WORKING PAPER 93

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis

Professor Jeff Richardson Director, Health Economics Unit, Monash University

August 1999 ISSN 1325 0663 ISBN 1 87666 05 0 CENTRE PROFILE

The Centre for Health Program Evaluation (CHPE) is a research and teaching organisation established in 1990 to:

· undertake academic and applied research into health programs, health systems and current policy issues; · develop appropriate evaluation methodologies; and · promote the teaching of health economics and health program evaluation, in order to increase the supply of trained specialists and to improve the level of understanding in the health community.

The Centre comprises two independent research units, the Health Economics Unit (HEU) which is part of the Faculty of Business and Economics at Monash University, and the Program Evaluation Unit (PEU) which is part of the Department of Public Health and Community Medicine at The University of Melbourne. The two units undertake their own individual work programs as well as collaborative research and teaching activities.

PUBLICATIONS

The views expressed in Centre publications are those of the author(s) and do not necessarily reflect the views of the Centre or its sponsors. Readers of publications are encouraged to contact the author(s) with comments, criticisms and suggestions.

A list of the Centre's papers is provided inside the back cover. Further information and copies of the papers may be obtained by contacting:

The Co-ordinator Centre for Health Program Evaluation PO Box 477 West Heidelberg Vic 3081, Australia Telephone + 61 3 9496 4433/4434 Facsimile + 61 3 9496 4424 E-mail [email protected]

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis ACKNOWLEDGMENTS

The Health Economics Unit of the CHPE receives core funding from the National Health and Medical Research Council and Monash University.

The Program Evaluation Unit of the CHPE is supported by The University of Melbourne.

Both units obtain supplementary funding through national competitive grants and contract research.

The research described in this paper is made possible through the support of these bodies.

AUTHOR(S) ACKNOWLEDGMENTS

The author would like to thank and acknowledge the comments of Bob Evans, Tom Rice, Victor Fuchs, Tony Culyer, Paul Dolan, Paul Menzel, Erik Nord, and, in particular, John McKie. Errors in the paper are, of course, original. I would also like to thank David Bull whose interest in the history of ideas led to the commencement of this paper and Jan Abel Olsen who linked its completion to my next invitation to Tromso.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 3 TABLE OF CONTENTS

Abstract

1 Introduction.

2 Rationalism and Empiricism: A Brief History

Classical Rationalism Subsequent Rationalism Empiricism (Naturalism) Essentialism..

3 The Epistemology of Rationalism and Empiricism

4 Rationalism in Economics

5 Rationalism and Cost Utility Analysis

A: Private vs Social Preferences B: Overriding Preferences C: Context D: Non Utility Objectives

6 Discussion

7 Conclusions

References

List of Tables:

Table 1: Observation vs Orthodoxy in Cost Utility Analysis

List of Figures:

Figure 1: History of Empiricism & Rationalism Figure 2: Logical Structure of Rationalism Figure 3: Popper’s ‘Post Empiricism’ Figure 4: The Logical Defect in Rationalism

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 4 Abstract

The theme of this paper is that there is a malaise in a significant part of theoretical economics which has adversely affected its character and growth and which has spilled over into applied economics in a particular way; viz by reducing the scope of hypotheses that have been the subject of empirical enquiry and by promoting policies on the basis of their conformity with an established orthodoxy, in preference to policies supported by evidence. The approach to this topic is both historical and epistemological. It is argued that the history of science has been characterised by a struggle between the conflicting paradigms of Rationalism and Empiricism with intellectual progress being broadly determined by the extent to which the latter and not the former has been ascendant. It is argued that the reason for this arises from the epistemological structure of the competing paradigms. While Empiricism leads to a method which encourages the growth of knowledge, Rationalism encourages an ultimately sterile focus upon analytical techniques per se.

It is suggested that economic orthodoxy and, more specifically, health economic theory has adopted the form and increasingly the substance of Rationalist paradigm and that the inhibiting influence of this can explain the neglect of a series of issues which arise in Cost Utility Analysis and, more broadly, in economic evaluation; issues which, for a non-economist, would have prima facie candidacy for investigation and for possible inclusion in economic theory. Ten examples are given. It is concluded that the opportunity cost of our adoption of methodological Rationalism in terms of intellectual progress elsewhere and policy prescriptions may have been very high.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 5 Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis

1 Introduction

The theme of this paper is that there is a malaise in the methodology of a significant part of theoretical economics and that this has increasingly inhibited the exploration of divergent hypotheses – the ‘bold conjectures’ – that fuel the growth of knowledge in the Popperian version of modern empiricism – and promoted policies on the basis of conformity with orthodoxy. An alternative statement of this theme is that there is a methodological dualism composed of ‘pragmatic’ theory and theorists – those who are relatively uninhibited in their search for the solution to particular problems, and orthodox theory and theorists who constrain their efforts and policy prescriptions to analyses and solutions that conform with ‘economic theory’ as defined by the acceptance of conventional axioms.

There is nothing new in this thesis. Numerous economists have lamented the ‘crisis of modern economics’ (Blaug 1992), the excessive emphasis on analytical, and particularly mathematical techniques, and the crowding out effect this has had upon enquiry into observed behaviour (Leontief 1971; Phelps-Brown 1972; Ward 1972; Worland 1972). Some have targeted general equilibrium theory – the intellectual pinnacle of post-war economics – as exemplifying this malaise (Blaug 1992; McCloskey 1991). In health economics, the usefulness of orthodox theory has attracted particular criticism (Evans 1997, 1998; Rice 1998). By their acceptance of the theory of supplier induced demand, the majority of health economists now accept some element of non-orthodoxy (Feldman & Morrisey 1990; Fuchs 1996). There is, however, a quantifiable trend towards the publication of evidence free ‘pure’ theory (Bridges 1999). This has been accompanied by an increasing tendency for health economists to appeal to the authority of ‘economic theory’ in order to support particular methods and conclusions; and there is a corresponding danger that this will lead to the same sterility of health economics theory, as judged by novel insights and empirically relevant predictions, as has occurred elsewhere when a Rationalist methodology has been adopted.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 1 The approach to this topic is primarily historical. It is argued that the history of science has been characterised by a struggle between the conflicting paradigms of Rationalism and Empiricism with intellectual progress being broadly determined by the extent to which the latter paradigm has been ascendant and with stagnation being primarily associated with the adoption of the former. The chief theme of the paper is that, while economics and health economics has been (and should be) entirely within the empiricist tradition, orthodox theory has over time adopted the form, and increasingly the substance, of the first paradigm. ‘Applied’ or ‘pragmatic’ economics, however, remains robustly empirical. In Section 2, this issue is placed in a broad historical context and it is argued that the observed dualism and the tensions emerging in health economics have characterised the history of science since its inception 2500 years ago. It is suggested that the reason for the dualism in economics is, at core, the same as the reason for the dualism in the past; viz, an impatience with empirical methods and dissatisfaction with the fact that they inevitably produce something less than ‘certainty’ or ‘absolute truth’.

In the second part of the paper it is argued that the inhibiting influence of a Rationalist methodology upon theoretical orthodoxy explains the neglect of a number of the particular issues which arise in cost utility analysis, and, more broadly, in economic evaluation; issues which, for a non-economist would have prima facie candidacy for investigation by and for possible inclusion in economic theory.

The symptoms of the postulated malaise can be found throughout economics. In the area of macro theory, belief in rational expectations and the inferred non-existence of involuntary, non- frictional unemployment was retained for over a decade despite the observation of what, to most observers, appeared like large scale involuntary unemployment in virtually all western countries. In consumer theory, the compelling evidence for Duesenberry’s relative income hypothesis (in the psychological literature) was dismissed and the theory replaced by the theoretically more appealing life cycle hypothesis1. As noted by Blaug (1992) there has been no diminution in the interest or teaching of general equilibrium theory despite the fact that ‘some of the best minds of modern economics devoted a quarter of a century and … enormous intellectual resources … to endless refinements, none of which has even provided a fruitful starting point from which to approach a substantive explanation of the working of the economic system’ (p168, 169). In health economics, it took over two decades to convince the majority of health economists that supplier induced demand could be a contributory factor to the rising use of services. Despite the apparent impossibility of explaining service use and expenditures through time and cross- sectionally by any other theory, orthodox economists are still sceptical of a theory which appears to violate the assumptions of fixed preferences and well informed and self interested consumers. The protracted debate over SID was characterised not only by a disregard or disbelief in the significance of the evidence but by the ready acceptance of flimsy and sometimes invalid criticisms (Richardson 1999).

1 By contrast, the displacement of Keynes’ absolute income theory of consumption by the permanent income hypothesis occurred as a result of the documented empirical superiority of the latter theory by Milton Friedman.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 2 Two of the more protracted debates in health economics have similarly been characterised by an astonishing lack of empirical content. Both the Quality Adjusted Life Year (QALY) and the Healthy Year Equivalent (HYE) purport to measure ‘utility’ and, there are now a series of empirical tests which could be employed to test the validity of the contenting instruments. Despite this, and after almost ten years of controversy, the peak journals of health economics report no such testing and not even a reference to the need for discriminating empirical evidence. Debate has focused upon analytical consistency with (empirically flawed) axioms2, 3.

The second debate, over the meaning of equity4 was less analytical and more taxonomic. As with the first debate, however, it was (almost) free of empirical content. Prima facie, the notion of equity that is relevant for economists should be related to the notion which is valued and desired by the society and its members. But empirical evidence with respect to social values was neither presented nor suggested. The debate was, in effect, a striking example of ‘essentialism’ as described below and the tangled intellectual web that is created by the a priori search for the essence of the concept which is presumed to be locked within a word.

A further symptom of the malaise is the now well documented fact that economists have persisted with, and drawn policy conclusions from, assumptions that are not simply unrealistic because of their abstraction from reality, but assumptions which are known to be wrong in particular contexts (see, in particular, Rice 1998). First, and possibly the most well documented example is the persistence with the Von Neumann and Morgenstern axioms and, particularly the assumption of the invariance of preference ordering of risky prospects when these are subject to linear transformation. As summarised by Schoemaker (1982) there is a large body of evidence demonstrating that individuals routinely and systematically violate these axioms. (It is also known that Von Neumann and Morgenstern did not believe their axioms represented a general description of risk related behaviour [Richardson 1994]). Perversely, while recognising the empirical deficiencies in the theory, economists have continued to use it as the basis for their analysis of risk, either ignoring the evidence or justifying the analysis with the exceedingly casual argument that it is interesting and possibly helpful to pursue the implications of conventional assumptions. Alternatively, the purpose of the axioms is sometimes redefined to give to the theorem a normative significance which was not originally intended and which requires the irrational disregard of risk related emotions that occur before the outcome is known (Richardson 1994).

A second example is the conventional assumption of fixed preferences which is one of the cornerstones of welfare theory and the normative conclusions drawn from it. The assumption,

2 For a recent contribution to this literature see Reid (1998). 3 The author’s own contribution to this debate was to point out that if ‘utility’ is empirically different from ‘value’ – which is a central tenet in the advocacy of the HYE – and if the stage 1 use of the Standard Gamble correctly incorporates this difference, then the stage 2 use of the Standard Gamble will necessarily invalidate the measure as it would, in effect, incorporate risk adjustment a second time. The argument which is based upon the simple logic of measurement, has been ignored in favour of the analysis of the theoretical consistency of the error free QALY and error free HYE. In this context ‘consistency’ means correspondence with the axioms of choice that have been found repeatedly and consistently to be empirically invalid (Schoemaker 1982). 4 See Culyer and Wagstaff (1993) and Mooney, Hall et al (1992).

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 3 however, is known to be counterfactual. Preferences not only vary but the overt and deliberate process of manipulating them may be observed daily in the form of advertising. Psychological theory and research supports the notion that – as known by the ancient Greeks – a person’s preferences and aspirations are formed, in part, by comparison with the preferences and behaviours of others. As others change their behaviour, the individual’s preferences mutate. Recent ‘Discrepancy Theories’ support the notion that satisfaction depends upon the gap between achievements and goals. Goals, however, slip and slither as people adapt to circumstances (Diener et al 1999). Perhaps the most dramatic example of this is provided by Brickman and Coates (1978) who found comparatively little differences in the subjective wellbeing of a control group, an ‘intervention group’ consisting of major lottery winners, and an ‘intervention group’ of persons previously interviewed but subsequently afflicted by paraplegia as a result of traffic accidents. By contrast with the postulate of fixed preferences, aspirations changed and the relative importance of different goals were altered to adapt to the new circumstances.

As a third example, orthodox economists define the objective function in terms of utility as revealed by actual behaviour. There is a separate puzzle associated with the practice of defining rather than investigating social objectives. However, if objectives are to be defined, then prima facie, the criterion of revealed preferences appears reasonable if individuals are well informed and what they reveal corresponds with what they like and with what produces satisfaction. However, it is now believed that ‘wanting’ and ‘liking’ arise from two different neural systems (Berridge 1996). ‘Wanting’ may not, therefore, be a reflection of activities which produce subjective wellbeing – which, it is arguable, should be a part of the objective function.

