Interpreting Macroeconomics

Explorations in the History of Macroeconomic Thought

Roger E. Backhouse

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781134741052
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Interpreting Macroeconomics explores a variety of different approaches to macroeconomic thought. The book considers a number of historiographical and methodological positions, as well as analyzing various important episodes in the development of macroeconomics, before during and after the Keynesian revolution. Roger Backhouse shows that the full richness of these developments can only by brought out by approaches which blend both relativism and absolutism, and historical and rational reconstructions. Examples discussed include Hobson, Keynes and Friedman.

Chapter 1

Methodology, rhetoric and the history of macroeconomic thought

METHODOLOGY, RHETORIC AND HISTORIOGRAPHY

Once upon a time (to inject the appropriate fairy-tale element into the story) historians of economic thought believed that they knew how to do their subject. The question ‘Why?’ might have been difficult to answer in a way that persuaded other economists, but between them historians of economic thought such as Viner, Schumpeter, Robbins, Bowley, Black, Hutchison and Blaug had established, by example as much as by explicit arguments, how the subject should be approached. The subject was represented in a number of surveys that have since become classics, notably Hutchison (1953), Schumpeter (1954) and Blaug (1968/85).¹ For these economists the history of economic thought had a number of characteristics.

1 It dealt with the way in which economic ideas had changed over time.

2 These ideas were to be explained and understood against the appropriate historical background, this including (a) cultural background; (b) sociological factors; (c) policy requirements; (d) developments in other disciplines; (e) biographical information on the economists concerned.

3 Ideas were to be appraised for (a) their logical consistency, (b) their compatibility with evidence either available at the time or subsequently discovered and (c) their implications for future developments in the subject.

Past economic theories might be appraised from the perspective of modern economic theory and the results of such appraisals might be used in explanations of why theories had succeeded or failed. This was, however, not the whole story. It was widely accepted that to explain why economic ideas had developed in the way they had, it was necessary to go beyond this— ‘external’ factors had to be taken into account. Most historians of economic thought were, therefore, absolutists in the sense outlined by Blaug (1968/85, p. 2). Understanding the historical context was necessary to explain why economic thought evolved as it did, but historical context did not justify the ideas, except in the sense that it might suggest that, given the information and techniques available to them, economists might have been justified in drawing the conclusions they did. It was as though they accepted the distinction emphasized by Popper between the contexts of discovery and justification.

To this extent, therefore, the history of economic thought was eclectic and pluralist. This pluralism arose from a recognition that though the appraisal of past theories in terms of modern theory was a valid, and important, exercise, there were other questions that needed to be answered. To explain the dominance of the Marshallian school, or the international transmission of economic ideas, sociological stories were told; Jevons’s approach to economics was explained by locating it in the context of his views on the nature of science; Ricardo’s views were illuminated by exploring the nature of his relationship with his mentor, James Mill; and so on. Different questions necessitated different methods of inquiry.

But this situation did not continue happily ever after. The first blow came with the entry of Kuhnian and later Lakatosian philosophy of science into the history of economic thought.² Economists interested in methodology turned to the history of economic thought as a testing ground for philosophical ideas. Kuhn’s picture of science developing through a series of paradigms and periods of normal science offered a way of making sense of the apparent unevenness in the growth of economic knowledge. Though their conceptions of science were very different, Kuhn’s concept of a paradigm was used to make sense of Schumpeter’s ‘classical situations’ and the accepted habit of seeing the history of economic thought in terms of classical, neoclassical and Keynesian economics.

This idea that the history of economic thought should be used as a testing ground for philosophical ideas was taken a stage further with Lakatos’s methodology of historical research programmes. This involved the idea that the way to test a methodology was to provide a rational reconstruction of the history of science—writing history as though science had developed in accordance with the methodology. If the rational reconstruction accounted for the main features of the actual history, without any need for recourse to ‘external’ factors (factors not part of the methodology) then this was evidence in favour of the methodology. The significance of this for our purposes is that it involves a conscious attempt to write the history of science (or economics) in a way that is influenced by philosophy.³

This use of history of economic thought as an adjunct to methodology had the benefit of making it clear why the history of economic thought was necessary. There were, however, costs. The main one was that Lakatosian rational reconstructions were seen as valuable exercises only as long as the philosophy on which they were based was considered useful. In the late 1980s Lakatosian methodology was called into question, to the extent that by the end of the decade support for it was very limited indeed (see Backhouse, 1994c). One reason for this loss of interest in Lakatos was the critique of ‘Methodology’ by McCloskey (1983, 1986). McCloskey’s claim that ‘Methodology’, a ‘modernist’ notion involving an indefensible presumption that methodologists could tell economists how better to do science, should be replaced by the study of rhetoric—of how economists persuade each other. To support this argument he produced a number of case studies in the rhetoric of economics. Though not presented as history of economic thought, they can be seen as contributions to it, for they provided new readings of important episodes. If McCloskey is right, historians of economic thought should be aiming to explain how economists have persuaded each other.

The other cost of such philosophically informed history of economic thought was that it appeared, by some standards, ‘thin’ and unhistorical. Taking up an idea proposed by McCloskey (1988), and inspired by work on the history of science, the sociology of scientific knowledge and literary criticism, Weintraub (1991a) argued that we should be writing ‘thick’ histories which recount the way in which economic ideas were negotiated within specific communities. Our standards should, he contended, be taken from history, not philosophy. Similarly Mirowski (1990) has been very critical of much writing on the history of economic thought, focusing instead on the underlying metaphors on which economic ideas are, he contends, dependent.

Rather different, though equally critical of ‘standard’ history, is Brown’s (1993) critique of ‘canonizing’ discourses. These are writings that present history as a unilinear progression towards modern theory, suppressing dissenting voices. We should, instead, she argues, be writing ‘decanonizing’ histories, sensitive to the variety of voices within our sources. This is a view strongly influenced by literary theory, critical of the notion that in searching for the meaning of a text we should be trying to find what was the original author’s intention. Like Weintraub she sees meaning as located in communities’ readings of texts.

Between them, these various ideas about how one should approach the history of economic thought have resulted in the subject looking very different from the way it looked up to, say, the mid-1970s. However, and this is one of the main themes of this book, it can be argued that, at least as regards the history of macroeconomics,⁴ the ‘traditional’ pluralistic approach to the history of economic thought is quite compatible with bringing to the subject insights obtained from areas such as methodology and rhetoric. This is argued explicitly in the three chapters in Part I.

The opening chapter tackles the issue of relativism through reviewing a book that adopts an extreme relativist stance. Dasgupta’s argument is that successive theories belong to different epochs, each characterized by the asking of a new set of questions. As a result, he claims, successive theories are independent of each other. It is impossible to speak of progress. The main response to this thesis is that when considering theories we need to consider the different levels at which a theory can be specified, ranging from, for example, general statements about the pursuit of self-interest leading to the coordination of economic activity to specific, numerical models of equilibrium in specific economies. At the former level it is hard to sustain the relativist argument, whilst at the latter level it is much easier. The other response is that there is enormous continuity in the history of economic thought, both in the questions asked and in the way in which economists sought to answer them. This is not to say that there are no discontinuities— clearly there are. But these discontinuities must not be exaggerated.

Dasgupta’s argument against what others have termed ‘Whig’ history is a practical one—that the nature of economics is such that a ‘Whig’ approach makes no sense. In contrast, recent critics of such history provide a philosophical argument in support of their case. This argument is the subject of Chapter 3, which takes up the charge, made most forcefully by Weintraub (1991a), that the constructedness of history undermines any basis for ‘Whig’ history (by this he means histories such as those written by Hutchison, Schumpeter and Blaug, that ask whether past theories were right or wrong). History should, he claims, be written as history, free from any philosophical baggage—free from the notion that theories might be progressing towards the truth. A useful way of tackling this problem is through the typology developed by Rorty (1984). In this typology the most significant distinction is between rational reconstructions, which read past ideas from the perspective of present-day ideas, and historical reconstructions, which understand past ideas in the context of their own times. Though he does not cite Rorty, Weintraub’s critique of ‘Whig’ history has much in common with Rorty’s arguments in favour of historical reconstructions. In particular, both are based on the notion that the constructedness of knowledge severely limits what we can say about truth, undermining epistemology.

