<<

. 3
( 25 .)



>>

possibilities argument which concerns only the necessary conditions and of
only adds apparent credibility to neoclassical theory, will be worse than the
the empirical argument which concerns only the statements which form the
absence of criticism. The purpose of this chapter is to explain why,
sufficient conditions. In each case I will also discuss the possible logical
although the neoclassical hypothesis is not a tautology and thus may be
defense for these criticisms.
false, no criticism of that hypothesis will ever be successful. My arguments
will be based first on the possible types of theoretical criticism and the
logic of those criticisms, and second on the methodological status of the The possibilities critique: can the necessary conditions be fulfilled?
maximization hypothesis in neoclassical explanations.
The possibilities critique builds on the difference between necessary and
sufficient conditions. Specifically, what is criticized is the possibility of
TYPES OF CRITICISM AND THE MAXIMIZATION fulfilling all of the necessary conditions for maximization. Of course, this
HYPOTHESIS type of critique begs the question as to what are all the necessary
conditions. Are there more conditions than the (a) and (b) listed above?
There are only two types of direct criticism of any behavioural hypothesis
Shackle, following Friedrich Hayek and John Maynard Keynes, argues that
once its logical validity has been established. One can argue against the
maximization also presumes that the knowledge necessary for the process
possibility of the hypothesized behaviour or one can argue against the
of choosing the ˜best™ alternative has been acquired. 4 For Shackle,
empirical truth of the premise of the hypothesis. In the case of the
maximization is always a deliberate act. Shackle argues that for
neoclassical maximization hypothesis, virtually everyone accepts the
maximization to be a behavioural hypothesis (i.e. about the behaviour of
logical validity of the hypothesis. For example, everyone can accept that if
decision-makers), the actor must have acquired all of the information
the consumer is a utility maximizer, then for the particular bundle of goods
necessary to determine or calculate which alternative maximizes utility (or
chosen: (a) the marginal utility is zero, and (b) the slope of the marginal
profit, etc.) and he argues that such an acquisition is impossible, hence
utility curve at the point representing the chosen bundle is non-positive and
deliberate maximization is an impossible act.
usually negative.2 That is to say, necessarily the marginal increment to the
Although this argument appears to be quite strong, it is rather
objective must be zero and falling (or not rising) whenever (i.e. without
elementary. A closer examination will show it to be overly optimistic
exception) the maximization premise is actually true. Of course, one could
because it is epistemologically presumptive. One needs to ask: Why is the
substitute the word ˜profit™ for the word ˜utility™ and the logic of the
possession of the necessary knowledge impossible? This question clearly
hypothesis still holds. With either form, (a) and (b) are the ˜necessary
involves one™s epistemology “ that is, one™s theory of knowledge. The
conditions™ for maximization. Note again that there are no ˜sufficient
answer, I think, is quite simple. Shackle™s argument (also Hayek™s and
conditions™ for maximization. Rather, the maximization premise is the
Keynes™) presumes that the truth of one™s knowledge requires an inductive
sufficient condition for (a) and (b).
proof. And as everyone surely knows today, there is no way to prove one™s
Parenthetically, I should note that economists often refer to the
knowledge inductively whenever the amount of information is finite or it is
conjunction of (a) and (b) as a sufficient condition for maximization. This
otherwise incomplete (e.g. information about the future). 5
is a common error.3 Even if (a) and (b) are both true, only local
The strength of Shackle™s argument is actually rather vulnerable.
maximization is assured. However, maximization in general (i.e. global) is
Inductive proofs (and hence inductive logic) are not necessary for true
what the premise explicitly asserts and that is not assured by (a) and (b)
knowledge. One™s knowledge (i.e. one™s theory) can be true even though
alone. I will return to this below when I discuss the methodological uses of
one does not know it to be true “ that is, even if one does not have proof.
the maximization hypothesis.