These three examples suggest that 50 years of psychological research has been largely, if not entirely, ignored by mainstream economics which persists with the impoverished concepts of human behaviour and motivation postulated in an earlier era.

The present paper suggest that these diverse ‘puzzles’ are not simply a set of coincidences. Rather, they are a result of the primacy of orthodox over pragmatic – unconstrained – theory and observation; of the drive by economists for theoretical elegance and analytical sophistication at the expense of empirical relevance. In this respect, orthodox economists are perpetuating a long tradition that once characterised the physical sciences but has now been replaced by a more fruitful approach to empirical problem solving.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 4 2 Rationalism and Empiricism: A Brief History

The history of Western thought can be summarised many ways, each with a different focus. One such focus is upon the relative importance of Empiricism and Rationalism, the latter being the belief that knowledge can and must be obtained principally or entirely through the application of pure reason. By contrast, the common element of the many variants of ‘Empiricism’ is the belief that the truth content of theories concerning the physical world is derived ultimately from observation and that the truth of theoretically deduced propositions should be established empirically. In the last 2,500 years there has been an epic struggle between these two approaches and, a central thesis of this article is that this continues within theoretical economics. The purpose of the selected history below is to focus attention upon the influence of Rationalism, the ascendant paradigm for most of the years of intellectual stagnation, and to highlight its defining characteristics; characteristics which bear a striking resemblance to the present orthodoxy of economic theory. The conflict is not simply about the role of empirical testing. Rather, the two approaches represent contrasting and conflicting ‘paradigms’, as this term has been defined by Kuhn (1957).

The major events of Western intellectual history and the individuals associated with them are summarised in Figure 15.

Classical Rationalism Thales (Circa 600 BC) The birth of Western science and philosophy is usually attributed to the school of thought which evolved in Miletus (modern day Turkey) early in the 6th Century BC and is associated with the name, ‘Thales’. Before this time it was believed that nature was subject to the random dictates of magical or divine forces. In Miletus, and for the first time in known Western history, a hypothesis was put forward which would be pursued, in different forms, until the present. This was that, behind the apparently chaotic behaviour of the observed world, there are a series of contextless ‘laws’ or regularities. It was postulated that these laws could be accessed by a combination of observation and reason processes, which have subsequently been described by the terms ‘Empiricism’ and ‘Rationalism’. The subsequent history of thought has been, inter alia, the history of an intellectual pendulum which has swung between these two elements as a belief in their relative importance has fluctuated.

Parmanedes (470 BC) The first movement of the pendulum was towards Rationalism, with Parmanedes of Elea (a Greek colony in Sicily) outlining the argument that would be adopted, in one form or another, by all subsequent Rationalists. This was that empirical observations are intrinsically unreliable – subject to error – and that, consequently, they cannot be the basis for ‘truth’. By contrast, the conclusions drawn from correct reasoning must necessarily be true. But as deductive reasoning requires premises or initial axioms, ultimate ‘truth’ depends upon the truth of these axioms. According to Parmanedes the veracity of axioms is ensured if they are derived

5 This summary draws heavily upon Russell (1965); Flew (1979); Magee (1973); Barnes (1996); Schilpp (ed 1974); Popper (1974, 1983); Blaug (1992); and particularly Tarnas (1991).

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 5 from divine revelation. With this as the epistemological basis, he created a philosophic system based upon, to that date, an unprecedentedly rigorous application of deductive logic.

Pythagorous (582-c507 BC) The mathematician/philosopher Pythagorous differed from the increasingly secular Rationalism of his contemporaries in two respects. First, he was less concerned with the material ‘substance’ of phenomena than with its form; and this, he postulated, was governed by mathematical rules. Secondly, and in a way not fully understood, he wove this belief into a mystical description of the world which was to become the basis for a secret and semi-religious cult. Subsequent disciples believed that the universe is somehow mathematical and that mathematics has, in some way, a mystical capacity for accessing the essence of the universe (Flew 1979).

Democritus (c460-370 BC) The religious element of the ‘sceptical Rationalism’ of the 5th Century BC was finally eliminated and replaced with a ‘naturalistic Rationalism’; that is, a deductive, rationalist methodology which did not base its authority upon divine revelation but upon clearly perceived truths which could be supported, in part, by their capacity to explain the natural world. Interestingly, Democritus used this methodology to derive the theory of ‘atomism’ – the theory that the world is composed exclusively of uncaused and immutable material ‘atoms’. These, it was argued, are invisible, minute and indivisible particles that perpetually moved. Random collisions result in varying combinations which produce the visible world of experience. The epistemological interest in these conclusions is that the use of axioms and a methodology which would be widely or universally rejected today, resulted in a description of the physical universe which corresponded remarkably closely with the modern atomic theory. Naive or unacceptable assumptions and methods are not inconsistent with truth or useful conclusions.

Plato (427-347 BC) With Plato, classical Rationalism reached its zenith and was to have a dominating influence on thought for the next 1,500 years. The first plank in the edifice was the hypothetico-deductive method of reasoning. Rather than dealing with facts, the method involved statements about facts; that is, the statement of hypotheses in a form which permitted the application of deductive logic. This could result in conclusions capable of testing by further logical argument. While attributed to Socrates, the second plank was the search for absolute definitions; definitions of the concepts embodied in particular words which could then be used as the basis for deduction.

The third and distinctively Platonic plank was the statement of a fundamental axiom; vis, that each property and its corresponding concept – ‘shape’, ‘colour’ ‘beauty’, ‘justice’, etc derives its characteristic by sharing or partaking in the ‘essence’ or ‘Form’ of that property. ‘Truth’ could only be accessed by the use of the intellect to understand the nature of these ‘transcendent’ entities – the Platonic ‘Forms’ or ‘Ideas’. As with Democritus, the epistemological anchor of this system – the guarantee of truth and certainty – was the argument that the fundamental axiom was a self evident revelation or truth for the person (trained philosopher) who sought truth with intellectual integrity.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 6 Figure 1: History of Empiricism & Rationalism

DOB KEY FIGURE BC Thales Basic Hypothesis of Western Thought: 636 (Miletus) Unseen, Contextless ‘Laws’ Describe the Physical World Accessed by Observation Reason (Empiricism) (Rationalism) Parmanedes Observation Divine Revelation (Axioms) + Reason 515 (Elea) Unreliable ® Truths Pythagorous Mystical Power of Mathematics 572 (Samos) ® Deduced Truths

469 Socrates (Athens) Basic Hypothesis Extended to Ethics

470 Democritus Reasons = Dialectic

Classical Rationalism derived from 427 Plato a priori axioms (Athens) Universal Coherent System Mathematics = Paradigmatic ‘Form’

384 Aristotle Empirical Synthesis Essentialist Method of Definition (Athens) and Codification Axioms ¬ Observation AD 352 Augustine Classical Rationalism & Christianity 1150 Re-emergence of Scholasticism Neo Platonism Aristotle 1225 Aquinas Theology – Axioms ¬ Revelation Philosophy – Axioms ¬ Observation Fall of 1453 Constantinople 1512 Copernicus RENAISSANCE 1564 Galileo ‘Scientific Revolution’ 1596 Descartes MODERN RATIONALISM

1634 Lock/Hume British Empiricism; ‘Enlightenment’ 1642 Newton ‘Why’ replaced by ‘How’ 1723 Smith } 1818 Marx } Basic Hypothesis Extended to Society/History/Behaviour 1856 Freud } Patterns 1724 Kant Imposed 1872 Russell · Radical Empiricism · Induction (Francis Bacon) · Logical Positivism 1844 Nietzsche 1902 Popper/Kuhn ‘Modern Empiricism’

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 7 End 20th Century Post Modernism: Denial of the Basic Hypothesis In combination with this axiom, various propositions and the contradictory propositions could be examined deductively and, when irreconcilable conclusions both appeared plausible, a further truth could be obtained to reconcile them and in so doing generalise knowledge (the dialectic). While mathematics was not used in the process, it was accorded particular significance and was considered to represent the quintessential Form.

A further important and defining characteristic of this schema was the belief that all human knowledge might be set out as a single axiomitised science. That is, from a small set of primary truths every other truth might be deduced. Fundamental truths did not depend upon context nor ever vary in kind. Empirical observation was to be distrusted as it was merely the shadow of reality. Conflicting empirical evidence was a reflection of the unreliability of the observation and not the unreliability of the general truth.

Aristotle (384-322 BC) While the basic Rationalist structure was maintained by Plato’s pupil, Aristotle, his work represented an important swing of the intellectual pendulum towards Empiricism. Along with his voluminous codification and description of an astonishing variety of plants and animals and his formalisation of the rules of logic, Aristotle postulated a Rationalist ontology – schema of things – which was diametrically opposed to the Platonic system in one important respect. Aristotle agreed that observation might, in particular cases, be unreliable and that truth should be obtained through the application of logic. However, the basic axioms in the Aristotelian ontology were obtained by the repeated observation of nature and by the careful recognition of common elements. The essence of some general truth could then be inferred and the role of definition was to explain the essence of the concept which corresponded with a common word used to describe disparate observations. Logic was then a device for describing the interrelationships between concepts. Importantly, and in apparent contradiction with Kenneth Arrow (see below), logic was not a devise for increasing the ‘truth content’ or confidence in a theory. This was derived entirely from the initial axioms. Ultimately, however, knowledge was to be obtained from perception. In Barnes’ words, ‘Plato, having given abstract Forms the leading role in his ontology, was lead to regard the intellect rather than perception as the searchlight which illuminated reality. Aristotle, placing sensible particulars at the centre of his stage, took sense perception as his torch.’ (Barnes 1996, p58).

By the end of the classical Greek era each of the elements of Rationalism and its variants had been explored. The defining and central tenet was that knowledge can be reliably obtained only by the application of analytical techniques to a set of axioms. These, in turn could be derived by divine revelation or by pure intellectual insight. In the somewhat less pure Rationalism of Aristotle, the intellect was used to abstract common elements from nature and to incorporate the essence of things in a definition. The major task of the scholar/philosopher was to show why certain conclusions must be true and this was to be achieved by personal insight and analytical skill. All variants of Rationalism were characterised by a belief in the unity of the truths underlying nature; that is, the context free nature of the truths. Truths were united according to the laws of logic and mathematics and for many subsequent Rationalists the intellectual edifice created by Euclid represented the quintessence of good science. For most Rationalists, mathematics had

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 8 particular importance for the derivation and demonstration of truth. In the Pythagorean schema mathematics had mystical powers for the revelation of truth.

Subsequent Rationalism

Few original contributions to philosophy were made during the period of the Roman Empire. With the Fall of the Western Empire many of Aristotle’s writings were lost and various forms of Neo-Platonism dominated Western thought until the re-emergence of the works of Aristotle in about 1150. This commenced a process of change which was accelerated by the influx of Greek scholars into Europe after the fall of Constantinople in 1453. This was shortly followed by the emergence of the scientific revolution which was one of the outcomes of the Renaissance. Apart from a brief flourishing of continental Rationalism this gave way to the British Empiricism of the 17th Century and the period of the ‘Enlightenment’. While the contest between Rationalism and Empiricism continued, comparatively little was added to the underlying epistemology or characteristics of the two paradigms and the major figures, of importance for other reasons in the history of philosophy, are discussed only briefly below and only in relation to their position with respect to the epistemological contest between the two paradigms. The evolution of empiricism is better known than the convolutions of Rationalism and receives fairly brief treatment below.

Augustine (354-430 AD) For almost 800 years Western thought was moulded by (Saint) Augustine’s synthesis of Christianity and Platonism. Augustine equated the Platonic Forms with the mind of God, and argued that this basis for reality lay beyond the world of sense perceptions and could only, therefore, be accessed by introspection of the soul. As with Plato, ‘truth’ would be guaranteed if such introspection was conducted by the true philosopher who was, Augustine argued, a lover of God. This view was to permeate virtually all of medieval Europe (Tarnas 1991).

