Professor Wright on Methodology-A RejoinderAuthor(s): Nicholas KaldorSource: The Economic Journal, Vol. 65, No. 257 (Mar., 1955), pp. 157-159Published by: Blackwell Publishing for the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2227473Accessed: 26/10/2010 16:43

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/action/showPublisher?publisherCode=black.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.

Royal Economic Society and Blackwell Publishing are collaborating with JSTOR to digitize, preserve andextend access to The Economic Journal.

http://www.jstor.org

1955] PROFESSOR WRIGHT ON METHODOLOGY-A REJOINDER 157

without harming the rest. Or it might be said that those who suffer from the removal of the social organization from the maximum of ophelimity could, if they were allowed to reach the maximum position, pay a sum such that everyone would be better off with the new or- ganization. It was thus that, in the past, the redemption of certain seigneurial rights was to the advantage of both serfs and landlords."

The idea is introduced in a parenthetical, almost underhand way, with the result that it has escaped attention for many years. Pareto offers no solution to the problems of interpretation which immediately arise, nor did he incorporate the idea into his general formulation. Whatever the reasons for this, they can hardly have been that he was unaware of the interest and importance of this novel criterion of economic policy.

DAVID POLE

Cardif.

PROFESSOR WRIGHT ON METHODOLOGY-A REJOINDER

IN the September issue of the ECONOMIC JOURNAL 1 Professor McCord Wright takes me to task " for not distinguishing sufficiently in his paper 2

between a possible and a true story. I submit, however, that one of the most fundamental principles of scientific business-cycle analysis is that it is never enough merely to show ways in which a cyclical movement could occur- granted certain assumptions. The problem is to find out empirically and historically which one of these possible stories has empirically occurred and is most likely to recur " (pp. 622-33. Italics in the original, except the second " empirically "). If Professor Wright can "' find out empirically " which of a series of alternative hypotheses " has empirically occurred " and thus select the " true story " and not merely a " possible story " he is a better man than the rest of us. No scientist (certainly not in the natural sciences) would claim to be able to prove the correctness of an hypothesis by empirical observation. The most that empirical observation can do is to disprove a theory, by showing that it fails to account for the observed phenomena, or else showing that it is based on demonstrably false assumptions. An hypothesis can be rejected also in favour of a simpler one, if the latter accounts for the observed phenomena equally well. But in neither case could it be claimed that the hypothesis finally chosen represents " the truth " or " reality."

The purpose of my cyclical model was to show that given elastic expecta- tions-i.e., a state of affairs where " the facts of the existing situation enter in a sense disproportionately into the formation of long term expectations " 3-

a cyclical movement is bound to follow, at any rate if there is net saving in the community when production is at its maximum level. I further intended to show that the same assumptions may, but not necessarily will, generate a trend. The model was also intended to throw light on the factors which

1 Pp. 622-5. 2 ECONOMIC JOURNAL, March 1954, PP. 53-71. 3 Keynes, General Theory, p. 148.

158 THE ECONOMIC JOURNAL [MARCH

determine the length of the cycle and of its various phases. I hoped it was obvious that the examples chosen were of a purely expository character and that the necessary assumptions were stated in an extreme form in order to emphasise the essential features.

I can readily believe that it is always possible to introduce such additional assumptions into any particular " model " as would destroy the "a priori necessity " of its conclusions. But if these assumptions are merely chosen at random (without any regard to their relevance to actual situations) they do not prove anything for or against an hypothesis. Scientific hypotheses are invented in order to account for the phenomena actually observed, not in order to demonstrate that there " ain't no such animal." Of course I would agree with Professor Wright (if this is what he really intended to say) that such simple analytical models should merely be regarded as a starting point; and they should serve as a guide to, and not a substitute for, empirical research.'

