(up-beat trumpet music)
- [Robert] This is a course of lectures
and discussions on economics.
Having considered the
way adjoining disciplines
like psychology, sociology and politics
help us understand how economies work,
I now want to turn for
help to economics itself,
though somewhat neglected parts
of it in modern curricula.
That is the history of economic thought
and economic history itself.
These will be the topics
of the next two sessions.
By looking at two famous
philosophers of science,
Thomas Kuhn and Imre Lakatos,
we will come to understand how economics
has defined and defended
itself through time,
against those who have attacked it
from different points of view.
Thomas Kuhn is the famous
philosopher of the paradigm,
how paradigms persist through time,
even though they seem to be
subject to devastating attack.
I think it's very important
that we understand
the history of economics,
because it guards us against the view
that it's been simply
an increasingly successful
search for truth,
and the history of economic
thought is rubbish.
It's rummaging around an attic
for ideas that are now
expressed much better.
And I think what we'll find out is that's
a complete caricature of
the history of economics.
(up-beat synthesized music)
(blaring trumpet music)
- [Robert] The main
reason then for studying
the history of economic thought
is to question the claim
that the newest economics
is the best economics.
That is the claim that's
usually made for all sciences,
that all the old stuff,
the things people
believed in 500 years ago,
it's all obsolete, and really,
what you study today,
the latest textbook knowledge that you get
is the best of the subject.
Everything else has been discarded,
and all that's left is what is true.
That is generally the theory
in the natural sciences.
That is generally a valid idea.
You don't want to study the
medicine of 3000 years ago,
and rely on that to cure you
from whatever ailments you suffer.
You want the latest medicine,
you want to study the latest thing.
Therefore, you want to
study the latest economics.
But I'm going to query that by saying
the latest economics isn't necessarily
the best economics, Just
happens to be the latest.
But the idea that it's the
best goes a long way back,
all the way back to the
beginning of the 19th century,
when famous economists of that period,
so we're talking really of a period
of well over 200 years ago,
J.B. Say wrote as follows,
"What useful purpose can be served
by the study of absurd
opinions and doctrines
that have long ago been exploded,
and deserved to be?
It's mere useful pedantry
to attempt to revive them.
The more perfect a science becomes,
the shorter becomes its history.
Our duty with regard to
errors is not to revive them,
but simply to forget them."
That is the doctrine of a natural science.
Our duty with regard to
errors is to forget them.
And they have been
forgotten, so it's claimed.
All the errors have been filtered out,
leaving nothing but
presently correct statements
of scientific theory.
Studying the history of economics,
studying the history of economics,
which is what we're going
to do this afternoon,
is like rummaging around in an attic
filled with rubbish, you know?
Pleasant enough past time
to spend bit of time,
if you have nothing better to do,
but of no practical use.
It also invites the suspicion
that the person who likes rummaging
isn't really very competent
at doing economics
because it's an easy thing,
studying the history of economic thought.
I think you have to be very
skeptical about the view
that the latest economics
is the best economics.
For example, why didn't the best economics
forecast the crash of 2008-2009?
There was a famous question
asked by the queen,
she saw a bunch of economics at the LSE
and she said,
"Why didn't you tell us
it was about to happen?"
And they said, "Oo, we didn't know,"
and then they eventually
produced some lame excuse.
But obviously if economics can't tell you
the most important crash since
the end of the second world war is
sort of coming onto the horizon,
and it can't foresee it,
then it's somehow not the best economics.
Or rather, if it is the best economics,
it leaves a lot to be desired.
I think it's that kind
of thing that leads one
to be skeptical.
I think that stock of knowledge
available to economics
is not greater than it ever has been,
I think it's less than it ever has been.
I think economics has been shrinking
in its understanding of what goes on,
as it's becoming more
and more mathematical.
The shrinkage and the
mathematics go together.
The mathematics is very
precise, but it's very limited.
Economists 100 years ago, 50
years ago, even 30 years ago
knew more about banking and
finance than they do today,
because these are areas that
are actually quite difficult
to render in formal equational structure.
So, the fact that an idea formally grasped
without mathematics is now stated in math
isn't necessarily an
argument for progress,
because it ignores the possibility
that a great deal of useful knowledge
gets lost in the translation.
If you study the history of the subject,
you may penetrate the
secret of what I call
persistence without progress.
That is certain ideas run
through from earliest times
to today, they're stated
more and more precisely,
more and more mathematicized,
and they're the same ideas,
you'd say well, where's the progress?
And there isn't any, but they persist.
Why is that?
To explain why that's so,
I want to introduce you
to two philosophers of
science, very famous.
One is Thomas Kuhn, and
the other is Imre Lakotos.
Philosophers who explain the histories
and structures of scientific disciplines.
They introduce the key concepts
in the history of economic paradigm,
and a research program.
