Explanation in Economics

1. Explanation in Economics Comparing the economical conditions of some European countries, Adam Smith faced a problem: how come that Spain and Portugal are among the poorest countries in Europe, even though they possess rich mines of precious metals? Here’s his explanation: Spain by taxing, and Portugal by prohibiting the exportation of gold and silver, cause a reduction in the value of these metals. “The cheapness of gold and silver, or what is the same thing, the dearness of all commodities, which is the necessary effect of this redundancy of the precious metals, discourages both the agriculture and manufactures of Spain and Portugal, and enables foreign nations to supply them with many sorts of rude, and with almost all sorts of manufactured produce, for a smaller quantity of gold and silver than what they themselves can either raise or make them for at home” (The Wealth of Nations, 1776, p. 671).

2. Moreover, “this bad policy is not in those countries counterbalanced by the general liberty and security of the people. Industry is there neither free nor secure, and the civil and ecclesiastical governments of both Spain and Portugal are such as would alone be sufficient to perpetuate their present state of poverty, even though their regulations of commerce were as wise as the greater part of them are absurd and foolish” (ibidem, p. 712). By appealing to the D-N model, we might reconstruct Smith’s explanation as follows: on the basis of a few laws of economics, he refers the fact that is to be explained (the underdevelopment of Spanish and Portuguese economies) to three causes, whose nature is economical and political (the strong disincentives to exportations of precious metals, scarce liberty and scarce security).

3. C1: the strong disincentives to exportations of precious metals of these two countries. This cause is linked to the explanandum by a chain of nomological explanations: i) the limitations to the exportations of gold and silver cause the increase in the quantity of these metals in Spain and Portugal; ii) the increase of their availability causes their devaluation; iii) such devaluation takes to the increase of the prices of other goods; iv) such an increase discourages economical investments; v) Without investments there cannot be any economic growth.

4. The cause-effect link suggested in each of these explanations is implicitly covered by at least two laws: L1: the law of supply and demand (the price of a good is given by the point of trade-off between supply and demand); L2: the law of the maximization of profit (economical agents tend to invest in sectors that guarantee a higher profit). C2: the scarce liberty in Spain and Portugal. This initial condition is linked to the explanandum by an implicit law, L3: “economical initiative can be adequately developed only if individual liberties are sufficiently protected”. C3: the scarce security in Spain and Portugal. This is linked to the explanandum by a similar law, L4: “economical initiative can be adequately developed only if a certain degree of social relations is assured”.

5. Explanation in Sociology In his study of the genesis and growth of the division of labour, Georg Simmel notes that cities have been the places in which the division of labour has always been very strong. In order to account for this important and widespread social phenomenon, Simmel advances the following explanatory hypothesis: “As soon as it expands, a city increasingly provides the decisive conditions for labour division. It provides a framework that, due to its size, can absorb a variety of very different services. At the same time, the concentration of individuals and their struggle for the search of customers force them to specialize in a function in which they can hardly be replaced by others. No doubt, living in a city has transformed the struggle for survival in nature into an inter-human struggle for profit, which is no longer warranted by nature, but acquired from other humans.

6. For specialization is not only the product of competition for profit, but it also originates from the less evident fact that the seller must always arouse new and differentiated needs in the customers he attracts. In order to find a new source of income that is not yet exhausted and a function that cannot be easily replaced, the seller is forced to specialize the services he provides. This process promotes differentiation, refinement and enrichment of public needs, something which obviously leads to increasingly different features of the public” (The Human Image, 1899, p. 539). In this passage Simmel (a sharp critic of the possibility of nomological explanations in the historical and social sciences) ultimately refers the explanandum (cities offer a higher division of labour than countryside) to the initial condition C = “the concentration of individuals” that obtains in cities, by tacitly appealing to the law L = “a greater concentration of individuals tends to produce a specialization in their functions”.

7. However, just as Smith, Simmel does not confine himself to advancing a possible cause, but renders his explanation sketch less indeterminate by suggesting a chain of explanations that aim at clarifying the causal link between demographic density and the division of labour. In fact, he highlights that: i) the greater concentration of individuals in cities causes a struggle for survival which takes place totally among humans. This implicitly appeals to the law according to which “in a social environment in which survival does not depend decisively on nature, there takes place a competition among individuals for subsistence and profit”.

8. ii) each individual tends to specialize as much as possible in his function and in his job, in order to cope with the competition of others. This appeals to the law according to which “the more an individual is specialized in the production of goods, or services, the easier it is that the goods he produces will meet the customers’ requests”. iii) entrepreneurs tend to create new widespread needs. This appeals to the law: “if you want to sell new products, you have to induce new needs and demands in the public”.

