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The principles of
economics
Some lies my teachers told me




Lawrence A. Boland, F.R.S.C.
Simon Fraser University




ROUTLEDGE




London and New York
To Irene




First published 1992
by Routledge
11 New Fetter Lane, London EC4P 4EE
Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
© 1992 Lawrence A. Boland
eBook version created at Simon Fraser University
© 2002 Lawrence A. Boland

All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photcopying and recording, or in any
information storage or retrieval system, without permission in
writing from the copyright holder.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library

Library of Congress Cataloguing in Publication Data
A catalogue record for this book is available from the Library of Congress
ISBN 0-415-06433-3 (hbk)
ISBN 0-415-13208-8 (pbk)




© LAWRENCE A. BOLAND
© LAWRENCE A. BOLAND

Contents




Preface xi
Acknowledgements xv
Prologue: Understanding neoclassical economics
through criticism 1
Necessary vs sufficient reasons 2
Explaining vs explaining away 2
Internal vs external criticism of neoclassical economics 3
The dangers of criticizing critiques 5
Understanding and criticism: were my teachers lying to me?
6
Notes 8

Part I The essential elements
1 The neoclassical maximization hypothesis 11
Types of criticism and the maximization hypothesis 12
The logical basis for criticism 13
The importance of distinguishing between tautologies and
metaphysics 16
Notes 19
2 Marshall™s ˜Principles™ and the ˜element of Time™ 21
The two explanatory ˜Principles™ 22
The ˜element of Time™ 23
Marshall™s strategy 27
Inadequacies of Marshall™s method vs problems created by
his followers 32
Some critical considerations 36
Notes 37
© LAWRENCE A. BOLAND
viii Principles of economics Contents ix

3 Marshall™s ˜Principle of Continuity™ 39 7 A naive theory of technology and change 105
Marshall™s Principle of Continuity and his biological Non-autonomy of technology 107
perspective 40 Capital as embodied technology 108
Marshall™s Principle of Substitution as a research programme Capital and change 109
42 Towards a theory of social change 109
Marshall™s rejection of mechanics and psychology 42 Notes 111
Comprehensive maximization models 44
Notes 47 8 Knowledge and institutions in economic theory 112
The neoclassical view of institutions 114
4 Axiomatic analysis of equilibrium states 48 A critique of neoclassical theories of institutional change 117
Analyzing the logical structures in economics 50 A simple theory of social institutions 119
Wald ™s axiomatic Walrasian model: a case study 52 Time, knowledge and successful institutions 124
Completeness and theoretical criticism 60 Notes 125
A theory of completeness 61
Notes 62
Part III Some missing elements
5 Axiomatic analysis of disequilibrium states 64 9 The foundations of Keynes™ methodology 131
Competition between the short and long runs 65 General vs special cases 132
The ˜perfect-competitor™ firm in the long run: a review 66 Generality from Keynes™ viewpoint 134
Profit maximization with constant returns to scale 68 Neoclassical methodology and psychologistic individualism
Linear homogeneity without perfect competition 70 134
Possible alternative models of the firm 71 Keynes™ macro-variables vs neoclassical individualism 136
Profit maximization 74 The Marshallian background of constrained-optimization
On building more ˜realistic™ models of the firm 75 methodology 136
Using models of disequilibrium 75 The Keynes“Hicks methodology of optimum ˜liquidity™ 139
Uniformities in explanations of disequilibria 81 The consequences of ˜liquidity in general™ 141
A general theory of disequilibria 84 On effective criticism 144
Notes 85 Notes 146

10 Individualism without psychology 147
Part II Some neglected elements
Individualism vs psychologism 147
6 Knowledge in neoclassical economic theory 91 Individualism and the legacy of eighteenth century
Maximization as ˜rationality™ 93 rationalism 148
The methodological problem of knowledge 94 Unity vs diversity in methodological individualism 150
The epistemological problem of knowledge 98 Unnecessary psychologism 152
The interdependence of methodology and epistemology 100 Notes 152
Concluding remarks on the Lachmann“Shackle epistemology
101 11 Methodology and the individual decision-maker 153
Notes 104 Epistemics in Hayek™s economics 154
The methodology of decision-makers 158
Notes 161
© LAWRENCE A. BOLAND
x Principles of economics