But what is a paradigm?
Kuhn and Lakotos have said
the reason why economics
and some sciences, and perhaps
they would apply to all sciences,
don't advance in the way
one thinks they should,
is that they exist to serve
other than scientific purposes,
specifically, a science
serves the interest
of the people who practice it.
So economics serves the
interest of economists,
and that means the existing
generation of economists,
not their successors,
because what they want to do
is they want to maintain
their own position.
They've invested in
certain forms of knowledge.
The upshot of all that
is once a normal way
of doing a science has been established,
it develops strong staying power,
however much its scientific
claims are questioned.
So, let's start with Thomas Kuhn's idea
of paradigm and paradigm persistence.
A paradigm is, "A way of doing a science",
he says, "which becomes hard-wired
into the psychology and the structure
of the scientific community,
while simultaneously
being open-ended enough
to leave all sorts of interesting problems
for the defined group of practitioners
to practice their skills on."
So the paradigm directs researchers
to the problems to be investigated,
furnishes them with the
tools to investigate them,
and also the experimental
methods required.
The threat to the paradigm
comes not from empirical failures,
which can usually be insulated as puzzles,
but from changes in the world view,
which makes the puzzle seem intolerable.
A mismatch develops between
the institutional map
of the science and the problem
which needs to be solved.
Now, there are a couple examples
from the natural sciences.
In other words, the world view shifts,
and suddenly the old science
doesn't seem to be addressing it.
The first famous example
is the Copernican Revolution
in the 16th century,
and you had a view of the world in which
the earth was at the center of the system,
and the sun and all the planets
revolved around the earth,
and that gave you measurements
of the predictions
of all kinds about the
movements of the planets
in relation to the earth,
which were fairly accurate.
They weren't bad.
This was the Ptolemaic system.
And Copernicus said, "No, no,
that's not how it works at all."
Out of that develops
theories, gravities, etc.,
but the point is that it
was absolutely revolutionary
because it displaced the earth, the world,
the aura from the center of the universe.
It had unbelievable consequences.
We weren't unique any longer,
we weren't uniquely made by God,
so it revolutionized the
way people thought about
the nature of the divine and the natural.
But, it wasn't a huge improvement.
It was a paradigm shift.
It didn't give you much
better measurements
of the relationships than
the older system did,
it represented a change
in the view of the world.
Now, you have another one
which was the replacement
of phlogiston replaced by gas
as the agent of combustion.
These are real shifts in science,
they could be called paradigm shifts.
You've had very, very few in economics,
very few paradigm shifts.
Two candidates for paradigm
shifts in economics.
I'm thinking of period from
1750, roughly, to today.
Can anyone think of
possible paradigm shifts
in economics that have occurred?
- I mean, the first one that comes to mind
is the marginal revolution
in the late 19th century
that really introduced
microeconomics to broader study
as well as slowly started the trend
of mathematization of the discipline.
- [Robert] Yup, yup, I agree.
That's the first of the candidates.
You have this shift,
the marginal revolution
at the end of the 19th century,
and a shift from cost production theory
to marginal utility theory of price.
Now you study marginal
utility theory of price,
whether you know it or not,
you are studying a marginal utility theory
of price formation, whether
it's being introduced
as such I'm not sure,
but that's what it is.
But before that time,
you would have studied
a different theory of price formation,
what it is that causes
prices to be what they are.
That's one candidate.
Then there's another candidate, I think,
for a paradigm shift in economics,
the Keynesian Revolution of the 1930s-40s,
which suggested that market system didn't
automatically guarantee full employment.
That was a major shift, because
it had always been assumed
that that was the case.
The Marginalist Revolution wasn't really
an attempt to overthrow the old system,
it was an attempt to make it more general.
The Keynesian Revolution was more radical
in its intention, but it was repelled.
The defenses stood because
what they actually ended up by saying,
"Well, yeah, there
could be some situations
in which a market, a
competitive market, economy,
doesn't deliver full
employment automatically,
but these are to be
regarded as exceptions,
imperfections, special
cases, sticky wages,
those kind of things
that... But the general rule
is still valid."
When a dissident theory penetrates
some outer set of defenses, they all rally
to close the breach that's been created,
and fight back, and usually they win.
This is not an idea you
might think that's relevant
to the way intellectual life should go on,
but it's very true to it.
Now, we now come to Lakatos.
Now, Lakatos is the other of
these theorists of science.
He gives a more elaborate
explanation of why ideas persist.
That is, through the notion
of a research program,
and distinguishing between
the constant elements
in the research program
and the variable elements.
In such an enterprise,
the researchers all share
a common set of basic axioms,
they all share a common set of ideas
about how to do the science,
they all share a common
set of working practices,
a common technique is the
technique you will study
in your courses, from your textbooks.
So think of it as three
sort of concentric circles.
You have at the core the
axioms, you have the techniques,
and then you have a protective belt,
almost an outer belt,
and in that outer belt, there
is the conflicts take place
in the discipline.
But they don't on the whole
effect anything that goes on in the core.
That's where dissidents
can have their say,
that's where they can be admitted,
or they can be repelled.
And the function of the protective belt
in the way Lakotos sees it is to prevent
a premature rejection of the core,
like an organism which develops
an immunity to infection.
You see, if everything the
core says is now rejected
by empirical work, the core
eventually degenerates,
sooner or later.
But, because it's so difficult
to disprove anything in economics,
you try and disprove any
sort of idea in economics,
and you run up against so many problems,
that it's very hard for anything
from the protective belt,
really, to damage the core.
It very occasionally happens,
but it doesn't happen that often,
and Keynesian Revolution
came closest to it.
So what Lakotos says,
really, is that the defenses
are very, very strong.
The protective belt is
true in all sciences.
All sciences, according to
Lakotos, have this structure,
this defensive structure
which protects them
against criticism, but in
social sciences like economics,
it's very, very powerful
because of the weakness
of the refutation procedure.
As I've just said, it's very, very hard
to disprove a theory in economics.
Now, there's other things
that tend to protect
theories against criticism.
For example, John Davis says that
you have a whole way of judging
the quality of research,
which tends to favor
the existing practitioners of a subject.
A whole structure of research journals,
which only publish articles
by really people who do the
economics in the accepted way,
you have a ranking of journals.
Every academic understands
exactly how this works.
If you have a new idea, it's
very hard to get it published.
And this is true now more and more so,
as government money flows towards research
which is good accredited research.
And so, the incentive to just stick within
accepted rules of research,
and not try and do anything new
is much, much stronger
because your departments
research money comes from being published
in a very limited number of journals.
Those journals are
controlled by the powers
within the profession.
So you can see how difficult
it is to get new ideas through.
A Nobel Laureate in economics,
and this has often been criticized,
that "This reliance on
referees leads to a much more
conservative strategy.
I think it works against
novel papers that cross
subfield boundaries and that makes it
all the more challenging.
Basically it makes the
simplest path to publication
in the top five journals to be
high-quality follow-up papers."
So if you want to get published
in the top five journals,
don't try and say anything new.
Just say something in a
slightly different way
from the previous paper.
And that gives you a
reputation for originality.
Now, we can give some examples
of methodological sniping in economics.
While the paradigms and research programs
have continued on their marry way,
there's been persistent attacks
from individual dissidents,
and dissident scholars about
the methods of the subject,
about the way economics is theorized.
These have been the main points of attack:
one, unreal behavioral assumptions,
especially the view of the human being
as a calculating machine.
Two, excessive maths.
Three, claims to universal truth.
And four, demand for
proper micro foundations.
Unreal behavioral
assumptions, that's easy.
If you think of a model,
you have assumptions there.
We assume A, B, and C, and
people have attacked that
from the beginning, that
way of building up models.
For example, I'll just give
you an example of this,
Sismondi, he was an economist
of the 18th century.
He wrote that, "Humanity
should be on guard
against all generalization of ideas
that causes us to lose sight
of the facts."
what about the idea
of the human being as
a calculating machine?
Is that true to the
facts of human behavior?
Do humans behave in the
way economists say they do?
If they don't, then you're
actually starting your theorizing
by losing sight of the facts.
That's been a continuous criticism
in the history of economic thought.
Richard Jones, a 19th century economist,
"Look and see as opposed
to see and deduce."
Cliff Leslie, another
19th century economist,
these are all dissidents.
"Instead of investigating actual motives,
economists construct a fictional person
out of the desire for wealth
and aversion from labor."
So, instead of trying to
look at actual motives,
they say, "Here, we present
you with this person.
He wants as much wealth for
as little effort as possible,"
and that is a human being,
and we deduce all the consequences
from that assumption.
Is that true?
Do people just want more and more money
for less and less work?
Well, it is, we all know people like that,
but is that a general rule?
Doesn't it exclude lots of
other motives that people have?
But the simplified model, and of course,
that sort of model can
be actual formalized.
It can be made into maths very easily.
It's useful.
Another one, William Beveridge.
He has a nice remark, called economics
a "survival of medieval logic."
"Economists are people
who earn their living
by taking in one another's
definitions for mangling."
And I think there's a strong
connection between economics
and medieval thought,
medieval scholasticism,
because you can't prove
the existence of God,
but that doesn't mean
that people didn't argue,
and argue, and argue, and argue about God
for hundreds of years, and about God's
intentions, and about the divine plan.
But they could never prove it.
They could never prove God exists, why?
Because, they couldn't
apply Richard Jones's motto,
look and see.
Now, too much maths, second criticism.
