Conceptual progress in economics. Abstraction of social kinds versus idealization Rol, Menno

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1 University of Groningen Conceptual progress in economics. Abstraction of social kinds versus idealization Rol, Menno IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2007 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Rol, M. E. G. M. (2007). Conceptual progress in economics. Abstraction of social kinds versus idealization s.n. Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). Take-down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Downloaded from the University of Groningen/UMCG research database (Pure): For technical reasons the number of authors shown on this cover page is limited to 10 maximum. Download date:

2 CONCEPTUAL PROGRESS IN ECONOMICS Abstraction of social kinds versus idealization

University of Groningen and BCN Copyright 2007 by M. E. G. M. Rol All rights reserved.

3 Doctoral Dissertation for Philosophy Conceptual Progress in Economics Menno Rol University of Groningen Faculty of Philosophy Oude Boteringestraat GL Groningen Research supported by University of Groningen and BCN Copyright 2007 by M. E. G. M. Rol All rights reserved. Published 2007 Printed in the netherlands by Ridderprint Offsetdrukkerij BV, Ridderkerk ISBN

4 RIJKSUNIVERSITEIT GRONINGEN CONCEPTUAL PROGRESS IN ECONOMICS ABSTRACTION OF SOCIAL KINDS VERSUS IDEALIZATION Proefschrift ter verkrijging van het doctoraat in de Wijsbegeerte aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts, in het openbaar te verdedigen op donderdag 27 september 2007 om uur door Menno Eugen Gerardus Maria Rol geboren op 10 juni 1960 te Zaandam

5 Promotores: Prof. dr. T. A. F. Kuipers Prof. dr. U. Mäki Prof. dr. A. Nentjes Beoordelingscommissie: Prof. dr. N. L. Cartwright Prof. dr. E. C. W. Krabbe Prof. dr. E. M. Sent ISBN

6 Acknowledgements Ideally, a PhD student is never solitary. Inquiries by the Groningen Association of PhD students, GrASP, show that many who are writing their doctorate thesis have few contact hours with the supervisors and are not adequately helped when in trouble or in doubt. As a result of this, they give up. Their situation is far from ideal. I am surprised to learn about this situation. I do not need to idealise to describe my own situation as ideal. It has been nothing less than perfect all along, thanks to the wonderful organization of and great atmosphere in the Theoretical Philosophy group in Groningen. This is a determining factor of its quality. Theo Kuipers commented on complex and lengthy texts in a very short amount of time, and meticulously so. We agreed to meet on a very regular basis at first, but soon I saw that I had no desire to talk this frequently. The reason was that Theo is so accessible that I have felt he was always around the corner if I needed his thorough knowledge and wide experience. I would advise any student to graduate under his supervision if possible, even if that means changing the topic of the thesis. But then again, it is probably not necessary to pay such a price, for Theo is acquainted with so many areas in natural and social science, philosophy, and mathematics, that it is hard to choose a theme outside his grand vision. Theo deserves my gratitude for so many other things, some of which include his encouragement given when I needed it and his pleasant receptions at his house. But there has been more to contribute to a successful completion of the task. The PCCP is a wonderful institution enabling the in-house pre-testing of our ideas and papers. It is a forum where everybody is taken seriously, and where nobody fears to be mocked for a mistake. It is a safe place. All participants, student or professor, go to the meetings to learn something. Papers are criticised before publication, presentations tried out before leaving for the congress. If possible, I shall try and introduce a similar forum in the places where I will be working. The faculty offered me a room with a view, more specifically to the academic garden and into the hall where a zillion promotion celebrations went on before mine. It is a pleasant place, as Jan-Willem now discovers. Hauke de Vries was always agreeable if I needed him, even if it was for my own laptop. Daan Franken was an inexhaustible oracle for questions about English and for keeping my emotional household in order. Barteld Kooi was the oracle for questions on logic. They made the corridor breathe. David Atkinson and Jeanne Peijnenburg have had a special role in my development. David s unusually systematic answer to any question one might ask him give a sort of background solidity to our group from which all PhD students draw confidence: that no matter the kind of puzzle, everything will eventually turn out all right, really. Jeanne taught me that not immediately getting published, when still green in science, need not establish my worthlessness. She made me see that one can submit a first paper to a sub-top journal also and aim for top journals later. Jeanne serves as the glue of our group in many ways too.