Preface
Part IV Some technical questions
12 Lexicographic orderings 165
L-orderings 166
The discontinuity problem 167
Orderings and constrained maximization 169
Ad hoc vs arbitrary 171
Multiple criteria vs L-orderings in a choice process 171
The infinite regress vs counter-critical ˜ad hocery™ 174
Utility functions vs L-orderings 175
Notes 176
Most students who approach neoclassical economics with a critical eye
13 Revealed Preference vs Ordinal Demand 177 usually begin by thinking that neoclassical theory is quite vulnerable.
Consumer theory and individualism 179 They think it will be a push-over. Unless they are lucky enough to
The logic of explanation 180 interact with a competent and clever believer in neoclassical economics,
Price“consumption curves 182 they are likely to advance rather hollow critiques which survive in their
Choice analysis with preference theory assumptions 186 own minds simply because they have never been critically examined.
Choice theory from Revealed Preference Analysis 188 Having just said this, some readers will say, ˜Oh, here we go again
Methodological epilogue 193 with another defense of neoclassical theory which, as every open-minded
Notes 194 person realizes, is obviously false.™ This book is not a defense of
neoclassical theory. It is an examination of the ways one can try to
14 Giffen goods vs market-determined prices 196 criticize neoclassical theory. In particular, it examines inherently
A rational reconstruction of neoclassical demand theory 198 unsuccessful ways as well as potentially successful ways.
Ad hocery vs testability 205 As with the question, ˜Is there sound in the forest when there is
Giffen goods and the testability of demand theory 207 nobody there to listen?™, there is equally a question of how one registers
Concluding remarks 210 criticisms. Who is listening? Who does one wish to convince? Is the
Notes 211 intended audience other people who will agree in advance with your
criticisms? Or people who have something to gain by considering them,
Epilogue: Learning economic theory through criticism 213 namely believers in the propositions you wish to criticize? If you write
for the wrong audience there may be nobody there to listen!
Bibliography 217 My view has always been that whenever I have a criticism I try to
Name index 225 convince a believer that he or she is wrong since only in this way will I
Subject index 227 be maximizing the possibilities for my learning. Usually when the
believer is competent I learn the most. Sometimes I learn that I was
simply wrong. Other times I learn what issues are really important and
thus I learn how to focus my critique to make it more telling. I rarely
learn anything by sharing my critiques with someone who already rejects
what I am criticizing. Unfortunately, it is easier to get a non-believer to
share your critique than to get a believer to listen. Nevertheless, this is
the important challenge.
© LAWRENCE A. BOLAND
xii Principles of economics Preface xiii