But I think there is an even stronger objection to the ˜true knowledge is
necessary for maximization™ argument. True knowledge is not necessary
© LAWRENCE A. BOLAND
14 Principles of economics The neoclassical maximization hypothesis 15
for maximization! Consumers, for example, only have to think that their The methodological problems of empirical refutations of economic
theory of what is the shape of their utility function is true. Once a consumer theories are widely accepted. In the case of utility maximization we realize
picks the ˜best™ option there is no reason to deviate or engage in that survey reports are suspect and direct observations of the decision-
˜disequilibrium behaviour™ unless he or she is prone to testing his or her making process are difficult or impossible. In this sense behavioural
own theories.6 maximization is not directly testable. The only objective part of the
In summary, Shackle™s inductivist argument against the possibility of a maximization hypothesis is the set of logical consequences such as the
true maximization hypothesis is a failure. Inductive proofs are not uniquely determinate choices. One might thus attempt an indirect test of
necessary for true knowledge and true knowledge (by any means) is not maximization by examining the outcomes of maximization, namely the
necessary for successful or determinate decision-making. Maximizing implied pattern of observable choices based on a presumption that there is a
behaviour cannot be ruled out as a logical impossibility. utility function and that utility is being maximized by the choices made.
If one wishes to avoid errors in logic, an indirect test of any behavioural
hypothesis which is based on a direct examination of its logical
The empirical critiques: are the sufficient premises true?
consequences must be limited to attempting refutations of one or more of
Simon and Leibenstein argue against the maximization hypothesis in a the necessary conditions for the truth of the hypothesis. For example, in the
more straightforward way. While accepting the logical validity of the case of consumer theory, whenever utility maximization is the basis of
hypothesis, they simply deny the truth of the premise of the hypothesis. observed choices, a necessary condition is that for any given pattern of
choices the ˜Slutsky Theorem™ must hold.8 It might appear then that the
They would allow that if the consumer is actually a maximizer, the
hypothesis would be a true explanation of the consumer™s behaviour but above methodological problems of observation could be easily overcome,
they say the premise is false; consumers are not necessarily maximizers since the Slutsky Theorem can in principle be made to involve only
hence their behaviour (e.g. their demand) would not necessarily be observable quantities and prices. And, if one could refute the Slutsky
Theorem then one could indirectly refute the maximization hypothesis. 9
determinable on that basis. Leibenstein may allow that the consumer™s
behaviour can be determined, but it is an open question as to what is the Unfortunately, even if from this perspective such an indirect refutation
determining factor “ utility, prestige, social convention, etc.? Simon seems cannot be ruled out on logical grounds alone, the methodological problems
to reject as well the necessity of determinate explanation although he does concerning observations will remain.
discuss alternative decision rules to substitute for the maximization rule. 7 The fundamental methodological problem of refuting any behavioural
A denial of the maximization hypothesis on empirical grounds raises the hypothesis indirectly is that of constructing a convincing refutation. Any
obvious question: How do the critics know the premise is false? Certain indirect test of the utility maximization hypothesis will be futile if it is to
methodological considerations would seem to give an advantage to the be based on a test of any logically derived implication (such as the Slutsky
critics over those who argue in its favour. Note that we can distinguish Theorem). On the one hand, everyone “ even critics of maximization “ will
between those statements which are verifiable (i.e. when true, can be accept the theorem™s logical validity. On the other hand, given the
proven true) and those which are refutable (i.e. when false, can be proven numerous constraints involved in any concrete situation, the problems of
false) on purely logical grounds. Furthermore, strictly universal statements observation will be far more complex than those outlined by the standard
“ those of the form ˜all Xs have property Y™ “ are refutable (if false) but theory. Thus, it is not difficult to see that there are numerous obstacles in
not verifiable (even if true). On the other hand, strictly existential state- the way of constructing any convincing refutation of maximization, one
ments “ those of the form ˜there are some Xs which have property Y™ “ are which would be beyond question.
verifiable (if true) but not refutable (even if false). At first glance it would I now wish to offer some different considerations about the potential
seem that the maximization hypothesis “ ˜all decision-makers are maxi- refutations of the neoclassical behavioural hypothesis. I will argue here that
mizers™ “ is straightforwardly a universal statement and hence is refutable even if one could prove that a consumer is not maximizing utility or a
but not verifiable. But the statistical and methodological problems of producer is not maximizing profit, this would not constitute a refutation of
empirical refutation present many difficulties. Some of them are well the neoclassical hypothesis. The reason why is that the actual form of the
known but, as I shall show a little later, the logical problems are insur- neoclassical premise is not a strictly universal statement. Properly stated,
mountable. the neoclassical premise is: ˜For all decision-makers there is something
© LAWRENCE A. BOLAND
16 Principles of economics The neoclassical maximization hypothesis 17
they maximize.™ This statement has the form which is called an incomplete not a matter of logical form. The problem with the hypothesis is that it is
˜all-and-some statement™. Incomplete all-and-some statements are neither treated as a metaphysical statement.
