- En Torno a La Funcion Del Capital, Joaquín Reig
- Reflections On the Keynesian Episode, W. H. Hutt
- Ludwig Von Mises and the Market Process, L. M. Lachmann
- Values, Prices and Statistics, Bettina Bien
- The Tax System and a Free Society, Oswald Brownlee
- How “should” Common-access Facilities Be Financed?, James M. Buchanan
- Pitfalls In Planning: Veterans' Housing After World War Ii, Marshall R. Colberg
- Presents For the Poor, R. L. Cunningham
- Restrictions On International Trade: Why Do They Persist? W. Marshall Curtiss
- “human Action”, E. W. Dykes
- The Genius of Mises' Insights, Lawrence Fertig
- On Behalf of Profits, Percy L. Greaves, Jr.
- Tax Reform: Two Ways to Progress, C. Lowell Harriss
- The Future of Capitalism, Henry Hazlitt
- Prices and Property Rights In the Command Economy, Arthur Kemp
- The Inevitable Bankruptcy of the Socialist State, Howard E. Kershner
- Entrepreneurship and the Market Approach to Development, Israel M. Kirzner
- The New Science of Freedom, George Koether
- Financing, Correcting, and Adjustment: Three Ways to Deal With an Imbalance of Payments, Fritz Machlup
- On Protecting One's Self From One's Friends, Don Paarlberg
- Recollections Re a Kindred Spirit, William A. Paton
- Ludwig Von Mises, William H. Peterson
- The Economic-power Syndrome, Sylvester Petro
- Ownership As a Social Function, Paul L. Poirot
- To Abdicate Or Not, Leonard E. Read
- The Book In the Market Place, Henry Regnery
- Lange, Mises and Praxeology: the Retreat From Marxism, Murray N. Rothbard
- The Production and Exchange of Used Body Parts, Simon Rottenberg
- The Education of Lord Acton, Robert L. Schuettinger
- Chicago Monetary Tradition In the Light of Austrian Theory, Hans F. Sennholz
- Hubris and Environmental Variance, Joseph J. Spengler
- An Application of Economics In Biology, Gordon Tullock
- What Mises Did For Me, John V. Van Sickle
- Economics In a Changing World, G. C. Wiegand
- Can a Liberal Be an Equalitarian? Leland B. Yeager
- The Political Economy of Nostalgia, Ramon Diaz
Economics in a Changing World
G. C. Wiegand
As the emphasis in economics has shifted during the past fifty years from a search for knowledge of the forces which govern the economic life to an attempt to plan and regulate the economy, a schism has developed within the discipline between the ‘pure theorists’ and the ‘practical policy-makers’ which may have serious consequences for the discipline and for the country as a whole, because it reflects a fundamental misunderstanding of the nature of economics in modern life.
The general public has never fully understood the basic nature of economics, and even economists occasionally admit that “they have not yet agreed what it is (they) are talking about.”1 After attending a recent meeting of the American Economic Association, a reporter complained about the “impotence and irrelevance” of economics, and the tendency of economists “to operate in a vacuum.”2 And many people agree with this view regarding the work of the ‘pure theorist.’
No doubt, the general public has always been inclined to criticize economists. The Physiocrats were ridiculed, and 19th century humanists and humanitarians deplored the ‘iron law’ pessimism of the classical school. “No Englishman in his secret soul” according to Bagehot, “would ever be sorry for the death of a political economist.” Today's criticism, however, is of a different nature by being largely pragmatic. What use is there, the people wonder, in spending time and money on abstract models which even members of the profession often do not fully understand, and which have no apparent bearing on the problems of the day? And why don't the practical policy-makers, who claim that they can “fine-tune” the economy, get on with finding a solution for the pressing problems of inflation and unemployment?
The public is told that we live in the “Age of the Economist,” and that thanks to “the internal advances in recent decades ... in economic knowledge ... modern economics can deliver the goods.”3 Yet the country and the world seem to be drifting deeper and deeper into what the Germans have come to call “stagflation,” the unhappy combination of economic stagnation and inflation. Is there something fundamentally wrong with economics as we know it today? Is the discipline as a whole in need of a basic reconstruction?
Few modern economists feel as Robert Torrens did 150 years ago, that within a few decades “there will scarcely exist any doubt respecting any of [the] fundamental principles”4 of political economy, or as Schumpeter wrote just before the First World War that “the theory of the socio-economic process [had been] unfolded for the first time as an organic whole.”5 But while most modern economists admit that we have made little progress in understanding the inner workings of the “great machine,” there is a widespread feeling that even though we do not really understand what makes the economy work, we can probably improve it “by tinkering with it.”
“Pragmatism” wrote Time some years ago, in describing the attitude of President Kennedy's economic advisors, “is the vogue word among economists today.... When economists call themselves pragmatists, they mean that they are the opposite of dogmatists, that they are wary of broad theories, that they lean to the cut-and-try approach to public problems, and that they believe it is possible to improve the functioning of the economy by tinkering with it.”6
In short, the pure theorists claim that they are not concerned—or certainly not immediately concerned—with the problems of the day, and the practitioners are wary of theories and try to solve the problems of the nation and the world by day-today ad hoc measures. All in all, not a picture which should reassure mankind, yet characteristic of the critical stage in which economics as a discipline finds itself at present.
The Changing Nature of Economics
“Model building” according to Gunnar Myrdal, “is a universal method of scientific research. But to construct models in the air, out of uncritically conceived concepts that are inadequate to reality and not logically consistent, and so pretend to knowledge when none had been established, does not represent scientific progress; it comes near to being an intellectual fraud.”7 Unfortunately, only too many economic theories, both of ‘scientific’ and popularized variety, reflect the tendency described by Myrdal, and the public is being misled into believing that the theories proclaimed by the experts actually explain reality, and that the remedies proposed are both consistent and feasible.
The Employment Act of 1946, which has had a profound effect on American economic life, is a case in point. It places upon the President the responsibility of achieving and maintaining ‘maximum employment,’ implying (1) that the President and the Council of Economic Advisors can predict months in advance the probable level of economic activities; (2) that the government has the tools to “fine-tune” the economy in order to achieve maximum employment and growth without inflation and a balance of payments deficit; and (3) that the President and his advisors can have the insight to foresee the repercussions which the full employment measures will, or may, have on other aspects of the socio-economic system.
After 25 years of “planning”—with chronic inflation and regular ups and downs in economic activities—we know today that the full employment scheme which Congress adopted in 1946 does not work as expected. And the reason should be obvious. No group of economists can at present predict sufficiently closely the level of economic activities to keep the economy on the extremely narrow path between inflation and unemployment, and there are no precision tools to correct deviations from the expected norm.
Conditions have changed little since Neumann and Morgenstern wrote a generation ago that “there exists at present no universal system of economic theory, and ... if one should ever be developed, it will probably not be in our lifetime.”8 Neumann and Morgenstern saw the problem chiefly as a methodological one, “the creation of new mathematical disciplines” to handle the functional relationships of the multitude of economic variables in a system of probabilities. Actually, the problem may be far more deep-seated.
As in all fields of human knowledge, economic theories are based, consciously or subconsciously, on the one hand upon the personal experiences and value-judgments of the individual scholar, and, on the other hand upon a variety of explicit or implicit premises which in turn reflect the prevailing intellectual climate. As Frank Knight once put it, the ultimate reality of economics is the ‘zeitgeist.’ And during the past 50 years, the physical surroundings and the intellectual climate of western civilization have undergone fundamental changes, which have weakened, if not destroyed, the philosophic premises upon which economics was built during the past 200 years.
We are not interested here in the outward technological-social changes which have occurred: urbanization; rapid transportation and communication; the population explosion in developing countries; the end of the “European age”; the development of mass democracy with its Procrustean inclinations toward ‘equality’; the growth of the new ‘Leviathan’; and the modern emphasis on social security at the expense of individual freedom;—all of which have obviously created a new ‘social reality’ which calls for new theoretical explanations.
Far more important, however, than the changes in the world in which we live, are the fundamental changes in the way in which we think about this world;—our ethical, metaphysical and socio-psychological premises.
