WEBVTT NOTE The Mengerian Milkstool: An Alternative History of Economic Thought 1 00:00:00.000 --> 00:00:09.700 There's a very interesting quotation that I came across by Eric Streisler in 1990 in a book dedicated to the legacy of Carl Menger. 2 00:00:09.700 --> 00:00:19.700 Intellectual history is overgrown with myth. The preconceptions of successive generations and of generations preceding our own make it difficult to uncover the truth. 3 00:00:19.700 --> 00:00:25.100 We tend to be wary of myths surrounding the interpretation of political or even social history. 4 00:00:25.100 --> 00:00:35.100 As scientists trained in objectivity, many of us are, however, naively surprised when confronted with distorted interpretations of the history of our own subject. 5 00:00:35.100 --> 00:00:45.100 But as intellectual history is often closely linked with political and social history, the same ideological forces which weave and shape myths here may be present there as well. 6 00:00:45.100 --> 00:00:51.100 And that's sort of the moral of my story, I guess, from my presentation this afternoon. 7 00:00:51.100 --> 00:00:57.100 So I want to start out with what my professors taught me about the history of my discipline. 8 00:00:57.100 --> 00:01:07.100 A miracle happened in 1871 when three men, simultaneously and independently, discovered two concepts that changed the course of economics. 9 00:01:07.100 --> 00:01:17.100 The two ideas were briefly marginalism, the distinction between marginal utility and total utility, and subjectivism, or the subjective theory of value. 10 00:01:17.100 --> 00:01:27.100 Modern economics, according to this story, is built on the foundations of this dual foundation discovered by these three people. 11 00:01:27.100 --> 00:01:32.100 It's called neoclassical economics because it contains something new and something old. 12 00:01:32.100 --> 00:01:39.100 The new are these two ideas and the old is the social coordination story of classical economics. 13 00:01:39.100 --> 00:01:44.100 That was what I was taught, to the extent that I was taught anything when I was a student. 14 00:01:44.100 --> 00:01:45.100 when I was a student. 15 00:01:45.100 --> 00:01:49.980 And we now know that this story is pretty much wrong. 16 00:01:49.980 --> 00:01:51.980 Gosen and others understood the distinction 17 00:01:51.980 --> 00:01:56.260 between marginal and total utility long before 1871. 18 00:01:56.260 --> 00:02:00.060 The Spanish scholastics, the French physiocrats, and others, 19 00:02:00.060 --> 00:02:02.620 maybe even the young Adam Smith, understood 20 00:02:02.620 --> 00:02:06.740 the subjective theory of value, again, long before 1871. 21 00:02:06.740 --> 00:02:11.540 And then, Jaffé, in a really insightful article in 1976, 22 00:02:11.540 --> 00:02:27.540 I've just pointed out that Jevons, Vollross and Menger really had quite different perspectives on the nature of economic theory or the nature of economic inquiry, even though their views are often homogenized, at least in the standard telling. 23 00:02:27.540 --> 00:02:33.300 And a more accurate story, I suppose, would be that most of what people understand as economics today 24 00:02:33.300 --> 00:02:39.620 really is Volrazian neoclassical economics as opposed to Javonsian or Mangerian. 25 00:02:39.620 --> 00:02:44.340 Not surprising news, I suppose, to anybody in this room. 26 00:02:44.340 --> 00:02:47.940 What does this matter? Well, I think it matters for two reasons. 27 00:02:47.940 --> 00:02:53.020 First, after 2008, it's been a hard, hard slog for economics generally. 28 00:02:53.020 --> 00:02:56.100 The credibility of our discipline has suffered. 29 00:02:56.100 --> 00:03:05.100 There have been all kinds of criticisms of neoclassical economics in the scholarly as well as in popular discussions. 30 00:03:05.100 --> 00:03:13.100 But this criticism doesn't differentiate among these competing alternative neoclassical traditions. 31 00:03:13.100 --> 00:03:24.100 The second reason that I think it matters is because of the weakened state, the disheveled state of economic methodology over the past 25 years. 32 00:03:24.100 --> 00:03:37.100 One of my hobbies is I study and write about and teach about economic methodology, and economists are probably more wary than ever about any sort of claims of scientific status for our discipline. 