An Interview with Economist Bruce Caldwell: A Reassessment of Positivism in Economics
Kovanda, Lukas, The New Presence: The Prague Journal of Central European Affairs
More than 25 years ago you wrote the successful book "Beyond Positivism," in which you claimed that positivism (a philosophy which holds that authentic knowledge is acquired solely through observation and experience) may see a revival if it's antithesis, the so-called post-positivism of Thomas Kuhn or Paul Feyerabend, proves ineffective. Has positivism seen a revival since that time?
Certainly, positivism still influences some social sciences, especially economics, in the sense that there is a conviction in the cumulative development of science. Many economists speak of the need to develop and improve theories, without realizing that they have squeezed everything out of them already. An exception to this rule is, however, Friedrich August von Hayek (1989-1992), a world-renowned economist of the Austrian school and defender of classical liberalism. He was well aware of the limits of human knowledge.
Hayek was a critic of the mathematical approach to economics. What do you think about this trend?
I believe that mathematical economics is incredibly important in understanding basic economic theory and reasoning about the phenomena of our world. But that is very different from pure mathematics. The world needs to see more economists who approach "economics with common sense," rather than economists who simply dress it up as mathematics.
Some economists, like Bruno Frey or Edmund Phelps, believe that the current financial crisis results from excessive trust in the ability to model and predict risk. Is it possible that bankers in a certain sense yielded to the magic of positivism and for all their numbers, formulas, and equations lost an overview of the market as a whole? The market is after all a myriad of "mere" human beings, not robots with easily predictable behavior.
I partly agree, but the problem is a lot more complex. The impulses received by market participants were misleading. I think that the problem stems from very complex derivatives which many people do not fully comprehend. It also stems from individual models, wrong signals, and the difficulty in appraising property within the market. As we see today, the housing bubble popped because growth was not based on real value.
Do you believe that in the last few decades of the twentieth century people became influenced by positivism to the extent that quantity, numbers, and formulas were regarded as the Holy Scripture or the guarantee of Truth? Is positivism's influence so strong that it could surpass reality?
That could be true. This leads me to recall another famous example--the collapse of the US hedge fund Long Term Capital Management. LTCM's collapse came in 2000 after employing complex trading strategies throughout the 90s. What's surprising is that two Nobel Prize winners for economics were even on the Board of Directors: Myron Scholes and Robert C. Merton. Initially, everything seemed to be calculated to the very last detail. In the end, the surprise came when mathematical models failed to predict the future and provide all the answers.
You profess to advocate pluralism in economic methodology, but it seems to me you strongly prefer the aforementioned economist Hayek and the Austrian school. Why?
Well, on the meta-level I am a pluralist. I think that it is advantageous to have several competing schools of economic thought which view social phenomena differently. On the level of individual schools, however, Hayek presents a convincing argument about the limitations of understanding in the sphere of social sciences. …