Chapter 13 returns to Mills inexact deductive method, as developed in chapter 10, concedes that it is too dogmatic, but shows how economics can be scientifically respectable, even though economists appear to conform to this method. The peculiarities of theory appraisal in economics follow more from the difficulties of testing in economics than from an aberrant view of confirmation. Although apparent Millians in practice, economists can be good Bayesians or hypothetico-deductivists in principle. Chapter 13 also considers some of the anomalies to which expected utility theory gives rise and provides an introductory overview of the innovations that behavioral economics has brought into the mainstream. This chapter shows how disconfirmation of basic principles of economics is possible and exposes the large and legitimate role that pragmatic factors play in theory appraisal in economics.

Although the normative model of rationality discussed in the first chapter is central to microeconomics, microeconomics is a positive theory describing, predicting, and explaining actual choices and their consequences. This chapter presents generalizations concerning market demand for commodities and services and consumer choice theory, which by means of economic models explains and to some extent corrects the generalizations concerning market demand. It presents an example of a simple economic model, where a consumer faces a choice between bundles consisting of only two infinitely divisible commodities, and it makes preliminary comments on the apparent empirical anomalies consumer choice theory faces. In reflecting on the theory of consumer choice and the explanation of demand, many questions arise concerning the structure of economic theory and whether the propositions of economic theory are in accord with the evidence. The material here should be familiar to economists.

Chapter 15 defends the critical implications of chapter 13 against the arguments that arbitrage and experiencing the costs of irrational behavior justify dismissing anomalous experimental results, such as those concerning preference reversals. The chapter then draws out some of the implications for the practice of economics of its philosophical conclusions, drawing on the work of George Akerlof and others who have studied conditional altruism and defended its importance. Chapter 15 also defends the legitimacy of the methodological preaching in this book against criticisms such as those voiced most compellingly by Deirdre McCloskey.

Chapter 8 is a case study focusing on Paul Samuelson’s essay, An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money, critical responses, and some of the discussion and applications it spawned. This case study illustrates the claims concerning the structure and strategy of economics presented in chapter 7, and it is of special interest because of the way in which normative issues intrude into what purports to be a positive investigation.

Chapter 6 is concerned with theories and models in economics. Economists typically prefer to speak of “models” rather than “theories” and of “generalizations” or “assumptions” rather than “laws.” Economists still speak of theories, but only when referring to subdivisions of the discipline. Why? What are models and how are they related to theories? Why are economists so enamored of models? Do they supersede or incorporate laws? Without settled definitions of theories or models, it is unclear whether the focus on models is just a change in terminology, or whether there is something interestingly different in the practice of contemporary economics. This chapter surveys philosophical conceptions of theories and defends a view of theories as sets of lawlike statements that are systematically interconnected. It argues that models should be understood as conceptual explorations without empirical commitments. They are definitions of predicates or kinds of systems. Models can be used to theorize, explain, or predict, when one offers theoretical hypotheses asserting that parts of the real world belong to the extension of the predicate a model defines.

Chapter 16 summarizes the argument and shows that the methodological peculiarities of economics depend to a considerable extent on the fact that it is a social science. The fact that equilibrium theory includes a theory of rationality helps to explain why positive and normative economics are so intermingled, why economists are so strongly committed to their theory, and why they pursue a distinctive strategy.

Chapter 5 provides a fragmentary introduction to macroeconomics that shows that highlights some of the philosophical questions macroeconomic models raise and relates them to equilibrium theory. Section 1 discusses how growth theory is linked to equilibrium theory. Section 2 considers how growth theory can be adapted to address questions about economic fluctuations, including recessions. Section 3 focuses on a simple influential Keynesian model of economic fluctuations. Section 4 discusses a specific relationship between employment and the rate of inflation (the Phillips Curve) that highlights methodological issues concerning causal inference and microfoundations that have led many economists to reject Keynesian economics. Section 5 develops these methodological issues further, highlighting the role of identities in macroeconomics.

Chapter 14 presents a case study of the reactions of economists to experimental work on preference reversals. In this instance, the profession has not relied on an unacceptably dogmatic view of theory appraisal. Such dogmatism as there has been stems from the commitment of economists to a vision of economics as a separate science. The discussion in this chapter is an illustration rather than an argument for the interpretation of the evolution of economic methodology defended in Chapter 13. As we shall see, the initial reactions of economists to the anomalous results of experiments carried out by psychologists are very different than current attitudes.

Chapter 3 turns to the determinants of the supply of goods and services and to the way in which the “forces” of demand and supply determine prices and the quantities exchanged. Via the use of simple models, economists explain generalizations concerning how the quantities of goods and services supplied respond to prices. The accounts of demand in chapter 2 and supply in this chapter take prices as given, and additional modeling is needed to explain how supply and demand are equilibrated and what properties market equilibria possess. This chapter pulls together the discussions of the first three chapters to offer a general sketch of the causal structure and basic principles of mainstream economics. It takes issue with the view, which used to be dominant, that general equilibrium theory is the fundamental theory of contemporary economics. What I call “equilibrium theory,” not general equilibrium theory, is fundamental.

In the second half of the Twentieth Century, Mill’s deductive method was criticized by defenders of more positivistic or modernist views of economic methodology, which I criticize in chapter 11. A number of economists, including Terence Hutchison, Paul Samuelson, Fritz Machlup, Milton Friedman, and Tjallings Koopmans argued that Mill’s deductive method is insufficiently empirical and that economic models should be judged by the agreement of their implications with economic outcomes. Yet they rarely practiced what they preached. This chapter thus highlights the methodological schizophrenia of many economists, in which methodological pronouncements and practice contradict one another.

Chapter 4 sketches the contemporary theory of economic welfare. It argues that welfare economics is a theoretically driven discipline, whose questions are determined more by equilibrium theory than by practical problems of economic welfare. Section 1 begins with the fundamental question: what is welfare or, synonymously, well-being? Section 2 explains why the answer that economists give has led them to eschew utilitarianism, and it links this chapter to the previous three, presenting the fundamental theorems of welfare economics, the grounds for the admiration economists have for the operation of perfectly competitive markets, the problems of markets that are not perfectly competitive, and further theorems concerning social choice and welfare. Section 3 turns to practical work in welfare economics and the foundations of cost-benefit analysis. Section 4 ends with an overview, including some remarks about alternatives to mainstream normative economics.

Mainstream economics portrays individual agents as choosing rationally. Many of its generalizations concerning how people actually choose are also claims about how agents ought rationally to choose. Chapter 1 focuses on the conception of rationality that is incorporated in contemporary economics and is central to it. It begins with the concept of preferences, which is the central concept in mainstream economics, and with the theory of rationality that focuses on preferences. The fact that a normative theory lies at the foundation of economics raises philosophical questions. What are requirements of rationality doing in what purports to be a scientific theory of economic phenomena? After presenting the axioms of ordinal utility theory, it offers an account of preferences, a critique of revealed preference theory, and an introduction to expected utility theory. It argues that if one wants to understand economics, the modeling of rationality is the place to begin.