princeton | ‘The great tragedy of science,’ the Victorian biologist Thomas Huxley
said in 1870, ‘is the slaying of a beautiful hypothesis by an ugly
fact.’ At the risk of being unfashionable, we part ways with present-day
methodologists and go back to simpler times, in which theory, to be
considered valid, had to accord with experienced reality. Confronting
theory with evidence is not simple or easy, and we do not mean to
dismiss the many writers who point this out. One of us has tried it
himself, confronting George Akerlof’s economic theory of ‘the market for
lemons’ (recognized by a Nobel Prize in 2001) with the facts of the
historical used-car market, the subject of Akerlof’s article. 3 A key
premise was found to be wrong, the theory as stated was not genuinely
testable, and some of its predictions were not borne out. Our reason for
insisting on reality is that theory is not only about how to understand
the world (epistemology), or how the world is constituted (ontology)—
it
is also about how life should be conducted, that is, theory is
‘normative’. So much hangs on the benefits and sufferings that economics
has the power to inflict that we have to insist on asking, ‘Is it true
and does it work?’ 4 Other sources of authority can do without that kind
of justification: commitment and inner belief have no need for external
confirmation. Authority is often resistant to argument and evidence.
Officials, priests, prophets, and leaders do not always submit to the
test of consequences. But the Enlightenment in Europe and America
ordained a quest for truth by means of critical argument and evidence.
The sciences abide by this method, and economics, when it aspires to the
same esteem, is presumed to do so as well.
What are the ‘norms’ that economics lays down? They start from the laudable principle of maximizing well-being, or ‘welfare’. Welfare, however, is defined merely as what individuals want, and only that. That is the principle of ‘methodological individualism’. A social improvement takes place when somebody can get more of what they want, without depriving anybody else. This is a ‘Pareto improvement’ (after Vilfredo Pareto, the Italian economist). When there is no slack, nobody can gain without somebody else losing. We get there by means of exchange: people sell what they want less of (including their labour), and buy what they want more of. Everybody has something to sell. If everyone trades freely, the system achieves a benign equilibrium, which is ‘Pareto efficient’. This was supposedly anticipated in the eighteenth century by Adam Smith as being like the work of an ‘invisible hand’. 5
In such a system, everyone gets the value of what they can sell, and what they get is what they are due. This imaginary marketplace belongs with a larger set of doctrines, ‘Just World Theories’. The concept comes from social psychology, but is used differently here. 6 The idea is simple: a Just World Theory says that everyone gets what he deserves. If the Spanish Inquisition burned heretics, that was only what they deserved. If peasants were starved and exiled in Soviet Russia, they got what they deserved. Likewise the Nazis and the Jews. Just World Theories are ubiquitous; they are political, religious, ethnic, gendered, and cultural. They justify the infliction of pain.
What are the ‘norms’ that economics lays down? They start from the laudable principle of maximizing well-being, or ‘welfare’. Welfare, however, is defined merely as what individuals want, and only that. That is the principle of ‘methodological individualism’. A social improvement takes place when somebody can get more of what they want, without depriving anybody else. This is a ‘Pareto improvement’ (after Vilfredo Pareto, the Italian economist). When there is no slack, nobody can gain without somebody else losing. We get there by means of exchange: people sell what they want less of (including their labour), and buy what they want more of. Everybody has something to sell. If everyone trades freely, the system achieves a benign equilibrium, which is ‘Pareto efficient’. This was supposedly anticipated in the eighteenth century by Adam Smith as being like the work of an ‘invisible hand’. 5
In such a system, everyone gets the value of what they can sell, and what they get is what they are due. This imaginary marketplace belongs with a larger set of doctrines, ‘Just World Theories’. The concept comes from social psychology, but is used differently here. 6 The idea is simple: a Just World Theory says that everyone gets what he deserves. If the Spanish Inquisition burned heretics, that was only what they deserved. If peasants were starved and exiled in Soviet Russia, they got what they deserved. Likewise the Nazis and the Jews. Just World Theories are ubiquitous; they are political, religious, ethnic, gendered, and cultural. They justify the infliction of pain.
