General economic policy

 

 

01. Approaches

02. Methods

03. Target analysis

04.  Means analysis

05.  Promoter analysis

06. Political economy

07. Welfare economy

08. Order analysis

09. Order conception

10. Order dynamics

 

 

Chapter 2b: Methods

 

 

Outline:

 

1. Introduction

2. Are there economic laws?

2 a. The controversy between Karl Menger and Gustav von Schmoller

2 b. Friedrich List: Are laws confined to a historical phase?

2 c. Historical laws in terms of economy stages

2 d. Developmental laws

2 e. Human liberty prevents laws

2 f. Too little empirical knowledge?

2 g. Von Hayek: Confinement to pattern statements

2 h. Walter Eucken: Historically different forms

3. The principle of the non-normativity

3 a. Max Weber: Freedom from value judgment

3 b. Assessments within the radius of science

3 c. Three different positions

3 d. The socio-technical restatement

4. The reproach of the model platonism

4 a. Theory as thinking tool

4 b. Hans Alberts reproach against the neoclassical economics

4 c. The importance of models of thought

 

 

3. The principle of the non-normativity

 

                  3 a. Max Weber: Freedom from value judgment

 

The representatives of the historical school were secondly attacked not only because of their method. It was made the reproach that they were trying to justify value judgments scientifically. Especially Max Weber arose as a proponent of a value-free science. An empirical social science can only provide information about how certain social problems are actually solved, not how they should be solved best. A value judgment can only be given because of an ideological position, but cannot be proved scientifically.

 

However, this does not necessarily mean that on the part of scientists no political advice should be given. It would quite match to the principle of freedom from value judgment when a scientist would derive a specific recommendation - perhaps along with some other facts - from superodinated objectives. The principle of freedom from value judgment relates only to the impossibility of being able to verify scientifically the ultimate basic values.

 

Generally, in the context of policy advice scientists are asked to recommend measures which appear suitable to achieve certain goals. The targets are here predetermined by the politicians, so they are in some measure taboo for scientists and the proposals which are then submitted to the politicians can be derived from these predetermined objectives. Again, here it is about valuing statements by the science but without violating the principle of freedom from value judgment, since this kind of evaluation is only a logical conclusion of the aims targeted by politicians.

 

However, Max Weber by no means wanted to exclude the scientists from the political debate. Max Weber himself repeatedly joined in the political debate and therewith indicated the fact that the political commitment of a scientist does not contradict the ideal of a value-free science. Of course, the scientists also can comment on basic aims, attack or defend these. This is a right of every citizen and of course, the scientists may not be exempted from it.

 

Well the scientists should not leave his audience (reader) in the dark about when he refers to the analysis of factual connections and when he talks judgmental about political issues. With this demand Max Weber wanted to prevent that personal value judgments are carried forward in scientific garments and, due to this hidden and surreptitious manner, claim a higher truthfulness than they are in fact assigned to. At the level of the final basic values, which cannot be attributed to any other higher values, the opinion of a scientist is worth as much as the opinion of any citizen, not more but not less.

 

This requirement is especially true in a pluralistic society in which there is no consensus over ultimate basic values. Here the risk is close that the scientist presents his own worldview in the garments of scientific results and thus valid for all and therewith ensures unauthorized starting opportunities to himself.

 

A political statement of a special kind can be that the scientist refuses to give the politicians or practitioners certain factual information. Especially relevant is this issue in dictatorships. Even when the scientist confines himself to answering factual questions, his answers may empower the dictator to suppress the population more than before. But here it must be said that this right of refusal in no way contradicts to the ideal of value-free science.

 

Basically Max Weber's requirement results from assessments, which were already previously formulated by the representatives of early liberalism. So David Hume had already found that out of Being never an Ought can be derived directly. Reason alone would also not be able to derive moral rules. Moral conceptions would always be caused by emotions. The reprehensibility of e.g. a murder arises not only from rational considerations, but first of all from the feeling of disapproval.

 

 

3 b. Assessments within the radius of science

 

From the postulate of value-free science formulated by Max Weber results by no way that science has nothing to do with values. We would like to show some value references below that are quite compatible with the ideal of a value-free science.

 

It should be undisputed that values and assessments go down as an object of study in the empirical social science. The formation of social assessment processes is even a major problem of social science. The traditional national economics primarily examines the determinants of prices. But what else is the price than an evaluation of the goods?

 

Three sets of questions interest in this context. An empirical social science first asks for the determinants of socially relevant values and assessments. So the economic theory points out that the price of a good is produced as resultant of the structure of supply and demand. Furthermore, we have to ask what social consequences are arising from a certain assessment. So perhaps a wage increase - a reassessment of the work - can increase productivity.

 

Finally, it is a legitimate concern of science to illuminate the logical and factual relations of individual values. Our environment has become so complicated that we do not readily recognize whether two values are dependent or mutually exclusive. Who wants to decide without theoretical knowledge whether the goals of price stability and full employment exclude each other?

 

An empirical social science wants to discover primarily factual connections. This objective must not be a self purpose. Knowing these factual connections serves us rather to facilitate decisions in politics and in everyday life. We are constantly faced with decisions. We can tread several ways in a case and we have to get clear what are the alternatives we want to tread.

 

If we behave rationally, we decide in favor of the alternative with the most advantages and the least disadvantages. Which way seems most advantageous, in fact can only be clarified by assessment. However, this must be preceded by the knowledge of the consequences associated with each alternative. Assessment is nothing else than to estimate the effects and to evaluate them. However, the knowledge of these effects renders the scientist. By giving the practitioner the conditions for a rational decision, the scientist meets one of its most important functions to the society.

 

But if a rational decision requires the previous knowledge of the factual connections, it may be that we need to review our policy decisions due to new knowledge. While it is not possible to conclude immediately from the Being to the Ought. This does not mean that changes in Being could not also necessitate changes in Ought.

 

Knowledge is not only a prerequisite for a rational assessment. In turn itself depends in many ways on our value judgements. It is an old and repeatedly re-confirmed empirical proposition that the world view of the individual scientist as well as of his time decisively influence the scientific progress. The worldview can inhibit scientific progress, but also can promote it. Worldview and science are to be separated one from another only logical, but not factual.

 

Truths are often uncomfortable and adversely to self-interest and therefore often remain unspoken. It is also a known fact that we sometimes do not see things because we do not want to see them. We observe things not as they are, but rather as we have learned to see them. Even the most objective observation comes as a result from a variety of psychological factors.

 

Of course, we should not make a maxim of this experience. Although psychological and ideological factors influence frequently on our scientific work, this is no reason to present this influence as an ideal. On the contrary: the fact that such an influence appears in principle possible warns us to double attention. Our demand, to eliminate this influence wherever possible, remains.

 

However, we also should not overestimate this influence. Science has developed methods to keep it down. For an individual scientist the correlation between worldview and knowledge may be considerable. However, what applies to the individual scientist may be far from applying to the science as a whole. Also today the knowledge is created more and more from a cooperation based on division of labor.

 

If an individual scientist gets to new hypotheses because of empirical studies, the development process of this knowledge is by no means completed. Only the first step is done. For our hypothesis to become a generally accepted theory, it requires a thorough scientific discussion. Just in this facility is situated a key element of scientific work at all. In this way a hypothesis can be criticized and if appropriate disproved. The result of this discussion is in a much lesser extent vulnerable for ideology and interests than the hypothesis of a single scientist.

 

Worldview and interest can not only exert a negative influence on the scientific development process. On the contrary, the worldview of the individual researcher can emanate strong incentives that promote the knowledge process. In the long term probably just the fact that the ideological struggle is being fought on the scientific grandstand, will help to revise long-established prejudices. Therefore, one should be cautious in attempting a de-ideologization of sciences. Again, there can be an excess, even here there is a danger that together with the worldview we eliminate an interest in new knowledge.

 

From the proponents of value-bound science is often interposed against the concept of a value-free science, that the in every science necessary abstraction and selection of problems already brings an evaluation along. The reality would be so complicated that we always have to confine us to a few effect correlations. Thus we give certain problems priority, in other words, we evaluate.

 

The fact as such is not denied by the supporters of a value-free science. However, in this case it is a very different kind of evaluation that does not permit practical policy recommendations. Nevertheless, it must be acknowledged that the practitioner understands this selection sometimes in the sense of a recommendation.

 

Moreover, this selection problem indicates us that we can ever come to knowledge only because of certain evaluations. Whether we consider a hypothesis as confirmed by reality can not be decided only by scientific means. We have already seen that a hundred percent confirmation of a general statement is logically not possible. It requires a convention about when a theory is considered verified. This agreement is already an assessment.

 

From supporters of a value-free science is therefore not required that our knowledge must arise without evaluations; this is not possible at all. Much more it is doubted alone that out of the empirical work can be drawn immediately judgmental policy conclusions based on scientific results.

 

The scientist therefore has to keep on certain rules in his work. These do not only mind to guarantee the success of science, but also to eliminate as much as possible negative secondary effects that may arise from the scientific operation. Rarely not our knowledge could be improved by daring and doubtful experiments. Most scientists reject such practices, as they come into conflict with the basic human values. In acknowledgement of these rules enters another evaluation element in the field of science. But also this evaluation element is not drawn into conflict with the ideal of a value-free science.

 

Let us summarize the results of our reflections: The demand for value-free science in the sense of Max Weber must not be taken too literally. Every science has to do with values and evaluations. That is also not denied by most supporters of a value-free science. If one wants to, the program of a value-free science consists of a truism and of a demand well accepted by most scientists: From the truism that ought-sentences cannot be logically deduced alone from being-sentences, that therefore every political opinion also contains a core of personal volition, and out of the demand, approved by the majority, that in the discussion about political values the personal opinion of a scientist should not outweigh the opinion of another citizen.

 

               

3 c. Three different positions

 

If one accepts this principle of freedom from value judgment, there are basically only three different positions of a scientific examination of normative statements. Firstly one can present, together with Hans Albert, the opinion that a scientist had to confine itself to examine factual connections in terms of a factual analysis. The scientist could thus e.g. investigate and explain how a Keynesian fiscal policy would be affecting inflation, but using scientific methods he was unable to judge on the desirability of such measures as a scientist. Thus he had - in his capacity as a scientist- to refrain from any normative statements about the desirability of policies or conditions.

 

A second position on this question took Gerhard Weisser (by the way the teacher of Hans Albert). The scientist could - without coming into conflict with the principle of freedom from value judgment - very well advance to normative statements on policies and conditions if he would disclose previously the value premises, due to which he came to these statements.

 

A scientific analysis in accordance with this scientific normativism formulated by Gerhard Weisser always begins thereafter with the disclosure of the value premises of the scientist, followed by the then correct derivation of normative statements from those disclosed value premises for concrete policies. Such an approach should - so meant Weisser - therefore be preferable to that way proposed by Hans Albert, as the scientist was much better able to draw conclusions from value premises and material contexts than a normal economical untrained citizen would be.

 

Though here would be noted critically, that these conclusions in this case have validity only ever for those citizens who are sharing the value judgments of the scientist. The danger here is that the group of scientists gets divided into ideologically structured subgroups and that therefore the claim, that scientific statements should be valid regardless of the ideological position of the individual scientist, is lost.

 

A third position took the traditional welfare theory. In a first step it tried to check which final value premises are accepted by the vast majority of citizens, and then cleared in a second step, the concrete measures and economic systems that are necessary in order to realize this generally accepted basic objectives. This third position also does not contradict the principle of freedom from value judgment formulated by Max Weber.