The Premises of Economic Analysis
Much of analytical economics is based on at least four major premises, namely, the assumption that economics can be treated as a value-free, purely quantitative discipline; that there exists a social order governed by innate, universal and eternal forces; that these forces are mechanistic in nature; and that they can be ‘discovered’ by the economist in his capacity as an objective, ‘value-free’, outside observer.
To these major premises, which developed during the Renaissance and especially during the 17th century—actually before economics as a discipline was born—the 18th century Enlightenment added four minor premises: (1) ‘Der wirtschaftende Mensch’ is inherently rational, i.e. a pleasure-profit-maximizing creature, whose ‘egoism’, however, is balanced by ‘altruism’ which assures the preservation of the social fabric. (2) The social order is atomistic, and can hence be interpreted in micro-economic terms. (3) Private property is the inherent right of the individual which cannot be impaired by government fiat. Its role in the socio-economic process can thus be treated as a constant. And (4), man and his material existence will infinitely progress, without bounds and without major ill effects.
The Abandonment of the Minor Premises
For better or for worse, western civilization has lost faith in these premises. They are part of an era which is no more. Yet most students of economics fail to see that the rejection of these premises weakens, if it does not destroy, the basis of traditional economic reasoning.
The Age of Irrationalism
Micro- and to a large extent macroeconomic theories assume that men, in the aggregate, act rationally, that they respond in a more or less uniform fashion to a given set of situations. Without this assumption, economic forecasts are all but impossible. Obviously, given two products (which provide the identical degree of satisfaction) the great majority of the people will purchase the cheaper of the two. But this ‘Robinson Crusoe’ situation does not necessarily apply to the more complex decisions, which are actually far more characteristic of modern society. Can we actually assume, as Adam Smith did, that man will choose what is best for him and society? Workers demand wage increases far in excess of the rise in productivity, even though ‘logic’ should tell them that excessive wage increases will result either in inflation or fewer jobs. Politicians and bureaucrats keep on raising taxes and public spending, and operate on huge deficits, even though ‘logic’ should tell them that these policies must produce inflation, weaken the currency, and in the end ‘kill the goose.’ How much rationality is there really in either the private or the public sector? Probably not much less than there was at the time of Adam Smith—although, the more all-inclusive the vote, the more difficult it becomes for political leaders to appeal to reason; but in the past, western man claimed to be rational, and economic theory assumed that he was. And economic theory, certainly microeconomic theory, still pictures the market place as a reflection of the rational actions of buyers and sellers, even though we have come to doubt the rationality of consumer behavior in an ‘affluent society,’ and western thought in general tends to challenge the traditional notion of man's rationality. “Reason, although dead, holds us with an embrace that ... turns out to be rigor mortis.”
From the Age of Rationalism, in which western civilization lived for the past 300 years, we are passing into a new Age of Irrationalism, whether it be modern art or poetry, the Freudian emphasis on the subconscious, the various shades of existentialism, the drug cult, or the growing popularity of the occult. “The whole world has become a surrealistic picture.” One of the highest-paid modern American painters, Willem de Kooning, is praised by Time as “an artist who boldly dares over and over again to capture the essence of chaos.”9 “Man now realizes that he is an accident, a completely futile being that he has to play out the game without reason.”10
Ours is at the same time, a world of science and technology, and a world of anti-intellectualism. “Muera la inteligencia!” was the battle cry of the Falange. “I want to make the people feel ... They can think afterwards,” wrote John Osborn, the author of Look Back in Anger. Like Tertulian's dictum: “Credo, quia absurdum,” modern man rejects the rational and reaches for the irrational. “I detest the Renaissance” wrote the French painter Pierre Soulages, and President Johnson was praised for being “a pragmatic man and not a theorist, an actionist and not a philosophic thinker.”11
Since we no longer believe that man as an individual, and hence men in the aggregate, are rational and can comprehend the world in which they live, it may seem justified for economists to assume that there is no sense in their trying to communicate with the public at large. This is obviously a complete reversal of the attitude which prevailed during the past 200 years since the days of the Physiocrats.
