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History
of Economic Doctrines Session 1 Notes Philosophy,
Science, and Human Behavior Philosophy
encompasses all of our attempts to understand how and why. Science is a subset of philosophy
that focuses on explanations of how.
Paradigms related terms: school of thought
| weltanschauung | gestalt | model A paradigm
comprises a shared collection
of beliefs that shapes both our thoughts about how things work and our actions. Broad paradigms may encompass what might
be viewed as sub-paradigms, or schools
of thought. For example, belief in science and logic is a widely shared
paradigm. Various religions are also paradigms. Paradigms provide
frameworks for how to think and act, but can prevent us from properly
processing information that might improve comprehension of how things work. The Environment of Intellectual History We are pretty sure that the ant has no idea about the world that
humans inhabit and there is equally no reason to suppose that the world that
is accessible to humans is all the world there is ... Kenneth
Boulding [1987][1] A scientific paradigm may evolve gradually, or a scientific revolution may quickly replace an older paradigm with a newer one. Today’s “myth” was often the commonsensical “truth” of an earlier era. For example, Ptolemaic and then Copernican views of the cosmos were once dominant paradigms, but mistaken assumptions imbedded in these earlier paradigms were ousted only slowly, while other “truer” ideas have been absorbed into the relativism of Einstein and its modern variants. Scientific disciplines may emphasize slightly differentiated models. One important paradigm encompasses classical and neoclassical economic theory. Keynesian theory is a slightly different paradigm, and Marxism represents a major alternative economic paradigm, although much of Marxism seems to have been discarded into the dustbin of history. “Everything should
be as simple as possible, but not moreso.” -- Albert Einstein Occam’s razor, also known as the principle of parsimony, suggests that the simplest workable theories are also the best and most useful. But does a preference for simplicity have any scientific foundation? (Note that Occam is sometimes spelled Ockham, after William of Ockham.) More
reading: Thomas Kuhn, The Structure of Scientific Revolutions http://cepa.newschool.edu/het/index.htm. Eric Temple Bell, Men of Mathematics http://www-groups.dcs.st-and.ac.uk/~history/ Alternative
Ways of Looking at the World Determinism: A continuing debate between determinists and believers in free will or a non-deterministic universe [chaotic or stochastic, per e.g., quantum mechanics of Brownian motion] dates back at least as far as ancient Greek philosophers. Determinism is the philosophy that all past, present, and future phenomena are completely explicable by the laws of science (physics, chemistry, etc). The core models of most of “modern” science are deterministic. In this view, everything, including human choice, is predetermined by the physical and chemical interactions of matter and energy, and the perception that we are “free to choose” is an illusion. See also dialectical materialism in my Economicae Economic Encyclopedia. Contrast with hysterisis, path dependence, and historicism.
“Laplace’s demon” [named after Pierre-Simon, Marquis de Laplace [1749-1827], and sometimes known as “Maxwell’s demon”] addresses the possibility that if a demon fully understood the laws of physics and knew the position of every particle in the universe at any given point in time, that “nothing could be uncertain and the future just like the past would be present before its [the demon’s] eyes."
Probability theory seems more consistent with a nondeterministic “stochastic” view of the world.
Quantum mechanics in physics is stochastic, discontinuous and arguably nondeterministic. Heisenberg uncertainty principle: When considering the position and velocity of a physical particle, the more we know about position the less certain we can be about velocity, and the more we know about velocity, the less we know about position. [From Werner Heisenberg, 1901-1976.] Issue: If something
has been “proved” mathematically, is it necessarily true? NO! -Ex: A Brief History of our Time by Steven Hawking. Early in his career, Hawking gained fame at least partially for developing a calculus-based deterministic model illustrating why “black holes are black.” A decade or so later, [using stochastic (probabilistic) math] he “proved” that “black holes may be furry” [NOT “black.”] Black holes are consequently thought to spit out “Hawking radiation.” The “truthiness” of any logical model (including a mathematical system) depends on the completeness and consistency of its axioms, and the correspondence between the axioms and reality (validity). Gödel’s incompleteness theorem(s): there are true propositions about the
natural numbers that cannot be proved from the axioms for any non-trivial and
self-consistent recursive axiomatic system powerful enough to describe the
(Peano) arithmetic of the natural numbers. [From Kurt Gödel,
1906-1978.] Meaning? Any complex mathematical system is logically incomplete. Issue: Are causal processes as simple and obvious as many rationalists seem to think? Consider Barry Bonds’ record breaking home run. Did Bonds hit a homer because his bat struck the ball at a certain angle with certain mass and velocity? Would the homer have occurred if Bonds had used a defective bat that broke off at the handle when it struck the ball? If not, perhaps Bonds’ homer is attributable to his having selected the bat he did before striding up to the plate. If that is true, then the homer seems attributable to the person who selected the particular piece of bass wood that made the bat, and the machinery on which the record-breaking bat was transformed from a raw piece of lumber. Or perhaps a microscopically different ball would not have been propelled out of the ballpark. Maybe the homer is attributable to the pitcher making a bad pitch. Or to the pitcher’s breakfast before the homer was hit. In a totally different vein, some critics argue that Bonds’ home run record is based on his ingestion of steroids. Or perhaps this record became inevitable when Bonds’ mother met his father? Or when another of his ancestors met another ancestor? The point of this argument is that to assert that causation can be used to explain everything requires an existential leap of faith. We observe sequences. We then use Aristotelian logic to infer causation in the particular sequence. We then generalize to attribute causation to all phenomenon that seem in any way connected. Belief in a complete web of deterministic causation that explains all phenomena everywhere in the universe (the Laplacean demon) is ultimately based in pure faith – and not on scientifically verifiable observations and logic – no less so than the worship of a particular interpretation of God by any religious fundamentalist of any faith anywhere in the space-time continuum of our universe. A Methodological Squabble