9. Explanation in Political Science In studying the political dynamics in Italy in the 1970s, Giovanni Sartori aims at explaining why the Christian-Democrat Party (DC) decided to accredit itself with the electorate as a left-centre party: “A party that (like the DC) occupies the centre of the political stage is not only the consequence of a polarization process; it is, in turn, the efficient cause of such polarization. At first, a centre party ties the whole system together. Eventually, however, it is the very occupation of the centre that fuels the centrifugal dynamics of the whole system. For this very simple reason: if the moderate, middle-of-the-road, centrist electorate has already been ‘assigned’ to the party at the centre of the political stage, the system as a whole has lost its centre, that is, it rewards those parties that seek votes in centrifugal directions, and penalizes the parties that seek votes in centripetal directions” (Teoria dei partiti e caso italiano, 1982, p. 29).

10. In his theory, Sartori (a political philosopher and sociologist who always distanced himself from any possibility of causal explanation) spots in the occupation of the centre of the Italian political stage the cause for DC’s strategy to present itself as a left-centre party. Sartori explains that, since the centre was already occupied (that is, since the votes of the moderate electorate was already “taken”), the competition among parties tended to develop along centrifugal lines, in order to hoard other votes. He is able to suggest such a causal connection between the explanandum (the centrifugal tendencies of parties) and the explanans (the occupation of the centre) on the basis of a simple and tacit law:

11. L: “parties tend first and foremost to gain the votes of those electors that do not directly identify themselves with other parties”. Such a strategy, in turn, can be explained by an even simpler law: “it is easier to win the votes of a fluctuating electorate rather than those of an electorate that strongly identifies itself with one or more parties”.

12. Explanation in Psychology In describing a number of very concrete examples of “the symptomatic and casual actions” by which the life of every individual is characterized, Sigmund Freud proposes to solve the following case: “A colleague related to me that he lost his steel pencil which he had had for over two years, and which, on account of its superior quality, was highly prized by him. Analysis elicited the following facts: the day before he had received a very disagreeable letter from his brother-in-law, the concluding sentence of which read: ‘At present I have neither the desire nor the time to assist you in your carelessness and laziness’. The effect connected with this letter was so powerful that the next day he promptly sacrificed the pencil which was a present from this brother-in-law in order not to be burdened with his favours” (Psychpathology of Everyday Life, 1924,pp. 224-225).

13. After stating the explanandum (the loss of the pencil by his colleague), Freud accounts for this by referring this fact to some previous and causally relevant conditions: C1: the pencil was a present of his brother-in-law; C2: the day before his colleague received an unpleasant letter from his brother-in-law. These were selected on the basis of two implicit laws: L1: “individuals tend get rid of those objects that remind them of unpleasant events”; which, in turn, refers to a more general law: L2: “individuals tend to obliterate unpleasant events”

14. Explanation in Historiography In his magnum opus on Italian Renaissance, Jacob Burckhardt aims at providing an explanation of a phenomenon he is most interested in: why, between the end of the 14th and the beginning of the 15th century, “Italy becomes the homeland of a ‘foreign politics’, which increasingly prevails over received rights in other countries as well, and the treatment of international affairs, completely objective and free from any moral reservations, achieves at times a level of perfection that provides it with alleged decorum and grandeur, whereas the whole process gives the impression of a bottomless pit” (The Civilization of the Renaissance in Italy, 1860, p. 87). After stating the explanandum (that in the book is postponed to the specification of causes) the Swiss historian explains it by referring to two initial conditions, or causes:

15. C1: since “the majority of Italian States were, within their boundaries, works of art, that is, conscious creations”, then “also the relationships between them and foreign states had to be founded on rigorous principles and produced after careful contemplation” (ibidem). This cause assumes the law L: “recently formed States need to entertain clear and easily recognizable relations with foreign States”. C2: “Most Italian States were founded upon fairly recent usurpations, and this was highly dangerous both in external relations and in internal politics. Nobody recognizes his neighbour without any reservations; the same stroke of luck that served to found and strengthen a State’s own power might hold for the neighbour as well. But it is not always up to the usurper to decide whether he might sit on the throne quietly, or not; the need to enlarge its own kingdom characterizes any illegitimate power” (ibidem).

16. In so arguing, Burckhardt provides a reconstruction of the Italian situation by appealing to (at least) three laws: L1: “States that were born out of usurpations are, and see themselves as, more under threat than others” (“Most of Italian States were founded upon fairly recent usurpations, and this was highly dangerous both in external relations and in internal politics”). L2: “States that are, and see themselves as, under threat need to establish clear-cut relationships with their neighbours” (“Nobody recognizes his neighbour without any reservations; the same stroke of luck that served to found and strengthen a State’s own power might hold for the neighbour as well”). L3: “States illegitimately established tend to enlarge themselves because they feel under threat” (“But it is not always up to the usurper to decide whether he might sit on the throne quietly, or not; the need to enlarge its own kingdom characterizes any illegitimate power”).

