Rules for scientific research in economics the alpha beta method

Table 1.1 Meta-assumptions of the theory of knowledge 6 Table 1.2 Scientifi c research rules derived from Popperian epistemology 8 Table 2.2 Matrix of beta propositions or matrix of cau

RULES FOR SCIENTIFIC RESEARCH IN ECONOMICS

The Alpha-Beta

Method

Adolfo Figueroa

Rules for Scientifi c

Research in

Economics

The Alpha-Beta Method

ISBN 978-3-319-30541-7 ISBN 978-3-319-30542-4 (eBook) DOI 10.1007/978-3-319-30542-4

Library of Congress Control Number: 2016944657

© The Editor(s) (if applicable) and The Author(s) 2016

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The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specifi c statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information

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The registered company is Springer International Publishing AG Switzerland

Pontifi cal Catholic University of Peru

Lima , Peru

Why has the growth of scientifi c knowledge in the social sciences ceeded at a rate that is slower than that of the natural sciences? The basic reason seems to rest upon the differences in the complexity of the reality they study Compared to the natural sciences, the social sciences seek to explain the functioning of the social world, which is a much more complex world than the physical world As biologist Edward Wilson pointed out:

Everyone knows that the social sciences are hypercomplex They are ently far more diffi cult than physics and chemistry, and as a result they, not physics and chemistry, should be called the hard sciences (1998, p. 183)

Methodology deals with the problem of how to construct scientifi c knowledge Is the understanding of the social world more demanding

on methodology than understanding the physical world? Economist Paul

Samuelson argued in his classic book Foundations of Economic Analysis

that indeed this is the case:

[This] book may hold some interest for the reader who is curious about the methodology of the social sciences…[I]n a hard, exact science [as phys- ics] a practitioner does not really have to know much about methodology Indeed, even if he is a defi nitely misguided methodologist, the subject itself has a self-cleansing property which renders harmless his aberrations

By contrast, a scholar in economics who is fundamentally confused cerning [methodology] may spend a lifetime shadow-boxing with reality

con-In a sense, therefore, in order to earn his daily bread as a fruitful tor to knowledge, the practitioner of an intermediately hard science like economics must come to terms with methodological problems (1947, pp viii–ix)

Paraphrasing both Wilson and Samuelson, the researcher’s good mand of methodology is more critical for producing scientifi c knowledge

com-on the highly complex sciences (social sciences) than in the less complex sciences (natural sciences) Therefore, the answer to the question posed above seems to be that the difference lies in methodology Social sciences development needs to use better methodology and more intensively This book intends to contribute to that development

Methodology is also called epistemology (from the Greek episteme ,

knowledge) Epistemology or methodology is usually presented as part

of philosophy of science In this view, epistemology is a branch of losophy that seeks to scrutinize the philosophical problems that arise in the practice of science, such as epistemological, metaphysical, and ethi-cal problems Philosophy of economics is the particular fi eld that deals with philosophical problems in economics, as economists practice it To

phi-be sure, this book is not about philosophy of economics There are good recent books that show the state of this discipline (e.g Reiss 2013) The approach followed in this book will be different It will correspond

to the view of epistemology as the theory of knowledge—the logic of scientifi c knowledge Then epistemology will be seen as part of the formal science of logic, not of philosophy Indeed, some textbooks of logic now deal with the logic of scientifi c knowledge (e.g Hurley 2008)

The book will show practical rules for the construction and growth of

scientifi c knowledge in economics, which will be derived logically from a

particular theory of knowledge or epistemology No such rules exist rently in economics; that is, economists follow a diversity of rules, derived from a diversity of epistemologies or having no epistemological justifi ca-tion The intended contribution of the book is then normative: what rules

cur-of scientifi c research ought economists to follow This view cur-of

epistemol-ogy is more natural for working scientists, who are epistemolepistemol-ogy users rather than makers

The epistemology proposed by Karl Popper (1968) will be adopted in this book This is one of the most popular epistemologies in the literature

It essentially says that theory is required for scientifi c knowledge, but this theory must be empirically falsifi able or refutable; thus, good theories will

prevail and bad theories will be eliminated, as in a Darwinian competition Scientifi c progress will result from this competition

However, Popperian falsifi cation epistemology is also the most debated

Many authors have argued that Popperian epistemology is not

applica-ble in economics The arguments are clearly summarized in the Stanford

Encyclopedia of Philosophy by Daniel Hausman (2013), a leading

philoso-pher of economics They are

1 Economic theories are rarely falsifi able

2 When they are, they are rarely submitted to testing

3 When they fail the test, they are rarely repudiated

Consequently, we can understand why in economics we observe that

no theory is ever eliminated and that progress in scientifi c knowledge is relatively limited, in spite of large amounts of research work

Problems (2) and (3) refer to what economists do and why These are not within the scope of this book Problem (1) is the subject of this book The challenge is how to make Popperian epistemology applicable and operational in economics Can we logically derive from Popperian episte-mology a set of practical rules for scientifi c research in economics? As the book will show, this derivation is subject to the transformation of a com-plex social world into a simple abstract world Popperian epistemology might be suitable for physics, but whether it is so for economics, a science dealing with a complex world, is another question In fact, problem (1) has to do with the complexity of the social world

How to make knowable a complex reality, such as the social world? The late Vanderbilt University professor of economics, Nicholas Georgescu- Roegen (1971) proposed a solution to this problem, and developed the

process epistemology Georgescu-Roegen is mostly known as the founder of

bio-economics, an economic school different from standard economics, but his contribution to epistemology is less known

