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This essay is a review of the recent literature on the methodology of economics, with a focus on three broad trends that have defined the core lines of research within the discipline during the last two decades. These trends are: (a) the philosophical analysis of economic modelling and economic explanation; (b) the epistemology of causal inference, evidence diversity and evidence-based policy and (c) the investigation of the methodological underpinnings and public policy implications of behavioural economics. The final output is inevitably not exhaustive, yet it aims at offering a fair taste of some of the most representative questions in the field on which many philosophers, methodologists and social scientists have recently been placing a great deal of intellectual effort. The topics and references compiled in this review should serve at least as safe introductions to some of the central research questions in the philosophy and methodology of economics.

Economics and political philosophy tend to lead separate existences in separate university departments. This paper argues that there are gains to be had in the understanding of the teaching of economics if the intellectual divide between these disciplines is bridged. The history of economic thought owes its evolution in part to responses at particular points in time to the enduring questions of political philosophy. A more deep‐seated understanding of economics and of HET is therefore available if considered in conscious alliance with the history of political philosophy (HPP). In short, the argument of this paper ‐ which considers five dimensions of the interdependence of HET and HPP ‐ is the reverse of Scott Gordon’s conclusion that economists have little or nothing to learn from philosophers.

During the last decade or so, philosophers of science have shown increasing interest in scientific models and modeling. The primary impetus seems to have come from the philosophy of biology, but increasingly the philosophy of economics has been drawn into the discussion. This paper will focus on the particular subset of this literature that emphasizes the difference between a scientific model being explanatory and one that provides explanations of specific events. The main differences are in the structure of the models and the characteristics of the explanatory target. Traditionally, scientific explanations have been framed in terms of explaining particular events, but many scientific models have targets that are hypothetical patterns: “patterns of macroscopic behavior across systems that are heterogeneous at smaller scales” (Batterman & Rice, 2014, p. 349). The models with this characteristic are often highly idealized, and have complex and heterogeneous targets; such models are “central to a kind of modeling that is widely used in biology and economics” (Rohwer & Rice, 2013, p. 335). This paper has three main goals: (i) to discuss the literature on such models in the philosophy of biology, (ii) to show that certain economic phenomena possess the same degree of heterogeneity and complexity often encountered in biology (and thus, that hypothetical pattern explanations may be appropriate in certain areas of economics), and (iii) to demonstrate that Hayek’s arguments about “pattern predictions” and “explanations of the principle” are essentially arguments for the importance of this type of modeling in economics.

International business (IB) research is traditionally heavily reliant on economics. In this chapter, we review selected debates in the philosophy of science of economics and consider their relevance for economics-based IB research, given important characteristics of IB such as phenomenon-orientedness, concern with data and facts and limited use of formal mathematical models and unrealistic assumptions in the analysis. We argue that, like in the case of mainstream economics, Lakatos’ concept of scientific research programmes (SRPs) is more useful for understanding the philosophy of science of economics-based IB than Popper’s falsificationism. Following this, we discuss characteristics of two possible IB SRPs, internalization theory and Dunning’s Ownership-Location-Internalization paradigm. Finally, we discuss the approach to modelling in IB, finding it to reflect a relative commitment to scientific realism.

Behavioral economics poses a challenge for the welfare evaluation of choices, particularly those that involve risk. It demands that we recognize that the descriptive account of behavior toward those choices might not be the ones we were all taught, and still teach, and that subjective risk perceptions might not accord with expert assessments of probabilities. In addition to these challenges, we are faced with the need to jettison naive notions of revealed preferences, according to which every choice by a subject expresses her objective function, as behavioral evidence forces us to confront pervasive inconsistencies and noise in a typical individual’s choice data. A principled account of errant choice must be built into models used for identification and estimation. These challenges demand close attention to the methodological claims often used to justify policy interventions. They also require, we argue, closer attention by economists to relevant contributions from cognitive science. We propose that a quantitative application of the “intentional stance” of Dennett provides a coherent, attractive and general approach to behavioral welfare economics.

Mainstream economists now consider their discipline to be a technical one that is free from ethical concerns. I argue that this view only arose in the twentieth century. In this paper I set out a brief history of economics as a moral science. First, I sketch the evolution of economics before Adam Smith, showing that it was generally (with the exception of the mercantilists) conceived of as a part of moral philosophy. Second, I present elements of the new interpretation of Smith, which show him as a developer of economics as a moral science. Third, I show that even after Smith, up to the beginning of the twentieth century, a number of leading economic theorists envisioned economics as a moral science, either in theory or in practice. Fourth, I sketch the decline of economics as a moral science. The key factor was the emergence and influence of positivism. Overall, I show that the current view of the detachment of economics from morals is alien to much of the history of the discipline.

The work of E.F. Schumacher is addressed in the broad context of economic philosophy. His economics present a frontal attack on neo‐classical economics. He likewise rejects a Marxist analysis of society. And while he shares some of the concerns of the institutionalists, he nonetheless stands apart from them in his questioning of the moral and philosophical foundations of the discipline. Schumacher can be considered a member of a fourth school – philosopher/economists.

After a clarification of definitions important in methodological discussions, a brief history of early methodological thought in economics and political economy is presented. The development of “orthodox” methodology is traced, and the fundamental assumptions underlying neoclassical economic methodology are enumerated. Philosophical positions – both critical of and sympathetic to the orthodox assumptions – are presented. In addition, the advantages and disadvantages of various heterodox positions are surveyed. Throughout the paper, methodological justifications for the emphasis on primarily deductive, complex mathematical models in contemporary economics as practiced in the USA – especially in light of the relevance and importance of primarily verbal, interpretive methodologies in the realm of applied and policy‐oriented economics – are examined.

A widely accepted belief holds that social economics is logically inconsistent with the pragmatic philosophy. This view has been very clearly and forcibly expressed by Mark A. Lutz at the Third World Congress for Social Economics. Lutz has summarised his conclusions in the following quotation:

Sages and seers in ancient India specified dharma, artha, kama and moksha as the four ends of a moral and productive life and emphasised the attainment of a proper balance between the spiritual health and the material health. However, most of their intellectual energy was directed towards the attainment of moksha, the salvation from birth‐death‐rebirth cycle. Kautilya, on the other hand considered poverty as a living death and concentrated on devising economic policies to achieve salvation from poverty but without compromising with ethical values unless survival of the state was threatened. Kautilya's Arthashastra is unique in emphasising the imperative of economic growth and welfare of all. According to him, if there is no dharma, there is no society. He believed that ethical values pave the way to heaven as well as to prosperity on the earth, that is, have an intrinsic value as well as an instrumental value. He referred the reader to the Vedas and Philosophy for learning moral theory, which sheds light on the distinction between good and bad and moral and immoral actions. He extended the conceptual framework to deal with conflict of interest situations arising from the emerging capitalism. He dedicated his work to Om (symbol of spirituality, God) and Brihaspati and Sukra (political thinkers) implying, perhaps, that his goal was to integrate ethics and economics. It is argued that the level of integration between economics and ethics is significantly higher in Kautilya's Arthashastra than that in Adam Smith's Wealth of Nations or for that matter in the writings of Plato and Aristotle.