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Abstract
It has been argued persistently that economic models frequently suffer from poor empirical performance because they rely upon empirically inadequate behavioral foundations, i.e. theories of rational choice. In this paper, I argue that much of this criticism misses the point: it assumes that economics is about explaining human behavior when in fact, since Adam Smith, economists have been more interested in explaining patterns that emerge from social interaction. While some minimal account of human behavior is needed for explaining such phenomena, a full-fledged psychological or neurobiological theory of individual behavior might not be. The more pressing yet under-researched challenge for economic models is to arrive at an adequate description of social interaction processes that connect individual choices on the micro-level and robust patterns on the macro-level.
Acknowledgements
I am grateful to Lorenzo Casini, Charles Djordjevic, Manuel Fasko, Roberto Fumagalli, Scott Scheall, and two anonymous referees for their feedback on earlier drafts of this paper.
Notes
1. Hausman (Citation2012, p. 61) stresses that ‘expected-utility theory says nothing about causation. It is not explicitly an account of means-end reasoning’ (Hausman, Citation2012, p. 61, italics in original). ‘Expected-utility theory merely relates preferences over the “pay-offs” of lotteries and degrees of beliefs to preferences over lotteries. The relations between lotteries and their payoffs are typically causal, but no causal interpretation is built into expected utility theory itself.’
2. Note that there is no unified subfield of behavioral economics. Rather, there are at least two different streams that go back to different intellectual traditions and thus offer different arguments for the need and legitimacy of their research program (Angner & Loewenstein, Citation2012; Heukelom, Citation2014; Sent, Citation2004).
3. Lehtinen and Kuorikoski (Citation2007, p. 125) distinguish between behaviorally realistic and psychologically (or intentionally) realistic. A theory is realistic in the first way, if it allows for accurately describing behavior in a realistic way. It is realistic in the second way, if the mental processes it invokes can be truthfully attributed to the agents. Critics of RCT frequently criticize it as being psychologically unrealistic and should be replaced by a psychologically realistic theory of human behavior.
4. For a related but normative claim against economics being a science of choice, see Hudík (Citation2011).
5. Note that on Hayek’s understanding, macro-level phenomena such as markets and their properties are exemplary cases of complex phenomena. But such phenomena can also be found on the level of the individual agent. For instance, for Hayek the human mind is itself a complex self-organizing system (Di Iorio, Citation2015), which further reveals the contingency of the distinction between levels.
6. Note that my concern is exclusively with positive economics, that is, with explaining and predicting economic phenomena. I am not concerned with welfare economics.
7. Cars that just left the showroom are cars that are already classified as used cars but are still of high quality.
8. Quality uncertainty is an inherent characteristic of the used car market. In the market for new cars, people do not know with certainty what they can expect in terms of quality either, but the probability that a new car will be of high quality is much greater than in the used car market.
9. In this model, the quality of the car is revealed shortly after purchase. Therefore, the owner should know with near certainty whether the car is good or bad when he sells it. Modeled as a probability, it is assumed that the seller believes the car is good with probability one if it is good and with probability zero if it is bad, whereas the buyer believes the car is good with probability q < 1 regardless.
10. Buchanan takes his interpretation of ‘association’ from symbiotics, which he defines as the study of ‘the association between dissimilar organisms’ (Buchanan, Citation1979, p. 27), whereby association has the connotation of being mutually beneficial for all parties (Buchanan, Citation1979, p. 27).
11. Buchanan also argues against social engineering and the mechanical calculation of solutions to optimization problems as being the primary concerns of economists. In so doing, Buchanan does not deny the importance of social engineering but only suggests that ‘the implications concerning the uses of individuals as means to nonindividual ends be explicitly recognized’ (Buchanan, Citation1979, p. 35).
12. For a similar point with a particular emphasis on the uses of revealed preference theory, see Ross (Citation2014a).
13. This is not to say that all economics is always about social interaction in general and about markets in particular. It is undebatable that nowadays, especially in microeconomics, economics has expanded to areas that have not traditionally been studied by economists and that economics has become more pluralist regarding its methods.
