2[This paper was delivered at the Tenth Anniversary Scholars’ Conference of theLudwig von Mises Institute, October 9, 1992. Working Paper from the Ludwigvon Mises Institute, November 1992. Reprinted in
The Logic of Action One: Method, Money, and the Austrian School
. Glos, UK: Edward Elgar PublishingLtd., 1997, pp. 111-172. Reprinted in
Journal des Economistes et des Etudes Humaines
, Vol. 6 No. 1 (March 1995), pp. 43-89. ]In the past two decades, there has been a seeming growth of methodologicalsophistication in the world of economics. Until the early 1970s, a blind Walrasianformalism held total sway in microeconomics, while a triumphant Keynesianismdominated macro, all held together by an unthinking and arrogant empiricistepistemology of logical positivism. The micro and macro synthesis of the neoclassicalparadigm were both embodied and symbolized in the work of Paul Samuelson, while thepositivist methodology was enshrined in the famed 1953 article of Milton Friedman andthe later work of Mark Blaug.
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Since that point, however, the dominant positivist paradigm has been effectivelyoverthrown, to be replaced by a bracing and near-chaotic Kuhnian “crisis situation” in themethodology of economics. For the last two decades, a dozen, if not a hundred, schoolsof economic thought have been allowed to bloom. Unfortunately, however, the orthodoxparadigms in macro and especially microeconomics are still dominant, although lessaggressively held than before; the crisis situation in methodology has not yet beenallowed to trickle down fully to the substantive bread-and-butter areas where economists,after all, earn their livelihood. If methodology is in ferment, however, the rest of thesubstantive fortress may soon follow.The deterioration of the dominant neoclassical paradigm starting in the early 1970s hasnumerous causes. I would contend that the main cause was the abject collapse of theKeynesian System upon the emergence of the first major inflationary recession in 1973—74, an anomalous situation that has marked every recession since. The inflationaryrecession of the early 1970s
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was a shock for two reasons: (1) in the Keynesian model,
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For my purposes, I am ignoring the allegedly wide gulf between the earlier positivists with their“verifiability” criterion and the Popperites and their emphasis on “falsifiability.” For those far outside thelogical empiricist camp, this dispute has more of the appearance of a family feud than of a fundamentalsplit in epistemology. The only point of interest here is that the Popperites are more nihilistic and thereforeeven less satisfactory than the original positivists, who at least are allowed to “verify” rather than merely“not falsify.”For a brilliant and incisive discussion and demolition of the logical empiricist contention on many levels,see David Gordon,
The Philosophical Origins of Austrian Economics
(Auburn, Ala.: Ludwig von MisesInstitute, 1993).
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Actually, inflationary recession had first emerged during the 1933-37 inflationary boom, which took placewithin a deep depression. But since the origins of that depression, in 1929-33, were seemingly notinflationary, this episode was considered anomalous, and irrelevant to future cycles. In addition, prices firstbegan to creep upward, but only slightly, during the 1957
-
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recession, an overlooked but importantharbinger of things to come. During 1966, there was a recession again without the usual price fall, but this
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