17. The epistemological nature of laws in social sciences 1. The laws appealed to in the social sciences refer to actions and consequences of (individual) actions. In some cases, the reference to individual behaviour is direct: “the pay off of men working in conditions of restriction is less than those working in comfortable conditions”. In other cases, it is indirect: reference is made to collective nouns only to resume groups of individual actions (“a people in which corruption reigns everywhere, cannot free itself in a short period of time”). Still in other cases, laws are formulated so as to comprise a more indirect reference to individual behaviours: “power is not difficult to keep, on condition that appeal is made to those very means through which power was achieved” (Sallust).

18. 2. Laws are empirical generalizations of human behaviour. In social sciences – as well as in the natural sciences, at least in many cases – we do not deal with laws whose universal character has been proved. Rather, we often deal with law-like statements, that is, with nomological propositions, expressed in generalized form, that play the same function of universal laws, linking causes to effects. Law-like statements are mostly empirical generalizations of varying dimension, that tell us what individuals usually tend to do when confronting given situations. Of course, not all individuals necessarily behave like that.

19. These laws in the social sciences might be described as “rules of experience” (Max Weber): causation rules, that is, drawn by the nomological knowledge of common sense, that allow us to understand an action by referring it to its causes (that is, the situation in which it developed). According to Ernest Nagel, the lack of universal laws – whose existence cannot be excluded, at least in principle – cannot be taken to be an element of sharp discrimination of the social sciences from the natural ones, for natural scientists as well make ample use of statistical laws, and these are nothing but empirical generalizations in quantitative terms.

20. 3. Laws are not tendencies or accidental generalizations. Laws are rules that highlight a causal connection which is valid for a more or less wide category of typical events. Tendencies – and any forms of accidental generalization –, by contrast, are mere descriptions of facts, pure accounts of experiences that describe a (small) number of contingent facts after they have instantiated. As a consequence, tendencies do not possess any explanatory or predictive power.

21. Obviously, we cannot explain the increase in the number of workers in England in the second half of the nineteenth century on the basis of the tendency – correctly highlighted by historians – of the growth of the proletariat in industrialized countries in that period. Indeed, in this case, it is the single event (the increase in the number of proletarians in England) that contributes to the consolidation of a tendency. This, in turn, is nothing but the realization of the occurrence of a finite set of individual existential data. As such, it cannot say anything more than that it describes. Even the most validated tendencies, covering ample historical periods (such as the increasing growth in the number of the democratic States in the past centuries) – just as existential regularities, whose scope is more limited – are facts that have to be explained by appealing to laws that refer them to initial conditions.

22. Once the epistemological nature of laws is defined, we might turn to consider whether and to what extent the kind of explanations provided in the social sciences meet the exacting conditions that – according to Popper, Hempel and Oppenheim – are required for any scientific theory. The three “empirical conditions” are easily met: as it can be seen from the examples of explanations offered above, it is not difficult to ascertain whether: (i) the proposition that expresses the explanandum and (ii) the singular statements that describe the initial conditions are true until they get disproved, and whether (iii) the laws appealed to are empirically tested.

23. Just as with the empirical conditions, the third and fourth logical conditions are easily met: the explanandum and the initial conditions must be (iii) distinct from one another, in order to avoid circular explanations, and must (iv) describe not an event in its entirety, but merely one of its aspects. Things are different in the case of the first two logical conditions. As it can be easily seen, the second requirement is not met: in the explanations quoted above there are no “general” (Hempel) or “universal” (Popper) laws.

24. The laws appealed to in the social and historical sciences areempirical generalizations: they might have a very wide scope, but it is not difficult to find instances that contradict them. Furthermore, since they are not based on general or universal laws, explanations in the social and historical sciences cannot meet the first logical condition, either: the logical deductibility of the explanandum from the explanans. The reason is clear: being false, such generalizations cannot possibly exclude contrary facts. As a consequence, the truth of the premises becomes compatible with the falsity of the conclusions.

25. But it is not only the nature of the nomological cover that makes the logical deduction of the explanandum from the explanans impossible. Another reason is to be sought in the very nature of causes, which are often “open” and ever-changing systems of interactions, that can be reconstructed only approximately. As a consequence, explanatory hypotheses are “deductively incomplete” – and, as such, they are scarcely relevant from the methodological point of view, that is, for the construction of explanatory hypotheses.

26. A primary role is therefore played by situational analysis, that is, by the reconstruction of the tangled plot of initial conditions, which turn out to be crucial in explanations in the social sciences. The more the reconstruction of causes is detailed, the less explanation sketches are incomplete (also from the point of view of the logical deduction of the explanandum from the explanans) and the greater is its explanatory strength. It is to be noted, though, that situational analysis as well is a form of deductive-nomological explanation, through which the causal context that generated the explanandum is reconstructed.