The main argument against this critique of ‘Whig’ history, it is argued in Chapter 3, is that we are not faced with a choice simply between foundationalist epistemology and social constructivism. Once this is recognized, the Rorty-Weintraub case collapses. It is further undermined by two additional arguments. The first is that the distinctions Rorty draws between various types of history are blurred. It is never possible totally to escape from our current concerns in order to view the past on its own terms. There is thus always an element of rational reconstruction, or Whiggishness, in any history. Even Weintraub’s view that one should be writing histories that recreate the way in which ideas were negotiated within specific communities— ‘thick’ history—reflects a specific philosophical position. The second is that to abandon the notion of standards is to abandon the notion of appraisal. This means that the history of economic thought can no longer play a critical role within economics. The Rorty-Weintraub case is very conservative.

Chapter 4 explores further the idea of ‘thick’ history used by McCloskey and Weintraub. It distinguishes between the philosophical case for such history, discussed in Chapter 3, and the ‘historian’s’ argument that history is too complex to fit into any simple scheme. The problem with the latter is that it relies on an unanalysed notion of historical sensibility. Neither argument is persuasive. The conclusion is drawn that history is written for a variety of purposes, different purposes calling for different approaches to history.

MACROECONOMICS

Keynes is, arguably, central to any history of macroeconomics in the sense that contemporary macroeconomics emerged out of the debates initiated by Keynes’s General Theory of Employment, Interest and Money (1936).⁵ This is not to say that macroeconomics did not exist before Keynes—it did. Rather it is that the impact of the Keynesian revolution was such that previous approaches were, with a few exceptions, neglected in favour of a way of thinking about macroeconomic problems that originates in the debate over Keynes’s book.

Macroeconomics, as the subject is now understood, has a number of characteristics, of which the following are perhaps the most important.

1 It deals with aggregates, such as GDP, consumers’ expenditure, investment, employment, unemployment, and so on, most of which have generally accepted definitions.⁶

2 Behavioural relations do not necessarily take the same form as those that describe the behaviour of individual agents in the economy, even if they are derived from aggregating the behaviour of individual, possibly optimizing, agents.

The paradigm case of a macroeconomic model is thus determination of the equilibrium level of national income using the consumption function and the condition that in equilibrium saving equals investment. Such analysis makes sense only once it has been accepted that ‘national income’ is a meaningful variable to model and that categories of saving and investment have been defined. The consumption function is a macroeconomic law that need not have a direct parallel at a microeconomic level.

The chapters in Part II discuss four pre-Keynesian economists: Hobson, Walker, Mitchell and J.M.Clark. What they have in common is that they all tackled the ‘Keynesian’ problem of persistent unemployment. Though these economists are in no sense ‘typical’ pre-Keynesian economists (if there is such a thing) discussing them illustrates some of the important changes that differentiate macroeconomics after Keynes from much of what went before.⁷ One of the major changes is the development of concepts and techniques. For example, since the Keynesian revolution the terms saving and investment have acquired fixed meanings. The stock/flow distinction is clearly understood to such an extent that it is hard to see how serious economists could confuse them. For earlier generations, however, this was not the case. Associated with this increase in conceptual precision, however, there has also been a narrowing of focus: phenomena that do not fit within the accepted theoretical framework are usually ignored or deemed to be of minor importance.

The first economist to be considered (in Chapter 5) is J.A.Hobson. Hobson’s writings on economics were published between 1889 and 1933, but his work in many ways reflects the conceptual framework of classical economics, notably that of J.S.Mill. The ‘Keynesian’ strand in his work is his belief that unemployment (the term was coined by Hobson, who defined it in the modern way as involuntary leisure) was caused by underconsumption—by a deficiency of aggregate demand. In holding this belief he was following the widespread consensus amongst businessmen and popular writers. He sought to show how underconsumption might arise, contrary to the arguments of the classical economists using a theore...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of figures and tables
• Acknowledgements
• 1 Methodology, rhetoric and the history of macroeconomic thought
• Part I Historiography
• Part II Macroeconomics before Keynes
• Part III Methodology and macroeconomics
• Part IV Rhetoric and macroeconomics
• References
• Index