When Professor Wright says that the model suffers from a " logical weak- ness" in that business men's expectations would not be elastic (in the above sense) in a purely static or stationary world, he shows a complete mis- understanding of the purpose of an analytical tool. A " static " model of the trade cycle is not intended to " explain " non-existing phenomena of a purely imaginary world: the purpose of the static abstraction, here and elsewhere, is to enable us to isolate the relevant factors from the irrelevant ones in the world as it exists. If it can be shown that it is the existence of elastic expecta- tions, and not economic growth as such, or technical innovation, etc., which is responsible for the generation of cyclical movements, it is perfectly legitimate from a methodological point of view to do this by assuming a particular state of expectations in a static framework-without being called upon to say whether that assumption is " realistic " in that particular imaginary situation. (Realism is only a meaningful attribute when applied to reality, not unreality.) 2

The same kind of misunderstanding underlies also his criticism of my numerical examples. I would agree, of course, that under the strict assump- tions of the numerical example, it is only as a result of a chance constellation of the various parameters that the cyclical movement takes the form of a " short cycle " of a simple pattern (meaning by a " short cycle " one where only a fraction, and not the whole, of the capital stock is renewed in each boom). But since, as I show later, more realistic assumptions concerning service-life remove this particular problem, I cannot see the inconsistency in

1 My remark that it would not be worth while to introduce certain additional assumptions into the model " at the present state of knowledge " (which seems to have been misunderstood by Wright) referred to our knowledge of the facts of the real world, not to our knowledge of altemative trade-cycle models. It merely intended to say that it is not worth while to introduce " complica- tions " at random until we know which particular " complications " are relevant.

2 That I am myself very much aware of the connection between the elasticity of expectations and " dynamic " change is shown by the more extended treatment of the problem of expectations in my " Speculation and Economic Stability," Review of Economic Studies, Vol. VII (October 1939),

particularly pp. 9-12.

1955] DEPRECIATION, REPLACEMENT AND REGULAR GROWTH 159

using-deliberately-the right figures to produce the required results in an expository example.'

Professor Wright's strictures thus fail to reveal (to me at any rate) the " in- ternal inconsistency " or the " logical weakness " which he claims-which do-es not exclude, of course, the possibility that his own model of the trade cycle is far superior to mine, or anyone else's. I can assure him that it was not my intention " to omit all rival accounts " on purpose, or to claim " exclusive validity" 2 for my theory; and if I had not taken account of his own work on the subject this possibly may only have been because I was not familiar with his books-a defect which I can see I must speedily remedy.

NICHOLAS KALDOR King's College,

Cambridge.

DEPRECIATION, REPLACEMENT AND REGULAR GROWTH

THE economic profession certainly will be grateful to Professor Domar for having drawn attention (in " Depreciation, Replacement and Growth," ECONOMIC JOURNAL, March 1953) to the consequences of the replacement lag, which were well known to practice but rather neglected in economic theory except in a famous passage in the General Theory. As Domar remarks himself, the subject need not be tied to models such as those presented in his paper. Indeed, in the revision of the Harrod-Domar model of a regularly progressive economy, in Sections III and IV of the paper, certain shortcomings of Domar's approach become apparent; I refer to the implicit assumption that, as in the older model, the regularly progressive economy, in which replacement lags behind depreciation, will necessarily follow an exponential time path. Formally, the problem is not attacked by Domar in its full generality; and from the economic angle a discussion of a most im-

1 I thought I had met Professor Wright's strictures concerning the initial build-up of the capital stock in the footnote to p. 59 of my paper, where I pointed out that it is only when over-lapping between building and scrapping periods is completely avoided that there will be a " short cycle " which, in the example chosen, meant booms and slumps alternating at five-yearly intervals (though I failed to make explicit that over-lapping could not be avoided if the initial build-up of the stock was a con- tinuous process). Otherwise the assumption of a rigidly fixed and uniform service-life will lead to " long cycles " which imply, in terms of the same example, alternating booms and slumps of fifteen years each, when the service-life is twenty-five years; fifteen years of boom followed by twenty years of slump, when the service-life is thirty years and so on. The reason for selecting " the short cycle " of the example was that the fluctuations in the actual world are undoubtedly short cycles (in this particular sense) since only a fraction of the outstanding stock of capital is renewed during each boom, whilst the inevitable over-lapping of scrapping and building periods (as a result of the " echo ") which prevents cycles from being " short " is only an acute problem (as Wright agrees) under the artificial assumption of a fixed and uniform service-life. (I completely fail to follow Professor Wright's own arithmetic either in the case of my original example or in the case of his assumption of a thirty-year service-life-but since the correctness or otherwise of his arithmetic is without significance to the points at issue, I do not wish to pursue this further here.)

2 Italics in the original.