Introduction

Human activity directed to knowledge, like Man’s day-to-day action in general, is obliged to proceed by trial and error and to develop by the free interplay and confrontation of ideas, for the simple reason that human cognitive capacities are limited. The point is to prevent this trial and error method from proceeding blindly. This requires methodological rules that permit judging the explanatory power of ideas and theoretical proposals, which means recognizing clearly enough the contribution of models and theories to the advancement of earlier knowledge and hence to the intelligence of decision making, by comparison with earlier theories. This methodological procedural support is indispensable to the advance of knowledge, i.e. to the accumulation and growth of knowledge based on knowledge. Creativeness, by definition, is not the product of method. But method is indispensable for selecting the contributions of creative processes to knowledge. In a world where all modes of thought and judgement are accorded equal dignity, as advocated by methodological anarchy (improperly called ‘pluralism’), knowledge will grow haltingly and advance in a most confused fashion. A number of scholars, most notably Feyerabend, have disputed the comparability of theories with sophisticated, even stimulating arguments. Their critical contribution deserves appreciation, but their negation of method denies science and is accordingly unacceptable. The title of this book, Economic Theory and Social Change, contains an implicit question: is there an economic structure separate from social structures and their evolution? The principle question is whether economics is actually analysing a substructure of the surrounding social structure. If so there are few possibilities for isolating a logical system of the economic structure within the realm of the social structure when we live in a dynamic society. Our scope with this book which appears in the second part of the title, Problems and Revisions, implies that we want to discuss the logical problems of such an isolation, and we will also suggest some revisions of the theory in order to bring in other questions and other analytical approaches. Not seldom, it is said that the market is always right. For those not understanding the language of economics the relevant question is, of course, ‘Who is the market?’ but for economists this proposition is also a bit tricky, after the financial debacle of autumn 2008. We may ask the leading persons of the

financial industry why they did not listen to the advice of the market. Did some agents wish to have a breakdown and some not or is the market result something else than the sum of good wishes and optimal individual behaviour? If either of these explanations are true we are at difference with the traditional neoclassical market theory. Furthermore it is sometimes claimed that the market should govern itself and further that the market, although void of any ethics, leads towards results which are ethically acceptable in the society. A prominent banker in Sweden claimed in an editorial debate article in one of the biggest Swedish newspapers, in spring 2008, that moral questions were to be held outside the realm of the markets and that markets will correct themselves with respect to moral failures. That is a very convenient approach – the individual agent has no responsibility for the aggregate result but that is fixed by someone beside or above the human agents, maybe we can call this agent the invisible hand. These lines of argument are probably due to Adam Smith’s famous invisible hand. Scientists within economics seldom discuss this invisible hand seriously except for historical reasons, and reject it in its naïve form, however many mainstream economists struggle implicitly with the question of aggregating microeconomic analysis into normative discussions of economic policy. Keynes frankly dismissed any such possibility by rejecting Say’s law, but in the modern variants of neoclassical theory Say’s law lingers in the shadows under the name of Axiom of Local Non-Satiation and thus there is still a strong temptation to use the neoclassical theory for normative analysis of the society in the form of welfare theory. After the financial debacle at the end of 2008 the general sentiment has also been changed towards political actions to support different groups of market agents and the whole banking sector has been begging, save for a few financial organizations, for guaranties and help with capital support from the taxpayers. Another interesting effect of the financial debacle is the remorse it seems to have created among economists. The Nobel Laureate Paul Krugman wrote in the New York Times on 2 September 2009:

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy . . . the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth . . . economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations . . . Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets – especially financial markets – that can cause the economy’s operating system to undergo sudden, unpredictable crashes;

and to the dangers created when regulators don’t believe in regulation. . . . When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly.