Economic Theory and Reality: a sociological Perspective on Induction and Inference




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Economic Theory and Reality:

A Sociological Perspective on Induction and Inference

in a Deductive Science




Yuval Yonay – The University of Haifa


Daniel Breslau –Virginia Tech


August 2001


Please address all correspondences to Yuval Yonay, Department of Sociology and Anthropology, University of Haifa, Mount Carmel, 31905, Haifa, ISRAEL

Economic Theory and Reality: A Sociological Perspective on Induction and Inference in a Deductive Science

I.Abstract


Based on ethnographic study of economic departments in Israel and in-depth interviews with 12 academic economists regarding specific models upon which they were working at the time of the interviews, this article examines the ways in which observations of economic phenomena bear upon model-building activities, and how they are assimilated to the mathematical medium of economics. Rather than comparing the models to ostensible realities—which are in fact, realities of common sense or of sociological analyses—and finding them unrealistic, we trace the mediations between the relative purity and abstraction of mathematical models and the relatively messier observations of economic reality. Thus, this article does not discuss how accurately formal models represent the real economy, but rather asks how the neoclassical economists themselves make the connection between their models and economic realities. Our goal is to reconstruct the “epistemic culture” (Knorr-Cetina 1999), or the “evidential culture” (Collins 1998), of economists. We show that like models in physics (Cartwright 1983), the economic model is expected by economists to simplify reality and isolate one mechanism that may explain an observed phenomenon. The audience of the model, the community of academic economists, do not expect to accept the suggested mechanism as the cause of the phenomenon, but rather as a proposal of a plausible economic force. We believe that comprehending how economists construct the relations between reality and their models would contribute to (1) the bridging of the incommensurability gap between mainstream neoclassical economics (and similar approaches in other disciplines) on the one hand, and common approaches in sociology and other social sciences on the other hand; (2) more apposite criticism of mainstream economics; and (3) more constructive debate about the methodology of social sciences in general.

I. Introduction

How well does economic theory capture the basic mechanism of economic processes and explains economic phenomena? As the economist’s “next-door neighbor,” the sociologist has much to say about the way that economists study and explain economic behavior. Many sociologists are inclined to criticize economic theory and to emphasize alternative sociological perceptions and explanations of economic activities, while others look upon economics as a model of a successful science, which may help sociology out of what they perceive as a disjointed and rambling cul-de-sac. The first approach is most evident, of course, in economic sociology. The roots of this sub-field can be found in classical sociological theory (Smelser and Swedberg 1994), but as a distinct specialization, it has emerged only in the last two decades. Economic sociology has stepped into areas that mainstream economists had deserted in previous decades and has challenged economic theory by emphasizing its limits and stressing the role of institutionalized practices, norms of social relations, power asymmetries, irrational behavior, and cultural influences in shaping economic behavior (e.g., Baker 1984, 1990; Burt 1992; Callon 1986, 1998; Carruthers 1996; Clark and Pinch 1988; Dobbin 1994; Fligstein 1990, 1996; Granovetter 1974, 1984; McGuire et al. 1993; Mizruchi, and Schwartz 1987; Talmud 1992, 1994; Uzzi 1996; Zelizer 1979, 1985, 1994). While economists are scarcely aware of the existence of economic sociology, economic sociologists have constructed their field very much as an antithesis to modern economic theory. Their very raison d’être is the challenge of the representation of the economy in economic theory and the claim to be able to provide a more accurate representation (DiMaggio 1994; Granovetter 1985 and 1990). Being impressed with the analytical tools of economists and with their social standing, other sociologists, however, have sought to apply economic methods and reasoning in dealing with sociological questions. James Coleman's efforts in the last part of his life, for example, were guided by such a vision (1990). The soundness of economic theory is thus not only a struggle over its ability to make economic phenomena more comprehensible, but also a conflict over the identity of the sociological profession itself.1

Our article is not intended to resolve this controversy. It rather aspires to facilitate this debate by shedding more light on the nature of scientific practice within academic economics. We believe that much of the criticism of sociologists, as well as of many other scholars including non-orthodox economists, is based on an improper understanding of how economists actually conceive of their models. We start with a short portrayal of this common criticism on economics and then proceed to explain our objection to this type of argument. This objection is based on the conception of science as it has developed over the last twenty years in the new sociology of science. Following the explication of our theoretical approach we describe our attempt to elicit the “epistemic culture” (a concept to be explained below) of economists, the understanding of which is important for a serious attempt to create a dialogue with neoclassical economists and their allies in sociology and in other disciplines.

