Institutional economics is a branch of
"critical theory" which, when focused on
examination, analysis and critique of society
and culture, draws concepts
and data from across the entire range of social
sciences and humanities.
The term
"critical theory" has two related but different
meanings with separate epistemological roots. One
meaning originates in sociology and the other in
literary criticism, but the term has been use
constructively in association with new critical
ways of looking at political ideology, economic
theory and even theology. This has led to the
literal use of "critical theory" as an umbrella
term to describe any theory founded upon critique
of the unthinking intuitive, the blind
conventional or the out-dated traditional.
For example, critical theorists view the
Western concept of the rule of law in democratic
political systems operating under market
capitalism as merely a method by which the ruling
class, members of which exclusively own and/or
control capital or enjoy special benefit from the
access to and control of capital, can justify its
rule over the rest of society, as they alone
command the financial resources to determine what
laws get passed to preserve its own narrow
interest, which is to secure the perpetuation of
capitalism and the control of capital by the
ruling class to set market conditions conducive to
the maximization of return on capital as the
operating rule of the economic system. The "rule
of law" has become a high-sounding cover for
attempts of the ruling class to rule by law.
Critical theory re-evaluates rationally
the integrity and morality implied historically by
the contingent nature of the culture that has
spawned it. Critical theorists adopt fresh
hypothetical stances against accepted traditions,
and on that basis form new insights on cultural
relativity and hypothesis. Participants in the
formation of critical theory take questioning
stances toward commonly accepted attitudes while
nonetheless avoiding the judgement paralysis
associated with limitless moral relativism. The
coercive application of Western ideals on
non-Western societies, such as democracy, rule of
law, individual freedom and market fundamentalism,
concepts that have evolved in the historical and
social context of the West as universal truth,
make it a legitimate target of critical theory, to
expose these concepts as components in the battle
plan for a Western campaign to establish cultural
hegemony globally. (See The
Abduction of Modernity - Part II: That Old Time
Religion, Asia Times Online, July 11, 2003.)
Meta-positivism Modern critical
theory arose from a growth trajectory extending
from meta-positivist studies (meta - Greek word
for beyond) of neutral positivist data collection
and observation to include a focus on critical
interpretative analysis of data in the sociology
of ideas - the view that social scientists must
necessarily go beyond empiricism and scientific
methods of analysis in the development of social
theory and in the conduct of social research, and
most importantly, the production of new concepts
that have no historical precedent, as required by
new social conditions.
Meta-positivism
relates to the historical discourse on the
philosophy and sociology of social science, issues
long since settled in natural science with the
coming of the Age of Science after physics jumped
form Newtonian mechanics to Einstein relativity.
In modern practice, meta-positivism relies
more on qualitative analysis with a critical view
on ideology, while positivist research involves
more on quantitative analysis to discover and
understand what exists. Positivists typically rely
on quantitative research methods such as
statistical analysis, aimed at the identification
of causality.
On the other hand,
meta-positivists use research methods that rely
more on testing new theoretical hypothesis with
unstructured interviews to collect data on market
participant behavior and reaction to construct
simulation models. With the availability of
high-speed and high-power electronic digital
computers to handle, organize and manipulate vast
amounts of quantitative data and with advances in
digital behavioral modelling of complex economic
phenomena, the gulf between quantitative digital
analysis and qualitative heuristic analog
processes has been largely bridged on the
operational level.
Still, data can only be
collected and organized usefully according to
particular concepts and theories, and theory
unsubstantiated by data is mere fantasy. Without
organizing concepts or theoretical structures,
data are as uninformative as inert masses of sand
on an undisturbed beach. The most advanced
computer will remain impotent of utility without
sophisticated mission-oriented software to turn
raw unstructured input into useful purposeful
output.
Even rigidly organized data can
appear to different analysts armed with different
theoretical frameworks as differently as a
Rorschach test can be for different test subjects
with varying psychological constructs. The message
buried in any data set can only be released with
the subjective interpretation of the viewer. And
different messages can be extracted by different
viewers from the same set of data.
