THEORY VS. ANALYSIS IN THE METHODOLOGY OF THE AUSTRIAN SCHOOL

 

Pure static economics is nothing but an abstract picture [or model] of certain

economic facts, i.e. a schema that should serve as a description about them. It

depends on certain assumptions, and in this respect, it is a creation of our

arbitrariness, just as every exact science is. … [But] this does not prevent

theories from fitting facts. (Schumpeter, 1908, 527; trans. by Shionoya, 1997,

103–4)

 

The aim of “economic science” for Schumpeter is not to theorize and thus to explain “reality”, because reality is very different from the scientific framework constructed to analyze it. Science is not a “closed system” of the type “whenever x, then y, where x is a dependent variable or function of y”. This kind of “closedness” (Ab-schluss) is in fact a tautology, as Bohm-Bawerk showed to the detriment of Marx, because the effect follows necessarily from the definition of the cause. Thus, in Marx’s “transformation problem” observable market prices in aggregate are determined by unobservable labour values in aggregate, making the empirical proof of the theory a mere article of faith (of “metaphysics”, Joan Robinson would say; “prophecy” for Schumpeter) because every aggregate can always be homologated to another aggregate, no matter how heterogeneous! Every theory that seeks to de-fine, to de-limit social reality as a “totality” must renounce by that very reason all practical application – because such practical or instrumental application can be made effectual only by renouncing the “totality” of the theory, by renouncing the claim of theory to be able to reconcile human interests, of being non-partisan, universal, neutral. For Schumpeter the only neutrality possible for economic theory is not that of being a “totalizing” science but that of being an instrument, a tool – indeed, in his own definition falsely attributed to Joan Robinson but in fact derived from Ernst Mach, economics is, like all science, “a box of tools”:

 

[O]ur objects of investigation are certain relations of dependence or functional relations.

The fact that economic quantities stand in such relations to one another legitimizes

their separate treatment provided that they are uniquely determined . . . If a system

of equations yields absolutely nothing but the proof of a uniquely determined interdependence,

this is already very much: it is the founding stone of a scientific structure.

(Schumpeter 1908: 33 - 4)

 

At the interface of scientific model or schema and its extrinsication in social reality lies the “tendency”. Science is an open system if its hypotheses represent tendencies that furnish a guide to action by warning against the necessity of the economic system, its “closedness”. The closed theory is “a box of tools”, a frame-work (Entwurf) from which hypotheses can be derived with which to frame and to correct reality according to one’s will. The aim of science is to provide “a box of tools” needed to correct reality or at least to take into account the ineluctable conflict contained in its axioms when we attempt “to bring them into being”, to pro-duce them or turn them into reality, into ec-sistence.

 

It is evident, then, that Schumpeter erred when he stated above that the arbitrariness of the Schema does not prevent the theory from fitting the facts. The opposite is true! It is the facts that must fit into the Schema – because the Schema is devised to preserve the facts as they stand at present – to perpetuate the established order! This is made devastatingly irrefutable by the very assumptions that support the Schema!

 

The whole of pure economics rests with Walras on the two

conditions that every economic unit wants to maximize utility and

that demand for every good equals supply. All his theorems follow

from· these two assumption. Edgeworth, Barone, and others may

have supplemented his work; Pareto and others may have gone

beyond it in individual points: the significance of his work is not

thereby touched. Whoever knows the origin and the workings of

the exact natural sciences knows also that their great achievements

are, in method and essence, of the same kind as Walras'. To find

exact forms for the phenomena whose interdependence is given us

by experience, to reduce these forms to, and derive them from, each

other: this is what the physicists do, and this is what Walras did. (TGE 79)

 

 

 

 

Once again, bourgeois science is neither a Sein nor a Sollen: it is a Mussen: it is not a “theory” that seeks to explain; it is merely a formal analysis that seeks to frame reality to fit the assumptions implicit in the analysis as the measure of the facts it selects! For bourgeois science, whatever is real is rational because the “real” is not a Kantian Is or Ought but rather a Must: it is the way the world must be for the bourgeoisie to maintain the rule of dead labour over living labour by means of the wage relation. The singular aim of bourgeois economic “science” is to turn theory into analysis – that is, to turn an interpretation of reality as it is in terms of what “ought to be” into the measurement or description of what is to ensure that it remains the same. A theory lays out explicitly the values that will lead to the final human goals, the ends (Latin, finis, end, goal) that motivated it – it contains a Wert-rationalitat (Weber’s worth-rationality).  By contrast, analysis wishes merely to describe and measure an existing reality for the purpose of preserving and perpetuating it:– it contains a Zweck-rationalitat (purposive rationality).

 

Schumpeter's first book, The Essence and Content of Theoretical

National Economics, published in 1908 when he was twenty-five,

was one of the earliest attempts to give a methodological foundation

to neoclassical economics. His standpoint was influenced by the

precursors of logical positivism, such as Mach, Poincare’, and Duhem.

