Lionel Robbins’s essay on the nature and siggnificance of economic science 75th anniversary conference proceedings Edited by Frank Cowell Amos Witztum Table of Contents Preface iii Lionel Robbins, Economising and Innovating: A Business School Perspective 1 Christos N. Pitelis and Jochen Runde Is Robbins’s Definition Necessarily Imperialistic? The Demarcation of 16 Economics in Robbins’s Essay and the Concepts of Real and Formal Scarcity Ignacio Falgueras-Sorauren Economics as a Moral Science 38 Anthony B. Atkinson Ethics and the Science of Economics: Robbins’s Enduring Fallacy 57 Amos Witztum Robbins and Welfare Economics: A Reappraisal 86 Roger E. Backhouse Can Economics be Founded on ‘Indisputable Facts of Experience’? Lionel Robbins 99 and the Pioneers of Neoclassical Economics Robert Sugden Robbins, Positivism and the Demarcation of Economics from Psychology 120 Don Ross Effective Tension in Robbins’s Economic Methodology 152 D. Wade Hands Disciplining Boundaries: Robbins’s Essay and the Borderlands of Economics 169 and Psychology Harro Maas Some Legacies of Robbins’s Nature and Significance of Economic Science Address to 194 Conference Celebrating the 75th Anniversary of Lionel Robbins’s Essay on the Nature and Significance of Economic Science Richard G. Lipsey Defining Economics: the Long Road to Acceptance of the Robbins Definition 209 Roger E. Backhouse and Steven G. Medema What was “It” that Robbins was Defining? 231 David Colander Cost and the ‘Means-End’ Definition of Economics in Lionel Robbins’s Essay: 244 Analysis and Contemporary Implications Andrew Brown and David A. Spencer Lionel Robbins: A Methodological Reappraisal 262 Rodrigo M. Zeidan and Marcelo Resende Robbins on the Stationary State: an Early Attempt to Distinguish Idealization from 279 Abstraction Menno Rol The Continuing Muddle of Monetary Theory: A Steadfast Refusal to Face Facts 292 C.A.E. Goodhart i Lord Robbins, Monetary Reform and Keynesian Economics 306 Geoff Tily Robbins’s Epistemology and the Role of the Economist in Society 343 Fabio Masini Scratch a Would-Be Planner: Robbins, Neoclassical Economics and the End of 366 Socialism Brigitte Granville and Judith Shapiro The Science of Things Generally 387 José Luís Cardoso and Nuno Palma Robbins’s Nature and Significance and the M2T Seminar: Measurement with Theory 403 and Theory with Measurement Jim Thomas The Making of Robbins’s Essay 431 Susan Howson Value-Free Economics in Management and Engineering Education 451 Kevin Christ Attractive Polarities, Narrow Boundaries 472 Reza Dibadj ii Lionel Robbins’s Essay on the Nature and Significance of Economic Science 75th Anniversary Conference. In 1932 Robbins set out to inquire about that which defines the subject matter of economic analysis: what economists can and cannot say and the method by which they can reach their conclusions. But this was far more a complex struggle than ‘merely’ to identify the methodology of economic analysis. At that time, he also had to cross swords with other approaches concerning the delineation of the subject of economics. On the one hand, he had to fend off historicism or the claim that social phenomena cannot be subdivided into separate spheres of examination. On the other hand, he also had to position himself vis-à-vis the empirical drive emanating from institutional economics of the time. In many respects today we face a similar situation to the one that Robbins faced. Economics is under attack for lack of relevance, for inappropriate premises regarding human behaviour, for failing to confirm many of its propositions and for ignoring other aspects of social relations. This is particularly poignant as today’s economics, in many ways, is based on Robbins’s conclusions from his Essay on the Nature and Significance of Economic Science. Robbins’s analysis did not lead to identifying the agenda of economics with any of the prevailing doctrines of the time. In fact, through a careful study of the existing alternatives both in substance and methods, Robbins forms an entirely new economics which, to some extent, is an amalgamation of Austrian and Lausanne themes. However, the economics he defined and, which still lives in contemporary textbooks, was new and brave and suggested yet another school of thought (the LSE School). Both the apparent difficulties that economics seems to be facing and the fact that its foundation can be traced back to the Essay suggested that the 75th anniversary of the Essay was a good opportunity both to repeat Robbins’s exercise and to examine its historical significance. So we invited scholars to do both. The conference, which ran over two days and included 30 papers, was divided broadly into the following themes: 1. Reflections on Definitions and Boundaries of Economic Analysis; 2. Ethics-Economics relationship; 3. Methodology; 4. The Role of Policy. Most papers in the conference were focused on topics 1 and 3 but topics 2 and 4 are, of