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post-autistic economics review
Issue no. 17; December 4, 2002                                     back issues at www.paecon.net
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             In this issue:
                      - Stephen T. Ziliak
                                 Economic History and the Rebirth of Respectable Characters
                      - Steve Fleetwood
                                 Why Neoclassical Economics Explains Nothing at All
                      - Tony Aspromourgos
                                 Defining "Economics" Inclusively
                      - Yves Gingras
                                 Beautiful Mind, Ugly Deception
                      - Ingrid Robeyns
                                 In Defence of Amartya Sen
                      - Robert Scott Gassler
                                 Economics Outside the (Edgeworth) Box
                      - Comment:
                                 Grischa Periono responds to Wolff

 

 

Economic History and the Rebirth of Respectable Characters
Stephen T. Ziliak   (Georgia Institute of Technology and Emory University, USA)

 

How long can irony and cynicism sustain the economics profession?  When will we see the rebirth of the Intellectual, the Social Activist, and the Teacher as respectable characters in the world of economics?    (Arjo Klamer, 1990)

 

I've been asked to name some contributions that economic history can make to the Post-Autistic Economics Movement.  The occasion made me think of the questions Arjo Klamer asked in The Making of an Economist (Westview Press, 1990: 185), his study with David Colander of graduate students at the universities of Chicago, Columbia, Harvard, MIT, Stanford, and Yale.

 

I thought of Klamer's question - - how long till the rebirth? - - because in America, the study of economic history was killed off with the Intellectual, the Social Activist, and the Teacher.  The timing was ironic.  I am not referring to the literal killings in Paris or Budapest or Mississippi (though the connection is worth exploring).

 

The irony is that when Harvard cut a full-year of history from the core of its graduate program in the 1960s (a fashion that was completed at most schools, including Chicago, by the mid-1970s), economic history was simultaneously and radically transforming.1  Historians at Harvard and Purdue were its prime movers.  It was a fantastic re-invention of the field, and brought - - as such things go in the human sciences - - a new methodology, a change of guard at the journals, and a large increase in output, prestige, and resources.  In 1993 two inventors of "the new economic history," Robert Fogel and Douglass North, were awarded the Nobel Prize.  Tragically, many economists could not say why.

 

Economic history, then, is in one story a victim and a failure.  As Deirdre McCloskey put it, the new economic historians had spent most of their energy explaining to departments of history the "wonderful usefulness" of economics.2  But they forgot to sell their wares to their own hiring and curriculum committees--in economics.  (McCloskey's article was published in 1976 in the Journal of Economic Literature.  She tried to stop George Stigler from taking history out of Chicago's curriculum.)  Economic historians continue to speak in the wonderfully useful language of statistics and constrained maximization.  But to the Samuelsonians of the Seventies who crafted the curriculum of micro-macro-and metrics while fetching money to mathematize economics, the numerate historians' talk of politics, religion, institutions, open fields, lacks of freedom, legacies of slavery, narrative voice, contested meanings, census manuscripts, personal diaries, and plantation account books was, to use a technical term from the sociology of science, "humanities crap."  A real economist was a Problem Solver, a calculus wonk.

 

Economic history, then, like foreign languages and the history of thought,  was killed when the Problem Solvers killed the Intellectual, the Activist, and the Teacher–“the respectable characters.”  It's difficult to imagine a re-valuation and legitimization of these social roles - - so central to a post-autistic economics - - without a simultaneous revival of historical inquiry. 

 

Now it's true that some people, loyal to the new Chicago School, have called the ahistorical Problem Solver, Robert Lucas, an intellectual.  If you begin with standard Samuelsonian assumptions, then yes, Lucas is.  If an intellectual is someone fastened to the belief that there is one way of doing "operational" economics "consistent with" real "science," if an intellectual (in published work) has read mainly in some corners of engineering mathematics and rational choice, free market economics, if an intellectual is a person who does not value social or cultural history as a mode of economic understanding, if an intellectual is someone unwilling to argue in his own seminar his privileging of a simple utilitarian social welfare function (for example, in Iowa City, Iowa, in 1994), then yes, Lucas is definitely an intellectual.  Similarly, under Samuelsonian assumptions, Robert Barro is a Teacher, George W. Bush is an Orator, and Gary Becker is a Social Activist (in Tantric healing).

 

In other words, one contribution of history to post-autistic economics is this: valuing economic history for the serious economics it is (while retaining what it is now perceived to be: serious history) will hasten to economics the return of the lost and wandering tribes of respectable characters.  (One example of the potential gain can be found in Nicholas Dawidoff's The Fly Swatter [New York: Random House, 2002].  It's an amazing and sad story of the great economic historian, Alexander Gerschenkron, who was twice forced to wander.)  A group of French students in the post-autistic movement have suggested a new curriculum, setting theirs against present-day Chicago (PAE Review 4, 29 Jan 2000).  They propose to put economic history back in to the core curriculum. 