The 18th and 19th centuries assumed that man must understand the mechanism of the self-equilibrating economic forces in order to be able to adjust to them. Today, we reject the very notion of self-equilibrating forces, and we deny that the public can grasp the complexities of the economic process. Yet we assume that the experts can not only understand the economic system, but can manage it for the benefit of—but without much help from—the great mass of the people.
There is danger is this ‘professionalism.’ Every time a person, be he an economic expert or not, makes a major purchase or sale, or votes for a political candidate, he makes economic decisions, and unless he understands what he is doing or voting for in the end, he surrenders his right of self-determination to politicians and behind-the-scene ‘experts,’ who are only too willing to take over. The German Chancellor Kiesinger, for instance, is quoted as having said that “in complex questions, I do not consider the mass of the people competent.”12 Economic problems “are intricate ... and [according to one of America's leading economists] cannot be fully understood even by the intelligent minority ... On these technical matters [including “the functioning of the monetary system”] the American people will have to accept the word of the experts.”13 Or, as another leader of the profession put it: “Economists, ... much to the detriment of their field, have attached unreasonable importance to be understood by the general public ...”14
From the Atomistic to the Organic Picture of Society
The shift in emphasis since the 1930's from an almost exclusively micro-to an increasingly macroeconomic approach in economics reflects the basic change from an atomistic to a predominantly organic15 concept of society.
As late as the 1920's, it was fashionable to proclaim that “there is no America—there are 120 million Americans.” Few would argue today that “America” is merely a verbal abstraction. The state, society, or whatever we wish to call it, has become an overpowering reality.
“The democratic idea of freedom ... must lose its nineteenth-century meaning of individual liberty in the economic sphere, and become adjusted to new conceptions of social duties and responsibilities.... Individualism in the laissez-faire sense is a false abstraction which has lost any concrete relevance it once possessed ... like the Divine Right of Kings, or the theological view of the State.... Our old order contains two principles which ... have now combined to deadlock progress. One is the liberal principle of economic individualism ...; the other is the conservative principle of class privilege based on property and social positions.”16 Keynesian economics, and the whole macroeconomic approach, lacks inner logic, unless we are prepared to abandon the spirit and premises of 19th century liberalism and individualism.
The Changing Notion of Private Property
One of the logical concomitants of the trend away from 19th century individualism has been the changing attitude toward private property. Disregarding Proudhon's slogan that “property is theft,” there are two basic views of the nature of private property. It can be regarded either as a social institution created by society for the benefit of society,—this is the traditional view; or, in the Lockian sense, as an inherent right of the individual, ranking equally in importance with life and liberty.17 During the 19th century, and in the United States until the Great Depression, the Lockian individualistic philosophy of private property predominated, supported in Europe by a one-sided interpretation of Roman Law and in this country by an equally one-sided interpretation of the 5th and 14th Amendments.
Modern thought represents a return to the pre-Lockian view; and modern economic policy, based on centralized planning by government authorities, calls for an increasing curtailment of private property rights. In the end, there is no way of reconciling Keynes and Locke. Literally hundreds of Supreme Court decisions and administrative rulings reflect the new spirit;—and so does the change in attitude in the Papal Encyclicals.18 An extreme view was recently expressed by Buckminster Fuller, whom many regard as “the Leonardo da Vinci of the 20th century.” “Property” Fuller proclaimed, “is the invention of an illiterate man who was hungry and tough and scared that he wouldn't survive. So how was he going to act? That's mine! That's mine! But there's not going to be any property much longer.”19
The Idea of Progress
Finally, the notion of progress, one of the most important driving forces in western civilization since the days of Bodin, More, Bacon and Campanella, has given way to a widespread apathetic pessimism. At the end of World War I, Spengler tried to prove that the progressive “decline of the West” was the result of inexorable laws of nature and society. At the end of World War II, Toynbee, dealing with the same topic as Spengler, agreed that western civilization was in a “time of troubles,” but he rejected Spengler's notion of inevitable laws of decay, and postulated instead that western man was free to overcome the difficulties of the time.