Consider now combining the epistemologies of Popper and Georgescu- Roegen into a single one, as they do not contradict each other Call this

combination the composite epistemology Then, as will be shown in this

book, a set of rules for scientifi c research in economics can be derived from the composite epistemology This set of rules will thus constitute a scien-tifi c research method, as it will have epistemological justifi cation or logi-

cal foundations This will be called the alpha-beta method This method

intends to solve the falsifi cation problem in economics, the problem that

“economic theories are rarely falsifi able”—the problem (1) of Popperian epistemology, cited above The alpha-beta method is a scientifi c research

method that ensures economic theories be always falsifi able Thus, the

alpha-beta method is not another name for a known method, but a truly new scientifi c research method, the application of which should contrib-ute to scientifi c progress in economics The book is thus intended to be problem-solving

Economics is a social science However, this defi nition of economics

is not always accepted and the term social science is usually reserved for sociology, anthropology, and political science Although scientifi c rules are derived for economics only, the book will show that extensions to the other social sciences are nearly straightforward This procedure means that eco-

nomics is presented as an example of the social sciences, not as the exemplar

Differences in the complexity of the social world compared to the ical world must be refl ected in the different epistemologies social sciences and natural sciences use The book presents a comparison between these epistemologies, just to better understand the epistemology of economics and the other social sciences

Therefore, this book is concerned with the problem of how sciences ought to seek scientifi c knowledge, not with what scientists actually do The common proposition “Science is what scientists do” ignores this dis-tinction Therefore, this book deals with the question of how scientifi c research in economics ought to operate The question of what economists actually do and why is outside the scope of this book, for the answer would require a scientifi c theory to explain that behavior The book takes the epistemologies of Popper and Georgescu-Roegen as given, and deals with the problem of deriving logically from them a set of practical rules for scientifi c research in economics

The book includes 10 chapters Chapters 1 , 2 , 3 and 4 deal with the construction of the alpha-beta method and its application to economics Chapters 5 and 6 show the logic of statistical testing of economic theories under the particular alpha-beta method Chapter 7 compares the alpha- beta method with other empirical research methods Chapter 8 discusses the most common fallacies found in economics that are uncovered by the alpha-beta method Chapter 9 compares the epistemologies of natural sci-ences and economics in the light of the alpha-beta method Chapter 10 presents the conclusions of the book

In sum, the objective of this book is to present a set of rules for tifi c research in economics, which are contained in the alpha-beta method

scien-These rules are scarcely used today, which is refl ected in the fact that no economic theory has been eliminated so far, and thus we observe the coex-istence of the same economic theories (classical, neoclassical, Keynesian, and others) over time, with the consequent lack of Darwinian competition

of theories Scientifi c progress is the result of such evolutionary tion Therefore, the book seeks to contribute to the scientifi c progress

competi-of economics by proposing the use competi-of the alpha-beta method, a method designed for the evolutionary progress of economics

The book is primarily addressed to students of economics at advanced undergraduate and graduate levels Students in the other social sciences may also fi nd it useful in the task of increasing the growth of interdisci-plinary research within the social sciences Even students of the natural sciences may benefi t from the book by learning the differences in the rules

of scientifi c research of their own sciences with that of the social sciences This understanding will prepare economists, physicists, and biologists to work in interdisciplinary research projects, such as the relations between economic growth and degradation of the biophysical environment, which

is, certainly, one of the fundamental problems of our time

Parts of this book have been taught in economics courses at the Social Science School and in the epistemology course in the Doctorate in Business Administration at CENTRUM Graduate Business School, both

at Pontifi cal Catholic University of Peru, and at the Universities of Notre Dame, Texas at Austin, and Wisconsin at Madison, where I have been Visiting Professor I would like to thank the students in these courses for their valuable comments and questions about my proposal of the Alpha- beta Method

I am also grateful to the three anonymous reviewers appointed by Palgrave Macmillan Their comments and suggestions to my manuscript were very useful to make revisions and produce the book Sarah Lawrence, the Economics & Finance Editor of Palgrave Macmillan, has been most helpful to go through the review process of the book project

My gratitude is immense with my current institution, CENTRUM Graduate Business School, Pontifi cal Catholic University of Peru, and with its Director Fernando D’Alessio, for providing me with great sup-port for the preparation of this book

2 Alpha-Beta: A Scientifi c Research Method 15

3 The Economic Process 29

4 The Alpha-Beta Method in Economics 47

5 Falsifying Economic Theories (I) 63

6 Falsifying Economic Theories (II) 73

7 The Alpha-Beta Method and Other Methods 99

8 Fallacies in Scientifi c Argumentation 117

9 Comparing Economics and Natural Sciences 129

10 Conclusions 145 Bibliography 151 Index 153

Fig 1.1 Diagrammatic representation of an abstract process 12 Fig 3.1 Types of economic processes: static, dynamic, and

evolutionary 36 Fig 3.2 Deterministic and stochastic static processes 42

Fig 6.2 Breakdown of the variation of Y j into two components 76

Table 1.1 Meta-assumptions of the theory of knowledge 6 Table 1.2 Scientifi c research rules derived from Popperian

epistemology 8

Table 2.2 Matrix of beta propositions or matrix of causality 26 Table 3.1 Economic process according to E-theory 32 Table 4.1 The alpha-beta method in economics 56 Table 5.1 Frequency distribution of income in the population B 67

