The facts of the social sciences
Who is F.A. Hayek?
- Hayek was a 20th century Austrian economist
- He work on a variety of issues, from the theory of the trade cycle to monetary theory, from epistemology and philosophy of economics to legal theory, from political philosophy to the history of ideas
- He was awarded the nobel prize in 1974 for these contributions
Why did he write this paper and who were the targets?
- Starting in 1937 (Economics and Knowledge) Hayek started noticing that economics was gravitating more and more towards methodological formalism. He though this was due to the uncritical adoption of the (supposed) methodological principles of the physical sciences
- Thus Hayek's criticism of behaviorism, the belief that human beings respond to external stimuli in completely passive and therefore exactly predictable ways
- Hayek adopted a sophisticated formulation of methodological dualism (later he rejected this notion thanks to the influence and Popper and shifted towards his own formulation of methodological universalism based on the notion of explanation of the principle)
The methodology of the social sciences
- What do we mean by "social sciences"?
- Demography vs economics, law, sociology, linguistic etc.
- The origins of scientific knowledge in the social sciences
- The role of introspection: We know more about human behavior thanks to the fact that we intuitively understand our fellow men than we would if we were to merely observe them as if they were atoms
- Example: The Marxian and the train station
- One of the most important problems in the social sciences is that of classification
- Individual things, facts, and events do not exist out there
- In the social sciences, the things are what people think they are
- It's not physical properties that matter, but the relationship between objects (even non existing objects) and the mind of individual agents. As social scientists, we must impute these meanings in order to make sense of our observations
- Take money: the notion of money (universally/generally accepted medium of exchange, store of value) must exist in the mind of the social scientist before he can ever identify it
- Of course, the human mind is fallible, thus we can make mistake
- The monology assumption: the LOGICAL structure of the human mind is the same across cultures, ethnicities, etc.
- Human action implies the universal notion of purposefulness (means-ends, causation, time, etc.)
- Praxeology as "only a kind of logic." We can derive all of the fundamental laws of economics starting from the notion of choice.
- Derive the law of demand.
- Once we have classified human behavior and the emergent results of human behavior in society (exchange, conflict) we can start to look outside the window and make sense of it
- This is where timology comes in (interpretation of human events through the imputation of meaning onto the minds of the agents)
- What is a battle? What is a revolution? Can we observe a government?
- What we refer to as "historical facts" are really just theories
- Social theory is EPISTEMOLOGICALLY and LOGICALLY prior to historical experience and therefore analysis
- There is no such thing as historical analysis without theory. There is only untested and tested (logically and empirically) theories
- A theory that has been so derived can never be falso (as long as it does not contain logical inconsistencies) but merely irrelevant for the purpose at hand
The economic approach
Who is Gary Becker?
- Arguably the greatest social scientist of the second half of the 20th century
- Like Hayek, wrote on a variety of issues that were thought to be outside of the scope of economics proper (racial discrimination, the family, crime, addictive behavior, fertility, politics, and so forth)
- He was awarded the nobel prize in 1992
- Champion of "economic imperialism" and of the economic approach to human behavior
What is the economic approach?
- How to define economics?
- By its scope (Coase, Knight, Buchanan?): 1) Allocation of material goods; 2) the market
- By its method (Mises, Becker, Tullock)
- Beyond homo economicus
The three fundamental assumptions of the economic method
- Maximizing behavior
- Market equilibrium
- Fixed (given) preferences
- What economics does not assume: perfect information, superhuman rationality, perfect foresight
Maximizing behavior
- This is the same as purposeful behavior from above. People strive to achieve goals. In doing so the have to make choices.
- Maximization does not require rationality. But as a first approximation, we should not attribute peculiar forms of behavior to irrationality
- Problem: what do we need by rationality. Instrumental vs. epistemic rationality.
- Instead, when we do observe peculiar behavior we should investigate further. Most likely, we ignored or failed to identify some major cost associated with the course of action we initially predicted
- In fact, animals maximize too. Are animals rational?
- This means the same as that people respond to incentive. Is the opposite true?
- Mayweather vs Mcgregor
Market equilibrium
- Extending the notion of markets
- What do we mean by equilibrium
- Prices, shadow prices, and costs
Fixed (given) preferences
- Defining preferences
- Not the common meaning of the word
- "Underlying preferences ... over fundamental aspects of life": Health, prestige, sex, etc.
- Why don't individual maximize happiness?
- Do they maximize on "life"? Is all death suicide, in some sense?
- The importance of tradeoffs
Implications
- The implications of these three principles are far reaching
- The law of demand
- The equimarginal principle
- The law of supply
- Important: economics deals with human action/choice. Everything that is outside of this realm does not belong to economics (is not to be explained by economics). It can picture into the context of economic analysis and influence the equilibrium outcome.
- Are the three assumptions redundant?
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