 

Why should a post-autistic economist study history?  McCloskey's rubrics from 1976 provide some of the answers:

History has more facts.  When today's economists begin a paper on America's Welfare Reform Act of 1996 they of course introduce the subject historically.  But because they do not collect facts from history they get the facts wrong.  The Institute for Research on Poverty (IRP), which is meaningful to me for many reasons, and partly because my brother is a research affiliate with them, is unfortunately a good example.  The IRP believes that poverty and the collective strategies to eradicate it began with President Johnson's War on Poverty.  (To be fair, some will refer to the Great Depression.  But their data sets still begin in the 1960s.)  America has had poverty and public assistance since the Elizabethan Poor Law of 1601.3  In the late nineteenth century the largest cities abolished "public outdoor relief"--the tax-financed subsidies in cash and in kind.  Abolition was part of the charity organization movement, a British import that attempted to privatize, moralize, scientize, localize, and personalize poverty and charity.  It's an open secret that the 19th century experiment inspired today’s Republicans to abolish entitlements.  Data on the failed movement are voluminous and contain evidence relevant to the Act of 1996.4

History has better facts.  Economic historians - - for example, Simon Kuznets, Eli Heckscher, John R. Commons, Lance Davis, Stanley Engerman, Jeffrey Williamson, Susan Carter, Richard Sutch, Roger Ransom, William Sundstrom, Gavin Wright, Warren Whatley, Claudia Goldin, Robert Margo, Emily Mechner, Elyce Rotella, Lee Craig, Ann Carlos, Dora Costa, Fernand Braudel, Joel Mokyr, Yasukichi Yasuba, Jean-Laurent Rosenthal, Pierre Bourdieu, Paul Baran, Paul Sweezy, Nancy Folbre, Kyle Kaufmann, Thomas Weiss, Sam Williamson, Jeremy Atack, Rick Steckel, John Murray, Joerg Baten, William Collins, George Selgin, Robert Higgs, Price Fishback, Shawn Kantor, Hugh Rockhoff, Peter Lindert, Avner Greif, Joan Hannon, Robert Humphreys, George Boyer, Mary MacKinnon, Timothy Hatton, Cormac O'Grada, Richard Easterlin, Gus Giebelhaus, Metin Cosgel, Mary Beth Combs, and Santhi Hejeebu - - collect their own facts.  You can see that it’s the industry standard.  Laboring in the archives yields an intimate knowledge of the scope and limitations of facts collected.  Downloading a *.gif file from www.economagic.com does not.  In our second look at significance testing in the American Economic Review (this time we examined the 1990s) McCloskey and I found that among all the subfields of economics, the historians and labor economists pay most attention to the economic significance of their estimates.

History yields better theory.  What caused the Great Depression?  A Problem Solver in the mid-1990s put to paper one answer, and gave it to me: "a technology shock in a real business cycle model."  There is in truth little consensus.  But Milton Friedman, Anna J. Schwartz, John Kenneth Galbraith, Peter Temin, Charles P. Kindleberger, Barry Eichengreen, and many other historians have advanced the theoretical conversation by insisting their theory connect with actual world events.

History makes better policy.  The history of welfare is a case in point: "time limits" do not produce self-sufficient wages.  But then, most economic policy is a case in point.  "The competitive supply of professional services in the nineteenth century, it is said, grievously injured consumers, justifying official cartels of doctors and undertakers."  So midwifery and home birth have been virtually outlawed in the United States.  "If marijuana were legally and competitively supplied there would be a huge increase in demand for it."  Hey, I mean, look at that Robitussin go!  "The United States will not lift the embargo on Cuba," President Bush told a crowd in Miami in Spring 2002, "because that would make Castro rich and therefore more difficult to remove."  I just got here, you can almost hear him dreaming.  C’mon, America, give embargoes a chance.

 

The rhetoric of Problem Solving needs revising.  What is the point of emphasizing the size of the t-test, or formalizing the set of pooling equilibria, if history shows that you are solving the wrong problem?  A non-experimental science ought to look at real world experiments when nature coughs them up.  For example, economists  have much to learn about policy from East and West Germany by looking at them when they were together, then separate, then together again.  Likewise in South Africa and in Palestine.  The labor economists David Card and Alan Krueger were not the first to see `natural experiments' in the adoption of minimum wage legislation; the method is old and historically sound.  Still, the laboratory of history is strangely under-utilized by the Problem Solver.

History makes better economists.  Arjo Klamer and David Colander asked their sample of graduate students to name the "most respected economists" (p. 42).  At every school except Chicago, at least half the heroes listed (there are no women on the lists) did their significant work in historical economics: they are Smith, Marx, Veblen, Keynes, Hicks (part-time), Schumpeter, Myrdal, Polanyi, John Kenneth Galbraith, and Friedman.  And still others on the list, such as Boulding, Sen, and Stigler, were deeply historical in the way they conceived of economic problems.   Economic history is apparently a major field of inquiry for the world's most respected economists.

