At the heart of the current methodological discussion in the social sciences in general and in economics in particular is (we believe) the predictive weakness of existing theory. The cause of this weakness is the indefinitely large number of variables that can affect the course of economic events. Since predictive models can take into consideration only a limited and, in fact, quite small number of variables, the failure of a prediction made with such a model is not decisive for the fate of the hypothesis. The prediction is made subject to the ceteris paribus condition and it is usually difficult, if not impossible, to ascertain whether this condition has been fulfilled in a specific case. Economics is often compared with meteorology, which for similar reasons also suffers from a notable predictive weakness. However, the economist cannot derive much solace from this comparison. Closer scrutiny reveals a fundamental difference between the two situations. Like economies, meteorology deals with an indefinitely large number of variables, i.e., with “unique events.” This leads, at times, to spectacularly wrong predictions. After the event, a satisfactory explanation is usually given in terms of the interference of unforeseen factors — that is, the nonfulfillment of the ceteris paribus condition.
The essential difference between meteorological and economic models lies in the fact that meteorology uses chiefly physical laws. These laws are verified independently from their use in meteorological predictions and explanations; they are used in (physical) models referring to situations for which the set of relevant variables is considered to be exhaustive — that is, for which it is successfully assumed that no exogenous variable can measurably affect the outcome.
On the other hand, as has been pointed out elsewhere in greater detail, the majority of the laws used in economic prediction and explanation are economic laws containing only economic terms. Therefore, they cannot be verified independently from their use in economic predictions and they cannot be strictly verified through their use in economic predictions because of the difficulty of disconfirming them. This difficulty prevails because economic models are usually incomplete, which means that exogenous variables can measurably affect the outcome. Thus the economist finds himself in a worse position than the meteorologist.
If the difficulty of validation by prediction of contemporary economic models is accepted, it is necessary to turn to an appraisal of the status of economic hypotheses. Specifically, we are interested in the class of hypotheses called “assumptions.” Formally these assumptions are presented as major premises in valid arguments leading to the formulation of predictions of specific economic observations. Beyond that, considerable doubt and little agreement prevail with regard to the status and content of these propositions. In the next section an attempt is made to determine the nature and the function of assumptions in economic prediction and explanation.
Source: Skyttner Lars (2006), General Systems Theory: Problems, Perspectives, Practice, Wspc, 2nd Edition.