Max Weber’s Way to Chicago Economics?

Yes! It is more than a light resemblance or impression. Let me quote three authors at length. First, Max Weber himself:

Laws are important and valuable in the exact natural sciences, in the measure that those sciences are universally valid. For the knowledge of historical phenomena in their concreteness, the most general laws, because they are most devoid of content are also the least valuable. The more comprehensive the validity,–or scope–of a term, the more it leads us away from the richness of reality since in order to include the common elements of the largest possible number of phenomena, it must necessarily be as abstract as possible and hence devoid of content. In the cultural sciences, the knowledge of the universal or general is never valuable in itself. (Max Weber, 1904, Objectivity of Social Science and Social Policy)

Second, Milton Friedman:

In so far as a theory can be said to have “assumptions” at all, and in so far as their “realism” can be judged independently of the validity of predictions, the relation between the significance of a theory and the “realism” of its “assumptions” is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense). (Milton Friedman, 1953, The Methodology of Positive Economics)

And third, Robert Lucas:

A second variation is easy to carry out. Rather than consider a worker- entrepreneur, one could separate these functions, introduce firms, and consider labor and product markets separately. In the present context, this would introduce a distinction between wages and prices, and raise the issue of risk-allocating arrangements between employers and workers. It would also permit the study of possibly different information sets for firms and workers. None of these questions is without interest, but all are, in my opinion, peripheral for business cycle theory. Observed real wages are not constant over the cycle, but neither do they exhibit consistent pro- or countercyclical tendencies. This suggests that any attempt to assign systematic real wage movements a central role in an explanation of business cycles is doomed to failure. Accordingly, I will proceed as though the real wage were fixed, using the terms “wages” and “prices” interchangeably. (Robert Lucas, 1977, Understanding Business Cycles)

These short texts are so Weberian in style and attitude that I always thought that the authors must have been influenced by Weber somehow. The answer was provided by Ross B. Emmett, who has been studying the role of Frank Hyneman Knight in the evolution of Chicago Economics, i.e. the intellectual environment for both Friedman and Lucas. Knight translated Max Weber’s General Economic History (1927), so he was strongly influenced by Weber and he was completely aware of the Weberian methodology. And… Knight was one of Friedman’s professors in Chicago, so Friedman must have been well-educated in Weber. This is the intellectual foundation of the relationship between Weber and Friedman – and Lucas, whose professor was Friedman himself. It is not accidentally that both of them created methodologies that bear strong resemblance to Weber’s methodological works. Now it is time to prove that Friedman and Lucas diverged in methodological terms, since Friedman made efforts to re-interpret Weber in an instrumentalist way. However, for me it is out of question that Lucas was far from being instrumentalist.

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What Is Mainstream Economics? And What Is Not…?

The exact nature of mainstream economics is occasionally difficult to discuss. An anonymous referee, saying the following, required me to provide a clear-cut definition of the main stream. It is worth quoting his/her suggestions at length:

The author uses the term ’mainstream economics’ (ME, henceforth) without defining it properly. He begins by writing that “mainstream economics should be regarded as an intended manifestation of pure logic”. However, later in the text he claims that one can have models that form the basis for the research program of mainstream economics. But, as contemporary philosophical studies on models show, models as such cannot be treated as “manifestations of pure logic” (models are not sentences). And here I wonder why the author did not refer to important papers in the history and methodology of economics that study the relation between such terms as ‘mainstream economics’ and ‘neoclassical economics’ (a must-read in this context is The Death of Neoclassical Economics by D. Colander). Nowadays the term ‘mainstream economics’ is usually used as an umbrella term for these approaches in economics that the audience agrees that they form the core of economics. However, then also institutional economics (pls. take into account N-prizes for North, Coase, or Williamson) should be treated as an important element of ME. The same holds for experimental economics (N-prize for V. Smith) or psychological economics (N-prize for Kahneman). Now, if one is to understand the author’s term of ME as comprising also, for instance, experimental economics, then many conclusions of this paper (e.g., the one dealing with the unrealisticness of ME assumptions) are simply false. For instance, take the following one “So, mainstream economics has disregarded the social character of economic behaviour even at the stage of describing the most fundamental economic laws”. However, pls. take into account, e.g., transaction cost economics. One cannot claim that O. Williamson, with his ideas of bounded rationality or opportunism, disregards “the social character of economic behaviour”.

Here is my response:

Now, turning to the detailed review of the review, I have to underline how astonished I was when reading some of his/her comments. For example, the Reviewer devoted almost an entire page to analyzing the possible meaning of my term “mainstream economics”. He/She seems to have made serious efforts to identify “my” interpretation, and doing so, he/she listed some possible meanings, among which there was some really strange suggestions. Here, and almost anywhere else, mainstream economics is referred to as the neoclassical orthodoxy, the American neoclassical synthesis, or the academic main stream, etc., that is, the neoclassical orthodoxy advocated by the leading American universities and the American-dominated scientific journals, founded by Paul A. Samuelson (and the most important predecessors and contributors of which were Walras, Jevons, Menger, Marshall, Koopmans, Haavelmo, Debreu or Lucas). To put it simply, it is the realm of mainstream formalism. On the contrary, any historical or institutional, behavioural approaches should be put under the “heterodox” label that can hardly be regarded as the parts of the well-known neoclassical orthodoxy. Once again, referring to institutional economics as a part of the mainstream camp makes no sense. Institutional economics per definitionem deals with the importance of the social institutions and the effects of their existence – the social institutions that are completely neglected by the neoclassical orthodoxy. The Reviewer called our attention to Oli Williamson – and here and now I would like to mention another name: Geoffrey Hodson, the leading figure of institutional economics. Prof. Hodson is completely supplanted from the mainstream camp, similarly to Oliver E. Williamson. Prof. Hodson is a faculty member at a small business school, while Oli Williamson is professor at Haas School of Business (Berkeley), but not at the department of economics! The suggestion according to which these scientific authorities should be regarded as the members of the mainstream camp seems to be absurd.

