I have been asked, on the occasion of my retirement, to make some remarks about my experience as an economist, addressing the participants of the Lisbon Conference on Money and Finance, which has been organised to honour this event.

As an economist, my first work was in 1972 as a junior researcher in the Exports Promotion department of the Portuguese Ministry of Economy. The following year, I took my second job, in a development bank. At the same time, I began to teach part-time as an Assistant of Economics at ISEG (Technical University of Lisbon). Later, I was invited to be a member of the Board of Management of a small commercial bank in Lisbon, a position that I occupied for two years. It was on completion of this appointment that I decided to embark on my Ph.D. in Money and Finance, with the aim of becoming a full-time professor of ISEG. At the same time, I was invited to be a professor of Economics and a research director at the Université d’Orléans, where I had completed my “Doctorat d’Etat”. Five years later, in 1997, I was asked to interrupt my lectures in Lisbon in order to work as Chief Consultant to the Minister of Finance of Mozambique, within the framework of a contract with the World Bank. I returned to ISEG in 1990 to resume my teaching and research activities, in the area of monetary theory and policy. I have continued to collaborate with Orléans throughout my academic career. Meanwhile, I have published six books since I began to work in the development bank.

I have reaped great pleasure and satisfaction from my entire working life and I could tell you many interesting stories extracted from my experience. However, I have chosen instead to explain the lessons that I have learned from my career, in the hope that this approach may be more useful.

These lessons concern the scientific methodology that an economist is expected to apply, either in research as a professional consultant, or as a theoretical researcher. The following sections will explain why scientific methodology matters in each of these diverse cases, as well as offering the comparison between economics and physics and the pertinence of considering the referential system when dealing with economic subjects, particularly with money.

Since the most significant economies are nowadays monetary, the title of this text has implicit the idea that economics is a science which deals with goods (real sphere or material wealth) and money (monetary sphere) simultaneously. This is a point that I emphasise and that contradicts the views of many economists who still think that “money does not matter” and that the subject of economics is merely the study of phenomena concerning material wealth.

1.      Is Economics a Dismal Science?

I had my first contacts with the philosophy of economics (epistemology concerning this science) in 1964 during my first year in college (now ISEG, at the time called ISCEF) with Prof. Pereira de Moura in the discipline of “Economics I”. His approach was good for the time, since he showed that economic science was a partial study of a complex social reality. He informed us that we would not consider theories dogmatically, although these should be constructed rigorously and explain economic reality correctly, and that we would consider the theoretical bodies (paradigms) as methodological guides to study concrete economic problems, rather than exact laws as those provided by physics. The problem confronting economics was the impossibility of experimental research, but theories might be tested through econometric techniques.

However, the researcher often encounters difficulties of testing economics and a conflict between empiricism and economics arises from the apparent disconfirmations of his theories. These empirical difficulties were a concern for the strict empiricist John Stuart Mill (1836). He faced a dilemma, called by Daniel M. Hausman “Mill’s problem”: “Since economics faced such major empirical difficulties, it might appear that Mill would have to change his epistemology or disavow his economics.” The “solution” he adopted for this problem consisted of maintaining that the basic premises of economics are empirically well established by introspective psychology, or by experimental testing of basic theoretical principles.

Hausman tells that the “classical economics” was called “the dismal science” (i.e., miserable) due to its pessimism concerning the future (Malthus’ views). However, in his article, he deals with what he calls "orthodox," "neoclassical," or "neowalrasian school models”.

Yet science philosophers have often given the same epithet to economics, to qualify it as a minor discipline. For example, Sam Vaknin writes: “Economics - to the great dismay of economists - is merely a branch of psychology. It deals with individual behaviour and with mass behaviour. Many of its practitioners sought to disguise its nature as a social science by applying complex mathematics where common sense and direct experimentation would have yielded far better results.
The outcome has been an embarrassing divorce between economic theory and its subjects.
The economic actor is assumed to be constantly engaged in the rational pursuit of self interest. This is not a realistic model - merely a useful approximation. According to this latter day - rational - version of the dismal science, people refrain from repeating their mistakes systematically.”

