize or minimize the value of some
variable. This strategy is similar to the one followed by Newtonian mechanics. This
approach, he adds, insulates theory from falsification to a degree absent from nonextremal
theories. With extremal theories the choice is always between rejecting the auxiliary
hypotheses –the description of test conditions- or rejecting the theory altogether. The only
change that can be made to the theory is to deny that its subjects maximize or minimize its
chosen variable. Apparent falsifications in the case of Newtonian theory led to new
discoveries about initial conditions, like the existence of Pluto and Neptune. The
differences between predictions and actual data were due not to a theory failure but to an
incomplete description of the constraints under which the system is operating.
However, this same strategy has not been equally fruitful in the case of economics.
Two hundred years of work in the same direction, Rosenberg argues, have produced
nothing comparable to the physicists’ discovery of new planets. Economics has persisted
in pursuing the extremal approach –as Newtonian mechanics also did- but has been
unable to independently test and improve its auxiliary assumptions. In contrast, this is an
area in which mechanics has made great advances.
What about the successes of economic theory and its applicability to practical
issues such as the determination of price by demand and supply? Rosenberg argues that
this is a similar case to what happens with Euclidean geometry. For millennia it was
viewed as the science of space but calling it ”science” does not make it one. However, it
was satisfactorily used for settling empirical questions of geography, surveying,
engineering, mechanics, and astronomy. Only in 1919 observations that confirmed the
general theory of relativity brought geometry to a crisis.
But, as it was said before, there is not such a theory which can play a role for
economics like the role played for geometry by physical theory. Physics enables us to
choose between alternative applied geometries and to explain the deviations from actual
observation of the ones we reject. We can calculate the amount of the divergence between
any physical triangle and the Euclidean claims about it, because we have a physical theory
to make these corrections. The lack of such a theory is a difference in kind between
Euclidean geometry and economic theory. There is no such theory that enables us to
improve on the applicability of economic theory.
Therefore, as Rosenberg (1994, 233) points out, economic theory can no more be
faulted than Euclidean geometry should be in the context of astrophysics.
However, if economics is best viewed as a body of mathematical axioms, lemmas
and theorems its role in the guidance of policy is seriously brought into question.
An alternative interpretation may be found in Brock y Colander (2000, 3). After
remarking that the majority of economists are applied economists, they point to the major
split that has developed between most formal general equilibrium models, where
assumptions are generally chosen to create global tractability, and applied policy models,
where assumptions are generally chosen to create a type of local model tractability, but
still achieve an empirical fit with the evidence. These differing assumptions create a
consistency problem, in the authors’ view.
Referring to the use of mathematical tools, Williamson (2000, 605) warns on the
possibility that core features of the theory may be left out or obscured by the translation to
the mathematical language.
In the same direction, Debreu (1991, 4/5) admits that the use of mathematics
imposes certain restrictions on economic theory. The very choice of the questions to which
the economist tries to find answers is influenced by her economic background. Economics
may become secondary, if not marginal, in that judgment. Mathematics is a demanding
master: it ceaselessly asks for weaker assumptions, for stronger conclusions, for greater
Of course, the advantage of mathematization is to avoid logical mistakes. Given the
difficulties for experimenting in economics, economic theory is strongly dependent on
logical reasoning. In physics, factual observations and experimental results provide a
constant check on its theoretical constructions; this allows employing occasionally some
reasoning which violate knowingly the canons of mathematical deduction. This is not
acceptable in economic theory where internal consistency is the only guarantee of rigor.
Anyway, there still remains the question whether mathematization must be
considered a necessary condition for every economic text. In other words, logical rigor is
necessarily equivalent to using mathematical language?
In this respect, we must remember that the most influential texts in economics have
been non-mathematical. For example, Friedman and Schwartz (1963) made more in favor
of the monetary approach than many sophisticated econometric models19, not to mention
in the opposite stream Keynes’ s General Theory.

Models and analogies

As it happens in all the sciences, in economics we use models. Again, the difference
between our discipline and those that do not belong to the social sciences field is the
difficulty to make controlled experiments. For example, engineers also use models; for
instance, they employ scale models to develop and test claims about the properties of an
airplane. But, then, they can test those claims in a wind-tunnel.
Hausman (1992, 76) maintains that science consists not only of model making, but
also of offering theoretical hypothesis that maintain that a model applies to the world. From
a theoretical hypothesis one infer what he calls “closures” of the assumptions of the model.
In a closure of the assumption the domain is specified. For example, from the theoretical
hypothesis that the solar system is a classical particle system, one can infer the closure of
the assumption that any two bodies in the solar system attract one another with a force
inversely proportional to the square of the distance between them. From a theoretical
hypothesis one “recovers” the assumptions of the model as assumptions about the world.
Closures of assumptions are statements that are true or false. A model plus a general
theoretical hypothesis asserting that the assumptions of the model are true of some
portion of the world results in a theory
Thanks to the possibility of creating simplified experimental circumstances,
closures of assumptions in models in the natural sciences may often be regarded as truths
with different degrees of universality. This does not happen in economics, because
economic models never reproduce exactly any portion of the economic world. “Unrealistic”
models are unavoidable in economics.
For this reason, Hausman follows Mill to qualify economics as an inexact science.
But before moving towards this subject, let us consider the following.
A scientific model may be defined as a real or thought system whose structure
resembles, in important features, the system object of the research. The utility of the
model lies in its similarity with the system under study and in its being a simplified version
of it.

Summers (1991).
Analogy, thus, is what authorizes the use of a model. Analogy is also present when
models are transferred from one field to another (from physics to economics, for instance).
Reasoning by analogy is a central tool in theoretical building.
Now, pertinence of a scientific theory implies the existence of a set of interpretative
principles which relate it with the empirical world. This is the role Hausman’s closures play.
According to Mill the method of economics consists of taking into consideration
only some of the multiple causes of economic phenomena; that is why economics is an
inexact science. The opposite happens in the case of astronomy; Mill (1843, 6.3.1) argues
that this is an exact science “because its phenomena have been brought under laws
comprehending the whole of the causes by which the phenomena are influenced.”
The premises of any economic model are always “inexact” because they abstract
of numerous causal factors which are present together with those effectively taken into
The economists analyze only the “great causes” of phenomena, omitting
“interferences” or “disturbing causes.” The method in economics consists of getting logical
inferences from inexact premises. Hausman (1992, 148) agrees that this is the method
needed in all sciences –as it happens in economics- in which there is a complexity of
causal factors. The correspondence between the data and the implications of theory is
necessarily rough. Since economic phenomena are the effects of numerous causes, many
of which the theory does not encompass, one can expect nothing better.
However, this yields serious problems when policy conclusions are drawn without
remembering that some and not all causal factors have been taken into consideration. This
is what Schumpeter called the “Ricardian Vice”, which is the main target of the critiques in
Mayer(1993). The latter compares the Ricardian Vice with the so-called “55/95 per cent
problem” in military strategy –the tendency to see that element of military difficulty that
bulks largest (55 per cent of the problem) as the whole of it (95 per cent).20 This is even
more serious when the choice of which variables to include and which to exclude is mainly
based on how easy or how difficult they are to be modeled.

Economics as a separate science

Hausman considers economics is doomed to be an inexact science. In his view, its basic
axioms are inexact and from them consequences are deduced; confidence in these
implications derives from confidence in the axioms rather than from testing their
implications. This is, according to Hausman, the method of economics and he finds it as
scientifically acceptable, given the conditions to which economics is subject.
What Hausman does not defend is the commitment to economics as a “separate
science,” i.e. as a discipline that is concerned with a domain in which a small number of
causal factors predominate. He refers to the fact that economic analysis takes into
consideration only economic factors and sets aside the sociological or psychological ones,
for example.
Akerlof, who has combined in his papers the use of economic tools with theories
from other social disciplines such as anthropology, sociology or psychology, maintains that
“economic theorists, like French chefs in regard to food, have developed stylized models
whose ingredients are limited by some unwritten rules. Just as traditional French cooking
does not use seaweed or raw fish, so neoclassical models do not make assumptions
derived from psychology, anthropology, or sociology”(1984, 2). Akerlof argues –and
Hausman agrees- that stretching and opening economics by using instruments and
knowledge coming from other disciplines would enrich economic analysis.

Mayer (1993, 75).
From economic theory to economic policy

Since its inception, economic theory has aimed at producing recommendations of

economic policy.
However, Hutchison (1994, 27) points out, in alarm, that in the last 50 years an
unprecedented change has taken place with regard to the aims of economists: interest in
policy problems has declined significantly. The traditional prime end of the subject has
been increasingly replaced, in recent decades, by games-playing (as Hicks described
much of economic theory) or by technical virtuosity in the form of empirically vacuous
mathematical “rigor” or aesthetics.
Blaug (1980, XXI/XXIII) coincides in the existence of an increasing tendency in
modern economics to pursue theorizing just as an intellectual game. However, if
economists are going to take a stand on questions of economic policy –he remarks-
economics should be first and foremost an empirical science; analytical rigor should be
traded off against practical relevance.

Positive economics and normative economics

David Hume was the first in distinguishing between “what is” and “what ought to be.” John
Neville Keynes introduced the distinction between positive economics, normative
economics, and the art of economics. While positive economics studies what is and
normative economics deals with what should be, the art of economics –according to
Keynes- relates the insights learned in positive economics to the goals determined in
normative economics.
It is usually maintained that positive economics is as an objective science as
physical sciences are; economists should not have differences on its assertions.
Divergences only make sense in the case of normative economics, due to different value
However, in this reasoning there is, from my point of view, a missing point. Positive
economics uses what Hausman calls the deductive method. One starts with certain basic
assumptions and generalizations from which predictions are deduced. Then, positive
economics does not deal with what the world is but with what the world would be if and
only if it behaved in accordance with economic theory assumptions21. As far as the
reasoning follows the rules of deductive logic, nobody could discuss the inferences made.
But if the assumptions are changed, the same procedure may lead to different and even
opposite conclusions.
For example, a basic assumption in neoclassical economics is that agents have
unbounded rationality. Conclusions are, then, strictly valid for a world with unbounded
rational agents, for that sort of world in which the assumption of unbounded rationality
In the natural sciences, no assumption is made on how particles make decisions –
particles do not choose. Natural sciences simply describe the observed –and, thus, the
expected- behavior of particles. Conclusions are valid as long as particles go on behaving
as they used to.
Positive economics tells us how the world would be if -and only if- consumers were
utility maximizers or if firms were profit maximizers. Or, at least, if they behave like that.

This is a basic reason why a prediction failure should not be interpreted as a refutation of the
theory behind it.
That is why it is often held that economic theory is normative; it is interpreted as a
body of prescriptions for how to be rational, for how to maximize profits, etcetera.
This makes that not only normative economics but also positive economics
becomes a subject of discussion and divergence, particularly with respect to the
relevance, pertinence and usefulness of its assumptions. Obviously, were there a crucial
experiment to discriminate among theories, the difficulty would be nil. Once again, it is this
fact which distinguishes economics and the rest of the social sciences from the natural
sciences, where conclusive refutations are, on the contrary, possible.
Therefore, positive economics is far from being a harmonic set of knowledge on
different aspects of reality, as is usual to find in the positive natural sciences. As I already
pointed out, what we find in economics is a large set of theories and models in a big
toolbox ready to be used according to the case under analysis and the common sense of
the analyst.
This is just the consequence of the particular conditions economics–as the rest of
the social sciences- faces: its agents are human beings who take decisions, a multiplicity
of variables interacts and, in most of the cases, there are no controlled experiments.

The art of policy economics

John Neville Keynes’s trichotomous classification did not win acceptance. Most
authors distinguish only two categories: positive and normative economics. The goals and
the means to get them are usually seen as part of the normative branch of economics.
However, policy economics is an art in the same way as medicine is. Policy
economics relates the insights learned in positive economics to the goals determined in
normative economics.
In the same way as the medical doctor has to choose among the available theories
the one suitable for the treatment of the specific case she faces, the policy designer or the
applied economist has to choose among the theories at her disposal the one she
understands is the most adequate for the situation under analysis.
In any case, the traditional point of view has been that one of the missions of
positive economics is to guide the economic policy. Here is where the issue about how to
introduce the non-economic dimensions –political, sociological, psychological, etcetera-
appear. In order to translate down from abstract theory to the real world one must take
account of the variables that were abstracted from in the development of the theory.
Hausman criticizes economic theory for not taking into consideration the non-
economic causal factors, which makes economics a ”separate” science. However, it does
not seem to be a simple task to bring non-economic factors into the economic theory field.
Anyway, what is really unthinkable is to make prescriptions of economic policy ignoring the
role of non-economic variables. One thing is to take into consideration, as a
methodological strategy, only the domain of the economic factors, and a quite different one
is to design and apply economic policies ignoring the role of the rest of the causal factors
as if they did not exist. If they are ignored, they will make the policy maker notice their
presence in the hard way.
We face in this respect something similar to what happens with the assumptions of
economic theory. One thing is to use them to simplify our analysis but quite a different one
is to consider them as part of the reality we are studying. For instance, it often happens
that the theoretical assumption of perfect flexibility of prices is used to argue as if it were a
condition of the economic portion of the world under study and for which some economic
policies are being suggested. In other cases, the assumption of lack of capital restrictions
is taken as a feature of the economic reality. And there are many other examples of the
In the same way, the lack of consideration of some non-economic causal factors for
methodological reasons leads to its lack of consideration when recommendations of
economic policy are drawn, with regrettable results.
Precisely, the New Political Economy emphasizes the need of taking into
consideration the political restrictions pointing out that many criteria of first best are
useless because they do not take into considerations those restrictions.
Summarizing, I agree with the strategy of building economic theory as a separate
science. However, I think it would be a serious mistake not to take into consideration the
influence of non-economic variables when analyzing economic policy alternatives. Despite
the economist ignoring them, they will be still there and play their role.

