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results of maximizing behaviour on the part of the relevant decision-
makers. Recognizing that the Principles are essential for any acceptable
explanation is itself an important consideration for any criticism.
Whether one™s purpose in criticizing is to dispute a proposition (or
dispute an entire school of thought) or just to try to learn more,
understanding what it takes logically to form an effective criticism would
seem to be an important starting point.
© LAWRENCE A. BOLAND
2 Principles of economics Prologue 2
NECESSARY VS SUFFICIENT REASONS in the latter case, if we could see all the costs (such as transaction costs)
then we could see that what appears to be a disequilibrium is really an
At the very minimum, explanations are logical arguments. The logic of
equilibrium.4
explanation is simple. The ingredients of an argument are either
The distinction between explaining and explaining away involves one™s
assumptions or conclusions. The conclusions of an explanation include
presumptions. If one thinks the decision-maker is always maximizing then
statements which are sometimes called necessary conditions. 1 One states
any appearance of ˜irrationality™ can be explained away by demonstrating
explicit assumptions which are all assumed to be true and then one
that the true utility function is more complicated [e.g. Becker 1962].
provides the logical structure which shows that for all the assumptions to
Explaining away takes the truth of one™s explanation for granted; thus
be true the conclusion (regarding the events or phenomena to be explained)
whatever one may think reality is can be seen to be mere appearance (e.g.
must necessarily be true. Despite how some early mathematical economics
apparently irrational behaviour). Moreover, reality is seen to be the utility
textbooks state the issues, there usually is no single assumption or
function that would have to exist to maintain the truth of one™s explanation.
conclusion which is a sufficient condition. 2 Usually, the sufficient
If one wishes to explain (as opposed to engaging in explaining away) then
condition is the conjunction (i.e. the compound statement formed by all) of
one™s assumption regarding the a priori form of the objective function must
the assumptions. The error of the early textbooks is that if there are n
be stated in advance and thus put at stake (i.e. not made dependent on the
assumptions and n“1 are true, then the nth assumption appears to ˜make™
observed behaviour). In this sense, one™s explanation makes maximization
the conjunction into the sufficient compound statement. Of course, any one
a necessary assumption (although not necessarily true “ its truth status is
of the n assumptions could thus be a sufficient condition when all the
still open to question). The claim is that we understand the behaviour
others are given as true.3 In short, the conclusions are necessary and the
simply because we assume maximization. For most of our considerations
conjunction of all the assumptions is sufficient.
here, it will not matter whether we are explaining or explaining away since
What is not always recognized is that it is the presumed necessity of the
in either case one must put either the truth status of one™s assumptions or
individual assumptions forming the conjunction that is put at stake in any
the logical validity of one™s argument at stake and thus open to criticism.
claim to have provided an explanation which could form the basis for
understanding the events or phenomena in question (e.g. ˜Ah, now I under-
stand, it is because people always do X™). This may seem rather compli- INTERNAL VS EXTERNAL CRITICISM OF NEOCLASSICAL
cated, so let me explain. We offer explanations in order to understand ECONOMICS
phenomena. To accept an explanation as a basis for understanding, one
Given the observations so far, if one wishes to criticize an argument, there
would have to have all assumptions of the explanation be true (or at least
are basically two general approaches depending on whether or not one is
not known to be false). Otherwise, the logic of the explanation has no
willing to accept the aim of the argument even if only for the purposes of
force. The logic of the explanation is that whenever all the assumptions are
discussion. If one accepts the aim of the argument then one can offer
true then the events or phenomena in question will occur. There is nothing
internal criticism, that is, criticism that examines the internal logic of the
that one can say when one or more of the assumptions is false since the
argument without introducing any new or external considerations. In
logic of explanation requires true assumptions.
contrast, methodologists will often refer to their favourite philosophical
authorities to quibble with the purpose of one™s argument rather than try to
EXPLAINING VS EXPLAINING AWAY find faults in the logic of the argument. This, of course, leads to arguments
at cross-purposes and usually carries little weight with the proponents of
A key aspect of the above discussion of explanation is that the events or
the argument. For example, advocates of a methodology that stresses the
phenomena in question are accepted as ˜reality™ (rather than mere
utility of simplicity (e.g. Friedman™s Instrumentalism) might wish to
˜appearances™). For example, the Law of Demand (i.e. the proposition that
develop explanations based on perfect competition while those who wish to
demand curves are universally downward sloping) was often taken as a fact
maximize generality are more likely to see virtue in developing imperfectly
of reality and thus we were compelled to offer explanations of it. Today, on
competitive models which see perfect competition as a special case.
the other hand, disequilibrium phenomena such as ˜involuntary
Criticizing perfect competition models for not being general enough or
unemployment™ may be explained away as mere appearances. Supposedly,
criticizing imperfect competition models for not being simple enough does
© LAWRENCE A. BOLAND
4 Principles of economics Prologue 4
not seem to be very useful. Nevertheless, the history of economics is librium in Chapters 1 to 5 and I will examine the questioning of the ad-
populated by many such disputes based on such external critiques. equacy of the essential elements of individual decision-making in Chapters