For example, one Nobel
Laureate in economics,
Leontief attacked the nearly
mandatory use of maths.
"Uncritical enthusiasm for
mathematical formulation
tends to conceal the ephemeral substantive
content of the argument
behind the formidable
front of algebraic signs.
In no other field of inquiry has
so massive and sophisticated
a statistical machinery
been used with such indifferent results.
Most of these models have
no practical applications at all."
But, they look good.
And pages and pages of
algebra give you formidable
scientific sense of scientific authority.
By the way, most people,
when they read these papers,
they don't actually bother
with the maths at all.
It would take far too
long to go through it all,
so they assume it much be right,
and the gist of the article
is actually contained
in the first sentence and last sentence.
So all this is just window dressing.
What is it?
I can do it.
(in a sing-song voice)
I can do it, therefore I'm a scientist.
In a similar vein, the British economist
Frank Hahn said, "It cannot be denied
that there is something
scandalous in the spectacle
of so many people refining the
analysis of economic states
which they give no reason to suppose
ever will or ever have come about."
In other words, they're building models
about imaginary states.
And Harry Johnson again noted that
"The testing of hypotheses
on which econometrics rested
is frequently a mere
euphemism for obtaining
plausible numbers to
provide ceremonial adequacy
for a theory chosen and
defended on a priori grounds."
In other words, the whole
thing is fraudulent.
Economists from different schools,
very different schools,
Freedman, Coles, Jane Robinson,
Krogan, Stiglitz, all complained
about excessive mathematization,
but it's become the benchmark, you see,
and their complaints have been like
water off a duck's back.
You can't say about these people
that they couldn't do maths,
because they could.
But they said, "Look, it is subject
to such a big law of diminishing returns
that you should really not
use it as the bench mark
of competence in the discipline,"
because that's what it is, really.
It tells people they can do the math,
therefore they are economists.
Now, I think you need to have
a more sophisticated test.
Claims to universal validity.
Economics likes to share one
claim of the natural sciences,
to put it very crudely, stones are stones
anywhere they appear in the world.
They follow the same laws.
And therefore, human beings are the same.
Absolutely the same, therefore
anything that applies
to a human being in a
little corner of Europe,
or let's say Robinson
Crusoe, which is fictional,
applies to all of them,
all over the world.
They're all exactly the same.
And therefore, you can have laws.
That's been attacked by lots of people,
including many economists.
For example, the German historical school,
19th century school,
introduced the important idea
that the validity of any
economic law is confined
to the period and the place
in which it's developed.
You can't say what was true in Germany
about human behavior in the 19th century,
under those particular circumstances,
was also true in France,
was also true in China,
was also true in India, and
everywhere, exactly the same.
I think that was the attack.
And the reason was that
unlike rats in a lab,
you can't subject all these societies
to the same conditions.
Therefore, let's study what
works in some situations
and what works in others and
what doesn't in the two cases.
My final point, the demand
for tight micro foundations.
Now, what does that mean?
This is one of the things that many
dissident economists
have attacked over time,
and it developed really
in the attack on Keynes.
John Maynard Keynes tried to overthrow
the existing paradigm in the 1930s
and one of the ideas he had was that
human behavior wasn't as
the classical economists
said it was.
In other words, human
beings, in their behavior,
they were motivated often by
what you called animal spirits
and by conventions and periods
of excitement and depression.
These sort of quasi-rational attributes
of human psychology
explain their behavior,
much more than the calculating machine
which you're taught about
in your economics courses.
What's called the optimizing agent.
So, what classical economics
has tried to do is to say,
"Look, you can't understand outcomes
without starting with these
individual calculations
that people make, adding them all up,
and then you get a picture
of how the economy as a whole will work."
that's what's called having
tight micro foundations.
Keynes and others said, "That's rubbish.
You can't have tight micro foundations."
these micro foundations may
work in some individual cases,
but to try and plot the
trajectory of a whole economy
from tight micro foundations,
ends you in a loony bin,
if you really try and do it that way,
and they're never going to get there.
These are criticisms that
have always been made,
and if you look at the
history of the economics,
you'll see them there,
and then you will wonder,
well why have they made so little impact,
or relatively little impact,
and I tried to give an answer to that,
which was the defenses of the existing
professional practitioners are so strong,
that they've been able to repel them,
and make sure that the young
dissenters don't get preferment
in the profession, that you
only really get promotion
in the good universities
and publications of the good journals
by following the orthodox line.
But, I think it's very encouraging,
and this brings me back
to why one should do
the history of economic thought,
to find precursors of
one's own heretical ideas.
Any doubt you may have had about the value
of what you're doing in economics
has been expressed by some
economist in the past,
and that should give one confidence
that one isn't alone.
In other words, one can
recognize one's self in
great thinkers of the past.
I think you feel less lonely
by studying the history of the subject.
