Carl Menger is known as the founder of the Austrian School of Economics. His “Principles of Political Economics” (1.871) is one of the most important contributions to the marginalist revolution along with the works of Jevons and Walras. Nevertheless, as Hayek highlights, the method used by Menger is radically different from that of his other colleagues. Indeed, this austrian economist uses a purely subjective analysis, always taking in present the factor of time in his postulates. In this manner Menger made important contributions with the theory of goods of different orders (wich would constitute the base for the future theory of capital and interest of Böhm-Bawerk), and also with his conception of the spontaneous origin of social institutions, such as the money, the law and the languagues, which emerge from a spontaneous (not deliberate) order by economic agents in their search of individual interest.

The Historic School of Germany, represented by Gustav Schmöller, made a fierce criticism on Menger´s methodology, denying the existence of universal economic laws and the economic theory on the whole. What really exist, according to Schmoller, are laws of relative validity that explain economic phenomena according to its concrete circumstances of time, place, etc where those phenomena act. This fact forces Menger to dedicate all his efforts to the question of methodology in social sciences. It is the origin of the called “Methodenstreit” or controversy of the method, which would become one of the most relevant episodes in the history of economic thought.

In 1.883, Menger publishes his “Investigations into the Methods of the Social Sciences”. This work results specially interesting for the purpose of our inquiry, because it offers a replica that reveals the logical inconsistencies of original positivism which, as we have seen before, was strongly influenced by the inductivism of empirical and historicist kind.

Menger establishes two kind of knowledges to afford the study of social phenomena: individual knowledge and general knowledge. The first one tries to obtain the nature of phenomena and its relation within a concrete space-time. On the other hand, the general knowledge has the task of studying the forms in which those phenomena repeat themselves in a change of their relations. Thus, treating the different kinds of phenomena, we get certain typical relationships, such as relationships between supply and demand (a consecutive increase in the supply of a good will suppose a reduction in the price of that good); relationships in capital markets (a change in temporal preference which leads agents to save more money will suppose a reduction of the interest rate), etc.

This regularity in the succession of phenomena belongs to the realm of general knowledge, so as to discover economic laws.

Certainly the empirical knowledge is necessary so as to understand concrete phenomena. But Menger warns that without the general knowledge (typical relationships of phenomena) the economists will be unable to get any knowledge about the real-world phenomena, annulling any chance of prediction or domain over them.

Given the formal nature of the phenomena, Menger defines the purpose of the historical sciences to the study of concrete phenomena and events and specific institutions within a particular time and space.

For its part, the aim of the theoretical sciences will be to study social phenomena (general) and extract the laws of succession and coexistence.

Defined both kind of sciences, Menger lays down two basic orientations to attend the theoretical research: exact orientation and empiric- realistic orientation.

Realistic orientation seeks to establish phenomena in a purely empiric way. Nevertheless this orientation can not formulate rigorous laws. We need the exact orientation, whose purpose is the “determination of strict laws of phenomena, of regularities in the succession of phenomena which do not present themselves to us as absolute, but which in respect to the approaches to cognition by which we attain to them simply bear within themselves the guarantee of absoluteness.” 

Despite this classification of sciences according to its purposes, the problem arises when the economists from the Historical School of Germany tries to confuse both sciences (historical and theoretical) or think there is a substitutability relation among them. Menger demonstrates that before describing any particular phenomenon we need a previous theory . This is to say, because we know theoretically social phenomena and their general laws, we can attend to the concrete phenomena.

Accordingly, Menger asserts that only by mean of the logical deduction we can get the theoretical knowledge that enables us to understand real phenomena. This premise collides with inductivism raised by some authors already mentioned above, as Francis Bacon, Augusto Comte or John Stuart Mill. In this regard, Menger points out the following:

“The error at the basis of this view is caused by the failure to recognize the nature of the exact orientation of theoretical research, of its relationship to the realistic, and by applying the points of view of the latter to the former. (…) Testing the exact theory of economy by the full empirical method is simply a methodological absurdity, a failure to recognize the bases and presuppositions of exact research”. 

Gustav Schmöller and his colleagues of the Historical School seek to implant the historical method and overthrow the analysis offered by the theoretical economy. Nevertheless Menger, although acknowledges that the study of history is essential, he explains that historical method can not substitute to theoretical economy, precisely because of the nature of social phenomena, which are in a continuous state of change and evolution. Accordingly, following Menger´s argument we can give two important objections to the Historical School of Germany:

a) First, if social phenomena are in a continuous change ¿when will history conclude its observations to let the theory act?

b) And secondly, ¿is it really possible to make any investigation without the assumption of certain criteria, views or, in general, previous theories of the researcher?

Indeed. Menger demonstrates that historical facts are useless if economists do not possess a prior theoretical framework to interpret and logically extract from them universal laws that explain social phenomena.

The work of Menger shows some inconsistencies of the primary positivism influenced by inductivism and historicism. The history of economic thought gave the triumph to the austrian economist and a new field of research was opened to the next generation of scholars.

This is a second fragment of my research project at the Institute of Economic Affairs in London.

After Popper, other authors treated the question of how scientific knowledge grows, trying to advance into the formalism of the critic rationalism and thus to renew logical positivism. In particular, there are two notable authors: Thomas Kuhn and Imre Lakatos.

In the preface of his “Structure of scientific revolutions”, Kuhn acknowledges the serious problem that social scientists have in their clashes among the accepted scientific methods. The main input of this american physicist is that science does not grow in a cumulative process of individual discoveries or inventions. In addition, he asserts that scientific progress is achieved through scientific revolutions, which are built around the concept of paradigm. Kuhn defines paradigm as “universally recognized scientific achievements that, for a time, provide model problems and solutions for a community of researchers”. 

Following to Popper, Kuhn criticizes the inductivist method of some philosophers like Bacon. He argues that just the previous theory can assure the future success of the scientific research. Thus, it is clear that Kuhn´s approach gives an important role to theory, questioning the original roots of positivism. In fact, he also develops a critic on Popper´s system:

“No process yet discovered by the historical study of scientific development appears in anything to demonstration methodological stereotype of falsification, by direct comparison with nature. This observation does not mean that scientists do not reject scientific theories or that experiment or experience are not essential in the process where they act. It means (which is after all a central point) that the act of judgment which leads to scientists to reject a previously accepted theory, is always based in more than a comparison of this theory with the world.” 

Kuhn does not believe in Popper´s falsification because he acknowledges that scientists might create a set of ad hoc auxiliary hypothesis that protect the main theory.

Therefore, the scientific revolution emerges as an episode of not cumulative process in which an old paradigm would be substituted by another new paradigm. The arrives of the new paradigm has important implications in the scientific research, due to the changes that scientists face in phenomena already studied and observed. Now they learn to observe with new roots and techniques. But also, and this is key, the new paradigm brings as consequence a change in the perception of the map of concepts. In effect, data are not unequivocally stable. Later we will demonstrate that this idea is specially relevant for the field of social sciences, with the aim of linking to Kuhn with the approach of some authors of the Austrian School.

The third relevant philosopher to considerate is Imre Lakatos, who tried to conciliate both proposals of Popper and Kuhn. Lakatos agrees with Popper in his reject to inductivism, though he acknowledges that his falsification system is not enough to resolve the problem of demarcation between scientific knowledge and pseudoscience. So, basing in Kuhn, Lakatos demonstrates that scientists elaborate auxiliary hypothesis to pass the test. Instead of possible refutations to a theory, scientists talk of anomalies. Nevertheless, Lakatos does not support Kuhn´s thesis,considering that scientific revolutions assume the change to other set of irrationals convictions, to the extent that these have not been tested. Thus, Lakatos brings his model: methodology of scientific research programmes (SRP). Indeed, the success of scientific knowledge is not based in an isolated hypothesis but in a SRP. The SRP is constituted by a hard core of ideas (equivalent to Kuhn´s paradigm) and a protective belt of auxiliary hypothesis. Also, SRP´s heuristic (or machinery) let it correct possible anomalies. Lakatos finds examples of SRP in Einstein´s theory of relativity or in marxism. Both have a hard core and a protective belt, and also machinery to solve the problems. Defined the SRP, Lakatos distinguishes sharply between progressive SRP and regressive SRP. The first one shows a theory which discovers new facts that before were totally unknown. In contrast, regressive SPR theories serve only to accommodate already known facts. Marxism was never capable of successfully predict any fact , and it has been forced to continually create auxiliary hypothesis so as to explain the events that were happening.