27. From sketches of explanation to potential predictions Predictions in the natural sciences are far more reliable than those in the social sciences: whereas an astronomer manages to predict in great advance and with great precision an eclipse, no expert in political affairs or sociologist will ever be able to predict – with a not even remotely comparable degree of reliability – whether a given policy will be voted by Parliament on a given day, or what will be the outcome of an election. This is true, of course. But that does not contradict the general D-N model – by contrast, it can be explained on the basis of the D-N model itself.

28. Since explanation (historical science) and prediction (applied science) are symmetrical operations, the very reasons by which the explanation in the social sciences is deductively incomplete make predictions uncertain and approximate. The fact that the laws appealed to by social scientists often present an “open” nature prevents logical deduction – both of the explanandum from the explanans (in explanation), and of the predicandum (what is to be predicted) from the predicans (the initial conditions and laws that allow for the prediction), for they allow for exceptions.

29. More than laws, however, it is the nature of causes that weights most on the “incompleteness” of explanations and predictions. Such “incompleteness” is often referred to the fact that initial conditions are highly complex systems, presenting a huge number of relevant factors and variables. However, if we understand the “incompleteness” of explanations and predictions only in terms of this complexity, we do not properly account for the difficulties involved in the attempt at explaining human actions and their consequences: in fact, our eyes and brains are much more complex than any markets and parliaments. Rather, the true reason why explanations and predictions in the social sciences are complex lies in the fact that the causes of social events are systems of interactions with a high level of “openness”.

30. The causes of social events, that is, are systems of interactions open to new information coming from outside, or else to endogenous information, and are therefore subjected to sudden innovations and changes. More particularly, the constant process of change in these systems of causes is related to: i) the fact that elements of knowledge are scattered among all social actors; ii) the emergence of unintended and unpredictable consequences of the actions of any individual; iii) the constant evolution in the preferences of any individual. Finally, the more the systems of interactions are “open”, the more numerous are the possible strategies for interaction and action, thereby increasing the number of possible unintended consequences.

31. If we want to explain or predict an action, we should take into account a huge number of constantly evolving factors: knowledge, aims, resources, and more generally the different perceptions of the situation by individual social actors. An astronomer or an ophthalmologist formulate their predictions (about the occurrence of an eclipse or the functioning of an eye) they take into account two systems that can be plausibly and without great risks be considered as “closed” (even though, in fact, they are not): they assume, that is, that such systems are always governed by the same dynamics. An expert in political affairs cannot do the same, for the behaviour of a number of electors is constantly subjected to new information that crucially influence it until the very moment in which any elector cast his vote.

32. These are the peculiarities that make any complete assessment of the causes of social phenomena difficult, if not impossible – thus turning explanations into sketches of explanations, and predictions into potential predictions. As a consequences, we have various “degrees of explanation” and different “degrees of prediction”, according to the variability and reliability of the laws and, above all, of the level of precision of the situational analysis through which we reconstruct initial conditions. The reliability of predictions, that is, is related to the degree of approximation of the ceteris paribus clause (“given these conditions, I predict that…”) upon which any attempt at predicting an event is based.

33. To sum up: explanations in the social sciences are mere sketches of explanations not only because there are factors (causes) that are implicit, although known in principle, but also and above all because in some theories part of these factors are not known to researchers, or to the scientific community. For, as in the case of the conditions influencing the behaviour of voters, by their very nature they cannot be completely ascertained.

34. The role of models The very nature of the laws and causes employed and appealed to in the social sciences is the key element to explain why – in the social sciences much more than in the natural sciences – models are extremely important. The huge quantity and continuous variability of human actions and their consequences, which constitute the very basis of the social sciences, call for patterns that allow for their intelligibility. Models aim at providing a sort of order within a given category of historical and social facts, by highlighting a typical plot of causes and laws. Examples: the models of “general equilibrium” or “perfect competition” in economics; Ferdinand Tönnies’ distinction between Gemeinschaft (community) and Gesellschaft (society), or Max Weber’s classification of authority into legitimate, traditional and charismatic, in sociology; and so on.

35. Such models are conceptual schemes and have a specific epistemological status: they are general and ideal, they refer to more or less wide categories of phenomena, but do not directly apply for the explanation of any specific event. Models are not laws: they cannot be employed to explain or predict specific events, and therefore they cannot be true or false. Rather, they have to be deemed – in every specific situation – more or less useful tools in order to direct the advancement of empirically testable hypotheses (either of explanation and prediction). They are tools, not targets in themselves; they are employed in order to achieve a scientific explanation. They do not represent something real, but provide a heuristics that might suggest what to look for within a given research field.