Using an episode from the history of science, I want to shine some light on the underlying scientific status of modern orthodox neoclassical economics.
Proof of the existence or reality of atoms and molecules provides immense and crucial support for the atomic-molecular hypothesis of matter, for it allows scientists to develop valid scientific explanations of the various physical and chemical phenomena of the natural world on a sound theoretical and experimental basis – in short, on a sound empirical basis (and furthermore, it allows them to make valid predictions). In other words, without such proof of the existence or reality of atoms and molecules, scientists would have no choice but to think of their basic theories of the natural world in instrumentalist rather than realist terms (as evinced by the positions taken by Poincare and others). To illustrate the importance of this for the scientific project of developing fundamental knowledge of the natural world, consider the following example about God-type explanations of the natural world. If, say, it is hypothesised that the different sorts of metals in the natural world are formed as a result of God breathing out different fire-balls into the world, one for gold and another for copper, and this ‘scientific hypothesis of matter’ was then used to explain a myriad of other natural phenomena, then the question can be asked: why should such a hypothesis of matter be accepted as offering a realistic (i.e., correct) explanation of natural phenomena? Now, the only legitimate reason one could possibly provide for its acceptance is actual proof of the existence or reality of God Himself. For, if it is proven that God really exists, then we have a sound basis on which to accept the God-type hypothesis of matter. However, until that is done, then we have no sound basis, and consequently no good reason, for accepting the God-type hypothesis of matter; and moreover, we cannot help but view it as providing nothing more than an instrumentalist explanation of natural phenomena. So, the analogy with attempts at proving the existence or reality of God, in order to establish the truth of the God-type hypothesis of matter, helps to bring out how important it was to prove the existence or reality of atoms and molecules in the establishment and acceptance of the atomic-molecular hypothesis of matter. For proof of something’s existence – as long as it is properly done in a well-tested way – provides the best evidence for believing it to exist (as well as whatever else consequently follows from it).
With this history of science episode in mind, what is the scientific status of modern orthodox neoclassical economics? Is it a realist or instrumentalist enterprise?
The core theory of modern orthodox neoclassical economics (the dominant school of mainstream economics) is the Walrasian or general equilibrium theory of a perfectly competitive market economy. According to this theory, when there is a balance between supply and demand in all markets at the same time - from markets for consumer goods to markets for scarce resources (labour, land and capital goods) - then they will all clear simultaneously (in terms of specific quantities of goods and resources at a certain 'equilibrium' price). As a result, there will be no unsold consumer goods or unsold scarce resources. In addition, this model of a particular type of economy gives rise to what is called a 'non-trivial' result; it gives rise to an optimal state of economic affairs in which no one can be made better off without making someone else worse off. So, if you make someone else better off by making someone else worse off, then it's no longer an optimal economic state of affairs. In economics this is called a 'Pareto optimum'. This model accordingly predicts, amongst other things, that when a market economy like capitalism is in a general equilibrium state there will be no unemployment.
Now, this particular model of a perfectly competitive market economy is nevertheless based on a specific set of 'stringent' assumptions which must all hold for the model to get off the 'theoretical' ground and make 'valid' predictions about a real market economy like capitalism. Some of these 'stringent ' assumptions are the familiar ones of neoclassical microeconomics - like rational economic agents, perfect and complete information, perfect foresight, perfect competition, complete markets for all goods and resources, no externalities, and so on. (Stiglitz identifies at least 10 of them for the model to hold.)
However, as it turns out, none of these underlying assumptions of the theory actually hold in reality, ie, within a real market economy like capitalism. This is because, as is generally acknowledged by both neoclassical economists themselves and their critics, these various assumptions of the theory are in fact 'unrealistic' in the sense that they bear no relation to reality, ie, to any recognisable features of a real market economy like capitalism. Consequently, it cannot be claimed by the adherents to this theory that it is founded on a realistic basis. Nevertheless, this core theory of modern orthodox neoclassical economics is used as a basis for making predictions about a real market economy like capitalism, as well as providing explanations for why these predictions of theirs fail to come out. (I won't go in to all the arguments and counter-arguments about how neoclassical economists attempt to explain themselves along lines, such as how the real economic world of capitalism is an imperfect copy of their general equilibrium theory or how their theory is nothing more than an 'as if' description of a market economy; I'll leave that for another blog post, or a series of them.) Since this is the case, it would be fair to assume here that modern orthodox neoclassical economics, via its core economic theory of general equilibrium, is an instrumentalist scientific enterprise, not a scientific realist one. Hence, its scientific status is an instrumentalist and not a realist one.
This, of course, raises the thorny question about whether we should accept the veracity of any of the various theoretical claims of modern orthodox neoclassical economics. In light of the above episode from the history of science, on prima facie grounds, we should not. If a theory is not based on sound premises, then it is (from both a logical and an epistemological point of view) hard to accept any of its claims about the real world. (Once again, I will explore these ideas in greater detail in other blog posts.)
Aside: It would seem, then, that the history of science (of the real sciences, that is) is a useful philosophical aid for making some philosophical points about things, which should not be forgotten when doing the philosophy of science.
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