Knowledge that Transforms

This paper studies the historical roots of the relationship between economics and psychology, and places recurring controversies between these disciplines in the context of the relationship between economics and the other human sciences, especially sociology. We focus on the formative years of contemporary economics, the early twentieth century, when psychologists and institutionalist economists attacked the unscientific nature of economics. Economists responded by (mistakenly) renouncing verstehen and claiming adherence to behaviorism, rather than by actually addressing the institutionalist critique. Behaviorist economics declared independence from psychology, and by analogy, from the other human sciences. Our illusion of independence continues to this day.

philosophical (i.e., conventionalist) criteria but rather they, too, are empirically based, hence can be expressed in instrumentalist terms: Simpler means requires less empirical knowledge (the word initial refers here to the process of generating predictions with something like modus ponens). More fruitful means more applicable and more precise [4, p. 10]. The possibility of a tradeoff is discussed. Friedman explicitly rejects the necessity of requiring the of substantive hypotheses before they are used simply because it is possible. But here it should be noted that his rejection of is partly a consequence of his use of the word testing. Throughout his essay always means testing for (in some sense). It never means testing in order to reject as most of his critics seem to presume. That is, for Friedman a successful test is one which shows a statement (e.g., an assumption, hypothesis, or theory) to be true; and, of course, a minimum condition for a successful test is that the statement be inconsistent with empirical evidence (see [4, pp. 33-34]).14 Appreciating the success orientation of Friedman's view is essential to an understanding of his methodological judgements. For Friedman, an instrumentalist, hypotheses are chosen because they are successful in yielding true predictions. In other words, hypotheses and theories are viewed as instruments for successful predictions. It is his assumption that there has been a prior application of modus tollens (by evolution, see [4, p. 22]), which eliminates unsuccessful hypotheses (ones that yield false predictions), and which allows one to face only the problem of choosing between successful hypotheses. In this 13 Note here, although Friedman uses conventionalist criteria, it is for a different purpose. For a conventionalist the criteria are used as status substitutes; in conventionalism one finds that theories are either or worse. In this sense, Friedman can be seen to pose the problem of choosing among theories already classified as better in his sense (successful predictions). 14 I stress, this is the view Friedman uses in his essay. In recent correspondence Professor Friedman has indicated to me his more general views of in which success might be either a confirmation or a disconfirmation. But he still would question the meaningfulness of testing in order to reject. Although Friedman seldom uses the word truth, it should be noted that throughout he consistently uses the word (by which he always means at least not inconsistent with the available facts) in the same sense that truth plays in modus ponens seemingly while also recognizing that modus ponens is assured only when applied to truth in the absolute or universal sense (i.e., without exceptions). Technically speaking his use of the word may lead one to the incorrect identification of truth with validity. In this regard, applications of Friedman's methodology are often confused with orthodox conventionalism. This confusion can be avoided by remembering that is a (but sufficient) condition of empirical truth-hence, validity and are identical-and by recognizing that someone can believe his theory is true, even though he knows he cannot prove that it is true. This content downloaded from 40.77.167.14 on Tue, 20 Sep 2016 06:14:18 UTC All use subject to http://about.jstor.org/terms 512 Journal of Economic Literature, Vol. XVII (June 1979) sense, his concentrating on successful predictions precludes any further application of modus tollens. And similarly, any possible falsity of the is thereby considered irrelevant. Such a consideration is merely an appreciation of the logical limitations of what I called reverse modus tollens (above, Section 1.2). And since he has thus assumed that we are dealing exclusively with successful predictions (i.e., true conclusions), nothing would be gained by applying modus ponens either. This is a straightforward appreciation of the limitations of what I called reverse modus ponens. Knowing for sure that the hypotheses (or assumptions) are true is essential for a practical application of modus ponens, but such knowledge, he implies, is precluded by the absence of an inductive logic [4, pp. 12-14]. By focusing only on successful hypotheses, Friedman correctly reaches the conclusion that the application of the criterion of simplicity is relevant. He says there is virtue in a simple hypothesis if its application requires less empirical information. One reason a simple hypothesis can require less information, Friedman says, is that it is descriptively false [4, pp. 14-15]. (For example, a linear function requires fewer observations for a fit than does a quadratic function.) This raises the question of descriptions versus necessary abstractions. Friedman explicitly recognizes that some economists (presumably, followers of Lionel Robbins) hold a view contrary to his. For them the of a theory is considered to be a direct result of the descriptive realism of the assumptions. But Friedman claims the relation between the significance of a theory and the realism of its assumptions is almost the opposite. . . . Truly important and significant hypotheses will be found to have assumptions that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the (in this sense)....

