Hans Albert Expands Robinson’s Critique of Marginal Utility Theory to the Law of Demand

December 16th, 2016
in history, macroeconomics

by Philip Pilkington

Fixing the Economists Article of the Week

A few days ago I wrote a post outlining Joan Robinson’s criticisms of the logical structure of marginal utility theory. It got quite a good response. Robinson’s point was that the manner in which the theory was constructed rendered it useless. Examined carefully it said or could say nothing of substance.

Follow up:

The theory posited that preferences must be fixed. Then we could attribute any change in consumer demand to price or income fluctuations. But if these preferences are not fixed in reality — as they certainly are not — then we could never be sure to what extent changes in consumer demand relied on price/income effects and to what extent they were due to a change in preferences.

I came across a very similar criticism of the Law of Demand in the philosopher Hans Albert’s 1963 paper Model Platonism: Neoclassical Thought in a Critical Light which was run on Lars Syll’s blog. I will first lay out the specific criticism, then highlight how it is analogous to Robinson’s and then allow Albert to provide something that Robinson did not: namely, an outline of what type of thinking gives rise to such errors.

Albert starts out by showing the tautology at the heart of the pure form of the Law of Demand. He writes:

The law appears prima facie to predicate a relatively simple and easily testable relationship and thus to have a fair amount of content. However, upon closer examination, this impression fades. As is well known, the law is usually tagged with a clause that entails numerous interpretation problems: the ceteris paribus clause. In the strict sense this must thus at least be formulated as follows to be acceptable to the majority of theoreticians: ceteris paribus – that is, all things being equal – the demanded quantity of a consumer good is a monotone decreasing function of its price. The ceteris paribus clause is not a relatively insignificant addition, which might be ignored. Rather, it can be viewed as an integral element of the law of demand itself. However, that would entail that theoreticians who interpret the clause differently de facto have different laws of demand in mind, maybe even laws that are incompatible with each other. Here, through an explicit interpretation of the ceteris paribus clause, the law of demand is made into a tautology. (p8)

What Albert is saying is that if we take the pure form of the Law of Demand — that is, the Law of Demand with an indeterminate ceteris paribus clause attached — then the law says nothing. If you adhere to it and I challenge you with a counterfactual you will just invoke the ceteris paribus clause. You will thus be insulated from criticism.

So, the logical response from a person who did not wish to speak in self-assertive tautologies would be to make explicit the all the ceteris paribus clauses. But Albert outlines why this does not solve the problem.

Various widespread formulations of the law of demand contain an interpretation of the clause that does not result in a tautology, but that has another weakness. The list of the factors to be held constant includes, among other things, the structure of the needs of the purchasing group in question. This leads to a difficulty connected with the identification of needs. As long as there is no independent test for the constancy of the structures of needs, any law that is formulated in this way has an absolute ‘alibi’. Any apparent counter case can be traced back to a change in the needs, and thus be discounted. Thus, in this form, the law is also immunized against empirical facts… If the factors that are to be left constant remain undetermined, as not so rarely happens, then the law of demand under question is fully immunized to facts, because every case which initially appears contrary must, in the final analysis, be shown to be compatible with this law. The clause here produces something of an absolute alibi, since, for every apparently deviating behavior, some altered factors can be made responsible. This makes the statement untestable, and its informational content decreases to zero. (p9-10)

This is where Albert’s criticism ties back in with Robinson’s: if we cannot say anything tangible about the structure of preferences — and the stability of that structure — then we can always blame any counterfactuals on unobserved changes in preferences. If you adhere to the law and you articulate all the possible ceteris paribus clauses you believe to exist and I challenge you that the empirical results still do not conform to the Law of Demand you can then invoke a change in preferences. Again, you are fully insulated from criticism and are still speaking in tautologies.

The logical response to this is to then dig into the preferences themselves and try to formulate a theory of them explicitly. But this is never done. Albert writes,

To counter this situation, it is in fact necessary to dig deeper into the problem of needs and preferences; in many cases, however, this is held to be unacceptable, because it would entail crossing the boundaries into social psychology. (p10)

But, of course, the whole reason for the Law of Demand and marginal utility theory more generally was to try to escape from the realm of psychology and psychological observation altogether. Paul Samuelson, for example, writes in his famous textbook Economics:

But you should definitively resist the idea that utility is a psychological function or feeling that can be observed or measured. Rather, utility is a scientific construct that economists use to understand how rational consumers divide their limited resources among commodities that provide them with satisfaction. (P. 73 — My emphasis)

Once we introduce the realm of psychology we have to throw the whole theory out because now we must seek out the real causes of shifts in consumer demand outside of economics. We no longer need microeconomics to explain anything. In such a case peoples’ relationship to the prices and quantities of goods they purchase are subject to entirely different causes than what the marginalist economists focus on. In such a world peoples’ purchases become as infinitely complex as any of their other psychological motivations and searching for some law-like relation in such a mire — not to even mention a law-like relation that is Universal across individuals — becomes a completely fruitless endeavor; just as the early marginalists had recognised it to be.

So, what does Albert attribute these strange conceptions to — remember, they are not only insulated according to the principles Albert lays out but, given that Albert’s paper is over 50 years old, we can only assume that they are also insulated from his criticisms. Albert attributes this to the formal properties of mainstream economics more generally. He describes these formal properties as ‘model Platonism’ — which is to say that the models are pure thought experiments, are designed that way and are constructed so as to avoid empirical reality. Albert writes,

The model Platonism of pure economics, which comes to expression in attempts to immunize economic statements and sets of statements (models) from experience through the application of conventionalist strategies… through conventionalist procedures, theories that certainly entail interesting ideas are often rendered insensitive to the facts and thus rendered useless. (pp9-10)

In short, this strange relationship to the real world is built into the methodology at the most basic of levels. It gives rise to strange constructions that speak to us in such generalities that they can never truly be applied to the real world.

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