Economics Social Institutions: Insights from the Conferences on Analysis & Ideology PDF
Preview Economics Social Institutions: Insights from the Conferences on Analysis & Ideology
'"''(.,''' 'Ilf '-~'l\' <-O"I-f IH '( f' 0" \" \1 \~" •. IIlH )1.0. . \ ROCHESTER STUDIES IN ECONOMICS AND POLICY ISSUES Published in cooperation with The Center for Research in Government Policy & Business Graduate School of Management University of Rochester Rochester, New York, U.S.A. II INSIGHTS FROM TH' CONFERENCES ON ANALYSIS & IDEOLOGY Kar I Brunner, edi tor Martinus Nijhoff Publishing, Boston Boston • The Hague • London III Portions of this work originally appeared in Journal of Fi nancial Economics, in Freedom in Constitutional Contract, James Buchanan, published by Texas A & M University Press, in Kyklos and in Schweizerische Zeitschrift filr Volks wirtschaft und Statistik. Library of Congress Cataloging in Publication Data Interlaken Seminar on Analysis and Ideology. Economics and social institutions. (Rochester studies in economics and policy issues) 1. Economics-Congresses. I. Brunner, Karl, 1916- II. Title. III. Series. HB21.I615 1979 330 79-13177 ISBN-13: 978-94-009-9259-7 e-ISBN-13: 978-94-009-9257-3 001: 10.1007/978-94-009-9257-3 © 1979 copyright by University of Rochester Center for Research in Softcover reprint of the hardcover 1s t edition 1979 Government Policy and Business. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except for brief quotations embodied in critical articles and reviews. For further information please notify the publisher, Martinus Nijhoff Publishing, 160 Old Derby St., Hingham, MA 02043 IV Contents Contributors VI Introduction Vll Karl Brunner The Economic Tradition: Economics as a Research 1 Programme for Theoretical Social Science Hans Albert Milton Friedman in Our Time 29 Karl Brunner Development Economics: Intellectual Barbarism 41 P. T. Bauer A Hobbesian Interpretation of the Rawlsian 59 Difference Principle James M. Buchanan Galbraithian Economics: The Methodology and 79 Political Economy of Neoinstitutionalism or a New Vulgar Economics? Gerard Giifgen "Economics and the Public Purpose" 105 Some Discussion Points Related to Chapter Three of John K. Galbraith's Homonymous Book Hans G. Monissen The Capitalist Corporation and the Socialist Firm; 131 A Study of Comparative Efficiency Svetozar Pejovich Theory of the Firm: Managerial Behavior, Agency 163 Costs, and Ownership Structure Michael C. Jensen and William H. Meckling Some Implications of Recognition of Property 233 Right Transactions Costs Armen A. Alchian The Antitrust Dilemma 255 Harold Demsetz Toward a Theory of the Press 267 Michael C. Jensen v Contributors Hans Albert-Lehrstuhl fUr Soziologie und Wissenshaftslehre, Un i versitat Mannheim Armen Alchian-Department of Economics, University of Cali fornia, Los Angeles Peter T. Bauer-Department of Economics, London School of Eco nomics and Political Science Karl Brunner-Center for Research in Government Policy and Business, Graduate School of Management, University of Rochester and Universitat Bern James M. Buchanan-Center for Study of Public Choice, Virginia Polytechnic Institute and State University Harold Demsetz-Department of Economics, University of Cali fornia, Los Angeles Gerard Gafgen-Fachbereich Wirtschaftswissenshaften unci Sta tistik, U niversitat Konstanz Michael C. Jensen-Managerial Economics Research Center, Graduate School of Management, University of Rochester William H. Meckling-Graduate School of Management, University of Rochester Hans G. Monissen-Justus Liebig Universitat-Giessen Svetozar Pejovich-Department of Economics, University of Dallas VI Introduction The productive work of widely distributed academic research has contributed substantially, over the postwar period, to important advances in our understanding. It has also offered a clearer recognition of many unresolved problems. Never theless, the progress achieved over the last decades, ex hibited by the systematic application of "theory" to actual issues and observable problems, could not overcome a per vasive sense of dissatisfaction. Some academic endeavors pursued within a traditional range of economic analysis have appeared increasingly remote from broad social issues, motivating the social and intellectual unrest experienced in recent years. Conditioned by the traditional use of economic analysis, many have naturally concluded that the "most relevant" social issues agitating our times are beyond the reach of economics. Purist advocates of a traditional view thus condemn any extension of economic analysis to social issues as an escape into "ideology". Others argue the need for an "interdisciplinary approach" involving sociology, social psychology, or anthropology as necessary strands in a useful understanding of social, institutional, and human problems of contemporary societies. We note here, in par ticular, the subtle attraction inherent in Marxian thought. It appears to offer a unified approach, with a coherent inter pretation, to all matters and aspects of human society, in cluding even nature. It is quite natural under the circum stances for eager young scholars, concerned with the broader social issues of our times and impressed by the allure of an encompassing vision, to turn to Marxian thought, disgruntled by the prevalent "Platonic exercise" in formal economics. These developments are not imposed on us as our uncon trollable fate. Weare offered a choice. There is an alternative to the illusion or reality of ideological miasmas, interdisci plinary convolutions, or salvation through Marxian dogma. This alternative was defined by Adam Smith's vision of economics as the social science. The successful development of a coherent analytic framework in the context of economic analysis-contrasting with shifting ad hoc constructions in social or behavioral psychology and empirical sociology, and contrasting also with the essentially programmatic and nonanalytic outlines and speculations in theoretical soci ology and the pronounced analytic flaws or metaphysical VII intrusions in Marxian thought-suggests the useful explora tion of a