Monday, December 29, 2008

Correspondence, abstraction, and realism

Science is generally concerned with two central semantic features of theories: truth of theoretical hypotheses and reliability of observational predictions. (Philosophers understand the concept of semantics as encompassing the relations between a sentence and the world: truth and reference. This understanding connects with the ordinary notion of semantics as meaning, in that the truth conditions of a sentence are thought to constitute the meaning of the sentence.) Truth involves a correspondence between hypothesis and the world; while predictions involve statements about the observable future behavior of a real system. Science is also concerned with epistemic values: warrant and justification. The warrant of a hypothesis is a measure of the degree to which available evidence permits us to conclude that the hypothesis is approximately true. A hypothesis may be true but unwarranted (that is, we may not have adequate evidence available to permit confidence in the truth of the hypothesis). Likewise, however, a hypothesis may be false but warranted (that is, available evidence may make the hypothesis highly credible, while it is in fact false). And every science possesses a set of standards of hypothesis evaluation on the basis of which practitioners assess the credibility of their theories--for example, testability, success in prediction, inter-theoretical support, simplicity, and the like.

The preceding suggests that there are several questions that arise in the assessment of scientific theories. First, we can ask whether a given hypothesis is a good approximation of the underlying social reality--that is, the approximate truth of the hypothesis. Likewise, we can ask whether the hypothesis gives rise to true predictions about the future behavior of the underlying social reality. Each of these questions falls on the side of the truth value of the hypothesis. Another set of questions concerns the warrant of the hypothesis: the strength of the evidence and theoretical grounds available to us on the basis of which we assign a degree of credibility to the hypothesis. Does available evidence give us reason to believe that the hypothesis is approximately true, and does available evidence give us reason to expect that the hypothesis's predictions are likely to be true? These questions are centrally epistemic; answers to them constitute the basis of our scientific confidence in the truth of the hypothesis and its predictions.

It is important to note that the question of the approximate truth of the hypothesis is separate from that of the approximate truth of its predictions. It is possible that the hypothesis is approximately true but its predictions are not. This might be the case because the ceteris paribus conditions are not satisfied, or because low precision of estimates for exogenous variables and parameters leads to indeterminate predictive consequences. Therefore it is possible that the warrant attaching to the approximate truth of the hypothesis and the reliability of its predictions may be different. It may be that we have good reason to believe that the hypothesis is a good approximation of the underlying economic reality, while at the same time we have little reason to rely on its predictions about the future behavior of the system. The warrant of the hypothesis is high on this account, while the warrant of its predictions is low.

Whatever position we arrive at concerning the possible truth or falsity of a given economic hypothesis, it is plain that this cannot be understood as literal descriptive truth. Economic hypotheses are not offered as full and detailed representations of the underlying economic reality. For a hypothesis unavoidably involves abstraction, in at least two ways. First, the hypothesis deliberately ignores some empirical characteristics and causal processes of the underlying economic reality. Just as a Newtonian hypothesis of the ballistics of projectiles ignores air resistance in order to focus on gravitational forces and the initial momentum of the projectile, so an economic hypothesis ignores differences in consumption behavior among members of functional defined income groups. Likewise, a hypothesis may abstract from regional or sectional differences in prices or wage rates within a national economy. Daniel Hausman provides an excellent discussion of the scope and limits of economic theories in The Inexact and Separate Science of Economics.

Another epistemically significant feature of social hypotheses is the difficulty of isolating causal factors in real social or economic systems. Hypotheses are generally subject to ceteris paribus conditions. Predictions and counterfactual assertions are advanced conditioned by the assumption that no other exogenous causal factors intervene; that is, the assertive content of the hypothesis is that the economic processes under analysis will unfold in the described manner absent intervening causal factors. But if there are intervening causal factors, then the overall behavior of the system may be indeterminate. In some cases it is possible to specify particularly salient interfering causal factors (e.g. political instability). But it is often necessary to incorporate open-ended ceteris paribus conditions as well.

Finally, social theories and hypotheses unavoidably make simplifying or idealizing assumptions about the populations, properties, and processes that they describe. Consumers are represented as possessing consistent and complete preference rankings; firms are represented as making optimizing choices of products and technologies; product markets are assumed to function perfectly; and so on.

Given, then, that hypotheses abstract from reality, in what sense does it make sense to ask whether a hypothesis is true? We must distinguish between truth and completeness, to start with. To say that a description of a system is true is not to say that it is a complete description. (A complete description provides a specification of the value of all state variables for the system--that is, all variables that have a causal role in the functioning of the system.) The fact that hypotheses are abstractive demonstrates only that they are incomplete, not that they are false. A description of a hockey puck's trajectory on the ice that assumes a frictionless surface is a true account of some of the causal factors at work: the Newtonian mechanics of the system. The assumption that the surface of the ice is frictionless is false; but in this particular system the overall behavior of the system (with friction) is sufficiently close to the abstract hypothesis (because frictional forces are small relative to other forces affecting the puck). In this case, then, we can say two things: first, the Newtonian hypothesis is exactly true as a description of the forces it directly represents, and second, it is approximately true as a description of the system as a whole (because the forces it ignores are small).

This account takes a strongly realist position on social theory, in that it characterizes truth in terms of correspondence to unobservable entities, processes, or properties. The presumption here is that social systems generally--and economic systems in particular--have objective unobservable characteristics which it is the task of social science theory to identify. The realist position is commonly challenged by some economists, however. Milton Friedman's famous argument for an instrumentalist interpretation of economic theory (Essays in Positive Economics) is highly unconvincing in this context. The instrumentalist position maintains that it is a mistake to understand theories as referring to real unobservable entities. Instead, theories are simply ways of systematizing observable characteristics of the phenomena under study; the only purpose of scientific theory is to serve as an instrument for prediction. Along these lines, Friedman argues that the realism of economic premises is irrelevant to the warrant of an economic theory; all that matters is the overall predictive success of the theory. The instrumentalist approach to the interpretation of economic theory, then, is highly unpersuasive as an interpretation of the epistemic standing of economic hypotheses. Instead, the realist position appears to be inescapable: we are forced to treat general equilibrium theory as a substantive empirical hypothesis about the real workings of competitive market systems, and our confidence in general equilibrium hypotheses is limited by our confidence in the approximate truth of the general equilibrium theory.

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