Table 5.2 Distribution of sample means for n = 2 drawn from

Table 5.3 Frequency distribution of income in the population C 70

Table 5.4 Distribution of sample means for n = 2 drawn from

Table 6.1 Kinds of reality based on Searle’s classifi cation 89 Table 7.1 Research methods: scientifi c and empirical 112

© The Editor(s) (if applicable) and The Author(s) 2016

A Figueroa, Rules for Scientific Research in Economics,

DOI 10.1007/978-3-319-30542-4_1

Abstract What is the criterion to accept or reject propositions about

the social reality as scientific? We need rules for that, which must have some rationality, some logic this logic is called epistemology Science is epistemology What is the epistemology of economics? the answer is still

debated the use of the falsification epistemology of Karl popper in

eco-nomics has been questioned this chapter presents this epistemology and analyzes the reasons for its shortcomings then the chapter introduces

the process epistemology of Nicholas Georgescu-roegen, which deals with

complex realities, and shows that the two epistemologies are tary and thus can be combined into a single composite epistemology the composite epistemology is now applicable to sciences dealing with com-plex realities, such as those studied by economics

complemen-Scientific knowledge seeks to establish relations between objects the objects can be mental or physical Formal sciences study the relations between mental objects, whereas factual sciences study the relations between material objects Mathematics and logic are examples of formal science; physics and economics are instances of factual sciences

Scientific knowledge takes the form of propositions that intend to be error-free Scientific knowledge is therefore a particular type of human knowledge What would be the criterion to accept or reject a proposi-tion as scientific? It depends upon the type of science In the formal sciences, the criterion seems to be rather straightforward: the relations

Science Is epistemology

established must be free of internal logical contradictions, as in a ematical theorem.

math-In the factual sciences, by contrast, the criteria are more involved as will be shown in this book, factual science propositions are based on for-mal science propositions; that is, the propositions of a factual science must also be free of internal logical contradictions however, this rule consti-tutes just a necessary condition, for the propositions must also be con-fronted against real-world data

Scientific knowledge in the factual sciences can be defined as the set

of propositions about the existence of relations between material objects

together with the explanations about the reasons for the existence of such

relationships therefore, it seeks to determine causality relations: what causes what and why It also seeks to be error-free knowledge, as said above

We can think of several criteria to accept or reject a proposition in the factual science Common sense is the most frequent criterion utilized in everyday life Common sense refers to human intuition, which is a strong

force in human knowledge Intuition is the natural method of human

knowledge

the assumption taken in this book is that intuitive knowledge is subject

to substantial errors Intuitive knowledge is based on human perceptions, which can be deceiving Galileo’s proposition that the earth spins on its axis and orbits around the sun was not generally accepted for a long time (even up to now) because it contradicted intuitive knowledge: people can-not feel the earth spinning and what they can see is rather that the sun

is going around the earth the same can be said about today’s climate change because the greenhouse gases are invisible to human eyes Intuitive knowledge is thus the primitive form of human knowledge

as said earlier, science seeks to produce error-free human knowledge therefore, human knowledge in the form of scientific knowledge requires

the use of a scientific method, which needs to be learned and educated thus,

science has to do with method thus, the criteria for accepting or ing propositions as scientific in the factual sciences—the scientific method—needs to be constructed this construction is the task of epistemology

In this book, epistemology is viewed as the field that studies the logic of scientific knowledge in the factual sciences epistemology sees scientific knowledge as fundamentally problematic and in need of justification, of

proof, of validation, of foundation, of legitimation therefore, the tive of epistemology is to investigate the validity of scientific knowledge For this we need a criterion to determine whether and when scientific knowledge is valid this criterion cannot be based on facts, for they are the objective of having a criterion; thus, the criterion can only be established logically Scientific knowledge must have a logic, a rationality, established

objec-by a set of assumptions therefore, the criterion is given objec-by a theory of knowledge, which as any theory is a set of assumptions that constitute a logical system

epistemology will thus be seen as theory of knowledge, as a cal system In this book, the concept of theory will be applied to the logic of scientific knowledge as well as to the scientific knowledge itself Consequently, two very useful definitions in parallel are needed at the very beginning:

logi-Theory of knowledge is the set of assumptions that gives us a logical criterion

to determine the validity of scientific knowledge, from which a set of rules for scientific research can be derived the set of assumptions constitutes a logical system, free of internal contradictions.

Scientific theory is the set of assumptions about the essential underlying

fac-tors operating in the observed functioning of the real world, from which empirically testable propositions can be logically derived the set of assump- tions constitutes a logical system, free of internal contradictions.

any factual science needs to solve the criterion of knowledge before doing its work because this question cannot be solved within the factual

science the logical impossibility of obtaining the criterion from within the factual science is relatively easy to proof Let S represent any factual science then

Factual science (S) is a set of relations (r) between material objects X and material objects Y, which are established according to criterion (L).

this proposition can be represented as follows:

how would L be determined? If L were part of S, then L would be lished through the relations between physical objects, that is, relations between atoms (physical world) or between people (social world); how-ever, this leads us to the logical problem of circular reasoning because

estab-we need L precisely to explain the relations betestab-ween atoms or betestab-ween people

the criterion L will thus have to be determined outside the factual ence how? the alternative is to go to the formal science, in particular to the science of logic the criterion L is now justified by a logical system this logical system is precisely the theory of knowledge (t), which as any theory is a set of assumptions (a) then we can write

sci-B is logically unavoidable, for the set a needs justification (e.g., why do

I assume that there is heaven? Because I assume there is God? Why do I assume that there is God? Because…, etc.) therefore, the set B needs a logi-

would need to determine the assumptions of the assumptions of the tions this algorithm leads us to the logical problem of infinite regress.the logical problem of infinite regress is a torment in science a classical anecdote is worth telling at this point (adapted from hawking 1996, p. 2):

assump-an old person challenged the explassump-anation of the universe given by assump-an omer in a public lecture by saying:

astron-– “What you have told us is rubbish the world is really a flat plate supported on the back of a giant tortoise.”

the scientist gave a superior smile before replying:

– “What is the tortoise standing on?”

