DEVELOPMENT OF ECONOMIC SCIENCE - MAIN METHODOLOGICAL PROBLEMS AND RETROSPECTIVE APPROACH

1. DEVELOPMENT OF ECONOMIC SCIENCE- MAIN METHODOLOGICAL PROBLEMS AND RETROSPECTIVE APPROACH I. Definition of economics as science • Economics as science about natural economic laws • Point of reference: natural economic order (system) • Analogy to natural system and natural laws (laws of the nature; e,g classical mechanics) • Laws of economics as laws of market and competition • Capitalism as the economy based on (1) the market regulation, (2)private ownership and (3) free entrepreneurship) • Capitalism as the natural economic order; the so called methodologicalmonism • Capitalism versus other socio-economic orders

2. I.Definition of economics as science – cont. 2. Historical and institutional approach to economics as science • Economics as sociology of economic life (phenomena and processes) and socio-economic orders changing over time (Marxian/Marxist economics, historical school in economics) • Economics as the theory of evolution of economic system (institutionalism, classical (Veblenian) and neo-institutional (post-Veblenian) • Common development factor: key role played by the science (in Anglosaxon meaning of this word) and technology in the economic development (technological determinism vs. economic determinism)

3. I.Definition of economics as science – cont. 3. Lionell Robbins’ definition based on the category of scarcity • Point of reference: physical scarcity of resources and goods vis-a-vis unlimited (endless) character of human needs • Features of resources (production factors, capital kinds) : • Physical scarcity, • Diversified productivity, • Possibilities of alternative use • Traditional and „non-conventional” (modern) production factors /capital kinds: social capital, knowledge, political capital, institutional capital

4. I.Definition of economics as science – cont. 3. Robbins’ definition based on the category of scarcity – cont. • Features of needs: • Unlimited character, • Full definiteness (needs as data) • Orderliness (consistency of preferences) as necessary for microeconomic rationality • Relative importance changing over time (owing to learning by doing or schooling) • Economics as an abstractive (pure) logic of choice, as science on alternative manners of using scarce resources for producing goods which satisfy unlimited (endless) needs • Economics deals exclusively with relations between goals (needs) and means serving to achieve those goals

5. I.Definition of economics as science – cont. • Imlications of perceiving economics as an abstractive (pure) logic of choice • ignoring (undermining) social and institutional factors influencing the economic development (New Institutional Economics: fundamental significance of those factors for contemporary economies and societies; D.Acemoglu and J. Robinson: Why nations fail. The Origins of Power, Prosperity and Poverty) • Economics as a purely positive science, as a science free of any axiology and value judgments • Positive economics versus normative economics

6. I.Definition of economics as science – cont. • 4. Economics as a domain of applied mathematics • L.M.E. Walras’ approach Economics as the theory of general economic qulibrium • Definition of T. Koopmans (activity analysis) Economics as science dealing with optimal distribution (allocation) of scarce resources which are at the disposal of enterprises • Definition of P.A. Samuelson Economics as science onconditions of equlibrium(in different scale) andconditions of stabilityof economic systems (in other words: economic statics and dynamics) • mathematical economics

7. I.Definition of economics as science – cont . 5. Attempts at widening the research domain of economis as science (the so called economic imperialism) • „Old” imperialism: each sphere of social life is subject to market-type performance and manner of human behavior – e.g. family, religion, philantropy and charity (G. Becker, Nobel Prize winner in economics, 1993) – and is characterized by the same motives (drivers) of action as purely economic choices: selfishness, greed, propensity to defraud (cheat), utility maximization Also called „deep” imperialism

8. I.Definition of economics as science – cont • 5. Attempts at widening …. (the so called economic imperialism) • „New” imperialism : (Mäkki, 2000): appriopriating by the science of economics of domains (research areas)which are specific for other social sciences; e.g. new institutional economics(e.g. new institutional economics) Also called „broad” (or outward) imperialism (economic theory of law, state, politics, democracy and others) Economic imperialism vs. cooperation with other social and natural sciences (behavioral economics and finance,, evolutionary economics, ecological economics, physico-economics, psychological economics and others)

