ABSTRACT OF PAPER

Title: Ketchup Economics: What is Finance about?
Author: Daemen Job


Back in 1985 Larry Summers employed the metaphor of “ketchup economics” to illustrate the relationship and differences between economics and finance. He distinguished two groups of researchers: general economists who study the ketchup market as part of the broader economic system and so-called ”ketchup economists”, located in the Department of Ketchup where they receive much higher salaries than do general economists . General economists focus on fundamental determinants of price and quantity of ketchup, the various supply and demand factors, and try to explain price fluctuations by examining various types of data and using models. Ketchup economists, on the other hand, reject this approach and its results. They point out that the aggregate data, used by general economists, are almost meaningless accounting entities which are not even accurately measurable in the first place. Instead they focus on studying the hard observable data of ketchup transaction prices and possible excess opportunities in the market. The lack thereof and the resulting efficiency of the ketchup market is regarded as the best established fact in empirical economics by ketchup economists. Gibbons (1987) points at the common interests in explaining certain phenomena and the sharing of methods -econometric methods in particular- and data. Ross (1987, 2005) claims that economics and finance have differing methodological perspectives: whereas in economics in general the equilibrium concept takes center stage, finance evolves around the no-arbitrage principle. Campbell (1994) combines both arguments. Peter Bernstein (1992, 2008) argues from a historical perspective that finance has changed through the years from a descriptive, qualitative endeavor into a formalized quantitative one, fueled by theoretical innovation. The stories mentioned above are to a large extent a claim about methodology: how the same phenomenon can be approached from various angles and with different methods. But while a large literature exists today on the methodology and philosophy of economics, there is not really such a thing in finance. Besides the scattered remarks above, there are papers and chapters on method and ways of doing research. These include the viability of certain statistical procedures, the proper use of data, and how (un)realistic certain assumptions are, but these are usually confined to a technical treatment (see for instance Cochrane, 2001). Which least squares calculation is most appropriate? What distribution of returns fits best? More in general a form of positivism is suggested as the methodological approach in finance. Merton Miller (1999) and Eugene Fama (1998) explicitly hint at Milton Friedman’s well-known 1953 article “The Methodology of Positive Economics” as the leading principle for research in finance. Sheila Dow (2007) makes an identical claim. Some literature exists on what has had impact in finance in terms of specific papers, specific scholars, and specific academic institutions (see Arnold et al., 2003, Keloharju, 2008). This research is based on citations and is usually limited to a particular time frame: Arnold et al. (2003) cover the 1990s while Keloharju looks at the new millenium. Kim, Morse, and Zingales have performed a similar study on economics at large, covering the period of 1970 till 2000. There would appear to be space for a more thorough, fundamental treatment of the methodology of finance, which includes but is not limited to its connections with economics at large . This paper is a rude and very basic attempt to do so in an empirical manner. A first step would be to investigate the ways of argumentation in finance. A sample from the entire history of editions of the Journal of Finance and the Journal of Financial Economics, the two leading journals in the field, has been examined in order to answer two basic questions. First, what are people writing about, and, second how do they write about it? In other words, what have been the subjects of the papers and what approach is used in tackling these various subjects: empirical, theoretical, or a mixture of both? The goal is to empirically check the intuitive notions that have been sketched above and gain insight from the bottom up in the ways of argumentation in finance. A longitudinal perspective is taken in order to track the developments through time since scientific fields are hardly ever static and thus methodological remarks are bound to be context-sensitive. An attempt will be also made to connect the findings to familiar concepts in the methodology, philosophy, and history of economics .

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