Economic history is their major field because history offers more facts, better facts, better theory, and better policy.  But the reasons for bringing history back in  exceed those that McCloskey raised against Stigler.  Since that time a small but growing band of economists and historians have allowed discourse, feminism, postmodernism, and classical rhetoric to affect their work.  Like feminist economics and economic methodology, the conversations of economic history are now more open and pluralistic.  (Easy does it, Clio: it's not like trade theory but we have a long way to go.)  History provides the alternative stories that give meaning to timeless models and “obvious” nulls.  History exposes the contested meanings of utility, labor, freedom, and justice.  History keeps us honest in our assumptions.  History connects teachers of economics to the concerns of the humanities.  History connects teachers to the concerns of minority and international students, and it connects students to the assumptions and the graphs.  For example, when I introduce undergraduate students to externalities with Upton Sinclair's The Jungle (1905), or to comparative advantage with Steinbeck's The Grapes of Wrath (1939), or to labor economics with The Philadelphia Negro (1899), by W.E.B. Du Bois, it is no surprise that women and students of color become differently engaged.

How can we bring history back in?  First: realize that Chicago and Columbia do not set world prices for economic education.  But when others think they do, distortion–autistic economics--emerges.  In fact, in another story, economic history is not dead; it’s already back in.  Today’s core curriculum at Harvard, MIT, Stanford, Berkeley, and Northwestern University requires from Ph.D. students a satisfactory grade in a course on economic history during the first or second year of study.  It’s not like Gerschenkron’s Harvard–a full-year of history--and it’s a lot of micro, macro, and metrics; but clearly, in many of America’s elite programs, economic history is still inside the core.  What can we do?  History stays out of the curriculum when the Problem Solvers say “that’s not what MIT does.”  Show the problem solvers that they are wrong.  Let it be known, moreover, that economic historians are the department chairs at Harvard (Jeffrey Williamson, 1997-2000), Stanford (Gavin Wright, currently, and for a second time), MIT (Peter Temin, 1994-1997), Northwestern (Joel Mokyr, 1999-2002), Arizona (Price Fishback, currently), and elsewhere. These Department Chairs are on your side.

 

Second.  I say we call out the Chicago-Columbia-Harvard-MIT-Stanford-and Yale Ph.D.s who as students had spoken honestly with Klamer and Colander and are now writing and teaching as junior or tenured professors.  It's time they speak up and say who they are. 

 

Of the 212 respondents to Klamer's and Colander's survey in the late 1980s, 98% said that a study of history was at least "moderately important" and 68% said that history was of highest importance (Klamer and Colander 1990, Table 2.1, p. 16).  Let me make a plausible out-of-sample observation.  Not long ago a knowledge of history was ranked by today's professors of economics as being of highest importance to the skills of a good economist, second in importance only to mathematics.  (Seventy-three percent [73%] said that mathematics was of highest importance [p. 16].)  If the respondents have changed their minds, if a knowledge of what Gerschenkron called "economic backwardness in historical perspective” is not useful, if a knowledge of the railroads, or the Poor Laws, or the Beveridge Plan, or the gold standard, or slavery, or Jim Crow, or the East India Company, or women's suffrage, or public education, or world war, or free immigration, or markets before central banking is, they believe, no longer important, they will of course agree to defend their change of mind at next year's ASSA meetings.  These are nameable professors who could help to rescue the young from the autism of the middle and to repopulate the world of economics with respectable characters.  These professors are acquiring the power to change the demand curve.  They can refuse to vote for the pseudo-mathematician, famous for formalizing nothing of consequence.  They can hire economists who care about the world and its many ways of knowing, and who show it in their teaching and their scholarship.  They can fill the pages of economics with the image they had of themselves when they were happy. 

 

But I am sorry to say with Nike that an important way to bring history back in lies solely within you--the obligation to just do it.  There is a simple proposition that clarifies my point.  If you are going to change the conversation, you have to change the conversation.  Inspired by the critical pedagogy of Paulo Freire, the African American writer and English professor, bell hooks, has made a similar point in Teaching to Transgress: Education as the Practice of Freedom (1994).  On the second day of classes I discuss with my students her Chapter 10, "Building a Teaching Community," which is a dialogue with a white male philosopher on the history and style of power and knowledge in the classroom and how to change them.  Students find the dialogue to be inspiring (though sometimes unnerving) for claiming their own power, finding their own voice, in my classroom.  Students for a post-autistic economics could take "education as the practice of freedom" as a second motto, a kind of just-do-it.

 

Education as the practice of freedom means taking graduate courses in history and other historical sciences, such as philosophy, biology, anthropology, or communication studies, and then putting your questions to your teacher, your dissertation, and your seminar speaker.  It is simply not true what department chairs say, and repeat, with liturgical command, "that there is no time for those courses." Insisting to the young "that there is no time" is at best an example of blackboard economics (but the costs are of course higher than that).  Ask, What did Alex do? Your courage to forge your own path will inspire others to do the same.  Conventional teachers will be angered and embarrassed by their ignorance and by the fragility of their top-down and consumerist metaphors of power and knowledge.  Who cares.  Science is criticism.  They should learn to take it.  Your teacher of labor economics may bark you off the podium when you reveal to your classmates the private fantasies and the racist histories of black people and public assistance that you found in The Bell Curve.  Big deal.  How long should irony and cynicism rule the economics profession?