9. II. Neo-classical concept of economic science – main components of methodological paradigm of ENC) • Methodological individualism • Behavioral dimension (concept of homo economicus , utility maximization hypothesis; UMH) • References of Hoe/UMH concept to important streams in economics and philosophy • Philosophicalroots: hedonism, utilitarianism (J. Bentham) • Historical roots : selfishnessand greed as main common instincts (drivers) of human social, including economic ones, actions (A. Smith (”grounding father” of economics a science) • Selfishness, greed and other instincts (procreation, safety, social recognition etc.) as both (1) innate and (2) socially determined instincts of the people • Smithonian dualism in perceiving the human nature

10. II. Neo-classical concept of economic science… 1. Methodologicalindividualism (cont.) • Cognitivedimension: necessity to identify (to seek for) microeconomicfoundations of alleconomicphenomena and processes • relation: microeconomics – macroeconomics • Cognitiveindividualismvs. cognitiveholism and cognitiverealism(orcriticalrealism – Lawson) • Criticalrealism and theH.Oe./HMU concept • Ideologicaldimension of MI(economicfreedom, Hayek), • economicfreedomisfundamental for (1) microeconomicrationality, (2) overallefficiency of market economy(in accordancewiththeconcept of methodologicalmonism) and (3) effectiveness of market as a regulatory (mechanism • Economicfreedom and market structure, trade unions and state

11. II. Neo-classical concept of economics – cont. • Methodological individualism – cont. • General neoclassical model of microeconomic behavior: optimization of human beings’ economic activitties • Conditional maximiztion of objective function (utility function) • Choice of best alternative from available and effective solutions • Static and dynamic optimization – economic statics and economic dynamics

12. II. Neo-classical concept of economics – cont. 1. Methodologicalindividualism – cont Criticism of homo oeconomicusconceptandits modificationsincontemporaryeconomics (A. Sen, J.K. Arrow, H.Simon and other) • Generally: criticism of methodologicalindividualism (MI): MIversusmethodologicalholism and cognitiverealism • UMH does not have a satisfactoryempiricalfoundation (intentionalcharacter of UMH, intentionalversusactualrationality) • UMH versus a commonoccurrence of non-selfishbehaviors and activities,

13. II. Neo-classical concept of economics – cont • H.Oe. and UMH inthelight of informational and cognitive/mentalconstraints • H.Oe. and commonoccurrence of co-operativeactivities(H.Oe. versusHomo cooperativus – selfishness and competitionversusco-operation • H.oe. versusempathy, charityetc. (emphathyand charityinthecontext of extendedunderstanding of rationality) • H.oe./UMH versusbehavioral/psychologicaleconomics:theory of perspective(Kahneman (Nobel Prizewinnerin 2002)/Tversky) • Utilityeverdepends on thepoint of reference (perspective), ambigouscharacter of utility and process of itsmaximization • Aversion to loss and risk as main driver of humaneconomicactions (losshurtsmorethanthegainenjoys)

14. II. Neo-classical concept of economics – cont. Mainmodifications of HOeconcept • H.Oe. as heuristic (cognitive) concepthavingthestochasticcharacter • H. Simon- concept of boundedrationality (satisfycinginstead of maximizationoroptimizationbehavior) • H. Leibenstein – a selectivelyrational men („efficiency gap” and itssources); • REMM (Jensen/Meckling) - resourceful and evaluating homo oeconomicus • Evolutionaryeconomics – routinevs. optimalchoice(routineandchange/innovationas socialcounterpartsofgenotypeandmutation)

15. II. Neo-classical concept of economics – cont. • Homo sustinens (Siebenhüner): hypothesis of survival of human species and sustainability of human civilization vs. UMH. HS as a microeconomic foundation of Sustainable Development theory and ecological economics • Homo oeconomicus vs. socially embedded human being (microeconomic rationality in the approach of new economic sociology) • (M. Granovetter) social embededdness means that relations between economic subjects are embedded in actually existing social nets and not in abstractive ideal markets • social embededdness concept as a reaction to economic imperialism

