economic methodology


That economics is a value-laden science is not a new idea. Most of the prominent economic thinkers were also philosophers, wary of moral and philosophical content of scientific assumptions, models, and theories. That economics needs philosophy, and the separation between these two cannot be maintained any longer, is gaining recognition, and has become a subject of debates in the field of philosophy of economics that brings together (to various extends) philosophers, mainstream, and heterodox economists. For example, Daniel Hausman (1992) discusses that at an analytic level economists do successfully separate the philosophical and ethical content from economic analysis, albeit this separation is possible only at the analytic level. Karl Polanyi (1957), in his discussion on the entanglement of economic activities in the social totality, gives insights from a different perspective how considering the subject of economic study in social vacuum can in fact lead to thinking that scientific practice indeed has disentangled from society.

Today economists of both mainstream (e.g., Jean Tirole) and heterodox approaches more readily admit: economics is a moral and philosophical science. Yet the meaning and scope of the normative components of economics, the epistemic consequences of the social embeddedness of science, and the social consequences of economics are raising so far inconclusive debates. These issues constitute two-tiered dimensions of scientific rationality: external and internal ones. While the criteria of internal rationality (which constitute the standard approach to scientific rationality) refer to disciplinary epistemology and methodology, the criteria of external rationality involve the axiological, ethical, and societal elements of the process of knowledge production and the social consequences of science.

Interestingly, as Gustav Márquez (2016) points out, even in the field of philosophy of economics, the discussions are often focused on the elements of what I call here internal rationality. Márquez argues that the predominant focus on these issues characterize the mainstream philosophy of economics, while the more normatively-laden issues, such as a broader theoretical reorientation towards more responsive and socially engaged approaches (which I considered as aspects related to the external scientific rationality), are not so much a part of the dominant concerns and discourse.

Why would an external rationality matter? What is the meaning of the social consequences of economics as a science? And how the acknowledgment of the value-laden component of scientific practices plays out in research practices of the scientific community, and of an individual researcher? These questions are not easy to answer, as they involve several complex issues, such as what is the meaning of scientific truth, scientific objectivity, how to account for the normative components of science, or what are the grounds for our confidence in scientific methods and analysis—to name a few. While each of these questions opens a Pandora box by itself, my goal is to simply open up some of the ways these profound issues can be approached for a discussion. My guiding thought is that one of the elements that drastically shapes our take on these questions pertains to the context in which science and the process of knowledge production is considered.

My specific focus will be on the role of science in society and for policy making. In my next entries of the WEA Pedagogy Blog, I am going to consider several issues, problems, and controversies raised at the intersection of economics, society, and policy, with an eye towards their educational and pedagogical challenges. My objective is to problematize, hopefully for a broader discussion with the readers, the fact that the specific philosophical commitments (e.g. ontological and epistemological assumptions about the role of science, function of knowledge, scientific truth, etc.) bear impact on how the epistemic consequences of the value-ladedness of economics are framed, and on the acknowledgment and role assigned to the extra-scientific components of research practices.


Hasuman, Daniel M. 1992. The Inexact and Separate Science of Economics. New York: Cambridge University Press.

Márquez, Gustavo. 2016. A Philosophical Framework for Rethinking Theoretical Economics and Philosophy of Economics. London: College Publications.

Polanyi, Karl, [1944] 1957. The Great Transformation. Boston: Beacon Press.


Preliminary Remarks: “The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.” From The Trouble with Macroeconomics (Paul Romer)

I do not understand why indifference to error is worse than committed advocacy. Tor an illustration of committed advocacy of error, see postscript below on 70 years of economists’ committment to a fallacious theory. Furthermore, the problem is not confined to macro. Microeconomists are also dogmatically committed to utility maximization, when in fact this hypothesis about consumer behavior is solidly rejected by empirical evidence; see: The Empirical Evidence Against Neoclassical Utility Maximization: A Survey of the Literature.

For the followup post, see “Understanding Macro II: Post-War Prosperity”

Understanding Macro: The Great Depression

Published in The Express Tribune, February 21st, 2018.