Aquinas (1225-1274) The rediscovery of Aristotle’s works coincided with the influx of Arabic scholarship and the rediscovery of later Greek works including those of Ptolomy. These ideas had an enormous impact as they were consistent with a rising tide of naturalism in Europe. Aquinas’ contribution was to create a new synthesis (scholasticism) which was to remain influential until the Renaissance 300 years later. For Aquinas, naturalism – the realm of philosophy – and revelation – the role of theology – were complementary in the same way as Empiricism and Platonism were complementary for Aristotle. Because of the uncertainties of observation, truth could, once again, only be ensured through reason. Axioms were truths relating to the ‘eternal Forms’, as described by Augustine and Plato. Knowledge of them was derived from a combination of observation and revelation; the former initiating or suggesting the axioms and careful contemplation in combination with revelation guaranteeing their veracity. From this axiomatic basis, both religious truths and the truths of nature could be deduced. As with Augustine and earlier Rationalists, both the natural world and the world of Platonic Forms represented a unified and coherent structure: truths were universal and it did not vary with context or time.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 9 Descartes (1596-1650) The last and relatively short-lived flourishing of Rationalism in the physical sciences commenced with the mathematician – philosopher Descartes, and was continued by Newton’s bête-noire Leibniz6 (1646-1716) and subsequently Spinoza (1632-1677). As with the Greek Rationalists, Descartes commenced his epistemology by doubting the veracity of all observation (and allowing that some ‘devil’ may be distorting observation). Certainty, however, was achieved by intellectual introspection. Descartes argues that the ‘I’ who is conscious of doubting must, as an absolute certainty, exist. Hence the famous dictum: ‘cogito, ergo sum’ – I think therefore I am. A second axiom was that God – a perfect, infinite being – had to exist and that such a God could not be a ‘deceiver’. Consequently, propositions which could be perceived ‘clearly and distinctly’ must be true or else God would be a deceiver. One of the most important truths which Descartes could see clearly and distinctly was that mathematical reasoning could not result in false conclusions. Descartes’ more enduring contribution to philosophy was the dichotomy between the mind and body which was created by these arguments and an enduring theme of subsequent philosophy has been the relationship between the mind – soul – and the truths it could perceive with respect to the physical universe. The more important legacy for methodology was his reductionist approach to the derivation of truth. Problems should be broken into smaller and smaller units until they became tractable and capable of description by mathematics. Mathematical reasoning could then derive further truth.

Empiricism (Naturalism)7

Galileo (1564-1642) Whilst scholasticism with its basically Aristotelian epistemology remained the dominant intellectual force until the 17th Century, the seeds of the Renaissance were sown shortly after the death of Aquinas and during the 14th Century. The assumed unity of the world of Platonic ideas and the empirical world of sense perception began to break down as did the 2,000 year old belief that basic truths could only be accessed by introspection and by intellectually grasping the essence of Forms or Ideas. Thus, for example, William of Ockham (1285-1349) challenged the long held view that the role of definition was to encapsulate essences. He promoted the concept of ‘nominalism’; that is, the view that universals were only names or mental concepts and not real entities. Increasingly, it was accepted that useful concepts could be derived by observation and not by intellectual introspection, a view which led to the secularisation of epistemology. By the time of the Renaissance this view (modernism) had become the predominant belief.

The basic principles of the ‘scientific revolution’ which accompanied the Renaissance were most clearly articulated by Galileo whose role model was Archimedes, the Greek mathematical physicist whose writings had been recently rediscovered. The Aristotelian method of passive observation, distillation of observations into essences, the capture of essences in definition and the application of verbal logic was totally replaced. The role of the scientist, Galileo argued, was

6 Leibniz is now credited with the discovery of calculus coincidentally with Newton’s discovery of it. As a consequence he was the subject of a series of vituperative editorials by the Royal Society of Science written by its President, Isaac Newton! 7 The terms empiricism and naturalism are sometimes used interchangeably. However the term naturalism is also used to denote empiricist theories of ethics viz, the view that normative statements of the form ‘X is good’ may be translated into positive statements, such as, ‘X will maximise utility’.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 10 to observe and measure ‘objective‘ quantities (size, shape, weight, motion etc). Rather than passively observe, Galileo established the role of the quantitative experiment as the final test of the hypothesis. The role of logic and particularly mathematics was to interconnect observations rather than to justify empirical beliefs by their derivation from eternal truths (axioms). This latter emphasis reached its culmination with Newton (1642-1727). Following the publication of his Principia Mathematica in 1687 science ceased to ask the question ‘why?’, with its emphasis upon a deductive connection to axiomitised truths, and replaced it with the question ‘how?’, with its emphasis upon the interconnection between events.

Locke (1632-1704) While Continental Rationalism was enjoying a temporary resurgence, in Britain, and under the influence of Newton’s monumental achievements, Empiricism was ascendant and confidence in its explanatory power gave rise to the period known as the Enlightenment. The tone of this period was established by John Locke a contemporary of Newton who argued that there is nothing in the intellect that was not previously in the senses; that the mind is initially a blank and that concepts and hypotheses arise from the impact upon the mind of the external world. The fundamental tenet of British Empiricism was that sensory experience was the ultimate source of knowledge and that the epistemological cornerstone of truth – to the extent that it could be accessed – was observation. General propositions or hypotheses about nature were to be derived by induction, a process described by Frances Bacon (1561-1626) which, in turn, was similar to the synthesis of observations described by Aristotle. In one form or other this version of empiricism continued until the present although, because of the critique by Popper, there is now less reliance upon the principle of induction. Empiricism reached its most aggressive forms with Hume and Mill who argued that logic and mathematics themselves can be explained by empiricism and, later, with the doctrine of logical positivism, associated with Bertrand Russell (1872-1970) and Wittgenstein (1889-1951). According to this doctrine, propositions have meaning only if they can be empirically ‘verified’. While it is unclear how its advocates could understand the meaning of the principle if it is in fact, true, (as the principle itself cannot be empirically verified) it appears to remain influential in British philosophy.

Kant (1724-1804) Long before the birth of logical positivism Emmanuel Kant had established the basis for a partial reconciliation of Empiricism and Rationalism and, simultaneously, postulated a fundamental defect with British Empiricism. Kant commenced with the observation that the history of metaphysics was the history of contradictory theses, each plausible within its own terms of reference; that is, reasoning is capable of rationalising incompatible conclusions. In his ‘Critique of Pure Reason’ he postulated that the human mind does not passively observe nature. Rather, it is an active agent which imposes patterns on the physical world; observations are accepted or rejected in conformity with pre-conceived hypotheses. As Tarnas notes ‘in the act of human cognition, the mind does not conform to things; rather, things conform to the mind’, (Tarnas 1991 p343). As described by Popper (1975) the mind does not act as a ‘bucket’ which collects facts at random; rather, it acts as a ‘searchlight’ that looks for observations that are consistent with its expectations.

Popper (1902-1995) Kant’s hypothesis was to become one of the cornerstones of Karl Popper’s epistemology, described here as ‘Modern-Empiricism’ to distinguish it from earlier British Empiricism. Based upon Kant’s hypothesis, Popper argued that ‘truth’ may never be achieved

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 11 with certainty. Knowledge must always remain as tentative or ‘best’ hypotheses and that the task of science is either to increase the confidence in our best current hypotheses or to generalise them to achieve greater explanatory power. Popper’s epistemology consists of both logical argument and methodological exhortation. These are commonly confused. The logical argument for which he is most well known is the proposition that the structure of logic is such that general propositions cannot be verified by particular (true) observations but they can be falsified. As a consequence, the possibility of falsification is adopted by Popper as the demarcation between metaphysics and science; that is, in his epistemology ‘metaphysics’ and ‘science’ are the words selected to mean ‘incapable of falsification’ and ‘capable, in principle, of falsification’. There is no attempt to describe the essence of metaphysics and science by this definition (see below) and both metaphysical and scientific propositions have a role in the epistemological theory.

Because falsification, but not verification is in principle possible, the primary methodological exhortation by Popper is to expose theories to falsification8. Our confidence in propositions, he argues, arises from the failure to falsify. The more likely the prior probability of falsification the greater our confidence in the proposition when falsification is attempted unsuccessfully. The extent of our knowledge – the truth content (‘versimilitude’) of theories – depends upon the number of states of the world that are ruled out by the proposition; that is, by the number of observations that may have, potentially, falsified the proposition but have not done so.9 The growth of knowledge is achieved as a result of two pivotal elements of the epistemology; first, error learning arising from refutation and, secondly, divergent thinking – described by Popper as ‘bold conjecture’ – in the formulation of hypotheses. In the starkest contrast to Rationalism, Popper insists that ‘anything goes’ in formulating hypotheses to explain observed puzzles – anomalies arising from our current (or orthodox) hypotheses. Adherence to an orthodoxy – constraint by conventional axioms – is the antithesis of good science.

8 A common and wrong belief is that Popper’s falsification principle is flawed because in practice falsification is no more possible than ‘verification’. Four paragraphs after his initial statement of the falsification principle, however, he notes that it is always possible to find some way of evading falsification …’. (Popper 1972, p42). The issue is then clarified. As noted in the text the desirability of seeking and not evading falsification is a methodological exhortation designed to promote error detection and the growth of knowledge. The misunderstanding of this distinction was so widespread that, in his ‘Postscript to the Logic of Scientific Discovery’, – published in two volumes (Popper 1983) – Popper commences by commenting on this error. ‘It is of great importance to current discussion to notice that falsifiability in the sense of my demarcation criterion is a purely logical affair. It has to do only with the logical structure of statements and of classes of statements, and it has nothing to do with the question whether or not certain possible experimental results would be accepted as falsifications (p xx) … we now come to a second sense of ‘falsifiable’ and ‘falsifiability’ which has to be distinguished very clearly from my purely logical criterion of demarcation in order to avoid gross confusion (p xxi) … it is never possible to prove conclusively that an empirical scientific theory is false …. Hence, to repeat, we must distinguish two meanings … (1) ‘Falsifiable’ as a logical – technical term … (2) ‘Falsifiable’ in the sense that the theory in question can definitely or conclusively or demonstrably be falsified. I have always stressed that even a theory which is obviously falsifiable in the first sense is never falsifiable in the second sense … an entire literature rests on the failure to observe this distinction (p xxii). 9 More precisely, Popper defines ‘versimilitude’ as the difference between the truth-content and the falsity-content of a theory (Popper 1994). Popper (1983 p xxxv) subsequently agreed that this attempt at a precise definition of versimilitude was a failure and that such precision of definition was unnecessary for his theory.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 12 ‘Naive’ falsificationalism is the doctrine, incorrectly attributed to Popper, that the above rules should apply to every hypothesis and every statement10. By contrast, Popper outlined what he described as a ‘metaphysical research program’. In this, the central propositions of a program will be in immune to falsification – they will be ‘metaphysical’. In combination with auxiliary hypotheses (which, inter alia, give the immunity) testable conclusions can be derived, some of which can be subject to falsification. During the growth of a program this process results in the expansion of knowledge: the derivation of previously unexpected propositions which are not falsified when they are tested. In the degenerative stage of the paradigm the converse is true. The description of the rise and fall of research programs has been wrongly attributed to one of Popper’s students, Imre Lakatos. The history of this attribution is a fascinating case study of academic fraud11.

A more important contribution to the description of Empiricism was subsequently offered by Thomas Kuhn (1970) with his publication of ‘The Structure of Scientific Revolutions’. In this, he introduced the concept of ‘paradigms’, a term which has subsequently been adopted in common use. These are characterised, not simply by the adoption of core (metaphysical) propositions, defended by a protective ‘belt’ of auxiliary propositions but also by a way of perceiving the world, by a vocabulary in which the nuances of meaning are so unique to the paradigm that communication between paradigms becomes difficult; and, finally and importantly, by a set of shared values and assumptions by the ‘normal scientists’ who work within the paradigm. According to Kuhn, the Popperian description of science and its progress only occurs during a period of ‘crisis’ in which repeated empirical failures of the paradigm and the encroachment of a rival paradigm force a complete realignment of perceptions and values which, together, results in a ‘gestalt change’.

10 See the statement of the principle in the previous footnote. 11 Lakatos simply relabelled the Popperian description while implying that it was the evolution of Popperian methods from ‘naïve’ falsification. In his intellectual autobiography Popper reports that ‘when Professor Lakatos was writing the paper (outlining the ‘new’ concept of a scientific research program) … he asked me that I should ‘never’ read this paper, and I have complied with his wish; (until his death) … Now that I am called on to reply to his views, I am disturbed to find that the argument which appears to be crucial for his criticism of my views … must, in my opinion, be totally rejected as unsound … (it is) an interpretation of my theory of falsifibility that makes nonsense of my views’. (Popper 1976, pp 999-1000). In confirmation, W W Bartley III, a long time acquaintance of Lakatos, subsequently wrote as follows: ‘There was a time … when I regarded Lakatos as the most immoral man I have ever met. I later came to think this judgement naïve. Lakatos merely talked openly and appreciatively … of the sort of behaviour which is widespread and almost universally covert … I often saw Lakatos lie when it suited his purposes … He explained to me in 1961 … that Popper was quite wrong to say that words do not matter. Quite to the contrary, Lakatos insisted, ideas are of secondary importance compared to the names one gives to them; if you give your ideas good names, they will be accepted – and you will be named the Father … It is then appropriate that Lakatos should have acquired his chief fame … for his ‘scientific research program’. This was an idea that he took over completely developed from the accounts by Popper, Agassi & Watkins of ‘metaphysical research programs’. Lakatos had the good sense to see that the word ‘metaphysical’ presented an insuperable public relations obstacle to the professional philosophers of scientific bent who lacked his own sense of humour. So he calmly changed the word ‘metaphysical’ to the word ‘scientific’ and won the acclaim that he had intended for the notion. What Popper meant, of course, is that words shouldn’t matter. But Lakatos knew better than to moralise (Bartley 1976, pp 37-38).