Said this, Lakatos conceives that the true scientific revolution arises from tow SPR models. Faced with instant rationalization of popperian solution and the sudden and irrational change of paradigm of Kuhn, Lakatos speaks of a substitution (in time, not immediate) of a regressive SPR to a progressive SPR.

Friedman´s Methodology of Positive Economics.

After this brief review, we are ready to analyze the main work to the defense of positivism within economic science. This work is “The methodology of Positive Economics” by Milton Friedman. In this essay, Friedman introduces his inquiry distinguishing between “positive economics” (study what the economic science is) and “normative economics” (study what the economy should be, this is to say, a set of rules to get an end). The confusion among both approaches leads to Friedman to consolidate the concept of positive economics, considering that “what is” must be independent of any ethic judgment about “what should be”.

Friedman defines positive economics as a “system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields.” 

Thus, positive economics must be understood as an purely objective science. While Friedman admits that economics studies human beings and that the researcher is both observer and observed (following the idea of Max Weber), for him these considerations are not important. The goal of positive science is the development of a theory or set of hypotheses that yields significant predictions of not yet observed phenomena.

Regarding to the concept of theory, it would be constituted by two elements: first, a language destined to foster systematic and organized reasoning methods; second, a set of substantive hypotheses designed to abstract essential phenomena from a complex reality.

As a language, the theory is constituted as a set of tautologies, a system to organize empirical data and facilitate its comprehension. That is to say, that categories are logic and well classified. Friedman gives a good example with the categories of supply and demand, which are basic so as to explain relative prices of products and factors of production. To ensure that this dichotomy is useful, empiric research must find a list of its forces, which must be clearly distinguished for the case of supply and for the case of demand. In those markets (such as speculative markets) where the empirical evidence can not accomplish a clear distinction of these forces, then, the categories of supply and demand would not be useful.

As a set of substantive hypotheses, theory is tested by its power of prediction for the kind of phenomena that it tries to explain. That is why only the factual evidence can prove whether a theory should be accepted as valid or whether on the contrary must be rejected. Accordingly, “the hypothesis is rejected if its predictions are contradicted (“frequently” or more often than predictions from an alternative hypothesis); it is accepted if its predictions are not contradicted; it is accepted if its predictions are not contradicted (…) Factual evidence can never “prove” a hypothesis; it can only fail to disprove it, which is what we generally mean we say, somewhat inexactly, that the hypothesis has been “confirmed” by experience.”

It may be noticed the great influence of Popper in Friedman´s thesis. Certainly this economist tries to be prudent when he considers the difficulty of experimenting in social sciences, precisely because of its peculiar nature. Nevertheless, as before mentioned, these differences are only differences of extent. To Friedman, the problem of the logical interpretation of facts (pointed out by Kuhn) is not important and he regrets the return to the tautological and formal analysis of some economists. In summary, a theory is not explained by the realism of its assumptions, but by the empirical testing of these ones. For instance, the hypothesis of profit´s maximization from entrepeneur is not true because of it emerges from a logic deduction, but because the factual evidence do not disprove it.

The work of Friedman shows the essentially positivist character of the methodology which is applied in economic science nowadays.

En los últimos días se ha generado una gran expectación en todos los medios de comunicación nacionales e internacionales acerca de la persona que fuese a relevar a Ben Bernanke en la presidencia de la Reserva Federal de los Estados Unidos (la Fed, para los colegas). Pues bien, después de ardientes especulaciones, debates televisivos, reportajes de prensa y teorías conspiratorias, el presidente Obama por fin ha hecho su propuesta a la sucesión de Bernanke: Janet Yellen, naturalmente.

Janet Yellen es la persona idónea para desempeñar las funciones de presidencia de la Reserva Federal. Y no digo esto precisamente por el curriculum vitae de la señora Yellen, el cual es realmente sorprendente (¡incluso está casada con un Premio Nobel de Economía!), sino porque va a continuar con la misma tendencia que Ben Bernanke y Alan Greespan en la política monetaria estadounidense. Es decir, Obama jamás habría propuesto a nadie que pudiese romper con el tono expansionista de la política monetaria y mucho menos comprometer o cuestionar el papel de la Reserva Federal como monopolio de la emisión de moneda e institución competente para la fijación de los tipos de interés, naturalmente.

Una de las virtudes que más se han destacado de la señora Yellen es su preocupación y dedicación por el problema del desempleo. Esta virtud no es más que un cliché que nos recuerda que la Reserva Federal tiene un mandato dual, esto es, que para la fijación de los objetivos de política monetaria, tienen la misma importancia el objetivo de inflación como el objetivo de empleo y crecimiento económico. Por ello resulta curioso cómo en cambio, con respecto a los presidentes del Banco Central Europeo (BCE), la virtud que a menudo se suele destacar, en la prensa, es su clara preocupación por la inflación. Y es que el BCE tiene un mandato prioritario, es decir, que teóricamente el objetivo prioritario es la estabilidad de precios frente a cualquier otro. Sin embargo en la práctica estamos viendo cómo Mario Draghi, el actual presidente del BCE, está manteniendo una política expansiva a imagen y semejanza de su homólogo en Estados Unidos. Eso sí, se hace un poco más de rogar por su supuesto compromiso al objetivo de inflación.

Dicen que la señora Yellen predijo el boom inmobiliario. No debería sorprenderle a nadie, pues la institución que ella representa es una de las responsables directas de la crisis financiera. Son las políticas monetarias de expansión del crédito las que inducen una sobreinversión que no está respaldada por ahorro real. La reducción artificial de los tipos de interés envía señales erróneas al mercado, ya que los empresarios observan que aparentemente existen más recursos financieros disponibles (aunque el ahorro real no se haya incrementado, sino más bien todo lo contrario). De esta manera, los empresarios se lanzan a invertir en proyectos que precisan de capital y que, por alocados que sean, son fácilmente financiables, dado que la oferta monetaria se ha incrementado tanto que los tipos de interés reales son negativos. Asimismo, los consumidores se lanzan a pedir créditos al consumo y comienzan a endeudarse progresivamente.

Todo marchaba bien mientras siguiera abierta la barra libre de la liquidez. Sin embargo, la señora Yellen sabía bien que la situación no podía mantenerse. Pero a pesar de ello…¿cuál es su receta para la recuperación económica? Más crédito, dinero fácil y endeudamiento de un país que actualmente se encuentra en suspensión de pagos y con el cierre de su administración.

Contamos por tanto con una keynesiana en la presidencia de la Reserva Federal, naturalmente. Su colega Paul Krugman no estará descontento con la elección, aunque él no confía tanto en la política monetaria y prefiere una intervención del Estado a través de la política fiscal expansiva. No obstante, una de las recomendaciones de Krugman que me gustaría recordar (aparte de sus enseñanzas sobre las bondades de la economía de guerra), es cuando en el año 2001, con la crisis estadounidense de las TIC´s, pidió crear un boom artificial para que la economía no se ralentizase.

Por todo ello estoy seguro que, a la vista de las recetas propuestas por Yellen, el economista Krugman podrá ponerse de acuerdo con ella para crear otro nuevo boom y sentar las bases de otra crisis financiera, naturalmente…

This is a small fragment of my research project, developed during my research internship at the Institute of Economic Affairs in London.

