Empiricism and Rationalism in Economics
Empiricism and Rationalism are two schools of philosophy, dating back to the ancient Greeks, dealing with how we obtain our knowledge of the external world. For Empiricists, such as Aristotle, this is best done through the evidence of our senses, that is, through empirical observations and experiments. For Rationalists, such as Plato, however, our senses are deceptive, so that the best path to knowledge is through contemplation and pure speculative thought. In particular, Rationalists consider physical entities as imperfect copies of their ideal Forms. Thus, all horses are imperfect copies of an ideal Horse; all circular shapes are imperfect copies of an ideal Circle, etc. Under these conditions, the true knowledge is gained by going behind mere physical appearances and study logical interrelationships among these perfect forms.
There is something to be said for Rationalism in the context of mathematical and physical sciences, as these sciences are often subject to rational principles. However, as it is well known, pure mathematical sciences are tautological, adding nothing to our knowledge of the external world. Thus, in any Euclidean space, we can either assume that parallel lines never meet and then prove that the sum of the angles of any triangle are 180 degrees, or simply doing the opposite. Either way, this knowledge of the properties of the Euclidean space cannot be used by themselves to determine whether our external world is indeed Euclidean. That is an empirical question. At the same time, it can be shown that many physical principles can be derived from the assumption that Nature economizes. For example, from the assumption that light travels in a way to minimize the time it takes to reach its destination, we can derive many reflection and refraction laws of light.
Inspired by the above examples, many economists have tried to derive economic laws through the assumption that individual economic unites also tend to economize. Thus, the laws of demand are derived from the assumption that consumers maximize their satisfactions and the laws of supply are based on the assumption that businesses try to maximize their profits.
Rationalism, however, is hardly the proper approach to the study of life and social sciences. In these sciences, evolutionary changes are often significant determinants of behavior. Indeed, it is not even clear what we mean by perfect forms in these sciences, given that many of the natural and social phenomena underlying these forms are constantly in flux. For example, we can hardly speak of the idea of a horse, when horses have evolved in the past and will continue to evolve in the future. Likewise, many economic agents and institutions are also subject to perpetual evolutionary changes. Thus, it is not clear how we can derive optimization behavior for economic units that are applicable to all times and all places. For example, much of modern economic analysis is conducted in terms which are more suitable for a medieval village economy than a modern industrial state. In this light, what is needed in economics is a much more empirical approach, where the distinctive features of modern economies are studied and their inherent dynamics closely examined. This means that we need to go back to the classical tradition in economics, where the study of economic history was an integral part of economics.
Hassan Shirvani, Ph.D.
Professor Cullen Foundation Chair in Economics