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Criticizing Dow and Chick’s Dualism: Gustavo Marqués (University of Buenos Aires, Argentina) ©
Copyright: Gustavo Marqués 2005 Introduction Sheila Dow and Victoria Chick
object to the mode of argument based on “duals”. In particular, they reject
the mainstream practice of reducing every situation in which decisions are
taken to one of certainty or risk. Following Keynes, they, like all
post-Keynesian economists, privilege those (more realistic) situations in
which uncertainty prevails. As far as real economies are open systems,
uncertainty is ubiquitous, and the dual “rational – irrational” is no longer
applicable, and its relevance as analytical tool vanishes. But Dow and Chick
do not stop here. They also want to criticize those who hold that no decision
may be called rational under uncertainty, a view that, according to them, is
just another form of dualism. Against both kinds
of dualistic thinking, they assert that under uncertainty human behaviour may
still exhibit different degrees of rationality, a claim founded on the
inductive logic developed by Keynes in his Treatise on Probability. Dow and Chick seem to think that Keynes’
early views are still alive in his The
General Theory, and find in this continuity the means for moving beyond
dualism. In this article I
argue, (1) that inductive logic is still unfounded and is absent in the
General Theory; (2) Dow and Chick’s proposal for moving beyond dualism is not
compatible with Keynes’ own vision
regarding investment decisions, which seems to be dualistic in Dow’s terms;
and (3) that the attempt to bring into existence some form of rationality
under uncertainty has heavy costs in terms of economic policy. Two types of decisions If an individual
action performed in a certain situation S is to be labelled by one of the
twin concepts that conform to the “dual” “rational – irrational”, there are
at least two requirements: a) There is a set
of actions X, which is a subset of the many reactions Y that the subject
could manifest in such circumstances. X only contains those actions which are
a pertinent response to the problem posed by S. To split off X from Y
a demarcation criterion is required. b) As the actions
that belong to X are pertinent, but not necessarily adequate, a second
criterion is needed to identify those actions which are to be considered
properly rational. Clearly, any other response
that individuals could perform that is not pertinent to S, can not be
labelled as rational or irrational. They may be considered as non-rational,
which also means that they are not irrational. Many – but not all
– situations in which people have to decide fit both requirements. Suppose
first that an individual has to pick up a red ball from one of two boxes in
one attempt. He knows that the first box contains 100 red balls and 10 white
balls, and that the second one contains 10 red balls and 100 white balls. The
set of actions X permits only two types of actions: pick up a ball from the
first box or pick up a ball from the second one. In this situation, it is
rational to choose the first box (and irrational to select the second one).
But in the process of doing what is pertinent, the situation allows (and in
some cases demands) one to perform some other actions, which could be called
“collateral” actions. Some of them are necessary (for example to walk towards
the box or introduce a hand into it), and others may be completely accidental
(for example, to swallow or touch one’s hair before the choice is made).
These collateral actions are not to be considered rational or irrational
regarding S. In our terms, they should be considered non-rational. In some other
situations, however, it is not possible to identify unambiguously the
adequate answer or the set of pertinent responses. If, as before, the subject
has to pick up a red ball from one of two boxes, but knows nothing about
their content, there is no way of applying the term “rational” to his
preference of the first box and “irrational” to his preference of the second.
And if a more complex situation is designed, in which he is informed that
there are some hiding devices programmed to throw out to his hands a red ball
in response to a certain conduct of his part (whose nature remains unknown to
him), nothing he can do may be counted as rational (or irrational). Sitting
down could be the right response. In such a situation every action
should be considered non-rational. What being dualistic and anti
dualistic means In Dow’s The
Methodology of Macroeconomics, dualism is defined as “the propensity to classify concepts,
statements and events according to duals, as belonging to only one of two
all-encompassing, mutually exclusive categories with fixed meanings: true or
false, logical or illogical, positive or normative, fact or opinion, and so
on” (Dow, 1998, p. 16)1. According to Dow,
dualists think by means of pairs of concepts (called “duals”) and their
arguments are directed to defend one of its poles. Taking the dual “criteria
of scientific demarcation – no criteria” Dow distinguished two forms of
dualism. Traditional methodology is dualistic because it states some
(universal) criterion for telling science from non science. But
Constructivism is also dualistic because it rejects any criteria. Dow says
that Constructivism is a dualistic reaction against the original dualistic
position of orthodox methodology. There would be, it seems, dualistic
positions and dualistic criticisms of them. Going back to the
two types of situations described in the previous section, it is easy, at
first, to link them with relevant economic situations2. Risky
contexts fit very well the kind of circumstances described in the first case.