The Positivist Model and Popper´s contribution:

 We can define “positivism” in a broad sense like the school of thought which establishes that only the scientific knowledge is that one true knowledge. According to this assertion, every knowledge must be analyzed and proved against experience, so as to consider its quality of “scientific” or not.

In this way, several methodological propositions arose during the nineteenth century, highlighting authors like Auguste Comte and John Stuart Mill, maximum exponents of empiricism. In addition, in the twentieth century we can point out other important authors like Bertrand Russell or Ludwig Wittgenstein, whose works inspired the constitution of “The Vienna Circle”. This group of intellectuals developed a great influence over the positivist logic, with the goal of establishing one single and true method for all sciences, which is no other but the experimental method own of the natural sciences. The rest, they say, is pure metaphysic. This is the origin of the called “methodological monism”.

However, this initial positivism was essentially influenced by the inductivism. It will be in 1.934 when a young Karl Popper publishes his “Logic of Scientific Knowledge”. In this work, Popper focus on a key question: how does scientific knowledge grows? The main task of the logic of scientific knowledge is to study the process (method) whereby the researcher lays down a set of hypothesis and after that, he proves them against the experience through the observation and experiment. Said this, Popper asserts that some people think the empiric sciences can only be those characterized by the inductivist method. The logic of all scientific knowledge is equal to inductivism:

“It is usual to call an inference inductive if it passes from singular statements (sometimes also called particular statements), such as accounts of the result of observations or experiments, to universal statements, such as hypothesis or theories.”  

 Despite the weight of inductivism in the positivist logic, Popper refuses it. As he follows:

“Now it is far from obvious, from a logical point of view, that we are justified in inferring universal statements from singular ones, no matter how numerous; for any conclusion drawn in this way may always turn out to be false: no matter how many instances of white swans we may have observed, this does not justify the conclusion that all swans are white.”

 Then, refused the inductivism, Popper proceeds to explain his “deductive method of testing”. According to this philosopher, for each new theory advanced by the researcher, its conclusions are obtained by deductive logical means. Then, these conclusions might be compared with other relevant (scientific) statements in order to get rational relations between them (such as equivalence relations, compatibility or incompatibility, etc). Therefore, Popper establishes four main test lines in the course of analyzing a new theory:

1. Logical comparison of conclusions among them so as to guarantee its consistency.

2. Inquiry of the logical form of the theory, in order to determine whether it is empiric (scientific) or tautological.

3. Comparison with other theories and acknowledge whether or not the new theory supposes a scientific advance.

4. Finally, contrasting the theory with the results offered by empirical evidence.

Conclusions which are supported by theories that have already been accepted do not admit difficulties. Statements which are not derived from current theory, and more specially those that contradict it, are the statements that concern to the method of testing.

Accordingly, Popper defines two important types of decisions:

“If this decision is positive, that is, if the singular conclusions turn out to be acceptable, or verified, then the theory has, for the time being, passed its test: we have found no reason to discard it. But if the decision is negative, or in other words, if the conclusions have been falsified, then their falsification also falsifies the theory from which they were logically deduced.”

 Popper´s “deductive method of testing” leads to his famous demarcation criterion. This criterion attempts to distinguish sharply on one hand between empiric sciences, and on the other hand, between logic, mathematics and metaphysics.

Nevertheless, there are two crucial considerations to point out when Popper asserts that the base of his criterion is falsifiability. First of all, we must recall that under this system a positive decision may support a theory just temporarily (i.e. while the empirical evidence does not prove it contrary) and instead, a negative decision can overthrow it forever. And secondly, positivism denies that knowledge which can not be verified by experience. On the contrary, Popper indicates that a theory can never be verified. Thus, because of this impossibility, Popper gets away far from inductivism and lays down a demarcation based in falsifiability, which admits scientific knowledge not in a positive sense but in a negative sense:

“My proposal is based upon an asymmetry between verifiability and falsifiability; an asimmetry which results from the logical form of universal statements. For these are never derivable from singular statements, but can be contradicted by singular statements.” 

 In fact, we can conclude that Popper has made a huge contribution redefining a more “sober” positivism within the called “critic rationalism”.