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2015 | OriginalPaper | Chapter

10. Methodology from the Viewpoint of an Economic Theorist: Fifty Years On

Author : Rudolf Richter

Published in: Essays on New Institutional Economics

Publisher: Springer International Publishing

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Abstract

Modern political economy, as part of social sciences, has been started by Scottish moral philosophers, among them David Hume with his Treatise of Human Nature (1740). He treats, what is called today, the problem of social control under the assumption of egoistic behaviour of individuals. What got lost in classical economics (as defined by Keynes 1936) was that Hume started essentially from the problem of future uncertainties of individual human beings. How are human individuals able to deal with future uncertainties despite their physical weaknesses? Comparing humans in the state of nature with animals, Hume (1739/1740, 1984, 536 ff.) writes:

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previous chapter German “Ordnungstheorie” from the Perspective of the New Institutional Economics

Cf. H. Albert (1978, p. 63): “The representatives of this tradition were looking for the foundations of the physical reasons of the phenomena in question and for the regularity, which they are subject to. In this way, they tried to integrate the sphere of human and thus social life into the epistemological program of theoretical ‘Real Sciences’ … hence transferring the research style of natural sciences to that of social life: Political Economics.” (Own translation)

Though, Hume does not use the term “uncertainty of the future,” he rather speaks of the relative weakness of man (compared with “all the animals”) and that “…as his force and success are not all times equal, the least failure in either of these particulars must be attended with inevitable ruin and misery.” (loc.cit. 537)

Vide Hollander (1998, p. 184) referring to Jaffé (1983, p. 101) “From the age of 19 on, when Walras first read Louis Poinsot’s Eléments de Statistique (1842), he had thought to create a theory of economics with the same formal properties that characterized celestial mechanics.”

Mirowski (1984, p. 363) explains the later genesis of neoclassical theory by developments in physics in the mid-nineteenth century (see also Hollander 1998, p. 170). For Mirowski (1984, p. 377) “neoclassical economic theory is bowdlerised nineteenth century physics.”

Cass and Shell (1976) on the Hamiltonian approach as applied in quantum mechanics.

Camerer et al. (2004).

That appears not to be clear to some professional forecaster. Thus, e.g., distinguishes Granger (2012, p. 317) between only two systems, a deterministic one “if its progress can be fully described without the use of probabilities (other than zero and one)” and a “stochastic system [that is] one that has to use probabilistic concepts in describing its progress”!

The final, clarifying word on the infamous German Methodenstreit seems to have had Lionel Robbins (1932) with his circumspective and clear written defence of neoclassical microeconomics. The standard definition of the object of economics are based since then on Robbins:

Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. (Robbins 1932, p. 16)

This definition, though, narrows the object of economics to known “ends and scarce means.” The problem of “uncertainty of the future” is neglected. It emerged again towards the end of the Lange-Lerner debate on market socialism. In this context, Hayek (1945, p. 524) defines the central problem of economics to be ability of society of “rapid adaptation to changes in the particular circumstances of time and place.” North (1990, p. 80) speaks later of the “adaptive efficiency” of organisations or institutions.

Richter (1965). References to at that time relevant literature are to found there.

I referred to McCloskey already in my ‘Swansong’that dealt with methodological developments during the preceding 30 years (see Richter 1994). At that time I took McCloskey not as serious as I do now.

This is exactly the problem in response to which David Hume (1739/1740, 536 f.) developed his idea of some self-enforcing “social control mechanism.” Game theorists like Ken Binmore (1992, p. 21) interpret the result as Nash equilibrium.

Cf., e.g., Allen and Gale (2006, p. 17), who write: if “there are enough derivatives and contracts, markets will effectively be complete and allocation of risk will be the same as in the Arrow-Debreu equilibrium. This is the sense in which credit risk transfer is desirable.”

Cf., e.g., the reminder of Koopmans (1957, p. 147) “…our economic knowledge has not yet been carried to the point where it sheds much light on the core problem of economic organization of society: the problem of how to face and deal with uncertainty. ….Meanwhile, the best safeguard against overestimation of the range of applicability of economic propositions is a careful spelling out of the premises on which they rest.” Very clearly also Arrow (1970, p. 137).

Whose statements depend are independent of the details of the relevant social background. “Ergodic” is a technical term of statistic mechanics used by Samuelson (1968, p. 12). He writes: “Technically speaking, we theorists hoped not to introduce hysteresis phenomena into our model…”.

And further: “…why should a country like Spain still look after its public budget if loans can be refinanced at such low interest rates?” (NZZ 01. 07. 2014).

Keynes understands as “classic economists” is explained in the only footnote oft he first chapter of General Theory (1936).

The “dual decision hypothesis” by Clower (1965, p. 118) consists in the assumption that “If the price mechanism stops working, consumers switch to ‘quantity rationing’ (Malinvaud 1977, 4 ff.). i.e., they buy the quantity of (present and future) goods that maximizes their utility given their present (national) income Y. Similarly firms maximize in this case their profit given employment N.”

On more details see Richter (2009).

Albert, H. (1978). Traktat über rationale Praxis. Tübingen: J.C.B. Mohr (Paul Siebeck).

Allen, F., & Gale, D. (2006). Systemic risk and regulation. NBER conference on The Risk of Financial Institutions, Woodstock, Vermont, October 22–23, 2004.

Arrow, K. J. (1970). Essays in the theory of risk-bearing. Amsterdam: North-Holland.

Bernanke, B. (2000). Essays on the great depression. Princeton, NJ: Princeton University Press.

Bernanke, B. (2002). Remarks by governor Ben S. Bernanke before the national economists club. Washington, DC, November 2, 2002—im Internet verfügbar.

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Camerer, C. F., Loewenstein, G., & Prelec, D. (2004). Neuroeconomics: Why economics needs brains. The Scandinavian Journal of Economics, 106(3), 555–579.CrossRef

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Title: Methodology from the Viewpoint of an Economic Theorist: Fifty Years On
Author: Rudolf Richter
Publisher: Springer International Publishing
Book: Essays on New Institutional Economics
Print ISBN: 978-3-319-14153-4

Electronic ISBN: 978-3-319-14154-1

Copyright Year: 2015
DOI: https://doi.org/10.1007/978-3-319-14154-1_10