I am firmly convinced that any effective critique must begin by a decision-maker one must deal with how that individual knows what he or
thorough and sympathetic understanding. It is important to ask: What is she needs to know in order to make a decision that will contribute to a
the problem that neoclassical economics intends to solve? What coordinated society.
constitutes an acceptable solution? With these two questions in mind, I While knowledge, information and uncertainty are often recognized
continue to try to understand neoclassical economics. Over the last today, rarely is there more than lip-service given to a critical discussion
twenty-five years I have been fortunate to have many colleagues at of their theoretical basis. How does information reduce a decision-
Simon Fraser University who are neoclassical believers. While I began maker™s uncertainty? What concept of knowledge or learning is
as a student who considered neoclassical economics to be a push-over, presumed by the neoclassical theorist? Typically, the presumed theory is
thanks to my colleagues I have come to respect both its sophisticated based on a seventeenth-century epistemology that was refuted two
structure and its simplistic fundamentals. My colleagues have listened to hundred years ago. If knowledge, information or uncertainty matter then
my complaints in seminars and they have taken the time to read my it is important for us to understand these concepts.
papers. When they thought I was wrong they told me so. And when they This book is written for those who like me wish to understand
did not agree, and particularly when they said they did not know how to neoclassical economics. In particular, it is for those who wish to develop
answer, they told me so. I do not think one should expect any more from a critical understanding whether one wishes to improve neoclassical
one™s colleagues. theory or just criticize it. I cannot preclude true believers who are
This book presents what I think remain as possible avenues for looking for research projects that would lead to needed repairs. They are
criticism of neoclassical economics. The simplicity of neoclassical welcome, too.
economics is that it has only two essential ideas: (1) an assumption of
L.A.B.
maximizing behaviour and (2) an assumption about the nature of the
Burnaby, British Columbia
circumstances and constraints that might impede such behaviour. The
29 November 1990
obvious avenue for criticism is to attack the assumption of maximization
behaviour. As we shall see, this turns out to be the most difficult avenue.
Moreover, since both types of assumptions are essential, there are many
other possibilities. For example, the problem is not whether one can try
to maximize one™s utility in isolation but whether a society consisting of
similarly motivated people can achieve a state of coordination that will
permit them all to achieve their goals. What are the knowledge
requirements for such coordination? What are the logical requirements
for the configuration of constraints facing these individuals?
Once one recognizes that the acceptance and use of the maximizing
hypothesis creates many difficulties for the model-builder, the number of
avenues multiplies accordingly. Perhaps the idea of a coordinated society
of maximizing individuals is not totally implausible. The question that
we all face as economic theorists is whether we can build models that
demonstrate such plausibility. Of course this raises the methodological
question of one™s standard of plausibility but for the most part I will not
be concerned with this question. I will be more concerned instead with
some technical issues even though questions of an epistemological or
methodological nature cannot be totally avoided. It is in the two areas of
epistemology and methodology that neoclassical critiques get very
murky once one recognizes that to explain the behaviour of an individual
© LAWRENCE A. BOLAND

Acknowledgements




I wish to thank several people who kindly took the time to read the
manuscript of this book. Those deserving pariticular praise are Irene
Gordon, Richard Simson and Xavier DeVanssay. Geoffrey Newman,
Paul Harrald, Zane Spindler and John Chant were most helpful with a
couple of difficult chapters. I also wish to thank Ray Offord for editing
the final version. Since I have taken the opportunty to use parts of some
of my published papers, I wish to thank the managing editors of
American Economic Review, Australian Economic Papers, Eastern
Economic Journal and Philosophy of the Social Sciences for giving me
permission to use copyright material.
© LAWRENCE A. BOLAND

Prologue

Understanding neoclassical
economics through criticism



Far too often when one launches a criticism of a particular proposition or
school of thought many bystanders jump to the conclusion that the critic is
taking sides, that is, the critic is stating an opposing position. Sometimes, it
is merely asked, ˜Which side are you on?™ Criticism need not be limited to
such a context.
Since the time of Socrates we have known that criticism is an effective
means of learning. Criticism as a means of learning recognizes that we
offer theories to explain events or phenomena. One explains an event by
stating one or more reasons which when logically conjoined imply that the
event in question would occur. While some of the reasons involve known
facts, making assumptions is unavoidable. Simply stated, we assume
simply because we do not know.
Economics students are quite familiar with the task of using
assumptions to form explanations of economic phenomena. But, some may
ask, will just any assumptions suffice? Apart from requiring that the
phenomena in question are logically entailed by the assumptions ventured,
it might seem that anything goes. Such is not the case. The ˜Principles of
Economics™ are essential ingredients of every acceptable explanation in
modern neoclassical economics. For example, it would be difficult to see
how one could give a neoclassical explanation of social phenomena that
did not begin with an assumption that the phenomena in question were the

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