I don’t have any economics degree, and I’m not competent to discuss advanced econometrics and the like, but I am quite interested in the philosophy behind different approaches to economics. This I feel somewhat competent to discuss, since, after all, economics is a social science and has certain things in common with other social sciences.
The main thing one needs to remind oneself of is that the the economy is a result of human preferences and choices. Thus, an economist should, presumably, be aware of the context in which such preferences are formed and choices are made. Where economists tend to go wrong is in assuming a more or less rigid, or static, set of preferences. This is not surprising, however, if one has the goal of reaching the kind of scientific rigor that a mathematical model can provide. On the other hand, there are a few economists who try to reach “axiomatic” certainty in economists by basically assuming nothing about human behavior, save that it is always goal-directed, purposeful, or the like.
The problem with the first view is that it only gives valid results as long as the original assumptions hold. In some unfortunate cases the economist might simply make assumptions about how he or she would like people to behave, and if people don’t actually behave as the resulting model would suggest, it is up to the politicians to devise institutions that make sure people change their behavior.
The problem with the second, or “axiomatic”, view is that it covers all possible behavior. In other words, no matter which situation (or economic policy) we observe, it will always be in line with the stipulated economic “laws”. And when there are no possible cases which might in principle falsify the theory, the theory seems to be of little value. A parallell example would be a theory that says that people always act selfishly, even if they give all their money to charity or donate their organs to strangers. They were selfish because these acts gave them the satisfaction of having helped people. In other words, everything we do is a result of our preferences, and since our preferences are by definition our own (and no one else’s), we always act selfishly no matter what we do.
It seems, then, that an interesting conception of economics must steer its way between these pitfalls. It has make some assumptions about human behavior, but be aware that such assumptions are limited to a particular social context. One might, for instance, claim that raising the minimum wage would increase unemployment. And it might be true, in a particular context. It would depend, for instance, on what kind of profits entrepreneurs expect – we might call that “level of greed”. Keeping the level of greed constant, it might be true that they would refuse to hire people who they perceive to have a lower “marginal productivity” than the raised minimum wage warrants. In another context, they might be willing to modify their level of greed for some other sake. The minimum wage might, for instance, be raised in a time of war, and patriotic feelings might induce entrepreneurs to lose some profit in order to give jobs to people who have volunteered to fight for the country.
A starker example of the importance of context could be an economist working in a thoroughly racist or misogynist context and simply assume that this is the way people are going to continue to behave. This might be relatively innocuous as an armchair activity. But economics is seldom an armchair activity. It influences politicians. And if the politicians are led to believe that economic models recommend certain institutions in line with people’s racist or misogynist behavior, we are not really talking about an economic science anymore, but about an ideology disguised as science.
In summary, economists (like other social scientists) must be open to the fact that preferences change, depending on the social context. But on the other hand, a theory which claims that preferences are infinitely malleable might – if true, which is implausible – be irrelevant to pressing political concerns (i.e., too utopian). A practical way of achieving balanced economics might, for example, be to provide for a few alternative scenarios in their models, in which preferences are changed in different directions, for instance, towards more or less altruism.