Ideational Reflexivity in Economic Systems

The present work is a chapter from my Ph.D thesis to be submitted in January 2006. Economists generate economic ideas, which are then spread to and impact on the very economic systems that they are ostensibly 'objectively' modelling. I term this dynamical relationship between economic theory and economic reality "ideational reflexivity," and show that various important contributions in economic theory such as the Lucas Critique and Merton's option-pricing theory may be identified as special cases of ideational reflexivity. I then argue that ideational reflexivity, pursued to its logical conclusions, raises serious methodological issues for economic science as a science. In particular the notion of a "positive" body of economic knowledge independent from the reality it describes becomes problematic, and all three "traditional" goals of science - explanation, prediction, and control, become problematic.