Notes
1.  I thank Deirdre McCloskey and Jeffrey G. Williamson for helping me to put the economic history requirement in historical perspective.  Errors are my own.
2.  Deirdre N. McCloskey, "Does the Past Have a Useful Economics?" Journal of Economic Literature (June 1976), 434-61.  Reprinted in R. Whaples and D.C. Betts, eds., Historical Perspectives on the American Economy (Cambridge University Press, 1995), Chapter 1, p. 31.
3.  S.T. Ziliak and Joan Underhill Hannon, "Public Assistance: Colonial Times to the 1920s."  Forthcoming in S. Carter, et. al., eds., Historical Statistics of the United States: Colonial Times to the Present (Cambridge University Press and U.S. Bureau of the Census).
4.  S.T. Ziliak: "The End of Welfare and the Contradiction of Compassion," The Independent Review (Spring 1996); "Some Tendencies of Social Welfare and the Problem of Interpretation," Cato Journal (Winter 2002); "Pauper Fiction in Economic Science: 'Paupers in Almshouses' and the Odd Fit of Oliver Twist," Review of Social Economy (June 2002).
_________________
Steve Ziliak teaches economics at the Georgia Institute of Technology and Emory University.  He is the editor of Measurement and Meaning in Economics: The Essential Deirdre McCloskey (Edward Elgar, 2001).  In 2002 he was voted "Faculty Member of the Year" by the Georgia Tech Student Government Association.

_________________________
SUGGESTED CITATION:
Stephen T. Ziliak, “Economic History and the Rebirth of Respectable Characters”, post-autistic economics review, issue no. 17, December 4, 2002, article 1. http://www.btinternet.com/~pae_news/review/issue17.htm





Why Neoclassical Economics Explains Nothing At All1
Steve Fleetwood   (Lancaster University, UK)

Introduction

Critical realists (c.f. Lawson 1998; Fleetwood 1999a&b, 2001a&b) argue that neoclassical economics is rooted in the deductivist method.2 Deductivism seeks to 'explain' something by deducing or predicting a statement about that something from a set of initial conditions, assumptions, axioms and a covering law and/or some other form of constant conjunction of events which drives the inferential machinery. These conjunctions, where for every event y there exists a set of events x1, x2...xn such that y and x1, x2...xn are regularly conjoined, only occur in, and are constitutive of, closed systems. There are, however, very few spontaneously occurring closed systems in the natural world, and virtually no non-trivial ones in the socio-economic world. Using deductivism, therefore, means engineering artificially closed systems by means of known falsehoods, reducing neoclassical economics to what Hodgson (1999: 11) calls ‘the economics of nowhere’. What is not always appreciated, however, is that the presence of known falsehoods removes all explanatory power from neoclassical economics. This paper illustrates the point via a brief analysis of the theory of labour demand.

Closed system theorising: the example of the theory of labour demand

The law of labour demand, which states that the quantity of labour demanded varies indirectly with the (real) wage, is an example of one kind of constant conjunction of events - a Humean law. Incidentally, the significance of this apparently arcane law should not be underestimated: it underpins the entire neo-liberal project of making labour markets more flexible. This constant conjunction is artificially engineered via (at least) four assumptions known as the Marshall-Hicks conditions. Demand for labour is alleged to be more elastic if:

 

1.       The elasticity of substitution between labour and capital is high. The demand for labour will be more responsive to a change in wages the more easily labour can be substituted for capital.
2.       The elasticity of demand for the final product is low. The demand for labour will be more responsive to a change in wages if the cost increases caused by wage increases can be passed directly to the consumer without a loss of revenue.
3.       The share of wages in the total cost of production is high. The demand for labour will be more responsive to a change in wages if production is labour intensive because ages  constitutes a relatively high proportion of overall costs.
4.       The elasticity of supply of other factors is high. The demand for labour will be more responsive to a change in wages if, when capital is substituted for labour, the suppliers of this additional capital are able to increase their supply immediately and effortlessly.

 

The M-H conditions close the system: without them there would be no constant conjunctions between changes in labour demand and changes in the wage. Unfortunately, however, the M-H conditions also introduce known fictions into the theory. Let us consider the four M-H conditions as four closure conditions.

 

Intrinsic closure conditions (ICC)

To close the system, the internal state of individuals must be artificially engineered so that the individual (person, production system, firm or whatever) always responds in the same predictable way. The ICC is maintained, for example, by assuming ubiquitous substitution between labour and capital.3 Where production involves a relatively fixed crew of workers operating a relatively fixed set of machinery it is often impossible to substitute a worker for a machine. Where production requires human emotion such as a helpful attitude, a machine cannot be substituted for a human. In some cases substitution of labour for capital is not feasible: how does one substitute a machine for a nurse to carefully bath an elderly patient? Even where is it technically possible, substitution is often not socio-politically possible. If, however, the ubiquity of substitutability is not assumed, a change in relative factor prices cannot be said to cause the substitution of labour for capital, and the constant conjunctions of events that constitute the law of labour demand fail to emerge. Assuming ubiquitous substitution is a falsehood. Where non-substitutability is recognised it is treated as a special case. Knowingly false claims are, thereby, treated as the norm, and knowingly true claims (e.g. that firms may offset a legislated wage rise by introducing flexible working practices that raise efficiency and reduce costs) are relegated to an afterthought.

