“Futile subtlety”: and How much economics did Popper know?

“The more fruitful debates on methods are always inspired by certain practical problems which confront the research worker; and nearly all debates on methods which are not so inspired are characterized by that atmosphere of futile subtlety which has brought methodology into disrepute with the practical research worker”. The Poverty of Historicism, page 57.

Actually there are two topics in this post, one regarding the effort that has been expended to little advantage in the methodology of economics since the field became a growth area in the 1970s. The second topic is the question of Popper’s grasp on the nuts and bolts of economics.

The first topic intruded, against my original intention, as a result of the quote above, and I will get it out of  the way as quickly as possible to get to the second. It seems that the efforts to apply “falsificationism”, Lakatosian MSRP and Kuhn’s paradigm theory to make sense of economics have not produced very  much of value to working economists. One reason is that a lot of the work  went into “big picture” issues like the marginal revolution and the Keynesian interlude, trying to fit these into one or other of the three  models. The results are inconclusive, partly because the models are defective. But in any case these episodes do not relate to the daily work of economists who have more modest interests and problems. 

So it would really help if people writing papers on methods and the  philosophy of economics would connect to some problem of interest and show what difference it makes to the daily activities of the researcher or the policy analyst (bearing in mind that most economists are working on policy and not theories) . That way you would at least learn something about some current problems and issues in the field when you read what they write.

Popper on economics.

Much has been written about Popper’s alleged methods in relation to economics but next to nothing has been written about his own views on the method and the substance of  economics. Homa Katouzian wrote about Popper’s “mysterious” view about orthodox economics.

The only explanation …is that he must  have been misinformed by economists themselves…It is not unlikely that Popper had been misled on the methodology of orthodox economics by economists whose judgements he trusted. There simply can be no other explanation. Ideology and Method in Economics, page 90.

Popper stated quite clearly that his approach was based on the methods of neoclassical economics, but what did he know, given that his main interests were always in physics and the cluster of problems (probability theory etc) that arose in modern times?

It is likely that the major influences were the people he met in Karl Menger’s seminar on mathematics and the economist Colin Simkin who he met in in New Zealand. Incidentally he was also invited to the Richard Mises seminar on probability and he very  much appreciated his membership of those two circles at a time when he was not invited to the closed sessions of the Vienna Circle of logical positivists.

In the Poverty he wrote that economics may have found its Galileo, meaning the turn to mathematical economics that he saw happening in the hands of Wald, von Neumann, Morgenstern. He encouraged the young Simkin to work on his maths, while Simkin briefed him on the latest developments in Keynesian demand management and the welfare state reforms in Scandanavia.

It is hard to blame the young Popper for being impressed by the proceedings in the Menger group, some of the brightest of the bright were gathered, and Popper was blown away by a paper by Morgenstern (hence the Galileo reference).  At the bottom of the post is an extract from some reading notes from a book on the rise of mathematical economics, this will convey some sense of the excitement at the time.

So Popper was over-impressed by the prospects for mathematical economics but  his encouragement of Simkin to pursue that direction did not pay off. After Colin died a close friend and colleague told me that his lifelong project in macro-modeling never worked out. In many hours of conversation over ten years he never mentioned it, though he did have some preliminary results of a project which purported to demonstrate that the deregulation in New Zealand did not stimulate economic growth.

Colin also became a lifelong friend of John Hicks when he went to Oxford after the war. He wrote touching memoires of both Popper and Hicks.

Popper on economics in The Open Society and its Enemies.

It would be most helpful to  have a professional review of Popper’s critique of Marx on economics.

This is a summary and commentary of his chapter on Marx’s economic analysis. It is a mixed bag of goods. He accepted the orthodox story of suffering under the Industrial Revolution but to his credit he wrote that he could not see how the alleged exploitation of the workers actually happened. He had a nuanced view of Marx’s method, praising his institutional analysis but damning his historicism, the combination of essentialism and prophecy that brought the system undone (with the ambivalent attitude towards violence which is the subject of the previous chapter).

The organization of the chapter:

Section I, a sketch of the premises of Marx’s prophecy, the laws of capitalist production and accumulation, and the conclusion, namely the law of increasing wealth (on one side) and misery (on the other).
Then four sections devoted to some subsidiary assumptions that are required for the argument:

Section II, the theory of value.
Section III, the effect of surplus population on wages.
Section IV, the trade cycle.
Section V, the falling rate of profit.
Finally two sections of critical analysis.
Section VI, the error of the Marxist prophecy of increasing misery.
Section VII, the practical influence of the false prophecy on the tactics of the Marxist parties.


This is a telling section, showing how close Popper came to a correct interpretation of the situation. Contrary to Marx the workers were not getting worse off, they were getting better off, as Popper perceives should have been the case (my emphasis).