Issue: Can time bend back on itself? These crude graphs show time as a unidirectional and semi-linear phenomenon that proceeds “forward.” However, recent experiments by some physicists appear to permit the possibility that in some instances, the future can “cause” the past. Concepts that May Support Heraclites’ View Chaos Theory: According to chaos theory, an apparently trivial decision can significantly alter the future in a split second. Even small differences in initial conditions or minute random disturbances across time can drastically change the long-term behavior of a system. Example: In H.G. Wells’ novel, The Time Machine, a person who traveled far back in time stepped on a butterfly. Result: Upon returning to “the present,” the environment had changed so drastically that it was almost unrecognizable. Historicism: Historicism is the theory that random historical events can be crucial in determining future events. Historicism suggests, e.g., that the outcome of England’s “War of the Roses” forever altered the course of human history. A deterministic approach suggests that history was predetermined long before it actually transpired. Hysterisis: Hysterisis models assume that history matters (in
contrast to deterministic models, for example), and that such aggregates as
unemployment, inflation, or rates of technological progress are affected by
the recent path of the economy. Persistent unemployment, for example, may
tend to self-perpetuate because unemployed workers become rusty. Symmetrically,
prosperity and low unemployment rates also tend to be self-reinforcing
because workers acquire more human capital through on-the-job training.
Similarly, if firms are encouraged to innovate by the prospects of profit
during prosperity, “spin-offs” from new technology tend to generate further
technological advances. Path Dependence:
Path dependence is the theory that even small random disturbances can change
the course of history. The conventional QWERTY layout of computer keyboards,
for example, is a consequence of the way mechanical typewriters were designed
a century ago, allegedly to minimize entanglements of typewriter keys by
slowing the typing process down. The QWERTY configuration still dominates
today, despite its inefficiencies, because this old convention has
considerable inertia, and change is a costly process. [See also switching costs.] Newtonian View (Classical physics) Isaac Newton: The cosmos is predetermined and orderly. [per Zeno?] Faith, Nihilism, and Pragmatism [In overly simplistic
terms?] Faith can be defined as a firm belief in something for which there is no proof. Nihilism is the rejection of faith as a pathway to truth. Pragmatism is a philosophy that rejects the possibility the humans can know any specific thing in an absolute and definitive fashion (“truth”), and that the best we can do is to act on the basis of our expectations that some specific decisions and actions are likely to yield salutary and predictable results, while other decisions and actions are likely to yield less satisfactory and less predictable results. The Problem of
Transaction Costs: Transaction costs are to the economic theory of competition as friction is to classical physical mechanics. Classical mechanics often assumes that activities are performed as if in a vacuum. Transaction costs
are the costs associated with gathering information about products and
transporting goods and people geographically or between markets. Information Costs: It was not until the 1960s that George Stigler [1911-1991] and Armen Alchian [1914 - ] independently published papers that treated information as a costly produced good. Much of modern economic analysis of information is based on their pathbreaking works. A 1994 paper by Deirdre (nee Donald) McCloskey and Arjo Klammer presented estimates that 60% or so of US national income (GDP) is devoted to the production and distribution of information. Information costs include all of education, all media, all consulting, most lawyers’ fees, management decisionmaking, …, [the list goes on and on]. Firms exist because they are able to cut transaction costs for the ultimate consumer. Economies of scale in processing information and moving goods and resources usually enable consumers to purchase products more conveniently, and at lower costs, if they buy from firms. Corollary 1 of the Coase theorem asserts that no firm can succeed unless it lowers transaction costs. Coase theorem*: If (a) property rights are fully specified and enforced and (b) transaction costs (information and mobility costs) are zero, then voluntary exchange will yield Pareto efficient solutions to all economic problems. 1. Corollary 1: Firms can survive only if they help reduce transaction costs in transforming resources or assets into goods and conveying goods from the ultimate owners of the resources to purchasers of final goods. 2. Corollary 2: Transaction costs underpin any alleged efficiency failures of markets (e.g., problems of public goods, externalities, or monopoly power). 3. Corollary 3: If income effects are not present, Pareto efficient resource allocations are unaffected by patterns of resource ownership. *Note: Named after Nobel Prize Winner Ronald Coase. |
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These web pages are significantly edited and elaborated versions
of student notes based on lectures by Ralph Byrns, 2002-2007.
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