33 00:03:37.100 --> 00:03:48.100 So this presentation is an attempt to focus on what I think is the neglected economic methodology of Carl Menger, founder of the Austrian School. 34 00:03:48.100 --> 00:03:58.100 And I'll speculate a little bit at the end about how the history of economic ideas might have been different had Menger's ideas in 1883 been taken more seriously than I think they have been. 35 00:03:58.100 --> 00:04:05.100 Okay, Carl Menger, there he is, born in 1840, initially studied law and political science. 36 00:04:05.100 --> 00:04:14.100 He did all kinds of things, but the thing that I've highlighted is he was what today we might call a commodity market analyst for a while. 37 00:04:14.100 --> 00:04:18.500 before he turned to economics in 1867. 38 00:04:18.500 --> 00:04:21.500 And my understanding is that he was a bit of a problem student 39 00:04:21.500 --> 00:04:27.100 because he kept correcting his professors as they were explaining to him price theory of the day 40 00:04:27.100 --> 00:04:30.100 and his correction always seemed to be based on 41 00:04:30.100 --> 00:04:33.700 well, I've just studied commodity markets for a considerable part of my life 42 00:04:33.700 --> 00:04:37.300 and that's not the way prices actually get formed and that's not what they mean. 43 00:04:37.300 --> 00:04:40.500 So in four years, he went from that to producing 44 00:04:40.500 --> 00:04:43.900 what I think is one of the most masterful treatises in economic theory ever, 45 00:04:43.900 --> 00:04:57.900 in 1873, he published his investigations, which is his methodology book, and that's mostly what I'm going to be talking about in my presentation today. 46 00:04:57.900 --> 00:05:10.900 He was involved in this thing called the Methodon-Schreit, this dispute about methods, retired in 1902 and died in 1921, and he was an avid fisherman, so that's why I'm wearing my fish tie today. 47 00:05:10.900 --> 00:05:15.900 Today, I'm an avid fisherman as well, so I have this sense of kinship with Menger. 48 00:05:15.900 --> 00:05:21.260 Okay, Menger's methodology, by Menger's methodology, I'm not meaning his method, I'm meaning more 49 00:05:21.260 --> 00:05:26.100 his philosophy of science, his science theory of economics, his theory of economic knowledge 50 00:05:26.100 --> 00:05:28.220 generally. 51 00:05:28.220 --> 00:05:34.100 And the question, the point that I want to make is, well, what did economics look like, 52 00:05:34.100 --> 00:05:37.100 scientific economics look like according to Menger? 53 00:05:37.100 --> 00:05:42.140 And it turns out, much to my surprise, as I delved into his investigations, I don't 54 00:05:42.140 --> 00:05:44.380 think that we can call Menger an apriorist. 55 00:05:44.380 --> 00:05:48.620 We certainly can't call him a logical positivist, a scientific realist, an instrumentalist or 56 00:05:48.620 --> 00:05:49.620 a dualist. 57 00:05:49.620 --> 00:05:52.420 And he certainly wasn't a retortician. 58 00:05:52.420 --> 00:05:56.920 In other words, he differed from virtually all the main views of economic methodology 59 00:05:56.920 --> 00:06:00.360 that are circulating competing with one another today. 60 00:06:00.360 --> 00:06:04.520 And I don't think that his actual methodological views have received the attention that they 61 00:06:04.520 --> 00:06:16.280 Menger's theory of economic science is that progress in economic scholarship takes place 62 00:06:16.280 --> 00:06:24.280 as a result of the sort of rivalrous interaction among three branches, he called them orientations, 63 00:06:24.280 --> 00:06:29.080 and today in kind of modern language I think we might call these theoretical economics, 64 00:06:29.080 --> 00:06:32.440 and empirical economics and applied economics. 65 00:06:32.440 --> 00:06:36.920 And I call this Menger's methodological milking stool 66 00:06:36.920 --> 00:06:40.400 because none of the three elements trumped one another, 67 00:06:40.400 --> 00:06:44.240 that they were sort of complementary to one another. 68 00:06:44.240 --> 00:06:46.120 And this is a picture of a milking stool. 69 00:06:46.120 --> 00:06:48.360 My department's in an agricultural college 70 00:06:48.360 --> 00:06:51.640 and I find I still have to explain to even some of my students and colleagues 71 00:06:51.640 --> 00:06:55.800 that a milking stool is a particularly unusual piece of furniture. 