verifiable nor refutable! As a universal statement claiming to be true for all A statement which is a tautology is intrinsically a tautology. One cannot
decision-makers, it is unverifiable. But, although it is a universal statement make it a non-tautology merely by being careful about how it is being used.
and it should be logically possible to prove it is false when it is false (viz. A statement which is metaphysical is not intrinsically metaphysical. Its
by providing a counter-example) this form of universal statement cannot be metaphysical status is a result of how it is used in a research programme.
so easily rejected. Any alleged counter-example is unverifiable even if Metaphysical statements can be false but we may never know because they
true!10 are the assumptions of a research programme which are deliberately put
Let me be specific. Given the premise ˜All consumers maximize beyond question. Of course, a metaphysical assumption may be a tautology
something™, the critic can claim to have found a consumer who is not but that is not a necessity.
maximizing anything. The person who assumed the premise is true can Typically, a metaphysical statement has the form of an existential
respond: ˜You claim you have found a consumer who is not a maximizer statement (e.g. there is class conflict; there is a price system; there is an
but how do you know there is not something which he or she is invisible hand; there will be a revolution; etc.). It would be an error to think
maximizing?™ In other words, the verification of the counter-example that because a metaphysical existential statement is irrefutable it must also
requires the refutation of a strictly existential statement; and as stated be a tautology. More important, a unanimous acceptance of the truth of any
above, we all agree that one cannot refute strictly existential statements. existential statement still does not mean it is a tautology.
In summary, empirical arguments such as Simon™s or Leibenstein™s that Some theorists inadvertently create tautologies with their ad hoc
deny the truth of the maximization hypothesis are no more testable than the attempts to overcome any possible informational incompleteness of their
hypothesis itself. Note well, the logical impossibility of proving or theories. For example, as an explanation, global maximization implies the
disproving the truth of any statement does not indicate anything about the adequacy of either the consumer™s preferences or the consumer™s theory of
truth of that statement. The neoclassical assumption of universal all conceivable bundles which in turn implies his or her acceptance of an
maximization could very well be false, but as a matter of logic we cannot unverifiable universal statement. Some theorists thus find global
expect ever to be able to prove that it is. maximization uncomfortable as it expects too much of any decision-maker
“ but the usual reaction only makes matters worse. The maximization
hypothesis is easily transformed into a tautology by limiting the premise to
THE IMPORTANCE OF DISTINGUISHING BETWEEN
local maximization. Specifically, while the necessary conditions (a) and (b)
TAUTOLOGIES AND METAPHYSICS
are not sufficient for global maximization, they are sufficient for local
Some economists have charged that the maximization hypothesis should be maximization. If one then changes the premise to say, ˜if the consumer is
rejected because, they argue, since the hypothesis is not testable it must maximizing over the neighbourhood of the chosen bundle™, one is only
then be a tautology, hence it is ˜meaningless™ or ˜unscientific™. Although begging the question as to how the neighbourhood was chosen. If the
they may be correct about its testability, they are wrong about its being neighbourhood is defined as that domain over which the rate of change of
necessarily a tautology. Statements which are untestable are not necessarily the slope of the marginal utility curve is monotonically increasing or
tautologies because they may merely be metaphysical. decreasing, then at best the hypothesis is circular. But what is more
important here, if one limits the premise to local maximization, one will
severely limit the explanatory power or generality of the allegedly
Distinguishing between tautologies and metaphysics
explained behaviour.11 One would be better off maintaining one™s
Tautologies are statements which are true by virtue of their logical form metaphysics than creating tautologies to seal their defense.
alone “ that is, one cannot even conceive of how they could ever be false.