The second case, on the contrary, corresponds to those situations called deep
uncertainty by post-Keynesian economists. Mainstream economists models all
decisions as instances of the first case, while post-Keynesians focus on
those situations in which uncertainty is pervasive and see elections as
instances of the second case. If I am right, both, mainstream economics (that
focus on certainty and risk) and post-Keynesian economics (that privilege
uncertainty) are dualistic in Dow’s terms (which are also Chick’s).
And to be consistent, they should reject the economic relevance of both
scenarios. Dow and Chick, however, do not agree with my interpretation. They
would say, instead, that what is dualistic is my own interpretation of
uncertainty as being like the second case, and would vindicate a non
dualistic view of uncertainty, that, in their view, conforms the kernel
of post-Keynesian thought.
The problem, then, is what does to have a non dualistic view of uncertainty
mean? To clarify her
proposal Dow brings in the Hegelian triad. The Thesis asserts that all
choices qualify as rational or irrational. As we saw, this claim presupposes
that two different criteria are available (one to separate the class of
pertinent responses from the rest, and another to discriminate inside the
pertinent set). The Anti-thesis posits that no behaviour is rational or
irrational. As far as there is no criteria whatsoever for separating
behaviour in different sets, all conduct should be labelled as non-rational.
If the original dualistic position is the Thesis and its dualistic rejection
the Anti-thesis, to be anti-dualistic is to go beyond both views. This is the
Synthesis, according to which each behavior
considered can not be called completely rational or irrational. There are, rather,
different degrees of rationality which allow us to order decisions along a
scale3. Possibly, what Dow has in mind is the inductive logic that
Keynes tried to develop in his Treatise
on Probability. From the Treatise on Probability to The
General Theory To highlight how
Dow misrepresents the possibility of deciding rationally under uncertainty,
it is convenient to distinguish two
periods in the development of Keynes’ thought. In some of his early writings,
he opposed Hume’s view according to which all knowledge was demonstrative
knowledge: i.e., knowledge conformed by arguments whose premises logically
implied the conclusion. Keynes has a wider vision that allows knowledge to be
acquired also by means of inductive arguments4. To Hume, inductive
argument faces an insolvable difficulty: induction is not valid in
principle. Keynes, however, thought that the problem of induction was
merely contingent. “Hume showed –he sustained- not that inductive methods …
were false, but that their validity had never been established” (quoted in
Meeks, 2003, p. 27). Starting from his critique of Hume, Keynes tried to
develop a theory of partial entailment between sentences able to commensurate
different non demonstrative arguments according to the support given to their
conclusions by the premises. Had he been successful, his logic would have
provided a way to distinguish different grades of reasonableness among
arguments considered invalid by formal logic5. The problem is that
he failed to do so. In The General Theory, Keynes
introduced the distinction between situations of certainty or risk and
situations of uncertainty. This difference is absent in his Treatise on
Probability. But, if one thinks that there is continuity in Keynes thinking,
a link between both works can be established: under the first type of context
agents would be able to argue conclusively, but under uncertainty they could
only reason in a non demonstrative way. And given the link between
uncertainty and non demonstrative
arguments, a successful inductive logic would clear the way for talking of a
rank of actions and decisions ordered by their degree of reasonableness. I
believe that Dow´s position gains plausibility as a
result of her support of both, the continuity thesis and inductive logic6.
However, I think both thesis are unfounded. In fact, in the
time elapsed between the Treatise on
Probability and The General Theory,
Keynes was convinced that probability judgements are subjective, and that
there is no way to construct an objective inductive logic (I mean, an
inter-subjectively accepted logic of partial implication between sentences).
This scepticism forced him to recognize that under uncertainty, where all
arguments are of a non demonstrative type, actions can not only be considered
rational or irrational, but it is not even possible to order them according
to degrees of rationality. Under uncertainty, all behaviour is of a
non-rational type. The significance of this point for Dow and Chick’s claim
concerning dualism makes it advisable to elaborate it a little more. The dualistic reaction of
Keynes to mainstream economics A quick reading of
Chapter 11 of The General Theory
might suggest that Keynes allows some kind of rational behaviour under
uncertainty: in the stock market there are rational people who can calculate
the marginal efficiency of different investment projects in the long run, and
decide the most profitable way to allocate their capital. But there are also
people who do not perform this calculation and invest their time trying to
guess the changes in conventional judgement about the valuation of the
assets. The former knows the fundamentals; the latter do not have this
knowledge. This is the difference between enterprise and speculation. From a
social point of view, at least, only the first attitude is rational. However, what
distinguished his analysis from the one performed by mainstream economists is
that Keynes does not provide any procedure to select the best behaviour. The
“calculus” alluded to is simply a deliberative process, like the one
undertaken by a politician. In fact, each decision is as legitimate as any
other and there is no way of recognizing in advance which actions are
rational and which irrational, or which decisions are more rational than
others. Those who – like Dow and Chick – claim the existence of degrees of
rationality cannot make this idea operative if uncertainty prevails. This impossibility
is shown clearly in the next chapter of The
General Theory, where Keynes frankly admits that investment decision are
guided by animal spirits. There are no experts under uncertainty. The
distinction between professionals and fools is just a rhetorical device in
this context. All subjects are non-rational: actions are determined by the
state of confidence, emotions and ideals. This shows that – beyond Keynes’
own equivocal expressions that may suggest the contrary – The General Theory is dualistic
in the second of the senses described by Dow: it represents a dualistic
reaction against mainstream dualism, which limits itself to model those
situations in which “rational” and “irrational” may be applied to decisions
without ambiguity. The vague status of anti-dualism Against this
interpretation, Dow and Chick think that there is in The General Theory some room for rational decision making. They
dismiss the obvious incompatibility among the two collections of Keynes’
writings referred above and argue that Keynes effected a methodological
revolution at the level of his mode of thought. They believe that Keynes
broke completely with the dualistic mode of reasoning, creating a “synthesis”
that preserves, even under uncertainty, some form of rational behaviour.
Beyond some differences between them regarding how to understand how the
synthesis operates7, both authors agree on the need to restore the
“excluded middle” by postulating a scale of rational reactions (the inductive
logic tried by Keynes in Treatise on
Probability). As long as there
is no adequate concept for representing the vague notion of “rational
belief”, and there also is no clear and articulated inductive logic, the
assertion of the possibility of rational behaviour under uncertainty is
unsupported. It is an appealing claim,
but its meaning and contents are still lacking. Consequently nothing is gained using labels
such as “rational” or “irrational” or “more rational than” in reference to
behaviour under uncertainty. In this context their application is beside the
point. It is like predicating “polite” for natural numbers (even if there
were grades of politeness, such a scale is of no use regarding natural
numbers). To insist on applying the predicate “rational” to any behaviour in
any context is a category mistake. As Arrow has said, rationality is not an
entirely individual matter; it is context-dependent, and this means that
there could be situations in which it is not defined8. I suggest
that calling such contexts “uncertain” would avoid many linguistic
discussions. Political risks of “vindicatory rationalism” Some Keynesians
proposed the imposition of a tax ad-valorem on
financial transactions, which, allegedly, would reduce volatility in
financial markets. This advice is based in those assertions of Keynes’
already examined. Particularly, in his distinction between investors and
speculators. The tax, they have said, would discourage the participation of
amateurs, thus increasing the rationality of decisions and giving more
stability to transactions9. Davidson (1998)
discussed an empirical study about New York’s stock market written by Jones
and Seguin, which contradicts the (allegedly)
Keynesian thesis that greater transaction costs will reduce volatility
improving the rationality of the decisions undertaken. The study shows the
contrary: a reduction in transaction costs is associated with a decline
in volatility. In his comment, Davidson rejected the interpretation of Keynes
advanced by the “old and new Keynesians” as mistaken and sustained that
Keynes’ position is indeed perfectly compatible with the empirical results
showed by Jones and Seguin. In Davidson´s terms, these “Keynesians” assume ergodicity, which means that, based on available
information, agents would be able to form “right” expectations
(rational beliefs) about the future profitability of their actual investment
decisions. Experts or professional investors can achieve this result.
