Process Explanation: What Is It, Really?

24 March 2007 at 11:36 am 1 comment

| Nicolai Foss |

As I have recounted on an earlier occasion (here), my interest in economics was, after about 1.5 years of a somewhat unsuccessful economics study, finally stimulated by discovering what may broadly be called “process approaches” to economics, particularly the work of Axel Leijonhufvud, and Austrian and evolutionary approaches. I was captivated by the claims inherent in these approaches of studying “real” market “processes” in “time,” taking account of “genuine uncertainty,” “surprises,” “ignorance,” etc. — all in contrast to the (I then thought) mindless neoclassical obsession with equilibrium states.

Clearly, the Austrian marketing effort seemed much superior to the mainstream one, much less dull and much more concerned with reality.

I eventually realized that equilibrium is a supremely useful tool in social science research, but I kept thinking that process explanation was also something to strive for as a complementary part of sound economics explanation. My problem was that it is wasn’t apparent from the economics sources I checked what process explanation really was, how it was conducted, and where I could examples of it. It seemed to either badly lack specificity or not really be that process-oriented after all. Menger’s theory of money? Well, while this is an account of the emergence of an institution, it was (and is) not clear to me whether this account was necessarily at variance with equilibrium economics. Nelson and Winter’s theory of industry evolution? In actuality, that theory makes use of temporary equilibrium. What probably came closest to a process explanation was Kirzner’s theory of the entrepreneurial market process, which, however, seemed highly abstract, designed to provide an abstract argument for why there may be a tendency to equilibrium, and therefore not something that was directly (or easily) applicable to analysis of processes in the real world.

I think that what worried me fifteen years ago are real problems in those economics approaches that seek to promote process explanation. Specifically, I think that “process economists,” particularly modern Austrian ones, usually fail to characterize the nature of process explanation, except in extremely general terms. Mainstream economists have established heuristics for how, for example, to explain virtually any institution, contract or market outcome as a subgame perfect equilibrium of a properly specified game (well, a little over the top, but not entirely wrong). Austrians just don’t seem to have a similar cookery book that provides the recipes for how to construct theoretical arguments.

Relatedly, it seems to me that Austrians fail to actually do process analysis, that is, apply process theory to economic reality. We may get interesting historical accounts (say, of America’s Great Depression), but while these will surely differ in terms of the conceptual apparatus that is applied by mainstream economists (of course, notions such as “roundabout’ness,” “the structure of production,” “calculation” etc. would not appear in the accounts of the latter), it not clear that the former would provide more “processual” accounts than the latter. And the methodological awareness that accompanies this kind of “history” is pretty low compared to the enormous attention philosophers, political scientists and sociologists pay to what it means to tell a case, describe a historical episode, narratives, etc. etc. (e.g., this nice collection).

Thus, Austrians (and other process economists) may consider issues such as:

  • If explanation must involve actors’ subjective states, what models of behavior/action are consistent with such subjectivism? And which models are not?
  • If explanation of social phenomena must involve explaining them as the unintended outcomes of the interaction of intentional individuals, exactly how intended can we allow these outcomes to be? Must they literally be completely uintended? Why apriori assume such heavy market failures (because that is what unintended consequences essentially are)?
  • How can we construct theories of process, that is, careful stylized accounts of generative mechanisms — in contrast to narrative accounts, that is, detailed accounts of real events?
  • In general, how can we do process research? Are simulation approaches permissible? (to the evolutionist, clearly yes, but what about the Austrian?).
  • Etc.

There are some papers that try to grapple with these issues, the best of which IMHO are a string of papers by Uskali Mäki from the beginning and mid-1990s (see here). Two other fine papers are Robin Cowan and Mario Rizzo’s “The Genetic-Causal Tradition and Economic Theory” and Roger Koppl’s 1992 paper, “Invisible Hand Explanations and Neoclassical Economics.” However, these are still placed on a very high level of abstraction, and may not be directly helpful for resolving the above kind of issues.

Entry filed under: - Foss -, Austrian Economics, Evolutionary Economics, Methods/Methodology/Theory of Science.

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1 Comment Add your own

  • 1. libertyfirst  |  29 March 2007 at 4:54 am

    I spent the last two years trying to grasp Austrian Economics and the last four months trying to grasp the orthodoxy, so it’s a bit too early to draw conclusions, but discussions with several economists I know has given me the impression that what is considered a drawback of Austrian Economics (lack of operationality of most of its concepts) is instead a drawback of the real system economics tries to explain (the economy).

    So, if a want for example a formal model, I shall remove what can’t be formalized, and there is no reason to expect that human intelligence, creativeness and alertness can (otherwise we could create intelligent robots). So, a formal model is forced to be filled with “soulless automata” and devoid of something that resembles the human factor.

    The market process in perfect equilibrium, for example, solves all the problems that a real individual face by the hypothesis of equilibrium itself: there is nothing to do in a general equilibrium, so that humans can be set aside.

    In real life, there is a need for humans, but I don’t see how this factor can be placed in a formal model.

    Yesterday I was reading a “neo-Austrian” (hicksian) paper in which there were some Austrian themese such as time consuming production. But in order to close the system formally they needed some “stupid” differential equations for system dynamics (e.g. dPrice/dTime = f(Supply,Demand)).

    That is, AE is too “human” to meet some “Positivist” methodological standards, but also reality is, so AE can easily be more insightful than soulless automata approaches.

    This is not an educated opinion, due to my lack of experience with the theory, but I find it convincing.

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