American Economic Association

The Philosophy of Economics: An Anthology by Daniel M. HausmanReview by: Don RossJournal of Economic Literature, Vol. 47, No. 1 (Mar., 2009), pp. 174-177Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/27647141 .

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174 Journal of Economie Literature, Vol. XLVII (March 2009)

Finally, macro analysis is required to study how

"meso units themselves are co-ordinated into

a macro whole," although readers should not

be misled by the use of the word "macro" into

thinking they know from their economics what

it means.

In short, the style of the book makes it difficult even for a reader sympathetic to evolutionary

eco

nomics to understand what is actually being said.

Perhaps all this does not matter. Perhaps the

authors really have succeeded in articulating a

theory of long-run economic growth which is

superior to both the original Solow model and

to its subsequent endogenous variants. After all, neither of these models offers a

completely sat

isfactory account either of the process or of the

outcomes of economic growth. As is well known, for example, there are persistent, long-run dif

ferences in income per head not merely between

countries with very similar cultural backgrounds, but between different regions within individual

countries.

But the Dopfer and Potts book is completely devoid of any empirical evidence. No attempt whatsoever is made to confront theory with data

of any kind. Nor is it discussed how this could

conceivably be done.

I have included more direct quotes from the text

than would be usual in a book review, this being the best way to illustrate the style and content of

the book. It will be apparent that the book is not suitable for students at any level. Nonevolutionary

professional economists with a potential interest

in this area are unlikely to find the book helpful. The main focus of many evolutionary economists

is on actually building models to explain empiri

cal phenomena, so there is very little in the book

for them. It will, however, undoubtedly appeal to

a small number of initiates.

Paul Ormerod

Volterra Consulting

The Philosophy of Economics: An Anthology. Edited by Daniel M. Hausman. Third edi

tion. Cambridge and New York: Cambridge

University Press, 1984, 1994. 2008. Pp. vii, 527. $95.00, cloth; $34.99, paper. ISBN 978

0-521-88350-4, cloth; 978-0-521-70984-2,

pbk. JEL 2008-0343

This is the third edition of the most widely used

teaching sourcebook in the philosophy of eco

nomics. Consideration of its contents invites two

questions. First, what disciplinary conception does it best reflect?is this primarily

a book for

philosophy of social science courses or, if these are not the same thing, for economic methodol

ogy courses? Second, what do the changes that

Daniel M. Hausman has made from the second

edition tell us about his perception of recent

changes in the field, and about the accuracy or,

conversely, idiosyncrasy, of this perception? I will

approach the first question?the most impor tant one for a teaching resource?by way of the

second.

The third edition is longer than the second, and so can range over more topics. Before I review

the additional coverage, I will indicate instances

of replacement. The amount of historical material has been

reduced in favor of more contemporary texts, but the truly classic sources on

methodology? Weber, Marx, Mill, Robbins, Friedman?remain.

In the first two, we have the foundation stones of

the bridge between economics and other social

sciences, while the latter three are the basic foun

tainhead of the internal methodological tradition.

Being clearly of second-order importance by com

parison, formerly included essays by Hutchison

and Machlup have now disappeared. Austrian

representation survives the removal of Machlup, since Hausman retains an essay by Buchanan and

Vanberg that he added in the second edition. A chapter by Kevin Hoover replaces Marschak

and Keynes on econometrics, which is surely

an

unambiguous improvement from the point of view

of currency. The same can be said of Hausman's

decision to supplant Dugger's formerly included

overview of institutional economics with a newer

survey by Geoffrey Hodgson. The quotient of highly abstract (contemporary)

discussion of the overall character of economics

as a science is about the same as before, but the

names and the focus have shifted. The second

edition featured Rosenberg on a

specific lacunae

(related to mental states as described by folk psy chology) in the basic metaphysical assumptions

alleged to be incorporated into economics. Now

we instead have Uskali M?ki and Tony Lawson on

the extent to which economic modeling captures

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Book Reviews 175

reality more

generally. M?ki believes that models

often succeed in successfully isolating aspects of

the world, while Lawson maintains that main

stream methods tend to spin unhelpful fictions

in the interests of mathematical tractability. The

M?ki-Lawson debate better reflects current

emphasis in "high church" philosophy of eco

nomics than the Rosenberg piece. Similarly, the

essay by Wade Hands that is now included pro vides a more nuanced and sophisticated review

of Popperian and Lakatosian themes than did the

chapter by Blaug that appeared in the previous edition.

Overall, then, to the extent that the third edi

tion repeats the topic coverage of the second, there is unequivocal improvement in both sophis tication and currency.

The extra length has then allowed Hausman to

broaden the anthology's reach. The section on nor

mative issues is significantly expanded. A general

essay on the role of ideology by Solow has been edited out, making way for Kaldor on interper sonal utility comparisons, Frank on ethical objec tions to cost-benefit analysis (which he rightly

rejects as unpersuasive), and Sen on

capabilities and well being. These supplement Schumpeter on

ideology and Hausman and McPherson on

assumptions underlying welfare economics, car

ried over from the previous edition. Clearly this

section of the book is now stronger. I would have

preferred a less idiosyncratic voice than Sen's?

say, Dasgupta or Collier?on normative issues

surrounding analysis of poverty and its reduction.