Due to frequent headlines, there is a substantial public awareness of core macroeconomic issues like unemployment, trade agreements, exchange rates, deficit, taxes, interest rates, etc. However, even professionals are often ignorant of the intellectual battles which have shaped modern macroeconomics, since this is not taught in typical PhD programmes in economics. This article attempts to provide the history of ideas which led to the emergence of macroeconomics, since this is an essential background required for informed analysis of these issues.

Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then. According to the classical economic theory, forces of supply and demand in the labour market would ensure full employment. Keynes starts his magnum opus, The General Theory of Employment, Interest, and Money, with the observation that the economic theory cannot explain the long, persistent and deep unemployment that was observed following the Great Depression. Keynes set himself the goal of creating a theory which could explain wide fluctuations in levels of employment that he observed. He discovered that creating such a theory involved rejecting deeply held convictions, central to economic theory.

Read More

shortlink for this post:

Polanyi offers a deep historical study of how European societies based on traditional values of cooperation and social responsibility were tansformed into modern secular societies. In Polanyi’s terminology, social relations became embedded within the market, creating a market society driven by the imperative of commercialization, which makes money the measure of all things, including human lives. This transformation has affected all dimensions of human existence – politics, economics, society and most importantly, our ways of thinking about these areas. In particular, Modern economic theory is a product of historical forces, and provides an intellectual framework for glorifying the market as the best way of organizing our economic affairs.

I believe that understanding Polanyi is of great importance in understanding the conflict between the values and intellectual frameworks of market societies and traditional society (and also Islamic ideal societies). Understanding how the great transformation took place also provides some clues as to how we can try to create the counter-revolution in thought and action that is needed to undo the damages caused by this commercialization of all spheres of human existence. Over the past decade, I have spent a lot of time thinking about ahd studying Polanyi. The links below provides an introduction to my papers, video-talks, and shorter posts about many aspects of Polanyi’s work in The Great Transformation:

Summary: My 1000+ word summary of Polanyi’s classic: “The Great Transformation: The Political and Economic Origins of Our Times” has been wildly popular, remaining constantly among the top ten on the RWER Blog since it was was published nearly five years ago.  I have recently (25/12/26) revised and updated the post to clean up extraneous elements and clarify the substance in light of readers comments as well as my own improved understanding. Perhaps the most important element of this post is that it explains how living in a market society shapes our thoughts to conform with the commercialization it creates. Creating radical changes requires the first step of liberating our selves from these blinders, to be able to imagine radical alternatives.  I have also recorded a 28m video-talk on this topic, which has been added to the original post.

Methodology: Moving forward from critique, Polanyi’s analysis is based on methodological principles radically different from those currently in use. Understanding and implementing these principles woujld allow us to create a new approach to economics and social sciences. My 20 page paper explaining the three fundamental principles used by Polanyi was published in the WEA Journal: Asad Zaman (2016) ‘The Methodology of Polanyi’s Great Transformation.’ Economic Thought, 5.1, pp. 44-63. A brief 1000 word explanation of this methodology is available in a WEA Pedagogy Blog post:    The Methodology of Polanyi’s Great Transformation. The post also provides a link to a 45m video lecture on this topic. (This lecture has been by far my most popular video-lecture, with more than 2000 views.) Polanyi’s analysis provides the basis for a radically different approach to economics, which considers politics, society, environment, and economics as inter-related subjects which cannot be understood in isolation. One of the deep insights of Polanyi is that economic theory itself is a product of a power struggle between different social classes and cannot be understood outside its historical context.