However, there is a larger number of amateurs who do not perform this
calculus and speculate through very short run transactions, generating
instability. To go back to stability, these “Keynesians” propose the tax
designed to reduce the number (and, consequently, the power) of irrational
people10. According to
Davidson, the true Keynesian thesis states that under uncertainty the ergodic axiom is no longer valid, and nobody can use past
experience to form right expectations about the future (and, consequently,
nobody can pick up the rational or more reasonable decision beforehand).
However, although there is no connection between participants’ rationality
and stability of the stock market, there is indeed an important connection
between the number and diversity of participants. What brings
stability to investment market is the diversity of opinions, not the
prevalence of rational decisions. As long as the number and diversity of
agents are positively correlated, the recommended tax on transactions would
have consequences exactly opposite to the ones pursued by those who advocate
it. To achieve stability, what is needed is to augment the number of
participants, not to reduce it. Incidentally, this makes it clear that the
study performed by Jones and Seguin fails to
provide empirical evidence against Keynes (on the contrary), but contradicts
the mistaken interpretation of Keynes performed by old and new Keynesians. Conclusion The concepts of
dualism and anti-dualism proposed by Dow, and adopted by Chick, are confusing
and too broad to be useful. They do not make any distinction between what in
the language of the old logic are called contrary and contradictory, so they
conflate “rational – irrational” with “rational – non rational”, which, as we
have showed, are vitally different. The anti-dualism they promote assumes
that every pair of duals has a higher concept (the Synthesis) that denies
each member of the pair but, at the same time, conserves and supersedes both
of them. This philosophical decree is assumed to be valid for any context,
and, in the particular case of the
dual “rational – irrational”, it
impelled them to look for some form of rationality even under uncertainty.
This vision, although inspired by the early work of Keynes, is not present in
The General Theory and is asserted
by Dow and Chick without the support of a clear and articulated inductive
logic. This is potentially dangerous because it may lead to wrong economic
policies. Endnotes 1. Dow sees duals everywhere:
“deduction-induction”, “conceptual knowledge – observation”, “analytic –
synthetic” (Dow, 1998, pp. 24, 26 y 27), “certainty-ignorance”,
“rationality-irrationality” (Chick and Dow, 2000, on line). 2. To avoid unnecessary complications I
will not consider here the case of certainty. 3. “While Cartesian/Euclidean thought
represents the choice of focusing exclusively on certain (at least in
principle) knowledge, Babylonean thought represents
the choice of building up rational grounds for beliefs in propositions, even
if most of the underlying knowledge is held with uncertainty. This indeed is
how Keynes … understands how knowledge is in general built up as a basis for
action; most propositions are believed to be known, subject to uncertainty of
various degrees which are unquantifiable” (Dow, 1998, p. 18). The various
degrees by which the premises of an argument support the conclusion are not
only unquantifiable, but in most cases (and certainly in those economic
decisions that really matter) are not even comparable. 4. “He rejected the dominant view, which
came from Hume, that only logically demonstrable arguments can claim
validity, to assert the claim of probabilistic knowledge as the basis for
rational action” (Chick, “Keynes, John Maynard (1st Baron)”, on line). 5. “In the Treatise on Probability,
Keynes …. sought a logic which would provide reasoned grounds for belief in
propositions, as a basis for action where certain or complete
knowledge is only a special case and is normally not available” (Chick and
Dow, 2000). 6. It is Chick’s position too. “Keynes
argues (that) there are many circumstances amenable to systematic analysis
even in these conditions (uncertainty). We need not be paralysed by inaction
or resort to irrational behaviour. Clues exist which may guide rational
action in some (but not all) cases, and repeated experience from these clues,
while not definitive, add to what Keynes called the ‘degree of rational
belief’ in the connection between an action and outcome which the agent
expects”. On this basis she could say that “he accepted fundamental
uncertainty but found a way to avoid the subjectivism, irrationalism or
nihilism which for others logically follows” (Chick, “Keynes, John Maynard
(1st Baron)”, on line). 7. According to Chick, the
dualist opposes reason to intuition (or emotion), but the anti-dualist brings
together both kinds of mental states. She understand that Keynes describes
the rational aspects of investment decisions in Chapter 11 of The General Theory and its irrational
aspects (animal spirits and states of confidence) in Chapter 12. The
synthesis would consist in endowing agents with both types of dispositions:
cold calculation and hot decisions. She regrets that "the theory of
investment … has often been interpreted dualistically. A dualist sees the
emphasis on animal spirits in Chapter 12 as invalidating the discussion of
rational calculation in Chapter 11. But it is perfectly possible to imagine
that someone carries out the calculations and, being still very uncertain,
opts to go ahead with the project anyway" (Chick, 2002). What does it
mean to say that someone can calculate the marginal efficiency of a unit of
capital under consideration and, at the same time, assert that he is very
uncertain? 8. “I want to stress that rationality is
not a property of the individual alone, although it is usually presented that
way. Rather, it gathers not only its force but also its very meaning from the
social context in which it is embedded. It is most plausible under very ideal
conditions. When these conditions cease to hold, the rationality assumptions
become strained and possibly even self-contradictory” (Arrow, 1987, p.201). 9. “Stiglitz ….
