Saturday, October 22, 2011

The Prince and the Pauper

"paternity is always uncertain, maternity is most certain."
"The later stage in the development of the neurotic's estrangement from his parents... might be described as ‘the neurotic's family romance’. It is seldom remembered consciously but can almost always be revealed by psycho-analysis." -- S. Freud
"Marshall's proof that laissez faire breaks down in certain conditions theoretically, and not merely practically, regarded as a principle of maximum social advantage, was of great philosophical importance. But Marshall does not carry this particular argument very far and the further exploration of that field has been left to Marshall's favourite pupil and successor, Professor Pigou." -- J. M. Keynes
It is Sandwichman's contention that Professor Pigou was the heir and successor to Alfred Marshall's legacy in name only. In Marshall's own view, Pigou placed too great a reliance on the statical (or equilibrium) method that simply did not apply to the economic facts to be analyzed.

Instead of further exploring Marshall's philosophically-crucial "proof" of the theoretical break-down of laissez-faire, Pigou, in effect, merely inserted the prima facie market failure case for government intervention as yet another abstract assumption in yet another statical model, where Ronald Coase could ferret it out some 40 years later, expose its transaction cost-free presumption and figuratively restore the laissez-faire pretender to the throne.

But if Pigou's analysis was beside the point, then Coase's critique of Pigou is almost equally irrelevant, except in so far as it exposed the former's vulnerability. Coase's critique of Pigou didn't go far enough and as such wallows in the very substance of Pigou's metaphysical blunder while niggling over fine points. (in "Marshall on Method", however, Coase makes observations that support the general thesis presented here).

Pigou's core blunder -- "'a virtual confession of the futility' of the doctrine of marginalism" (Marshall citing Hobson) -- was identified by J. A. Hobson in 1914 in a criticism that struck Marshall as correct in so far as Pigou "overrates the possibilities of the static method." (See Krishna Bharadwaj, "Marshall on Pigou's Wealth and Welfare." Economica 1972)

The issue at stake here is the distinction between mechanical metaphors and what Marshall referred to as the Mecca of the economist: biology. In his unpublished autobiography, Marshall's other "favourite pupil", Sydney Chapman, reflected on his understanding of Marshall's biological metaphor:
I accepted that [Marshall's idea] and thought that I understood it, but it was not until I had immersed myself in the Lancashire Cotton Industry and traced its growth that I really began to see the economic world as a system of systems, each of which was in part a separate whole and in part a dependent portion of a larger whole. This, as it shaped itself in my mind, was a biological idea, and not merely a mechanical one, when the facts of growth were allowed for.
Although there is a kind of equilibrium that can be observed in biological processes it is not the same kind of equilibrium as that exemplified by physical forces at rest or in motion.

In a letter to Chapman upon publication of his Lancashire study, Marshall praised it as "the best monograph of the kind that has ever been published. It is both a realistic-impressionist study of human life and an economic treatise." Fifteen years later, Marshall cited Chapman's realistic study with approval several times in his book, Industry and Trade while Pigou's mathematical analysis was dismissed -- after a perfunctory note of superlative praise -- as inapplicable:
The brilliant work of Edgeworth and Pigou has special claims on English readers. But their route is not followed here: for mathematical analysis cannot easily be applied to conditional monopoly: it is almost constrained to start with the hypothesis of pure monopoly, and gradually to introduce successive limitations, corresponding to the various limitations and restrictions…
There was a didactic purpose to Mark Twain's tale of The Prince and the Pauper. Twain sought to call attention to the harshness and inequity of the law in 16th century England by portraying a prince being subjected to the hardships ordinarily endured by commoners. Similarly, there is an analytical purpose in reexamining this episode in the history of economic thought. It is to uncover old objections and qualifications raised at the very foundation of neo-classical economics that have been glossed over, evaded and shunted aside in the name of an analytical rigor whose usefulness and validity is itself called into question by those very same objections and qualifications.

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