Economics and Philosophy of Economics
Philosophy of economics consists of inquiries concerning: rational choice; the appraisal of economic outcomes, institutions and processes; and the ontology of economic phenomena and the possibilities of acquiring knowledge of them.
Although these inquiries overlap in many ways, it is useful to divide philosophy of economics in this way into three subject matters which can be regarded respectively as branches of action theory, ethics (or normative social and political philosophy), and philosophy of science. Economic theories of rationality, welfare, and social choice defend substantive philosophical theses often informed by relevant philosophical literature and of evident interest to those interested in action theory, philosophical psychology, and social and political philosophy. For an overview of economics and ethics with some discussion of rationality, see Hausman and McPherson (2006). Questions concerning rationality and welfare will not be discussed in this essay, which will focus on epistemological and ontological issues concerning economics.Contemporary economics consists of many schools and many branches. Even so-called “orthodox” or “mainstream” economics has many variants. Most mainstream economics is applied and relies on only rather rudimentary theory, but there is also a good deal of theoretical inquiry. Both theoretical and applied work can be distinguished as microeconomics or macroeconomics.
Microeconomics focuses on relations among individuals (though firms and households often count as honorary individuals and consumer demand is in practice often treated as an aggregate). Individuals have complete and transitive preferences that govern their choices. Consumers prefer more commodities to fewer and have “diminishing marginal rates of substitution” - i.e., they will pay less for units of a commodity when they already have lots of it than when they have little of it.
Firms attempt to maximize profits in the face of diminishing returns: holding fixed other inputs, with more units of one input output increases, but at a diminishing rate. Economists idealize and suppose that in competitive markets, firms and individuals cannot influence prices, but economists are also interested in strategic interactions, in which the rational choices of separate individuals are interdependent. Game theory is devoted to the study of strategic interactions. Economists model the outcome of the profit-maximizing activities of firms and the attempts of consumers to best satisfy their preferences as an equilibrium in which there is no excess demand on any market. What this means is that anyone who wants to buy anything at the going market price is able to do so. There is no excess demand, and unless a good is free, there is no excess supply.Macroeconomics grapples with the relations among economic aggregates, focusing especially on problems concerning the business cycle and the influence of monetary and fiscal policy on economic outcomes. Most mainstream economists would like to unify macroeconomics and microeconomics, but fewer are satisfied with the attempts that have been made to do so. Econometrics is a third main branch of economics, devoted to the empirical estimation, elaboration, and to some extent testing of specific microeconomic and macroeconomic models. Among macroeconomists, disagreement is much sharper than among microeconomists or econometricians. In addition to Keynesians and monetarists, “new classical economics” (rational expectations theory) has spawned several approaches, such as so-called “real business cycle” theories (Begg 1982, Minford and Peel 1983, Carter and Maddock 1984, Hoover 1988, Sent 1998). Branches of mainstream economics are also devoted to specific questions concerning growth, finance, employment, agriculture, natural resources, international trade, and so forth. Within orthodox economics, there are also many different approaches, such as agency theory (Jensen and Meckling 1976, Fama 1980), the Chicago School (Becker 1976), and public choice theory (Buchanan 1975, Brennan and Buchanan 1985).
In addition to mainstream economics, there are many other schools, but none is nearly so influential. Austrian economists accept orthodox views of choices and constraints, but they emphasize uncertainty and question whether one should regard outcomes as equilibria, and they are skeptical about the value of mathematical modeling (Mises 1949, Rothbard 1957, Dolan 1976, Kirzner 1976, Mises 1978, Buchanan and Vanberg 1979, Mises 1981, Wiseman 1983). Traditional institutionalist economists question the value of abstract general theorizing (Veblen 1898, Dugger 1979, Wisman and Rozansky 1991, Hodgson 2000). They emphasize the importance of generalizations concerning norms and behavior within particular institutions. More recent work in economics, which is also called institutionalist, attempts to explain features of institutions by emphasizing the costs of transactions, the inevitable incompleteness of contracts, and the problems “principals” face in monitoring and directing their agents (Williamson 1985, Maki, Gustafsson, and Knudsen 1993). Marxian economists traditionally articulated and developed Karl Marx's economic theories, but recently many Marxian economists have revised traditional Marxian concepts and themes with tools borrowed from orthodox economic theory (Morishima 1973, Roemer 1981, 1982). There are also socio-economists (Etzioni 1988), behavioral economists (Winter 1962, Ben-Ner and Putterman 1998, Rabin 1998, Camerer 2003, Camerer, Loewenstein, and Rabin 2003), post-Keynesians (Kregel 1976, Dow 1985), and neo-Ricardians (Sraffa 1960, Roncaglia 1978, Pasinetti 1981). Economics is not one homogeneous enterprise.
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