I appreciate reasons for selecting Sen: the issues

he raises are foundational, and are linked directly to core problems in philosophical moral theory. On the other hand, they

are more distant from

the simpler emotional revulsion at material pov

erty's stupid inefficiencies that mainly motivates

most development economists. Thus privileging the normative considerations addressed by Sen

seems to be a case of a philosopher's emphasis

winning out over what might be stressed by an

economist. I will come back to this below.

I would group the five remaining additions into

two sets. There are three essays that address top ics that seem to me to lie at the dead centre of

contemporary methodological issues as encoun

tered by practicing economists, and which

deserve to join the chapters by Mill, Robbins,

etc. as elements which this anthology series will

never exclude. The first of these is a second piece

by Kevin Hoover, this one on the extent to which

macroeconomics should be regarded as a dubi

ous enterprise if it cannot be given microfounda

tions. I agree with Hoover that this widespread belief among economists is not well supported, and unnecessarily restricts degrees of freedom in

the discipline. The second key addition is a chap ter by Vernon Smith on

experimental economics.

I am glad that Hausman selected Smith for this

instead of a representative of the influential new

behaviorist camp who implicitly call for econom

ics to be supplanted by psychology. Compared with them, Smith's views are more

complex, idio

syncratic, and intellectually productive. Many will disagree with aspects of these opinions, as I

do myself; but they lie at the root of the best cur

rent research programs in experimental econom

ics, and an economics graduate student who has

not critically considered them suffers from a gap in her professional knowledge. The third essen

tial new essay is Robert Sugden on the point and

nature of model construction in economics. I sug

gest that if we were restricted by curricular space to devoting attention to only one methodological

topic, this would appropriately be it. After all, model construction and analysis is what 90 per cent of economists do 90 percent of the time.

Sugden structures his essay around consideration

of two models which many will agree with him

in regarding as ideal templates: Akerlof's market

for lemons and Schelling's checkerboard model of

neighborhood segregation. Each member of this

pair beautifully exemplifies the philosophically interesting property of our best models: their

elegant simplicity obviously distances them quite far from descriptively rich historical reality. It

could hardly be more important that economists'

best?in the sense of most fecund and insight

ful?representations of the world are so utterly

stripped of the noneconomic detail emphasized

by "heterodox" economists of all stripes. The two other new

chapters Hausman has

added come from that heterodoxy. Julie Nelson

surveys desirable impacts of feminism on both

economic method and economists' choices of

research topics in a clear, balanced, and sen

sible way. It is to be hoped that by the time of the fourth edition we will no

longer have grounds

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176 Journal of Economie Literature, Vol. XLVII (March 2009)

to regard this as heterodox; on the other hand, and for that very reason, perhaps there will no

longer be grounds for including Nelson's piece at all. Colin Camerer provides an overview of the new

interdiscipline of neuroeconomics.

Neuroeconomics has two wings?one that uses

economic equilibrium dynamics to model neural

learning and valuation and another that seeks

neural foundations and explanations for puta tive "anomalies" discovered by behavioral econo

mists?and Camerer is the leading exponent of

the second wing. His survey here is not unfair to

the first body of literature, although he devotes more space to, and considers fewer problems with, the second body of literature than I would

prefer. It is too early to know whether neuroeco

nomics will establish a claim to be regarded as

an enduring and significant subfield of economics or not. Empirical outcomes, not

methodological debates, will ultimately determine the matter.

So it will be interesting to see whether neuro

economics is still deemed to warrant inclusion in

Hausman's fourth or fifth editions.

In his second edition, Hausman included a

light meditation by Deirdre McCloskey on rheto ric in economics, and he retains it here. As befits its topic, the chapter is diverting (and quick) reading. I am unconvinced that it is

sufficiently important that it should not be crowded out to

make room for some things that are missing, on

which more below.

I now turn to the question of the audience to

which this anthology is best suited. I have identi

fied one instance, the choice of Sen over Dasgupta

or Collier as the voice on the normative founda tions of development economics, where a

philos

opher's bias might be thought to win out over an

economist's. I could imagine someone making

out a similar case for the inclusion of M?ki and

Lawson; on the other hand, they provide impor tant background to Sugden's essay, which I have

said is the most important contemporary chapter in the book. I think it would have been a (slightly) better world if economists' attention to method

ology had never been significantly distracted by Popper or Lakatos, so if I were using this book in a course for economics students I'd be tempted to

skip Hands's chapter. On the other hand, it is not an invention of philosophers that some influential

economists claimed crucial inspiration from these

LSE thinkers for at least a couple of decades; and

perhaps the influence of philosophical falsifica tionism really did contribute importantly to the

improved status of empirical work in the disci

pline (though I doubt it). In general, then, there are scant grounds for

viewing this anthology as biased toward the inter ests of philosophers rather than economists on the basis of what it includes. However, due to some