72 00:06:55.800 --> 00:06:57.400 It has three legs. 73 00:06:57.400 --> 00:07:04.400 And the reason it has three legs is because a three-legged stool in general is stable on an uneven floor, like a barn. 74 00:07:04.400 --> 00:07:10.400 And just like a milking stool, Menger's view of economic science had these three legs. 75 00:07:10.400 --> 00:07:15.400 There was the theoretical leg, the empirical leg, and the applied leg. 76 00:07:15.400 --> 00:07:24.400 And it was the synergies and also the rivalry among those three things that made the stool, in some sense, work. 77 00:07:24.400 --> 00:07:35.400 Menger's theory of economic knowledge was that in each of these orientations, each of these elements, our knowledge of economic phenomena is always partial and it's always corrigible. 78 00:07:35.400 --> 00:07:41.400 So in some respects Menger was like a pre-postmodern when it came to his theory of economic knowledge. 79 00:07:41.400 --> 00:07:46.400 Other aspects of his methodology, he seems to be quite clearly in the unity of science camp. 80 00:07:46.400 --> 00:07:50.400 In other words, he doesn't seem to maintain that economics requires its own methodology, 81 00:07:50.400 --> 00:07:56.400 and his own methodology, that science has a methodology and economics fits in that. 82 00:07:56.400 --> 00:08:01.400 He does acknowledge that the subject matter of economics was differentiated from other branches of science, 83 00:08:01.400 --> 00:08:06.400 but that was true of other disciplines as well. 84 00:08:06.400 --> 00:08:14.400 And a very important concept in Menger's methodology and also in his knowledge theory is this concept of complexity 85 00:08:14.400 --> 00:08:20.560 and that various levels of complexity are present in the subject matters of scientific inquiry 86 00:08:20.560 --> 00:08:25.600 and that will have implications for the relative importance of these, of the three legs of the 87 00:08:25.600 --> 00:08:31.600 milk stool. Another view that he had on methodology was that scientific advance in general and in 88 00:08:31.600 --> 00:08:38.160 economics in particular is episodic. He was almost Kuhnian in that respect and that advances occur 89 00:08:38.880 --> 00:08:43.440 in the three constituent elements at different rates and at different times. So we might get 90 00:08:43.440 --> 00:08:48.120 It's stuck on one of the legs, and then a breakthrough will happen on another leg. 91 00:08:48.120 --> 00:08:53.680 Okay, so what he called the exact orientation of theoretical research, or what I'll call 92 00:08:53.680 --> 00:08:59.720 theoretical economics, he described as atomistic, abstract, essentialist, concerned with the 93 00:08:59.720 --> 00:09:05.840 question of, well, what is it that we're studying, and why is it the way that it is? 94 00:09:05.840 --> 00:09:11.240 And the goal of this orientation was to reduce complex economic phenomena to their simplest 95 00:09:41.240 --> 00:10:09.240 He makes this very important point that I think hasn't received as much attention as it deserves is that exact research may not be able to fully, I'm going to say, deconstruct complex economic phenomena, at least at a given point in time, and so here's where this complexity theme comes in. 96 00:10:09.240 --> 00:10:14.040 What he called the historical or historical empirical orientation of theoretical research, 97 00:10:15.080 --> 00:10:21.080 I'll call empirical economics, investigates the individual aspects of phenomenon, identifies 98 00:10:21.800 --> 00:10:27.720 typical empirical relationships among phenomenon and produces what he called empirical laws. These 99 00:10:27.720 --> 00:10:35.400 are different from exact laws, they're statistical and this may be the only option available for 100 00:10:35.400 --> 00:10:44.400 He acknowledged that empirical laws were unavoidably limited by the problem of induction, which he attributes to Aristotle, not Hume. 101 00:10:44.400 --> 00:10:51.400 He also seems to be aware of the problem of theory-laden observation, these are sort of modern philosophy of science concepts, 102 00:10:51.400 --> 00:10:55.400 and also of the problem of observational equivalence. 103 00:10:55.400 --> 00:10:59.840 And he also seems to be aware of the problem of theory-laden observation. 104 00:10:59.840 --> 00:11:02.680 These are sort of modern philosophy of science concepts. 