For example, the statement ˜I am here or I am not here™ is true regardless of
Metaphysics vs methodology
the meaning of the non-logical words ˜I™ or ˜here™. There is no conceivable
counter-example for this tautological statement. But the maximization Sixty years ago metaphysics was considered a dirty word but today most
hypothesis is not a tautology. It is conceivably false. Its truth or falsity is people realize that every explanation has its metaphysics. Every model or
© LAWRENCE A. BOLAND
18 Principles of economics The neoclassical maximization hypothesis 19
theory is merely another attempted test of the ˜robustness™ of a given In summary, the general lesson to be learned here is that while it may
metaphysics. Every research programme has a foundation of given seem useful to criticize what appear to be necessary elements of
behavioural or structural assumptions. Those assumptions are implicitly neoclassical economics, it may not be fruitful when the proponents of
ranked according to their questionability. The last assumptions on such a neoclassical economics are unwilling to accept such a line of criticism.
rank-ordered list are the metaphysics of that research programme. They can External criticisms may be interesting for critical bystanders, but for
even be used to define that research programme. In the case of neoclassical someone interested only in attempting to see whether it is possible to
economics, the maximization hypothesis plays this methodological role. develop a neoclassical model to explain some particular economic
Maximization is considered fundamental to everything; even an assumed phenomenon, the questions of interest will usually only be the ones
equilibrium need not actually be put beyond question as disequilibrium in a concerning particular techniques of model-building. They will usually be
market is merely a consequence of the failure of all decision-makers to satisfied with minimalist concern for whether the model as a whole is
maximize. Thus, those economists who put maximization beyond question testable and thus be satisfied to say that if you think you can do better with
cannot ˜see™ any disequilibria. a non-neoclassical model (in particular, one which does not assume
The research programme of neoclassical economics is the challenge of maximization), then you are quite welcome to try. When you are finished,
finding a neoclassical explanation for any given phenomenon “ that is, the neoclassical economists will be willing to compare the results. Which
whether it is possible to show that the phenomenon can be seen as a logical model fits the data better? But until a viable competitor is created, the
consequence of maximizing behaviour “ thus, maximization is beyond neoclassical economists will be uninterested in a priori discussions of the
question for the purpose of accepting the challenge. 12 The only question of realism of assumptions which cannot be independently tested as is the case
substance is whether a theorist is willing to say what it would take to with the maximization assumption.
convince him or her that the metaphysics used failed the test. For the
reasons I have given above, no logical criticism of maximization can ever
NOTES
convince a neoclassical theorist that there is something intrinsically wrong
1 Thus one might use Simon™s argument to deny the necessity of the
with the maximization hypothesis.
maximization assumption. But this denial is an indirect argument. It is also
Whether maximization should be part of anyone™s metaphysics is a
somewhat unreliable. It puts the onus on the critic to offer an equally sufficient
methodological problem. Since maximization is part of the metaphysics, argument that does not use maximization either explicitly or implicitly.
neoclassical theorists too often employ ad hoc methodology to deflect Sometimes what might appear as a different argument can on later examination
possible criticism; thus any criticism or defense of the maximization turn out to be equivalent to what it purports to replace. This is almost always
the case when only one assumption is changed.
hypothesis must deal with neoclassical methodology rather than the truth of
2 Note that any hypothesized utility function may already have the effects of
the hypothesis. Specifically, when criticizing any given assumption of
constraints built in as is the case with the Lagrange multiplier technique.
maximization it would seem that critics need only be careful to determine 3 This is not the error I discussed in the previous chapter, that is, the one where
whether the truth of the assumption matters. It is true that for followers of some people call (b) the sufficient condition.
Friedman™s Instrumentalism the truth of the assumption does not matter, 4 Although Shackle™s argument applies to the assumption of either local or global
maximization, it is most telling in the case of global maximization.