 

The extrinsic closure condition (ECC)

 

The ECC ensures that the system is completely isolated from any external influences that would violate closure. This occurs by assuming things like: (a) the suppliers of other factors of production can increase their supply immediately and effortlessly should need arise, which is unrealistic, especially when the economy is running near to capacity; and (b) the elasticity of demand for the final product is low so that firms can pass wage increases onto customers, which is a rather tenuous assumption in highly competitive global markets. Maintaining the ECC, then, often requires falsehoods.

 

The aggregational closure condition (ACC)

 

The ACC ensures that the response remains constant, irrespective of the level of aggregation. Hence, the need to assume that the share of wages is high no matter what the industry. If for example, the industry was, or became, highly capital intensive, an increase in wages might be lost in the overall costs and demand for labour might not fall following a wage increase. In capital-intensive industries, then, the ACC is a falsehood.

 

The reducibility closure (sub) condition (RCsC)

 

The RCsC requires the existence of assumptions whose sole purpose is to ensure mathematical tractability. These are merely technical assumptions used to ensure the relevant functions are well behaved, thereby preventing perverse outcomes. Even where substitution of capital for labour is possible, it is often not continuous or ‘smooth’ but ‘lumpy’. Production functions would have ‘lumps’ in them and could not be differentiated. 

If any of these four closure conditions are not met (and there are, of course, more ways of meeting them than mentioned here) constant conjunctions will not emerge.  Incidentally, that there are four M-H and four closure conditions is merely coincidence. Moreover closure requires far more than the M-H conditions: the latter are merely those explicitly mentioned in the theory. Other assumptions lie buried within the ceteris paribus clause; are attached to sub-components of the theory, such as diminishing marginal returns; or are made by omission.

Neoclassical economists know perfectly well that they are using falsehoods (hence the reference to known falsehoods) but often ignore the causes and consequences of constraints on their freedom to choose the M-H conditions, or assumptions in general. They cannot choose assumptions on the grounds of their truth-likeness because the need to maintain systemic closure often overrides these (and other) considerations – such as descriptive adequacy. Faced with a decision between adopting an assumption that is known to be false yet closes the system, and one that is known to be true yet violates closure, the known falsehood must be chosen or the constant conjunctions will not emerge.

 

Removal of explanatory power

 

A damaging consequence of adopting known falsehoods is that their presence removes explanatory power, for (at least) three reasons - on explanation see Runde (1998).

Explanation is not merely efficient causality

Many critical realists share with Lipton (1993; 33) the thesis that to ‘explain a phenomenon is to give information on the phenomenon’s causal history’. The causal history of a phenomena is not merely (if at all) one couched in terms of the event(s) that precede the phenomena, but in terms of the underlying causal mechanisms. One does not, for example, adequately explain (the event of) a lamp becoming illuminated simply by pointing to the (event of) flicking of the switch that preceded it. One does not adequately explain an increase in the demand for labour by pointing to the fall in wages that (allegedly) preceded it. Yet this form of ‘explanation’ is all deductivism offers. The overriding necessity of closure requires the removal (theoretically of course) of all causal mechanisms that might violate the closure conditions. So, for example, the theory of labour demand omits reference to trade unions, the introduction or abolition of labour laws and responses to them, government policy, political ideology, management systems, different working practices and so on, mechanisms that have considerable causal impact on labour demand. But here is the rub: once removed from the theory these causal mechanisms cannot subsequently be recalled and offered as part of the causal explanation. Relevant causal mechanisms are either included in the theory, in which case they can contribute to the causal explanation, or they are excluded, in which case they cannot.

Explanation is not prediction

Prediction does not constitute explanation. The conflation of prediction and explanation is referred to as the ‘symmetry thesis’ whereby the only difference between explanation and prediction relates to the direction of time (Caldwell 1991; 54). Explanation entails the deduction of an event after it has (or is known to have) occurred. Prediction entails the deduction of an event prior to (knowledge of) its occurrence. One can, however, predict without explaining anything at all. One can predict the onset of measles following the emergence of Koplic spots, but the latter does not explain measles. Even supposing an econometric model successfully predicted an event (and the predictive power of neoclassical economics is arguably weak), the regression might be grounded in no economic theory whatsoever, or be grounded in a theory that contains known falsehoods. In this case, even a successful prediction would not constitute an explanation.

Explanation does not allow known falsehoods

If, as part of a causal account, one includes a known falsehood, or, leaves out some important causal mechanism (falsehood by omission) then the ‘explanation’ can immediately be rejected as a bone fide explanation by pointing to this falsehood. Consider an analogy. In explaining how my rubbish bags get ripped during the night, I might hypothesise that it is the work of a fox or I might hypothesise that it is the work of a ghost. The explanation involving the fox is advanced because I believe it to be true. The ‘explanation’ involving the ghost is known to be false but is advanced for a pragmatic reason: I want to frighten my young nephew and stop him playing with the bin bags. Whilst the explanation involving the fox is valid (even if it turns out to be mistaken) the ‘explanation’ involving the ghost, pragmatically useful as it is, is invalid because it is known to be a falsehood. One only has to reflect upon this for a moment to see this conclusion is self-evidently correct: if known falsehoods are allowed to constitute ‘explanations’ imagine the bizarre explanations that could be advanced!