– “You’re very clever young man, very clever,” said the old person

“But it is turtles all the way down.”

how could science escape from the infinite regress problem? this is a classical problem, the solution of which goes back to aristotle’s “unmoved mover.” everything that is in motion is moved by something else, but there cannot be an infinite series of moved movers thus, we must assume that there exists an unmoved mover

In order to construct scientific knowledge, we need an unmoved mover,

an initial point, established as axiom, without justification, just to be able

to start playing the scientific game, which includes eventually revising the initial point, and changing it if necessary the scientific game includes the use of an algorithm, that is, a procedure for solving a problem by trial and error, in a finite number of steps, which frequently involves repetition of

an operation thus, the initial point is not established forever; it is only

a logical artifice If the route to his desired destination is unknown, the walker could better start walking in any direction and will be able to find the route by trial and error, instead of staying paralyzed

regress problem in the theory of knowledge is by starting with the meta-

assumption B as given, and thus ignoring the third line and the rest then

the set of assumptions B will constitute the foundation or pillar of the theory of knowledge t, which in turn will be the foundation or pillar of the criterion L, which we can use to construct the theory of knowledge the infinite regress problem is thus circumvented and we are able to walk.the role of the theory of knowledge in the growth of scientific knowl-edge is to derive scientific rules that minimize logical errors in the task

of accepting or rejecting propositions that are intended to be scientific knowledge the theory of knowledge needs foundations, that is, meta- assumptions Consider that the meta-assumptions B of the current theo-ries of knowledge include those listed in table 1.1

as shown earlier, these meta-assumptions need no justification (please

do not try to justify them! We need to move on.) thus, this initial set of assumptions constitutes just the beginning of an algorithm to find the best set of assumptions Given these initial or fundamental assumptions, we have a rule to follow: any particular theory of knowledge will have to be logically consistent with these four general principles

In table 1.1, assumption (i) implies that we may fail to understand a reality because it is unknowable examples may include chaotic systems (weather), rare events (earthquakes), and ancient civilizations where facts are limited assumption (ii) in turn implies that research is needed

to attain scientific knowledge according to assumption (iii), a theory of knowledge seeks to provide science with a logical foundation or justifica-tion, that is, with a rationality therefore, discovery cannot appear “out

of the blue.” accidental discoveries are not “accidental”, but part of a constructed logical system; otherwise, it could hardly be understood as discovery according to assumption (iv), a theory of knowledge must have a rule that enables us to separate scientific knowledge from pseudo- knowledge in order to have error-free knowledge

theory of knowledge is a set of assumptions that constitute a logical system; that is, the assumptions cannot contradict each other thus, the-ory of knowledge can be seen as part of logic, that is, as a formal science Factual sciences and formal sciences thus interact: theory of knowledge (constructed in the formal science of logic) is needed in factual sciences any theory of knowledge has a particular set of assumptions that justify rules of scientific knowledge, in which the set of assumptions are all con-

It should be clear from the outset that a theory of knowledge is a mative theory It says what the rules of scientific knowledge ought to be therefore, a theory of knowledge cannot seek to explain what scientists

nor-do these are not epistemological questions; they are scientific research questions in themselves, equivalent to researching about why financial investors choose a particular portfolio to allocate their funds the answer

to both questions (the behavior of scientists and that of investors) will come from a factual science the usual sentence “science is what scientists do” cannot constitute a scientific rule because it is inconsistent with the

Table 1.1 Meta-assumptions of the theory of knowledge

(i) reality is knowable It might not be obvious to everyone that this proposition is needed, but reality could be unknowable to us

(ii) Scientific knowledge about reality is not revealed to us; it is discovered by us

(iii) Discovery requires procedures or rules that are based on a single logical system, which implies unity of knowledge of a given reality; moreover, there exists such logical system (iv) there exists a demarcation between scientific knowledge and non-scientific knowledge

Just to be clear on definitions:

• epistemology is sometimes called methodology, as it deals with the

procedure (the “how” question) to attain scientific knowledge

• epistemology is also called theory of knowledge, as it deals with the

logic of scientific knowledge

therefore, the three terms—epistemology, methodology, and theory of knowledge—can be considered synonymous and will be used interchange-ably in this book however, a possible confusion may arise with the use of the category “theory,” which may refer to either the theory of knowledge

or to the scientific theory In order to avoid this possible confusion, the book will use the term “epistemology” or “methodology” rather than

“theory of knowledge” whenever the risk of confusion should appear

this section will present the theory of knowledge developed by Karl popper (1968, 1993) popperian epistemology includes the following set

of assumptions:

First, scientific knowledge can only be attained by using hypothetic- deductive

logic, which implies the construction of scientific theories Scientific theories

are needed to explain the real world Second, the scientific theory is cally falsifiable or refutable Third, the logical route for scientific knowledge

empiri-can only go from theory to testing it against facts; in contrast, there is no logical route from facts to scientific theory, for it would require inductive logic, which does not exist.