Internal critiques focus on two considerations. The most obvious 6 to 14.
consideration is the truth status of the assumptions since they must all be
true for an explanation to be true. The other concerns the sufficiency of the
THE DANGERS OF CRITICIZING CRITIQUES
argument. If one wished to criticize an explanation directly, one would
have to either empirically refute one or more of the assumptions or cleverly There is another level of discussion that it is not often attempted. When a
show that the argument was logically insufficient. If one could refute one particular argument has generated many accepted critiques, obviously there
of the assumptions, one would thereby criticize the possibility of claiming arises the opportunity to critically examine the critiques. Given the
to understand the events or phenomena in question with the given sociology of the economics profession this approach is rather dangerous. If
argument. Much of the criticism of neoclassical economics involves such a you treat each critique as an internal critique (by accepting the aims of the
direct form of criticism. Unfortunately, many of the assumptions of argument) you leave yourself open to a claim that you are defending the
neoclassical economics are not directly testable and others are, by the very original argument from any critique. This claim is a major source of
construction of neoclassical methodology, put beyond question (this matter confusion even though it is not obviously true. I have a first-hand
of putting assumptions beyond question will be discussed in Chapter 1). familiarity with this confusion. When I published my critique of the
Even when an assumption cannot be refuted, one can criticize its numerous critiques of Friedman™s famous 1953 essay on methodology
adequacy to serve as a basis for understanding by showing that it is not [Boland 1979a], far too many methodologists jumped to the conclusion that
necessary for the sufficiency of the explanation. To refute the necessity of I was defending Friedman. My 1979 argument was simply that the existing
an assumption one would have to build an alternative explanation that does critiques were all flawed. Moreover, while I defended Friedman™s essay
not use the assumption in question and thereby prove that it is not from specific existing critiques it does not follow that I was defending him
necessary. To refute the sufficiency of an argument one must prove that it from any conceivable critique. A similar situation occurred in response to
is possible to have the conclusion be false even when all of the assumptions my general criticism of existing arguments against the assumption of
are true. This latter approach is most common in criticisms of equilibrium maximizing behaviour [Boland 1981]. Many readers jumped to the
models where one would try to show that even if all the behavioural conclusion that I was defending the truth status of this assumption. Herbert
assumptions were true there still might not exist a possible equilibrium Simon has often told me I was wrong. But again, facing the facts of how
state. the maximization assumption is used in economics, and in particular why it
It might be thought that the criticism most telling for the argument as a is put beyond question, in no way implies an assertion about the assump-
whole would be to criticize the truth of one™s conclusion. But since tion™s truth status “ even though the assumption might actually be false.
explanations are offered to explain the given truth of the conclusion, such a The difficulty with my two critical papers about accepted critiques is
brute force way of criticizing is usually precluded. However, an indirect that too often the economics profession requires one to take sides in
criticism could involve showing that other conclusions entailed by the methodological disputes while at the same time not allowing open
argument are false. This approach to criticism is not commonly followed in discussion of methodology. Specifically, those economists who side with
economics. Friedman™s version of Chicago School economics were thrilled with my
If the theorist offering the explanation has done his or her job, there will 1979 paper but those who oppose Friedman rejected it virtually sight-
not be any problem with the sufficiency of the logic of the argument. Thus, unseen. Clearly few of the anti-Chicago School critics actually finished
theoretical criticism usually concerns whether the argument has hidden reading my paper. I reach this conclusion because at the end of my paper I
assumptions (or ones taken for granted) which are not plausible or are explicitly stated how to form an effective criticism. Only one of the critics
known to be false. Such a critique is usually presented in a form of whom I criticized responded [see Rotwein 1980]. My paper apparently
axiomatic analysis where each assumption is explicitly stated. The most disrupted the complacency among those opposed to Friedman™s
common concerns of a critical nature involve either the mechanics of equi- methodology “ it appears that they were left exposed on the methodology
libria or the knowledge requirements of the decision-makers of neoclassical flank without a defense against Friedman™s essay. This is particularly so
models. I will pursue various essential aspects of maximization and equi- since by my restating Friedman™s methodology, and thereby showing that it
© LAWRENCE A. BOLAND
6 Principles of economics Prologue 6
is nothing more than commonplace Instrumentalism, it was probably clear that neoclassical economics is inherently ˜timeless™. Chapter 3 is concerned
to Friedman™s opponents that their methodological views did not differ with the lie perpetrated by friends of neoclassical economics who, by
much from his. ignoring one of the fundamental requirements for any maximization-based
While there is the potential for everyone to learn from critiques of explanation, suggest that the maximization assumption is universally appli-
critiques, if the audience are too eager to believe any critique of their cable. As Marshall pointed out long ago, maximization presumes the Prin-
favourite boogey-man they read, then all the clearly stated logical ciple of Continuity, that is, a sufficiently free range of choice if maximiza-
arguments in the world will not have much effect. Despite the confusion, tion is to explain choice.