Millions of Americans, especially among the young, no longer share Toynbee's qualified optimism of thirty years ago. Instead, a deep gloom has settled over America and large parts of Europe. Surrounded by ever greater material affluence, the world lives in an “age of impatience,” “an age of anxiety,” “an age of terror,” or in “den letzten Tagen der Menschheit,” depending upon the degree of pessimism of the author. Modern physicists have calculated when all life on this earth will end; according to Karl Jaspers “we regard it as possible that man may be doomed, or that he may turn into a different animal, disconnected from all that we are, seek, love and have made;”20 and Boulding speaks of the “inexorable and irreversable movement toward the equilibrium of death.”21 The faith in science, technology and progress, which dominated western life for the past 2–300 years, is being replaced by the fear of an atomic cataclysm or the slow death through pollution. Progress means change, and change means insecurity; and man seems no longer willing to sacrifice security to progress. In the early 1960's President Kennedy could fire popular enthusiasm, and Congress voted billions to put the first American on the moon. Ten years later, the majority of the American people and Congress voted against the Supersonic Transport.
Progress need not be a steady increase in material affluence, of course. Instead of a bigger and bigger G.N.P., man can strive for a more meaningful life. But such a goal could not easily be explained by profit-directed micro- or growth directed macro-economic theories. Our merchandising methods, our technology, our industrial and economic planning, our whole life would change, if the American people no longer believed that the latest must be the best.
Yet, while the faith in progress has been seriously weakened, most economic theory has made no allowance for this basic change in the popular outlook.
The Changing Metaphysical Basis
In the preceding pages we have shown how western man has largely abandoned four of the important assumptions, which for the past 200 years formed an integral part of economic reasoning.
It is not a question whether these changes represent progress or decay, we merely claim that the nature of economic reasoning must change, as we abandon the traditional premises.
Less obvious, but probably more fundamental, is the fact that modern philosophy and modern science no longer accept the picture of reality which crystallized during the 17th century, and which provides the four basic premises of analytical economics.
During the 19th century, when economics was largely an analytical discipline, searching for an insight into the mechanism of the ‘great machine,’ the question whether economic models truly reflected empirical reality, was largely academic. In fact, some economists, and among them especially Ludwig von Mises, always held that “economic theorems are not open to any verification or falsification on the ground of experience.... The ultimate yardstick of an economic theorem's correctness or incorrectness is solely reason unaided by experience.”22
Economic Assumptions and Economic Planning
The situation is different today, as economics is becoming an increasingly operational discipline. Like all applied sciences, modern economics is expected to provide ‘practical knowledge,’ which will permit quantitative economic planning.
Can economics meet these requirements of the time? The premise that economics is—or is gradually developing into—an exact science is based on three assumptions: (1) that the economic life is governed by inherent ‘laws;’—or to put it less emphatically: that there are, in the aggregate, certain predictable tendencies in economic behavior, which determined the main stream of economic events; (2) that these ‘laws’ are of such a nature that they can be understood by man; and (3) that man can develop the proper tools to control the essential features of economic life.
In order to prove the rationality of modern economic planning, it is thus necessary to show that there is a ‘reality’ about which man can know enough to permit forecasts within a fairly narrow range of probability. This is not merely a question of the accurateness of the statistical data and the effectiveness of economic tools—both of which leave much to be desired—, it is above all a question of the justification of metaphysical assumptions. Man is free to build models, but unless these models closely resemble ‘reality’—whatever ‘reality’ may be—he cannot hope to land on the moon. Do economic models resemble ancient maps or modern astro-physical calculations? Can they ever be made to resemble the latter?
A thousand or more years ago, Christian mapmakers pictured the world on basis of a ‘divine plan’ which they had gleaned from the Bible and other authorities;—the equivalent of modern economic models based on non-verifiable assumptions. If a country did not fit into the design, it was simply omitted;—which was really not more ‘unscientific’ than the practice of modern economists of turning important variables into constants, because they cannot readily be quantified. The early medieval maps served their purpose in illustrating the ‘divine plan,’ but the ‘geography’ of the Venerable Bede, Isidor of Sevilla and Scotus Erigina—all very learned men—was of no use in guiding ships and caravans. A choice had to be made between designing a map which was ‘logical’ according to the revealed divine plan—and hence of obvious value in its own right—, and a map which was ‘practical’ in guiding the traveler.