Ecological Collapse: The relationship between the Great Transformation and the looming environmental catastrophe which threatens the future of humanity on planet Earth is discussed in Zaman, Asad, “Unregulated Markets and the Transformation of Society” Chapter 18, Routledge Handbook of Ecological Economics: Nature and Society. Editor Clive Spash. 2016. Major points made in this 5000 word paper are summarized in my earlier post on “Markets and Society” which also provides links to the full paper and a 50min Video-Talk on this topic. Very briefly, markets generate profits by appropriating and exploiting resources, eventually exhausting them, before moving on to the next frontier. The dynamics of growth is such that it is threating to exhaust the last remaining frontiers at the planetary level, leading to collapse. This topic is also addressed in my paper on “Evaluating the Costs of Growth” Real World Economics Review, issue 67, 9 May 2014, page 41-51.. Available at SSRN:

Islamic Economics: One of the central themes of Polanyi is the opposition between values of traditional societies and those of Market Societies. Islamic Economics is aligned with traditional values and opposes the commercialization generated by market societies. Studying these contrasts leads to a sharper understanding of the underlying principles of an Islamic Economy. These relationships are clarified in my 30 page essay on   “The Rise and Fall of the Market Economy,” Review of Islamic Economics, Vol. 14, No. 2, 2010, pp. 123–155. A brief explanation is also available from a post on “The Great Transformation in European Thought” in my “Islamic WorldView Blog”. A longer 5000 word explanation, meant as an entry for an Encyclopedia of Islamic Economics, was never published: The Limits of Market Economy.

Four Lectures on Polanyi: In my Advanced Micro class, I covered “The Great Transformation” in detail in four lectures listed below. Each lecture is about 90 minutes. The links provide both video-recording and transcripts of the lecture for faster reading.

  1. L16: From Hunter-Gatherer to World War 2
  2. L17: The Transition from traditional paternalistic and regulatory economies to market economy.
  3. L18: Three Artificial Commodities – Labor, Land, Money. Analysis of Social Change.
  4. L19: Devastating Impact of Unregulated & Expanding Markets, and how to reverse the Great Transformation – concluding lecture on Polanyi.

In addition to the longer articles/talks above, some short previous posts on the WEA Pedagogy Blog deal with topics related to Polanyi; these are listed below.

Meta-Theory and Pluralism in the Methodology of Polanyi: Post explains the meta-theoretical methodological stance of Polanyi. Polanyi is concerned with the process of social change. He analyzes how theories emerge as attempts by different social classes to understand, explain, control, and harness for their own benefit, changes which are created by external drivers. Thus, his is a meta-theory which studies the emergence of theories about economics, society and politics, and the impact of these theories on the alignment of power between different social groups.

The Neo-Liberal Way of Life: Madi’s post explains how the market society molds our way of life, as well as our ways of thinking, in accordance with Polanyi’s conception of “embeddedness” – that is, social relations are embedded within economic relations in a market society.

Hunter-Gatherer Societies: The idea that political and social structures of a society depend on the economic relations of production is cleanly demonstrated in context of primitive hunter-gatherer societies. This shows how economic theories are situated within historical context, unlike scientific theories which are universal invariants. It also shows the impossibility of analyzing economics in isolation from political, social and historical context.

Three Methodologies: The differences between contemporary, Marxist, and Polanyi methodology are clarified in this post. Contemporary economics treats the economy like a physical system subject to laws which are independent of what observers think – that is, economic theories do not affect the laws governing the economic system. Marx tells us that the economic relations of production are primary, and give rise to the social and political systems. Also economic theories emerge to justify the powerful (capitalist) classes. Thus economic theories are born out their historical context. This is well-illustrated by the Hunter-Gatherer Societies. Polanyi argues for two-way interactions. Economic theories are born out the historical context as a result of the struggle for power between different classes. At the same time, these theories are use to explain and control the economic system, so that theories actually influence the behavior of the economic system. For example, Marx’s theory of communism influenced the structure of the economy of Russia and China. This idea, that economic theories influence the behavior of the economic system, is alien to both modern economics and also to Marx, since material determinism excludes human will and interpretation from influencing the behavior of economic systems. However, human agency is at the heart of Polanyi’s analysis. For a link to more materials and a 90m video lecture on this topic, see: Advanced Micro Lecture 15: 19th Century European History