In his article “Immortality and Mortality in the Economic Sciences”, he writes: “Businessmen amass superfluous wealth and collectors bid in auctions regardless of their age. We all - particularly economists - seem to deny the prospect of death.
Examples of this denial abound in the “dismal science”:
(….) Economic theories assume that humans - or maybe humanity - are immortal and, thus, possessed of an infinite horizon.”

Explaining the meaning of “dismal science”, Andrew Beattie goes directly to the point:
“The phrase "dismal science" was coined by Thomas Carlyle in response to Thomas Malthus' beliefs that the exponential population growth would outpace the linear growth of the world's food supply, resulting in a global famine. (…) economics, like science, aims to explain certain phenomenon, but for many reasons economics cannot fulfil the criteria of the experimental model”.

This negative epithet given to economics (viewed as the mainstream economics), corresponds to the general feeling that I perceived when a student and several years later, since economics was not an exact science, for example, like physics. The latter was seen as knowledge in which the theoretical truth was absolute. This was the view transmitted to my generation within a framework of predominant positivism. Today, however, I hold a different view and I do not agree with the epithet. Below I will explain why not.
It is true, as Hausman shows in the article quoted above, that several economists dealing with economics methodology criticised Mill’s solution to his problem and attempted to find alternative responses. Yet they were unable to solve Mill’s problem. 
One of the most influential was Milton Friedman, who, in his essay, “The Methodology of Positive Economics”, argued that the only relevant test of an economic theory is its success in predicting the phenomena that economists are concerned with. He defended that standard microeconomic theories and his quantity theory of money fulfil the requirements of such tests well. He was criticised for "unrealistic assumptions" underlying his theories, but he responded that such criticisms mistakenly presupposed that theories could be tested by their assumptions. In his view, Mill's problem does not exist, since scrutinizing the realism of assumptions is a methodological mistake. He wrote: "The ultimate goal of a positive science is the development of a "theory" or "hypothesis" that yields valid and meaningful predictions about phenomena not yet observed" (1953, p. 7, Hausman quotation). Thus, a theory based on false assumptions is scientifically true if it provides good predictions of the behaviour of an economy.
Friedman’s view is not acceptable, because the goal of economics is not so narrow as to make good predictions to be used by economic policy. Economic science is supposed to be concerned with explaining the phenomena of economies with truth. A theory based on false hypothesis may not be true, despite its correct construction logically or mathematically. If the model leads to an accurate prediction, it may be a consequence of a mere random event, not necessarily verifiable in subsequent circumstances. Moreover, economic history shows the difficulties faced by Friedman’s theories in making predictions. So, he did not solve Mill’s problem.
Other modern approaches to solve Mill’s problem derived from Karl Popper’s philosophy, according to Hausman’s article (application of falsificationist methodology to economics). This approach was the motivation for the work of Mark Blaug (1992) and Imre Lakatos (1970). They could not solve Mill’s problem because Popper’s falsificationist thesis is not applicable to economics (and neither to physics, as Kuhn  has shown).
Despite all of the problems described above, economics is not a dismal science. Mill’s problem cannot be solved, because it has not been correctly formulated. From a positivist point of view, it is a crucial problem, since positivism relies on empiricism. However, positivist philosophy was considered dogmatic and scientifically misleading, even in physics. Concerning methodology, economics faces problems identical to those of physics, as will be shown in the next section, while nobody qualifies the latter as a dismal science.
Moreover, economics should not be reduced to the “orthodox school” or “mainstream economics”. In economics different paradigms exist, as in physics and this reality must be taken into account. The conflict between paradigms looks like tremendous turmoil to outsider observers, unlike what happens with physics. It is so because economics is a social science and its statements have to do with the interests of people, in society, rather than mere consequences concerning the status of supporters of established theories when their views are placed in doubt. For example, the mainstream economics defends that market mechanisms solve all problems in the long run (hypothesis of immortality underlying) which usually implies that high unemployment existing now (short run) is a good thing, provided it means structural changes towards “progress”. Keynes argued that in the long run, we are all dead and did not agree with the proposals of the orthodox school. One sees how easy it is to pass from a positive to a normative point of view and many people, mainly those who are unemployed, including young graduates without work, do not necessarily agree with such statements.
Another typical point is the economic views that become popular and politically correct in some periods as a cyclical fashion, depending on the opinions of politicians in power at the moment. Many economists follow the fashion out of personal convenience and present ad hoc arguments that have nothing to do with scientific truth.
Aware of this reality, Hausman pointed out in the article quoted above: “Economics has been of philosophical interest in three main regards. First, it raises moral questions concerning freedom, social welfare and justice. Although economists often deny that their theories have ethical content, they are ready with advice about how to make life better.” (cf. section 3).

