One of the regular members of Mises' private seminar was ''the unforgettable Felix Kaufmann'' Haberler, , philosopher of social sciences b. Craver, pp. Later on, in the s, Kaufmann's book on the methodology of the social sciences was instrumental in Haberler's emphasis on the distinction between ''tautological'' and ''empirical'' statements in economics, and on the role of induction in the search for the ''empirical regularities'' that are essential for the creation of new hypothesis.
I shall argue that Haberler's criticism of Hayek's capital shortage explanation of the crisis after an initial enthusiasm that showed in his Harris Foundation lecture delivered in Chicago in , as well as his rejection of Keynes' equilibrating mechanism through income changes and his skepticism towards econometric modelling of the business cycle Tinbergen's and others stem in great part from his views on method.
The organizing principle of part I of Prosperity and Depression is the classification of business cycle theories into groups according to the explanatory hypotheses deployed see Haberler, , The purpose of the survey was ''to test the logical consistence'' of the several hypotheses and ''their compatibility with one another and with accepted economic principles'' This would provide the starting point for the much needed ''synthetic exposition'' of the business cycle in part II.
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Haberler's methodological standpoint is left largely only implicit throughout the book, though. We must look at some of his other writings in order to find out where he stood in the s controversies on economic methodology. Most of Haberler's statements on matters of methodology came out of his criticism of the saving-investment terminology of Keynes and Harrod Haberler, a, b.
He pointed out that the ''neo-Cambridge'' terminology had made it difficult to ''decide in this field whether a particular statement involves a really material assumption about the real world that is, about the behavior of individuals , or whether it is a purely 'syntactic' proposition about the definition of certain terms'' b This distinction is, of course, reminiscent of the logical positivism of the ''Vienna Circle'', but Haberler had learned from Kaufmann , , that one should distinguish between three, not just two, sorts of propositions. He clarified that in a footnote:.
This distinction is here used in the sense in which it has been made quite clear by ''Logical Positivism'' Wittgenstein, Carnap. It should be noted, however, that the fact that a proposition has been arrived at by purely logical tautological derivation from some other proposition, by no means in itself reduces this derived proposition to a tautology, so long as there are ''material'' propositions among the premises.
On all this compare, F. Kaufmann, Methodenlehre der Sozialwissenschaften Vienna, , passim , and esp. The ''Vienna Circle'' distinction between ''synthetic'' statements verifiable by empirical evidence and ''analytic'' statements tautologies would be introduced effectively into economcis one year later by Hutchison ; but see also his discussion of tautologies in economics in as a reaction against Lionel Robbins' apriorism see, e. In this connection, it is worth noting that Haberler referred to Hutchison in the new chapter on Keynes in the edition of Prosperity and Depression see n, n.
Furthermore, despite the similar approaches of Kauffman , part II, ch. According to Haberler a, , n. As he put it in a letter to Keynes written in 11 April , a relationship by definition is ''exact but does not tell us anything about the real world'', while an empirical one ''would tell us something about the world but could not be proved a priori'' Moggridge, Haberler reaffirmed later on in a debate at the meetings of the American Economic Association his overall anti-apriorism:.
Of course, the difference between experimental and nonexperimental sciences must not be exaggerated. It is a difference in degree only and an anti-empiristic, aprioristic methodology of economics or any other science cannot be based on the fact that it is impossible to make laboratory experiments with the economy or society as a whole an. In the same vein, there was no straight contrast between the operations of deduction and induction, as Kaufmann , part I, ch.
The premises of deductive reasoning are decided by experience, since they are chosen ''with a view to their empirical applications'' Hutchison made it clear against Robbins that ''it is no comparative justification Quite the reverse. The necessary fundamental assumption of all scientists is that there are some regularities about the facts of the world which allow of successful inductive hypothesis'' p.
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Haberler treated the various explanations of the business cycle with emphasis on the upper turning point as empirical statements and called attention to the empirical regularities that could form the inductive basis for the formulation of alternative hypotheses.
