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Essay: Logical Positivism and its Limitations in Economics

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  • Published: 1 February 2018*
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Logical positivism is a movement put forward in the late 1920s by Jewish philosophers of the Vienna Circle. They created a philosophical program that incorporated features of logicism that all scientific language is an extension of logic, and positivism or empiricism meaning knowledge emerges from experience. Logical Positivists sought to demarcate science from pseudo-science. A Logical Positivist's demarcation criterion relied on a statement’s verifiability, being logically consistent and empirically verifiable. Only synthetic a posteriori, empirically correct, and analytic, true by definition statements were to be scientific laws or theories. According to logical positivists, the more observations we make, the more theories we can derive, illustrating a continuous exponential growth of knowledge. Nevertheless, three major problems arise with applying logical positivism to economic reality. Firstly, it is arguably impossible to assume any theory as a law or law-like statement. Any observed regularity could be deemed merely coincidental. Secondly, there is the issue of operationalization. Different minds with different mindsets can define the same matter in different ways, which manifests in conducting different conclusions. Thus, finding one generally agreed upon definition is extremely problematic. Finally, there is the Humean induction issue that entails the futility of determining a verified universal law. It is impossible to consider a recurrent finding to be universally applicable.

Subsequent to logical positivism, many econometrists desired to be considered scientists. They failed in attempting to predict whole economic events using complex models. Milton Friedman offered two solutions: 1. To either limit a model to the most relevant variables on a specified domain 2. Use a simulacrum to represent the theory if it can illustrate easier and better results. He argued that it is best to build various simple models that predict certain parts of the economy and combine them to form an integrated explication. Friedman believed that the predictive power of a model is what makes it scientific. His methodology was that the more significant a theory is, the more unrealistic its underlying assumptions are; realism is irrelevant as long as the prediction works. This is inline with Keynes’ theory that it is better to be vaguely right than precisely wrong. Critiques began contending that unreasonable assumptions regarding negligibility of factors can incredibly influence the efficacy of a model. Consequently, Friedman deduced that albeit realism is irrelevant, scientists must advocate the irrelevance of their assumptions. This is extremely useful to apply to economic reality. For example, as unrealistic a ceteris paribus condition may be, it may immensely add to how sound the results of a model are.

Opposing logical positivism, Popper’s Logic of Discovery possesses a demarcation criterion of falsifiability rather than verifiability. Popperian’s Epistemology followed a deductive doctrine; deriving implications from theories, not deriving theories from observation. The more empirical content a statement possesses, the more significant it is. Subsequently, immunizations were forbidden. A scientist should not construct a theory with an ex ante or ex post immunization protecting it from being falsified, e.g the ceteris paribus condition. Popper added that growth of knowledge is to be achieved by repairing past mistakes rather than by building certainties upon certainties. The Duhem-Quine thesis proposed counterarguments to Popper: 1. In practice, immunizations can be means to improve the theory when falsified. 2. If a theory was to be concluded false, what was really falsified is unclear. One could not determine if the issue is with the whole theory, a certain aspect, or a simple measurement error. Therefore, Popperian ideology also failed to be significantly applied to economics.

To close, despite the failure of Logical Positivists, Popper and other philosophers in proving a coherent demarcation criterion for science, it is as yet conceivable to have development in knowledge. As Friedman clarified, if we remain capable of designing well predicting models, we can have growth in knowledge regardless of whether their presumptions are realistic. One simple model could act as a basis for the improvement of another model and so on, increasing the existing aggregate economical knowledge in our community. Inevitably these models could be adjoined to finally create universal laws. Although Friedman’s methodology does not prompt Popper’s 100% assurance, the former follows Keynes’ idea that it is better to be vaguely right than precisely wrong. That mindset is fundamental in economic reality; no theory could be applied to everyone and everything.

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