204 ALTERNATIVE VIEWS OF HERMENEUTICS

Because positivist methodology is based largely on foundationalism, many of the critiques against foundationalism in philosophy apply to the economic methodology used by most RE theorists. For example, it is doubtful whether the positivist standard for testing hypotheses actually satisfies the requirements of basic beliefs. To employ the predictive mechanism suggested by Friedman, we must compare a model’s predictions with observations concerning the world. The problem with this method is that there are no known procedures for making ‘direct’ observations of economic phenomena. Friedman himself points out that the evidence used to test formal models is never conclusive. Comparison of observations with predictions is never free from what Friedman calls ‘the background of the scientists’, and thus ‘the weight of evidence for or against a hypothesis can never be assessed completely “objectively”’ (Friedman 1953, p. 30). Since the process of classifying, aggregating, and measuring economic data necessarily involves the use of background judgements, beliefs based on empirical observations cannot be justified directly. The background context used to interpret observations must also be justified, and this generates the regress that foundationalism seeks to avoid.

There are also difficulties with the positivist criteria for making empirical observations. The positivist standard justifies an absence of qualitative analysis because this type of data cannot be incorporated into predictive models. Formal predictive models are often assumed to be the only method appropriate for studying economic phenomena and addressing economic questions. The difficulty with this view is that it cannot be defended purely on positivist grounds, since the positivist standard for deciding which phenomena are important and which questions are relevant must be justified. Despite the positivist claim to the contrary, a theory’s validity is never completely dependent on the pragmatic criteria of whether it ‘works’, because the criteria used to measure success must be examined.

When the positivists’ standard of success is questioned, economists often interpret the challenge as an argument against using models which include unrealistic assumptions. Realistic assumptions are not important to positivists, therefore challenges to the appropriateness of positivism are sometimes dismissed as irrelevant. The positivists’ position is that the only appropriate test is of the model’s predictive ability. This response overlooks the fact that it is not only the model’s assumptions that are being questioned, the assumptions of positivism are being challenged as well. The question, then, is whether the standards for success dictated by positivism are appropriate for studying all or even any economic issues. Positivism does not address this question and thus cannot solve the regress problem.

THE COHERENCE STRATEGY

As indicated earlier, the foundationalism method of relying on basic beliefs has not produced a solution to the regress problem. Given the objections raised against

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the use of basic beliefs, a promising alternative would appear to be a theory based on the overall coherence of beliefs which does not depend on basic beliefs. Two of the most comprehensive theories of this type are those developed by Nicholas Rescher and Lawrence BonJour. The following discussion of coherence theories is based primarily on their work.22

Since coherence theories lack basic beliefs, the structure of justification in these theories is different from that of foundationalism. The foundationalist structure resembles a tree in which all the branches lead to a foundation of basic beliefs. In contrast to this linear formation, coherence theories rely on models from network or systems theory. The epistemological standard of coherence is applied to the entire system of beliefs rather than to specific beliefs. In his text on epistemology Jonathan Dancy notes that, for coherence theories: ‘The set is coherent to the extent that the members are mutually explanatory and consistent’ (Dancy 1985, p. 112, my italics). Justification in coherence theories depends on the ability of a belief to increase the coherence of this interconnected system of beliefs.23

Coherence theorists view system circularity as the primary method of solving the regress problem. At the same time they want to avoid the type of circular argumentation in which a belief justifies itself because this would open the door to relativism and scepticism. In place of this vicious circularity, coherence theories adopt a holistic strategy in which ‘beliefs are justified by being inferentially related to other beliefs in the overall context of a coherent system’ (BonJour 1985, p. 90).

Rather than linking one belief to another, justification by coherence involves a process of examining specific beliefs in the context of the entire system. Rescher describes the coherence approach as:

iterative and cyclical; one is constantly looking back to old points from new perspectives, using a process of feedback to bring new elucidations to bear retrospectively on proceeding analysis. What determines correctness here is the matter of over-all fit, through which every element of the whole interlocks with some others.

(Rescher 1979, p. 107)

According to coherence theorists, adoption of a system-standard avoids the problem of a belief justifying itself.

Coherence theory and rational economics

While foundationalism is perhaps the most obvious method for demonstrating the rationality of expectations, the coherence strategy represents another alternative for defending the claim that RE agents and economists are rational. Indeed, there is a remarkable consistency between the RE hypothesis and the