course, no less significant. Naturally, there was no single voice coming out of the conference. However, the breadth of issues which were tackled suggests to us that the exercise was worth pursuing. We hope that this volume will stimulate a discussion and a debate about the nature and significance of economic science but, most of all, we hope that it would stimulate a greater deal of reflection by those who are at the forefront of economic analysis. Frank Cowell Amos Witztum iii Lionel Robbins, Economising and Innovating: A Business School Perspective∗ Christos N Pitelis† and Jochen Runde± Abstract We revisit and critically evaluate Lionel Robbins’s famous definition of economics from a business-school perspective, in the light of post-Robbins developments in (1) neoclassical economic theory and (2) evolutionary economics and management theory. We argue that while the economising approach to economics captured by Robbins’s definition has an important place in business school curricula, there are various economics-related topics of significant interest to business-school audiences – not least those relating to technological change and its impact on resource creation and intertemporal economic performance – that can only be addressed by moving beyond the strictures of Robbins’s conception of the subject. 1. Introduction The aim of this paper is to revisit Lionel Robbins’s famous definition of economics from a business school perspective and in the light of post-Robbins developments in neoclassical economic theory, evolutionary economics and management scholarship. The main thrust of our argument is that while economics in its Robbinsian “economizing” guise contains important lessons for business school audiences, his insistence on economic analysis proceeding by taking means-resources - what he calls the “ultimate data” of “technique” and institutions (such as property rights) - as givens, may actually divert attention from or even obscure various other issues of central importance from a business school perspective. The reason for this is that while business leaders and managers are certainly interested in questions of economizing, they are also interested in questions of innovation and strategy. And many of the issues involved here are ones that have less to do with the efficient allocation of existing resources than with questions of how resource constraints might be reduced, i.e. with technological change, increasing returns, intertemporal efficiencies and the productivity-enhancing effects of the co-evolutionary character of market structures, organisations and technological change. These factors are vital determinants of intertemporal efficiency and economic performance, and therefore ∗ We are grateful to Mark Casson, Tony Lawson, Joe Mahoney, David Teece and participants at the 75th Anniversary Conference on Lionel Robbins held at the LSE on 10-11 December 2007 for comments and discussion. † Judge Business School, University of Cambridge, Trumpington Street, Cambridge, CB2 1AG, UK, Tel: +44 (0) 1223 339619, Fax: +44 (0) 1223 766815, Email: [email protected] and Queens’ College, University of Cambridge. ± Judge Business School, University of Cambridge, Trumpington Street, Cambridge, CB2 1AG, UK, Tel: +44 (0) 1223 338082, Fax: +44 (0) 1223 339701, Email: [email protected] and Girton College, University of Cambridge. 1 cannot be treated simply as parameters that are only interesting insofar as they affect relative scarcities. The paper is structured as follows. We begin in the next section by revisiting the definition of economics proposed by Robbins in his 1935 The Nature and Significance of Economic Science (henceforth NSES) and argue that his particular view of economics as being purely about economizing is of a piece with his view that economics is not about the causes of wealth or welfare. Section 3 then looks at the influence of the Robbinsian view on business school economics via Post Robbinsian economic theory. Section 4 discusses recent developments in neoclassical economic theory, evolutionary economics and management scholarship that focus on the role of technological change and its relationship to market structures, organisations and institutions. We argue that these developments put into question Robbins’s view that the economist should treat “technique” and “institutions” as “ultimate data”. In particular, we argue that economising cannot always be treated as separable from innovating, and that in the business world it is mainly through innovation and technological change that long-term economizing can be effected. Section 5 closes with some concluding remarks. 