We start with the common view of economics among many sociologists. The Achilles heel of economic theory is often said to be its lack of realism. Because the use of mathematical models is not, strictly speaking, empirical research, economists appear to substitute a set of unrealistic, untested assumptions, for real-world observation, and produce theory that is insulated from economic reality beyond the formal model. Sociologists often understand the difference between their discipline and economics in these terms. The following is a much euphemized statement of pronouncements that are aired in less diplomatic forms in sociology departments everywhere:

By precluding attention to nonrational elements of human behavior, economists leave themselves no mechanism for learning about the crude and messy empirical world that so defies their models. Economists pay a heavy price for the very simplicity and elegance of their models: empirical ignorance, misunderstanding, and, relatedly unrealistic and bizarre policy recommendations (Hirsch et al., 1990, 42).

This comment relies on distinctions between formal and empirical research, and between mathematical models and data analysis. As opposed to empirical research, where the traceable link between results and actual observations, abstract models seem to be disconnected from the real world, fabricated as a substitute for observation. The proportion of economics papers devoted to formal models is used as an indicator of the lack of reality inherent in the discipline (e.g., Hutchison 1977; Leontief 1971).2

Based on approaches developed in the sociology of science, we believe that part of the reason for this impression is kind of “disciplinary ethnocentrism.” Sociologists quite naturally compare the representation of the economy available in economic models to the “reality” that is available to them from sociological methods and concepts. The gap between the reality of sociology and that of economics is thus perceived by sociologists as a gap between economics and an adequate depiction of the real world.3 Such an attitude towards economics was a temptation that we resisted in our effort to understand the logic of mathematical models on their own terms. Based on our training as sociologists of science we were sensitive to the incommensurability gap (Kuhn 1970) between the disciplines and sought ways to bridge this gap by employing the interpretive methods of the ethnographer.

The sociology of science regularly deals with scientific disputes and conflicts among competing claims, theories, schools, and disciplines (e.g. Beder 1991; Brante and Hallberg 1991; Brante et al. 1993; Engelhardt and Caplan 1987; Richards 1991; Rudwick 1988; Social Studies of Science 1981; Star 1989; Stewart 1990). In contrast to practicing scientists (including sociologists and economists), who cannot resist judging other research programs according to their own professional biases, sociologists of science are careful not to adopt the attitudes of one party in explaining scientific development and in accounting for the outcomes of scientific disputes.4 Bruno Latour (1987) refers to this methodological rule as "the principle of symmetry." He insists that researchers should not adopt the views of a triumphant theory in explaining its success. This principle is not so much a matter of skepticism toward all theories, but is rather a claim about the role of the sociology of science as a unique field of research.5 Following Bruno Latour, the main goal of constructivist sociologists of science is to examine how scientists in general reach an agreement on reality. They focus on the process of negotiation, persuasion, mobilization, and alliance building, from the time that a certain claim is first suggested to the moment it is accepted as true (e.g. Amann and Knorr-cetina 1989; Breslau 1998; Bijker 1995; Clarke and Montini 1993; Collins 1975; Epstein 1996; Fujimura 1987; Knorr-Cetina 1981 and 1999; Latour 1983, 1988, and 1999; Latour and Woolgar 1979; Pickering 1984; Pinch 1986; Social Studies of Science 1981; Star 1989; Stewart 1990; Travis 1980; Yonay 1998) or rejected (e.g., Latour 1996; Scott 1995; Wallis 1979).

If we want not only to take a side in the controversy over the question of how to study the economy, but also wish to rationally consider the various options, we must properly understand how neoclassical economists think and work. We therefore believe that the question of the realism of economic theory should be rephrased. Unlike many sociologists and traditional methodologists of economics, who ask how accurately formal models represent the real economy, we want to ask how the neoclassical economists themselves make the connection between their models and economic realities. We do not take a stand on the question of how successful they are in this pursuit, but we are interested in the way economists themselves evaluate their own success and the success of their colleagues.6

Before we describe our methodological strategy we must admit that our exploration of the epistemic culture of economists was preceded by a similar project conducted by a group of British sociologists of science who have entered “into the culture of the community of British health economists” (Ashmore et al. 1989, 184). Ashmore and his associates, however, were interested in a particular group of economists, those who applied economic reasoning to issues related to health policies. No doubt, the way of thinking of those economists is closely related to the general logic behind the economic models we are interested in. But Ashmore at al. have studied the considerations behind the application of economic models and the interaction between applied health economists on the one hand, and a variety of other experts and bureaucrats on the other hand. The importance of their analysis lies in the explication of how economic reasoning enters a major area of modern social life and policy making, while our work contributes to the illumination of a more abstract scientific practice. We believe that our study is also very important due to the implications of that abstract practice for all applications of economics, including in monetary and fiscal policies, in education, in law, in transportation, in housing, and, of course, in public health.


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