Limits of Science?. John E. Beerbower
was not alone. Interest in the methodological issues blossomed in the first half of the twentieth century, with rather elaborate and excited tributes written about the scientific status of economics. See, e.g., T.W. Hutchinson, The Significance and Basic Postulates of Economic Theory (1938) and, to be discussed in some detail below, Milton Friedman, “The Methodology of Positive Economics,” in Essays in Positive Economics (1953). Hutchinson wrote that deductive economic theory was constructed on the model of mechanical equilibrium, which generated “a body of ‘pure theory’ the possession of which distinguishes Economics from the other social sciences.” The Significance and Basic Postulates of Economic Theory, p.3.
Pareto optimality
Let us explore an illustration. Assume that an economy is in the position in which no changes could be made that would result in making any person better off without making at least someone else worse off. Such a situation became known as Pareto optimality, named after the Italian engineer and economist Vilfredo Pareto (1848–1923), who published his Manual of Political Economy in 1906. This definition of an optimum seems “scientific” or, at least, objective.
In addition, it avoids any attempt at the comparative valuing of benefits for different people. For example, one would not assert that a change would benefit society, as a matter of economics, if one person sacrificed so that 100 people could benefit. Similarly, the satisfaction of a human vice is not assigned less weight than the satisfaction of a fundamental human need.
This approach had one clear virtue: How could anyone disagree with a reallocation of resources that made one person better off without disadvantaging anyone else? If this standard were actually sufficient to resolve some of society’s important questions, that is, to enable a choice between policies to be made, then one could hardly complain. However, to the contrary, this standard is simply irrelevant with respect to most of the really important and pressing policy issues facing most societies—issues involving questions of justice and fairness, the establishment of priorities among or weighting of competing goals, the value of human life (or animal lives), etc.
Of course, many of these issues are decidedly outside of the defined scope of economics, but others have been excluded by choice. For example, traditional economics consciously refuses to rank or value individual choices. Instead, not only are people presumed to be the best (or only) judge of what pleases them, but no judgment is made about the relative merits of such pleasures (at least as long as the indulgence does not hurt anyone else). For this reason, the gross domestic product of a nation reflects the sum of the market prices of all of the goods and services produced. No differentiation is made between products that promote health and those that undermine it; no different weighting is made for expenditures that add to wealth or productivity and current consumption of luxuries. Thus, comparable GDPs can represent very different levels of economic wellbeing. At a more prosaic level, as has been frequently observed, if two caregivers simply take care of each other’s wards in exchange for payment (in amounts that can even cancel each other out), rather than stay at home caring for their own, GDP is increased. Yet, there is no actual increase in real output (indeed, there may be time lost in commuting, additional expenses and more taxes paid because of the creation of recognizable income). There is an increase in economic activity only because economic activity is defined to include the exchange of services but not the self-provision of them.
This last example could, in theory, be corrected for, with substantial problems of data collection. But, the other examples reflect the decision by economists to avoid value judgments, allegedly, in part, in order to be more scientific.
Problems and controversies
The Great Depression raised significant questions about economists’ understanding of the macro-operations of economies and of the role of money, but the theoretical model of the determination of price and output came to be subject to sharp criticisms as well. Part of the reason for some of the passion reflected in the attacks were the apparent normative implications of the theory (some of which are discussed below in the subsection "Economic 'morality'"), coupled with the claims that it was a science resembling Newtonian physics.
Micro-economics appeared to demonstrate that the most efficient allocation of scarce resources would occur in conditions of perfect competition. When equilibrium was reached, the allocation would be such that any change would result in a reduction in total output. Of course, the particular equilibrium in question would depend upon the initial conditions, including the distribution of wealth and resources. Other initial conditions would lead to different results. Thus, economists would argue that free exchange and open markets, with certain caveats developed over time, would lead to the most efficient allocation of resources. However, some would call the caveats “minor” qualifications; others would say that the caveats reflect almost everything that matters, rendering the general theory almost or totally useless or, even, dangerous.
This theoretical structure was built upon a large number of propositions or postulates that appeared to have factual content (that is, they could be true or false). The results are deduced from those postulates. Attacks on the theory often challenged specific postulates. The resulting debates are quite interesting and informative.
I think that the nature of the methodological issues that arose can be illustrated better—or, at least, certainly more concretely—by an example. The example I use here is the controversy over the theory of the firm.
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