derived from the assumptions of popperian epistemology rule (a) is self- explanatory rule (b) indicates that the criterion of demarcation is falsi-fication a proposition is not scientific if it is not empirically falsifiable

a falsifiable proposition is one that in principle is empirically false Under

the falsification principle, the presumption is that the proposition is false

so that its testing becomes a necessity; that is, the proposition is presumed false until proved otherwise If the presumption were that the proposition

is true, or that it could be false, then the testing would become

discre-tionary; the proposition would be presumed true until proved otherwise

through the falsification principle, science is protected from including untested propositions within its domain.

rule (c) indicates the criterion to accept or reject a scientific theory It implies that the opposite of the sentence “the theory is false” is not “the

theory is true,” but “the theory is consistent with facts” because there may

exist another theory able to explain the same reality this rule can be trated with a simple example Consider a theory that states, “Figure F is

illus-a squillus-are” (suppose Figure F is unobservillus-able) By definition, illus-a squillus-are is illus-a rectangle with all four sides equal If these characteristics are taken as the assumptions of the theory, then the following empirical proposition can be logically derived: the two diagonals must be equal If empirical evidence

on the diagonals becomes available, and are not equal, Figure F cannot

be a square the theory has been refuted by facts however, if empirically

the diagonals are equal, we can only say that the prediction has been

cor-roborated; we cannot say that we have verified that F is a square, for the

figure could be a rectangle

therefore, the popperian criterion to accept a proposition as scientific knowledge is not based on theory alone or on empirical data alone; it is rather based on the empirical refutation of theories, on the elimination of false theories Falsification leads us to an evolutionary (in the Darwinian sense) scientific knowledge “the evolution of scientific knowledge is, in the main, the evolution of better and better [scientific] theories this is a Darwinian process the theories become better adapted through natural selection: they give us better and better information about reality (they get nearer and nearer to the truth)” (popper 1993, p. 338) In sum, the logic of scientific knowledge is this: falsification is the way to eliminate

Table 1.2 Scientific research rules derived from popperian epistemology

(a) Scientific theory is required to explain the real world: No scientific theory, no

explanation

(b) Falsification is the criterion of demarcation a scientific theory must be falsifiable In order

to be falsifiable, a scientific theory must contain a set of assumptions that constitute a logically correct system, from which empirically falsifiable propositions can be logically derived

(c) If the empirical predictions are refuted by the reality, the scientific theory is rejected; if they are not, the theory is accepted a scientific theory cannot be proven true; it can only

be proven false, which implies that a scientific theory cannot be verified, but only

corroborated rejecting a scientific theory is definite, but accepting it is provisional, until new data or superior theory appears; hence, scientific progress is a Darwinian evolutionary process in which scientific theories compete and false theories are eliminated

false theories and thus to generate the progress of science In this sense,

we may say that popperian epistemology leads to the construction of a critical science

the assumptions of the popperian epistemology are consistent with the general principles of epistemology, established as meta-assumptions in table 1.1 they are clearly consistent with principles (i) and (ii), that is, the popperian epistemology implies rules to discover the functioning of the real world, assuming that this real world is knowable referring to prin-ciples (iii) and (iv), the popperian epistemology proposes the logic of sci-entific knowledge based on deductive logic and falsification as the principle

rules (L) have been derived from the set of assumptions of the popperian epistemology (set a), for given set of meta-assumptions (set B)

Social sciences seek to explain the functioning of human societies We may say that human societies constitute highly complex realities at a first glance, the social world seems to be a more complex reality than the physi-cal world the notion of complexity refers to the large number and the heterogeneity of the elements that constitute the particular reality under study, and to the multiple factors that shape the relations between those elements human diversity together with the multiplicity of human inter-actions makes human societies intricate realities; moreover, the individuals that make up human society are not identical, as opposed to atoms in the physical world human society is a highly complex system because many individuals interact and individuals themselves are complex systems.the problem that concerns us now is to find the proper epistemology for the social sciences the popperian epistemology presented above gives

us general scientific rules according to popper, these rules are applicable

to the natural and social sciences, for these types of sciences differ in scope, not much in method (popper 1976) however, the use of popperian epistemology in the social sciences is something that needs logical justi-fication to this end, this book will show, firstly, that social sciences and physics indeed differ in scope, but, and contrary to popper’s statement, that they also differ in method

how can a complex social reality be subject to scientific knowledge? It will now be shown that complex realities are subject to scientific knowledge if,

and only if, they can be reduced to an abstract process analysis this is the

process epistemology of Georgescu-roegen (1971, Chap IX), which will be

summarized in this section

Conceptually, a process refers to a series of activities carried out in the real world, having a boundary, a purpose, and a given duration; further-more, those activities can be repeated period after period the farming process of production, for example, includes many activities having a given duration (say, seasonality of six months), the purpose of which is, say, to produce potatoes, which can be repeated year after year the factory pro-cess of production also includes many activities, but with a shorter dura-tion, say, the hour, the purpose of which is, say, to produce shirts, which can be repeated day after day

the process epistemology makes the following assumptions:

First, the complex real world can be ordered in the form of a process, with

given boundaries through which input–output elements cross, and given duration, which can be repeated period after period this ordering is taxo-

nomic Second, the complex real world thus ordered can be transformed into

a simpler, abstract world by constructing a scientific theory this is the ciple of abstraction By transforming the complex real world into an abstract world, by means of a scientific theory, we can reach a scientific explanation

prin-to that complex real world.