2. Robbins’s Definition of Economic Science According to Robbins’s famous definition, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” (NSES, p. 16). By “ends” Robbins means human objectives, possible states of affairs that can be can be ranked in terms of their importance or desirability. By “means” he has in mind the available time and other resources that could be deployed to achieve those ends. Economic problems, as he conceives them, arise in situations where there are competing ends of different levels of importance, and where the available means could be put to more than one use and are scarce relative to those ends. In situations of this kind economic choices have to be made: “ … when time and the means for achieving ends are limited and capable of alternative application, and the ends are distinguishable in order of importance, then behaviour necessarily assumes the form of choice. Every act which involves time and scarce means for the achievement of one end involves the relinquishment of their use for the achievement of another. It has an economic aspect” (NSES, p. 14). Robbins thus characterizes economics in terms of what we will call an economizing orientation, namely a concern with analyzing how scarce resources may be put to their best use. He contrasts this conception with what he calls the “materialist” conception that he associates with scholars such as Cannan, Marshall, and even Pareto and J.B. Clark, and according to which economics is about the “causes of material welfare” (NSES, p. 4). Robbins is sharply critical of this conception and insists that whatever economics may be about, it is not about the causes of material welfare (NSES, pp. 4- 23). However, the target of Robbins’s criticism is not so much the emphasis on the causes of welfare per se, but that a focus on material welfare would render economics unable to accommodate certain activities such as enjoyment of leisure and the services of an opera singer on the grounds that these are not instances of material wealth (NSES, pp. 4-23). 2 Robbins is surely right that leisure activities and the provision of services should fall under the purview of economics. As he puts it: “… is true that the scarcity of materials is one of the limitations of conduct. But the scarcity of our own time and the services of others is just as important. The scarcity of the services of the schoolmaster and the sewage man have each their economic aspect … it is not the materiality of even material means of gratification which gives them their status as economic goods; it is their relation to valuations. It is their relationship to given wants rather than their technical substance which is significant” (NSES, pp. 21-22). However, accepting that the scope of economics extends to “non-material” welfare and the implication that the materialist conception of economics should be rejected for excluding them, does not by itself imply that economists should not be concerned with the causes of welfare in some more general sense. That is to say, there is no logical barrier to allowing that economics should be concerned with “economising” in the Robbinsian sense, at least in part, and also extend to the analysis of causes of welfare. As far as Robbins himself is concerned, and while he is unequivocal in his insistence that economics is not about the causes of material welfare in Chapter I of NSES, he there does not explicitly deny that it might be about the causes of welfare in a more general sense1. In Chapter III Robbins goes on to claim that instead of dividing economics into the theory of production and the theory of distribution – whether the former is concerned with explaining “the causes determining the size of the ‘total product’” and the latter with “the causes determining the proportions in which it is distributed between different factors of production and different persons” (NSES, p. 64) – as Adam Smith and others economists did, we now have “a theory of equilibrium, a theory of comparative statics and a theory of dynamic change” (NSES, p. 68). Robbins leaves his reader in little doubt about his position on the theory of production: “We have all felt, with Professor Schumpeter, a sense almost of shame at the incredible banalities of much of the so-called theory of production – the tedious discussions of the various forms of peasant proprietorship, factory organization, industrial psychology, technical education, etc., which are apt to occur in even the best treatises on general theory”… (NSES, p. 65). And commenting on Adam Smith’s own excursions on this topic: “… although Adam Smith’s great work professed to deal with the causes of the wealth of the nations, and did in fact make many remarks on the general question of the conditions of opulence which are of great importance in any history of applied Economics, yet, from the point of 1 Indeed one may be forgiven in thinking that Robbins would not disagree with this when he states that “The services of the opera dancer are wealth. Economics deals with the pricing of these services, equally with the pricing of the services of a cook.” (NSES, p.9, emphasis added). Robbins, however, goes on to say that economics should not, nevertheless, be concerned with the determinants of the wealth of nations. This may strike his readers as somewhat inconsistent. 