INSTITUTIONAL ECONOMICS: ECONOMIC METHODOLOGY

We shall discuss the how economics defines itself and maintains its disciplinary distance from others. Then, we shall critically assess the methodology of mainstream economics. In a separate lecture notes, I shall an alternative theory for economic methodology, drawing on better conceptions of science and social world.

Economics is represented as a study of rationality and choice, while sociology is seen as a study of how irrational individual behave. Within the social sciences, there is an intellectual structure: a division between the study of formally rational behaviour (i.e. economics) and the study of its irrational, cultural content (i.e. sociology and psychology, anthropology and politics).

Each discipline tries to extend its own influence over others. Economics extends its territorial claims by shifting from grounding itself in a topic or object of study (such as markets and firms) to identifying itself in terms of ‘ways of seeing’. Economics is not just the study of economies, it’s a way of understanding every aspect of society through the lens of rational choice.

Many social scientists have attempted to break down the disciplinary walls and encourage interdisciplinary exchanges. Institutional and feminist economics and political economy are some of the outstanding examples of this interchange. Interdisciplinary studies emerge when scholars identify with learning rather than disciplines.

There are some problems of using quantitative methods in economics.

Quantitative analysis: What must objects of study be like for it to be possible to quantify them? Can we quantify labour power? Investment? Education? Medical services? Market shares?

Adequate forms of quantifying can only be developed for objects and processes that are qualitatively invariant. As such, they can be split up and combined without changing their nature. We can measure them at different times or places in different conditions and know that we are not measuring different things. But only a few objects and processes satisfy this condition of stability. Failing to appreciate the qualitative nature of objects and processes means that analysts are blind to social structures and their emergent powers.

Acausal analysis: The mathematical operations performed in a mathematical model provide a way of calculating, deducing or deriving certain results from assumptions and data, but not a way of causally explaining phenomena. The belief that finding a way of calculating something is the same as giving a causal explanation of what produced it is common in economics. Mathematical modellers tend not to be concerned with explaining what it is about social objects that produces certain changes but with representing and calculating the effects of actions.

Mathematical functions such as y = f (x) say nothing about what makes y or x, only that quantitative variation in y is formally related in some way to quantitative variation in x.

Quasi-causal analysis: Mathematical models try to explain how components quantities vary, e.g. explaining balance of payments by disaggregating it into exports, imports and so on. And one of the simplest kinds of model ‘explains’ change in an aggregate object by disaggregating it into its components. Yet these kinds of ‘quantitative disaggregation’ often fail to correspond to what might constitute ‘causal disaggregation’.