Economics, Positive Science and the Quest for Predictive Performance
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2011-05-12
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Ray, Jeffrey, Economics, Positive Science and the Quest for Predictive Performance (May 12, 2011). Available at SSRN: https://ssrn.com/abstract=2105691 or http://dx.doi.org/10.2139/ssrn.2105691
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This paper tracks the evolution of the subject area of positive economics from the contributions of John Keynes, Friedrich Hayek, Milton Friedman, and Karl Popper. Economics is said to be a “positive science” that can be used to predict the consequences of “changes in circumstances.” Like other scientists, economists need to be self-conscious about their research methodology. Keynes, Friedman and Hayek all attacked the problem of applying scientific methodology to economics from different perspectives. Although in some aspects their results were similar, some key distinctions often contrasted their teachings. This paper addresses these distinctions and concludes that a researcher’s perspective, as they develop and test economic theories, is influenced by the view of how they expect to implement the theories. An advocate for one theory, therefore, may observe the same experiment and come to completely different conclusions than an advocate of another theory observing the same experiment.
When viewed as a body of a substantive hypothesis, a theory is found to have a predictive power. Only factual evidence can prove the theory right or wrong. The only relevant test of validity of a hypothesis is to compare its predictions with experience. Scientific theories must be prohibitive in that they forbid by implication particular findings. As such, a theory can be tested and falsified, but never logically verified. The distinction Popper made is it’s not appropriate to infer that a theory can be verified through testing. But rather, test results merely indicate that a theory wasn't proven wrong and, as such, should be provisionally retained as the best available theory until it is finally discredited, or is superseded by a better theory. Since economics is said to be a science that is denied dramatic and direct evidence from conclusive experiments, the fact that theories can never be verified is particularly troublesome. It makes it hard to achieve a consensus for economic theories which tend to require economic metrics collected over time to support them. This renders the weeding-out of unsuccessful hypotheses slow and difficult. While economics may be a positive science, this paper contends it has inherent barriers caused by a scientific methodology that anticipates development of hypotheses that can predict future states, and be verified by controlled observations. The economy is a complex mechanism not suited to abstracting out aspects of the problem to support a focused investigation of potential remedies.