7 ii Outside the faculty, I encountered all the help I needed with my other two supervisors. It was a fortunate pick to ask Andries Nentjes. He took all the available time to expose my mistakes in the history of economics in order to protect me. He had a lot of time available, when not given a deadline; his comments were prompt, when given a deadline. Hence the planning was in my own hands. It was also my own choice to ask Uskali Mäki for supervision. He jumped at my proposal to be involved with my project and never hesitated to fire his deep criticisms onto me when so needed. He gave me the feeling that if I could get past his thorough critique, I really had something valuable on paper. His advanced course on the philosophy of economics counts among the few very best I was ever taught. The Erasmus Institute for the Philosophy of Economics (EIPE) was my second home faculty in the first three years; a bastion of internationalization and xenophilia, a stronghold of forbearance, thus challenging the counterproductive immigration policies as I stood facing how these damaged my country so much during the politically grim years when I was writing my dissertation. But there was more on the cheery side. Jan-Willem Romeyn has grown into an intimate friend. Over the years, I shared many thoughts about life in its broadest sense. Sometimes we were young boys, who talk of girls and cars; often we were serious, contemplating matters in love and happiness, all in the same gasp of air with philosophical issues. Pieter Sjoerd Hasper has become a friend of me and my wife and children. He manages to maintain a multifocus on mathematical issues, on classical languages, Frisian, Dutch, Italian, French, German, and English, on etymology, philology, and history, on chess, on literature, on my son; it is easy to forget he also knows his philosophy. Moreover, he is a gracious guest at the dinner table. In addition, he enabled me to considerably improve the paper for the Journal of Economic Methodology and, with this, chapter III. I hope the end of my stay at the faculty will not reduce the frequency of my contact with Jan-Willem and Pieter Sjoerd. I want to thank these warm people. There are others who deserve my special gratitude. First are Sheila Dow and Eric Schliesser who commented on a long chapter that I decided to discard thanks to them. Next, I am very grateful that Erik Krabbe took an enormous effort and worked his way through all of the text so scrupulously. His comments have been unusually detailed; he has helped improve both the philosophical quality and the readability of the entire text. I am also obliged for his proof in chapter III. Further, I much appreciate Nancy Cartwright s invitation to give a talk at the London School of Economics and her swift reading of the dissertation when the time schedule became tight. Lastly, I thank Esther-Mirjam Sent for her willingness to read it during the time when she was on parental leave. I wish to further express my appreciation to Gerda Bosma for being interested both in my person and in my project; to Boudewijn de Bruin who made me think once again (and again) about my chapter III; to John Davis for willing to share my table for the Thai dinner in Amsterdam and for his many encouragements at several conferences; to John Dupré for another Thai dinner, in Ghent; to Ben Gales for supervising my masters thesis and for keeping contact afterwards; to

8 iii Martin van Hees for his incessant encouragement and his criticism to the first draft of the paper on abstraction and idealization; to Harold Kincaid for discussing my comments on one of his most interesting books; to Hans Radder for always taking my questions on his work seriously; to Don Ross and Nelleke for being so sweet and for organizing a very nice party at their house in Alabama; to Evert Schoorl for dragging me into the economics faculty in Groningen; to Allard Tamminga for always showing interest in my work; to David Teira for the dinner in San Sebastián; to Job Zinkstok for taking the time to criticise the Dutch summary. The whole project has been made possible by the parelsubsidie grant offered by the executive board of the University of Groningen as a prize to the Theoretical Philosophy group for the top score on all items the research visitation committee had judged over the years 1996 to I am honoured that Theo spent it on me and I want to thank the University for providing this grant. The research school Behavioural, Cognitive, and Neurosciences (BCN) financed courses, part of a visit to Don Ross and Harold Kincaid s congress at the UAB, and part of the printing costs. Some of the BCN courses taught me a lot of neurology as I once thought, perfectly irrelevant for economists. But Don Ross has convincingly shown in his (2005) that explaining the brain is urgent for economics too. Both Louwke and me dislike the subservient role wives implicitly get when thanked for the support and the endurance. Such a qualification would underrate what her presence in my life means. From the start, we decided together that the project was worth while. It has turned out that we made the right decision.