Schumpeter’s methodology in Wesen can best be interpreted as instrumentalism,

i.e., the view that theories are not descriptions but instruments

for deriving useful results and are neither true nor false. (Y. Shinoya, “Instrumentalism in Schumpeter’s Economic Methodology”).

 

 

 

 

Shionoya is manifestly wrong with his last sentence: true, for Schumpeter, a theory is an instrument, a tool, not an explanation, least of all a teleology. But for that reason alone it is a description containing a prescription in terms of defining the logical space (German, Ort) within which facts may be measured and fitted into the theoretical parameters of the theoretical Schema (German, Entwurf). Once the bourgeoisie has managed to subsume the entirety of social reproduction to capital and has therefore established a veritable “society of capital” – a society in the image and likeness of the wage relation -, then and only then for it “whatever is real has now also become rational”! (This point of the adequacy of bourgeois social reality to its analytical tools is made most perceptively by H. Arendt, in Human Action, citing G. Myrdal.)

 

 

Simply pathetic is Joan Robinson’s attempt to combat this Rationalisierung with the romantic-existentialist and humanist protestations about the irreversibility of time – cf. her “Time in Economic Theory” in On Re-Reading Marx and “History vs. Equilibrium” [– or indeed Tony Lawson’s bemoaning of the loss of “reality” in bourgeois economic theory]. This from the theoretician who described economics as “a box of tools” and derided the Classical notion of Value as “metaphysical”! For the negatives Denken it is precisely the elimination of “metaphysical” notions such as “time as history” - the “spatialisation” and mathematisation of time decried by Bergson and Heidegger - that is one of its greatest achievements! Only by eliminating the “experience” of time, the “reality” of time, the “metabolic content” of human living activity – even time as kairos rather than chronos, or worse still even in its ethereal version as Husserlian epoche’ or Bergsonian duree – could the Neoclassics hope to establish general equilibrium as an “exact science” founded on a system of simultaneous equations! (Cf.  Colletti’s complete incomprehension of this problematic in his misguided attempt to correct the Marxian notion of value with neo-Kantian epistemology in “From Bergson to Marcuse” in Marxism and Hegel.)

 

This is a point that completely escapes Lawson in his assessment of “the confused state of equilibrium theory” because he is too preoccupied with the idea that a “closed” system simply abstracts from the “contingency” of “existence” or “reality” – hence, the title to his work, “Economics and Reality”! For Lawson, and for Moura, a system is “closed” if it does not allow for “contingency”, if it presumes to predict the future and thereby banishes “history” – as if history were purely the realm of contingency, of the aleatory! But this scientific “prediction” is the property of all nomothetic social sciences, and Lawson’s objection is both pathetic in the face of the brutal violence of the bourgeoisie and unwarranted because no “science” is possible except as a theoretical framework for a given political practice! Of course, even Heidegger would not share Lawson’s “existentialist humanism”, the petulant pretense, reminiscent of Sartre, that “human beings are free”, that they have “choice”! (Cf. Heidegger’s  Letter on Humanism.) Lawson has simply misunderstood Heidegger entirely because “freedom-toward-death” is a property of Da-sein and not necessarily of human beings. In essence, Da-sein is only “possibility”: it is the “free-dom” of Hobbes and Schopenhauer or at best the “liberty” of liberalism (Locke, Constant), not the “freedom” of philosophical rationalism from Plato to Rousseau and Marx; and it is certainly not the teleological Freiheit of Classical German Idealism.

 

 

The problem with these critiques of Neoclassical Theory is not that they are wrong but rather that they entirely miss the point of the political purpose (Zweck) behind the theory! It is the effectuality of “economic science” that we must examine, not its theoretical shortcomings or logical inconsistencies – for all theories are internally inconsistent and even Robinson opined that “a one-to-one map of reality is useless”. But a map of “reality” serves the purposes of those who draw it – it is never “neutral”, and that is the point that the obtuse Robinson could not see because she was too busy caviling at the “flaws” in bourgeois economic theory when in fact they were “strategies”. These people still believe that it is possible “to humanize” economics without changing its real subject-matter – “the economy”, the frame-work of violence as imposed by the bourgeoisie!

 

Schumpeter’ s scientific hypothesis is simultaneously a logical requirement of the concept of pure competition and the practical implementation of the concept, which is what makes it “logical” yet not “closed” or self-referential and therefore tautological. To repeat, a closed system is one in which the final effect is connected by definition to the initial cause so that cause becomes effect and effect becomes cause – a circulus vitiosus. Here instead the real outcome of a concept is the result of its practical implementation and causality plays no role whatsoever in the connection between concept and reality. The outcome is what must occur if the concept is to be realized; but there is no causality between the concept and its realization. Hence, bourgeois economic “science” cannot tell us, ethically or deontologically, what to do; it can tell us only what we must do if we wish to attain a particular goal. It is this instrumental purpose dictated by the inevitable conflict or clash of wills in society that is theorised by economic science and that can be applied to the reality of society to achieve stated goals. Equilibrium theory assumes that all economic agents are equal participants in the process of market competition both formally and materially. Dynamic theory instead assumes that for the system to escape the stagnant gravitational pull of competitive forces keeping the system at equilibrium there must be “frictions”, sociological and historical, that arise from the operation of the market process itself and that lead it away from theoretical equilibrium. Both these theories can be “pure”, but the latter can be so only in the sense that it considers the empirical operation of economic agents in the social network.