The problem of the 20th century economist is far more difficult than was that of the 8th century map-maker, because the economist's task does not consist simply in picturing what he can see, the various phases of the economy in action, but in presenting a model of the economic forces which he cannot see. In fact, the economist does not know whether the economic forces which he strives to ‘discover’ actually exist, or whether they are only constructs of his mind. The 19th century assumed that the economist could know reality; the modern economist is far less certain, since the 19th century concept of reality is fading away as a result of the experiences of modern science.
The Nature of Reality
There are at least three ways in which ‘reality’ can be conceived. One can look upon reality as being composed of three closely interrelated elements: God, man, and the physical universe. According to the Christian cosmology of the Middle Ages, God had created the world as a stage setting for the great cosmic drama of man's struggle for salvation. Nothing existed that was not related to man and his ultimate destiny, and an all-powerful, all-wise and all-kind God was free at all times to intervene directly in the material world to reward or punish man.
On the other hand, reality can be conceived as consisting of the material world only; the Cartesian view. God has created man and the universe, but no longer directly intervenes in the world of time and space, which exists in its own right, independent from the human observer, who looks upon the world, as it were, from the outside. This is the view of the world on which science has been based for the past 300 years, and it is also the picture of reality which the analytical economist assumes.
Finally, it is possible to conceive the physical world and man as an inseparable entity. The physical world no longer exists in its own right independent from the human observer, and man, being now an integral part of the reality he attempts to observe, can no longer claim the ‘objectivity’ which the 19th century postulated. You cannot study a wave, of which you are a part. To a Hindu, this is the only possible way in which reality can be conceived—man as an integral part, rather than a special feature, of creation;—and modern western science leans in the same direction.
As the picture of reality changes—from that of the world of Descartes which can be viewed by man as an outside, and hence objective observer, to one in which the physical world and the human observer are inextricably interrelated—the very nature of our knowledge changes. Where does reality which we observe and measure cease to be objective reality, and begin to be a reflection of the subconscious of the observer?
Most economists still believe that they are dealing with a Cartesian reality. Yet the very notion of an objective economic reality, analyzed by an objective economist may have been foolish from the outset, and this misconception may well be at the root of many of our ills.
For the medieval mind, truth, as it concerned the material world, consisted in reconciling material observations with the ‘revealed’ truth, all of which was contained in the Bible and the teachings of the Church. The world reflected an Aristotelian hierarchy of innate qualities: bitterness, heaviness, hardness; and only very gradually, as clocks and measuring devices improved,—Lewis Mumford spoke of the transition from the “eternity of the religious man” to the “time of the secular man”— did western thought gradually change from ‘qualitative’ to ‘quantitative’ reasoning.23
During the 17th century, a new concept of the material world gradually emerged. However, “this fascinating new world of matter was not being discovered, but literally created by the new scientific mode of thinking. This is the new world that we feel so sure ‘exists’ around us today—the plain commonsense world of hard facts ... [Actually] the form we give to this world is a construction of our brains. Only in that sense does it exist ... Our favorite ‘real’ world was only invented in the seventeenth century, and [at that time] seemed very far from commonsensical to the average man.”24
Newton's great synthesis, at the end of the 17th century, finally seemed to confirm on the one hand the concept of an absolute material reality existing in time and space, subject to innate laws; and on the other, the Baconian-Cartesian dream that man's intellect could ultimately decipher God's most secret blueprints.