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 13 Kuhn’s description of science has a larger sociological than methodological/epistemological content. Popper accepts this element when he writes that ‘Kuhn has discovered something which I failed to see … even though my attitude to the phenomenon which Kuhn discovered is very different from his. Kuhn discovered what he has called ‘normal science’ and the ‘normal scientist’ … I admit the existence of the phenomenon …; but I do not admit the evaluation hinted at by the term ‘normal’: I not only dislike the phenomenon, but I think that it has only recently become very important and, in my opinion, a danger to science (Popper 1976, p1145).

Popper’s epistemology was introduced to economics as early as 1938 by Hutchison and subsequently defended by a variety of influential authors including Blaug (1992). Naive falsificationism was popularised as a result of Milton Friedman’s influential essay on methodology (Friedman, 1953).

Essentialism

As the defining characteristic of Rationalism is the deduction of knowledge from initial axioms, it is necessary that some or all of the axioms contain different parts of the knowledge that is to be extracted from them. Taken together, the set of the axioms must contain all of the information to be extracted. Deductive reasoning re-configures rather than creates knowledge. As previously noted, Plato explicitly sought to convert the truths concerning the eternal Forms into linguistic statements which might become the subject of deductive logic. But it was Aristotle who formalised the ‘essentialist method of definition’. The purpose of definition was to capture the ‘essence’ of a general truth. While Aristotle differed from Socrates and Plato in the source of that truth (observation for Aristotle; introspection for Socrates and Plato), in each case a definition was the answer to a question of the form ‘what is meant by X’, where X represents a general word such as ‘justice’, ‘rationality’, ‘colour’ etc. The truth of deduced propositions therefore depends upon the truth of the axioms and this implies the need to pay the greatest attention to the ‘truth’ and accuracy of definitions. This, in turn, leads to the intense analysis of the meaning of words to ensure that the definition embodies the true essence of the word/concept. As stated by Blaug (1992) ‘Adherents of essentialism are inclined to settle substantive questions by reaching for a dictionary of their own making (p109)’. The process describes a very significant part of the intellectual effort of Western philosophy. Insert at end of sentence: are not known to be universally true then

This practice and the role of definition are in the starkest contrast with the methodological nominalism first advocated by William of Occum and adopted as one of the cornerstones of Popperian epistemology (Popper 1974b). In this, words are labels: question of the form …‘what is X’ are likely to be misleading. The meaning of X may not be precise (and, indeed, its description cannot be fully precise without encountering circularity or an infinite regress. X must be defined in terms of words which must be defined in terms of words, etc). Rather, the definition should be made clear by the theory context in which it is used and, conversely, clearly presented theory should leave no ambiguity about how particular words are to be used. The choice of words, per se, however, should not have any particular significance. Hence Popper’s lack of concern over his label ‘Metaphysical Research Program’. With nominalism this might equally

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 14 have been entitled ‘Scientific Research Program’ or, for that matter, any other convenient linguistic label.

The significance of essentialism in the history of western thought should not be underestimated. In the second last paragraph of his monumental ‘History of Western Philosophy’ Russell (1965) concludes:

‘What is number? What are space and time? What is mind, and what is matter? I do not say that we can here and now give a definitive answer to all these ancient questions, but I do say that a method has been discovered (analytical philosophy) by which, as in science we can make success of approximations to the truth’ Russell, 1965 p789 (bracketed words inserted).

As clearly noted by Allais (1984) the question, ‘What is meant by x?’, may rapidly degenerate into a confused but apparently profound analysis. As the meaning of words mutates from context to context and as words are used metaphorically or even to describe conflicting ideas, the attempt to abstract the essence of meaning from each of these contexts is a recipe for analytical entropy.

Despite a resurgence of interest in essentialism,12 following Wittgenstein’s influential work13 most philosophers recognise that the search for simple definitions which are sufficient for the derivation

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 15 of unambiguously true conclusions is a fruitless pursuit and the physical sciences unambiguously employ nominalism. As noted by Magee (1973) ‘The sentence “a die neutron is an unstable system” is the scientist’s answer to the question, “What shall we call an unstable system comprising two neutrons?”, not an answer to the question, “What is a die neutron?”’ (p49). Precision does not depend upon precise definition. For example, the statement ‘the height of a sand dune will be reduced by 2.2 centimetres each hour when the velocity of the wind is 35 kph’, does not derive its precision from the careful definition of ‘a sand dune’, ‘height’, ‘velocity’ and ‘wind’ all of which may remain undefined in a meteorological analysis.

Popper’s summation of the impact of essentialism is as follows:

‘The development of thoughts since Aristotle could, I think, be summed up by saying that every discipline which still uses the Aristotelian method of definition has remained arrested in a state of empty verbiage and barren scholasticism, and the degree to which the various sciences have been able to make any progress depends upon the degree to which they have been able to get rid of this essentialist method. (This is why so much of our “social sciences” still belong to the middle ages.)’ Popper (1974a) p9

12 Putnam (1975) and others have argued that the essence of a thing may be equated with its basic physical structure. Thus, the essence of water is being composed of HsO molecules; the essence of a tiger will have something to do with its DNA. The role of science, then, is to discover these essences and commencing with the correct view that there are such essences will motivate the scientific enquiry into the substance. This argument is only superficially attractive. At best it applies to the physical world. Concepts such as ‘beauty’, ‘truth’, ‘number’, ‘justice’, ‘probability’, ‘rationality’, ‘utility’ do not necessarily have real world correspondence as they are created; and it is possible to create an unlimited number of concepts unrelated to the physical world (fairies, ghosts, and unicorns are all understood, more or least, by children). In effect, the Putnam et al approach simply equates ‘the essence of a thing’ with the physical world and supports this with the obvious argument that there is benefit in investigating the physical world to discover its structure (‘essence’). However the epistemological role of such ‘essences’ is quite different from the role of the Aristotlian ‘essence’. For Putnam, discovery of the essence is the endpoint of scientific enquiry (which implies that an independently determined methodology must drive the enquiry). The essence of essentialism in the Aristotlian schema is that the true essence is not the endpoint of enquiry but much closer to the commencement. For many Rationalionists the essence is seen through introspection or divine revelation. Subsequent knowledge is then deduced. For Aristotle and Francis Bacon the essence is abstracted from observation but once again becomes the premise from which further knowledge is deduced. It is not the endpoint of enquiry.

It is, indeed, also questionable whether Putnam can ever, in principle, discover an ‘essence’. The tentative view that HsO is the essence of water must be modified as HsO is also the essence of ice and steam. Consequently, a lower level essence must be determined with the possibility that this also must give way to a more fundamental essence and so on ad infinitum. The paradoxical conclusion must therefore follow that the essence of a concept underlining a particular word will almost certainly be incomprehensible to those using the word. But the essence is intended to be the essence of the concept used in communication and, clearly, the Putnam essence cannot be this. 13 Wittgenstein argued that the things denoted by a term may not share one common property but may be connected by a network of common features. Thus, in one of his examples, the question is asked ‘what is a game?’. Is it something involving two or more people competing? But this happens in war and business. It is something involving two or more people competing and having fun? But solitaire is a game and gambling addicts may not have fun etc etc. Eventually there may be no common property to all examples of a game, but sufficient overlap between different examples that the concept is widely understood. (I am grateful for John MacKay for pointing out the significance of this and the material in the previous footnote).

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 16 Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 17 3 The Epistemology of Rationalism and Empiricism

Historically, the ascendancy of Rationalism corresponded with periods of little or no growth of scientific knowledge. After more than a millennium of stagnation the emergence of Empiricism in the Renaissance was accompanied by the rebirth of science and the evident success of the contemporary physical sciences, as judged by their capacity to explain, predict and control the physical world, has been accompanied by an unambiguous commitment to Empiricism. The historical events are not coincidental as the respective methodologies of the two paradigms discussed here inevitably have a major – and arguably, decisive – affect upon the likelihood of a sustained growth of knowledge.

The structure of the Rationalist and Popperian epistemological systems are represented in Figures 2 and 3. It is not the intention here to present the latter as the methodological gold standard. Rather, it is presented primarily to highlight the contrast with Rationalism. Both systems employ the hypothetico-deductive system for translating assumptions into conclusions and the analytical heart of both systems is the same – deductive logic or, in its more sophisticated manifestations, mathematical analysis. As further discussed below, it is arguable that the Rationalism of economic orthodoxy has been an attempt to mimic the form of this analytical core in the physical sciences (Ormerod, 1994). Beyond this analytical core, however, the two systems are radically dissimilar. The true engine of Popper’s Empiricism is two fold: first is the methodological exhortation to exposure assumptions (tentative axioms) and conclusions to criticism and empirical falsification and, secondly, the exhortation to explore ‘bold conjectures’. The mind-matter dichotomy is, at least in part, brought together by the unconstrained exposure of the patterns – hypotheses – which the mind creates, to the possibility of empirical refutation. The more this process is repeated, the greater the possibility that the mental patterns suggested will correspond with the external patterns first postulated by Thales and retained as the central tenet of the Popperian schema14. It is these dynamic aspects of Modern Empiricism – and not its ‘static’ logical structure – that are the basis for an ‘evolutionary approach to the increase in objective knowledge’ and the ‘growth of scientific knowledge’: the concepts highlighted in the titles of two of Popper’s key books (Popper 1974b, c, d; 1975).

By contrast, Rationalism has at least two fundamental defects in its epistemological structure; the first to do with the narrowly defined process of deduction and the second concerning the dynamics of the growth of knowledge. The first of these is illustrated in Figure 4 which is an enlargement of Figure 2 but with the middle step – the deductions – represented only by lines connecting axioms and conclusions. Perhaps the most secure tentative hypothesis which may be supported by the history of science and philosophy is that we have no examples of certain truth; that, as Popper insists, general propositions may only be granted the status of ‘tentative hypotheses’. Acceptance of this view in the physical sciences became universal after the leading candidates for unquestionable truths, as demonstrated by their extraordinary predictive power –

14 In his article ‘The Science of Galileo and its New Betrayal’ Popper (1963a) defends methodological realism - the view that science deals with a physical reality corresponding with its descriptions - against the encroachment of instrumentalism - the view that theories are simply instruments for useful prediction.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 18 the Newtonian laws of motion – were shown to be, at best, approximations to a more general truth15.

Once it is granted that general propositions – axioms – are not known to be universally true then it must follow as a matter of logic that some of the conclusions drawn from these axioms may be false. For example, Figure 4 represents a simplified version of the Orthodox theory of consumer demand. In this, three initial and general propositions/axioms represent the theoretical core; viz, (1) the information about the utility relevant characteristics of goods and services is sufficient for decision making; (ii) consumers are rational, by which it is meant that they will maximise utility and (iii) consumers have the power to act which subsumes several sub-hypotheses; viz, that they are ‘empowered’ – that they have the will power, ‘know how’ and motivation to act; that there is some form of market which permits them to express their preferences and that there is not an excessive concentration of power on the supply side of this market. When this theoretical core is linked to subsidiary propositions concerning the market for groceries then it may be correctly deduced that such a market will be ‘efficient’ as economists understand this term. By contrast, a similar conclusion correctly deduced about the market for health services may be invalid. While the core assumptions are true in the first market they may not be true in this second market. As observation suggests that, in the real world, these particular assumptions are very often correct, they have been adopted as general axioms and have become part of a widely accepted orthodoxy; that is, the assumptions are so commonly assumed that they are taken for granted. However, the general ‘economic solution’ based upon this orthodoxy may lead to orthodox conclusions in the health sector that are misleading. This is depicted in Figure 4. In this, each assumption/axiom may be true in a particular domain of behaviour – context. In other domains it may be false. From this it follows, as a logical necessity, that some (or all) predictions may be false. Conclusions cannot, therefore, be assumed to be generally true on the basis of the truth content of the initial axioms.

The second fundamental defect also arises from the fallibility of assumptions. With either Rationalism or Empiricism there is no necessity for assumption/axioms to be testable. If they are indeed false, then the Empirical paradigm, at least in the Popperian manifestation illustrated in Figure 3, has at least one unavoidable error detection mechanism; viz, whether or not subsequent predictions explain the initial empirical puzzle or defect with the previous theory which was the starting point of the enquiry. If the Popperian methodological exhortation is followed then additional conclusions will be exposed to possible refutation, thereby strengthening the likelihood of error detection. No such mechanism for the growth of knowledge exists within the Rationalist paradigm.

