Class 1 Flashcards
Forms of rationality in market economics
1) operational rationality: auto organisation (individuals); natural, unconscious (automatism)
2) constructive rationality: organisation hierarchy/state invisible hand (conscious)
Keynes
- Economics rules the world
- Economics as particular social science
- society as outcome of social interaction
Invisible Hand (Adam Smith)
- individual pursuit of maximization of economic profit will insure general wealth
- general welfare —> good/ happy society/ 18th century: sovereign
History of economics and its characterization
- process of increasing abstraction
- start: Aristoteles
- living a good life, then economics is only an aspect of a virtuous life
Who writes Economics?
- Adam Smith
- Aristoteles : Household
- Mercantilism: King
- Marx: Proletarian
For who, Economics is written?
- whose benefit
- Key economic actor
- whose welfare function is maximized
- concentration on the individual is not that natural as it might seem
- individuals have the right to persuade of happiness (maximization of profits)
End of the 18th century: changes
- Enlightenment
People stepping outside/ advancing beyond of their immaturity (Unmündigkeit) - Reduction in the cost of communication and transport (transaction costs) f.ex. East India Company
- industrial revolution
- counter movement (Marx, Child labor, exploiting workers)
circular flow:
what comes out, must come back: constructive rationality
relativist approach to economic theory
realistic view of economics/ line: absolutistic view siehe Grafik
Eco - nomics
(auto organization)
oikos nomos
the law- the money(nomisma) takes its only valid because connected to the law, laws of household management, the law is fix, you don’t discuss, STATIC)
Oikos
law polis (city; organization; good chrematistics)
Nomos:
Nomos is the Greek term for law, but also for custom (Brauch) and agreement (Übereinkunft
Logos:
reason word (open, still need to discuss, DYNAMIC)
Polis (city)
logos - reason, word (open, still the need to discuss, DYNAMIC)
(organisation)
(good chrematistic)
eikos+logos :
ecologie takes a wider and larger view, dynamic
eco+nomos :
economies, static
Definition of Oikos:
moderate subsistence strategy in the oikos is the base for a good life in a stable polis, which includes private property and autarky
Definition of Polis:
- kind of city state which was established centuries after the Sumerian
- Private property and autarky (self supply)
o Economic independent through agriculture
Positive Economics:
- how things are
- Insisting of economics to be positive, one imposes the norm of liberal markets
- claim of being positive has a normative core
- ultimate goal of positive Economics is development of a “theory” or “hypothesis” valid and meaningful predictions about phenomena not yet observed.
Test of validity of a hypothesis:
-comparison of prediction with theory
rejected: predictions are contradicted
accepted: predictions are not contradicted; great —-confidence attached; has survived many opportunities for contradiction
2 Stages of constructing hypotheses and testing them:
1) particular facts (partly an accident), collection of data, knowledge of the particular investigator.
2) never from scratch; there is always a comparison from former/earlier set if hypotheses
–> two methodically distinct stages are always proceeding jointly.
Significance of a hypothesis:
- has to give “assumptions” that are widely inaccurate and descriptive representations of reality
- The more significant the theory, the more unrealistic the assumptions.
- important if it ‘explains’ much by little
- therefore, a hypothesis must be descriptively false in its assumptions to be important
The use of assumptions in stating a Theory
- rules can be formulated explicitly
- must be complete and incomplete
o any possible not in “real world”
o formulate rules explicitly in so far as possible and continue to widen the range of phenomena for which it is possible
Normative:
how things should be, what should be, based on which norm
All modern economist claim to be positive economists
Liberal economists usually tend to be positive
We don’t interfere with what they are doing; we don’t say whether it is good or bad
When describing this automatism —> positive
All modern economist claim to be positive economists
Liberal economists usually tend to be positive
We don’t interfere with what they are doing; we don’t say whether it is good or bad
When describing this automatism —> positive
Construction rationality
impose ecological and environmental aspects —> normative values that we impose —> some sort of construction rationality being imposed on auto organizational rationality
which norm even is respected even in the most liberal part of auto-organization: respect of the law, private property, protection from bodily harm
Excurse: Market liberalism (liberalism auto-organization)
-
Since the 20th century, term for economic policy position represented by classical national economists, which are going back to Adam Smith
Fundamentals of market liberalism:
- private property
- freedom of contract
Liberal approach: take the humans as they are
- people are profit and wealth maximizers.