14. Boland considers the other methodological principle in economics to be inductivism.
15. Weaver also mentions similar difficulties with problems in biology, political science, psychology, and medicine (Weaver, Citation1948/2004, p. 540).
16. For a discussion of the advantages and disadvantages of the three modeling strategies, see Helbing (Citation2013).
17. Note that there is no agreed upon notion of ‘representation’ in the literature on modeling.
18. For an overview of the main philosophical models of explanation and their applicability in the social sciences, see Mantzavinos (Citation2015). With respect to the debate about models (in economics) and their status, see Alexandrova (Citation2008), Cartwright (Citation2007), Frigg and Hartmann (Citation2017), Frigg (Citation2009), Gibbard and Varian (Citation1978), Grüne-Yanoff (Citation2009b), Hausman (Citation1992), Mäki (Citation1994), Morgan (Citation2005, Citation2012), among others.
19. For an extensive discussion of Sugden’s account of economic models, see the special issue of Erkenntnis 2009, Vol. 17, Issue 1.
20. For a related but slightly different classification of current positions, the ‘isolationists’ and ‘fictionalism,’ see Grüne-Yanoff (Citation2009a).
21. For a detailed overview of counterarguments against Mäki’s account of economic models, see Reiss (Citation2012a, pp. 127–133).
22. As a result, Sugden is primarily concerned with models that are highly abstract and theoretical, such as the Akerlof model. While Sugden admits that Akerlof’s model is not necessarily a typical economic model because it ‘represents theory at its best,’ it is representative because it has ‘many of the vices that critics attribute to theoretical economics: they are abstract and unrealistic, and they lead to no clearly testable hypotheses’ (Sugden, Citation2000a, p. 2). At the same time, it is of epistemic value for a researcher and the economics community.
23. Sugden sees in this statement a commitment to some sort of realism on Akerlof’s side (Sugden, Citation2000a, p. 12).
24. This discussion is undertaken regarding Reiss’ so-called Explanation Paradox (Reiss, Citation2012b). Reiss concludes that Sugden’s instrumentalist account of scientific explanation does not resolve his paradox.
25. Reiss (Citation2012a, p. 19) distinguishes between types of economic phenomena and tokens in that an economic phenomenon is located in a specific time and location and is instantiated only once. I would argue that most economic phenomena are instantiations of a general type of a phenomenon and thus neglect the distinction in the following. While I would agree that economists attempt to examine token phenomena in great detail, I will argue in the following that most economic explanations based upon simple theoretical models concern types of phenomena because the examination of token phenomena frequently requires information that is difficult to obtain and models that would be extremely challenging to formulate and work with.
26. See Hands (Citation2017) for a discussion of what has been called hypothetical pattern explanations in biology and how they closely relate to Hayek’s notion of explanation of the principle.
27. Hayek’s account of explanations of the principle is conceptually compatible with his account of methodological individualism understood as a non-atomistic approach and with his idea that social phenomena emerge as unintended consequences from intentional action of human beings (Di Iorio, Citation2015, p. 3). Hayek’s views are too complex to be discussed here in detail. But see Di Iorio (Citation2015) for a discussion of Hayek’s account of methodological individualism and how, together with an intentional account of human agency, it can be reconciled with Hayek’s focus the study on unintended consequences and his interested in cognitive psychology.
28. Note that Hayek states explicitly that the model explains better when the mechanism specified in the model is the same as the actual causal mechanism that can be observed.
29. Hayek writes in his Degrees of Explanation: ‘There may be no possibility of getting beyond this by means of observation, because it may in practice be impossible to test all the possible combinations of the factors x1, x2, x3, … xn. If in the face of the variety and complexity of such a situation our imagination cannot suggest more precise rules than those indicated, no systematic testing will help us over the difficulty’ (von Hayek, Citation1955, p. 214).
30. Hayek remarks that his conclusions ‘are most readily seen to apply to those disciplines which, like mathematical biology or mathematical economics, employ formalized symbolic models’ (von Hayek, Citation1955, p. 223; italics mine); see also Caldwell (Citation2004, p. 387).