15 Other candidates such as the rationality of individuals and the universality of utility maximisation, briefly discussed later, depend for their plausibility upon interpretations of the key terms which are so close to being analytical-tautological-truths that they produce no predictions capable of potential falsification. In the Popperian epistemological schema they have no information-truth- content.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 19 Figure 2: Logical Structure of Rationalism

Axioms abstract general truths

deductions

coherent/unified system of truths

It is clear from this brief overview that there is something of a continuum between pure Rationalism and Popper’s Post Empiricism. To the extent that theory and conclusions are exposed to empirical refutation and to the extent that there is a willingness to contrast new with old theory, the methodology approaches the ideal of Modern Empiricism exemplified by the Popperian theory. Conversely, to the extent that orthodox axioms are preserved at all cost, new and conflicting theories and novel predictions eschewed by design or by default and emphasis placed upon the analytical core, the system approaches the ideal of Platonic or Cartesian Rationalism.

The structure of the respective epistemologies is not, however, the only relevant characteristic of Rationalism and Modern Empiricism. In Kuhnian terms, each of these epistemologies represents a different ‘paradigm’ – not simply a different set of core hypothesis but a set of shared beliefs, concepts, perceptions, language, rewards and punishments for the reinforcement or erosion of the paradigm and rules for the conduct of ‘normal science’. The contention of this paper is that orthodox economics is increasingly adopting the characteristics of the Rationalist paradigm in this Kuhnsian sense.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 20 Figure 3: Popper’s ‘Modern Empiricism’

Empirical Problem ‘Bold’ Conjecture

Theory: Definitions logical relations

Role of = Capture essences Deductions Definition = Simplify statement of theory

Testing Truth Testing Increased confidence in exposure to possible falsification conjecture

New Tentative Rejection problems acceptance

Figure 4: The Logical Defect in Rationalism

General (Context free) Assumptions/ Axioms/Truths Captured in Definitions 1. Information exists 2. Consumers are 3. Consumers have ‘Rational’ Power to act Yes No Yes No Yes No

Context 1 Context 2 Groceries Health valid invalid deductions conclusions

II Orthodox Orthodoxy conclusions misleading

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 21 4 Rationalism in Economics

In summary, the last two sections have argued that, for a significant part of its history, western thought has been dominated by epistemological Rationalism and that such times have corresponded with periods of intellectual stagnation; and that progress in our understanding of the empirical world has progressed during periods in which empiricist methods have been adopted. In the last section it was argued that there are compelling reasons for believing that this outcome was not coincidental; that Essentialist-Rationalism focuses intellectual effort upon barren verbiage or its mathematical counterpart, and that, by contrast, Empiricism, at least in some of its forms, is a prerequisite to our understanding of the physical world. The selected history and abridged epistemologies of the conflicting traditions were presented to highlight the similarities of the former paradigm with economic orthodoxy. This central theme is discussed further below.

Economists have, of course, been aware of the methodological characteristics of their profession; but it is not obvious that the full implication of the various methodological debates have been widely appreciated. Nineteenth Century economists were well aware of the dependence of economic theory upon abstract assumptions. As noted by JS Mill ‘political economy is essentially an abstract science that employs the “method a priori” … (by which we mean) … reasoning from an assumed hypothesis.’ (Quoted from Blaug 1992, p57). John Neville Keynes summarised the Nineteenth Century view when he argued that ‘the right procedure is the a priori method of starting from “a few indisputable facts of human nature” … (and because of the inevitable abstraction from context this implied that) … political economy is a science of tendencies only, not of matters of fact’. (Blaug p73). An important corollary of this view, however, is that in particular contexts the generalisations embodied in the axioms might fail; there might be what Mill called ‘disturbing cases’. It was for this reason that Mill warned that ‘the mere political economist, he who has studied no science but political economy, if he attempts to apply his science to practice will fail’. (Blaug p58). This was a view echoed by John Maynard Keynes when he argued that ‘good economists are scarce because the gift for using ‘vigilant observation’ to choose good models … appears to be a very rare one’. (Blaug p79).

The Rationalist view of axioms as context free truths that are independent of experience was to be most clearly articulated in the 1930s and 1940s by Robbins and Von Mises with the latter arguing that ‘the fundamental propositions of economic science are ‘true’ or ‘hold’ independently … of experience … no meaningful action can be performed without them and therefore no action would contradict them.’ (Latsis 1976, p5). The fundamental axiom of rationality is, therefore, ‘a synthetic, a priori principle … this principle says that human actions are adequate or appropriate in the situations in which they occur.’ (Latsis 1976, p4).

In the subsequent debate over the status of assumptions, a less extreme positions was adopted. It his influential essay on the Methodology of Economics, Friedman (1953) argued for the instrumentatist view that assumptions need not be true or an accurate reflection of reality. Rather, it was sufficient that they should serve as useful instruments (a view initially repudiated but subsequently and reluctantly accepted by Galileo in response to the persuasive arguments of

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 22 the Inquisition!)16. Friedman was vigorously supported in this view by Machlup (1963). While defensible, this view will degenerate into Rationalism unless the empirical status of the theory is achieved through the testing of conclusions and, more particularly by the conduct of discriminating tests to establish the superiority of the theory over other contenders. However, as noted below, economists have also found great difficulty in the empirical testing of conclusions. It is simply the worst of both paradigms to excuse wrong assumptions as being mere instruments but to simultaneously fail to test conclusions.

In his discussion of the conceptual framework of modern economics, Fusfeld (1980) notes that in the 1950s and 1960s many economists believed that there had been a satisfactory resolution of the methodological debate and that the methodology of ‘logical empiricism’ was the appropriate basis for economic analyses. Fusfeld (1980) describes the partial consensus as follows: ‘The method of logical empiricism embodies three steps … the first step is construction of a theoretic model; the second derives hypotheses about reality from the theory; the third tests the hypotheses against empirical data (p3) … and rejects hypotheses falsified by empirical tests (p5) … The operating rule of logical empiricism is that logical propositions, in addition to possessing logical validity (ie being correctly derived from the assumptions of the theory) must also generate testable hypotheses, or be capable of generating potentially testable hypotheses’ (p4 bracketed words added). With the exception of two important elements this consensus view generally corresponds with the Popperian description of what science ought to be17.

This consensus was short-lived. Fusfeld suggests that its demise was at least in part attributable to Thomas Kuhns influential book ‘The Structure of Scientific Revolutions’ (Kuhn 1962). In this, Kuhn argues that normal paradigms – core theories – are not, in fact, rejected when hypotheses derived from them are falsified and that ‘normal scientists’ – those working within the paradigm – seek to defend and not falsify their paradigm. Fusfeld argues that the attempt by Lakatos to replace simple falsification with a more descriptively accurate process involving the rise and fall of ‘scientific research program’ similarly failed because of Kuhn’s demonstration that the very facts needed for the falsification of hypotheses are themselves unprovable. They are generated in the biased atmosphere of a particular paradigm and are eventually accepted or rejected as a result of the agreement or disagreement of the scientific community. That is, ‘facts’ themselves are inherently biased and subjective.

16 See Popper (1974d),‘The Science of Galileo and its New Betrayal’. Popper (1974 p98) notes that ‘there was no objection to Galileo’s teaching … so long as he made it clear that its value was instrumental only; that it was nothing but a ‘supposition’ as Cardinal Bellarmino put it; or a mathematical hypothesis – the kind of mathematical trick ‘invented and assumed in order to abbreviate and ease the calculations’. Galileo’s crime was to insist that his hypothesis described the real world. 17 The two (related) missing elements are, first, that scientists should seek to find fault in their theories, (ie generate hypotheses which they suspect may be falsified) because confidence in theory (verisimilitude) rises, not with the verification of self evidentially true hypotheses but with the failure to falsify the theory with hypotheses which initially, appear improbable. Second, theories with the greatest verisimilitude – truth content – are likely to arise from ‘bold conjecture’ (lateral or divergent thinking) as this process is most likely to produce hypotheses contradicting establlished wrong beliefs. Note that these quintessential features of the Popperian method represent methodological exortations rather than logical requirements.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 23 This widely held belief that Kuhn had successfully demonlished the Popperian edifice is, in fact, wrong18 as is the incorrect belief that Popper believed that conclusions and theories could be conclusively falsified (see footnote 8). The historical error is not, however, of importance here. The significant fact is that much of the economics community rejected ‘logical empiricism’ but did not follow Fusfeld’s advice to carry out a ‘comprehensive re-examination of the epistemological and conceptual foundations of economics’ (p2). Rather, and the contention of this paper, a significant part economic theory reverted to the methodology of Essentialist – Rationalism.

The defining characteristic of Rationalism is the assumption of axioms which are regarded as embodying the essence of truths that are assumed to be self evident for one of several reasons and the use of these axioms to derive conclusions whose truth is guaranteed by the truth of the axioms. The other characteristics associated with Rationalism are: the distrust of observation because of its unreliability; the analysis of concepts/words in order to distil their essence which is then to be encapsulated in definitions. The emphasis upon showing why conclusions must be true by demonstrating their correspondence with axioms, the emphasis upon analytical techniques – and the percentage of the intellectual effort devoted to this – in order to extract the greatest volume of truth from the axioms and, as a consequence of this, the special status of mathematics; and, finally, the emphasis upon intellectual coherence and belief in the universality – context independence – of the final conclusions.

It is clear that this archetypal Rationalism describes different branches of economics to a greater or lesser extent. Viewed in its totality, post war macro economics represents robust empiricism, with different theories being accepted and rejected (eventually) by their capacity to explain the macro economy. Similarly, many of the components of macro theory could be cited as conforming closely with the Popperian version of Empiricism. Consumer, investment and

18 The belief that Popper advocated the rejection of whole theories because individual hypotheses had been falsified is historically incorrect. Popper explicitly rejected this view and explicitly argues that ‘it always remains possible … that we shall make mistakes in our relative appraisal of two theories … this point can hardly be over-emphasised … our preferences between theories need not change … if we eventually refute the better of the two theories. Newton’s dynamics, for example, even though we may regard it as refuted, has of course, maintained its superiority over Kepler’s and Galileo’s theories (Popper 1974(c) p235-236). More generally Popper discussed the conditions under which a paradigm – or what he called a ‘metaphysical research program’ – could be considered to be expanding or contracting and there was an explicit acceptance – implicit in the quotation above – that one theory – paradigm – would only be fully displaced when a superior theory – paradigm – was proposed. As noted in footnote 9 Lakatos purloined this element of Popperianism. Similarly the view that Popper’s methodology is flawed because individual facts may never be proven but are themselves selectively sought and subjectively accepted is, once again, a misunderstanding of Popperianism. As noted in footnote 7, Popper acknowledged in his seminal work that it is always possible to evade falsification. Similarly, and extending the view of Emanual Kant that our mind imposes patterns on the world rather than visa versa, Popper insisted that all observation is ‘value ladden’. Immediately following his first statement of the falsification principle Popper argues that while the evasion of falsification is possible for the reasons discussed above, ‘I am going to propose that the empirical method shall be characterised as a method that excludes precisely those ways of evading falsification which, as my imaginary critique rightly insists, are logically possible … its aim is not to save the lives of untenable systems but, on the contrary, to select the one which is by comparison the fittest by exposing them all to the fiercest struggle for survival (Popper 1972 p42). The common error of interpretation arises from the failure to distinguish between the methodological exhortation described here and the logical analysis which justifies the exhortation. It is when we have genuinely tried but failed to falsifiy theory that our confidence in it is increased.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 24 monetary theory have been characterised by the intellectual free market advocated by Popper. On closer inspection, the term ‘reluctant empiricism’ might, arguably, be a more accurate description of some of the methodologies with their drive to axiomatise theory and to derive results from ‘secure micro economic foundations’. As noted in the introduction, the Nobel prize winning achievement of connecting macro theory to the axiom of rational behaviour – the rational expectations hypothesis – was probably responsible for a five to ten year analytical detour (and, perhaps, to policies responsible for the loss of countless millions of job years). Even within these areas dominated by Empiricism the process of change appears to have depended, to a large extent, upon intellectual elegance and the Rationalist imperative to link conclusions and fundamental axioms.

Other areas of economic theory have been less fortunate as the subject matter does not force a confrontation between prediction and events that are uncertain at the time of the prediction. Numerous economic theories – human capital, household production, the theory of the firm – commence with a set of conventional axioms and produce predictions that are so general that falsification is impossible. These theories, however, do not truly exemplify Rationalism as they at least commence with well defined empirical problems and end with predictions which, in principle, may be the subject of empirical investigation. Over time most positive theories of economics have evolved to a greater or lesser extent but often because of the emergence of an alternative theory that is analytically more elegant and only indirectly in recognition of its empirical shortcomings. At worst, these theories may be criticised as representing ‘weak empiricism’ or even Rationalist in spirit, as the greatest intellectual effort is devoted to the axioms and the analytical structure.