Once we have separate concepts for mainstream economics and institutionalism, then why should we mix them up…? Admittedly, I was confused.

You Can’t Model

Models are the common analytical instruments in economics, but they often seem to be misused.

One of the silliest mistakes I have ever seen is provided by the empirical analysis of real convergence hypothesis based on the simplest form of neoclassical growth theory. According to its core idea (i.e. beta-convergence), poorer national economies should produce higher growth rates in term of per capita income. All this is traced back to the age-old theory of diminishing returns, so capital-rich countries are expected to grow at lower levels. This is the theory, while the empirical side is something different.

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It is very typical how the editors of page Convergence on Wikipedia try to sort out the problem that the „fact that a country is poor does not guarantee that catch-up growth will be achieved.” The entry describes this phenomenon as a limitation to the theory. This is a wrong approach to the problem, similarly when the editors say that there „are many examples of countries which have converged with developed countries which validate the catch-up theory.” So what’s up now…? If one finds some poor countries growing at low rates then he can validate the theory – while, on the contrary, if the statements of the theory are not true on their face value, then we should think that the theory itself is refuted. I do not thinks so.

No wonder if we come across contradicting statements about the value of such theories, since the big picture is admittedly confusing. Some empirical facts support a given theory (or, more precisely, they seem to support the theory), while others do not. However, this problem can easily be solved on the basis of the Weberian methodology. Theoretical economics is nothing more than a base line case, a system built from abstract-idealized components, from which actual economies should always be supposed to be different. And it is the difference that should be understood and explained. Why actual economies are different from our theories? The answers are available in economic policy, institutional economics, transitology or even sociology, and the like – while pure theory is only responsible for generating the base line cases, that is, the basis for comparisons.

So what if we made philosophy of economics, or methodology if you like, the theoretical ground for our everyday practice…? This is my idea.

Poznan, One of My Favourite Cities

Yes, now Poznan advanced to be one of my favourite cities… My Beyond-Realism draft has just been accepted by the editorial board of Economics and Business Review of Poznan University of Economics (former Poznan University of Economics Review). Hoooooray! Some fine-tuning is needed, of course, but this is a real breakthrough for me. An international scientific journal with international audience. The best way of getting read. Please, feel free to be happy with me about this event!

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Duke Chronicle #2

Yesterday I received the letter of invitation from Duke‘s Center for the History of Political Economy (HOPE). I am going to be a visiting scholar at HOPE, entitled to study the Lucas Archives at David M. Rubenstein Library.

To be honest, I am really excited about this trip. It is not just a great opportunity to study the drafts Lucas made for his official publications. It is also an outstanding chance to share ideas with like-minded leading researchers… and to learn from them, of course. Bruce Caldwell, Kevin Hoover and Roy Weintraub: all of them are Duke professors. I can hardly wait to take off.

A Critique of a Critique (in English)

Tamás Mellár, professor of the University of Pécs, economic politician, former president of the Hungarian Central Statistical Office – his name is widely known, and not only in professional circles. The economist being a man of wide reading, who also acquired fame by his frequent public appearances, by his often-emphasized critical remarks on both operative economic policy and the evolution of mainstream economics, catches our attention time and time again. He is known to build his strikingly marked beliefs on well-elaborated arguments, so he can hardly be charged with superficiality, not even by his opponents. He is regarded as an opinion-leader in our home circles of both public policy and theoretical economics, so paying attention to his words and taking them serious is always the correct thing to do. The area of his curiosity is far-reaching, however, he never becomes eclectic, deconcentrated or someone having multiple centres of interest: while he is supposed to be a famous critic of mainstream economics, by his strong commitment to science, he is also an outstanding expert in these theories. He can pay attention to the developments within high theory and, at the same time, translate his knowledge into the language of operative economic policy – and, what is more, he is a professional having superlative modelling expertise. A real and classic role model. Passionate and respectable polemist. The professional debates one can have with him are always spirited, but never go rough. He is one of the few who vehemently believe in the truth of their scientific ideas – and all this is an existential question to him. By defending his theory, he defends himself and his unique way of understanding the world. This is the background from which he draws both his faith during the debates and the impulse for his constant efforts to improve.

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The unproofread English draft of the review paper is available here. For the Hungarian version, please, click here.

From Weber to Kant

In understanding how mainstream economics creates the laws of optimizing economic behaviour Weber is only the first step. If one wants an in-depth understanding of this problem, turning to Kant is unavoidable. Without referreing to Kant we would only be able to say: mainstream economists, by creating ideal-types, can find the ultimate economic laws or law-like tendencies, but we would be unable to answer why.

It is a commonplace that the methodology of Weber cannot be understood without Kant. At this superficial level, one needs to keep in mind that our concepts are theoretical constructs that help us to understand and comprehend the world. But there is a deeper level, to be sure. Ernst Cassirer in his “Kant’s Life and Thought” gives a detailed but somehow ponderous analysis on how Kant clarified the possibility of theoretical physics: how is it possible to get knowledge about nature (physical or even our social environment) which is objectively valid. How can we build up theoretical systems which grab the laws and the tendencies of our reality, and how is it possible for us to have testable theories at all…?

Understanding Kant is the key to understanding Weber and to understanding the way how theorems are formed in mainstream economics.