An example of untranslatability: the conceptual structures of Marshall's and Keynes' conceptions of investment

Abstract

This essay discusses the following two hypotheses. The first one is based on the epistemological proposal which we have named the principle of discontinuity. It asserts that certain developments in the history of economic thought involve theoretical breaks which can only be fully explained by making use of the concept of discontinuity. The second hypothesis concerns one of the consequences drawn from the principle of discontinuity, namely, the untranslatability of concepts. Besides other theories to which reference is made by way of examples of specific conclusions regarding the principle of discontinuity, the conceptual structures of Marshall's and Keynes' conceptions of the determinants of investment are analysed and compared with the aim of illustrating the aforementioned hypotheses.

Keywords:

• History of economic thought
• economic methodology
• Keynes
• Marshall
• neoclassical economics
• investment

Notes

* The valuable comments of two anonymous referees are gratefully acknowledged. Obviously, they bear no responsibility for possible errors remaining.

Particularly, Koyre's conception of the history of science (1939, 1957, 1973), Kuhn's concept of incommensurability (1970, 1977, 1999), or Feyerabend's version of it (1962, 1993).

As regards the problem of communicability, Weintraub's point of view is more radical: ‘The communities of neoclassicals and Marxists cannot converse, but what is worse, perhaps, is that the neoclassical theorists themselves cannot understand arguments that cross over from the static to the dynamic’ (1991: 145).

In the course of the well-known discussion between Malthus and Ricardo about the concept of effective demand, the former wrote in a letter addressed to the latter the following: ‘With regard to our present subject of discussion, it seems to me as if we should never thoroughly understand each other, and I almost despair of being able to explain myself’ (Ricardo 1952: 19).

When discussing the quantity theory of money, Hayek adds that ‘neither aggregates nor averages act upon one another, and it will never be possible to establish necessary connections of cause and effect between them (…). I would even go so far as to assert that, from the very nature of economic theory, average can never form a link in its reasoning’ (1931: 4 – 5).

On this matter, Lakatos' methodological proposal is worthy of special consideration, given the large influence which the methodology of research programmes has had on economics during two decades. This influence started declining at the beginning of the nineties. In an attempt to date the critical point of such a decline, different authors have made reference to the conference on economic methodology celebrated in Capri in 1989. Blaug, one of the editors of the book in which the papers presented at the Capri conference are collected (see de Marchi and Blaug 1991), sums up the general atmosphere of the conference as follows: ‘a recent conference on economic methodology organized precisely to reassess the status of Lakatos' ideas in economics revealed a surprising wide-ranging hostility to it’; and, immediately afterwards, he points out the following explanation: ‘Most of that hostility centred in fact on Lakatos' appraisal criterion, the dominant argument being that, while the history of economics frequently reveals “analytical progress”, it rarely demonstrates “empirical progress”. By “analytical progress” (or what Lakatos called (…) “heuristic progress”) we mean the refinement of ideas and techniques, the clarification of terms, the honing of concepts and so forth. By “empirical progress”, we mean corroborated “theoretical progress” “à la” Lakatos (…). There is no question that economics constantly exhibits analytical or heuristic progress but there is great doubt that it exhibits empirical progress, except intermittently. This being the case, the fear is that a Lakatosian appraisal of modern economics would leave little of it standing as a “progressive” SRP’ (1998: 306). Hence, given the features which characterize the development of economic theory, the difference between progressive and regressive research programmes – which is at the root of Lakatos' assessing criterion – would be hardly applicable to economics. Moreover, some authors have not only questioned the applicability of the Lakatosian criterion to economics, but have criticized harshly the very foundation of the criterion, namely, its absolute dependence on novel facts. In this regard Hands' criticisms are particularly revealing, for he was – during the first half of the eighties – one of the most outstanding defenders of the relevance of the methodology of research programmes to economics: ‘Why would we want to accept the position that the sole necessary condition for scientific progress is predicting novel facts not used in the construction of the theory? (…) Even if we can find a few novel facts here and there in the history of economics, and even if those novel facts seem to provide an occasional “clincher”, the history of great economics is so much more than a list of novel facts' (1990: 78). Blaug's argument reinforces an idea which has already been mentioned, namely, the idea that empirical criteria do not normally play a definitive role in relation to the problem of theory selection in actual economics. In fact, on the non-reductionist basis which provides considering the history of economics as much more than a list of novel facts, underlining that the development of economic theory is more ‘heuristic’ than ‘empirical’ becomes particularly relevant in relation to the principle of discontinuity. For it lends additional support to the statement that, as far as economic theorization is concerned, the truly important reality is theorized economic reality. But this leads us to think of the possibility that economic theories – such as the quantity theory of money and Hayek's theory – could be ontologically different, and hence they both could be constructed or could be evolving at the same time, but in ways which differ completely in consequence of the fact that they define differently what exists and the relations that exists among what exists.