But the conclusion above – that the analysis is ‘Rationalist in spirit’ – is precisely the symptom of the malaise that motivated the present paper. It is not simply the case that economists find great difficulty with the production of empirically novel conclusions which lend themselves to strong empirical testing. Rather, the thesis here is that economists in their pursuit of their ‘normal science’ have increasingly abandoned this gold standard and rationalised the adoption of methods and conventions which have driven the subject matter in the directionf of the Rationalist paradigm. The asphyxiating effects of this upon the scope of orthodox enquiry is the theme of the next section.

At the other end of the methodological spectrum from Macro Economics is General Equilibrium theory which has held the leaders of the economics profession in thrall for more than a quarter of a century. As documented by Blaug (1992) the theory is yet to be formulated in a way which connects it with any form of empirical comparison. It is, arguably, closer to the spirit and epistemological status of the Platonic Forms than any surviving theory which purports to connect with the physical world. Truths are analytic and no clear criteria for judging the empirical purpose and success of the theory have been offered. As reported by Blaug (1992), Arrow suggests that when you find a new concept or theory, the question is, ‘Does it illuminate your perception? Do you feel you understand what is going on in every day life? Of course, whether it fits empirical and other tests is also important’ (p169). As there is no empirical component in GE theory, the remaining and self evidently unsatisfactory basis for believing it has merit is that it may ‘illuminate perception’ or make people feel they understand more: criteria which would justify mysticism and

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 25 belief in the occult. The opportunity cost of the theory’s development as judged by the intellectual input of leading economists and graduate students and by the diminished effort and outcome from economic theory elsewhere, is incalculable.

Examples of essentialism in economics are not hard to find. Blaug (1992) devotes a chapter to a discussion of the different answers that have been given to the question, ‘What is rationality?’. With respect to the question, ‘What is utility?’, Allais (1984) notes that ‘some, including myself even believe that it (cardinal utility) can be defined … by reference to the intensity of preferences … others deny it any existence. Still others hesitate to state a categorical judgement; this is apparently the case of Arrow who answered, ‘I am not sure – maybe it exists’, to one of my questions. (Allais 1984, p6 emphasis added). In the same article, and commenting on the 1983 Oslo Conference on Utility and Risk Theory, Allais (p28) notes that ‘Most of the conflicts seem to have arisen from the use of the same word to designate entirely different concepts – words such as ‘probability’, ‘random variables’, ‘chance’, ‘utility’, ‘rationality’ (Allais 1984, p6).

As noted above, Nineteenth Century economists commonly regarded economics as dealing with ‘tendency laws’, that is, with the statement of likely outcomes or outcomes towards which the economy might gravitate if certain conditions are fulfilled. More succinctly, students are commonly taught that economists deals with questions of the form ‘If … then’. If this correctly and fully represents the epistemological status of economics then the subject has degenerated into the statement of analytical truths. To the extent that empirical relevance is claimed as a result of axioms, it has degenerated into Rationalism. To the extent that it wishes to retain the status as an empirical science, it must go beyond the justification of conclusions in terms of tendencies or possibilities.

The problematical status of economics was vividly illustrated by an interchange between Kenneth Arrow and a group of physicists at the Santa Fe Institute. This is an organisation, founded in the mid 1980s, which has drawn together eminent scholars from a number of disciplines in an attempt to ‘forge the first rigorous alternative to the kind of linear, reductionist thinking that has dominated science since the time of Newton’. (Waldrop 1994, p13). As part of the process of cross-disciplinary education, representatives of the different subjects outlined recent developments in their field. The response to the economist’s contribution is described as follows:

‘As the axioms and theorems and proofs marched across the overhead projection screen the physicists could only be awe struck at their counterparts’ mathematical prowess – awe struck and appalled … the physicists had no objections to the mathematics itself, of course. Physics is far and away the most mathematised science in existence. But what most of the economists did not know – and were startled to find out – was that the physicists are comparatively casual about their maths. They use a little rigorous thinking, a little intuition, a little back of the envelope calculation – so their style is really quite different,’ says Arrow, who remembers being pretty surprised himself. And the reason is that physical scientists are obsessive about founding their assumptions and their theories on empirical fact … the general tendency is that you make a calculation and then find some experimental data to test it. So the lack of rigour is not so serious. The errors will be detected any way … (Arrow noted that) ‘we don’t have data of that quality in economics.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 26 We cannot generate data in the way physicists can. We have to go pretty far on a small basis. So we have to make sure every step of the way is correct’. (Waldrop 1994, p140).

It is here that Arrow’s view appears to be in stark contrast with Aristotle who recognised that analytical techniques cannot correct incorrect axioms or increase the truth content of theories. As a minimum, Arrow appears to be making an exaggerated claim for the role of mathematics that contrasts with the warning given by Paul Samuelson19 about this tendency. The response of the physicists to Arrow’s defence and the apparent neglect of empiricism in economics is, however, even more revealing. This is described as follows:

Physicists were nevertheless disconcerted at how seldom the economists seemed to pay attention to the empirical data that did exist. Again and again, for example, someone would ask a question like ‘What about non-economic influences such as political motives in OPEC oil pricing and mass psychology in the stock exchange? Have you consulted sociologists, or psychologists, or anthropologists, or social scientists in general?’ (Waldrop 1994, pp 140-141).

Prima facie, it might be expected that the difficulty encountered with empirical testing would result in an increased, and not a decreased, emphasis upon empiricism as economists attempted to overcome this deficiency. By contrast and as reported in Bridges (1999) a survey of the most influential journals indicated that almost twice as many articles in the economics literature are purely theoretical than in the journals of Physics. The significance of this and the reaction by economists noted at the Santa Fe Institute is that it supports the contention that economic theory is not simply struggling with the difficulties of empiricism but is increasingly retreating into a different epistemological paradigm in which the attitudes, goals, interests and rewards systematically differ from those of Modern Empiricism.

19 In 1972 Samuelson noted that ‘In connection with slavery, Thomas Jefferson has said that, when he considered that there is a just God in Heaven, he trembled for his country. Well, in connection with the exaggerated claims that used to be made in economics for the power of deduction and a priori reasoning … – I tremble for the reputation of my subject. Fortunately, we have left that behind us.’ The content of most graduate textbooks of economic theory would not support this final conclusion (cited by Blaug 1992, pp 81-82).

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 27 5 Rationalism and Cost Utility Analysis

It was suggested in the Introduction that the debate over the respective merits of the QALY and the Healthy Year Equivalent (HYE) is a quintessential example of Rationalism. It also illustrates Lakatos’s argument with respect to the power of a good name – (see footnote 1120). The focus of the debate has been upon the correspondence of each measure with orthodox axioms. There has been little interest in the empirical and psychometric properties of the respective measures. In conformity with pre-Newtonian scholarship, the focus has been upon the question ‘Why’ (the HYE should or should not be the preferred measure, the answer being determined by whether it does or does not correspond more closely with orthodox axioms. It has not been concerned with the post-Newtonian question of ‘How’ (the respective measures connect with other measures of quality of life or other observations).

Perhaps the most overt statement of Rationalist methodology is the argument by Gafni and Birch, (1995) that, in their analysis of the current approaches to measuring outcome in the economic literature, they will ‘consider the extent to which these approaches are consistent with the principles underlying the economics discipline and hence are suitable as measurement methods for use in economic evaluation’ (p768). Along with others, the authors redefine the original purpose of the Expected Utility theory so that the axioms may be preserved despite empirical contradiction (see Richardson 1994). In the author’s words, ‘we might find that individual behaviour violates all or most of the underlying axioms of a theory and yet we would like to use these theories based on the criterion of normative appeal. The important point is that when a theory is chosen based on the normative criterion alone, one does not have to establish validity using classical psychometric methods’ (p769 italics added).

The Rationalist legacy in cost utility analysis is further explored below (albeit rather briefly in this working paper). It is argued that in each of ten examples there is significant prima facie empirical evidence that issues and objectives exist which are almost totally ignored in the literature. It is suggested that the reason for this is that in each case, the hypothesis conflicts with one or more of the conventional axioms of orthodox economics; that is, it is suggested that the presupposition of the orthodox assumptions has inhibited the exploration of these issues.

In the context of utility theory and economic evaluation there are a small number of fundamental axioms which define orthodoxy and a larger number of conventional assumptions/axioms which have been adopted either as a conventional interpretation of the more fundamental axioms or as a means for expanding the predicted power of the model. First, and fundamentally, it is assumed that individuals are ‘rational’. Narrowly interpreted, this implies consistency in preference ordering which, narrowly defined, is equivalent to utility maximisation. More broadly, ‘rationality’ has been taken to imply the adequacy of individual’s computational skills, the availability of sufficient information for decision making and the irrelevance of context. It is assumed that the individual’s objective is the maximisation of utility, defined by the strength of preference. More narrowly, it is the utility of consequences that has been assumed and the utility of processes

20 There is, in fact, a large class of QALY-like measures, each a respectable candidate for use and consideration as a ‘gold standard’.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 28 arising from system wide issues has been ignored. Social welfare has been defined in terms of individual utility (welfarism) and, in practice, by the utility associated with consequences. The result of this is that applied research has usually embodied the value judgement that society should adopt utilitarianism. As individuals are assumed to be rational, and proactive (‘empowered’) the objective of utilitarianism often becomes indistinguishable from the embrace of libertarian values. In order to sum utilities it has been assumed that the Kaldor-Hicks potential compensation principle is acceptable; ie that compensation does not have to be carried out but that, in principle, losers could be compensated by a redistribution of income. Finally, the key assumptions of economic orthodoxy is that human behaviour may, indeed, be reduced to context free axioms.

The ten issues discussed below are loosely and imperfectly grouped under four headings; vis, (i) the conflict between private and social preferences, that is, the preferences of the selfish and civic minded individual; (ii) the willingness of individuals to interfere with, and override, the preferences of others, (ie paternalism); (iii) the effect of context upon decision making; and (iv) the importance of non-utility objectives.

A: Private vs Social Preferences

1 Severity: In conventional CUA the initial health state is only of importance because health improvement is equal to the quality of life of the final minus the initial health state. When directly questioned and informed of the fact that individual patients find two health improvements to be of identical benefit, individuals express a strong preference for allocating resources to the illness where the initial health state is most severe. This result has been independently derived in Norway, Spain, the USA and Australia (Nord Ubel & Scanlon 1996; Nord 1993; Nord et al 1999; Menzel 1999). As the initial health state is not a consequence, the result conflicts with consequentialism. As individual preferences are not sovereign, it conflicts with individualism; that is, the priority accorded to patients with a severe condition does not arise from the magnitude of the utility gain as perceived by the individuals affected, but from a social judgement about the distribution of such benefits.

B: Overriding Preferences

2 Direct Cost: Individuals surveyed in Australia decisively rejected the proposition that services should be provided on the basis of least cost, as this implies ‘discrimination against those with high cost diseases’. Respondents persisted with this view when interviewers were instructed to argue with them and when they were asked to allocate their own budget between two groups of ill patients. As discussed by Nord and Richardson (1995a) this result is not necessarily as perverse as it first appears as it is based upon the stated view that it is unfair to discriminate against patients who are unfortunate enough to have high cost illnesses. Rather, it is felt that some compensation should be given to offset this disadvantage. This finding strikes at the heart of the economic paradigm (Nord & Richardson 1995a). In particular, it is likely to conflict with the assumption of potential compensation. A likely explanation of the first result is that respondents implicitly recognise that compensating individuals for illness is difficult and

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 29 especially when the individual is dead. Empirical results consistent with these observations have been found in Spain and the USA (Menzel et al 1999; Ubel et al 1995, 1996).

3 Indirect Benefits: One of the benefits of a health program arises from the early return to work of a patient or their retention in the workforce when they may otherwise have died. It has generally been accepted that these benefits should be included in the comparison of overall costs and benefits of the program. However, when directly surveyed, individuals reject the inclusion of such indirect benefits when these necessarily favour the wealthy. Olsen and Richardson (1999) have suggested that such production gains should be included in a new category of ‘socially irrelevant benefits’; a class that would also include the net benefits of crime and drug taking. These conclusions conflict with the assumption of consequentalism and potential compensation for the reasons given above.

4 Willingness-to-Pay: Surveyed individuals almost unanimously reject conventional willingness-to-pay as the basis for evaluating health benefits. This is quite distinct from the willingness-to-pay as a taxpayer for health benefits; a willingness that is conditional upon tax payments by other members of the community (Olsen, Richardson & Mortimer 1998; Richardson 1999). This conflicts with the assumption of context free rationality as the results apply to benefits in the context of a National Health Scheme. It also conflicts with the assumption of welfarism, ie the assumption that the relevant benefit is always a function of individual utility as defined by the individual willingness to pay. The citizen’s willingness to pay as a taxpayer is arguably more related to communitarian values (Mooney 1998).

