A Method for Theoretical Innovation in Economics

20 September 2012
Publication Type: Working Paper
JEL Code: B40

How can more theoretical innovation in economics be stimulated? Clues to the answer can be derived from the work of theorists who have been recognised for their innovative contributions to economic theory and from the philosophy of scientific progress. This paper takes the view that scientific progress is propelled by the need to address unsolved problems. From problem theory it is derived that these unsolved problems are generated by inconsistent assumptions and slows down theoretical progress for as long as such problems remain unsolved. Gifted economic theorists intuitively recognise logical inconsistencies, and employ various abductive reasoning strategies to find assumptions that remove these inconsistencies. Their research often produces new inconsistencies, and so triggers further theoretical innovation by others. A rational reconstruction of the seminal work of Nobel Prize winners Kydland and Prescott (1977) provides a running illustration, and shows that an understanding of the structure of economic problems can allow more economists to deliver innovative theoretical work.

Series title: Working Paper 066
1 November 2007