31. I am not claiming that knowledge about the psychology of individuals involved in exchange processes would be useless in those explanations, but only that such knowledge would provide only limited insights in terms of describing the causal connection between individual psychology and social phenomena.
32. Just to clarify, sometimes the labels ‘pattern’ and ‘structure’ are used interchangeably here to label the phenomenon that occurs (in the market for used cars, for example) and which is denoted by the ‘principle of adverse selection.’ I am not making any claims about the actual methodological status of the principle of adverse selection.
33. Akerlof takes equilibrium to be conventionally defined as the situation in which no individuals can by any form of arbitrage make very large profits.
34. In this context, we can think about explanation of the principle further as implying explanations on different levels, such as the aggregate level as opposed to the level of the individual.
35. Hayek’s view does not seem to imply that, if we could gather all the data from all the individuals and about other circumstances that, directly or indirectly, are causally responsible for bringing about the phenomenon in question, we could then provide a precise numerical prediction as well as a deductive-nomological explanation of an instance of the phenomenon. We would also have to know how the consequences of those single instances of behavior, etc. affect each other. Furthermore, even if data could be gathered for one particular situation, given the dynamic character of the social world, the same situation would unlikely occur again.
36. Hayek stresses that the complexity of phenomena such as markets is a matter of degree. As such, not just any market is a highly complex phenomenon. It could be argued that a market already exists in the case of a two-person exchange situation. As such, it would not be characterized by the high degree of complexity Hayek is referring to. Yet we can think of the used car market as sufficiently complex to qualify the resulting explanation as an of the principle.
37. In this context, Hayek speaks primarily about the theory of evolution by natural selection.
38. Note that this procedure does not necessarily contradict Sugden’s view of what he calls a ‘model world.’ What is, however, important for my purposes is that the model suits the problem, i.e. understanding a complex phenomenon that is characterized by particular characteristics that have to be taken into account by the model builder.
39. I should note that the approach that I am defending is at odds with Ludwig von Mises's methodology and his idea of the ‘logic of choice.’ Thus, although I extensively draw upon Hayek's view of economic explanation, I am not making an Austrian argument.
40. That methodological individualism is acceptable without committing to psychologism has been defended by both Hayek and Popper. Popper (Citation1985) defends what he calls social scientific explanation in terms of ‘situational analysis’ by maintaining that the explanatory burden in accounting for individual behavior in the social sciences relies on the situation, specified in the initial conditions, and not on what he calls the ‘rationality principle.’ Popper’s position has been found to be unsatisfying and inconsistent with his theory of falsificationism (see Hands, Citation2001). For the main contributions on Popper’s view of the rationality principle, see e.g. Lagueux (Citation1993), Nadeau (Citation1993), Latsis (Citation1983), and Koertge (Citation1979).
41. Note that methodological individualism does not necessarily imply any commitment to ontological individualism. A rejection of methodological individualism does also not imply a rejection of ontological individualism (e.g. Mantzavinos, Citation2009).
42. The orginal quote is: 'Soweit wir in den Sozialwissenschaften individuelles Denken analysieren, geschieht es nicht zu dem Zweck, jenes Denken zu erklären, sondern bloß, um die möglichen Arten von Elementen zu unterscheiden, mit denen wir bei der Konstruktion verschiedener Typen von sozialen Beziehungen zu rechnen haben. Es ist ein Irrtum, der durch nachlässige Ausdrucksweise seitens der Sozialwissenschaftler oft noch unterstützt wird, zu glauben, daß es ihr Ziel ist, bewußtes Handeln zu erklären. Das ist, wenn es überhaupt getan werden kann, eine andere Aufgabe, und zwar die der Psychologie.'
43. One common way of doing this is to introduce ceteris paribus clauses in order to ‘squeeze the non-universal, exception rich causal structures that populate […] the social domains under the cloak of scientific lawfulness’ (Mitchell, Citation2009, p. 131).
44. This is not to deny that the critique of RCT as a universal theory of individual behavior has profound methodological flaws.