 

 

3 d. The socio-technical restatement

 

In the first chapter of this lecture we have seen: Social facts can be presented as a cause-effect relationship or an aim-means relationship. In both cases, the scientist confines himself to a factual analysis and abstains from any value judgment.

 

We bring an example: An increase in consumer demand increases - when certain conditions are met - the level of employment. The increase in consumer demand is considered as a cause, the increase in the level of employment is considered as an effect. The same situation we can restate in an aim-means relationship. This is known as a socio-technical restatement. Our proposition would then mean: If we wish to increase the level of employment (so if we pursue the aim to increase the level of employment), we need to increase consumption demand (or also a different demand). Measures which lead to increase in consumption would then be the means to achieve the employment aim.

 

With this conditional recommendation the scientist does not issue an assessment, he remains within the scope of a factual analysis. We could even rephrase this statement so that at first sight their conditional content is no longer recognizable and initially looks like a categorical recommendation: To increase the level of employment an increase in consumer demand is required.

 

 

4. The reproach of the model platonism

 

4 a. Theory as thinking tool

 

A controversy about the method within the economics grew thirdly from the very different use of the word 'theory'. Some scientists understand theory in the sense of thinking tool. Although a thinking tool allows gaining control over the social reality, it though must not be confused with the actual knowledge of facts correlations.

 

The theory in terms of a thinking model would be a way to expand our knowledge, but it would not be this knowledge itself. Such a theory would confine itself to arrange already known facts and to draw further conclusions from given assumptions. The discovery of new facts relationships would be up to the sociologist, not to the economic theorist. Economic theory itself could not check the validity of the assumptions. If one disregards logical thinking errors, a theory cannot be right or wrong, but at most be up to date and appropriate or may not.

 

 

4 b. Hans Alberts reproach against the neoclassical economics

 

These widespread theories of the neoclassical theory were attacked by the neo-positivists around the middle of the last century. So meant Hans Albert that the economic theory would have degenerated to a model platonism. Of a real theory could only be spoken if their statements relate to fact relationships that are already checked on the reality or at least could be checked. The neoclassical theory in contrast would issue propositions that are merely derived logically from hypothetical assumptions and yet need the empirical revision, as already proven empirical truths.

 

Moreover, the neoclassical economics work with assumptions that already have been disproved due to past empirical studies. Finally, the neoclassical economics, in the attempt to defend classic positions, had more and more fled in tautologies, which are logically consistent always right, but just because of this it would have solidified to an empirically trivial empty formula.

 

Despite all the justified criticism of the neoclassical economics, however, most neoclassical theories quite allow to be reformulated so that they contain empirically meaningful statements, which can be checked empirically. Take the case of the marginal productivity theory of wages. This theory developed by John Bates Clark corresponds in its original form, in fact, to the features scourged by Albert.

 

This theory is based on three assumptions: first, the assumption of profit maximization, secondly the assumption that the entrepreneurs behave as quantity adjusters, which take the price as the date from the market and third, the adoption of a production function, which such as the Cobb-Douglas production function is determined by the law of diminishing partial marginal returns of work.

 

It is not considered a task of this theory to test these assumptions empirically. They are assumed to be given. When these theorists are reproached that these assumptions do not at all correspond to the reality, it is countered that this theory does not take any position on this issue, merely it is postulated that if these assumptions are given, the alleged conclusions, the wage corresponds to the marginal product of labor, would apply.

 

These conclusions now result in fact from the three assumptions alleged. Supposed that an entrepreneur demands a certain amount of work. He faces the question of whether he should extend his demand for labor. He will expand it, if he can increase his profit by this. And this is exactly the case when the increases in expenditure, due to the more demand for labor, are lesser by one unit, namely the wage rate, than the hereby acquired surplus, that is to say the marginal product of labor. Therefore the entrepreneur will expand his demand for labor as long until the marginal product of labor just corresponds to the wage rate given externally.

