#Lukáš Kovanda, Ph. D.

Nobel Prize for Economics? Let no one have it.

A reassessment of positivism in economics. Economists need to approach “economics with common sense.”

More than 25 years ago you wrote the successful book “Beyond Positivism,” in which you claimed that positivism (a philosophy which holds that authentic knowledge is acquired solely through observation and experience) may see a revival if it’s antithesis, the so-called post-positivism of Thomas Kuhn or Paul Feyerabend, proves ineffective. Has positivism seen a revival since that time?

Certainly, positivism still influences some social sciences, especially economics, in the sense that there is a conviction in the cumulative development of science. Many economists speak of the need to develop and improve theories, without realizing that they have squeezed everything out of them already. An exception to this rule is, however, Friedrich August von Hayek (1989–1992), a world-renowned economist of the Austrian school and defender of classical liberalism. He was well aware of the limits of human knowledge.

Hayek was a critic of the mathematical approach to economics. What do you think about this trend?

I believe that mathematical economics is incredibly important in understand- ing basic economic theory and reasoning about the phenomena of our world. But that is very different from pure mathematics. The world needs to see more economists who approach “economics with common sense,” rather than economists who simply dress it up as mathematics.

Bruce Caldwell is a professor of economics at Duke University in North Carolina. He is one of the most prominent current methodologists in economics, and is known as an expert on the work of Friedrich August von Hayek. He is married and has two teenage children.

Some economists, like Bruno Frey or Edmund Phelps, believe that the current financial crisis results from excessive trust in the ability to model and predict risk. Is it possible that bankers in a certain sense yielded to the magic of positivism and for all their numbers, formulas, and equations lost an overview of the market as a whole? The market is after all a myriad of “mere” human beings, not robots with easily predictable behavior.

I partly agree, but the problem is a lot more complex. e impulses received by market participants were misleading. I think that the problem stems from very complex derivatives which many people do not fully comprehend. It also stems from individual models, wrong signals, and the difficulty in appraising property within the market. As we see today, the housing bubble popped because growth was not based on real value.

Do you believe that in the last few decades of the twentieth century people became influenced by positivism to the extent that quantity, numbers, and formulas were regarded as the Holy Scripture or the guarantee of Truth? Is positivism’s influence so strong that it could surpass reality?

That could be true. This leads me to recall another famous example – the collapse of the US hedge fund Long Term Capital Management. LTCM’s collapse came in 2000 a er employing complex trading strategies throughout the 90s. What’s surprising is that two Nobel Prize winners for economics were even on the Board of Directors: Myron Scholes and Robert C. Merton. Initially, everything seemed to be calculated to the very last detail. In the end, the surprise came when mathematical models failed to predict the future and provide all the answers.

You profess to advocate pluralism in economic methodology, but it seems to me you strongly prefer the aforementioned economist Hayek and the Austrian school. Why?

Well, on the meta-level I am a pluralist. I think that it is advantageous to have several competing schools of economic thought which view social phenomena differently. On the level of individual schools, however, Hayek presents a convincing argument about the limitations of understanding in the sphere of social sciences. This also refers to the limitations of social engineering and the construction of society from top down. This is what Hayek based his argument on regarding the free market. It is really quite convincing.

As a methodological pluralist, do you agree with Imre Lakatos’ view that scientific progress is predicated on taking into ac- count competitive and diverging theories and conciliating them within his so-called research programmes? This contrasts, of course, with Thomas Kuhn’s espousal of revolutionary science: the idea that scientific thought does not progress via linear accumulation but through paradigm shifts which transform science from one dominant paradigm to the next.

Lakatos theorized on how science develops and also on how it should develop. I would not label myself as a “Lakatosian,” someone who prescribes how science should develop. I believe that competition between various scientific views is useful, especially if they attempt to clarify social phenomena. Such competition produces interesting findings. If we look at the world solely through a positivist prism, certain essentially immeasurable phenomena are lost on us. For example, the Russian financial crisis in 1998 was a major contributor to the collapse of aforementioned LTCM fund, but mathematical modules could not and did not predict the crisis.

In the American political sphere, Hayek’s advocates often enthuse over the libertarian candidate. In the 2008 US presidential election, the candidate was Ron Paul. Did you support him?

As much as I might have desired it, Ron Paul’s election was not realistic. We need to be concerned with the real world. In my opinion, the best option is therefore “gridlock,” or when one party governs the White House and the other controls the Congress.

Who should get the Nobel Prize for Economics in 2009?

After receiving the Nobel Prize for Economics, Hayek opined in his speech that an economics Nobel Prize should not even exist. He believed that the existence of a Nobel Prize for Economics contributes to the belief, held by many economists, that economics is comparable to natural sciences. Just as a chemist experiments with acid in his laboratory, they arrogantly believe that they have the right to experiment with our society. But you cannot experiment with society. You cannot enclose it within a lab and repeat a failed experiment under different conditions. So I also believe that it would be better if no one received the Nobel Prize for Economics.

Suggested Reading

Caldwell, Bruce. Beyond Positivism: Economic Methodology in the Twentieth Century. (Routledge, 1994).

Caldwell, Bruce. Hayek’s Challenge: An Intellectual Biography of F. A. Hayek. (University of Chicago Press, 2004).

Frey, Bruno. Happiness: A Revolution in Economics. (MIT Press, 2008).

Taking Hayek Seriously. Ed. Greg Ransom.

Published in The New Presence (The New Presence), issue: 2 ­ Spring / 2009, pages: 50­51, on www.ceeol.com.

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