philosophy of economics the study of methodological issues facing positive economic theory and normative problems on the intersection of welfare economics and political philosophy. Methodological issues. Applying approaches and questions in the philosophy of science specifically to economics, the philosophy of economics explores epistemological and conceptual problems raised by the explanatory aims and strategy of economic theory: Do its assumptions about individual choice constitute laws, and do they explain its derived generalizations about markets and economies? Are these generalizations laws, and if so, how are they tested by observation of economic processes, and how are theories in the various compartments of economics – microeconomics, macroeconomics – related to one another and to econometrics? How are the various schools – neoclassical, institutional, Marxian, etc. – related to one another, and what sorts of tests might enable us to choose between their theories? Historically, the chief issue of interest in the development of the philosophy of economics has been the empirical adequacy of the assumptions of rational ‘economic man’: that all agents have complete and transitive cardinal or ordinal utility rankings or preference orders and that they always choose that available option which maximizes their utility or preferences. Since the actual behavior of agents appears to disconfirm these assumptions, the claim that they constitute causal laws governing economic behavior is difficult to sustain. On the other hand, the assumption of preference-maximizing behavior is indispensable to twentieth-century economics. These two considerations jointly undermine the claim that economic theory honors criteria on explanatory power and evidential probity drawn from physical science. Much work by economists and philosophers has been devoted therefore to disputing the claim that the assumptions of rational choice theory are false or to disputing the inference from this claim to the conclusion that the cognitive status of economic theory as empirical science is thereby undermined. Most frequently it has been held that the assumptions of rational choice are as harmless and as indispensable as idealizations are elsewhere in science. This view must deal with the allegation that unlike theories embodying idealization elsewhere in science, economic theory gains little more in predictive power from these assumptions about agents’ calculations than it would secure without any assumptions about individual choice.
Normative issues. Both economists and political philosophers are concerned with identifying principles that will ensure just, fair, or equitable distributions of scarce goods. For this reason neoclassical economic theory shares a history with utilitarianism in moral philosophy. Contemporary welfare economics continues to explore the limits of utilitarian prescriptions that optimal economic and political arrangements should maximize and/or equalize utility, welfare, or some surrogate. It also examines the adequacy of alternatives to such utilitarian principles. Thus, economics shares an agenda of interests with political and moral philosophy. Utilitarianism in economics and philosophy has been constrained by an early realization that utilities are neither cardinally measurable nor interpersonally comparable. Therefore the prescription to maximize and/or equalize utility cannot be determinatively obeyed. Welfare theorists have nevertheless attempted to establish principles that will enable us to determine the equity, fairness, or justice of various economic arrangements, and that do not rely on interpersonal comparisons required to measure whether a distribution is maximal or equal in the utility it accords all agents. Inspired by philosophers who have surrendered utilitarianism for other principles of equality, fairness, or justice in distribution, welfare economists have explored Kantian, social contractarian, and communitarian alternatives in a research program that cuts clearly across both disciplines.
Political philosophy has also profited as much from innovations in economic theory as welfare economics has benefited from moral philosophy. Theorems from welfare economics that establish the efficiency of markets in securing distributions that meet minimal conditions of optimality and fairness have led moral philosophers to reexamine the moral status of free-market exchange. Moreover, philosophers have come to appreciate that coercive social institutions are sometimes best understood as devices for securing public goods – goods like police protection that cannot be provided to those who pay for them without also providing them to free riders who decline to do so. The recognition that everyone would be worse off, including free riders, were the coercion required to pay for these goods not imposed, is due to welfare economics and has led to a significant revival of interest in the work of Hobbes, who appears to have prefigured such arguments. See also DECISION THEORY, PHILOSOPHY OF THE SOCIAL SCIENCES , POLITICAL PHILOSO – PHY , SOCIAL CHOICE THEORY , UTILITARIAN – IS. A.R.