hence for strictly methodological reasons it is futile to criticize
5 Requiring an inductive proof of any claim to knowledge is called Inductivism.
maximization. And the reasons are quite simple. Practical success does not
Inductivism is the view that all knowledge is logically derived generalizations
require true knowledge and Instrumentalism presumes that the sole that are based ultimately only on observations. The generalizations are not
objective of research in economic theory is immediate solutions to practical instantaneous but usually involve secondary assumptions which require more
problems. The truth of assumptions supposedly matters to those economists observations to verify these assumptions to ensure that the foundation of
knowledge will be observations alone. This theory of knowledge presumes that
who reject Friedman™s Instrumentalism, but for those economists interested
any true claim for knowledge can be proven with singular statements of
in developing economic theory for its own sake I have argued here that it is
observation. Inductivism is the belief that one could actually prove that ˜all
still futile to criticize the maximization hypothesis. There is nothing swans are white™ by means of observing white swans and without making any
intrinsically wrong with the maximization hypothesis. The only problem, if assumptions to help in the proof. It is a false theory of knowledge simply
there is a problem, resides in the methodological attitude of most because there is no logic that can ever prove a strictly universal generality
based solely on singular observations “ even when the generality is true [see
neoclassical economists.
© LAWRENCE A. BOLAND
20 Principles of economics
further my 1982 book, Chapter 1].
2 Marshall™s ˜Principles™ and
6 Again this raises the question of the intended meaning of the maximization
premise. If global maximization is the intended meaning, then the consumer
the ˜element of Time™
must have a (theory of his or her) preference ordering over all conceivable
alternative bundles. At a very minimum, the consumer must be able to
distinguish between local maxima all of which satisfy both necessary
conditions, (a) and (b).
7 Some people have interpreted Simon™s view to be saying that the reason why
decision-makers merely satisfice is that it would be ˜too costly™ to collect all the
necessary information to determine the unique maximum. But this
interpretation is inconsistent if it is a justification of assuming only ˜satisficing™
as it would imply cost minimization which of course is just the dual of utility
maximization!
8 The Slutsky Theorem is about the income and substitution effects and involves
an equation derived from a utility maximization model which shows that the The Hatter was the first to break the silence. ˜What day of the month is
slope of a demand curve can be analyzed into two basic terms. One represents it?™ he said, turning to Alice: he had taken his watch out of his pocket,
the contribution of the substitution effect to the slope and the other the income and was looking at it uneasily, shaking it every now and then, holding
effect™s contribution. The equation is interpreted in such a manner that all the it to his ear...
terms are in principle observable. ˜Two days wrong!™ sighed the Hatter. ˜I told you butter wouldn™t
9 For example, if one could show that when the income effect is positive but the suit the works!™ he added, looking angrily at the March Hare.
demand curve is positively sloped, then the Slutsky Theorem would be false or ˜It was the best butter,™ the March Hare replied.
there is no utility maximization [see Lloyd 1965]. I will return to Lloyd™s views Lewis Carroll
of the testability of the Slutsky equation in Chapter 14.
10 The important point to stress here is that it is the incompleteness of the
statement that causes problems. Whether one can make such statements While it might not be possible to confront neoclassical theory by criticizing
verifiable or refutable depends on how one completes the statement. For
the maximization hypothesis, its main essential element, internal criticisms
example, if one completes the statement by appending assertions about the
are still not ruled out. But internal criticisms of maximization are very
nature of the function being maximized (such as it being differentiable,
difficult since too often utility as the objective of maximization is not
transitive, reflexive, etc.) one can form a more complete statement that may be
refutable [see Mongin 1986]. directly observable. Are there any ancillary aspects of maximization that
11 See note 6 above. If one interprets maximization to mean only local maximiza- can be critically examined? Perhaps if there are, we can find them in the
tion, then the question is begged as to how a consumer has chosen between
views that Marshall developed in his famous book Principles of Economics
competing local maxima.
[1920/49]. Marshall, I now think, had a clear understanding of the
12 For these reasons the maximization hypothesis might be called the ˜paradigm™
limitations of what we know as neoclassical economics. Recognized
according to Thomas Kuhn™s view of science. But note that the existence of a
paradigm or of a metaphysical statement in any research programme is not a limitations would seem to be a good starting point for a critical
psychological quirk of the researcher. Metaphysical statements are necessary examination of neoclassical economics.
because we cannot simultaneously explain everything. There must be some
I say that I now have this view because as a product of the 1950s and
exogenous variables or some assumptions (e.g. universal statements) in every
1960s I never learned to read originals “ we were taught to be in a big
explanation whether it is scientific or not.

<<

. 3
( 25 .)



>>