On the boundary of the process and the input–output elements, the first assumption implies that we are able to separate those elements that

come from outside and enter into it—called the exogenous elements—from those that come out from inside the process—the endogenous elements

all the elements that participate in a process have thus been classified as endogenous, exogenous, or underlying mechanisms this is just a taxo-nomic ordering of a process therefore, the first assumption says that the complex real world can be represented in the form of a process

the second assumption says the complex social reality can have a tific explanation if it is reducible to an abstract process, a simpler abstract world, by means of a scientific theory, which assumes what the essential

scien-elements of the process are this is the well-known abstraction method

Certainly, to present the complete list of the elements of a process would

be equivalent to constructing a map to the scale 1:1 as in the case of the map, a complex reality cannot be understood at this scale of representation

In the abstract form, theoretical form, the complex reality is represented by

a map at a higher scale

although a process would include observable and unobservable elements, the abstract process will select only those that are observable or

measurable Call endogenous variables and exogenous variables to those

ele-ments that are observable In order to explain the changes in the enous variables, the object of the research, the scientific theory selects only the essential exogenous variables and the most important underly-ing mechanisms (unobservable) by which the endogenous and exogenous variables are connected the use of abstraction or the use of scientific the-ory implies that some elements of the real-world process must be ignored the process must be represented at higher scales, as in maps In sum, this

endog-is how a complex real social world can be transformed into an abstract world, into an abstract process, in which only the supposedly important elements of the process are included, and the rest are just ignored

how do we decide which elements are important in a process and which are not? how is an abstract process constructed? the construc-tion of an abstract process is made through the introduction of a scien-

tific theory, which is a set of assumptions, as was defined earlier hence,

the assumptions of the scientific theory will determine the endogenous variables, the exogenous variables that are important in the process, and the underlying mechanisms that are also important a scientific theory

is, therefore, a logical artifice by which a complex real world can be transformed into a simple abstract world the assumption of the process epistemology is that by constructing the abstract world, by means of a sci-entific theory, we will be able to explain and understand the complex real world: We will know the determinants of the endogenous variables and also the causality relations, namely, the relations between endogenous and exogenous variables

going to be repeated period after period; X is the set of exogenous variables, and Y is the set of endogenous variables the shaded area indicates the underlying mechanism by which X and Y are connected What happens inside the process is not observable, as indicated by the shaded area in the figure If it were, the interior of the process would be considered as another process in itself, with other endogenous and exogenous variables and other mechanism; the latter mechanism would also be observable and then constitute another process, and so on thus, we would arrive at the logical problem of an infinite regress We may avoid this trap by making assumptions about the mechanism and maintaining it fixed Ultimately,

there must be something hidden beneath the things we observe Science seeks to unravel those underlying elements.

the scientific theory must also include assumptions about how the abstract process operates the social relations taking place within the

mechanism constitute the structural relations these social interactions

must have a solution, which will be repeated period after period Call this

solution the equilibrium conditions the outcome of the abstract process

showing the relations between endogenous and exogenous variables—more precisely, the endogenous variables as a function of the exogenous

variables alone—constitutes the reduced form relations.

the reduced form relations may be represented as the following

exog-enous variables X are the ultimate factors in the abstract process that

determine the values of the endogenous variables Y, after all internal tions or structural relations have been taken into account the structural

rela-equations show only the proximate factors that affect the endogenous

vari-ables Y. Moreover, according to the reduced form equation, changes in the exogenous variables will cause changes in the endogenous variables

therefore, the reduced form equations may be called the causality

rela-tions of the scientific theory.

the rules of scientific research that are logically derived from Georgescu- roegen’s epistemology include:

1 Construct an abstract process to represent the complex social world with the help of a scientific theory;

2 Select a particular type of abstract process according to the nature of the process repetition (static, dynamic, or evolutionary, to be shown in Chap 3);

3 Submit the reduced form equation of the scientific theory to empirical test

Fig 1.1 Diagrammatic representation of an abstract process

combining The Two episTemologies inTo one

Comparing the set of assumptions of popper’s epistemology and roegen’s epistemology, we can see that they do not contradict each other; thus, they are complementary and can be combined into a single epistemol-

Georgescu-ogy Call this combination the composite epistemolGeorgescu-ogy to the need of

scien-tific theory and the principle of falsification of popperian epistemology, the process epistemology adds the principle of abstraction, the need of scientific theory for the particular purpose of reducing the complex real world into a simpler, abstract world so as to be understood in terms of endogenous and exogenous variables, and underlying mechanisms; moreover, whether the abstract world is a good approximation to the real complex world is resolved

by using the falsification principle

therefore, the composite epistemology assumes the following:

We can explain and understand a complex real world if, and only if, it is reducible to a simpler and abstract world in the form of an abstract process,

by means of a scientific theory, which is also falsifiable; such scientific theory exists and can be discovered.