C: Context

5 Double jeopardy: Context free rationality implies that if a cure returns a person to a pre- existing chronic health state such as quadriplegia, then saving such a person’s life should have lower priority than saving the life of a person who will return to normal health (McKie et al 1998; Nord 1993). However this conclusion is almost universally rejected as such discrimination against particular individuals is believed to violate principles of social justice (Olsen, Richardson & Mortimer 1998). In effect, it is believed that individual health gains should be weighted to overcome any such context specific discrimination. It is of interest to note that failure to acknowledge this in the theory of utility measurement was a major contributory factor to the rejection, in court, of the methodology of the Oregon Experiment for prioritising services in the Medicaid program for the poor and medically indigent. It was argued that the QALY procedure discriminated against the disabled.

6 Rule of Rescue: In the context of the Oregon experiment Haddorn (1991) argued that rationing which may be acceptable in abstract, or in at least some contexts, would not be acceptable in the context of an emergency. The view appears to receive general support although it again conflicts with the axiom of context free rationality (Pinto & Lopez 1998; Ubel et al 1996).

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 30 7 Ex ante vs Ex Post Perspective: In the context of a National Health Scheme, respondents to an Australian survey indicated that they did not wish the Australian health service, Medicare, to pay for ‘ex ante’ sources of utility such as the elimination of fear, dislike of risk and the anticipation of regret. This conflicts with the axiom of context-free consistency of preferences and welfarism (Richardson 1998).

8 Communitarianism: Peacock et al (1997) found that decision makers in the State of South Australia expressed a strong preference for what they described and defined as ‘community empowerment’; a concept which explicitly excluded eventual health related utility benefits to patients. The decision makers were prepared to trade off very significant health benefits for ‘community empowerment’. This conflicts with the assumptions of welfarism and individualism.

D: Non Utility Objectives

9 Richardson & Nord (1997) found that there was a significant difference in people’s preferences when they viewed benefits from their personal perspective and from the perspective of a citizen judging social benefits. If a social perspective is deemed appropriate in social decision making then the outcome would conflict with the result of libertarian welfarism.

10 Explicit Paternalism: When asked whether community decision makers should allocate resources in accordance with the preferences of well informed citizens or in a way which maximised lives saved, an overwhelming majority of respondents nominated the second option (Olsen & Richardson 1999). The result is an explicit repudiation of welfarism.

Two possible reactions to these issues and empirical findings are, first, that people’s stated preferences are sensitive to framing effects and when respondents to a survey have insufficient time to deliberate on unusual issues, these framing effects may dominant the results; and, secondly, that respondents may simply be wrong; that they have supported options and outcomes that would reduce their wellbeing.

These criticisms may have some validity. However, the point of the examples above is to show that there are a series of hypotheses about socially desired outcomes that have prima facie legitimacy – they are consistent with accepted principles of social justice – but which have not even been discussed in the literature which has been overwhelmingly concerned with a narrowly defined range of ‘orthodox’ issues. It is true that stated preferences are often elicited without the possibility of lengthy deliberations; but this is true for almost all stated preference studies and not simply those concerned with unorthodox issues and outcomes. It is also true that individuals may be ‘wrong’ in their choice of options in the sense that they will not lead to optimal outcomes. This is, of course, definitely true if ‘optimality’ is defined conventionally. It may also be true if optimality is defined in some other way. But a prerequisite to this conclusion is the determination of what this other way entails – which other unorthodox social values define ‘optimality’ – and it is the failure to adequately and creatively explore this question that is highlighted by the studies summarised above.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 31 It is not suggested that any of these results, summarised in Table 1, has been ‘established’ and certainly not to the point where they should influence health policy. The purpose of their enumeration here is to demonstrate that there are a surprisingly large number of unsurprising responses from the public which conflict with the present practice or theory and which have not been systematically investigated or even discussed. The suggested reason is that, in each case, the unsurprising public response conflicts with economic orthodoxy and with the assumptions that are consciously or unconsciously made by many or most economists. Each of these issues could, of course, be reconciled with economic orthodoxy by the tautological approach to utilitarianism21. But the point is that without the wisdom of hindsight economists have been constrained in the scope of their enquiry.

These issues by no means exhaust those which need further explanation. There is a large class of distributional issues still requiring quantification (Nord, Richardson et al 1995b; Williams 1997). The only one of these which has been researched to any extent is the importance of age weights (Tsuchiya 1999).

21 Any view expressed by the public could be inserted into a utility function in one form or other and, in this way, empirical observations of any sort could be rationalised ex post, in terms of orthodox welfarism. As there is no possible state of the world for which this could not be done, in Popperian terms, such an analytical approach would have no information value; it would simply create a set of tautologies. More importantly, it would devalue the capacity of language to discriminate between useful concepts. Deontological theories of ethical behaviour – which, in normal language are distinguished from consequentalist theories – would collapse into a sub-set of welfarism. There would now be a preference for deontological rules. For example, the injunction that we should obey the laws of God would be translated into a preference for the laws of God. The motivation of Adolf Hitler and Mother Theresa would be indistinguishable as both simply maximised utility. In sum, the 2,500 year study of social justice and ethics would be defined as a fraud. There could be no motivation apart from utility maximisation. To avoid this conclusion it would be necessary to examine the reasons why particular preferences ‘maximised utility’. Some reasons could be deemed praise worthy and others not. But this would simply reinstate the present theories of social justice but recast in the language of welfarism. The increased verbiage would contribute nothing but confusion.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 32 Table 1: Observation vs Orthodoxy in Cost Utility Analysis

Issue Observed Conflicting Assumptions A. Private vs Social Preferences 1 The importance of severity per sé Individualism: consequentalism B. Overriding Preferences 2 Devaluation of cost Potential compensation: consequentalism 3 Devaluation of indirect benefits Potential compensation: individualism 4 Rejection willingness-to-pay Rationality: welfarism C. Context 5 Rejection of Double jeopardy Rationality: individualism 6 Acceptance of the Rule of Rescue Rationality: 7 Ex post not ex ante perspective Consistency, rationality D Non-utility objectives 8 Desire for Communitarianism Welfarism: individualism 9 Differing Perspectives Welfarism: individualism 10 Embrace of Paternalism Welfarism:

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 33 6 Discussion

As judged by each of the major dimensions of a Kuhnsian ‘paradigm’, a significant part of our orthodox theory appears to resemble classical Rationalism more closely than modern Empiricism. First, the defining characteristic of orthodoxy, as the term is used here, is the belief that theory should be ‘axiomatised’ – predictions should be analytically justified by acceptable orthodox assumptions. This is also the defining characteristic of Rationalism. While this creates the form of the analytical core of Empiricism, it differs, as noted by the Sante Fe Group, as the physical sciences employ assumptions that have significant empirical support and, despite this, seek further empirical confirmation of new conclusions. Secondly, and as described by Kuhn, orthodox economics now has a language – mathematics – which makes communication with other disciplines and other paradigms difficult; a language which contains a set of simplifications, assumptions and values which are accepted by the practitioners. Thirdly, interest, prestige and the likelihood of publication in the most prestigious journals are determined primarily by analytical elegance and often by the generality – contextlessness – of the theory. As judged by Popperian standards, there is a perverse inversion of the prestige accorded to those who do, and do not, seek lateral solutions and those who do, and do not, attempt to support their hypotheses with empirical evidence. Finally, there is a socialisation process which draws students into the paradigm and psychologically commits them to it. So much attention is now given to analytical techniques and, relatively, so little to empirical methods and the demonstration of their use to distinguish between competitive ideas that, by demonstration, the message is powerfully conveyed that it is the former and not the latter that is of value and that will promote a student’s career. By the end of graduate studies there has been such a commitment of intellectual energy to the mastery of techniques that it would be, for most students, unthinkable that these techniques could be of exaggerated importance. A complimentary effect arises from the sheer technical complexity of modern analytical methods. Their mastery is so demanding that few will have the intellectual reserves to question their relevance or relative importance. Those who master the techniques easily are offered a path to publication and reputation by the further application of the techniques, that is faster and more secure than a path involving the labours of empiricism and the obstacles and opprobrium arising from the criticism of orthodoxy. In this entire process there is no point at which students are taught the need for intellectual divergence – the bold conjectures that characterise Popperianism. They are taught to value and perpetuate ‘normal science’.

A possibly irrelevant – though interesting – question is why this situation has arisen – why economists have persisted with what they know to be flawed axioms and inadequate empirical methods. At least four answers might be given. The first hypothesis, suggested by Evans (1998) is ‘that skilful manipulation of an intellectual framework shared by peer reviewers and editors leads to prestigious publications, reputation, research grants, academic promotions, etc’ (p492). The theory is at least consistent with the neo classical axiom of rational self interest! Secondly, Alford (1993) argues that characteristics of the paradigm may reflect the personal tastes of those who have dominated it in the past. More specifically, Alford argues that males generally have a preference for abstract manipulative activities whereas females prefer contextualisation and knowledge which is embedded in a broader societal context. This, Alford aruges, explains the disproportionately small number of women economists. As a testable hypothesis, the theory would suggest that the relatively more contextualised sub-discipline of health economics should

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 34 have relatively more women practitioners. A third hypothesis, and one discussed by Ormerod (1994), is that there may be a genuine confusion of the form of the analysis with the substance of the methodologies adopted by disciplines that have had the most spectacular success. That is, economists may have genuinely believed that an emphasis upon analytical precision in some way increases confidence and truth content in conclusions, irrespective of the validity of the axioms. Fourth, and as suggested early in this paper, the outcome may be a reflection of a frustration with empiricism. Experimentation is difficult; natural experiments seldom occur; random control trials have limited application and, perhaps because of the limited range of genuinely independent observations, the econometric ice breaker is all too often stuck in the ice. The apparent certainty offered by Rationalism may appear an attractive and rigorous alternative to the apparently endless ambiguity of empiricism. This road to Rationalism has been well trodden.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 35 7 Conclusions

Theoretical economics has undoubtedly developed a number of powerful concepts and frameworks for the analysis of resource allocation and these have been accompanied by the development of a variety of powerful quantitative techniques, as judged by the standards of the social sciences. The value and importance of these does not ensure that it is always efficient to employ the full armamentarium of theoretical orthodoxy, even when the resulting theory produces new insights into economic behaviour. Rather, the routine deference to orthodoxy is likely to create a theoretical cocktail which is somewhat like the ancient Egyptian recipe for pain, vis, a combination of ground poppy seed and cobweb. In many contexts the recipe may produce valuable results – empirical verification of the mixture’s potency. This does not, however, demonstrate the importance of all the ingredients.

More specifically, it has been argued that, rather than produce new and novel insights, adherence to orthodoxy has placed intellectual blinkers upon economics and, as illustrated in the context of health economics and cost utility analysis, this has reduced the scope of the hypotheses which have been investigated. In stark contrast to the empowering Popperian exhortation to approach problem solving and empirical anomalies with bold conjecture, economic theory has typically practiced timid incrementalism. While Popperianism may or may not be viewed as the current gold standard for empiricism, the contrast between it and the practice of economic orthodoxy, clearly demonstrates that there is, indeed, an orthodoxy with idiosyncratic characteristics which are seldom questioned or even recognised. The fact that it is a highly contestable orthodoxy is not generally suggested to students and this, of course, helps perpetuate the orthodoxy.

Most fundamentally, it has been argued that the exercise of this orthodoxy in certain branches of economics has resulted in the de facto embrace of epistemological Rationalism and it has been suggested that there are both historical and methodological reasons for believing that this will have a seriously deleterious effect upon the development of these fields. It has also been suggested that the endorsement of the desirability of interconnecting all theory through the adoption of common axioms – irrespective of their context specific truth – represents an intrusion of Rationalism into otherwise empirically robust sub-disciplines of economics. In addition to the damage to prediction arising from the use of defective and impoverished axioms, the opportunity cost of the intellectual effort devoted to the analytical task by theoretical economists and by students labouring to comprehend the theory is immense. A full reckoning of the opportunity cost would have to take account of the effect of policy prescriptions based upon theory which has been systematically moulded to conform with orthodoxy. While it is clearly impossible to estimate the full effect of this, the orthodox assumptions summarised in Section 5 are clearly linked to policy prescriptions which promote or impose market competition and the growth of GDP irrespective of market characteristics and the effect of GDP upon subjective wellbeing22. They favour outcome measures in the health sector that are based upon the maximisation of choice for the individual rather than health per sé, severity, or systemic objectives as discussed by Mooney

22 It appears likely that the historical, epistemological Rationalism discussed here is the intellectual progenitor of the uncritical faith in market forces coincidentally termed ‘economic rationalism’.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 36 (1998) and Jan (1998). The advocacy of such policies and their undoubted impact upon the nature of our economy and society may be the broader legacies of economic Rationalism.

