The current readings reminded me of Friedman (1953), who stated that “in general, the more significant the theory, the more unrealistic the assumption”[i]. This prompts a reflection on whether unrealistic assumptions are indeed necessary for the development of impactful economic theories. This essay reviews the writings of Maki (1998, 2008), Hausman (1998), and Lawson (1999) to explore this question. In this essay, I humbly argue that realism and realisticness do play a crucial role in economic theories, aligning with the perspectives of both Maki and Lawson.
Maki’s work on “Realism” and “Realisticness” focus on realism and its application to economics. He examines various forms of realism, including ontological, semantic, and epistemological realism, emphasizing the need to contextualize realism by considering the specific entities and claims within economic theories. Ontological realism, for instance, posits that certain entities exist independently of our perceptions or theories, similar to scientific realism’s assertion about entities like electrons or genes. Maki argues that it is more important to evaluate realisticness rather than arguing about realism as a theory and its assumption.
Aligning with Maki’s view, I agree that realisticness of assumption (and its definition) play a crucial role in the applicability and relevance of economic models. Realisticness assumptions is grounded in the idea that economic theories should be able to refer to real entities and provide plausible explanations of economic behavior. Maki stated that “an obvious sense of ‘realisticness’ is practical relevance or, more strongly, practical usefulness”[ii]. By ensuring that assumptions are realistic, economists can create models that are more likely to be empirically valid and practically useful.
Thus, defining realisticness and understanding how to evaluate it are equally important. I find it extremely helpful that Maki clearly explains Ernest Nagel’s (1963) guidelines for defining realisticness in his paper, including the three ways a statement can be unrealistic and Nagel’s classification list. This detailed definition provides valuable guidance and clarity for future discussions.
In contrast, Hausman (1998) downplays the importance of realisticness assumptions, suggesting that the primary goal of economic models is to provide useful predictions rather than accurate representations of reality. Hausman argues that while realism is a significant philosophical topic, many debates about realism, especially those concerning unobservables, are not particularly pertinent to economics. He concludes by stating that “given the many varieties of realism, every economist is a realist of one kind or another”[iii].
In my humble opinion, Hausman is not entirely correct that unobservables are not important in economic theories. Unobservables do play a crucial role in economic theories. The unobsorvable include social relations, structures of power, social processes, and institutions, which are essential to understanding the social realm and are often not directly observable. Lawson (1999), in his critique of Hausman’s position, argues that modern economics suffers from a lack of focus on ontology, the study of what exists, which contributes to its shortcomings. Lawson criticizes mainstream economics for its heavy reliance on formalistic models that prioritize mathematical tractability over explanatory power. He identifies the primary failing of modern economics as ontological neglect, meaning a lack of attention to the nature of social reality.
Ultimately, the integration of realisticness assumptions and a focus on ontology can enhance the explanatory power and practical relevance of economic theories, providing a more comprehensive framework for addressing the challenges of modern economics. This balanced approach, informed by the insights of Maki and Lawson, offers a path forward for developing robust economic models that are both theoretically sound and empirically grounded.
Reference
- Mäki, U. (1998). “Realism” and “Realisticness,” in John Davis, D. Wade Hands, and Mäki, editors, The Handbook of Economic Methodology. Cheltenham: Edward Elgar, pp. 404-413.
- Hausman, D. (1998). “Problems with Realism about Economics,” Economics and Philosophy 14(2), pp. 185-213.
- Maki, U. (2008). “Realism” in Daniel Hausman, editor, The Philosophy of Economics: An Anthology, pp. 431-438.
- Lawson, T. (1999). “What Has Realism Got to Do with It,” Economics and Philosophy 15(2), pp. 269-282.
[i] Friedman, 1953, p. 14
[ii] Maki, 1998, p. 412
[iii] Hausman, 1998, p. 209
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