and regardless of whether anyone else learned from my two papers on The logical requirements for equilibrium are examined in Chapters 4
effective criticism, certainly I think I learned a lot. Unfortunately, I and 5 with an eye on how equilibrium models can be construed as bases for
probably learned more about the sociology of the economics profession understanding economic phenomena. Chapter 4 is concerned with the
than anything else! common misleading notion that model-builders need to assure only that the
number of unknown variables equals the number of equations in the model.
Chapter 5 is about the erroneous notion that models of imperfect
UNDERSTANDING AND CRITICISM: WERE MY TEACHERS
competition can be constructed from perfect competition models by merely
LYING TO ME?
relaxing only the price-taker assumption.
Even after having recognized the dangers, I wish to stress that I still think Chapters 6 to 8 are concerned with two neglected elements of every
criticism is an effective means of learning and understanding. Moreover, neoclassical model. Specifically, they are about the knowledge and
understanding without criticism is hollow. As a student I think I learned institutional conditions needed for decision-making and how these
much more in classes where teachers allowed me to challenge and criticize requirements can be used as a basis for criticizing neoclassical economics.
them on the spot. Sometimes I thought they were telling me ˜lies™ and most Chapter 6 examines the claim that Austrian economics is superior to
of the time I was wrong. Of course, I doubt very much that teachers neoclassical theories because the former explicitly recognizes the necessity
intentionally lie to their students. Nevertheless, many textbooks do contain of dealing with the knowledge required for utility or profit maximization. It
lies with regard to the essential nature of neoclassical economics and is argued that both versions of economics suffer from the inability to
students and their teachers would learn more by challenging their handle knowledge dynamics. Chapter 7 examines the questionable notion
textbooks. that the Principles of Economics can be applied to technology when
Each of the following chapters is concerned with a specific ˜lie™, that is, explaining the historical developments of an economy. And Chapter 8
with an erroneous notion that has been foisted on us by various textbook questions the applicability of Marshall™s Principles to a similar question
writers and teachers. The first such notion I discuss in Chapter 1 which is concerning the development of the institutions of an economy.
about the claim by many critics of neoclassical economics that the Chapters 9 to 11 consider some critiques which claim there are missing
assumption of maximization is a tautology and thus inherently untestable. I elements in neoclassical economics particularly with regard to the role of
will explain why this claim is false. The remaining chapters explore various the individual in neoclassical theory. While some proponents of Post-
theoretical avenues for criticism of neoclassical economics that have Keynesian economics claim that Keynes offered a blueprint for a different
interested me over the last twenty-five years. With the exception of approach to explaining economic behaviour, in Chapter 9 I argue that such
Chapters 5, 7 and 9, my discussion will focus primarily on consumer a view may be misleading readers of his famous book. I think his General
demand theory since neoclassical economists give more attention to Theory is better understood as a critique of neoclassical economics, one
demand theory than they do to the theory of supply. that was written to convince believers in neoclassical economics rather than
In Chapters 2 and 3 I begin by determining the nature of the essential provide the desired revolutionary blueprint. Chapter 10 explains why
ingredients of neoclassical economics, namely, the Principles of Eco- neoclassical economics does not need an infusion of social psychology as
nomics, starting with Alfred Marshall™s view of these principles. While it some critics claim. And Chapter 11 pushes beyond Chapter 6 to challenge
may not be possible to simply deny that people maximize, we can question those neoclassical theorists who think the behaviour of individuals can be
the necessary conditions for maximization along lines suggested by explained without dealing with how individuals know they are maximizing.
Marshall. Chapter 2 is concerned with the lie perpetrated by some critics Chapters 12 to 14 deal with a few technical questions raised by those
© LAWRENCE A. BOLAND
8 Principles of economics
economists who attempt to construct logically complete formal models of
Part I
consumer choice. Chapter 12 examines the common lie that lexicographic
orderings are not worthy of consideration by a neoclassical model-builder
even though many of us may think that they are certainly plausible.
Chapter 13 examines the alleged equivalence of Paul Samuelson™s revealed
The essential elements
preference analysis and the ordinal demand theory of R.G.D. Allen and
John Hicks. For many decades the critical issue of consumer theory has
been whether we can explain why demand curves are downward sloping.
Today many theorists think demand theory can be developed without
reference to downward sloping demand curves. In Chapter 14 I show why
downward sloping demand curves have to be explained in any neoclassical
theory of prices.
Each of these chapters represents the understanding of neoclassical
economics that I have acquired from various attempts on my part and
others™ to criticize the logical sufficiency of neoclassical explanations. The
criticisms in question are almost always ones which argue that there are
hidden presumptions that might not survive exposure to the light of day.
One thing which will be evident is that I will often be discussing articles
published in the 1930s. This is no accident, as I think that many of the
problems considered in those ˜years of high theory™ were the most
interesting and critical. However, my interest in these old papers is not
historical. Many of the problems discussed during that period unfortunately
remain unresolved today. If I had my way we would all go back to that
period of ˜high theory™ and start over at the point where things were
interrupted by the urgencies of a world war.


