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5 October 2005

Economics as Methodology

John Friedman

Most disciplines define themselves through their field of inquiry; historians study events of the past and the evolving stories of those events, psychologists study the working of the mind, and political scientists study the interaction of governments and people. Economists take a different approach, though, identifying themselves not through subject matter but instead through methodology.

What are these tenets of methodology? While the precise delineation of one’s field is always a tricky matter, I believe most economists would agree on three basic principles: Preferences, Optimization, and Equilibrium. In essence, economics operates under the assumption that people know what they want and then do their best (given limited means) to get it. Given these foundations, mathematics helps to formalize our intuition, since choosing the best alternate can be rewritten as the maximization of a function, often named “utility.� In many cases, of course, people will fail miserably to achieve these goals. The problem might be a lack of information, or unforeseen costs, or any number of other obstacles; but, in economics, it cannot be that people simply do not want something that is better for them.

To many, this definition of economics will seem extraordinarily narrow, disallowing the study of a great many human phenomena. No doubt, in many cases, this observation is correct. But I believe it exactly this methodological focus that has laid the foundations for the great success of economics in the past 70 years. As a foundation, the framework is straightforward and intuitive; why would someone not want something that, by definition, they prefer? Furthermore, the mathematical expression of economics ideas – a direct result of the assumption of optimization – has helped to lay bare the assumptions lurking behind arguments with great speed. And while I freely admit that economics cannot capture all relevant aspects of human behavior, it would seem a fool’s errand to find a research design that could.

(A brief aside: Mathematics, in economics, is no more than a language for expressing ideas. It is extremely helpful in many situations, as is much jargon, for discussions among experts within the field. But, far too often, economists allow this language to become a barrier between them and the world. I suggest you hold all economists you meet to this standard: If they cannot explain the intuition behind an economic idea, using only standard English words, in five minutes, it is their fault and not yours!)

Posted by James Greiner at 5:58 AM