Lachmann discusses Menger’s attitude to “economic laws” and the law of demand:
“For a long time students of Menger have been puzzled by the precise meaning of his notion of ‘exact laws’. He regards it as the prime task of economic science to formulate such laws. In Appendix V of the Untersuchungen we are told that ‘in the field of human phenomena exact laws (so-called ‘laws of nature’) are attainable under the same conditions as in that of natural phenomena.’ In this regard, then, there is no difference at all between social and natural sciences. On the other hand, Menger distinguishes sharply between these ‘exact laws’, i.e. ‘laws of the phenomena which are not only valid without exception but which, according to the laws of our thought simply cannot be thought of in any other way but as without exceptions’ (Menger 1963: 42), and ‘empirical laws’ which rest on observation and admit of exceptions.These views will no doubt strike many of us as odd, but the main reason for it is that we have come to take it for granted that ours is a world of relentless positivism. There will be few natural scientists today ready to acknowledge that their prime task is to find exact laws of the kind Menger describes. For the most of us ‘laws of nature’ are empirical laws, in principle falsifiable.” (Lachmann 1994: 209–210).Menger’s views on the law of demand are quite peculiar. On the one hand, the law of demand is “unempirical when tested by reality in its full complexity,” but at the same time, “in spite of everything, true, completely true”!
Menger uses the ‘law of demand’ as an example for this distinction. According to him the exact law tells us not merely that a rise in demand will lead to a rise in price, but that, under certain conditions, the extent of this price rise is quantitatively exactly determinable (‘dem Masse nach genau bestimmbar’). But he goes on to warn us that these conditions require not only that all participants maximize their satisfaction in the pursuit of which they must be free of all external coercion, but also the absence of error and ignorance. Hence we must not expect to find instances of the exact law in the real world. It is [sc. according to Menger – LK]unempirical when tested by reality in its full complexity.But what else does this prove than that the results of exact research do not find their criteria in experience in the above sense? The above law is, in spite of everything, true, completely true, and of the highest significance for the theoretical understanding of price phenomena as soon as one looks at it from that standpoint appropriate for exact research. If one looks at it from the point of view of realistic research, to be sure, one arrives at contradictions … but in this case the error lies not in the law, but in the false perspective. (Menger 1963: 57).
That Menger could seriously believe and write those words demonstrates that he formulated the law of demand at a level so abstract that it could only be true in that almost imaginary world. It is as if we were to formulate a law that must be necessarily true in the Land of Oz, admit that such a law is not universally true in our world, but nevertheless contend that such a law is always and universally true in Oz, the world of our imagination.
That all this bespeaks a deeply flawed, even deluded, approach to the social sciences goes without saying.
Menger conceded that when related to the empirical real world of experience, the law of demand” arrives at contradictions.” That is quite clearly a continuing problem with the law of demand even in neoclassical economics.
BIBLIOGRAPHY
Lachmann, L. M. 1994. “Carl Menger and the Incomplete Revolution of Subjectivism,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics, Routledge, London. 207–212.
Menger, Carl. 1963 [1883]. Problems of Economics and Sociology (trans. F. J. Nock). University of Illinois Press, Urbana, Illinois.
This is typical of 19th century writing in the social sciences. The more thoughtful would make confused statements precisely like Menger is here. Laws would be at once laws and not laws -- and so on.
ReplyDeleteIn the other social sciences these issues were generally teased out over the next century and it became known that it is very, very rare that any truly law-like phenomena exist in the social sciences (one possible exception might be the universality of the incest taboo across human societies...). However, neoclassical/Austrian economics shut this debate down before it could ever get started. And so here we stand today.
BTW, Lord Keynes, given these rather interesting issues you may find the exchange on Vernengo's blog today rather interesting as you can see quite clearly the neoclassical response to these criticisms which, although pretty strained, is nevertheless at least a tiny bit less confused than the Austrian response (but not much...). (I'm TheIllusionist, but I'd say you can guess that yourself):
http://nakedkeynesianism.blogspot.ie/2013/01/phillips-curve-what-curve.html
Thanks, will certainly read the post and comments over at Vernengo's blog.
Deleteregards
Economics is more like biology than the natural sciences. For example, it is observed that mammalian species provide parental care to their young, feeding and protecting them. This is necessarily true for mammals not to die out, as their young could not survive without it. Yet, there are also rare cases when mammalian parents kill their young. The law of demand is like this - necessarily true if humans are to improve their welfare, but not true in every individual case.
ReplyDeleteGood point.
DeleteI think the science of nutrition is also instructive. Even on basic issues, after decades of research, it has been hard to reach a consensus. Saturated fat: good or bad? Vitamin pills: effective or not? Coffee? Aspirin? No conclusive answers yet, despite the huge advantages of being able to carry out double-blind studies and the relative solidity of the "microfoundations" of biochemistry, endocrinology, etc.