2.      The Need for Scientific Methodology

Economists usually adopt a paradigm without discussing the scientific basis of their theoretical beliefs (e.g. the mainstream economics taught at colleges as an absolutely true science). Everything is taken from the paradigm as well settled and commonly accepted as truth. This view should be changed.
As a matter of fact, despite the indifference of most economists to epistemological issues, the discussion made in the preceding section made clear the necessity of adopting a credible scientific methodology in economics. It is so for the sake of intellectual honesty, as well as for the social consequences of defending false theories. It is well known that economic policy recommendations are based on the scientific explanations of the problems to solve. If the interpretations of economic reality (theories) are false, then there is a high probability of adopting harmful measures. Before I suggest a methodology, I shall compare economics with physics from an epistemological point of view, using the analysis presented by Kuhn, in the book quoted above, The Structure of Scientific Revolutions (1962).

Kuhn received a Ph.D. in physics from Harvard in 1949. As he tells in the preface to his book, he was asked by the President of Harvard, before finishing his dissertation (1947), to teach a course as a budding theoretical physicist to undergraduate humanities students. Attempting to reconcile the seemingly obvious flaws of old-fashioned physics with Newtonian thinking for the class, Kuhn realized that some disused ideas were not "bad Newton," but different ways of looking at the same thing.  His beliefs about the nature of science collapsed and he decided to change his career from physics to the history of science and later to philosophy.
 During fifteen years of thought and clarification, he articulated his ideas in the form of his now famous essay.

A  A Brief Reading of Kuhn’s Book

Kuhn’s philosophy is based on the history of science. At the beginning of the first chapter, he presents the concept of normal science which "means research firmly based upon one or more past scientific achievements, achievements that some particular scientific community acknowledges for a time as supplying the foundation for its further practice".

School textbooks on science, he says, present this accepted knowledge, usually not in its original form. These achievements are called by him paradigms. He described a paradigm as essentially a collection of beliefs shared by scientists, a set of agreements about how problems are to be understood.

If scientific achievements become paradigms, this is because they fulfil two requirements: they must be "sufficiently unprecedented to attract an enduring group of adherents away from competing modes of scientific activity," and they must be "sufficiently open-ended to leave all sorts of problems for the redefined group of practitioners to resolve". Paradigms, he says, are closely connected to natural science. Students study these paradigms in order to become members of the particular scientific community in which they will later practice.
Because the student largely learns from, and is mentored by, researchers "who learned the bases of their field from the same concrete models", there is seldom disagreement over fundamentals. Men whose research is based on shared paradigms are committed to the same rules and standards for scientific practice. Paradigms help scientific communities to bound their discipline and this stimulates the scientist to create avenues of inquiry, formulate questions, select methods with which to examine questions and define areas of relevance. They are essential to scientific inquiry, for "no natural history can be interpreted in the absence of at least some implicit body of intertwined theoretical and methodological belief that permits selection, evaluation, and criticism.".

