On The Role of Fundamental Theory in Positive Economics

Abstract

There is a standard distinction in economics between positive theory, which concerns law-like propositions about individual or aggregate economic behavior, and normative or welfare theory, which concerns the evaluation of alternative policies or institutions. In addition, contributions to economic theory are often classified according to whether they are ‘pure’ or ‘applied’. Although this classification is not a precise distinction, there is substantial agreement about which contributions are quite ‘pure’ and which are rather ‘applied’. The present paper concerns the relation between positive theories which lie toward opposite ends of this spectrum. In order to avoid some misleading implications of the traditional way of speaking, I will employ the term ‘fundamental theory’ to refer to contributions which are usually called ‘pure’, and ‘specific theory’ to describe those which are usually called ‘applied’. Although I will offer definitions of these terms, I do not intend to posit a rigid distinction, of which every contribution must fall unambiguously on either one side or the other. Another understanding which should be explicit at the outset is that, in discussing the role of fundamental theory, I will be systematically vague about the philosophical theory of science. My point will be that fundamental theory performs functions and satisfies criteria which would be necessary on any reasonable view of science, rather than that some particular view can explain its existence and justify its usefulness.

I am indebted to Daniel Hausman and Steven Pollack who provided detailed and valuable comments on an earlier draft of this paper.