Milton Friedman and positive
economics In economics, positive economics
focuses on understanding of existing phenomena
while normative economics focuses on creating an
ideal state by changing what is undesirable in the
existing world.
In his 1953 essay "The
Methodology of Positive Economics", Milton
Friedman argues against the "basic confusion
between descriptive accuracy and analytical
relevance that underlies most criticisms of
economic theory". The paper asserts that complex
realities can be scientifically reduced to simple
fundamental structures. The test of this
hypothesis is its fruits. Theory is the way
through which we perceive "facts", and we cannot
perceive "facts" without theoretical context.
Behavioral economist Andrew W Lo,
Professor and Head of Finance at the Sloan School
at Massachusetts Institute of Technology, quipped
in an intelligent and entertaining lecture,
"Warning: Physics Envy May Be Hazardous to Your
Wealth", to economists who envy physicists,
because in physics, three laws explain 99% of the
physical world, while in economics, 99 laws
explains about 3% of economic phenomena.
Hume on unobservable
phenomena David Hume (1711-86) pointed out
in his Inquiry into Human Understanding,
published in 1748, that since the conclusion of a
valid inference could contain no information not
found in the premise, there could be no valid
conclusion from observed to unobserved phenomena.
That of course is not to say that unobserved
phenomena must be false. Its just that their truth
cannot be validated by observable facts.
Notwithstanding denial by positive
economists, economics as a science deals mostly
with unobservable facts, as observable facts are
self-evident and require no further analysis.
Unobservable facts can only be surmised by
conjecture which are subsequently tested on their
validity. For example, unemployment is easily
measured while the cause and effects of
unemployment in the economy continues to be a
matter of debate centuries after the emergence of
the industrial market economy. Further, even the
definition of unemployment itself is still subject
to debate.
The invisible hand of the
market In neoclassical economics, the
"invisible hand of the market" is a term used to
describe the self-regulating nature of free market
and market's tendency toward an equilibrium state.
The metaphor was coined by Adam Smith in The
Theory of Moral Sentiments, to describe the
conjunction of the forces of self interest,
competition and the law of supply and demand, to
produce the optimum allocation resources in a
market economy. The concept is the founding
justification for laissez-faire economic
philosophy. The wide spread acceptance of the
concept of the unseen hand is the coup de grace
that proves the flaw in positive economics.
The Theory of the Invisible Hand states
that if each consumer is allowed to choose freely
what to buy and each producer is allowed to choose
freely what to sell and how to produce it, the
market will settle on a product distribution and
prices that are beneficial to all the individual
members of a community, and hence to the community
as a whole. The concept of the invisible hand was
at first considered a "natural inclination" in a
free market, not yet a social mechanism as it was
later classified by Leon Walras (1834-1910) and
Vilfredo Pareto (1848-1923).
Borrowing
concepts from physics, Walrus proposed the General
Equilibrium Theory as a branch of theoretical
economics to explain the behavior of supply,
demand and prices in an economy with many markets
to settle in a general equilibrium in.prices,
supply and demand.
Pareto developed the
concept of "Pareto Optimum", which asserts that
resources are optimally distributed when an
individual cannot move into a better position
without putting someone else into a worse
position. Much welfare economics is based on the
concept of the Pareto Optimum. In an unjust global
society, the Pareto Optimum will perpetuate
injustice in the world.
Immanuel Kant
(1724-1804) emancipated man's command of knowledge
from Humean skepticism. In his Critique of Pure
Reason (1781), Kant emphasized the
contribution of the knower to knowledge. An
uncultured person looking at a sausage sees a
delicious meal while an art critic would see
Cubist painter Picasso. Since economists can only
collect but not create economic data, the
economist's contribution to the science of
economics is economic theory, without which
economics will stay outside of the realm of
discourse.
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