Counter arguments considered

Two counter-arguments are commonly deployed to legitimise the use of known falsehoods. The first runs as follows: ‘all theory has to leave out the inessential, has to abstract from reality, has to make unrealistic assumptions, so all theory is inevitably false in the strict sense of the word’. Now whilst abstraction is legitimate, the process is complex and cannot be elaborated upon here (c.f. Sayer 1998). I defend my claim with the following observation. Theories like that of labour demand are replete with such obvious falsehoods that to suggest they are really (legitimate) abstractions is merely a rhetorical ploy to avoid methodological discussion. In any case, as noted above most neoclassical economists admit to knowingly using falsehoods. The second counter-argument invokes the ‘method of successive approximation’ (Sweezy 1968; 11) or the ‘method of isolation’ (Maki 1992, but see Pratten 1999), and runs as follows. ‘The initial stages of theorisation use known falsehoods. Explanatory power is added in stages as realistic assumptions are successively substituted for false ones’. There are two objections to this.

 

  1. The method of successive approximation or isolation might be appropriate when the successive analytical steps merely involve the mechanical addition of factors that were previously assumed away. This mechanical addition is, however, not appropriate for systems where the elements possess emergent properties. When, for example new technology is introduced to a workplace or a new management regime is installed, its behaviour often evolves, giving rise to properties that were not present before. Many theoretical propositions derived on the basis of pre-emergent properties provide no grounds for the analysis of post-emergent forms of behaviour. 
     
  2. Theory is still reliant on closed systems. All that has happened is that one closed system has been added to another (slightly larger) closed system. A succession of closed systems does not, however, add up to an open system. Consider the following example:

·         Closed system1 assumes demand for labour is determined solely by wages.

·         Closed system1 generates the deduction/prediction1 that the introduction of a minimum wage will cause a fall in labour demand.

·         losed system2 now allows labour demand to be determined by wages and (say) aggregate demand.

·         System2 is, however, still a closed system: it just contains more variables. Many of the previous (false) assumptions remain in place and, new (false) ones are added to ensure closure in this more complex system. Falsehood is then piled upon falsehood – and the dream of one day removing all false assumptions evaporates. 

·          

The method of successive approximations, or successive closures might, therefore, be more accurately termed the ‘method of successive falsehoods’ or the ‘method of successive closed systems’. In short, the counter-arguments do not evade the critical realist critique.

 

Conclusion

 

To the extent that neoclassical economic theory is rooted in the deductivist method, constant conjunctions of events, artificially closed systems and known falsehoods, it explains nothing at all.

Notes
1. I wish to thank Paul Lewis for his careful comments.
2. Deductivism is also found in some heterodox (Austrian, Institutionalist, Marxist and Post-Keynesian) economics whereupon these perspectives also become vulnerable to the following critique.
3. Neoclassical theorists do, of course, recognise that substitution between labour and capital is not ubiquitous and attempt to deal with it via non-convex isoquants. ‘L’ shaped isoquants imply only one production technique based upon one capital-labour combination and allow no substitution. Isoquants with n ‘flat’ sections imply n-1 production techniques and allow limited substitution. But, where tangency between the isocost curve and the isoquants is at a corner, factor prices could change without ‘causing’ substitution. Where tangency occurs along the face of one of the ‘flat’ sections of the isoquant, then the choice of technique becomes indeterminate. 

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Lawson T. (1998) Economics and Reality, Routledge
Maki U. (1992) ‘On The Method Of Isolation In Economics’, Dilworth C. (ed)  Intelligibility in Science IV, Rodophi.
Pratten S. (1999) ‘The “Closure” Assumption as a First Step’, in S. Fleetwood (ed) Critical Realism in Economics;
       Development and Debate, Routledge.
Runde J. (1998) ‘Assessing Causal Economic Explanations’, Oxford Economic Papers No. 50, pp 151-172
Sayer A. (1998) ‘Abstraction: A Realist Interpretation’, M. Archer, R. Bhaskar, A. Collier, T. Lawson, A. Norrie, (eds) 
       Critical Realism: Essential Readings, Routledge
Sweezy P. (1968) Theory Of Capitalist Development, Modern Reader.
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SUGGESTED CITATION:
Steve Fleetwood,  "Why Neoclassical Economics Explains Nothing At ”, post-autistic economics review,
issue no. 17, December 4, 2002, article 2. http://www.btinternet.com/~pae_news/review/issue17.htm




 Defining "Economics" Inclusively
Tony Aspromourgos   (University of Sydney, Australia)

In following the contributions and debates in this Review it has struck me that there is a need for a definition of economics which is wider and more inclusive than the old Wicksteed-inspired formula articulated by Lionel Robbins, in terms of the allocation of scarce means to inexhaustible purposes. By the very terms of its constitution, this definition tends towards defining the discipline as marginalist. That is to say, it tends naturally to the normative inference that orthodox economics is (the only legitimate) economics. Any definition of more generality should be concise, constitutive and programmatic. I offer the following for consideration: In the most general terms, economics is the study of how societies organize the production and distribution of the means of human sustenance and larger consumption. This is constitutive and programmatic in the sense that it defines a proper domain for the discipline – and points to a desirable set of research programmes which ought to be undertaken.

 

Its inclusiveness – or, if one prefers, its expansiveness – should be evident. The classical-Marxian orientation towards material reproduction and distribution, with the price system as a conduit for the associated allocation of commodities, fits naturally into this definition. Keynesianism (and hence also the effective demand dimension of Kalecki) can be articulated within its domain – as a theory of how, in certain kinds of political societies, there may be no spontaneous mechanism to ensure an optimal level of resource utilization, and hence sub-optimal activity levels and consumption outcomes occur. The evolution of social organization and institutions also finds a natural place, as the study of how the politico-social mechanisms for effecting consumption have varied. Hence those associated with the Historical School, evolutionary economics and Institutionalism find a legitimate place.

 

My definition also avoids the asocial orientation of marginalism by taking its point of departure from social organization, rather than from independent individuals. Furthermore, it embraces the study of current, past, or even future (including ‘ideal’), societies. Hence it does not discriminate against economic history – economic history is included in a natural way in the definition, as well as economic anthropology and economic sociology. (The discipline definitely would be better off if some of the resources currently devoted to theorizing were redeployed to historical studies. There is too much of the former and far too little of the latter.) The study of ‘ideal’ societies points to normative analysis – in orthodox language, welfare economics – though of course, non-orthodox welfare economics need not only proceed on such a grand scale.

 

If it is felt that nature and the natural environment should be more explicit in the definition, then ‘extraction,’ could be inserted before ‘production’ in the definition. In fact, the focus on ‘sustenance’ is suggestive of sustainability – and indeed, the classical focus on reproduction of social economies is, at core, a notion of sustainability (including scarcity of an objective kind, rather than the subjective marginalist form).

 

The definition offered here might also have the effect of orienting the various, current subdisciplines of economics more towards the final, human, material purpose of economic systems. This need not in all respects involve radical departure from conventional thinking. Hence, for example, the theory of finance has as its purpose the study of instruments and systems for enabling the intertemporal shifting of consumption. This is not a heterodox proposition, even if participants in financial analysis often lose sight of this ultimate (legitimate) social purpose of financial systems.

 

Consumption is not the ultimate human purpose of course; but beyond survival, the purposes consumption serves seem not to be something economics can say anything very significant about. Certainly orthodox economics has offered little beyond empirically empty nonsense-tautologies like ‘utility’ and ‘preference’. (Why not just say ‘people are what they are’ and be done with it!) The referring of consumption demand back to deeper underlying characteristics of commodities may be a fruitful way towards saying more.

 

From the standpoint of my suggested definition of economics, the marginalist approach then appears as the study of the distribution or allocation of a given set of resources to the achievement of (some of) a given set of possible (ranked) uses. Hence my definition does not, and does not seek to, exclude orthodox economics – it rather locates it as one approach, to one particular kind of question, in a larger and more general context.

 

Or perhaps it does exclude one dimension of the marginalist intellectual project in its widest form: the idea that its method (constrained individual optimization, with or without strategic interaction) can be a general theory of human psychology and choice as such – hence the idea that it can explain getting married, having children, going to war, committing suicide, and so on. By orienting the subject matter towards ‘economics’ in the common sense of that term, my definition marginalizes (pun intended) these pretensions. Get back to the study of ‘guns and butter’ (or, in a classical vein, machine tools and corn) boys and girls! ‘It’s the economy, stupid’ – indeed.

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SUGGESTED CITATION:
Tony Aspromourgos, “Defining 'Economics' Inclusively”, post-autistic economics review, issue no. 17,
December 4, 2002, article 3. http://www.btinternet.com/~pae_news/review/issue17.htm





Beautiful Mind, Ugly Deception:
The Bank of Sweden Prize in Economics Science1
Yves Gingras   (Univerité du Quebec à Montéal)

 

Much has been said about the Oscar-winning movie A Beautiful Mind and its hero, the mathematician John Nash. Just as spring is the time for Oscars, a new crop of Nobel prizes has accompanied the fall of autumn leaves every October since 1901. As Daniel Kahneman and Vernon L. Smith share an award this year, it’s a good time to pose a question raised by a neglected aspect of the movie: what prize exactly did Nash really win?

The answer is not as obvious as it seems. When A Beautiful Mind hit our screens, one correspondent to an entertainment weekly pointed out that the ‘Nobel Prize in Mathematics’ he had read about did not actually exist. Many will recall the brief scene in the movie when the young Nash – suffering from lack of recognition of his true genius – remarks to his MIT colleagues that he has been robbed of the ‘Fields Medal’. What is that? Ask any mathematician, and he will tell you: ‘this is the equivalent of the Nobel prize for mathematicians’. Established in 1936, it is given once every four years to no more than four exceptional mathematicians under 40 years of age.

The incident confirms that John Nash, in coveting this most prestigious prize in the mathematics community, was at that point still rooted in reality. In contrast, though the story of a man from Stockholm waiting for Nash after his class to share the good news that he had won a prize is confirmed, it is doubtful that the prize itself was real. Or so I will claim.

 

The currency is prestige

 

Which ‘Nobel prize’ was the man from Stockholm talking about? Most journalists (and every economist) will of course answer, the ‘Nobel Prize in Economics’ – even though it is never specified in the movie. Against this taken-for-granted ‘fact’, I am arguing here that this prize does not exist: and moreover, that this so-called ‘Nobel prize’ is an extraordinary case study in the successful transformation of economic capital into symbolic capital, a transformation which greatly inflates the symbolic power of the discipline of Economics in the public mind.

