by From Asad Zaman and WEA Pedagogy Blog 1. The Methodenstreit: How Economics Forgot History In the late 19th century, economics experienced a deep philosophical debate over methodology, known as the Methodenstreit, or Battle of Methodologies. Geoffrey Hodgson, in his book How Economics Forgot History, emphasizes the critical nature of this debate. The essential conflict was between those who believed that historical context and specificity are crucial for understanding economic phenomena, and those who sought to create universal laws that apply across time and space, much like in the natural sciences. Economic theories, in their ambition to be scientific, began to strip events of their unique historical context. The goal was to create models and laws that would be valid universally.
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from Asad Zaman and WEA Pedagogy Blog
1. The Methodenstreit: How Economics Forgot History
In the late 19th century, economics experienced a deep philosophical debate over methodology, known as the Methodenstreit, or Battle of Methodologies. Geoffrey Hodgson, in his book How Economics Forgot History, emphasizes the critical nature of this debate. The essential conflict was between those who believed that historical context and specificity are crucial for understanding economic phenomena, and those who sought to create universal laws that apply across time and space, much like in the natural sciences.
Economic theories, in their ambition to be scientific, began to strip events of their unique historical context. The goal was to create models and laws that would be valid universally. However, as Hodgson points out, this desire to generalize economic principles meant that economists were forced to ignore the particularities of historical events. As a result, many of the most important economic insights—those tied to specific historical conditions—were lost or marginalized.
For example, Keynesian macroeconomics, which emerged as a response to the Great Depression, was deeply rooted in the historical circumstances of the 1920s and 1930s. Yet modern interpretations of Keynesian economics often abstract away from these historical details, reducing complex phenomena to simplified models. The result is an incomplete and, at times, misleading understanding of economic systems.
2. Logical Positivism and the Loss of Morality in Economics
The second key flaw emerged in the early 20th century with the rise of Logical Positivism, a philosophy that claimed science was the only valid source of knowledge. Positivists dismissed all non-scientific forms of knowledge, including morality, as meaningless noise. This shift had profound implications for economics, which had historically been a branch of moral philosophy.
Before this period, economics was deeply concerned with human welfare, and discussions of morality were integral to economic thought. However, under the influence of Logical Positivism, economists began to conceal moral judgments in an attempt to appear more scientific. This detachment from moral philosophy led to the marginalization of discussions about the sources of human well-being, as these were seen as subjective and unquantifiable.
One of the most significant consequences of this shift was the neglect of human welfare as a central concern of economic theory. Instead, the focus turned to metrics like GDP and wealth accumulation, with little attention paid to how these measures related to actual human well-being. As studies like Richard Easterlin’s Happiness Paradox have shown, increases in material wealth do not necessarily lead to increases in happiness or life satisfaction. Yet, because modern economics treats wealth as a proxy for welfare, this insight has been largely ignored.
Three Central Insights of Keynes That Were Forgotten
Keynesian macroeconomic theory was developed in response to the Great Depression, a phenomenon that classical economic theories of the time could not explain, particularly the long and persistent high unemployment that plagued the global economy. Keynes’ work was built on three crucial insights, all of which were later abandoned or misunderstood by his followers.
- The Complexity of the Economy: Keynes argued that the economy is a complex system and that one cannot simply aggregate the behaviors of individuals and firms to get a clear picture of the macroeconomy. Even if all laborers and firms try to cut wages, the price level is determined at the aggregate level, outside the control of any single agent. This could even lead to a rise in real wages, counteracting the intended effects of wage cuts. This complexity means that macroeconomic outcomes are not simply the sum of microeconomic behaviors, a crucial insight that was lost when Keynesian economics was later simplified.
- Radical Uncertainty About the Future: Keynes emphasized that the future is fundamentally uncertain. No one knows what wages and prices will be tomorrow, making the kind of rational expectations and forward planning assumed in neoclassical models impossible. This uncertainty has profound implications for how economies function and how policies should be crafted. Keynes’ followers largely ignored this aspect, instead adopting models that assumed rational actors with perfect foresight or at least predictable expectations, thus undermining a core part of Keynes’ critique.
- The Non-Neutrality of Money: In contrast to the classical view that money is neutral in the long run, Keynes argued that money matters both in the short and long run. Changes in money supply and monetary policy have lasting effects on the real economy, not just on nominal variables like prices. This insight was also neglected by later interpretations of Keynesian economics, which reduced his theory to a simplistic explanation based on wage rigidity.
These insights were misinterpreted and trivialized by later economists, particularly those who reduced Keynes’ work to a theory about wage rigidity. According to this oversimplified view, unemployment persists because wages are slow to adjust downward in response to economic shocks. However, Keynes explicitly rejected this explanation, arguing that the dynamics of unemployment are far more complex and cannot be resolved by simply adjusting wages.
The Need to Reintegrate Morality and History into Economics
The abandonment of historical context and the concealment of moral judgments have left modern economics blind to many of the real sources of human welfare. Without considering history, economists miss the unique conditions that shape economic systems. Without considering morality, they fail to address the deeper question of what truly improves human well-being.
In my talk, I proposed that a return to the roots of economics—where history and moral philosophy play central roles—can help us correct these methodological mistakes. Agent-based models (ABM) offer a promising way forward, as they allow for the inclusion of historical specificity, social relationships, and moral considerations in ways that conventional models do not.
Agent-Based Models: A New Path Forward
One of the central recommendations of my talk was to adopt ABMs as a tool for studying economic phenomena. ABMs allow us to move beyond the oversimplified models that dominate modern economics and instead create more realistic representations of economies as complex systems. These models can account for heterogeneity among agents, historical context, and the importance of social networks and relationships—all of which are crucial for understanding human welfare. All three of the central Keynesian insights can easily be modeled within an ABM framework, while they are very difficult to handle within the methodological straitjackets of neoclassical economics.
For example, while conventional economic models focus on wealth as a measure of welfare, ABMs can explore how social capital, relationships, and community cohesion contribute to long-term well-being. These models allow us to capture the complexity of human welfare in ways that traditional models simply cannot.
The Policy Implications of ABMs
The use of ABMs has far-reaching policy implications. One of the key messages of my talk was that welfare is not synonymous with wealth. Social networks, relationships, and moral character are far more important determinants of long-term happiness and satisfaction than material consumption. Policymakers, however, are blind to these factors because they are not easily quantified in conventional economic terms.
By incorporating these insights into ABMs, we can design policies that promote real human welfare rather than merely increasing GDP. For example, ABMs can be used to model the effects of policies on income distribution, social cohesion, and other factors that contribute to human well-being but are typically ignored by mainstream economics.
Conclusion: Toward a More Holistic Economics
The talk concluded with a call to action for economists and students alike: we must rediscover the roots of economics as a moral science grounded in history. By doing so, we can address the flaws that have plagued the discipline for over a century and move toward a more holistic understanding of human welfare. ABMs provide the tools to do this, but we must be willing to challenge the dominant methodologies that have led us astray. A more detailed discussion of ABMs is available from one of the Four Talks in Istanbul.
The future of economics lies not in abstract mathematical models divorced from reality but in models that embrace the complexity of human societies, recognize the importance of morality, and understand the unique historical conditions that shape economic systems