Welfare economics

Welfare economics occupies an intermediate position between positive and

normative economics. Some economists even consider it as part of positive economics,
arguing it does not depend on any value judgment22. However, even such a simple
concept as a Pareto improvement is not value free. For example, let us consider a policy
change which improves the situation of the upper one percent of the population without
changing the situation of the rest. It is, undoubtedly, a Paretian improvement. However,
this more efficient alternative will be rejected in many societies in the name of equity. The
Pareto improvement concept implicitly assumes that absolute and not relative situations
are relevant. Although this is a common simplifying assumption in microeconomics it does
not imply that societies, when assessing a certain policy measure, will follow it to make
their valuation. It will depend on the idea of equity that in that society prevails.
On the other hand, it is society and not economists who should decide what weight
should be given to efficiency and what weight to equity: it is typically a value judgment.
However, economists tend to implicitly assume that efficient solutions should be given
priority per se.

Context-dependency and the realism of assumptions

Economic ideas go through a selection process which is strongly context-dependent.

When the economic environment changes, many theories become outdated as well as the
policies they inspired. What yesterday was a success today may be a failure. For example,
the Keynesian ideas inspired the economic policies of most Western countries since the
end of World War II until the beginning of the1970s in what many people consider the
Golden Age of the world economy. However, these policies worked successfully in a world
with strong restrictions to the international mobility of capital. When these restrictions were
lifted, the Keynesian scheme became inapplicable. Negative or near zero real interest
rates in one country are incompatible with a world of free capital flows. It was not the case
that the hypothesis was initially confirmed and later on refuted; what happened was that
the assumptions of the model made it inapplicable when the reality changed.23
On the other hand, this is a clear example of how maladjustment between the
assumptions of a theory or a model and reality can invalidate the policy conclusions
obtained from the former.
By definition, every model implies a certain degree of unrealism in its assumptions
–it is a simplification of the real world-; the limits of the portion of the world to which the

See Archibald (1959, 320-1).
In the same vein, Woo (1991, 49) argues that laws are governed by facts whose continued
presence is required for their existence.
model applies is conditioned by those assumptions. Galileo’s law of falling bodies
contains the assumption that bodies fall in the vacuum. If we use a cannon ball in an
experiment we will find that it behaves according to that law. But if we use a feather falling
in the atmosphere, we will find out that the law apparently fails: the lack of vacuum makes
the law inapplicable in this case while it is irrelevant in the cannonball case.
Something similar happens in economics: a model built under the assumption of a
closed economy is of little use in an open economy. In the same way, models built using
the assumption of perfect competition are not relevant for highly concentrated markets.
That is why it is extremely important to establish the limits of applicability of any
economic model or theory. This implies the identification of the assumptions on which the
conclusions are sensitively dependent.
Context influences not only the sort of questions economists try to answer but even
the kind of answers they give. While a world worried by unemployment was receptive to
Keynesian ideas, I seriously doubt that the New Classical Macroeconomics ideas about
economic fluctuations might have received any attention in that socio-economic context.


The main obstacle social sciences face –and makes them different from natural
sciences- is the difficulty to carry out controlled experiments. This makes too difficult to test
predictions and, moreover, to refute any hypothesis. Although potentially falsifiable, most
statements in economics are only imperfectly testable.
If our observation instruments do not allow us to assert if a swan is white or gray
we are in the presence of a falsifiable proposition (“all swans are white”) which can not
actually be falsified except in the trivial case a black, red, green, etc. swan ever appears.
This is the case with most empirical results in economics which are more useful to
illustrate theories than to test their validity24.
As a matter of fact, this is the attitude that the whole profession implicitly has
towards empirical results; they are best viewed as a way of illustrating that a theory may
be true.25 For example, I do not know any journal which induces the authors of an
empirical paper –or its critics- to test, some time after publication, the hypotheses included
in it using the new data.
At best empirical data are used to test if they corroborate the predictions of a
theory. That is why Caldwell (1982) characterized economic methodology as
In any case, refutation in economics seems to work only through what we have
called “big social experiments”; at least they are those which historically have discredited
and buried some economic ideas.
Given the enormous difficulties to test economic theories it is extremely important
to establish the limits of applicability of any economic model or theory in order to make
clear when it applies and when it does not.
If we accept Popper’s demarcation criterion, economics is a science inasmuch as
it formulates falsifiable theories.27 However, the peculiarity that distinguishes it from, for