Entanglement of the Objective and Subjective:   Western epistemology is built on numerous false dualities which deeply damage our ability to understand the world we live in. Sharp separation of the body and soul, the unobservable motivations and the observable behaviors, normative and positive, and objective and subjective, are just a few examples. As philosopher Hilary Putnam has said, facts and values are inextricably entangled within the body of economic theory. We cannot separate the two, as economists assume, and assert. Many authors have realized how numerous un-appealing value judgments are built into the foundations of objective-seeming economic theories. See, for example, “The Normative Foundations of Scarcity,” Real-World Economics Review, issue no. 61, 26 September 2012, pp. 22-39, to see how three major value judgments are involved in making scarcity the fundamental concern of economists. This post shows how the objective and subject are inextricably entangled, which means that economists must take human agency into account, instead of treating them as robots subject to mathematical laws of behavior.   For a link to more materials, and a 90m video lecture on this topic, see: Advanced Micro Lecture 13: Entanglement of History and Economic Theories

An earlier (unsuccessful) attempt at organizing material on Polanyi: (to be updated later)


As a preliminary demonstration, and an explanation of the “Three Methodologies“, we assess how they work in primitive hunter-gatherer societies.

A hunter-gatherer is a human living in a society in which most or all food is obtained by foraging (collecting wild plants and pursuing wild animals), in contrast to agricultural societies, which rely mainly on domesticated species.

There are many characteristics of such societies forced by the material conditions of production. Since existing food supplies in any one location are soon exhausted, such societies are generally nomadic. Here are some philosophies, and political and social structures that would naturally arise in hunter-gatherer nomadic societies.

Philosophy: Since human beings are directly dependent on the environment, the idea of “Mother Earth” and a close relationship with nature can be expected to develop. This stands in contrast with urban lifestyles which are remote from nature; it is this detachment from nature which has permitted the widespread environmental destruction which is currently taking place.

Politics: Typical Hunter-Gatherer societies are egalitarian. This is because everyone derives a living directly from nature, and is mobile. If one subgroup is oppressed, they can simply leave, so there is not much room for powerful groups to exercise large amounts of power and control over other groups. Furthermore, in subsistence economies, one cannot afford slaves because there is generally not enough surplus food to feed them. So economic conditions favor egalitarian political structures; nonetheless, human ingenuity can sometimes overcome such obstacles.

Property: Since property of nomads is confined to what they can carry with them, it is necessarily limited. Illustrative of hunter-gatherer attitudes towards property is the Cherokee Constitution of 1839, which states: “The lands of the Cherokee Nation shall remain common property”.

We now consider insights yielded into the study of such societies by the three methodologies discussed in the previous post

Read More

This is a summary of the introduction/motivation part of href=””>Lecture 15 on Advanced Microeconomics II, delivered at PIDE in Spring Semester 2017.  The lecture is about 19th Century European History, and how it is deeply entangled with Modern Economic Theory. We cannot understand one without the other.

19th Century European Economic Ideas In Historical Context.

“… the race is not always to the swift, nor the battle to the strong …” Ecclesiastes 9:11

In the late 19th century, a battle of methodologies (“Methodenstreit”) took place, which shaped the future of economics. The German Historical School lost out to the newly emergent, quantitative, mathematical and scientific approach. This led to a re-conceptualization of economics as a science similar to physics, which studies the economic laws of motion of societies. For a detailed account of this battle, and its effects, see “How Economics Forgot History,” by Geoffrey Hodgson.

1. Contemporary Methodology:[humans are predictable robots] The idea that economic theory is a science like physics has extremely unpleasant and counterintuitive consequences. We look for universal laws of economics, which apply equally well to Pakistan, France, Brazil, Russia and Nigeria. Furthermore, they apply equally well in the seventeenth, nineteenth, and twenty-first century. The trade theory of economists must apply equally to trade between Ghana and England, India and Pakistan, and the Huron and Iroquois tribes. Since the ability of human beings to shape their destiny in accordance with visions cannot be fit into a scientific framework, human behavior is reduced to that of a robotic pleasure machine, which follows precise mathematical laws.