However, our knowledge of nutrition is slowly improving. Just b/c it hasn't produced guidelines that apply to every single person in every single case is hardly a good reason to throw out or dismiss the entire corpus of nutritional research and knowledge.
But I do agree that economists should NOT delude themselves by insisting that their conclusions be accepted with the same confidence as those of the hard sciences. Thus, no point of view (Neoclassical, New Keynsian, Post-Keynesian, neo-Austrian, etc) can be classified as absolutely wrong with anywhere near the same degree of confidence as in physics, chemistry, etc.
(Exception: insistence on 100% reserve banking by hardcore Rothbardians. That's just logically inconsistent and nuts).
"Thus, no point of view (Neoclassical, New Keynsian, Post-Keynesian, neo-Austrian, etc) can be classified as absolutely wrong with anywhere near the same degree of confidence as in physics, chemistry, etc."
DeleteOf course it can if it is internally inconsistent. Neoclassical/Austrian economics is internally inconsistent on any number of different points (SMD conditions, reswitching etc.). Thus these approaches are indeed wrong.
"The law of demand is like this - necessarily true if humans are to improve their welfare"
DeleteThat does not follow at all.
"The law of demand is like this - necessarily true if humans are to improve their welfare"
DeleteHey look, it happened again. Just like over at Vernengo's blog when you push a neoclassical they eventually drop the mask and admit that their "laws" are just normative judgments on what they think is "right" for society. Funny that, isn't it?
And I recall being called a kook for saying that the marginal utility system was just a giant normative program that buried normative psychological judgments in geometrical figures that sought to ensure people acted in line with how neoclassical economists thought that they should act. *Whistles*
http://www.nakedcapitalism.com/2011/10/philip-pilkington-marginal-utility-theory-as-a-blueprint-for-social-control.html
Of course the reality is that people don't have fixed tastes -- or fixed tastes at time 't' or whatever -- and thus they are not utility calculators and do not fall in line with the law of demand and so on. And when you press this point enough neoclassicals eventually admit it: what they really think is that if everyone acted like utility calculators we would be on our way to Utopia. In fact, its more likely that we'd be on our way to Brave New World or Walden Two. But, I digress.
"However, our knowledge of nutrition is slowly improving. Just b/c it hasn't produced guidelines that apply to every single person in every single case is hardly a good reason to throw out or dismiss the entire corpus of nutritional research and knowledge. "
ReplyDeleteThe problem of Law of Demand (LOD) not holding to all goods is only an example of why we shouldn't hold it as universally true. Another problem would be that in the real world, price is not determined by the LOD
"The problem of Law of Demand (LOD) not holding to all goods is only an example of why we shouldn't hold it as universally true."
ReplyDeleteWhat are some examples of such goods?
You missed my point, though LK has listed examples... This is only a minor point to why LOD is mistaken. The major point would be that the LOD DOES NOT determine price, this is the main point, and it is something that Austrians should have noticed a long time ago, that is, they should have noticed if they were serious enough to learn about the market process.
Delete"the LOD DOES NOT determine price"
DeleteLook, I'm not necessarily disputing this, but I'm merely asking, "What evidence are you basing this on?" I'm open to accepting your view that the LoD is mistaken, but give me something to consider rather than just insisting that it's mistaken.
I have seen LK's list, and I don't consider it to be sufficient evidence that the LoD is mistaken. I have expressed my thoughts in a previous post.
How do you interpret the results of this empirical study? (Note: I'm not claiming this study definitively *proves* the LoD). If the LoD is not a satisfactory explanation, what is?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1173642
John S@January 24, 2013 at 6:28 AM
DeleteTo clarify my view, at any rate:
(1) I do not dispute that many commodities do seem to behave as the law of demand predicts. Not even Steve Keen disputes this: he says so quite explicitly:
"There are of course reasonable grounds to expect that, for many commodities, demand will rise as price falls ..."
(Keen, Steve. 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn). Zed Books, London and New York. Keen 2011. p. 72).
(2) What is being disputed is that the law of demand is universally and necessarily true.
It has already been pointed out that, if you define the ceteris paribus assumption to require no change in real income, then the law is already logically incoherent. It is not possible to change price without changing real income.
I have not yet summarised Keen's arguments on the law of demand, but he shows how you can only prove that the law of demand is true for a world with one consumer.
(3) the evidence for how prices are set in many fixprice markets is available in any amount of empirical studies. Literature is given here or in these works:
Gu, G. C. and F. S. Lee. 2012. “Prices and Pricing,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 456–463.
Melmiès, J. 2012. “Price Rigidity,” in J. E. King, The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 452–456.
Blinder, A. S. et al. (eds.). 1998. Asking About Prices: A New Approach to Understanding Price Stickiness, Russell Sage Foundation, New York.
Frederic S. Lee. 1998. Post Keynesian price theory. Cambridge University Press, Cambridge and New York.
