Workshop on Theory Building

1. Workshop on Theory Building Those who can DO Those who cannot DISCUSS METHODOLOGY Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

2. Workshop on Theory Building Theory and observation: the scientific project Paradigms: the scientific process Lazear’s thesis on why economics is successful as a discipline Krugman’s views on theory building Impatience and verbal modeling Implications for ISNIE Publication strategies Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

3. A few questions How to contribute to society‘s body of knowledge? What is a theory? What its relation to ‘reality’? What its relation to ‘truth’? Kuhn: ”Observation and experience can and must drastically restrict the range of admissible scientific beliefs, else there would be no science.” Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

4. Theory and Observation Still in the 1930’s, the ‘Vienna Circle’ tried to understand how to ‘prove’ a theory. Only in the 1940’s, Popper published his famous work on refutability (this is as good as it gets …) Lazear article is witness to how engrained Popper’s methodology has become! Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

5. Error in the scientific process “Truth emerges more readily from error than from confusion.” “The university is like a fireplace: you turn it on to heat the house, but most of the heat escapes through the chimney.” Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

6. The infinite regress of knowledge Theory must be measured against ‘reality’ The description of that reality is dictated by theory Where did these variables come from (Ref. Friedman)? Previous theories Which were developed by measuring against reality Which was defined by a different set of variables Which were prescribed by a yet earlier theory Ad infinitum All cognition is somewhat self-referential (Theory of autopoietic systems, both in Sociology and Neuro-Biology) Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

7. Relevant Variables …. Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

8. The structure of scientific revolutions When examining ‘normal science’, we shall want finally to describe research as a strenuous and devoted attempt to force nature into the conceptual boxes supplied by professional education … indeed, those phenomena that will not fit the box are often not seen at all. <If the only tool you have is a hammer, every problem will look like a nail> When [observations / experiments] reveal an anomaly that cannot be aligned with professional expectations, the extraordinary investigations that lead the profession at last to a new set of commitments [begins] – a new basis for the practice of science. Coase: When a worker moves from Department X to Department Y …… Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

9. The structure of scientific revolutions If … out-of-date beliefs are to be called myths, then myths can be produced by the same sorts of methods and held for the same sorts of reasons that now lead to scientific knowledge. If, on the other hand, they are to be called science, then science has included bodies of belief quite incompatible with the ones we hold today. Out-of-date theories are not unscientific because they have been discarded. What aspect of science will emerge to prominence in this effort? First is the insufficiency of methodological directives, by themselves, to dictate a unique substantive conclusion to many sorts of scientific problems (Compare Feyerabend). Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

10. The structure of scientific revolutions The early developmental stages of most sciences have been characterized by continual competition between a number of distinct views of nature, all roughly compatible with the dictates of scientific observation and method. Particularly, I was struck by the number and extent of overt disagreement between social scientists about the nature of legitimate scientific problems and methods. Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

11. The structure of scientific revolutions The revolutionary competition between the adherents of the old normal-scientific tradition and the adherents of the new one … is a process that should – in a theory of scientific inquiry – replace the confirmation or falsification procedures made familiar by our usual image of science. Competition between segments of the scientific community is the only historical process that ever actually results in the rejection of one previously accepted theory or the adoption of another (Again: compare Feyerabend). To be accepted as a paradigm, a theory must seem better than its competitors, but it need not, and in fact never does, explain all the facts with which it can be confronted. Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

12. Lazear Economic methodology produces refutable implications, and tests them with solid statistical techniques Determinants of success: Rational maximizers Equilibrium Efficiency <Rigor = mathematical modeling / theory building> What would Kuhn or Feyerabend say to that claim? Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

13. Kuhn on the Social Sciences “Particularly, I was struck by the number and extent of overt disagreement between social scientists about the nature of legitimate scientific problems and methods.” Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

14. Krugman on scientific process in economics Economists realized that they could not model … anything interesting about economic geography with the kind of rigor that was increasingly expected of them, and so they simply left the subjects alone. Homo economicus is an implausible caricature, but a highly productive one, and no useful alternative has yet been found. A successful model enhances our vision, but it also creates blindspots, at least at first. Once you have a model, it is essentially impossible to avoid seeing the world in terms of that model. The problem is that there is no alternative to models. We all think in simplified models all the time. Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

15. Krugman on scientific process in economics For those who are impatient with modeling and prefer to strike out on their own into the richness that an uninhibited use of metaphor seems to open up, [my] advice is to stop and think. Are you sure that you are having such deep insights that you are better off turning your back on the cumulative discourse among generally intelligent people that is modern economics? But of course you are! Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

16. Impatience and theory building The mathematical modeling technique is a straightjacket for complex problems: the achievement of results is often constrained by model tractability (economic geography). In such circumstances, verbal modeling may apply the ‘normal’ way of economic thinking to derive more immediate and possibly more substantive but less precise results. Instead of narrowly definable hypotheses, we generate conjectures or educated guesses. But: these are also subject to empirical testing (there is anyhow never an exact overlap in the variables used in theoretical modeling and those measured in empirical testing)! Experience: ‘Rigor’ oriented Journals will reject verbal models as admissible theory, but publish empirical tests of hypotheses generated by verbal modeling (missing variables bias?). Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

17. Impatience: the TCE experience Change assumption from complete to bounded rationality New variables are identified as relevant for the ultimate object of interest, resource allocation (contracts specifying terms over and above prices and quantities, e.g. adjudication of conflicts over prices and quantities). Our definition of reality has changed: institutions matter for the economic problem! All of this without recourse to mathematical modeling Should we have waited for Oliver Hart, Mr. Krugman? Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

18. Why is mathematical modeling so successful? Consider the imperfections of language as a communication device 150 years after their publication, scholars still debate on the correct interpretation of Marx’s theories In the course of scientific inquiry, the researcher may well realize that the existing vocabulary is insufficient to describe the richness of phenomena and concepts he/she wants to describe A German Professor rather uses his colleague’s toothbrush than his nomenclatura. Breakdown of communication. Failure of the scientific process! Alternative explanation to Lazear’s to explain the same phenomenon! Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

19. ISNIE‘s Problem Conviction that prices and quantities are insufficient to determine optimal resource allocation. Institutions matter also! To generate theory outcomes that deliver such results, assumption of full rationality must be dropped (bounded rationality). This is a core assumption in standard economics – hostility! Uphill struggle: ISNIE topics not necessarily the editor’s choice. The lunatic fringe! Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster

20. ISNIE’s potential We are the enactors of Kuhn’s revolutionary competition in the economic sciences. The society should be a playground for Kuhn’s revolutionary competition. This implies methodological pluralism, especially in theory building. Then, it will be the boxing ring, in which the contestants fight. Does this explain the success of institutional economics at business schools? What do we have to do to ‘win’ the competition: Expose and explain paradoxes (anomalies) that cannot be explained by traditional methods: empirical research program! Workshop ‚Theory Building; Cargese, May 18th 2006 Professur für BWL, insb. Internationale Wirtschaft; University of Münster