3 view of the history of theoretical Economics, the central achievement of his book was his demonstration of the mode in which the division of labour tended to be kept in equilibrium by the mechanism of relative prices” … (NSES, p. 68) The upshot of all this is that, for Robbins, it is never the means-resources in their own right that are of significance for the economist, only the relationship between ends and means that is of significance to the economist, and not the ends and means in their own right. That is to say, means (and ends) should be treated as givens by economists, as “ultimate data” that it is not their business to enquire into: “… the subject matter of Economics is essentially a set of relationships – relationships between ends conceived as the possible objectives of conduct on the one hand, and the technical and social environment [means] on the other. Ends as such do not form part of this subject matter. Nor does the technical and social environment. It is the relationship between these things and not the things in themselves which are important for the economist” (NSES, p. 38). And again: “Economists are not interested in technique as such. They are interested in it solely as one of the influences determining relative scarcity. Conditions of technique “show” themselves in the productivity functions just as conditions of taste “show” themselves in the scales of relative valuations. But there the connection ceases. Economics is a study of the disposal of scarce commodities. The technical arts of production study the “intrinsic” properties of objects or things” (NSES, pp. 37-38). 3. The Economising Conception and Business School Economics Robbins’s view had a revolutionary impact on economics (see for example Baumol, 1984), as taught both in economics departments and in business schools. In the case of business schools, much of the economics taught zeroes on what we will call “core” microeconomics delivered in the familiar neoclassical style of standard introductory and intermediate textbooks. While the level and extent of provision varies quite significantly across schools, as well as across different programmes offered within the same schools, the kind of topics that tend to be covered invariably include some elementary price theory, the theory of the consumer, the theory of the firm (costs, revenues and profit maximisation), market structure, some managerial economics, welfare economics and market failure (market power, externalities and public goods). Neoclassical microeconomics is widely regarded as the paradigm example of economics in its Robbinsian guise, and this is true of economics texts directed at a business school audience. Thus UK-based authors Nellis and Parker (2006) in their Principles of Business Economics declare that: “Economics is concerned with the efficient allocation of scare resources. When purchasing raw materials, employing labour and undertaking investment decisions, the manager is involved in resource allocation” (Nellis and Parker, 2006, p. 3, emphasis in the original). 4 Similarly, US-based authors McKenzie and Lee (2006), in what is described on the cover as “the first microeconomics text written exclusively for MBA students”, distinguish the economist’s work from that of other social scientists as follows: “Economists take a distinctive approach to the study of human behaviour, and they employ a mode of analysis based on certain presuppositions. For example, much of economic analysis starts with the general proposition that people prefer more to fewer of those things they value and that they seek to maximize their welfare by making, reasonable, consistent choices in the things they buy and sell” (McKenzie and Lee, 2006. 10). While neither book mentions Robbins specifically and McKenzie and Lee display a preference for American over British authorities, the spirit of the Robbins view clearly shines through in the passages quoted above. Further, it seems to us right that business schools student be exposed to the economizing perspective in the Robbinsian sense, since business leaders, managers and entrepreneurs are often engaged in allocating resources, in having to make difficult choices between competing ends under conditions of scarcity and attempting to find more efficient and cost-effective and efficient ways to perform already-existing functions. Basic lessons about resource allocation, opportunity costs, diminishing returns, marginal analysis and so on, are central to all this kind of activity and therefore valuable to the students. There are of course other reasons for teaching core microeconomics to a business school audience. First amongst these is that it provides a theory of price and insights into the operation of the price mechanism, a characterisation of the firm and different forms of market structure and their effects – especially useful with respect to more mature and relatively more stable sectors (Pitelis, 2007) – and the effects of market failure (the last of which is becoming increasingly important because of increasing concerns about the environment and relevant policy responses). Second, microeconomics is in many ways a fundamental discipline that provides the theoretical underpinning of parts of other subjects that students will encounter on their courses, such as business strategy. Michael Porter’s (1980) approach to competitive strategy, for example, derives from the microeconomic market structure analysis. Third, a grounding in microeconomics puts students in a better position to receive, interpret and evaluate the many messages they will be receiving about the ‘economy’ during their working lives. However, to say that the core microeconomics taught in business schools is useful is of course not to say that there aren’t limitations to the material and its potential relevance. Some of these limitations are directly related to aspects of the economizing orientation articulated by Robbins, but others have do with features of the discipline that have crystallized in ways that he might not have imagined. Here are three features we regard as characteristic of modern microeconomics and which we shall focus on below: 1. The assumption that actors are motivated purely by self-interest and pursue this aim in a perfectly-informed and perfectly-consistent way, maximising utility if they are consumers or maximising profits if they are firms. In general, the methodology of core microeconomics is to analyse economic phenomena 5 as the outcome of the actions (and interactions of) such rational agents. This approach is consistent with Robbins’s conception of economics (NSES, p. 78). 2. An emphasis on static allocative efficiency and the idea that this is most likely to be effected by the desirable properties of certain “optimal” market (industry) structures such as perfect competition, perfect contestability or Bertrand competition (see for example Varian, 1992). This emphasis is largely a post-Robbins development. 3. A failure to explore the full ramifications of the possibility that industry structures which are optimal from the point of view of static efficiency, may well be sub-optimal from the point of view of dynamic or intertemporal efficiency. This failure reflects Robbins’s insistence on treating “technique” as a datum, thereby discouraging the analysis of the determinants of technological change.2 To appreciate these issues better, is worth remembering that one of the major achievements of this approach has been to prove that under conditions of perfect competition, a market economy, will allocate (scarce) resources in an efficient way. Economic efficiency is approximated by Pareto efficiency, defined as a situation in which it is not possible to any one person better off without making someone else worse off. In addition, any Pareto efficient situation can be shown to correspond to a competitive equilibrium, given an appropriate distribution of endowments (see Dasgupta (1986) for a critical assessment of these ideas). These are powerful results, the derivation of which makes economists justifiably proud. It is also clear, however, that they have been achieved at the cost, not only of narrowing the scope of economics to what we have called an economising orientation concerned exclusively with the efficient allocation of scarce resources as per Robbins, but also to a largely uncritical view of the virtues of highly idealised “optimal” types of market structures. There has accordingly been a slew of criticisms of this approach, of which we will briefly consider two. In the first place it has been pointed out that its emphasis on self-interest maximisation has rendered economics free of any considerations or virtuous behaviour (Sen 1987). Second, the alleged optimality of “optimal” industry structures such as perfect competition and perfect contestability has been questioned. Both of these structures are characterized by the presence of free entry and costless exit by other firms, essential to establishing their “zero waste” property. As Baumol (1991) puts it: “It is the costlessness of entry and exit under perfect competition or contestability that prohibits all inefficiency, because any firm that indulges in wasteful expenditure cannot long survive the incursion of efficient entrants.” (p.12) 2 Robbins does not focus on optimal industry structures, Credit for exploring the link between market structure and technological change (or intertemporal efficiency) is due to to neoclassical IO scholars who have attempted to test the “so called” Schumpeterian Hypothesis (see Baumol 1991). With few exceptions, however, amongst whom Baumol is notable, they have subsequently failed to explore the relationship between optimal market structures, static efficiency and inter-temporal efficiency. 6