Philosophy of economics
Economic philosophy provides an account of the logical processes by which the intellectual discipline of economics has been constructed.
The following paragraphs illustrate the philosophical aspects of the processes of economics by their application to a selection of aspects of current economic theory. Explanations of the concepts referred to can be obtained via the economics index [1], and accounts of their historical development are available in the article on the history of economic thought.
The process of discovery
The process of discovery in economics usually starts with an insight as to which of the many interactions in the economic system are likely to be relevant to the matter under investigation. That is followed by the formulation and analysis of an imaginary system in which only those interactions are represented. The subject of that analysis is thus an abstraction in the literal sense of ignoring all but the chosen selection among the perceived aspects of reality. The interacting relationships that are ascribed to that imaginary system (or “model”) need not have any connection with reality: the only question with which it is concerned is how such a system would behave if it existed in reality. Answers to that question are then sought using deductive logic, sometimes assisted by mathematical analysis. At that stage, the process of discovery involves two conceptually distinct “worlds”: the model world, and the real world. In the real world, propositions can be true of false, but that distinction has no meaning in the model world, which is concerned only with the validity and consistency of its analysis.
The final stage in the process of discovery is an attempt to establish a connection between the model world and the real world by using the model’s analysis to predict the consequences of events in the real world. The process of making a scientific discovery is deemed complete if the use of the model results in better predictions than had previously been possible.
Thus the end-product of economics is the discovery of a way to make a useful estimate of the economic consequences of particular actions. But the content of economic theory is much broader than that: it also contains a variety of intermediate products that serve as tools in the process of discovery. Those intermediate products provide a framework or “filing system” that enables the economic system to be categorised and examined in an orderly way, and so enables models to be formulated . They include classifications, terminologies, and tautologies: matters that can be intellectually important without having any direct connection with reality. The distinction between those intermediate products and the end-products of economics is not always apparent, however, and confusion sometimes arises from the misleading practice of attaching the prefix “law of” to findings that do not qualify as scientific discoveries.
Microeconomic philosophy
Production
As an example, the statement that “the factors of production are land, labour and capital” is sometimes wrongly presented as an observation about the real world. In fact it is a definitional statement, amounting to no more than the proposition that all contributors to production other than human activity and natural resources are to be termed capital. The converse statement that capital (or land or labour) contributes to production is not a statement of fact but merely a tautology. In fact, economics has had little to offer by way of factual statements about production. Production processes have been grouped into categories according to the response of their outputs to the scale of their operations, and individual processes have been successfully modelled, but nothing useful has emerged that amounts to a useful factual statement about production in general. The so-called “law of diminishing returns” is a statement that certain types of production exist which, beyond some unspecified level of output, yield a successively diminishing increment of output for each further increment of an input. Other statements acknowledge that types of production also exist for which no such diminution occurs, some of which exhibit increasing returns to scale. (All three possibilities are embodied in a single equation, known as the Cobb-Douglas production function, which has been adopted as an assumption in many hundreds of economic studies. The Cobb-Douglas function is not , however, regarded as an empirically established scientific discovery: it is not claimed to be anything but a mathematically useful assumption that can be used to represent the production process in broader models of economic activity.) Other concepts that figure as diagrams and equations in the economics textbooks, such as the production-indifference function and the production possibility curve, are also intermediate products that are useful for organising thoughts and building models, and are not the statements about reality that constitute end-results of the discovery process.