16. II. Neo-classical concept of economics – cont. 2. Equlibrium concept in w NCE • Equlibrium as heuristic (cognitive) fiction and a real feature of economic phenomena and proceses • Equilibrium versus tendency to equilibrium • Economic statics and dynamics vs. static and dynamic equilibrium • Microeconomic and macroeconomic equilibrium • Macroeconomic equlibrium versus macroeconomic stabilization (low and controlable inflation, full employment, equlibrium of public finance, external equlibrium

17. II. NCE concept of economics – cont. 2. Concept of equilibrium in NCE– cont. • Market equilibrium: partial and general(on final goods markets, intermediate goods and production factors markets, financial markets) • General equilibrium: static and dynamic (equlibrium growth) • Equlibrium vs. disequlibrium (controverses between NCE and Keynesian economics) • Equlibrium as a stochastic category

18. II. Neoklasyczna koncepcja ekonomii c.d. 3. Critical rationalism (C. Popper) • Genesis: – philosphy of positivism as a commonly accepted general methodology of science • Positivism: observation of empirical reality as the only source of true knowledge and reliable base of scientific cognition • Critical realism (falsyphicationism) as criterion for appraisal of „scientific character” of generalizations (hypothesis, models, theories etc.) of economic science

19. III. Criteria of progress/development of economic science • 1. Criterion of capability to explain the nature of economic phenomena and processes (criterion of the so called scientific realism) • 2. Social utilitarity criterion • 3. Criterion of predictivity power (Friedman) • 4. Mongin’s – Laudan’s criterion of effectiveness (the so called instrumental realism): criterion of higher (increasing with respect to „competitive theories” ) effectiveness in solving scientific problems

20. IV. Main criteria of distinguishing streams (schools) in economics 1. Interpretation of economic categories and laws 2. Market and state as mechanisms of economic coordination and optimization (in macroeconomic scale) 3. Manner of interpretation of utility/value/price of goods, of sources (origins) of social welfare and economic growth factors

21. IV. Main criteria of distinguishing streams (schools) in economics • Interpretation of economic categories and laws a) Natural vs. historical (natural economic system vs. systems changing over time) b) Deterministic vs. stochastic c) Causal vs. functional d) Economics as a science dealing with economic models and theories describing and explaining in a still better way economic reality and not searching for objective economic laws or principles e) Economics as a science constructing subsequent research paradigms (T. Kuhn) and programs (I. Lakatos)

22. Market and state as regulation mechanisms: paradigm of market vs. paradigm of state • The nature of paradigm of market • Economic entities take decisions based on the observation of changing market prices • Markets are characterized by the feature of alocative effectiveness • There occurs a constant tendency to market equilibrium • Providing that the equlibrium is effective, there takes place the maximization of social welfare (Pareto optimum)

23. Market and state – cont. • Paradigm of market– perfectly competitive (ideal) market as the point of reference • Real economic life: occurence of numerous market failures • The very nature of market failures: impairing (distortion) of conditions of (1) perfect competition and (2) system of private property rights • Most important and common types of market failures: monopolies /oligopolies, external effects, public goods, imperfect information (knowledge), uncertainty and risk • General and sector-specific market failures • Market failures vs. state failures

24. Market and state … – cont. • Market failures – the need of public regulation • Public regulation as direct impact of the state upon individual economic entities • Public regulation and other domains of state economic activities (macroeconomic policies, structural (pro-growth) policies and other • Public regulation does not contradict the paradigm of market • Normative and economic interpretation of public regulation • Diversification of market failures results in the necessity of diversifying methods and instruments of public regulation

25. Market and state … - cont. • Point of departure for the paradigm of state: permanent incapability of market mechanism to maximize the social welfare due to (among others) : • Lacking tendency towards the macroeconomic equlibrium (Keynesianism) • Need for direct defining and implementing by the state od important social objectives (institutionalism, historical school, mercantilism) • Tendency towards „anarchy of production” and waste of economic resources (Marxist economics) • State regulation as quasi-market