A Lakatosian reconstruction of monetarism

Duhs, Edward John. (1988). A Lakatosian reconstruction of monetarism Master's Thesis, School of Economics, The University of Queensland.

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Author Duhs, Edward John.
Thesis Title A Lakatosian reconstruction of monetarism
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 1988
Thesis type Master's Thesis
Total pages 265
Language eng
Subjects 14 Economics
Formatted abstract Theories in the natural sciences and in the social sciences (such as economics) have a great capacity to endure, despite at times, considerable evidence against them. For instance, Ptolemy's theory of the geo-centric universe held sway for 14 centuries and some of its proponents were still maintaining its validity some 100 years after Copernicus published “De Revolutionibus Orbium Caelestium" in 1543.

In economics, the neo-classical research programme is proving similar durable though its life span has so far been much shorter than that of the Ptolemaic theory. The neo-classical programme had its origins in the Quantity Theory of 19th century. In Keynesian times it fell into disrepute, but it was revived by Milton Friedman et al so successfully that in many countries on a policy level, at least, it replaced the Keynesian orthodoxy. Since 1973 it has lost some ground both within the profession and amongst the general public although the rational expectations approach of Lucas, Sargent et al has recently revived it, and the monetary approach to the balance of payments has given it an international dimension which it lacked before.

The ability of a theory to adjust to circumstances often serves to protect it from a critical examination of the assumptions on which it is based. More than half a century ago, a philosopher of science, Alfred Whitehead, wrote

      "When you are criticising the philosophy of an epoch, do not chiefly direct your attention to those intellectual positions which its exponents feel it necessary explicitly to defend. There will be some fundamental assumptions which adherents of all the variant systems within the epoch unconsciously presuppose. Such assumptions appear so obvious that people do not know what they are assuming because no other way of putting things has ever occurred to them. With these assumptions a certain limited number of types of philosophical systems are possible, and this group of systems constitute the philosophy of the epoch.” 1

In the case of the Ptolemaic theory those assumptions involved the idea that as the heavens were perfect they should be represented by perfect geometrical shapes such as circles and sphere. Such assumptions remained largely unchallenged until the 16th century. Failure to challenge such assumptions earlier resulted in a false theory being allowed a longer life. In the case of the neo-classical programme in economics there are assumptions about optimisation, about rational its based on the Lockean view of “economic man”, about the operation of the price-auction model and the possibility of applying a Walrasian general equilibrium framework.

Tobin says “‘the methodology of positive economics’ protects (neo-classicists) from empirical examination of their premises”.2 In contrast to this, I shall argue that it is possible to critically examine the assumptions on which the programme is based, if we use a philosophy of science approach developed by Imre Lakatos, and that a Lakatosian methodology is superior to that of positivism, which has hitherto provided the foundations of neo-classical economics as we know it. Some writers are now coming around to this point of view& For example, Rosenberg3 says “The F-twist is giving way to the methodology of scientific research programs”.

Lakatos believes that a sweeping revolutionary intellectual movement or scientific research programme has two vital attributes or characteristics. Firstly, there are the “hard core” assumptions which are to be protected from anomalous empirical results and behavioural arguments by the negative heuristic of the programme.

      “The negative heuristic of the programme forbids us to direct the modus tollens at this ’hard core’. We must use our ingenuity to articulate or even invent 'auxiliary hypotheses' which form a protective belt around this hard core, and we must redirect the modus tollens to these.”4

Secondly, there is what he calls the "positive heuristic“ of the programme, in which specific propositions are put forward, measured, and tested. In the case of the neo-classical programme in economics this is the domain of monetarist policy recommendations about curtailing the rate of growth of the money supply in order to curb the rate of inflation, the stability of the demand for money or its international equivalent the monetary approach to the balance of payments, the Phillips Curve versus the "natural rate” hypothesis, the relationship between spot and forward rates and the possibility of modelling expectations endogenously, to name a few topics. Lakatos shows how anomalies in the positive heuristic are accommodated within the protective belt:

      “It is (the) protective belt of auxiliary hypotheses which has to bear the brunt of tests and get adjusted and re-adjusted, or even completely replaced, to defend the thus hardened core. A research programme’s successful if all this leads to a progressive problemshift; unsuccessful if it leads to a degenerating problemshift.”5

Only a few writers have applied Lakatosian methodology to economics but those that have, have tended to concentrate on the progressivity vs. degeneracy aspect. Some have even claimed that this is the centre point of a Lakatosian reconstruction.6 One drawback of such, an approach is that it focuses attention on empirical testing and on the positive heuristic and is likely to ignore the implications so clearly expressed in Whitehead’s quote earlier. As well, the problems associated with empirical testing in economics often makes it difficult to distinguish turning points in the progressivity degeneracy cycle, with the result that considerable subjective judgment is involved. As a contrast to this approach, this thesis emphasises the fact that ultimately positive heuristics depend on negative heuristics. Positive heuristics can become so overloaded, tortuous and excessively complicated, as they adjust their auxiliary hypotheses to explain the "facts” that the research programme may run the risk of being overthrown on aesthetic grounds alone. This was the reason for the replacement of the Ptolemaic theory by the Copernican theory. There are other reasons also why a research programme may have to be abandoned. Two of these are mentioned here. Firstly, the predictive capacity of one theory may decline and come to be continually overshadowed by the predictive capacity of its rival. Secondly, the theory may cease to predict novel facts and be forced into ex-post rationalisations instead. These (latter) reasons are mainly logical and empirical.

Until recently no one has ever suggested that prediction itself may fail. Yet on a practical level this seems to be a conclusion of the recent work on “Economic Chaos”.7 And on a theoretica1 1eve1, a Lakatosian approach emphasises that the claim by positivist economists like Friedman8 , that prediction is the sole criterion for theory selection will only serve within the framework of the positive heuristic. Clearly there is no reason why arguments about the merits or demerits of a theory or the debate between conflicting theories should always be confined to the positive heuristic. If this is accepted then there are both practical and theoretical grounds for carrying the arguments into the negative heuristic.

In summary, this thesis argues that philosophy of science is a necessary pre-requisite for the study of economics and that the Lakatosian methodology of scientific research programmes is not only appropriate to economics but has advantages which its competitors lack. The thesis also argues that neo-classical economics can be regarded as a scientific research programme, (is in fact the most appropriate research programme in economics) and that while the study of the positive heuristic of that programme has captured most attention, it cannot exist in isolation. Ultimately the positive heuristic depends on the capacity of the negative heuristic to protect the "hard core" assumptions. The advantages of such a view are detailed in the concluding chapter.


1. Whitehead, A.N., (192SJ, Science and the Modern World, Macmillan. Republished 1967, Free Press.
Also quoted in Caldwell, B., (1982), Beyond Positivism, Allen and Unwin, p. 1.
2. Tobi n, J.,(1981), "The Monetarist Counter-Revolution", The Economic Journal, March, 91, p. 24-42.
3. Rosenberg, A., (1 986) , “ Lakatosian Consolations for Economics", Economics and Philosophy, 2, Cambridge University Press, U.S.A., p. 127.
4. LaKatos I., (1978), The Methodology of Scientific Research Programmes, Vol. 1, edit. J. Worrall and G. Currie, C.U.P., p. 48.
5. ibid., p. 48.
6. Maddock says "The guiding tool of a Lakatosian construction is the notion of progressivity”
see Maddock, R. , (1983) , "Rationa1 Expectations Macrotheory : A Lakatosian
Reconstruction", A.N.U. Working Paper No. 11, March, p. 1.
7. see Day, R., (1981), “The Emergence of Chaos from Classical Economic Growth”, MRG 8014, U.S.C.
    Also Li, T.Y. and Yorke, J. A., (1975), "Period Three Implies Chaos", American Mathematical Monthly, December, p. 985-992.
8. Friedman, M., (1953), Essays in Positive Economics, University of Chicago Press,
p. 7 ff.
Keyword Lakatos, Imre, 1922-1974.

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