As Machlup has stated, when ‘the economist's prediction is “conditional”, that is based upon specified conditions, but where it is not possible to check the fulfilment of all the conditions stipulated, the underlying theory cannot be disconfirmed whatever the outcome observed. Nor is it possible to disconfirm a theory where the prediction is made with a stated “probability” value of less that 100 per cent; for if an event is predicted with, say, 70 per cent probability, any kind of outcome is consistent with the prediction. Only if the same “case” were to occur hundreds of times could we verify the stated probability by the frequency of “hits” and “misses”. This does not mean complete frustration of all attempts to verify our economic theory. But it does mean that the tests of most of our theories will be more nearly of the character of “illustrations” than of verifications of the kind possible in relation with repeatable controlled experiments or with recurring fully-identified situations. And this implies that our tests cannot be convincing enough to compel acceptance’ (1955: 19).

‘Interest, being the price paid for the use of capital in any market, tends towards an equilibrium level such that the aggregate demand for capital in that market, at that rate of interest, is equal to the aggregate stock forthcoming at that rate’ (Marshall 1961: 534).

The example used by Marshall to illustrate the idea that a lower rate of interest widens the range of profitable investments is hat-making trade: ‘A rise in the rate of interest would diminish their use of machinery; for they would avoid the use of all that did not give a net annual surplus of more than 4 per cent. on its value. And a fall in the rate of interest would lead them to demand the aid of more capital, and to introduce machinery which gave a net annual surplus of something less than 4 per cent. on its value. Again, the lower rate of interest, the more substantial will be the style of building used for the hat-making factories and the homes of the hat-makers; and a fall in the rate of interest will lead to the employment of more capital in the hat-making trade in the form of larger stocks of raw material, and of the finished commodity in the hands of retail dealers' (Marshall 1961: 520).

‘Under ordinary conditions of the industry, production and consumption move together: there is no consumption except that for which the way has been prepared by an appropriate production: and all production is followed by the consumption for which it was designed. There may be come miscalculation in particular branches of production; and a collapse of commercial credit may fill nearly all warehouses for a time with unsold goods. But such conditions are exceptional’ (Marshall 1961: 524). Concerning the exceptional, partial, and temporary nature of the effects of credit unbalances, see also Marshall (1920: 247).

‘The production of everything, whether an agent of production or a commodity ready for immediate consumption, is carried forward up to that limit or margin at which there is equilibrium between the forces of demand and supply. The amount of the thing and its price, the amounts of the several factors or agents of production used in making it, and their prices – all these elements mutually govern one another, and if an external cause should alter one of them the effect of the disturbance extends to all the others' (Marshall 1961: 526). In this sense, Keynes, in his biographical essay Alfred Marshall, would assert that the ‘general idea, underlying the proposition that value is determined at the equilibrium point of demand and supply, was extended as to discover a whole Copernican system, by which the elements of the economic universe are kept in their places by mutual counterpoise and interaction’ (Keynes 1972: 205).

‘the physical conditions of supply in the capital-goods industries, the state of confidence concerning the prospective yield, the psychological attitude to liquidity and the quantity of money (…) determine, between them, the rate of new investment’ (Keynes 1973: 248).

‘the behaviour of each individual firm in deciding its daily output will be determined by its “short-term expectations” – expectations as to the cost of output on various possible scales and expectations as to the sale-proceeds of this output; though, in the case of additions to capital equipment and even of sales to distributors, these short-term expectations will largely depend on the long-term (or medium-term) expectations of the parties. (…) The “actually realised” results of the production and sale of output will only be relevant to employment in so far as they cause a modification of subsequent expectations' (Keynes 1973: 47).

‘if for a given value of “N” [volume of employment] the expected proceeds are greater than the aggregate supply price, i.e. if “D” [expected aggregate demand price] is greater than “Z” [aggregate supply price], there will be an incentive to entrepreneurs to increase the employment beyond “N” (Keynes 1973: 25).

‘consumption will depend on the level of aggregate income (…), except when there is some change in the propensity to consume’ (Keynes 1973: 28).

In Leijonhufvud's terms: ‘Keynes' model will settle down to an unemployment situation – which Keynes chose to call “unemployment equilibrium” – and the Classic model cannot. Whatever exactly “Classics” is agreed to mean, the “Classic” model cannot’ (Leijonhufvud 1981: 45).

In relation to the attempts to match Marshall's Principles and Keynes' General Theory, Hicks' ‘Mr. Keynes and the “Classics”; a Suggested Interpretation’ (1937) is a pioneer and particularly distinguished example. With regard to this essay and, in general, to the so-called neoclassical synthesis, Leijonhufvud states the following in ‘Schools, Revolutions, and Research Programmes in Economic Theory’: ‘The “neoclassical synthesis” proposed a reconciliation of “Keynesianism” and “orthodoxy” on a purely formalistic plane. Substantively, each of the two world-views that were thus wrenched into the logical appearance of consistency was basically uncompromised by the adopted formula. Behind the formal screen, they stood poles apart. It is inconceivable that this deceptive “papering-over” of the stark inconsistency of substantive beliefs could be indefinitely sustained. Yet, (…) this modelling formula gained widespread acceptance, “despite” the incompatibility on a basic theoretical level’ (Leijonhufvud 1981: 333).

Additional information

Notes on contributors

Manuel Montalvo

* The valuable comments of two anonymous referees are gratefully acknowledged. Obviously, they bear no responsibility for possible errors remaining.