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