claims that a small transactions tax has a strong deterrent effect primarily
on short-term speculators. The tax will not be a deterrent to long term asset
holders who are rational market participants and who base their trading on
fundamentals . . . and are willing to wait a long time to realize a return.
Rational market participants therefore do not change their already optimal
behaviour if a transaction tax is imposed” (Davidson,
1998, on line). 10. “Since short run
speculation trading is attributed primarily to the action of fools (noise
traders), they interfere with the efficient capital allocation function of
financial markets. The tax, by making it more costly for fools (as well as
for all other mortals) to engage in short-run financial market activity
therefore improves the efficiency of financial markets” (Davidson, 1998, on
line). References Arestis, P. (1992) The Post-Keynesian Approach to Economics
–An Alternative Analysis of Economic
Theory and Policy, Aldershot, Edward Elgar. Arestis, P. (1996) “Post-Keynesian
Economics: Towards Coherence”, Cambridge
Journal of Economics, v. 20, nº1, pp. 111-135. Arrow, K. J. (1987)
“Rationality of Self and Others in an Economic System”, in Hogarth
y Reader, eds., pp. 201 – 215. Chick, V. (2002) "Theory,
Method and Mode of thought in Keynes's General Theory" (on line). Chick, V., and Dow, S. (2000)
“Formalism, Logic and Reality: A Keynesian Analysis” (on line). Davidson, P. (2003) "The
terminology of uncertainty in economics and the philosophy of an active role for government
policies", in Runde and Mizuhara,
eds. Davidson, P. (1998)
"Volatile financial markets and the speculator" (on line). Dow, S. (1997) “Methodological
pluralism and pluralism of method”, in Salanti
and Screpant, eds. Dow, S. (1998) The Methodology of Macroeconomic Thought,
Cheltenham, Edward Elgar. Dow, S. (2003)
"Probability, uncertainty and convention: economist's knowledge and the knowledge of economic actors",
in Runde and Mizuhara,
eds. Hogarth, R. M. and Reader, M.W., eds. (1987) Rational
Choice –The Contrast between Economics and
Psychology,
The University of Chicago Press, Chicago. Keynes, J. M. (2002) The General Theory of Employment, Interest
and Money (on line); first published, 1936. Keynes, J. M. (1937) “The General
Theory of Employment”, The Quarterly
Journal of Economics, February 1937. Lavoie, M. (1992), Foundations of Post-Keynesian Economic
Analysis, Aldershot, Edward Elgar. Meeks, G. T., (2003) “Keynes
on the rationality of decision procedures under uncertainty: the investment decision”, in Runde and Mizuhara, eds. Runde, J. and Mizuhara,
S., eds, (2003),The Philosophy of Keynes´s Economics – Probability,
uncertainty and convention, London, Routledge. Salanti, A. and Screpanti,
E., eds. (1997) Pluralism in Economics
–New Perspectives in History and Methodology, Cheltenham, UK, Edward Elgar. ___________________________ SUGGESTED
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