9 Preface Here I comment on some choices I have had to make when writing this thesis. On model. Throughout the thesis I often use the terms model in a loose sense, except in chapter III. Economists tend to use model and theory interchangeably. In the context of problems concerning truth and falsity, this is problematic. A theory has truth value, models have not. The fact of the matter is this. A theory if conceived of as a set of propositions can be true or false depending on the truth value of its explicit and implicit propositions. Insofar as a theory describes (and explains) a reality which differs from the actual world (in its past, present, and future states) it is false simpliciter. But this theory is of course necessarily true of the world it happens to describe. Chapter III makes use of some concepts from model theory, which sees possible worlds as models of propositions about possible states of affairs. The set of models of which a proposition (theory) is true belongs to the extension of the proposition (theory). In this sense it is a category mistake to talk of the truth or falsity of models. In other contexts, however, when economists use the term model in order to denote a theoretical hypothesis, one can safely attach truth values to models. I do not want to speak of truth or falsity as a property of models in any context. But I do also not strictly distinguish between theory and model if the context does not require so. For this dissertation this means that I use the terms rather loosely in the first two chapters, only to upgrade the stringency of the distinction when it becomes necessary, viz. after the intermezzo. On description and explanation. A sometimes useful distinction of scientific practices is that between descriptive and explanatory sciences. Anatomy is an example of a descriptive discipline. So is a merely quantitative sociology that tries to acquire data on suicide in a number of countries. Chemistry is an example of an explanatory science. So is economics. Notwithstanding the rigour suggested by this distinction, there is a subjective aspect to it. Suppose nobody knew, at a certain point in time, that metals conduct electricity, and that copper is a metal; the explanation that metals conduct electricity and that copper conducts electricity because it is a metal considerably increases understanding. A critic of Hempelian deductive-nomological explanatory schemes would say that this clarification is hardly elucidating. But under the circumstances given here it is. The point is that descriptions may strike the learner as explanatory

10 v if his background knowledge is sufficiently poor. Initial descriptions may be instructive while these are felt unsatisfactory at a later point in the development of knowledge. The distinction between description and explanation is perhaps pretty sharp analytically, the difference is fluid in practice. In this thesis the distinction is not very important. Especially where it discusses (social) kinds, the idea is that describing essential objects (properties, relations) is an explanatory undertaking. I cling to documenting this because economists sometimes make the distinction in order to set apart rich descriptions of reality from slender theoretical hypotheses. Here the concept of abstraction turns up again. Theorists claim that abstraction is the best way to understand (economic) reality, while historicist economists are said to distrust theory and favour the collection of reliable data. This view of things is, firstly, a caricature of the possible ways to do social research 1. But, secondly, it misses an important point as well. There is no object of research, natural or social, of which anyone can make a complete description. What would completeness amount to? The molecular make-up of the Central Bank president? And would more abstraction also imply more explanation, as the caricature suggests? What counts as explanatory is what increases understanding. As stated, this is a contextual matter, and the contexts that codetermine it include the research interests and the particular capabilities of the scientist: clearly subjective determinants. What I can say is this. If we accept the analytical distinction, it is clear that an explanans is always in need of an explanandum, and the explanandum cannot be denoted without describing it (at least partially). Explanatory sciences are descriptive by their very nature; descriptive sciences need not be explanatory. As I do not need it to make my points in this thesis I largely ignore the distinction. On gender. I noticed that male scientists use the female form to refer to a person in their texts more often than female scientists do. But this impression is strongly biased, for I know the work of more male than female economists and philosophers. This phenomenon, then, is precisely what drives men to sometimes talk of scientists in general by using the word she. They see it as fair to women in a time when sex discrimination in the labour market (and elsewhere) is only starting to cease, if at all. Better, they feel that they thus partake in the fight against such discrimination, however modestly. Especially in the Netherlands this seems to be appropriate as for the Dutch a repair of this waste of talent is long overdue. The proportion of 1 Precisely this is Böhm-Bawerk s central claim in his (1890b) review of Schmoller s Festgabe for the founder of the historical school, Wilhelm Roscher.

11 vi women in higher positions is scandalously low in this country, and emancipation is slow. However, I believe, somewhat hesitantly, that an occasional she and her in academic texts is not going to change anything about it. This is a contested field, and I am perchance wrong. I am on the other hand certain that, from a linguistic point of view, it is an ugly use. I do not endorse it. When I use the words he and his in general, I refer to men and women alike. On orthography. For non-native speakers of the English language, there is the choice between British and American English pronunciation and spelling. Logically, the options in orthography is available for an Englishman or a US citizen too, but for me the choice has some stakes. My education is firmly grounded in Dutch practices in the nineteen seventies. That is the time that secondary school pupils were not supposed to have a choice. Decent English, I was taught, is European. Looking back, this attitude now strikes me as silly, and nowadays education is, I believe, more liberal in these matters. Still, a British orientation toward the English language has been chiselled into my personality. For me no option for American custom exists without a high cost. So I use British spelling in this dissertation. I would not have dwelled on this seemingly unimportant point if it had not confronted me with practical problems. I thought that the only thing I had to observe was to be consistent, but that turned out less easy as I had thought. Idealisation is British, but hardly a Briton uses it. Yet, the verb realise is in normal use in the Kingdom. What to do, given that no language is used consistently anywhere outside the classroom? I noted that all zations and other za s are habitually written with a z by most Britons, even though the use of the s instead is not wrong. I have decided to follow this practice, not in the least because David Atkinson told me he does it too. To me, he is the ultimate authority in many Indo- European languages, in mathematics, and in Indian cooking. Finally, some apparent German spelling mistakes in quotes are not such, but Böhm-Bawerk s nineteenth century Austrian idiosyncratic way of writing. On the philosophy of science as methodology Methodology is a word often used in the philosophy of economics. Possibly this is to immunise the discipline against the charge that it is practised by failed economists. Methodology sounds more creditworthy to people who do not professionally reflect on economics in the way philosophers do. It makes sense to distinguish clearly between the study of rules of method of research and philosophy. But in this thesis, the distinction is not important. I do nowhere discuss method. In consequence, I use the words interchangeably.