The Dawn of a New Reality
But this Cartesian-Newtonian world of observable ‘facts’ and discoverable ‘laws’ is now fading. “The old framework of classical physics [and may we add: of analytical economics] ... the conception of a material world in time and space comparable to a machine, which, once set in motion, continues to run, governed by immutable laws has proven inadequate to explain reality.... This machine as well as the whole world of science were themselves only products of the human mind.”25
“The mid-nineteenth century scientists thought they were looking upon a real external substantial world of material bodies whose content could be measured by its mass and weight.... The information thus provided gave clues ... to the external and changing principles that were firmly believed to underlie the behavior of the world.... Our view is very different.... We can no longer say the world is like this or like that. We can only say our experience up to the present is best represented by a world of this character.”26
The beginnings of this new concept of reality date back more than a century. When Darwin's Origin of the Species appeared in 1859, few people realized that it challenged not only the beliefs of traditional religion, but also the then prevaling basic premises of science. Yet, the theory of evolution made man himself “a natural member of the universe under discovery rather than a superior being endowed with ‘faculties’ from above and beyond.... While enterprises of pre-Darwinian type require certainties, and require these to be achieved with perfection, absoluteness and finality, the post-Darwinian logic is content to hold its results within present human reach, and not strive to grasp too far beyond.”27
Half a century later, Einstein's theory of relativity and Heisenberg's principle of uncertainty showed that the system of causality of Newtonian physics is apparently not universal, and that the nature of physical reality is thus that man can probably never attain full knowledge of a ‘reality’—which may or may not exist.
If this is true in physics, it is even more obviously the case in economics, where we are confronted with not one but actually three factors of uncertainty: (1) The natural laws which we postulate as a basis of our economic model building are largely reflections of the changing ‘zeitgeist’ which affect the conscious and subconscious of the economic model builder. The four ‘minor premises,’ discussed earlier, are typical examples of time-conditioned assumptions which became part of abstract reasoning. All theories are historically conditioned. All methodologies ultimately teleological.
(2) The economic ‘reality,’ largely statistical aggregates, are the result of far from perfect measurements conditioned by strictly subjective criteria of selection.28
(3) the economic standards by which economic performances are measured, and which thus become guidelines for policy—the definition of full employment, or of the ‘normal’ rate of economic growth, or the ‘poverty’ level—are essentially non-economic, but socio-political and teleological in nature, and thus in conflict with the mechanistic-automatic notions of economics. They are definitely ‘subjective’ rather than ‘scientifically objective.’
In short, we can almost be certain that there is no ‘objective’ economic reality existing in time and space which can be ‘observed’ and ‘measured’ by a ‘value-free’ economist. Instead, the economic ‘reality’ which the economic planner tries to manipulate is actually a construct of the human mind, i.e. of the ‘trained imagination’ of the economist. But this imagination, in turn, is subconsciously conditioned not only by the ‘zeitgeist,’ e.g. by the notion of ‘progress,’ but also by the subconsious ‘values’ or prejudices of the economic ‘reality builder.’
“It is absolutely useless to study a mountain of facts without knowing first of all, and very precisely and clearly, what one is looking for.”29 If we look for affluence, we shall find the statistics to prove it; if we look for poverty, statistics likewise will provide the evidence;—as two bestsellers, Galbraith's Affluent Society and Harrington's The Other America—Poverty in the United States indicate.
The Mechanistic Notions of Economics
The mechanistic elements in economic reasoning have disturbed economists almost from the outset. But the dangers of the mechanistic mode of thinking are becoming apparent only now.
It may seem foolish to us that the 18th century simply assumed that since mechanistic laws apparently governed the physical universe, similar laws must apply to society as well. Yet, considering the spirit of the time, the idea probably seemed as plausible, as did the Keynesian theory to the depression-conscious economists of the 1930's. “It would be very singular” wrote Voltaire, “that all nature, all the planets, should obey eternal laws, and there should be a little animal, five feet high, who in contempt of these laws, could act as he pleased, solely according to his caprice.”
Thus was born the picture of the economy as a great, self-equilibrating machine, similar to the solar system. “In this immense machine” Galiani wrote in 1770, “everything hangs together, is connected and linked. Nothing must disturb the equilibrium lest the whole mechanism overturn.”30 And two generations later, Bastiat wrote in the preface of his Harmonies Economiques: “I believe that He who has arranged the material universe has not withheld His regard for the arrangements of the social world. I believe that He has combined and caused to move in harmony free agents as well as inert molecules.”