 

These conclusions result in fact solely from the assumptions made and therefore, do also not include any additional information, which go beyond what we already assume in the three assumptions.

 

We will now try to reformulate this theory so that it consists of falsifiable hypotheses. First we make the assertion that the entrepreneurs are in competition with each other. This is not a self-evident assumption, it has to be verified empirically, however, it can be classified as realistic, if we assume that a competition authority effectively prevents the formation of monopolies.

 

The second hypothesis says then that under competitive conditions strong incentives go out to enterprises to take advantage of any increase in profits, otherwise they run the risk of being thrown out of the market by the competitors. Here too, it is by no means a self-evident assumption. We could for example insinuate that enterprises renounce certain forms of profit-taking in kind of an informal lockstep; they can afford this attitude, because they assume that almost all other competitors behave in the same way. Nevertheless, this hypothesis of profit maximization may be quite broadly in line with reality.

 

As a third hypothesis a Cobb-Douglas production function is then assumed which indeed again is not self-evident, we know also other production functions such as the classical production function. But here too, we can assume that this function has been repeatedly tested empirically.

 

 

4 c. The importance of models of thought

 

With the models of thought we are trying to organize systematically a complex of statements about a clearly defined factual area. But in what consists the organizing principle? We examine every statement to see if it is dependent on the other statements of the system. Statements that can no longer be traced back to other statements of the system, and therefore must be taken as given, we call premise or data of the model. The assumptions derived from these premises however are a matter of dependents, variables or problem sizes.

 

A first task of a model of thought consists in getting clear about the consequences that imply certain assumptions. The assumptions as such are regarded as established. The model of thought is not able to check their validity and closeness to reality. We do not get to know more than we have already implicitly alleged in the assumptions. Surely, using a model of thought we can clarify our actual knowledge, as we are not always readily aware of all consequences of certain assumptions.

 

Secondly, we can use models of thought to make us aware of the requirements of certain statements. It is based on the same logical relationship. While in the first case we presuppose the assumptions as known and ask us for the consequences, here we assume a concrete, publicly expressed statement and we get clear under which conditions such statement can ever claim validity.

 

Thirdly, models of thought can fulfill the task to work out the problems of a situation. The model of thought allows us to uncover the logical relationships between the currently as valid regarded assumptions about reality. We give ourselves an account of what we know and what we do not know yet. In some circumstances we may come across some logical contradictions of various statements, and eventually we can decide whether we can clarify all known facts with the help of our current knowledge. The model of thought helps us to formulate more clearly the not yet satisfyingly answered questions.

 

Models of thought can help us fourthly to form new hypotheses. Not yet empirically verified statements about the reality we understand as hypotheses. A priori, the most diverse connections are conceivable. We would however, violate the principle of rationality, if we painstakingly wanted to check empirically all possible connections for validity. In practice, we apply a promising method. Based on our previous experience we resort among the millions of possible connections a small number, which seem realistic and check them in the reality. Also with this method the model of thought serves us well. Yet it indicates us which hypotheses match best to our current knowledge.

 

A fifth task of the model of thought is in the pedagogical. We do not just uncover new facts connections, but also have to make the students understand the already known, but often difficult to understand, relationships. Here it may be appropriate for educational reasons, to initially start from knowingly unrealistic but simple assumptions to give in this way evidence to certain relationships more clearly. Have the simplest connections got clear to the student, it is much easier to adapt the model of thought to the reality and now understand even complicated structures.

 

So it is usual to examine in a first step the circuit connections of a closed national economy without economic activity of the state, not because these assumptions are viewed to be realistic, but because under these simplified assumptions specific relationships can be recognized better. It is then easy to remove these unrealistic assumptions in a second step and to show that the initially identified connections in principle retain validity even under more realistic, more complex assumptions.