12 Contents Introduction 1 I Time as a unifying concept 1 Introduction 7 2 The structure of the Positive Theorie des Kapitales Judging Böhm-Bawerk A pyramid-like structure Dropping assumptions and claiming truth The key assumptions 12 3 Böhm-Bawerk s concept of time in economic theory Capital building: A Robinsonade A more complex economy 20 4 Subjective Value Theory Marginal utility as a measure for value The market Objective value theory: true as a limiting case, otherwise false 27 5 A new conception of the present and the future The central idea The three causes 31 6 Interest and capital yield Interest Capital yield: durable goods in general Capital yield: the labour market and the subsistence market Positive interest 40 7 Interest and income distribution The level of interest in the idealised case The level of interest in the de-idealised case 46 8 Conclusion and summary 49 II Realism and explanation 1 Introduction 51 2 SVT as a unifying tool The Law of Costs and the Law of the Marginal Agents Layman s observation and empirical justification 56 3 Essentialist metaphysics The ordering principle of the phenomena A unified order Essentialism, reduction, abstraction 62 4 Discrete narratives versus continuous mathematics Böhm-Bawerk s interest theory in Wicksell s Wert, Kapital und Rente The limits of a discrete analysis The demand curve of capital 72 5 The principle of sufficient complexity Hypothetical worlds in the theory of the market Narrativism. A concept from historiography Highlighting the mechanics from micro to macro. Sufficient complexity 81 6 Conclusion 82

13 viii Intermezzo 85 III Abstraction and idealization 1 Introduction Isolations: a simple taxonomy Clauses concerning the ceteri Horizontal and vertical reasoning Abstraction and its use in explanatory theories Idealization From Boyle to the van der Waals equation and back again 105 Three Gas Laws: progressed de-idealization 106 Idealization in the gas laws: the issue of falsity Idealizational conditionals as conditional implications Economics and policy 113 Idealizations: truth and external validity 113 External validity of true counterfactuals and economically possible worlds 117 Economically impossible worlds. The case of capital structure Abstraction Abstraction as existential generalisation A concise antithesis of idealization and abstraction Abstraction and policy relevance Vague qualifications Hausman: Vague laws as inexact generalisations Abstraction as focussing in scientific practice The Social Model Böhm-Bawerk: what closure is it that explains the explanandum? Abstraction ante explicationem and abstraction post explicationem Conclusion 134 IV Four Examples 1 Introduction Wicksell s stationary state Building on Böhm-Bawerk: rent Land as capital: the insertion of heterogeneity Simple interest as a dispensable assumption Statics versus dynamics, stationary state versus long run growth 145 The stationary state: condition for static analysis or limiting case? 145 Idealization of the stationary state. 146 From de-idealization to abstraction Keynes on involuntary unemployment. The case of pure theory The neoclassical model The Keynesian model Idealization and abstraction in the analyses The Dutch market for health, care, and cure Inefficiencies in the health care market Health care and the social model 156

14 ix 5 The economics of environmental governance The adverse effects of ethical food in your trolley Idealizational assumptions and their policy implication 161 V Abstraction, vagueness, and social kinds 1 Introduction Is essentialism tenable? The theory of extensible concepts: essentialism is not tenable The theory of redescription: essentialism is there The theory of exact types: essentialism in economics Essentialism is tenable, but not for social science The theory of recognitional capacities: essentialism is tenable Our metaphysical appreciation Exact types and social science Essentialism is tenable, also for social science Kind terms specified de jure The exaggerated demands on the Causal Theory of Meaning Vagueness of kind terms 182 Essentialism and pluralism as concordant 183 Minimal concepts, rigid designation de jure, and kinds Social kinds as structures of the social The idea of an actual causal process The idea of an hypothetical causal mechanism in Austrian economics Kind terms for social structures 191 Essentialism, not infallibilism 191 Market structures Conclusion 194 Conclusion 197 Appendices 201 References 215 Summary 223 Index of names 227 Samenvatting voor groter publiek 229

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