In the famous concluding paragraph of his general theory Keynes argued that: ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood … I am sure that the power of vested interests is exaggerated compared with the gradual encroachment of ideas …(for) … soon or late it is ideas, not vested interests, which are dangerous for good or evil.’ (Keynes 1936, pp 383-384). To date, the ideas of Rationalism and its associated orthodoxy in economics have remained in something like an equilibrium with the ideas and methods of pragmatic and robust Empiricism. There are clear indications, however, that the ideas and beliefs associated with the former paradigm have been gaining ground – especially amonst more recently trained graduates – and that more economists are accepting the Rationalist methodology as the backbone of economic theory. This suggests that policies may increasingly be defended because they are ‘implied’ or ‘consistent’ with ‘economic theory’ and economics itself may become defined, not by the solving of a particular class of problems, but by the acceptance of the orthodoxy. If this trends continues then Popper’s concern and warning may be relevant when he argues that ‘we may soon move into a period where Kuhns’ criterion of science – the community of workers held together by a routine – becomes accepted in practice. If so, this will be the end of science as I see it’ (Popper, 1976 p1146-47). The conclusion of this paper is that economics may face a similar threat.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 37 References

Alford K 1995, ‘What’s a nice girl like you doing in a place like this: Gender and economics’, Paper for Department of Economic History, Faculty of Economic and Commerce, The University of Melbourne. Allais M 1984, ‘The foundations of the theory of utility and risk: Some central points of the discussion at the Oslo Conference’, cited in Progress in Utility and Risk Theory, (ed) O Hagen & F Wenstop, D Reidel Dordrecht. Barnes J 1996, Aristotle, Oxford University Press. Bartley WW, 1976 ‘Lakatos: Essays in memory of Imre Lakatos’, in Essays in Memory of Imre Lakatos (ed) RS Cohen, pp 37-38. Berridge KC 1996, ‘Food reward: Brain substrates of wanting and liking’, Neuroscience and Bio Behavioural Reviews, vol 20, no 1, pp 1-25. Blaug M 1992, The Methodology of Economics: Or How Economists Explain, Second Edition, University of Cambridge Press Syndicate, New York. Bridges J & Haywood P 1999, ‘The evolution of methodology in health economics’, paper presented at the 21st Australian Conference of Health Economists, Canberra July 1999. Brickman P & Coates D 1978, ‘Lottery winners and accident victims: Is happiness relative’, Journal of Personality and Social Psychology, vol 36, no 8, pp 917- 927. Culyer AJ & Wagstaff A 1993, ‘Equity and equality in health and health care’, Journal of Health Economics, vol 12, pp 431-457. Diener E & Suh E 1999, ‘Measuring quality of life: economic, social and subjective indicators’, Social Indicators Research, vol 40, pp 189-216. Diener E, Suh M, Lucas R & Smith H 1999, ‘Subjective wellbeing: Three decades of progress’, Psychological Bulletin, (in press). Evans RG 1998, ‘Towards a healthier economics: Reflections on Ken Bassett’s problems’, in Health Care and Health Economics: Perspectives on Distribution, (eds) M Barer, T Getson & G Stoddart, John Wiley.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 38 Evans RG 1997, ‘Going for the gold: The redistributive agenda behind market based health care reform’, Journal of Health Politics, Policy and Law, vol 22, no 2, pp 427-466. Feldman R & Morrisey M 1990, ‘Health Economics: A report from the field: What economists believe in’, Journal of Health, Politics and Law, vol 15, no 3, pp 627-646. Flew A 1979, A Dictionary of Philosophy, Pan Books and Macmillan Press. Frey BS 1993, ‘Motivation as a limit to pricing’, Journal of Economic Psychology, vol 14, pp 635-664. Friedman M 1953, Essays in Positive Economics, Chicago University Press, Chicago. Fuchs V 1996, ‘Economics, values and health care reform’, American Economic Review, vol 81, no 1, pp 1-24. Fusfeld DR 1980, ‘The conceptual framework of modern economics’, Journal of Economic Issues, vol 14, no 1, pp1-52. Gafni A 1996, ‘Proper preference-based outcome measures in economic evaluations of pharmaceutical interventions’, Medical Care, vol 34, no 12, DS48-DS58. Gafni A & Birch S 1995, ‘Preferences for outcomes in economic evaluation: An economic approach to addressing economic problems’, Social Science and Medicine, vol 40, no 6, pp 767-776. Haddorn DC 1991, ‘Setting health care priorities in Oregon’, Journal of American Medical Association, vol 265, p 2218. Hutchison TW 1938, The Significance and Basic Postulates of Economic Theory, New York: Augustus M Kelley, 1965. Jan S 1998, ‘A holistic approach to the economic evaluation of health programs using institutionalist methodology’, Social Science and Medicine, vol 47, no 10, pp 1565-1572. Keynes JM 1936, The General Theory of Employment Interest and Money, Macmillan &Co Ltd, London. Kuhn TS 1970, The Structure of Scientific Revolutions, University of Chicago Press, Chicago, Second Edition. Kuhn TS 1962, The Structure Of Scientific Revolutions, Chicago, University of Chicago Press. Lakatos I 1970, ‘Falsification and the methodology of Scientific Research Programs’, in Criticism and the Growth of Knowledge, (eds) I Lakatos & AE Musgrave, pp 91-195, Cambridge University Press. Latsis SJ 1976, ‘A research program in economics’, in Method and Appraisal in Economics, (ed) S Latsis, Cambridge University Press. Leontief W 1971, ‘Theoretical assumptions and non-observed facts’, American Economic Review, vol 61, pp 1-7. Machlup F 1963, Essays on Economic Semantics, Englewood Cliffs: Prentice Hall. Magee B 1975, Popper, Fontana/Collins, London.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 39 McCloskey D 1985, ‘The rhetoric of economics’, Journal of Economic Literature, vol 21, reprinted in Caldwell, 1984, 320-517. McKie J, Richardson J, Singer P, Kuhse H 1998, The Allocation of Health Care Resources: An Ethical Evaluation of the QALY Approach, Dartmouth Publishing Company, UK; Ashgate, USA. Menzel P, Gold M & Nord E, Pinto Prades J, Richardson J, Ubel P 1999, Towards a broader view of values in cost effectiveness analysis of health care’, Hastings Centre Report, May-June pp 2-10. Mooney G, 1998, ‘Economics, communitarianism and health care’, in Health, Health Care and Health Economics: Perspectives on Distribution, (eds) ML Barer, TE Getzen; GL Stoddart, Wiley, London. Mooney G, Hall J, Donaldson C & Gerard K 1992, ‘Reweighting heat: Response to Culyer, van Doorslaer & Wagstaff’, Journal of Health Economics, vol 11, pp 199-205. Nord E, Pinto-Prades J, Richardson J, Menzel P & Ubel P 1999, ‘Incorporating societal concerns for fairness in numerical valuations of health programs’, Health Economics, vol 8, pp 25-39. Nord E, Richardson J 1995a, ‘Who cares about cost: Does economic analysis impose or reflect social values’, Health Policy, vol 34, pp 79-94. Nord E, Richardson J et al 1995b, ‘Maximising health benefits verses egalitarianism: An Australian survey of health issues’, Social Science and Medicine, vol 44, no 10, pp 1429-1437. Nord E, 1993, ‘Health politicians do not wish to maximise health benefits’, Journal of the Norwegian Medical Association, vol 113, pp 1171-1173. Nord E 1993, ‘The trade-off between severity of illness and treatment effect in cost- value analysis of health care’, Health Policy, vol 24, pp 227-238. Nord E, 1993, ‘The relevance of health states after treatment in prioritising between different patients’, Journal of Medical Ethics, vol 19, 33-42. Olsen JA & Richardson J 1999, ‘Production gains from health care: What should be included in cost effectiveness analysis’, Social Science and Medicine, (forthcoming). Olsen JA, Richardson J & Mortimer D 1998, ‘Priority setting in the public health service: Results of an Australian survey, Technical Report 9, Health Economics Unit, Centre for Health Program Evaluation, Monash University, Melbourne, Australia. Ormerod P 1994, The Death of Economics, St Martins Press, New York. Peacock S, Richardson J & Carter R 1997, Setting priorities in South Australian Community Health II: Marginal analysis in Mental Health Services, Research Report 14, Health Economics Unit, Monash University, Melbourne, Victoria, Australia. Phelps Brown EH 1972, ‘The under-development of economics’, Economic Journal, vol 82, pp 1-10

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 40 Pinto Prades J-L & Lopez N 1998, ‘More evidence on the plateau effect: A social perspective’, Medical Decision Making, vol 18, pp 287-294. Popper K 1972, The Logic of Scientific Discovery, (Eighth Impression), Hutchinson, London. Popper K 1974a, The Open Society and Its Enemies, vol II, Hagel & Marx, Routledge & Kegan, Paul Limited, London. Popper K 1974b, ‘Ultimate explanation by essences’, in Conjectures and Refutations: The Growth of Scientific Knowledge, 5th edition, (ed) K Popper, Routledge & Kegan Paul. Popper K 1974(c), ‘Truth and content: Verisimilitude verses probability’, in Conjectures and Refutations: The Growth of Scientific Knowledge, 5th Edition, Routledge and Kegan, Paul Limited, London. Popper K 1983, ‘Realism and the aim of science’, (Postscript to the Logic of Scientific Discovery, edited by W W Bartley III, Hutchinson, London, Melbourne, Sydney). Popper K 1976, ‘The philosopher replies’, in The Philosophy of Karl Popper Part 2, (ed) PA Schilpp, The Library of Living Philosophers, La Salle, Open Court, Illinios. Popper K 1975, Objective knowledge: An Evolutionary Approach, Oxford Clarendon Press Popper K 1974d, ‘The science of Galileo and its new betrayal’, in Conjectures and Refutations: The Growth of Scientific Knowledge, (ed) K Popper, Routledge & Kegan Paul. Putnam H (1975), ‘Explanation and reference in mind, language and reality’, Philosophical Papers, vol 2, Cambridge University Press. Rabin M 1998, ‘Psychology and economics’, Journal of Economic Literature, vol 36, pp 11-46. Reid W 1998, ‘QALYs versus HYEs – what’s right and what’s wrong: A review of the controversy’, Journal of Health Economics, vol 17, no 5, pp 607-625. Rice T 1998, ‘The desirability of market based health reforms: A reconsideration of economic theory’, in Health Care and Health Economics: Perspectives on Distribution, (eds) M Barer, T Getson & G Stoddart, John Wiley. Richardson J 1999a, Supplier Induced Demand Reconsidered, Working paper 81, Health Economics Unit, Centre for Health Program Evaluation, Monash University, Melbourne, Australia. Richardson J 1998b, The role of willingness-to-pay in resource allocation in a National Health Scheme, Working paper 80, Health Economics Unit, Centre for Health Program Evaluation, Monash University, Melbourne, Australia. Richardson J 1998, Ex post evaluation health services: Should Medicare pay for non-health benefits, unpublished study, Health Economics Unit, Monash University, Melbourne, Victoria, Australia. Richardson J & Nord E 1997, ‘The importance of perspective in the measurement of quality adjusted life years’, Medical Decisionmaking, vol 17, pp 33-41.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 41 Richardson J, 1994, ‘Cost utility analysis: What should be measured?’, Social Science and Medicine, vol 39, no 1, pp 7-21. Russell B 1965, History of Western Philosophy, Unwin University Books, London. Schilpp PA, 1976, The Philosophy of Karl Popper, Part I, Part II, La Salle, Illinios, Open Court. Schoemaker PJ 1982, The expected utility model: Its variants, purposes, evidence and limitations’, Journal Economic Literature, vol 20, no 2, pp 529-563. Singer P, Kuhse H, McKay J & Richardson J 1995, ‘Double jeopardy and the use of QALYs in health care’, Journal of Medical Ethics, vol 21, pp 144-150. Tarnas R 1991, The Passion of the Western Mind, Pimlico, Random House, London. Tsuchiya A, 1999 ‘Age-related preferences and age weighting health benefits’, Socical Science and Medicine (forthcoming). Ubel PD, Scanlon G, Loewenstein & Kamlet M 1996, ‘Individual utilities are inconsistent with rationing choices: A partial explanation of why Oregon’s cost-effectiveness list failed’, Medical Decision Making, vol 16, pp 108-119. Ubel PD, DeKay M, Baron J et al 1996, ‘Cost effectiveness analysis in a setting of budget constraints: Is it equitable?’, New England Journal of Medicine, vol 334, pp 1174-1177. Ubel PD, Loewenstein G 1995, ‘The efficacy and equity of retransplantation: An experimental survey of public attitudes’, Health Policy, vol 34, pp 145-151. Waldrop MN 1994, Complexity: The Emerging Science at the Edge of Order and Chaos, Pelican Books. Ward B 1972, What’s Wrong With Economics?, Macmillan, London. Williams A 1997, ‘Inter-generational equity: An exploration of the ‘fair innings’ argument’, Health Economics, vol 6, no 2, pp 117-132. Worland ST 1972, ‘Radical political economy as a “scientific revolution”’, Southern Economic Journal, vol 39, pp 274-284.

Rationalism, Theoretical Orthodoxy and Their Legacy in Cost Utility Analysis 42