Concerning the nature of normal science, Kuhn asks: if a paradigm consists of basic and incontrovertible assumptions about the nature of the discipline, what questions are left to ask?
Initially, a paradigm offers the promise of success. Normal science consists in the achievement of that promise. This is accomplished by extending the knowledge of those facts that the paradigm displays as particularly revealing, increasing the knowledge of the match between those facts and the paradigm's predictions, and further articulation of the paradigm itself.
This means that the work to do in normal science is ‘mopping up’. Mop-up operations are what most scientists do throughout their careers. This paradigm-based research is "an attempt to force nature into the pre-formed and relatively inflexible box that the paradigm supplies". No effort is made to call forth new types of phenomena. Normal science does not have the goal of inventing a new theory, and there is no tolerance for those scientists who try. “Those restrictions, born from confidence in a paradigm, turn out to be essential to the development of science. By focusing attention on a small range of relatively esoteric problems, the paradigm forces scientists to investigate some part of nature in a detail and depth that would otherwise be unimaginable" and, when a paradigm ceases to function properly, scientists begin to behave differently. They thus change the nature of their research problems.
As normal science does not have the goal of novelty, studying new phenomena or elaborate new concepts, the research done in its framework is essentially solving puzzles at the instrumental, conceptual and mathematical levels. In order to solve puzzles, rules are necessary. A rule is an adopted point of view or a predetermined solution. In normal science, the research has the aim of discovering what is known in advance. So why do research? Results add to the scope and precision with which a paradigm can be applied.
Normal science does not aim at novelties of fact or theory and, when successful, finds none. Nonetheless, new and unsuspected phenomena are repeatedly uncovered by scientific research and new theories have often been invented by scientists and paradigms change. Discovery begins with the awareness of anomaly - the recognition that nature has refuted the paradigm. The area of the anomaly is then explored. The paradigm change is complete when the paradigm has been adjusted, so that the anomalous becomes the expected, until the scientist is able "to see nature in a different way".
The persistent failure of the puzzles of normal science to be solved as they should be creates a scientific crisis. Kuhn gives several examples of the crisis of physics at the end of the 19^th century that prepared the way for the arrival of the theory of relativity in 1905.
The recognition of anomalies results in crises that are a necessary precondition for the emergence of novel theories and for paradigm change. In responding to these crises, scientists generally do not renounce the paradigm that has led them into crisis. Rather, they usually devise numerous modifications of their theory in order to eliminate any apparent conflict.
Concerning “The Nature and Necessity of Scientific Revolutions”, Kuhn wrote: “What are scientific revolutions, and what is their function in scientific development? (…) revolutions are here taken to be those non-cumulative developmental episodes in which an older paradigm is replaced in whole or in part by an incompatible new one. (…) Why should a change of paradigm be called a revolution? In the face of the vast and essential differences between political and scientific development, what parallelism can justify the metaphor that finds revolutions in both? (…) In both political and scientific development, the sense of malfunction that can lead to crisis is prerequisite to revolution (…) Scientific revolutions, …, need seem revolutionary only to those whose paradigms are affected by them”.
“Like the choice between competing political institutions, that between competing paradigms proves to be a choice between incompatible modes of community life. Because it has that character, the choice is not and cannot be determined merely by the evaluative procedures characteristic of normal science, for these depend in part upon a particular paradigm, and that paradigm is at issue. When paradigms enter, as they must, into a debate about paradigm choice, their role is necessarily circular. Each group uses its own paradigm to argue in that paradigm's defence”.


