Theoretical Approaches to Economic Growth and Development

An Interdisciplinary Perspective

Panagiotis E. Petrakis

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030500689
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

This book provides the theoretical and analytical background critical to understand the process of economic development and growth at the beginning of the 21 st century. This book adopts an interdisciplinary approach, using concepts borrowed from related disciplines such as politics, anthropology, psychology, business, and more. The core theme of this book is the argument that different theoretical approaches constitute excellent creative contributions, the study of which is necessary for a complete understanding of development and growth. Thus, this book stands out for its theoretical pluralistic character. The first part of the book provides an introduction to essential methodology terms for the theory of economic development and growth, while the second part outlines important concepts of economic behavior. Part three focuses on the sources of economic growth and their evolution throughout history, and pays special attention to the main theories related to economic growth as well as to the growth and development implications of Covid-19. The book ends with an analysis of international financial architecture and the consolidated financial transaction framework.

Part IMethodology and Introduction

© The Author(s) 2020

P. E. PetrakisTheoretical Approaches to Economic Growth and Developmenthttps://doi.org/10.1007/978-3-030-50068-9_1

Begin Abstract

1. The Methodological Puzzle

Panagiotis E. Petrakis¹

(1)

Department of Economics, National and Kapodistrian University of Athens, Athens, Greece

Panagiotis E. Petrakis

Email: [email protected]

End Abstract

1.1 Introduction

Theories of development and growth are part of the theories of economics. Therefore, the methodological issues concerning economics also relate to theories of development and growth.

To understand how the methodological issues in economics evolve, we need to clarify some of the issues that emerge as dominant. These are:

• 1st—On what principles are new theoretical constructs developed?
• 2nd—What are the trends in the evolution of economic thought concerning theory and reality, that is, the relationship between theoretical constructs and empirical data?
• 3rd—On the basis of what principles do alternative theoretical constructs interpret the particular phenomena being studied?

The first chapter attempts to answer these questions. It is essentially a panoramic view of the methodological background of economic science. Thus, the approach is illustrated that characterizes the structure and organization of the book, which follows a pluralistic methodology.

1.2 Navigating Between Theories

Navigating between the different theories requires five issues to be clarified. These are:

1. 1.
   the basic elements of theory construction
2. 2.
   the importance of positivism in economic thought
3. 3.
   expanded approaches to economic methodology
4. 4.
   the difference between models and theories and the role of mathematics in economic thought
5. 5.
   the criteria for selecting theories and hypotheses and the role of predictionism as well as operationalism in economic thought.

1.2.1 Theory Construction

The scientific method should be distinguished from the aims and results of science, such as knowledge, predictions or control. The method is the means by which these are achieved.

Explanation is a process of describing what caused an event. It encompasses the concepts of physical causation and rational influence. Physical causation is a physical process that takes place in reality, while rational influence is a mental process that takes place in rational thought. Rational influences shape the steps of scientific justification in the transition from theory (assuming something is true) to conclusions. Scientific reasoning sets out a set of criteria for evaluating causal theories. Justification may be inductive, abductive, or deductive. Other models of reasoning are more informal, such as intuitive reasoning and verbal reasoning.

1. 1.
   Inductivism

This is a form of logical reference which states that observation occurs first, followed by generalization, and thus the theory emerges. In Baconian model (Bacon, [1620] 2000) one observes nature, proposes a law to generalize observed behavior, confirms it through a multitude of observations, attempts to formulate a slightly broader law, and confirms it through many more observations, while rejecting unconfirmed laws.

Speculation about an argument supports the conclusion but does not substantiate it. It is about attributing properties or configurations to metaphysical formulations, based on the observations of similar phenomena.

1. 2.
   Abductionism

This is a form of logical reference which from observation leads to a theory that applies to that observation. It is formulated in the process of seeking the most straightforward and most likely interpretation and is based on rationality in choosing the best explanation. The original assumptions do not validate the conclusion. This is the process of creating a set of justifications and selecting an instance from that set (proof by contradiction).

1. 3.
   Deductivism

This is the kind of reasoning in which the conclusion is a sub-case or a specialization of a hypothesis. Assumptions or theorems are posited, and empirical verification is sought.

In order words, it refers to the creation of a theoretical hypothesis and its confirmation or rejection by observation. According to deductivism, certain interpretation hypotheses are first introduced and then, while some environmental conditions are taken into account, the ability of hypotheses to adequately interpret real data is empirically investigated.