The last one was not controversial cf. Schumpeter, op. The statement would be tautological, of course, if prices were absolutely rigid. Haberler later on submitted that this parallelism is suggestive of a causal connection between fluctuations of the money flow ''effective demand'' and oscillations in the flow of goods, which, by the way, is consistent with changes in effective demand provoked by autonomous shifts in, e.
He realized that if prices and wages were completely flexible the statement would have to be substantially changed and suggested the concept of ''elasticity of supply'' of output to express reactions of aggregate production to changes in the money flow ibid. In order to explain the business cycle, ''we need either a law about a cyclical change in certain data or a dynamic theory'' Haberler, ; this distinction has a long pedigree in economics; see, e.
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This led Haberler to discriminate between, respectively, exogenous of which Jevons' ''sunspot theory'' is the classical example and endogenous theories pp. In the first group, the upper turning point is explained by an accidental disturbance, while in the other one the boom itself creates a disequilibrium of the economic system which eventually brings about the crisis.
In an article that appeared a couple of months after Haberler finished writing part I of Prosperity and Depression in December , he used the distinction between ''logical'' tautological or purely deductive and ''empirical'' propositions to point out that:. From a purely logical point of view, there seems to me to be only a difference of degree between these two types of answers.
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When it is said that a boom must lead to a crisis, because, say, the expansion of credit is bound to create a vertical maladjustment in the structure of production, this is not to be regarded as a logical but an empirical law. Therefore, exceptions are thinkable and, in fact, we shall see below that it is not difficult to formulate conditions under which the proposition will not hold Haberler, b:4, n.
He further divided the group of endogenous theories into the following categories, according to the reason given for the upper turning point: purely monetary, over-investment of the monetary and non-monetary types , under-consumption, and psychological theories. With the exception of the purely monetary one put forward by Ralph Hawtrey , all these theories explain the upper turning point as a result of what Haberler used to call a ''maladjustment in the structure of production'', by which he meant ''an allocation of the factors of production in a way that does not correspond to the flow of money'' b Furthermore, Haberler's Austrian background showed in this proposition that there are ''vertical'' and ''horizontal'' maladjustments.
It the structure of production does not correspond to ''the decisions of the population as to spending and saving'' there is a vertical maladjustment; if it does not correspond to either the ''decisions of consumers as to the distribution of expenditure between various lines of consumption goods'' or ''the decisions of producers at every stage as to the distribution of their cost expenditure between different forms of inputs'', it is a case of horizontal maladjustment ; apparently, he introduced this distinction for the first time in I shall comment below on how Haberler made use of this scheme to evaluate the explanatory power of alternative hypotheses.
Before that, it should be noted that he was critical of the use of the concept of equilibrium in business cycle theory, since it was not empirically framed, but dependent on divergent definitions given by different theories. I personally find it advisable to drop the concepts of natural and equilibrium rates The concept ''equilibrium rate'' suggests, e. It surely cannot be defined by full employment of all factors of production.
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- 1. Introduction.
It is not defined by the condition that ''the market should be cleared'' b:3 ] of the economic system as a whole. But this rate cannot be determined even if we agree on the definition of equilibrium, unless we know how the equilibrium can be brought about. Haberler repeated his reservations about the use of equilibrium concepts in business cycle analysis when he put forward his own ''synthetic explanation'' cf.
Owing to the operation of the acceleration principle, demand for investment goods will fall abruptly when consumers' goods industries cease to expand. This hypothesis is essentially identical to the one advanced independently by Harrod in his Trade Cycle published in September a, p. It is also part and parcel of Hick's well-known non-linear model of the trade cycle, who referred to Harrod and to Haberler in this connection , n. Haberler is here very far from his Austrian heritage, reflecting his critical attitude towards the empirical basis of Hayek's capital shortage hypothesis, as we shall see next.
In the early s Haberler was quite enthusiastic about Hayek's theory of the business cycle see a; b; Let us pause for a moment to discuss Haberler's ; b:4 rejection to Hawtrey's claim that the reason for the crisis is always an interruption of the growth of money supply. According to Haberler and , Hawtrey based his theory of the upper turning point on the lag of cash reserves of the banking system behind the expansion of credit, which causes the drain of cash to continue after the expansion of credit has been interrupted.