How do the proponents of a competing paradigm convert the entire profession or the relevant subgroup to their way of seeing science and the world?  asks Kuhn in the chapter, “The Resolution of Revolutions”.
From a methodological point of view, the scientific revolutions process is analogous to natural selection: one theory becomes the most viable among the actual alternatives in a particular historical situation. Nevertheless, it is not easy to convince the supporters of an old paradigm to adopt a new one. This is so because each group of scientists argues by the rules of his paradigm, each one living in a different intellectual world, which makes communication inoperative.
At the start, a new candidate for a paradigm may have few supporters. If they are competent, they will improve the paradigm, explore its possibilities and show what it would be like to belong to the community guided by it. For the paradigm destined to win, the number and strength of the persuasive arguments in its favour will increase. As more and more scientists are converted, exploration increases.
But this process is usually very slow. Usually it is necessary to wait for the passing of a generation of normal science supporters to see a new paradigm adopted by the following generation. It is difficult for those who had made brilliant careers engaged in an older tradition of normal science to embark on a new paradigm, one that is opposed to what they have always believed.

B  Comparing Economics with Physics

The epistemological arguments contained in Kuhn’s book concerning physics apply perfectly to economics. Kuhn has shown that physics is not a science so absolute and “exact” as was thought before. Nevertheless, it is seen as the paradigmatic science, namely because it has been the source of prodigious technical progresses.

The “natural science” described by Kuhn, that is, a set of paradigms taught and accepted by the academic community, corresponds very well to what is called the “mainstream economics”. The behaviour of paradigm supporters described by Kuhn exists also in economics, where it is equally difficult for a new theory to be accepted when it infringes the assumptions of orthodoxy.

Kuhn has given many historical examples drawn from the science of physics to prove his arguments: None of these have been reiterated here for the sake of simplifying this text. What is characteristic of scientific revolutions in physics, concerning the reactions of supporters of old paradigms, is also evident in economics. For example, almost 70 years after the appearance of the General Theory of Keynes, which for a time was seen as revolutionary, this paradigm is still not established as natural science in economics. Early on, his theory was converted into a neo-classical version by Hans and Hicks, who presented the IS-LM model, which became popular and known as keynesianism in mainstream manuals. The economic policy recommendations following that interpretation, in which money - although present in the model - actually did not matter, focused on public budget deficits as an instrument without concern for its financing. This discredited the paradigm and gave the opportunity to a generalised résumé of the orthodox view, never abandoned in Chicago University, if we are to believe a famous statement by Friedman.

Concerning scientific methodology, the problems existing in economics are also similar to those of physics. Positivism has been abandoned, since the theory of relativity had as a consequence that the unique system Nature  in which experiments were carried out was inadequate. The falsificationism of Popper seems inapplicable in physics, as Kuhn pointed out, as well as in economics. 
  

3. The Referential System: Relativity in Monetary Economics

In a book that I published in 1979, I defended the application of the philosophy of Einstein’s theory of relativity to economics. The main point has to do with “the place” where phenomena are observed and studied, which I shall call “the referential system” and which corresponds to the “rigid body of reference”, or “system of co-ordinates” in relativity theory.

As is known, the system of co-ordinates for Newtonian physicists was nature, in which experiments were made. Positivism, based on empiricism, supposed the world where we live as “the system” and the laws obtained through a rigorous experimental method had an absolute value concerning truth. Since Galilei, it was thought that the laws of physics are identical in all systems of co-ordinates with uniform motion between them. Einstein has proven that this is not true.

In the chapter, “In What Respects Are the Foundations of Classical Mechanics and of the Special Theory of Relativity Unsatisfactory?” we read:
“We have already stated several times that classical mechanics starts out from the following law: Material particles sufficiently far removed from other material particles continue to move uniformly in a straight line or continue in a state of rest. We have also repeatedly emphasised that this fundamental law can only be valid for bodies of reference K which possess certain unique states of motion, and which are in uniform translational motion relative to each other. Relative to other reference-bodies K the law is not valid. Both in classical mechanics and in the special theory of relativity we therefore differentiate between reference-bodies K relative to which the recognised ‘laws of nature’ can be said to hold, and reference-bodies K relative to which these laws do not hold.”