-Free competition
-Reveal Preference: you only care what people do, not about what they say or think
operational rationality
-Humans rational only in respective to utility maximization (mathematically formulated)
utopia of economic liberalism (related to liberal approach)
- economy that controls itself via market without state interference (auto-organization)
- spontaneous order after which the invisible hand of the market reconciles interests of individuals and society.
Spontaneous order through human action not according to human planning
Freedom = absence of state rest
Methodology
- ) Hermeneutics / Interpretation
- ) Induction - Bacon, Hume
- ) Deduction / Falsification
1.) Hermeneutics / Interpretation
- Heidegger (you are trying to be mathematical and exact but what does that mean? one is taking one cut through the whole cut, one is working only in one direction and then you are calling it precise)
—> You cannot isolate specific aspects of truth
2.) Induction - Bacon, Hume
From a singular statements to universal statements, such as hypotheses or theories
- observations, regularities, specific to general theory/hypothesis
- Everything must be consistent with “Basic Laws/Sentences”
Problem of Induction:
The problem of induction is the philosophical question whether inductive reasoning leads to knowledge understood in the classical philosophical sense, since it focuses on the alleged lack of justification
- ) Generalizing about the properties of a class of objects based on some numbers of observations of particular instances of a class (e.g. the inference that “all swans er have seen are white, and therefore all swans are white”) or
- ) Presupposing that a sequence of events in the future will occur as it always has in the past (e.g. that the laws of physics will hold as they always been observed to hold.) Hume called this the principle of uniformity of nature
- ) Problem of Induction: Naturalistischer Fehlschluss: no matter how many instances of white swans we have observed, this does not justify the conclusion that all swans are white; question of validity
Elimination of psychologism
- work of a scientist consists in putting forward and testing theories
- The initial stage is the act of conceiving or inventing a theory
- Distinction between process of conceiving a new idea and methods and results of examining it logically.
3.) Deduction / Falsification - Popper (1934 Logic of Scientific Discovery)
General Hypothesis: From the general to the specific
hypothesis —> testable predictions (falsifiable prediction as criteria) —> observed in a controlled experiment : That is what Popper really demands
!!! You can never really verify a scientific hypothesis, we can only provisionally accept hypothesis that have not been falsified !!!
Popper demands 4 criteria of a scientific theory:
1) Internal logical consistency: cannot be self-contradictory
2) absence of tautology: must be something new; investigation of the logical form of the theory, with the object of determining whether it has the character of an empirical or scientific theory, or whether it is a tautology
3) scientific progress: comparison with other theories; determining whether the theory would constitute a scientific advance, should it surive our various tests
4. falsifiable/ testable (key):
Aim of Methodology:
which message gets us closer to some acceptable notion of true. How should we go about to arrive at results that make sense, what is the nature of truth? —> to arrive at some notions of true
Any choice of methodology means that we are choosing to leave something else out, we are always cutting something else out
- Hermeneutics is not the way, but still is going to be introduced
- non-scientific measure
- Hermes: God, messenger —> to interprete
- there is no such truth without dialog, there must be a dialogue!
What is the problem with economics?
—> difficulties to have controlled experience, because things change in the meantime and what might have been true last time, must not be true today
Is a deductive theory applicable to economics?
experimental economics:
put people into a laboratory
participants are usually economic students who behave much more profit maximizing than average persons because of framing
—> this is the problem with experimental economics
Problems of Economic Experiments:
1) stability (Parameters (Income etc.) change) better in short run
2) distinction between economic and extra economic considerations (f.ex. friends go to other restaurant)
3) abstract controlled experiments (f.ex. too many economics students think different)