 

The confusion can be traced back to 1968 when the governor of the Central Bank of Sweden decided to mark the tercentenary of that institution by creating a new award. It could have been named after a well-known ancestral economist, such as Adam Smith, or more simply, though unimaginatively, ‘The Bank of Sweden Prize in Economics’. After all, every discipline has its own ‘prestigious’ prize. Their number grows every year. However, the problem is that all these prizes, though well known within the microcosms of their discipline, have little public appeal. Only the Nobel prizes have a real public impact. But they are limited to five fields: physics, chemistry, physiology and medicine, literature and, finally, peace.

 

Moreover, the enormous symbolic capital of the very name ‘Nobel prize’ has been accumulated over the years by a careful selection of prizewinners. Like every new prize, by definition unknown, the Nobel faced the problem of what we can call (invoking Pierre Bourdieu’s apt concept) the ‘primitive accumulation of symbolic capital’. This obstacle was overcome by giving the prize early on to already renowned scientists who would bring the prize real credibility. The idea was that, over the years, this symbolic capital would surely accrue to such an extent that it could in turn bring recognition to the chosen winners.

 

The organisers, conscious of this conundrum and wishing to endow the discipline of economics with as much public credibility as possible, decided to call the prize: ‘The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel’. Curiously then, it was the memory of Nobel, not that of an economist, that was being recalled. This mystery can be explained if we unpack the process crystallised in that bizarre and awkward name.

 

First, despite the scepticism of some scientists towards the ‘scientificity’ of economics, the Bank managed to convince the Royal Swedish Academy of Sciences and the Nobel Foundation to administer their prize. Secondly, identical procedures for the selection and nomination of the prize were chosen to those of the real Nobel prizes. Of course, the prize money would come from the Bank of Sweden, not the Nobel Foundation, but all the rest would be done exactly as if it was in fact a Nobel prize, up to and including the ceremony of 10 December.

 

Thus, the inclusion of the term ‘in Honor of Alfred Nobel’ in the title created the necessary bridge to the Nobel prize, and by exactly mimicking the process, the Bank created all the conditions enabling the association and even the identification of its prize with those established by Alfred Nobel at the turn of the century. Note that, for obvious reasons, it is much simpler to say ‘Nobel Prize in Economics’ than ‘Bank of Sweden Prize in Economic Sciences in Honor of Alfred Nobel’! No surprise that, since 1969, all journalists and economists have commonly referred to the Bank of Sweden Prize as ‘The Nobel Prize in Economics’. The strategy was a complete success.

 

The social alchemy of belief

 

Now that we understand why a bizarre name was chosen, transforming a peculiar social alchemy into a ‘Nobel prize’, let us look at the ‘flow of capital’ the whole process involved. The Bank started with economic capital and ‘invested’ it in the Nobel Foundation to transform it into symbolic capital as fast as possible. Even a very large amount of cash is not sufficient in itself to assure the prestige of a prize. The key point was to effect a complete transfer of the already accumulated symbolic capital of the Nobel prizes to the new Economic Prize instituted by the Bank. Any other strategy would have been more risky given the difficulty, uncertainty and time lag attending any primitive accumulation of symbolic capital. In other words, this history makes visible the well-managed transformation of economic into symbolic capital, thus confirming Bourdieu’s theory of the convertibility of the basic kinds of capital (economic, social, cultural and symbolic).

 

Of course, many will say: ‘We all know it is the Bank of Sweden Prize, but it is much simpler to say “Nobel Prize”.’ In point of fact, the Nobel website is careful to make the distinction, thus habitually announcing the ‘2002 Nobel Prizes and the Prize in Economic Sciences in Memory of Alfred Nobel’. But this argument is either naive or disingenuous. For the success of the strategy of creating a ‘Nobel by association’ has obvious social consequences.

 

As anyone knows, the attribution of a Nobel prize gives instant world fame to the winners, who become oracles commenting on anything journalists can fathom: war, peace, philosophy, environment, irrespective of their particular fields of expertise. Interestingly, there is a strong correlation between the dates of attribution of a Nobel prize and the subsequent publication of memoirs or opinionated books by Nobel Laureates. This is a socio-logical consequence of the fact that the legitimacy bestowed by the Nobel prize is rapidly put to use in the public space to voice ideas that the winner would not have dared to submit were he or she a ‘simple scientist’.

 

Whereas the ‘spontaneous’ philosophy or sociology of scientists can be considered relatively harmless, the situation is quite different in economics. By its annual offer of a public image of ‘hard science’ through its association with the Nobel prizes, the Bank of Sweden Prize in Economic Sciences gives the discipline and its laureates the ‘scientific’ aura it lacked to put forward authoritative but often simplistic theories about the economy (or, worse, the whole society) conceived as a big ‘market’ where everything can be submitted to the so-called ‘law of demand’ – be it a house, a wedding, or even an idea.

 

What is even more fascinating is that the social alchemy which transmuted the Bank of Sweden prize into a Nobel prize, affe