John Stuart Mill (1806–1873) was the main proponent of deductivism. As Hausman (1989) points out: “According to Mill ([1843] 2002) a complex object, such as political economy, can only be scientifically studied through the deductive method. Since so many causal factors affect economic phenomena and experimentation is not generally feasible, there is no way to apply the methods of inductivism directly. The only solution is first to inductively substantiate basic psychological or technical laws—such as “people seek more wealth” or the law of diminishing returns—and then formulate their economic implications given the specific parameters of the relevant circumstances. Empirical confirmation or verification plays an important role in determining whether deductive conclusions are applicable, both in checking the correctness of the deductions and in determining whether significant causal factors have been omitted. Such control is not based on one’s unreasonable commitment to basic “laws.” These have already been documented by insight or experimentation. In this respect, civil economics is similar to science which adopts independently substantiated laws.”

A crucial conflict has developed between deductivism and inductivism. In his work, The Logic of Scientific Discovery, Karl Popper ([1934] 1959) advocates deductivism and criticizes inductivism (Popperian Deductivism). His criticism was so intense that he proposed eliminating inductivism from the sciences and replacing it with the deductive method. As Popper argues: “The empirical basis of objective science, therefore, contains nothing absolute. Science is not based on a strong foundation. The structure of its theories rests on a marsh. It’s like a building erected on piles. The piles are driven from a height down in the marsh, though not on a natural or ‘given’ basis. And if we stop driving the piles deeper, this is not because we have reached solid ground. We simply stop when we are satisfied that the piles are strong enough to bear the construction, at least for the time being.” Popper’s contribution was so significant that positivism is often referred to as the Popperian view.

Box 1.1 The Scientific Methodology in Social Sciences: Until John Stuart Mill

The issues of scientific ethics had already been raised by the ancient Greek philosophers Plato (429–347 BC) and Aristotle (384–322 BC). The “Platonic Way” emphasized rationalization as a method, downplaying the importance of observation. Aristotle disagreed, focusing on “the natural world as the fundamental principle to be discovered through the search in nature” (Stanford Encyclopedia of Philosophy).

Scientific thinking in the Middle Ages—Magnus (1200–1280), R. Bacon (1219–1292), Aquinas (1225–1274)—was centered on the phenomenon under investigation to discover their basic explanatory principles. However, it was Newton (1642–1727) who founded the principles of scientific deontology. The role of experiment and causation and explicit methodological rules were at the heart of his contribution. The methodological controversies went through the views of major intellectuals, such as David Hume (1711–1776) and Kant (1724–1804). Both influenced the methodological reflections of the following century, until Mill (1806–1873) came into the forefront as the most influential philosopher of the English language in the nineteenth century with his System of Reason (1843).

1.2.2 Positivism Versus Normativism in Economic Theory

Comte (1798–1857) developed his thoughts on positivism¹ in the process of setting out the organizing principles of the science of sociology (of which he is considered the “father”) based on empirical infrastructures. His approach was based on two main axes: Methodological monism and the assumption that reality is empirical in nature and relates to empirical data (that is, information perceived by the senses). Methodological monism holds that there is a single scientific method, independent of the kind of phenomena being analyzed, and, this scientific method is the one followed in the natural sciences. Positivism holds that a theoretical proposition is valid only when it is logically verifiable, either directly or indirectly through empirically verifiable conclusions. In this sense, we may accept that positivism is a stricter version of deductivism.

Normative economics stands in contrast to positivistic economics, which includes policy choices from alternative proposals. So, what we “see happening” (positivism) is counterbalanced by “what should happen” (normativism) which is the fundamental conception of the ‘normative’ approach. Positivism developed in the nineteenth century and eventually replaced (in the 1960s and 1970s) the orthodox traditional view of Mill (which was based on deductivism) which had prevailed until then.

Normativism’s views express value or normative judgments about what the outcome of economic policy should be. To the extent that normative judgments are linked to data or knowledge, they may be purely scientific or changes in variables. Admittedly, it is possible that positive reasoning leads to normative outcomes, but this is another story.

Ceteris paribus clauses accompany the views of positivism. This is a society’s mode of operation following general laws (to the exclusion of instinctual or metaphysical concerns). According to positivism, knowledge is based on the “positive” contents of empirical verification and limits the purpose of the sciences to acknowledgement and recording rather than the interpretation of facts and phenomena. Thus, observation and measurement are at the core of any scientific endeavor. For these reasons, according to the positivist doctrine of science, any scientific theory should be based on the same critical preconditions:

1. 1.
   Rational documentation of a theory that purports to be scientific (including the principle of falsification)
2. 2.
   Observation
3. 3.
   Experimentation.

Positivism received major support through the contributions of Popper ([1934] 1959) and Lakatos (1970). It proposed to economists a more verifiable methodology for evaluating the reliability of a theory. Popper moreover argued ...