Hicks maintained that because economics theories can neither verified nor falsified economics is
a discipline, not a science.
Mayer (1993, 148).
More precisely, as Mayer (1993, 138) maintains “when someone writes that his or her hypothesis
is confirmed, that merely means that it is not strongly disconfirmed.”
It may also be considered a science from the Kuhnian point of view as far as there is a paradigm
shared by most economists, as Canterbery and Burkhardt (1983) point out.
instance, natural sciences, is that theories, in most cases, cannot in practice be falsified28.
Anyway, in this respect it may be interesting to remember that the Popper of the Proscript
seems inclined to lend less importance to the falsifiability criterion and to pay more
attention to critical rationalism. This older Popper argues that “[s]cientific theories are
distinguished from myths merely in being criticizable, and in being open to modifications in
the light of criticism”29 Theories are attempts to solve problems, and should be criticized
according to how well they solve them.
The substantial restriction posed by the fact that economic theories are very difficult
to falsify makes determinant the ability of each author to persuade her colleagues about
the validity of her findings. It is not necessary to fully agree with McCloskey’s position to be
open to accept this characteristic aspect of economic science.
Nor it is necessary to fully agree with Rosenberg’s position in order to accept the
idea that there is a tendency in economics to move away from empirical sciences –even
from physics- and increasingly merge with mathematics.
Although mathematization prevents logical mistakes, which is crucial for a science
where controlled experiments are in most cases excluded, I am not quite sure that logical
rigor necessarily implies the use of mathematics in every case.
Given economics’s peculiarities it does not seem reasonable to judge its scientific
character on the basis of its ability to use the methods and procedures of the experimental
sciences. It seems more reasonable to analyze how to satisfy the scientific method
requirements taking into consideration its particularities as a social science30.
Given that economics has a very different epistemological object from the natural
sciences it seems reasonable to think that its methodological approach should also be
When one analyzes the evolution of economics along time, attention is drawn by
the fact that advances mainly consist of improvements of deductive rigor, economy and
elegance of expression, better axiomatization and the proofs of more and more general
results; broadly speaking, better analytical tools rather than novel results.
In any case, more important than to elucidate if economics is a science or not is to
elucidate what we can expect from the study of economics and what we cannot expect
from it.
Given the fact that methodological criteria use to be a reason to dismiss economic
theories, it would be important to set up what is acceptable and what is not in economics.
For instance, it has become fashionable to demand for microfoundations as a necessary
condition in macroeconomics. But, as it was already pointed out, thermodynamics and
chemistry do not claim for a micro theory. All biological creatures are made up of particles.
This does not mean that the natural place to start in building biology is to start with particle
physics. Botanists study certain characteristics of the behavior of plants without knowing
the exact biochemical mechanism behind them. Zoologists study anthills without having to
resort to the individual behavior of ants. It is well known that relativity theory (macro-
physics) and quantum mechanics (micro-physics) are mutually inconsistent. Why should
economics demand what harder sciences do not?

Hausman (1992, 177-179) argues that scientific theories are themselves not logically falsifiable.
So, all non-trivial science would be not science at all. If, alternatively, Popper’s demand for
falsifiability is applied to the whole system of scientific theories, auxiliary assumptions, and
statements of initial conditions, then virtually nothing fails to count as science. Hausman concludes
that either Popper demands too much or he demands too little.
Popper (1983, 7).
Flyvbjerg (2001, 4) asserts that social science “never has been, and probably never will be, able
to develop the type of explanatory and predictive theory that is the ideal and hallmark of natural
I think that our science has to re-analyze some critical issues. Which are its main
objectives? Which should be its methodology? Which is its cognitive status in the world of
science? What are the requisites to be considered a scientific activity? Which are the
peculiarities that the fact that it does not belong to the natural sciences but to the social
sciences impose on it?
I firmly believe that on the answers to these and other similar questions will depend
the future role and development of economics within the scientific world.

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