105 00:11:02.680 --> 00:11:05.720 And also of the problem of observational equivalence. 106 00:11:05.720 --> 00:11:11.980 So he was certainly very cautious about the degree to which this empirical historical research 107 00:11:11.980 --> 00:11:13.600 could produce knowledge. 108 00:11:13.600 --> 00:11:18.760 But nevertheless, it was, I think, a necessary part of his science theory. 109 00:11:18.760 --> 00:11:23.520 Then he also talks about applied economics or policy or the theory of finance. 110 00:11:23.520 --> 00:11:28.520 I'll call it Practical Economics, or maybe the modern term might be Applied Economics. 111 00:11:28.520 --> 00:11:31.520 And this is the recognition of practical problems and experiences 112 00:11:31.520 --> 00:11:35.520 and efforts to address those problems often give rise to knowledge. 113 00:11:35.520 --> 00:11:39.520 And I think this occurred in Menger's own career 114 00:11:39.520 --> 00:11:43.520 when he was frustrated with the way that economists of his day, his professors, 115 00:11:43.520 --> 00:11:47.520 were theorizing about the origin and the nature and the formation of prices 116 00:11:47.520 --> 00:12:06.520 I think Menger's economics, looking back to 1871, are consistently a reflection of his methodology, his value theory, his theory of exchange, his theory of marketability, which leads him to his theory of money, are all consistent with his methodology. 117 00:12:06.520 --> 00:12:12.520 I'll just quickly go through this because I think this isn't news to anybody in this room. 118 00:12:12.520 --> 00:12:17.520 I'll just quickly go through this because I think this isn't news to anybody in this room. 119 00:12:17.520 --> 00:12:23.520 This idea that value is subjective, it exists in human minds, it does not exist in the thing. 120 00:12:23.520 --> 00:12:28.520 And his extension of value theory back to what he called goods of higher order, 121 00:12:28.520 --> 00:12:33.520 his integration of value theory back to concepts of production, 122 00:12:33.520 --> 00:12:39.520 his theory of exchange is based on this theory of value, 123 00:12:39.520 --> 00:12:45.520 which again was developed with this atomistic approach. 124 00:12:45.520 --> 00:12:52.520 In the process of doing a Vivelli-Siri exchange, he rehabilitates the reputation of intermediaries 125 00:12:52.520 --> 00:13:00.520 who appeared to not do any physical transformation to goods but nevertheless made money from doing it. 126 00:13:00.520 --> 00:13:08.520 His theory of the commodity based on his theory of the exchange was foundational to his theory of money 127 00:13:08.520 --> 00:13:14.520 and many particularly metallic money in the form of gold and silver. 128 00:13:16.520 --> 00:13:23.520 The one aspect of Menger's methodology book, which has attracted attention among modern Austrians and others, 129 00:13:24.520 --> 00:13:29.520 especially Hayek, is Menger's distinction between two types of social institutions, 130 00:13:30.520 --> 00:13:37.520 the intentionally designed or positive legislation institutions and what Menger called organic institutions. 131 00:13:38.520 --> 00:13:53.520 and his idea that the mission of social science is to try and explain the origins and the function of those organic orders. 132 00:13:53.520 --> 00:14:00.520 He applied his methodology to the theory of money. Money emerged before recorded history. There aren't any data. 133 00:14:00.520 --> 00:14:08.520 So he developed his theory of the origin of money atomically using his methodology of exact research. 134 00:14:08.520 --> 00:14:16.520 Alternative history, I'm kind of working on this part to kind of fill in what this would look like. 135 00:14:16.520 --> 00:14:22.520 Suppose we had taken Menger's methodology more seriously in the 1830s when it was produced. 136 00:14:22.520 --> 00:14:25.520 What would modern economics look like? 137 00:14:25.520 --> 00:14:40.520 And it seems to me that we would have avoided what I view as a centuries long fruitless competition between theoretical economics and empirical economics, as those two branches of our subjects struggled for supremacy. 138 00:14:40.520 --> 00:14:44.520 Menger's view was that neither one of them was preeminent. 