Whether we think of the “ordre naturel et essentiel des sociétiés politiques” of the Physiocrats, the “invisible hand” and “iron laws” of the classical school, Walras' general equilibrium, or even Friedman's idea that the economy can be kept on a steady keel by increasing the supply of ‘money’ at a fixed rate;—we meet everywhere the same implied philosophic premise of an economy existing in time and space, functioning like a machine according to innate laws, which the economist can discover;—and (this is the assumption which developed during the past 40 years) can successfully manipulate. In the introduction to his Foundations of Economic Analysis, Paul Samuelson quotes, as a quasi-preamble, a passage from the American mathematician E. H. Moore: “The existence of analogies between central features of various theories implies the existence of a general theory which underlies the particular theories and unifies them with respect to those central features.”
For the past 200 years, this notion of a ‘general theory,’ a universal principle, which unifies all aspects of reality has been deeply rooted in western thought, so that it is not surprising that the ideas of Newtonian physics, which seemed the ultimate truth at the time when economics was born as an independent discipline, should have pervaded—and still pervades—economic thinking, unfortunate as this might be.
After showing, in his younger years, that the cosmic worlds could not be explained in terms of Newtonian physics,—and the same applies, of course, to nuclear physics—Einstein, in his later years, devoted a great deal of time to the search for a ‘principle’ which would unite Newton's world of causality and the modern world of relativity and probability. Werner Heisenberg and many others do not share Einstein's optimism: “The extension of scientific investigation to new fields of experience does not mean the application of previously known laws to new subjects. The belief of the 19th century that the principles of classical physics are ‘absolute,’ i.e., valid for all times, and could never be modified as a result of new experiences, is no longer accepted by modern physicists.”31
Yet economists cling to the traditional mechanistic pattern of thought even though many of them—e.g. Jevons and Marshall, both of whom had been raised in the mechanistic tradition—have long been aware of the potential dangers. The failure of economics to provide what Veblen called a “generic account of an unfolding process” has become a particularly problematic aspect of economic thought, as the emphasis has shifted from micro- to macroeconomics. Growth and decay cannot be explained in mechanistic terms. While economists list numerous, largely non-economic, factors which apparently make for development and growth, no integrated theory has yet been developed. Even more serious is the absence of a ‘theory of decay,’ because there is an obvious danger that Britain, and possibly even the United States, mistake symptoms of long-range decay for the reflections of temporary cyclical downswings.
Despite the promise that we live in the “Age of the Economist,” economics as a discipline finds itself in a fundamental crisis of transition. We may well have reached the end of a two-hundred year epoch which began with the Physiocrats, and which, in recent decades, produced among the general public the—probably false—feeling that “economics can deliver the goods.”
Our political and social atmosphere would be quite different, if the American people realized that the Employment Act of 1946, for instance, and many other political promises are the result of a basic misunderstanding of the nature of economics, and of man's ability to shape socio-economic reality. The American people do not expect the President to be able to assure adequate rainfall throughout the country, even if Congress were to pass an “Adequate Rain Act” and set up a Council of Meteorological Advisors;—yet meteorologists, as a rule, have been more successful with their short- and long-range forecasts than economists.
The people have been told that Washington can produce full employment, stable prices, and rising incomes, that it can abolish poverty, and since government after government has failed to achieve the promised goals, the people are beginning to conclude that there must be something wrong with the ‘system.’
Actually, the fault does not lie with the ‘system’ which has failed to ‘deliver the goods,’ but with the false expectations raised by politicians and experts, and the naive ignorance of the public as to the nature of economics and its capacity to meliorate the world's ills.
Man has obtained a great deal of insight during the past 200 years into the economic forces which shape his life, but many of the explanations are based on premises which modern man no longer accepts. A new approach—a new philosophy of economics—is needed, and in this respect, the situation is not unlike that which existed in the mid-18th century when the ‘science of economics’ was born.
But new ideas do not develop overnight. The Physiocrats and Adam Smith did not prevent the revolutionary upheavals of the 1790's, nor the Napoleonic wars. Decades may elapse before social philosophers have developed a new ideological basis. In the meantime, the future of western civilization may well depend upon the ability of the economist to convince the general public not of his skills and wisdom, but of the obvious limitations of both his insight and skills, so that the people can begin to realize the narrow limits within which government economic policy operates;—limits set by inadequate knowledge, and, more importantly, by the very nature of economics as we understand it today.