Comparing the rules that were derived from Georgescu-roegen’s temology with those that were from popperian epistemology (presented

epis-in table 1.2), we can see that rule (1) and rule (a) are consistent with each other Scientific theory is needed to understand the real world in both epistemologies however, process epistemology is more precise in that the role of the scientific theory is clearly established: the set of assumptions by which a complex real social world is transformed into an abstract process rule (2) is absent in popperian epistemology, but it does not contradict it Falsification as the demarcation principle, rules (b) and (c), are absent in process epistemology, but they can be introduced into rule (3) of process epistemology, as they complement each other

It is clear that both epistemologies are complementary, for the two sets

of assumptions do not contradict each other; thus, they can be seen as a single logical system, from which a single set of rules for scientific research can be derived this set of rules are obtained just by consolidating the comparisons made above the derived rules are the following:

1 Construct an abstract process to represent the complex social world by means of a scientific theory;

2 Select a particular type of abstract process according to the nature of the process repetition (static, dynamic, or evolutionary, to be shown in Chap 3);

3 Submit the scientific theory to the falsification process

It should be clear that the composite epistemology is also logically sistent with the assumptions of the meta-theory B, which was presented in

with that consistency, as was proven earlier, and that the assumptions of the composite epistemology are just the elementary aggregation of the assumptions of both epistemologies, for they are complementary

It should be noted that the composite epistemology is now applicable

to complex realities, such as those studied by economics and the social ences in general We have given popper’s epistemology the needed logic to

sci-be applicable to complex realities by adding the principles of Georgescu- roegen’s epistemology this is the most significant finding of this chapter however, the derived set of research rules are still too general In order

to make them operational, a set of more specific research rules will have

to be developed this calls for a scientific research method, containing the rules logically derived from the composite epistemology in a more practi-

cal way, which will be called the alpha-beta method this is the subject of

the next chapter

© The Editor(s) (if applicable) and The Author(s) 2016

A Figueroa, Rules for Scientific Research in Economics,

DOI 10.1007/978-3-319-30542-4_2

Abstract In this chapter, a set of rules for scientific research, which is called

the alpha-beta method, is logically derived from the composite

epistemol-ogy this method makes the composite epistemology operational alpha propositions constitute the primary set of assumptions of an economic the-ory, by which the complex real world is transformed into a simple, abstract world; beta propositions are logically derived from alpha and are, by con-struction, empirically falsifiable alpha propositions are unobservable but beta are observable thus, the economic theory is falsifiable through beta propositions Beta propositions also show the causality relations implied by the theory: the effect of exogenous variables upon endogenous variables the principles of the alpha-beta method will constitute the rules for scien-tific research in economics in later chapters

the highly complex social world will be subject to scientific knowledge if, firstly, it is reducible to an abstract process, as indicated by the Georgescu- roegen’s epistemology; secondly, if the scientific theory is falsifiable, which comes from popperian epistemology as shown in the previous chapter, both epistemologies are not contradictory and can be combined into a single epistemology to make this composite epistemology operational, this chapter derives a particular research method, containing a practical set

of rules for scientific research, which is called the alpha-beta method.

the debate about the applicability of popperian epistemology in economics is that economic theories “are rarely falsifiable,” as shown in alpha-Beta: a Scientific research Method

the preface We need a method to deal with the problem of falsification in economics the objective of the alpha-beta method is precisely to ensure

that economic theories are constructed in such a way that they are always

falsifiable therefore, the alpha-beta method is not just another name for

a known research method; it is truly a new scientific research method, the application of which should contribute to the growth of the science of economics

It will help to introduce the following concept, in which Georgescu- roegen presents the structure of scientific knowledge as a logically ordered system, as follows:

In terms of the logical ordering of its propositions, any particular field of knowledge can be separated into two classes: alpha and beta, such that every beta proposition follows logically from …alpha propositions and no alpha proposition follows from some other alpha propositions (Georgescu- roegen 1971, p. 26)

the task before us is to apply this definition to the composite ogy and particularly to make it consistent with the principle of falsification.Let alpha propositions constitute the foundation or primary assump-tions of the scientific theory and beta propositions the empirical predic-tions of the theory the assumptions of a theory seek to construct an abstract world to make the complex world understandable Because the social world is too complex to understand, abstraction must be applied, which implies ignoring the variables that are supposedly unessential and retaining only those that are supposedly essential this is the role of a scientific theory hence, the objective of the theory is to construct an abstract world that resembles best the real complex world this is consis-tent with Georgescu-roegen’s epistemology

epistemol-What are the logical requirements for a proposition to be considered

an alpha proposition?

Looking back to the abstract process diagram (Fig. 1.1, Chap 1), it was clear that there were observable and unobservable elements the alpha propositions refer to the first and beta propositions to the latter alpha propositions are the assumptions of the scientific theory and must deal with the mechanisms or forces that connect the endogenous and exogenous

variables therefore, alpha propositions refer to the set of assumptions about the underlying factors operating in the relationships between the endogenous and the exogenous variables alpha propositions are unob-servable, but they must be non-tautological because they need to generate beta propositions, which should be observable and falsifiable the set of alpha propositions must constitute a logical system, free of internal con-tradictions this is just the definition of scientific theory presented earlier

hence, a scientific theory is a set of alpha propositions.

Can the assumptions of a scientific theory be logically derived from empirical observation? No, they cannot the main reason is that the the-ory precisely seeks to explain those observations, so it cannot assume what

it intends to explain alpha propositions intend to discover the essential factors that lie beneath the observed facts; therefore, the mechanisms contained in alpha propositions are unobservable What we can get from reality by empirical observation is a description of it, not an abstraction the listing of all elements one observes in the real world cannot discover

by itself the essential and nonessential variables as will be demonstrated later on (Chap 7), there is no logical route from empirical observations

of infinite regress the assumptions of a scientific theory are, to some extent, chosen arbitrarily therefore, the need to test the theory becomes

a requirement for scientific knowledge

Beta propositions are derived from alpha propositions by logical tion and make the theory comply with the testing requirement Beta prop-ositions are, by construction, observable and refutable because they refer

deduc-to the relations between endogenous and exogenous variables, which are observable then the logical relations between alpha and beta proposi-tions are as follows:

(a) If alpha is true, then beta must be true

(b) If beta is false, then alpha must be false

(c) If beta is true, then alpha is corroborated

therefore, beta propositions are observable and refutable, and thus they can be utilized to falsify the theory this is consistent with the popperian epistemology.

alpha propositions are chosen somewhat arbitrarily, as said earlier however, they are subject to some logical constraints: they must be unob-servable and non-tautological the condition of unobservable is required because alpha propositions refer to the underlying forces in the workings

of the observed world Furthermore, alpha propositions that are non- tautological will be able to generate beta propositions, which are both observable and refutable

unfalsifiable propositions are unobservable or, if observable, they are tautologies in the sense given to this term in logic: propositions that are always true as examples of propositions that are unfalsifiable, consider the following:

“Men die when God so wishes”

“If you have faith on this medicine, you will get well”

“It will rain or not rain here tomorrow”

the first example is unfalsifiable because God’s wishes are able; hence, a person is alive because God so wishes and when he dies

unobserv-it is just because God so wanted the proposunobserv-ition will never fail the second is also unfalsifiable because if the person complains that he is not getting well, he or she can be told, “You had no faith on this medicine.” this proposition will never fail because faith is unobservable the third is tautological because it includes all possible outcomes thus, tautological propositions are unfalsifiable, useless for scientific knowledge, for they can never fail

Consider now the statement “people act according to their desires.” It is unobservable but tautological, and thus unfalsifiable this statement will

always be true because whatever people do will always reflect their desires;

hence, it cannot be an alpha proposition and no beta proposition can be derived from it however, the statement “people act guided by the moti-vation of egoism” (not of altruism) is unobservable and non- tautological, and thus qualifies to be an alpha proposition a beta proposition can logi-cally be derived from it For example, selfish motivations imply free-riding behavior toward public goods; therefore, people will be forced (through taxes) to produce public goods (parks and bridges) this empirical propo-sition could in principle be false; thus, it is a beta proposition

take note that beta propositions are observable and refutable, even though they are derived from alpha propositions, which are unobservable this paradox is apparent because alpha propositions are free from tautolo-gies; moreover, alpha propositions assume the endogenous variables (Y) and exogenous variables (X) of the abstract process, which are observable, and beta propositions refer to the empirical relations between X and Y. If beta propositions cannot be derived from a theory, this “theory” is actu-ally not a theory; it is a tautology, useless for scientific knowledge to take the example shown above: the statement “people act according to their desires” is not an alpha proposition, for no beta proposition can be logi-cally derived from it It follows that the alpha-beta method eliminates any possibility of protecting scientific theories from elimination because beta propositions are falsifiable this is so by logical construction.

although subject to some logical constraints, the set of alpha tions is established somewhat arbitrarily however, this presents no major problem for falsification because the theory is not given forever on the contrary, a theory is initially established as part of an algorithm, of a trial-and- error process, the aim of which is to reach a valid theory by eliminat-ing the false ones If the initial theory fails, a new set of assumptions is established to form a new theory, and a new abstract world is thus con-structed If this second abstract world does not resemble well the real world, the theory fails and is abandoned, and a new set of assumptions

proposi-is establproposi-ished, and so on a valid or good theory proposi-is the one that has structed a simple abstract world—in the form of abstract process—that resembles well the complex real world

con-under the alpha-beta method, the valid theory is found by a trial-and- error process, in which we assist to the funerals of some theories the beta propositions derived logically from the alpha propositions are observable, falsifiable, and mortal this is consistent with the Darwinian evolutionary principle of scientific progress hence, what the set of assumptions of a theory needs is not justification; what it needs is empirical falsification, testing it against the facts of the real world using the beta propositions.Beta propositions thus have the following properties:

• Beta propositions show the falsifiable empirical predictions of a

sci-entific theory the reason is that beta propositions represent the reduced form relations of the abstract process: the relations between the exogenous and endogenous variables that the theory assumes hence, beta propositions are logically derived from the theory and

are observable and refutable; if beta propositions are not consistent with facts, then the theory fails and is rejected; if the beta propositions are consistent with facts, then the theory is accepted.

• Beta propositions also predict causality relations: changes in the

exogenous variables (X) will cause changes upon the endogenous variables (Y), which again are observable and falsifiable, that is,

causality requires a theory, that is, no theory, no causality

Because beta propositions indicate causality relations, for each enous variable of the theory there will exist a causality relationship; hence, there will be as many causality relations or beta propositions as there are endogenous variables (variables the theory seeks to explain) in the theo-retical system

endog-according to the alpha-beta method, if the abstract world constructed

by the theory is a good approximation of the real world, we should observe in the real world what the beta propositions say although a beta proposition is logically correct—it is the reduced form equation of the theoretical system—it may be empirically false the reason is that the set

of assumptions contained in the alpha propositions was selected somewhat arbitrarily Falsification of a scientific theory is thus a logical necessity

In order to illustrate the principle that logically correct propositions may

be empirically false, consider the following syllogism:

all men are immortal

Socrates is a man

then, Socrates is immortal

the conclusion follows logically from the premises, but it is empirically false the reason falls upon the first premise, which is empirically false In the alpha-beta method, by contrast, the premises (the assumptions) are unobservable and they may be false in the sense that the underlying forces

of the workings of the real world are not those assumed by the theory; then the logically correct proposition may be empirically false Consider the following example:

Capitalist firms seek to maximize employment

Workers seeking jobs are fixed in number

then, the capitalist system operates with full employment