 

The transition between equilibrium points cannot be pure in the same manner of static analysis but only in the sense that it takes into account the “real operation” of competitive conflict at its interface with the social system. Schumpeter tries to capture the “purity” of the Dynamik by focusing on the necessity of innovation as the ex-pression of profit-seeking pure competition – that is to say, on the necessary implication that the “purity” of competition in equilibrium analysis must be relinquished the minute the analysis comes into contact or “friction” with reality. It can be argued that the “necessity” or pre-supposition (Heidegger’s famous Zurucktritt where he comes closest to Hegelian dialectics) of this “friction” is what preserves the conceptual “purity” of the Dynamik itself! (Cf.  Bobbio’s similar argument with regard to Kelsen’s “pure theory of law” requiring not just the concept of State and People, but also that of “co-action” or “enforcement”! The purity of the perfect mechanism is lost when somebody has to switch it on [Da Hobbes a Marx, p.65].  Bobbio’s discussion of Macpherson on Locke is a brilliant exposition of these points with regard to their different interpretations of the state of nature.)

 

This is a passage that displays the conceptual hiatus between the “determinateness of prices” in equilibrium analysis, because they are “relative prices” or mere “exchange rates”, in a static schema that admits of no “transformation”, of no metabolism, of no pro-duction, - and the “indeterminateness of prices” in a dynamic process that allows of such transformation. The reason that compels Schumpeter to use equilibrium as a benchmark, as a “centre of gravitation” (Schumpeter uses the term “Gravitationszentrum” in the Theorie) or “neighbourhood of equilibrium”, is precisely the need to anchor the bourgeois analysis of the economic system as a historical and institutional market process to a “scientific frame-work”, one in which prices at the very least appear to be determinable, at least sufficiently to yield “interesting results” (Schumpeter’s phrase), that is to say, to guide economic policy for the bourgeoisie in accordance with the fundamental postulates and axioms of its worldview – the view of “labour as disutility” (see our “Capitalist Metaphysics” on this central notion in the praxis of the bourgeoisie) and possessive individualism! 

 

It is far from a coincidence that Schumpeter chose to title his majestic review of economics “A History of Economic Analysis”, and not of Economic Theory!

 

[Can capitalism survive?] What counts in any attempt at social prognosis is not the Yes or No that sums up the facts and arguments which lead up to it but those facts and arguments themselves. They contain all that is scientific in the final result. Everything else is not science but prophecy.  Analysis, whether economic or other, never yields more than a statement about the tendencies present in an observable pattern.  And these never tell us what will happen to the pattern but only what would happen if they continued to act as they have been acting in the time interval covered by our observation and if no other factors intruded.  “Inevitability” or “necessity” can never mean more than this.

What follows must be read with that proviso. But there are other limitations to our results and their reliability. The process of social life is a function of so many variables many of which are not amenable to anything like measurement that even more diagnosis of a given state of things becomes a doubtful matter quite apart from the formidable sources of error that open up as soon as we attempt prognosis. These difficulties should not be exaggerated, however. We shall see that the dominant traits of the picture clearly support certain inferences which, whatever the qualifications that may have to be added, are too strong to be neglected on the ground that they cannot be proved in the sense in which a proposition of Euclid’s can.

 

 

From the point of view of the market process, equilibrium analysis is the logico-mathematical schema or “anchor” that allows prices to be determined, however “approximately” or “asymptotically”. Equilibrium therefore encapsulates the “tendency” of the capitalist economic system to gravitate around its core ethico-political and institutional imperatives and objectives. The trans-crescence or mutation of the economic system must be formalized by “crystallizing” this political process with its social antagonism into a “scientifically and logico-mathematically predictable or exact pattern”. The ability to formalize reality is an indication of the ability to control it! (Cf. Heidegger in “Postscript to ‘What is Metaphysics?’ in  Pathmarks at p.235:

 

“Calculative thinking compels itself into a compulsion to master everything on the basis of the correctness [we should say, effectuality] of its procedure.”)

 

This is why both Schumpeter and the rest of the Austrian School of economic theory always held tight to the notion of “equilibrium” even when they denounced its “unattainable” character. That is why Schumpeter and the Austrian School hold steadfastly to the fantastic notion that it is possible to gravitate or to reach the neighbourhood of, and to display the tendency to equilibrium – as if this were a “process” of a series of quantitative approximations to equilibrium – without ever being able to reach it – because otherwise the conceptual inconsistency of the market process with the equilibrium schema would be entirely evident: a “metabolic process” can never be a “logical schema”; and vice versa! (On Schumpeter’s Dynamik as “a series of approximations”, see Moura.)