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AN INVESTIGATION INTO the FORMATION of CONSENSUS AROUND NEOCLASSICAL ECONOMICS in the 1950S

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AN INVESTIGATION INTO the FORMATION of CONSENSUS AROUND NEOCLASSICAL ECONOMICS in the 1950S THE ECLIPSE OF INSTITUTIONALISM? AN INVESTIGATION INTO THE FORMATION OF CONSENSUS AROUND NEOCLASSICAL ECONOMICS IN THE 1950s A Dissertation Submitted to the Temple University Graduate Board In Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy By Julie Ragatz May, 2019 Committee Members: Dr. Miriam Solomon, Department of Philosophy Dr. David Wolfsdorf, Department of Philosophy Dr. Dimitrios Diamantaras, Department of Economics Dr. Matthew Lund, Department of Philosophy, Rowan University, External Reader © Copyright 2019 by Julie Ragatz Norton All Rights Reserved ii ABSTRACT The Eclipse of Institutionalism? An Investigation into the Formation of Consensus Around Neoclassical Economics in the 1950s Julie Ragatz Norton Temple University, 2019 Doctoral Advisory Committee Chair: Dr. Miriam Solomon As the discipline of economics professionalized during the interwar period, two schools of thought emerged: institutionalism and neoclassical economics. By 1954, after the publication of Arrow and Debreu’s landmark article on general equilibrium theory, consensus formed around neoclassical economics. This outcome was significantly influenced by trends in the philosophy of science, notably the transformation from the logical empiricism of the Vienna Circle to an ‘Americanized’ version of logical empiricism that was dominant through the 1950s. This version of logical empiricism provided a powerful ally to neoclassical economics by affirming its philosophical and methodological commitments as examples of “good science”. This dissertation explores this process of consensus formation by considering whether consensus would be judged normatively appropriate from the perspective of three distinct approaches to the philosophy of science; Carl Hempel’s logical empiricism, Thomas Kuhn’s account of theory change and Helen Longino’s critical contextual empiricism. The conclusion is that there is no ‘consensus on consensus’. Longino’s approach reveals the ways in which alignments between mid-century philosophy of science and neoclassical economics mask the normative commitments implicit in both disciplines. Moreover, Longino’s alternative set of theoretical virtues reveal how questioning the standards of “good science” yields very different conclusions about both iii the scientific credentials and viability of institutional economics. My conclusion is that a pluralistic approach to the philosophy of science is essential to fully understanding the case study of mid-century economics. iv ACKNOWLEDGEMENTS I am grateful for the support and encouragement of my dissertation advisor, Professor Miriam Solomon. It was her work on social empiricism that sparked the thought that there could be a different way to understand the case of mid-century economics. My path through graduate school has not been traditional, and Dr. Solomon was consistently supportive, always willing to discuss my work and offer crucial suggestions for how to amend and improve. Professor Dimitrios Diamantaras had the unenviable task of tutoring a philosopher in both the history and contemporary practice of neoclassical economics. He invited me into his home and spent many hours educating me, starting with the very basics of economic theory and expanding from there. He was kind, generous and patient and I am very much in his debt. Finally, Professor David Wolfsdorf generously agreed to serve as a reader and offered insightful comments and many meaningful suggestions that made this a far better work than it would have been otherwise. My professional life has taken me away from academia and so it is with a renewed appreciation that I reflect on the commitment of established scholars to support and mentor their more junior students. Finally, I would like to acknowledge the support of my family. Both my parents have consistently supported by educational pursuits and I could not have reached this point without their support. My husband, Mike, has been along with me on this journey from its beginning. He has been unwavering in his support of my goals and I am deeply grateful. v To Mike: two up, two down. vi TABLE OF CONTENTS PAGE ABSTRACT ....................................................................................................................... iii ACKNOWLEDGEMENTS .................................................................................................v DEDICATION ................................................................................................................... vi LIST OF TABLES ........................................................................................................... viii CHAPTER 1. WHY THE FATE OF INSTITUTIONALISM STILL MATTERS ........................1 2. ANTECEDENTS TO INSTITUTIONAL AND NEOCLASSICAL ECONOMICS .........................................................................12 3. THE PHILOSOPHICAL UNDERPINNINGS OF INSTITUTIONALISM ..........................................................................................33 4. CASE STUDIES OF INSTITUTIONAL ECONOMISTS ....................................60 5. THE PHILOSOPHICAL UNDERPINNINGS OF NEOCLASSICAL ECONOMICS .........................................................................93 6. NEOCLASSICAL CASE STUDIES ...................................................................127 7. HEMPEL’S PHILOSOPHY OF SCIENCE ........................................................166 8. THOMAS KUHN’S THEORY OF SCIENTIFIC REVOLUTIONS ..................191 9. HELEN LONGINO’S CRITICAL CONTEXTUAL EMPRICISM ...................222 10. THE LACK OF CONSENSUS ON CONSENSUS ...........................................252 REFERENCES CITED ....................................................................................................283 vii LIST OF TABLES Table Page 1. Table 1: Distinguishing Characteristics of Pure and Applied Science ......................................................................................97 2. Table 2: Theoretical Virtues: Longino v. Kuhn ...................................................224 3. Table 3: Critical Features of Neoclassical/Logical Positivism v. Institutionalists ...............................................................................230 viii CHAPTER 1. WHY THE FATE OF INSTITUTIONALISM STILL MATTERS It is reasonable to ask how an examination of the state of American economics during the interwar period is a topic worthy of consideration in 2019. A ready response is that a search for answers as to the causes of the 2008 financial crisis leads, almost inevitably, to a consideration of the economic theory in ascendance leading up to the time of the crisis. In this context, the exchange between Representative Henry Waxman and Alan Greenspan, known as the ‘maestro’ for his masterful direction of the Federal Reserve over his 19-year tenure, during Congressional hearings regarding the causes of the financial crisis in October 2008 is particularly illuminative:1 HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made? ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact. REP. HENRY WAXMAN: You found a flaw in the reality… 1 http://www.pbs.org/newshour/bb/business-july-dec08-crisishearing_10-23/ 1 ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working? ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. According to neoclassical economic theory, the decline of the housing market, the seizure of the credit markets and the mispricing of risk should never have happened at all. The Efficient Market Hypothesis, one of the guiding principles of modern finance, states that the prices of assets reflect available information. Information (also referred to in the literature as ‘news’) is incorporated into prices completely and quickly. Prices change only in response to ‘news’. ‘News’ is defined as information that affects the fundamental value of the asset. Since the market can distinguish between information and ‘non- information’ there is no such thing as ‘market bubbles’. As financial journalist Justin Fox (2011) states, “Financial markets knew best. They moved capital from those who had it to those who needed it. They spread risk. They gathered and dispersed information. They regulated global economic affairs with a swiftness and decisiveness that governments could not match.” (xii) That the events leading
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