The nature of fruitful theorizing in economics

The answer to the first question can be located in Marshall’s own am­ bivalence. It has already been suggested that there was a strong ten­ sion in Marshall between having a theory that captured what he saw as the key structural aspects of the economic system and of economic processes, and having an abstract theory that was analytically trac­ table and logically complete. G iven the mathematical tools at his dis­ posaC he could not reconcile these two objectives. He recognized the great importance of the latter to the progress of economics as a sci­ ence. That the discipline responded to his leadership in formal theory construction rather than to his richer insights into economic reality probably reflects what the pursuit of “science” was thought to entail.

More generally, a reading of the economic literature and reflection upon the role of economic theory in economic analysis suggest that theory is used in two distinguishable ways. These two modes are sufficiently different so that one may reasonably think of two dif­ ferent kinds of theory as being involved. When economists are doing or teaching theory per se or reporting the results of empirical work designed to test a particular aspect of theory, the theoretical style is stark, logical, formalized. In contrast, when economists are under­ taking applied work that is of interest for policy reasons or are ex­ plaining, to an audience interested in that question per se, why cer­ tain economic events happened, theoretical ideas tend to be used less formally and more as a means of organizing analysis. These two different styles of theorizing we shall call formal and appreciative. Although they are quite different, both kinds of theorizing are neces­ sary for economic understanding to progress satisfactorily, and there are strong if subtle connections between them.

The adherents of a broad theoretical structure share a way of look­ ing at phenomena, a framework of appreciation. A theory defines the economic variables and the relationships that are important to understand, gives a language for discussing these, and provides a mode of acceptable explanation. Implicitly, therefore, a theory clas­ sifies some phenomena as peripheraC unimportant, and theoretically uninteresting; also it implicitly characterizes certain ways of talking about economic phenomena and certain kinds of explanations as ill-informed and unsophisticated.

In its role of providing a framework for appreciation, a theory is a tool of inquiry, and in skillful applied research that tool is used flex­ ibly, bent to fit the problem, and complemented by any other tools that happen to be available and that appear to be useful . The focus is on the endeavor in which the theoretical tools are applied. In con­ trast, when economists or other scientists are pursuing the formal development of a theory, or undertaking empirical work as a specific check on theory, the focus is on improving or extending or corrobo­ rating the tool itself: they are exploring possible logical connections that have not been seen before, seeking implications of certain sets of assumptions, developing abstract parables that display possible causal mechanisms for particular phenomena, and trying to under­ stand at an intuitive level the implications that seem to flow from de­ ductive theorizing. In these activities, as contrasted with use of a theory as a framework of appreciation, the premium is on analytical tractability and power.

Formal and appreciative theory are linked in a number of ways .

Formal theory is an important source of the ideas invoked in appreci­ ative theory. The formal theoretical enterprise extends and sharpens the tools used by the more empirically or policy-oriented members of the discipline. But in a well-working scientific discipline, the flow of influence is not only from formal to appreciative theorizing, but in the reverse direction as well. Phenomena identified in applied work that resist analysis with familiar models, and rather casual if percep­ tive explanations for these, become the grist for the formal theoretical mill. Formal theoretical structures are augmented so that the pre­ viously uninterpretable phenomena now have an interpretation. Somewhat informal explanations in the style of appreciative theory are abstracted, sharpened, and made more rigorous. These linkages also can be seen as constraints. In particular, if certain mathematical limitations prohibit formal theorizing from proceeding fruitfully in certain directions, appreciative theory tends to respond to the blockage too, and to be pulled where formal theory does proceed fruitfully.

Marshall clearly recognized the distinction between these two dif­ ferent forms of theorizing and the desirability of close connections. So, albeit implicitly, has the economics profession at large. What probably was a binding constraint in Marshall’s time on the range of analytically tractable styles of formal theorizing has played an extremely powerful role in determining how formal theory in eco­ nomics has evolved, and has thereby shaped appreciative theory as well. But since Marshall’s time, that constraint has been considerably relaxed. A wider range of mathematical knowledge has become available, including in particular the modern mathematical theory of stochastic processes. The stock of mathematical competence in the discipline is vastly larger than it was. The advent of the computer has made available the computer program as a type of formal theoretical statement, and simulation as a technique of theoretical exploration. These developments now make possible what Marshall obviously wanted but could not reasonably attempt with the mathematical tools he had then- the development of a formal evolutionary theory.

Our answer to the first question-why theory evolved along the lines  it did-provides the basis for our answer to the second question-why the contemporary heterodox tradition in economics has had so little impact on thinking within the profession. In the ap­ pendix to The New Industrial State, Galbraith (1967) proposes his own answer to the question: the hostile reaction to heterodox ideas should be attributed to parochialism and (intellectual) vested inter­ ests. There certainly are parochialism and vested interests in the sense that the profession as a whole has an enormous stake in a coherent theoretical structure, that the prevailing structure provides a power-ful if particular way of looking at things, and that it is hard to shift focus. But one could argue as well that the failure of the heterodox tradition to influence the profession stems from its lack of apprecia-tion of the importance and nature of theory in economics . Heterodox critics also tend not to understand the varied and extremely fl exible nature of prevailing theory.

Indeed, a major reason for heterodoxy’s lack of influence is that many complaints or proposals can be accommodated by slight changes of meaning, treated and accommodated as special case models, or absorbed by broadening the theory somewhat, all with very few ripples. The fact that prevailing theory itself defines what are reasonable and sophisticated objections to prevailing theory and what distinguishes appropriate from inappropriate proposals for amendment or reform is another defense. It is employed primarily when the complaint seems uninteresting and unimportant, but tends to be used also in cases where the complaint is potentially important but not easily treated by marginal modifications of the theory. Thus, proposals that firms are interested in obj ectives other than profits are readily absorbed in special models and held at the periphery of orth­ odoxy. More general complaints that the theory of the firm does not adequately recognize the market-shaping activities of large corpora­ tions are absorbed into appreciative theory but not formal modeling, and the tension between appreciative and formal theory is ignored. But the proposal that such firms are governed by shifting coalitions and that therefore their objectives are not readily expressed in maxi­ mizing language is dismissed as ill- informed or atheoretical at the level of appreciative theory as well as formal theory.

If the contemporary critics of orthodox theory can be accused of not appreciating the importance of a coherent theoretical structure and of underestimating the resiliency and absorptive capacity of pre­ vailing orthodox theoryI the defenders of orthodoxy can be accused of trying to deny the importance of phenomena with which orthodox theory deals inadequately and at the same time overestimating the potential ability of models within the orthodox framework somehow to encompass these phenomena. Perhaps economists should be less pessimistic about the prospects of developing a broad-gauge eco­ nomic theory that encompasses much of what contemporary ortho­ doxy does but is not subject to its basic difficulties.

Source: Nelson Richard R., Winter Sidney G. (1985), An Evolutionary Theory of Economic Change, Belknap Press: An Imprint of Harvard University Press.

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