What Haberler finds particularly unsatisfactory about Hawtrey's explanation is the premise that prosperity could be prolonged indefinitely if only money supply continued to expand, without real maladjustment in the structure of production especially in the form of the accelerator mechanism described above in connection with Haberler's own exposition of the upper turning point.
Haberler left only implicit, though, that Hawtrey's pure monetary had been falsified by the depression of the early s, which was not preceded by rising wholesale prices. This was the main topic of his Harris Foundation lecture, when he argued that the main features of the years in the USA were price stability and rapid growth of production, accompanied by increasing money supply and vertical maladjustment of the structure of production.
If we accept the proposition that the productive apparatus is out of gear, that great shifts of labour and capital are necessary to restore equilibrium, then it is emphatically not true that the business cycle is a purely monetary phenomenon, as Mr. Hawtrey would have it; this is not true, although monetary forces have brought about the whole trouble. Such a dislocation of real physical capital, as distinguished from purely monetary changes, can in no case be cured in a very short time This is, of course, a description of Hayek's capital shortage hypothesis, which Haberler called a ''more refined monetary theory of the cycle'' b; What Haberler found especially attractive about this new theory was ''Hayek's convincing proof that 'the monetary explanation is not equivalent to the explanation through the variations of the general price level'.
In view of the fact that the present depression in the USA has not been accompanied by serious variations of the wholesale and retail price-levels, a theory which does not stress general price changes and yet retain all the obvious advantages and the plausibility of the monetary explanation, should be of considerable interest'' b As we could expect from Haberler's application of Kaufmann's framework, it is precisely the investigation of Hayek's ability to explain the American depression that will constitute in Prosperity and Depression the crucial test of the capital shortage hypothesis.
It is well-known see, e. In contrast to voluntary savings, consumers will tend to restore the former proportion between consumption and saving when money income rises during the upswing, with ensuing increase of prices of consumers' goods and abandonment of production in the higher stages.
Hayek's reasoning hangs on the crucial assumption that the new roundabout methods of production have not been completed when credit expansion ceases. Hayek is not able to show that a steady rate of credit expansion would necessarily bring about unsustainable forced savings. The relevance of this conclusion for Hayek's claim that his theory explained the crisis is pointed out by Haberler.
It seems to follow that [Hayek's] theory does not prove, as it claims to do, that a credit expansion which does not lead to a rise in prices but only prevents a fall in prices must have the same evil effect as the more violent type which brings about a rise in the absolute price level. In a progressive economy, where the output of goods in general grows continuously and prices tend therefore to fall, there is scope for a continuous expansion of credit at a steady state The practical importance of this conclusion is considerable in view of the American prosperity in the twenties, a notable feature of which was the fact that wholesale prices did not rise Fifty years later Haberler reflected once more on Hayek's business cycle theory.
He reaffirmed on that occasion his view that there is ''no reason why a steady stream of forced saving, the price level remaining stable, should be unsustainable'', but he focused his criticism on Hayek's attempted explanation of the depression as a period of readjustment of the structure of production. Haberler had already made it clear that this is ''admittedly incomplete and unsatisfactory'' and that a general deflationary process usually referred to as ''secondary deflation'' is necessary in order to explain ''why the depression spreads to all stages and branches of industry''.
Later on, he commented on Lionel Robbins belated acknowledgment that unemployment in the s was largely provoked by fall in aggregate demand and, therefore, that ''Keynesian'' measures were justified , which he opposed to Hayek's insistence in his Nobel lecture that the deviation of the actual structure of prices and wages from its equilibrium structure is always the primary cause of unemployment.
Haberler's views on the role of empirical testing in economics are apparent in his reaction to Hayek. This is not the place to go into the deep epistemological problems raised by Hayek's Nobel Lecture. The problem at hand is much simpler There is sufficient evidence of a general nature to show that Robbins was right ; emphasis added. Haberler's mention of falsifiability should not be a surprise, for he was one of the first economists to read Karl Popper's Logik der Forschung see Popper's autobiography and Besides, Kaufmann had long stressed that every empirical proposition is ''refutable'' , part II, ch.
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