far-reaching intellectual program. There are no inherent reasons for limiting the application of economic analysis to the narrow range codified by a tradition formed in this century. There are, in particular, no a priori grounds why the perception of man elaborated in economic analysis since its origins in the writings of the Scottish philosophers of the 18th century could not be use fully extended over the widest range of human experiences. This research program has been initiated by a small number of economists and has gained substantial momentum in recent years. It offers many opportunities for coping with serious social issues or institutional problems beyond the traditional marketplace. It promises, moreover, to yield use ful analytic evolutions in the adaptation of inherited formu lations to new ranges of human endeavors and expressions. The Interlaken Seminar on Analysis and Ideology was conceived in 1973 as a forum encouraging an explicit and searching extension of economic analysis to the full sweep of social phenomena. The Interlaken Seminar thus ad dresses, in Hans Albert's words, a "sociology" with the analytic means developed by economic analysis. The first meeting was held in 1974, and the sessions con tinue every year during Mayor June. A wide range of topics has been considered and vehemently argued in past years. A number of papers have been collected for a first volume. The authors are mostly academic economists but also in clude a philosopher of science and sociologist (Hans Albert). The issues covered range from economics as a social sci ence (Hans Albert, Karl Brunner), to critical evaluations of Galbraithian notions of the world (Gerard Gafgen, Hans Georg Monissen) and interpretation of Rawlsian ethics (J ames Buchanan); from social and political incentives en couraging disregard of economic analysis (Peter Bauer), to the working of specific social institutions (Annen Alchian, Michael Jensen, William Meckling, Svetozar Pejovich). The reader may not be convinced of the validity of the broader purpose of this volume and of the Interlaken Seminar. But the participants of the seminar may reasonably hope that the outcome will stimulate further probing and pondering of the basic questions. Karl Brunner VIll Hans Albert The Economic Tradition Economics as a Research Programme for Theoretical * Social Science Methodological Remarks In general the growth of knowledge takes place within the framework of comprehensive theoretical traditions that are connected with more or less explicitly formulated research programs. Tradition means for knowledge about the same as capital means for the economy. Methodology has to take account of this fact. A methodological conception can only be judged in rela tion to aims-the aims of scientific activity. These aims are controversial among scientists; therefore, we have to take sides on this question. I prefer critical realism as an episte mological conception, as Adam Smith did about two hun dred years ago.! According to this view, the central aim of scientific activity is to discover the structure of reality by a systematic search for comprehensive, deep, and precise knowledge. It is thus necessary to strive for theories with great explanatory power; that is, theories that are as simple '" Presented at the Third Annual Interlaken Seminar on Analysis and Ideology, Switzerland, June 1976. I am thankful for the assistance of Marty Zupan in re vising this article. 1 Adam Smith, "The Principles Which Lead and Direct Philosophical Enquiries Illustrated by the History of Astronomy," in The Works of Adam Smith, ed. Du gald Stewart (1811-12; reprint, Aulen: Otto Zeller, 1963), vol. 5. 21 ECONOMICS AND SOCIAL INSTITUTIONS as possible while explaining very much. Most methodologi cal problems can be related to this aim. The first problem seems to be to answer the question, Which are the properties such a theory must have? It would be plausible to say, certainly, that it has to be simple, gen eral, and true. But with all these properties we get into diffi culties, because no adequate explication exists at present. Simplicity seems to be important,2 but it is a rather vague idea, not completely reducible to information content. 3 Generality seems to be relevant as well, but the attempt to reduce it to independence from spatiotemporal restrictions is insufficient.4 As to truth, there is not only a problem of explication. Another problem seems to be even more impor tant. If we agree that fallibilism is inherent in modern sci ence and philosophy, then there can be no criterion of truth. Truth can only be a regulative idea-the idea of adequate representation-which leads to a particular orientation for the methodology of testing: All attempts at testing should be organized so that the "resistance of reality" is used to find out the strong and weak points of our problem solu tions. It is always possible, by using alibi formulas or ad hoc assumptions, to immunize a set of propositions against criti cism. But corroboration is only possible via serious attempts to test.5 Another problem is to formulate an adequate characteri zation of theories themselves. A theory may be conceived of as a system of interconnected nomological statements that depend on some simple, unifying ideas and are formulated in terms of a coherent conceptual apparatus. It implies as sertions to the effect that under certain general conditions certain events are to be expected, perhaps with a certain probability. Because of their nomological content, counter factual or subjunctive conditionals can be deduced from them (example: if in the space-time region x, y, Z, t the quantity of money was increased rapidly, an inflationary develop- 2 Ibid.; Karl Popper, Conjectures and Refutations (London: Routledge & Kegan Paul, 1963), p. 241. 3 Carl Gustav Hempel, Philosophy of Natural Science (Englewood Cliffs, N.].: Prentice-Hall, 1966), p. 44. 4 Karl Popper, The Logic of Scientific Discovery (originally published as Logik der Forschung, 1934) (London: Hutchinson, 1959), pp. 420-41. 5 Popper, Scientific Discovery.
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