Chapter 6 is concerned with theories and models in economics. Economists typically prefer to speak of “models” rather than “theories” and of “generalizations” or “assumptions” rather than “laws.” Economists still speak of theories, but only when referring to subdivisions of the discipline. Why? What are models and how are they related to theories? Why are economists so enamored of models? Do they supersede or incorporate laws? Without settled definitions of theories or models, it is unclear whether the focus on models is just a change in terminology, or whether there is something interestingly different in the practice of contemporary economics. This chapter surveys philosophical conceptions of theories and defends a view of theories as sets of lawlike statements that are systematically interconnected. It argues that models should be understood as conceptual explorations without empirical commitments. They are definitions of predicates or kinds of systems. Models can be used to theorize, explain, or predict, when one offers theoretical hypotheses asserting that parts of the real world belong to the extension of the predicate a model defines.

Chapter 16 summarizes the argument and shows that the methodological peculiarities of economics depend to a considerable extent on the fact that it is a social science. The fact that equilibrium theory includes a theory of rationality helps to explain why positive and normative economics are so intermingled, why economists are so strongly committed to their theory, and why they pursue a distinctive strategy.

Chapter 5 provides a fragmentary introduction to macroeconomics that shows that highlights some of the philosophical questions macroeconomic models raise and relates them to equilibrium theory. Section 1 discusses how growth theory is linked to equilibrium theory. Section 2 considers how growth theory can be adapted to address questions about economic fluctuations, including recessions. Section 3 focuses on a simple influential Keynesian model of economic fluctuations. Section 4 discusses a specific relationship between employment and the rate of inflation (the Phillips Curve) that highlights methodological issues concerning causal inference and microfoundations that have led many economists to reject Keynesian economics. Section 5 develops these methodological issues further, highlighting the role of identities in macroeconomics.

Chapter 14 presents a case study of the reactions of economists to experimental work on preference reversals. In this instance, the profession has not relied on an unacceptably dogmatic view of theory appraisal. Such dogmatism as there has been stems from the commitment of economists to a vision of economics as a separate science. The discussion in this chapter is an illustration rather than an argument for the interpretation of the evolution of economic methodology defended in Chapter 13. As we shall see, the initial reactions of economists to the anomalous results of experiments carried out by psychologists are very different than current attitudes.

Chapter 3 turns to the determinants of the supply of goods and services and to the way in which the “forces” of demand and supply determine prices and the quantities exchanged. Via the use of simple models, economists explain generalizations concerning how the quantities of goods and services supplied respond to prices. The accounts of demand in chapter 2 and supply in this chapter take prices as given, and additional modeling is needed to explain how supply and demand are equilibrated and what properties market equilibria possess. This chapter pulls together the discussions of the first three chapters to offer a general sketch of the causal structure and basic principles of mainstream economics. It takes issue with the view, which used to be dominant, that general equilibrium theory is the fundamental theory of contemporary economics. What I call “equilibrium theory,” not general equilibrium theory, is fundamental.

In the second half of the Twentieth Century, Mill’s deductive method was criticized by defenders of more positivistic or modernist views of economic methodology, which I criticize in chapter 11. A number of economists, including Terence Hutchison, Paul Samuelson, Fritz Machlup, Milton Friedman, and Tjallings Koopmans argued that Mill’s deductive method is insufficiently empirical and that economic models should be judged by the agreement of their implications with economic outcomes. Yet they rarely practiced what they preached. This chapter thus highlights the methodological schizophrenia of many economists, in which methodological pronouncements and practice contradict one another.

Chapter 4 sketches the contemporary theory of economic welfare. It argues that welfare economics is a theoretically driven discipline, whose questions are determined more by equilibrium theory than by practical problems of economic welfare. Section 1 begins with the fundamental question: what is welfare or, synonymously, well-being? Section 2 explains why the answer that economists give has led them to eschew utilitarianism, and it links this chapter to the previous three, presenting the fundamental theorems of welfare economics, the grounds for the admiration economists have for the operation of perfectly competitive markets, the problems of markets that are not perfectly competitive, and further theorems concerning social choice and welfare. Section 3 turns to practical work in welfare economics and the foundations of cost-benefit analysis. Section 4 ends with an overview, including some remarks about alternatives to mainstream normative economics.

Mainstream economics portrays individual agents as choosing rationally. Many of its generalizations concerning how people actually choose are also claims about how agents ought rationally to choose. Chapter 1 focuses on the conception of rationality that is incorporated in contemporary economics and is central to it. It begins with the concept of preferences, which is the central concept in mainstream economics, and with the theory of rationality that focuses on preferences. The fact that a normative theory lies at the foundation of economics raises philosophical questions. What are requirements of rationality doing in what purports to be a scientific theory of economic phenomena? After presenting the axioms of ordinal utility theory, it offers an account of preferences, a critique of revealed preference theory, and an introduction to expected utility theory. It argues that if one wants to understand economics, the modeling of rationality is the place to begin.

Chapter 12 criticizes Karl Poppers and Imre Lakatos’ views on theory appraisal, which have been particularly influential among writers on economic methodology, although their influence has waned. Popperian critics of economics are right to claim that economists seldom practice the falsificationism that many preach, but, in contrast to authors such as Mark Blaug (), I argue that the problem is with the preaching, not with the practice: falsificationism is not a feasible methodology. Although Lakatos provides more resources with which to defend economics than does Popper, his views are also inadequate and for a similar reason. Both Popper and Lakatos deny that there is ever reason to believe that scientific statements are close to the truth or likely to be true, and neither provides a viable construal of tendencies. In denying that such reasons to accept generalizations have a role in either engineering or in theoretical science, Popper and Lakatos are implicitly calling for a radical and destructive transformation of human practices.

Chapter 10 considers what conditions must be met if one is to have good reason to accept tendency claims or inexact laws, and it presents an interpretation of J. S. Mills views on confirmation, which still appear to dominate methodological practice in economics. It begins in §10.1 by discussing well-known Bayesian, hypothetico-deductive, and likelihood approaches to confirmation, before focusing on an indirect inductive method, which Mill calls “the method a priori” or “the deductive method.” §10.2 lays out the broad outlines of Mill’s deductive method. §10.3 expands upon Mill’s method a posteriori – his direct inductive method – to address the question of how economists can know whether their fundamental generalizations express inexact laws or tendencies. §10.4 examines in detail what Mill has to say about his deductive method, while §10.5 lays out the implicit algorithm that Mill offers for testing the implications of theoretical hypotheses in an inexact and separate science.

Chapter 7 is concerned with the global strategy and structure of economic theory. After arguing that Thomas Kuhns and Imre Lakatos notions of paradigms and research programs are in some ways misleading and not sufficiently detailed to be immediately applicable to economics, chapter 7 sketches the structure and strategy of economics as an inexact and separate science and comments on the role of abstract general equilibrium theories in this enterprise. Crucial to the global structure of economics is the conviction that economic outcomes depend mainly on a small set of causal factors that typically capture the most important features of economic outcomes. Economic theories are inexact, because other causal factors are left out, but at a high level of approximation, they are complete, and their scope includes the whole of economic phenomena.

A less defensible aspect of economic methodology, whose influence is waning, is the commitment to economics as a separate science. To insist that any acceptable economic theory must aspire to capture the entire economic realm has little justification. As argued in the first edition, the keys to the methodological peculiarities of economics lie in its structure and strategy.