IN THE FALL OF 1942, as the Allied and Axis nations marshalled their forces for decisive battles at Guadalcanal, El Alamein, and Stalingrad, Joseph A. Schumpeter's Capitalism, Socialism, and Democracy (CSD) was published. Perceived by Schumpeter at the time as a little book of essays somewhat in the nature of a potboiler,' it distilled for the intelligent lay reader almost forty years' thought, observation, and research (1942, p. ix) by the Austrian economist-statesman-banker turned Harvard don. Fifty years later, it remains relevant. In particular, it brought into the main stream of economic discourse the question of what market structures were most favorable to technological change and hence economic growth. Both in the United States and abroad, policy debates over that issue persist. Schumpeter's conjectures on market structure, the work by economists to extend them, and the continuing policy puzzles are the main focus of this anniversay essay. II. The Challenge

Political Order and Inequality: Their Foundations and Their Consequences argues that geography, technology, and wars determined the formation of a ruling class, inequality, and institutional development, rather than the other way around. Institutions are not a cause but a consequence. This relatively short book covers an enormous amount of material. I have sympathy for the basic idea of the book, but in some parts I would have liked to see more detailed evidence, especially on the more recent history and the Industrial Revolution. (JEL D02, D63, D72, H11, O43)

This is a review essay based on a critical assessment of The Ant Trap: Rebuilding the Foundations of the Social Sciences by Brian Epstein. Epstein argues that models in the social sciences are inadequate because they are based on a false ontology of methodological individualism, and proposes a new model of social ontology. I examine this model and point to flaws in it. More generally, I argue against Epstein's methodological approach, which treats social ontology as prior to social scientific modeling and as certifying the “building blocks” that modelers then use. I argue that modelers can legitimately shape the building blocks for their own models. (JEL A10, B40)

The role of science and technology in the First Industrial Revolution is still contested. Some scholars, focusing on the textiles sector, argue that skilled and talented artisans with no scientific training were mainly responsible for the key inventions; others, with steam power in mind, hold that the links between science and the crucial inventions of the period were fundamental. Margaret Jacob has been a leading contributor to the debate for nearly four decades. The publication of her The First Knowledge Economy offers an opportunity to review the issues. (JEL J24, L26, N13, N73, O31, O33)

Organizations fail due to incentive problems (agents do not want to act in the organization's interests) and bounded rationality problems (agents do not have the necessary information to do so). This survey uses recent advances in organizational economics to illuminate organizational failures along these two dimensions. We combine reviews of the literature with simple models and case discussions. Specifically, we consider failures related to short-termism and the allocation of authority, both of which are instances of “multitasking problems”; communication failures in the presence of both soft and hard information due to incentive misalignments; resistance to change due to vested interests and rigid cultures; and failures related to the allocation of talent and miscommunication due to bounded rationality. We find that the organizational economics literature provides parsimonious explanations for a large range of economically significant failures. (JEL D21, D23, D82, D83, M10)

This article surveys the literature on regulatory arbitrage in four settings: labor regulation, environmental protection, corporate governance, and banking and finance. For a regulatory race to occur, firms must migrate across state or country borders in response to geographic differences in the costs and benefits of regulation, and governments must shape their regulatory policies with the aim of affecting those migration flows. We find that both these conditions hold only in rare circumstances. Instead, the much more common outcome is for political pressures within jurisdictions to produce a heterogeneous pattern resembling Tiebout sorting. Such regulatory convergence as occurs is more often the result of deliberate harmonization or imitation. (JEL G18, G28, G38, H73, J08, L51, Q58)

We review Immigration Economics by George J. Borjas, published in 2014 by Harvard University Press. The book is written as a graduate-level textbook, and summarizes and updates many of Borjas's important contributions to the field over the past thirty years. A key message of the book is that immigration poses significant costs to many members of the host-country labor market. Though the theoretical and econometric approaches presented in the book will be very useful for students and specialists in the field, we argue that the book presents a one-sided view of immigration, with little or no attention to the growing body of work that offers a more nuanced picture of how immigrants fit into the host-country market and affect native workers. (JEL A22, J11, J24, J31, J61, R23)

The WTO has delivered policy outcomes that are very different from those likely to emerge out of the recent wave of preferential trade agreements (PTAs). Should economists see this as an efficient institutional hand-off, where the WTO has carried trade liberalization as far as it can manage, and is now passing the baton to PTAs to finish the job? We survey a growing economics literature on international trade agreements and argue on this basis that the WTO is not passé. Rather, and subject to some caveats, our survey of research to date suggests that the WTO warrants strong support while a more cautious view of PTAs seems appropriate. (JEL F13, F14, K33, N70)