Historically, empirical work on administered prices goes back to Gardiner Means's work (e.g., The Modern Corporation and Private Property, 1932) from the 1930s onwards, and R. L. Hall and C. J. Hitch, "Price Theory and Business Behaviour," Oxford Economic Papers 2 (May, 1939): 12-45.
See also here:
http://socialdemocracy21stcentury.blogspot.com/2012/07/more-on-prices-in-real-world.html
http://socialdemocracy21stcentury.blogspot.com/2012/06/price-rigidity-in-new-keynesianism-and.html
(4) Regarding your link, this is from the abstract of the article you cite:
" Abstract:
We report results of an experiment on prices and demand in a fantasy-based virtual world. A virtual world is a persistent, synthetic, online environment that can be accessed by many users at the same time. "
I quite doubt whether findings in a "fantasy-based virtual world" prove anything about the universality of the law of demand in the real world, with all its complexity.
But even the findings reported here do not contradict what I have said in (1) above.
"We report results of an experiment on prices and demand in a fantasy-based virtual world."
DeleteYes, I realize this. This seems no less artificial than the conditions of most "experimental economics," and it also allowed the ceteris paribus condition to be fulfilled perfectly.
Going forward, I think there is a lot of potential for experimentation in virtual worlds. And can we really say that virtual worlds have less connection with the real world than the "toy models" used to elucidate textbook theories?
Re: PK price theory--I'm reading several books now, and I admit I have lagged in my progress in Debunking Econ. I did find the Frederic Lee's price theory article online, and it's much shorter, so I'll start with that.
Re: point (1)--I'm not necessarily insisting that these cases prove the law of demand is universal. But the fact that many products *do* seem to conform to the LoD predicts is a phenomenon that needs to be explained.
It seems that you and Izzy are doing a lot of hand-waving here; "yes, those cases exist, but these various exceptions are the really important things." My feeling is the opposite; if the LoD describes the behavior of most goods and services, then it does (or potentially can) serve as a useful tool for analysis and is not just a superficial "rule of thumb" as others have stated.
"It is not possible to change price without changing real income."
Yes, logically correct--but the real income changes due to price changes are usually tiny and would seem to exert almost no influence on consumer behavior. What am I missing here?
Finally, I'd just like to ask again: What are the "bad" effects of using supply and demand analysis? How would using Post-Keynesian price theory specifically lead to better policy outcomes?
"What are the "bad" effects of using supply and demand analysis? How would using Post-Keynesian price theory specifically lead to better policy outcomes?"
DeleteFrankly, I have already explained this:
(1) The belief that all markets have prices determined by supply/demand dynamics (in reality, price setting/price administration exists in many important markets).
(2) the belief that all product markets behave in accordance with demand curves and gravitate to their equilibrium prices.
Both ideas are false. The belief in a market tendency to general equilibrium (or Mises's final state of rest) is derived directly from (1) and (2). (I also doubt whether many products markets really even have "equilibrium prices" - this is mostly just another metaphysical assumption.)
The belief in a real world market tendency to general equilibrium is a bad effect of thinking the law of demand is universal and that it sets prices.
Without a real world tendency to general equilibrium, market economies have no tendency to full employment.
As Keynes saidt:
“our actual experience … [sc. is] that we oscillate, avoiding the gravest extremes of fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life.” (Keynes, J. M. 2008 [1936]. The General Theory of Employment, Interest, and Money, p. 229).
Keynesian economics becomes a quite obvious policy for market economies - assuming you want high employment and strong economic growth.
Also, the vulgar "economic calculation" critique (which also requires points (1) and (2) above) falls like the house of cards it is:
http://socialdemocracy21stcentury.blogspot.com/2012/12/vulgar-austrians-economic-calculation.html
According to Kaldor the LOD does not determine prices, but also the assumptions are not true, which, as I respected, means the theory does not hold. In regards to this discussion, Kaldor dismisses the assumptions of economics with ease, "without which," he says, "the main conclusions of [the general equilibrium theory of Walras (as amended by Wald, Arrow, Debreu, McKenzie, and others)] would not hold, as for example those relating to the laws of production."
ReplyDeleteAfter he says that the assertions of general equilibrium can be refuted, and that there are other axioms that are "untrue," such as that "prices constitute the sole kind of information on which decisions are based," he notes:
"there are other axioms, though non-tautological, are incapable, in practice, of being refuted; for example, that the actions of all agents is guided solely by the criterion of 'optimization' by which is meant that producers maximize their profits and consumers their 'utility.'"
Nicholas Kaldor, Economics without Equilibrium, 1985, p.12.
I've digitized this book from my local University and might upload it to a d/l site. it seems to be rare, but is a great read.
--successfulbuild
successfulbuild,
DeleteThanks for the insightful quotes from Kaldor above - he was right too, and was a great economist.
regards