What is not so clear, and not explained by Marx either, is why the supply of labour should continue to exceed the demand. For if it is so profitable to ‘exploit’ labour, how is it, then, that the capitalists are not forced, by competition, to try to raise their profits by employing more labour? In other words, why do they not compete against each other on the labour market, thereby raising the wages to the point where they begin to become no longer sufficiently profitable, so that it is no longer possible to speak of exploitation? Marx would have answered—see section V, below—’ Because competition forces them to invest more and more capital in machinery, so that they cannot increase that part of their capital which they use for wages’. But this answer is unsatisfactory since even if they spend their capital on machinery, they can do so only by buying labour to build machinery, or by causing others to buy such labour, thus increasing the demand for labour. It appears, for such reasons, that the phenomena of ‘exploitation’ which Marx observed were due, not, as he believed, to the mechanism of a perfectly competitive market, but to other factors—especially to a mixture of low productivity and imperfectly competitive markets. But a detailed and satisfactory explanation of the phenomena appears still to be missing.
For the same reason, there is no satisfactory explanation of the Lock Ness Monster.
Another passage is similarly critical of the Marxist account. Popper noted that the theory of increasing misery applied to the employed workers (that was the whole point of the analysis) and he made some interesting comments on subsequent developments, notably the way that employed workers actually improve their real incomes during times of depression. And he also noted that the capitalists did not gain from unemployment in times of depression because they lost their investments or at least the cash from from their factories.
Marx, as we have seen, believed that unemployment was fundamentally a gadget of the capitalist mechanism with the function of keeping wages low, and of making the exploitation of the employed workers easier; increasing misery always involved for him increasing misery of the employed workers too; and this is just the whole point of the plot. But even if we assume that this view was justified in his day, as a prophecy it has been definitely refuted by later experience. The standard of living of employed workers has risen everywhere since Marx’s day; and (as Parkes has emphasized in his criticism of Marx) the real wages of employed workers tend even to increase during a depression (they did so, for example, during the last great depression), owing to a more rapid fall in prices than in wages. This is a glaring refutation of Marx, especially since it proves that the main burden of unemployment insurance was borne not by the workers, but by the entrepreneurs, who therefore lost directly through unemployment, instead of profiting indirectly, as in Marx’s scheme.
An interesting analysis, which should have made Popper more sympathetic to Hayek’s free market views. But Popper did not go all the way with Hayek, perhaps if  they had talked the issue through it would have helped but they only wrote letters and so could not generate the quick interchange of ideas and arguments that might have changed Popper’s mind.
Notes from  a Book on the rise of mathematica economics, by Ingrao and Israel.

The plot thickens in the 1930s as the action moves to Vienna. Here we encounter J von Neuman, Oskar Morgenstern [joint authors of the book on game theory that Popper took along on the boat from New Zealand to England], Wald, Karl Menger and the three stooges of the Vienna Circle. Hicks, on a different continent, also made a major contribution to spread the word in the economics profession. Samuelson, on yet another continent, also made a major contribution to the acceptance of the new regime.

The authors revert for a few pages to the crisis in classical physics with the usual talk about undecidability, indeterminism, relativity, etc.

“A consequence of the new scientific approach was the crumbling of the unified fabric of classical science and, at the same time, a fragmentation of scientific work, an increasingly accentuated process of specialization”. (182)

They move on to consider the role of David Hilbert (1862-1943) at Gottingen, especially his axiomatic program. They note that he rejected some of the developments that followed from his work. He remained attached to a “unitary” concept of science (like Newton). “He fought against abstraction for its own sake and stressed the crucial role of problems in research.” (184)

Von Neuman emerges as the man who went all the way with abstraction [in maths, physics, and economics, it seems].

“It was, in fact, John von Neuman who interpreted the Hilbertian viewpoint with the most clear sighted consistency and, at the same time, the most scrupulous awareness of the deeper currents of contemporary research” (184). [For an alternative view, see comments on von Neuman by Popper in Schism.]

The authors quote a commentator on von Neuman’s ‘naïve and optimistic faith in mathematical machinery’. Under his leadership “The old reductionism was replaced by a sort of neoreductionism, whose key idea was the centrality of mathematics, understood as a purely logicodeductive schema” (185)

The authors suggest that “Some years earlier non Neuman had carried out a similar operation in the field of physics in order to exorcise the problems raised by quantum mechanics” quoting M Cini that von Neuman’s axiomatization of quantum mechanics codifies ‘in the form of real and proper vetoes, formulated in scientific language, the two ideological strong points of the Gottingen-Copenhagen school: a) the ultimate and definitive nature of QM; b) the impossibility of an objective description of reality because of the indispensable role of the observer. Both these assertions of a metaphysical nature were transferred by von Neuman into propositions that belong to the theory itself…it is exactly here that we find the proof of the axiomatization of QM is an operation of definition of the boundaries of the discipline, boundaries of whose integrity the community had to become guarantor’. [sounds like a labour union picket line!] (186)

So the scene is set for foundational work along the lines of a new sort of reductionism, a neoreductionism not inspired by mechanics but by the axiomatic proofs of mathematics. The Newtonian flux of time has been ousted by “a static and atemporal mathematics”. The new mathematics included von Neuman’s “decisive use of Brouwer’s theorem” to assign a key role to the mathematics of fixed point theorems which led to the work of Arrow and Debreu in the 1950s.

The authors then backtrack to sketch in the role of Abraham Wald and the Vienna Circle who provided a hospitable niche for von Neuman and Morgenstern to develop their ideas, as did the symposium convened by Karl Menger (where Karl Popper was so impressed by a presentation by Morgenstern that he thought mathematical economics had found its Galileo).

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1 Response to “Futile subtlety”: and How much economics did Popper know?

  1. slacker says:

    Interesting post , I’m going to spend more time learning about this topic

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