A similar statement has to be made concerning economic theories, where the capitalistic system was assumed to be universal, as was “Nature”, by empiricism and positivism. However, many assumptions that are valid for one economic system are not for another. For example, if the subject of study concerns phenomena of an economy in which money (in its contemporary meaning) is not used, assumptions concerning interest, inflation and so on make no sense. The same applies if the Stock Exchange does not exist. On the other hand, if money exists in the economy, it has to be considered one axis of the referential, beyond those of goods, institutions, family structures, religions, as well as other social values and elements that influence the behaviour of individuals concerning their economic activities. Capitalism, as it exists in the U.S.A., is far from being a universal system. So, it is usually misleading to apply theories constructed in the framework of this system to others that do not have the same characteristics, or are not yet capitalistic systems.

Money has to be considered an axis of the modern capitalistic referential, since monetary and financial phenomena influence investment and production, through the interest rate, the availability of credit and other instruments of direct financing.

Family structure is important because it determines consumption and saving. A tribal structure has implications quite different from what occurs with monogamous families in capitalistic societies, with Judeo-Christian cultural values.

Other arguments of a social kind could be added to show how it is crucial to study and fix beforehand the referential axes of an economy when economic reality is going to be studied.

This is the first step of the methodology I defend for economics. After fixing the referential, the theoretical assumptions are stated. The second step is to identify the problem to be studied. Thirdly, an explanatory hypothesis must be set and a mathematical model must be constructed. Mathematics is an indispensable tool for economics, due to the rigorous deduction it permits, departing from assumptions, as well as providing the basis for econometric tests. Econometric tests are the last step of a first theoretical validation in economics. Finally, as economic theories have instrumental value for economic policies, the results of these policies also provide validation for theories. Here, we are often confronted with the problem of defensive arguments raised by the supporters of theories and correlated economic policies, when their theories do not seem to work, affirming that the results are not yet in evidence because the effects only appear in the long run. The “long run” is not defined in economics as a certain number of years (unlike the case in finance, where “long run” means more than five years). In economics, the long run is an undefined period of time during which the economic structure changes. Nevertheless, this is overlooked in the above-mentioned argumentation and we never usually see the good results of economic policies if they do not transpire within a year or two.

Conclusion

The lessons that my life as an economist suggest are optimistic. Despite some apparent turmoil concerning methodology and contradictory economic theories, economics nowadays allows us to have more clear views concerning economic problems.

Provided that correct methods are used and the value judgements of economists are correctly controlled, economics is a science as well founded as physics, medicine and other greatly respected disciplines. Let us take medicine as an example. It has performed miracles, in spite of the errors that are sometimes reported and the theoretical disagreements between different schools. It is not perfect, but it is indispensable for human welfare. The same is true of economics.

Thank you very much.

Barata, José Martins - Política Monetária  da Teoria à Realidade, Ed. Caminho, Lisboa, 1979, p.55
Beattie, Andrew - “Hairline Fractures: Exploring the Dismal Science”, July 11, 2003, http://www.investopedia.com/articles/basics/03/071103.asp
Einstein, Albert - Relativity  The Special and General Theory, chapter 21,
 http://www.bartleby.com/173/21.html
Friedman, Milton - Essays in Positive Economics, Chicago: University of Chicago Press, (1953)
Hausman, D.M. - “Philosophy of Economics”, http://philosophy.wisc.edu/hausman/default.htm, section 3, consulted September 2004
Kuhn, Thomas S.  - La Structure des Révolutions Scientifiques, Flamarion, Paris, 1983, pp.202-203 (translation of the original American edition of 1970)
Pajares, Frank - Synopsis of the Structure of Scientific Revolutions, available at http://www.emory.edu/EDUCATION/mfp/kuhnsyn.html, September 2004
Vaknin, Sam - “Economics - Psychology's Neglected Branch”, http://samvak.tripod.com/econbehave.html,
consulted September 2004
Vaknin, Sam - "Immortality and Mortality in the Economic Sciences",
http://samvak.tripod.com/mortal.html, consulted September 2004