2. Marxist Methodology:[social and political structures are determined by economic structures] A key element of Marxist methodology is that economic relations of production are fundamental. These determine the political and social superstructures. Marxist methodology is far richer than current methodology, which removes history, and human beings, from economics. Nonetheless, Marxist methodology gives primacy to materialistic conditions of productions, and considers society and politics as important secondary consequences.

3. (Polanyi’s Methodology):[material circumstance shape human societies, but also human vision and ideas shape material circumstances] Whereas conventional methodology restricts attention to the material circumstance, and Marx considers material circumstances as primary, Polanyi uses a bi-directional causality. Human ideas and visions can shape history, and conversely, the economic relation of production shape human ideas and visions. For more discussion of the radical implications of this entanglement of ideas and materials, see my earlier post on “Meta-Theory and Pluralism in Polanyi’s Methodology“.

These are three distinctly different methodological principles.  In the rest of this lecture, we will look at nineteenth century European history through these three different colored glasses and see how they help us understand the economic, social and political changes which occurred during this period. Our goal will be to establish that “entanglement” occurs – that human ideas are both shaped by, and shape, history. In particular, economic theories are used by humans to understand historical experience, and also to guide social responses to this experience, and attempt to mold history in favorable directions. An extremely important consequence of this entanglements is that economic theories cannot be understood when detached from the historical context in which they were born. As Polanyi explains clearly, modern economic theories were produced in nineteenth century England, and to understand these theories, it is necessary to understand European history of that era.

The failure to see the impact of ideas on history was due to the overwhelming influence of a materialist view of the world, which had come into existence following the success of Newton’s laws in explaining diverse phenomena. Since material substances follow laws, they could not be affected by ideas. This duality and divide between spirit and matter has been influential in shaping Western epistemology, and in making it difficult to see the influence of spirit on matter, due to ideological preconceptions.

Before proceeding to the complexities of European history, we will do a dry-run of the conceptual framework we are using within the simpler context of hunter-gatherer as well as feudal societies. The 90m Video-Lecture linked below, discusses the co-evolution of economic theories along with the historical context in 19th century Europe:

Currently, I am teaching a course in Advanced Microeconomics where I have started with the premise that conventional economic theory, both Micro and Macro are fundamentally wrong. The number of ways in which they are wrong cannot even be counted. Instead of enumerating errors, the course is devoted to providing a constructive alternative. A lot of the early lectures deal with the basic concepts of optimization and equilibrium, the fundamental building blocks of conventional courses, and explain how these are wrong. I also explain how economists are using a wrong methodology, and how they misunderstand the concept of a theoretical model, and the relations between models and reality. The video-taped lectures, PPT slides, and some supporting materials, are available from my website:

Originally, I had not planned to teach Karl Polanyi because his theories are significantly more complex than those of Karl Marx and Adam Smith. However, because the class has been very receptive, and has understood the what I have been teaching, I have decided to explain his ideas. We have already started discussing his ideas starting from Lecture 13, and have finished Part I of the Great Transformation in Lecture 16. In order to prepare for the complexities of Part II, I have distributed the following handout to the class, to explain the complex general methodological framework which underlies Polanyi’s analysis.

Read More

[shortlink:] This is an outline of the lecture 3 in Advanced Microeconomics — expands somewhat on the slides available from the link. This should be useful to heterodox economists looking for ways to teach an alternative course, radically different from conventional approaches. First two lectures consisted of some preliminary math, and can be skipped without lack of continuity.  Video of the lecture (90m) is available at the bottom of the post.

Supply & Demand is Central to Economics: This is the modern Theory of Value. The market price determines the value – this is in conflict with classical conceptions of value.

BUT, this theory is WRONG!  The central question in theory of Value is: HOW are prices determined? Why are water and tomatoes cheap, and why are diamonds expensive?

Current answer is the Supply and Demand theory of economics. Classical economists’ answers were  Labor Theory of Value.

Modern Answers are seriously deficient. Classical Schools had substantially more insight into these questions. We will be discussing classical thinking (Adam Smith, Ricardo, Marx, Sraffa) later in the course. This lecture deals with: Failure of Supply & Demand in Labor Market. This failure was the Raison-d’etre of Keynesian Economics

Read More