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Chapter 17: The Conflict Between Formalism and Realisticness in Modern Economics: The Case of the New Institutional Economics
17 The conﬂict between formalism and realisticness in modern economics: the case of the new institutional economics Stephen Pratten Introduction Fictions abound in modern economics. The types of assumptions upon which the models of modern mainstream economics are typically based – human agents as possessing perfect foresight or always rational (optimising) in their behaviour, identical, living in two commodity worlds, operating within two-ﬁrm, or entirely isolated, economies, etc. – are plainly false and widely recognised as such. Often these ﬁctions are given an ‘instrumentalist’ justiﬁcation whereby models are understood as merely a basis for generating predictions. From this instrumentalist perspective the issue of how these models express or relate to reality, over and above the question of predictive success, is of little concern. Proponents of critical realism1 argue that these ﬁctions are not chosen because they are desired at all, but are an unavoidable consequence of using methods that are largely inappropriate to social analysis. The sorts of formalistic modelling methods used by economists presuppose for their relevance that the world is closed in a certain sense. At the same time the social world is found to be largely open. As a consequence the worlds expressed in the formalistic models appear to have little if any connection with the sort of world in which we do or could live. The insistence always on maintaining a framework within which deductive, usually formal mathematical, procedures can proceed severely restricts the kinds of assumptions that can be made. There is often a...
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