NOTES
1 For example, for a differentiable function to be maximized, the ˜necessary
conditions™ are (1) that its first derivative must be zero and (2) that its second
derivative be negative. These two necessary conditions merely follow from
what we mean by maximization.
2 Years ago, it was typically said that for a differentiable function, given a zero
first derivative, the function™s second derivative being negative is the ˜sufficient
condition™ for maximization [e.g. see Chiang 1974, p. 258].
3 The only time a single assumption is sufficient is when there is just one
assumption. The statement ˜all swans are white™ is sufficient to conclude that
the next swan you see will be white.
4 See further Robert Solow™s [1979] examination of the usual ways disequilibria
are explained away in macroeconomics.
© LAWRENCE A. BOLAND

1 The neoclassical maximization
hypothesis




At present the maximization postulate has an unusually strong hold on
the mind set of economists... Suffice it to say that in my view the
belief in favor of maximization does not depend on strong evidence
that people are in fact maximizers... The main argument against the
maximization postulate is an empirical one “ namely, people
frequently do not maximize. Of course, this standpoint argues that
while postulates simplify reality, we are not free to choose
counterfactual postulates. Hence, from this point of view a superior
postulate would be one under which maximizing behavior is a special
case, but non-maximization is accommodated for as a frequent mode
of behavior.
Harvey Leibenstein [1979, pp. 493“4]

If by rational we mean demonstrably optimal, it follows that conduct
in order to be rational must be relevantly fully informed.
George Shackle [1972, p. 125]

The assumption of maximization may also place a heavy (often
unbearable) computational burden on the decision maker.
Herbert Simon [1987, p. 267]


The assumption of maximization is a salient feature of every neoclassical
explanation. Obviously, then, if one wanted to criticize neoclassical
economics it would seem that the most direct way would be to criticize the
assumption of universal maximization. Several approaches have been
taken. Harvey Leibenstein [1979] offered an external criticism. He argued
for a ˜micro-micro theory™ on the grounds that profit maximization is not
necessarily the objective of the actual decision-makers in a firm and that a
complete explanation would require an explanation of intrafirm behaviour.
He also gave arguments for why maximization of anything may not be
realistic or is at best a special case. Similarly, Herbert Simon has argued
that individuals do not actually maximize anything “ they ˜satisfice™ “ and
© LAWRENCE A. BOLAND
12 Principles of economics The neoclassical maximization hypothesis 13
yet they still make decisions. 1 And of course, George Shackle has for many THE LOGICAL BASIS FOR CRITICISM
years argued that maximization is not even possible.
As stated above, there are two types of direct criticism of the maximization
Some anti-neoclassical economists are very encouraged by these
hypothesis: the possibilities criticism and the empirical criticism. In this
arguments, but I think these arguments are unsuccessful. For anyone
section I will examine the logical bases of these critiques, namely of the
opposed to neoclassical theory, a misdirected criticism, which by its failure

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