139 00:14:44.520 --> 00:14:53.520 And that theoretical economics and empirical economics would have existed in a relationship like the relationship between theoretical and experimental physics and engineering. 140 00:14:53.520 --> 00:15:06.520 So that maybe instead of the Big Bang Theory being about physics and engineering it might have been about theoretical economics, applied economics and experimental or empirical economics. 141 00:15:06.520 --> 00:15:10.520 And then we'd all be in a sitcom rather than doing what we do. 142 00:15:10.520 --> 00:15:19.520 So unfortunately the milking stool that 20th century methodologists in economics ended up with is a milking stool that looks like this. 143 00:15:19.520 --> 00:15:26.520 One of my former graduate students read an abstract of this paper and he sent me this picture, and in a sense that's what we have. 144 00:15:26.520 --> 00:15:31.520 We have a one-legged, we have a series of competing one-legged milking stools. 145 00:15:31.520 --> 00:15:36.520 And let me just close with some examples, because I'm out of time, right? I have one minute? 146 00:15:36.520 --> 00:15:44.520 Okay, I think that there are examples, and some of these are kind of happy examples and some of them are not so happy, 147 00:15:44.520 --> 00:15:50.520 of what I'll call Mengerian trilateralism or the Mengerian three-legged milking stool. 148 00:15:50.520 --> 00:15:58.520 Ronald Coase, I think, is an example. Most people don't realize this, but he began his career in agricultural economics working on the hog cycle in Britain. 149 00:15:58.520 --> 00:16:07.520 But later on, he observed that something called transaction costs exist. Otherwise, there'd be no reason to form business firms. 150 00:16:07.520 --> 00:16:11.520 And then he looked at the microeconomics his professors were teaching him and said, 151 00:16:11.520 --> 00:16:18.160 and said there's no chapter, there's no section, there's no acknowledgement of transaction costs in microeconomics, 152 00:16:18.160 --> 00:16:25.360 therefore there's something wrong with microeconomic theory and that should be fixed, and as far as I understand, he maintains that position to this day. 153 00:16:25.360 --> 00:16:33.560 Elmer and Holbrook working, again a couple of agricultural economists who tried to estimate demand curves for agricultural commodities. 154 00:16:33.560 --> 00:16:43.560 They were applied economists, but basically discovered that sometimes when they ran these correlations the demand curve sloped up and sometimes they sloped down. 155 00:16:43.560 --> 00:16:46.560 And nobody seemed to understand how that could be the case. 156 00:16:46.560 --> 00:16:50.560 Well, they discovered what econometricians now call the identification problem. 157 00:16:50.560 --> 00:16:55.560 They weren't sort of theoretical econometricians in their own right. They were just trying to do some stuff. 158 00:16:55.560 --> 00:17:00.560 And then they discovered this problem, which the theoreticians then had to acknowledge. 159 00:17:00.560 --> 00:17:30.560 And then my final example is George Akerlof, his paper on lemons, the market for lemons was mentioned earlier, his counterpart Eric Bond is hardly ever mentioned, but Akerlof produced this theoretical paper about the market for lemons and the prediction among other things in that paper was that there would never ever be transactions in used cars anywhere in the world, which is sort of a surprising prediction, but it got him the Nobel Prize. 160 00:17:30.560 --> 00:17:33.560 Well, I'm going to go out and test this, because it was a theoretical paper. 161 00:17:33.560 --> 00:17:34.440 I'm going to go out and test it. 162 00:17:34.440 --> 00:17:37.480 And I'm going to test it in the market for used pickup trucks. 163 00:17:37.480 --> 00:17:40.400 Because if you're ever going to find a market for lemons phenomenon, 164 00:17:40.400 --> 00:17:42.080 that would be the market to look for it. 165 00:17:42.080 --> 00:17:45.240 And what Eric found is that, lo and behold, there's an extensive and well-developed 166 00:17:45.240 --> 00:17:47.880 market in used pickup trucks in the United States. 167 00:17:47.880 --> 00:17:51.040 So here's an example of where the trilateralism didn't work. 168 00:17:51.040 --> 00:17:56.240 Vaughn didn't get the Nobel Prize, but Akerlof did. 169 00:17:56.240 --> 00:17:57.280 So I think I'm out of time. 170 00:17:57.280 --> 00:18:01.280 So, I'll stop.