topics it excludes, I would not use it as my only textbook in a

methodology course for econom

ics students. Except indirectly in Smith's and

Sugden's chapters, there is nothing here about the

philosophical foundations of game theory, and in

his introduction Hausman offers no explanation

for this. Surely this is a considerable omission. I

find that in teaching game theory to novice econo

mists I must constantly pause for methodological

reflection. Game theory texts are typically highly

ambiguous on the question of whether and where

their enterprise is prescriptive or positive, and are

frequently elusive on the vital question of whether

applications of game theory incorporate assump tions about in-board hyperrationality in real

human agents. (The alternative view is that sophis ticated inferences such as backward induction are

best thought of as idealized proxies for processes that, in applied scenarios, are implemented by institutional constraints on market performance. Smith says that this interpretation supports appli cation of some game-theoretic elements but not

others; yet his chapter offers no diagnosis of

which general properties might distinguish games people really play from games they don't.) Game

theory is the dominant technology in theoretical

and applied microeconomics, in industrial orga nization theory, in public choice institutional eco

nomics, and in experimental economics. By way of

international trade theory and herding models of

markets, it is strongly invading macroeconomics

too. In my opinion, a well tailored methodology course intended to be of practical value to young economists should devote about half of its class

hours to questions in the foundations of game

theory. Another missing topic is survey and field-exper

iment methodology. Increasingly?partly owing

to the exploding computational capacities with which economists are armed?these strongly empirical approaches are coming to dominate

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Book Reviews 177

ever larger proportions of journal space. In the

graduate program at my university, they are heav

ily crowding other elements of curriculum (and

pushing the frontiers of econometric techniques,

especially as applied to panel data). They raise

methodological issues which, while technical, are often philosophically deep. (Consider, for

example, what must be considered in choosing between a functional form for intertemporal

consumption that collapses discounting and

probability framing, such as prospect theory, and

a functional form that separates them.) Students

devoting large proportions of their time to wor

rying about sophisticated methods for data gath

ering and analysis might be surprised to find

methodologists devoting most of their attention

to the question of whether economists are inter

ested in empirical reality.

My overall opinion, then, is that Hausman's

third edition improves on the second (as the sec

ond did on the first) in its relevance to economists'

activities and concerns. At least half the chap ters it contains should be regarded

as essential

parts of every economist's knowledge portfolio. But I suggest that a best graduate curriculum in

methodology would supplement it about 1:1 with other material, perhaps chapters from Richard

Blundell, Whitney Newey, and Torsten Persson

(2007).

References

Blundell, Richard, Whitney Newey, and Torsten

Persson, eds. Advances in Economics and Econo

metrics. 3 volumes. Cambridge and New York:

Cambridge University Press.

Don Ross

University of Cape Town and University of Alabama at Birmingham

D Microeconomics

Predictocracy: Market Mechanisms for Public

and Private Decision Making. By Michael

Abramowicz. New Haven and London: Yale

University Press, 2007. Pp. xviii, 346. $50.00. ISBN 978-0-300-11599-4.

JEL 2008-0358

Prediction markets are artificial stock mar

kets where one can trade securities with values

that depend on

particular events happening. For

example, on election eve, traders on Intrade.

com could buy for around 92 cents a security that would pay $1 if Barack Obama was elected President. The probability of 92 percent implied by that price reflects traders' evaluation of all

the polling, blogging, and bloviating then in the

public domain. For spectators wishing to know

the status of the race without consuming all that

material, or for researchers later wanting an objec

tive ex ante probability for a postelection analysis,

prediction markets are great time savers.

There is growing interest, among academics

and in business, in applying prediction markets

in new ways. Firms such as Google and Microsoft

are running internal markets predicting, for

example, whether software will be released on

time. Academics are using prediction markets to

run better event studies, to estimate the cross

state correlation in political shocks, and as labo

ratories to understand how price manipulation or

noise trading affects prices. Prediction markets are a

powerful tool?for

some problems. Predictocracy is an exercise in

reenvisioning problems as nails for this particu

lar hammer. Michael Abramowitz discusses using

prediction markets to write texts, software, and

laws; to conduct discovery for and adjudicate law

suits; to evaluate employees and fire underper

forming CEOs and government officials; and to

allocate resources in response to the next hurri

cane Katrina. "Predictocracy" is related to Robin

Hanson's (2000) idea of "Futarchy," a system of

government in which policymakers define a social

welfare measure and decisions are made by pre diction markets that forecast which policies will

yield higher social welfare.

Abramowitz admits this is "political science fic

tion" (p. 309). The distinction between "science"

and "science fiction" is a useful organizing prin

ciple for thinking about the appeal, and limita

tions, of the book. The science fiction of the 1950s

played a useful role?it helped get a cohort, my

parents among them, excited about doing scien

tific research. It was not overly concerned with

grounding itself in the actual science, or with

figuring out which ideas would come to fruition

(e.g., wristwatch phones) and which would not

(e.g., interstellar travel). Readers were invited to

suspend disbelief, enjoy themselves, and then put

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