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ROCHESTER STUDIES IN ECONOMICS
AND POLICY ISSUES
Published in cooperation with
The Center for Research in Government
Policy & Business
Graduate School of Management
University of Rochester
Rochester, New York, U.S.A.
II
INSIGHTS FROM TH' CONFERENCES
ON ANALYSIS & IDEOLOGY
Kar I Brunner, edi tor
Martinus Nijhoff Publishing, Boston
Boston • The Hague • London
III
Portions of this work originally appeared in Journal of Fi
nancial Economics, in Freedom in Constitutional Contract,
James Buchanan, published by Texas A & M University
Press, in Kyklos and in Schweizerische Zeitschrift filr Volks
wirtschaft und Statistik.
Library of Congress Cataloging in Publication Data
Interlaken Seminar on Analysis and Ideology.
Economics and social institutions.
(Rochester studies in economics and policy issues)
1. Economics-Congresses. I. Brunner, Karl, 1916-
II. Title. III. Series.
HB21.I615 1979 330 79-13177
ISBN-13: 978-94-009-9259-7 e-ISBN-13: 978-94-009-9257-3
001: 10.1007/978-94-009-9257-3
© 1979 copyright by University of Rochester Center for Research in
Softcover reprint of the hardcover 1s t edition 1979
Government Policy and Business. All rights reserved. No part of
this book may be used or reproduced in any manner whatsoever
without written permission except for brief quotations embodied in
critical articles and reviews. For further information please notify
the publisher, Martinus Nijhoff Publishing, 160 Old Derby St.,
Hingham, MA 02043
IV
Contents
Contributors VI
Introduction Vll
Karl Brunner
The Economic Tradition: Economics as a Research 1
Programme for Theoretical Social Science
Hans Albert
Milton Friedman in Our Time 29
Karl Brunner
Development Economics: Intellectual Barbarism 41
P. T. Bauer
A Hobbesian Interpretation of the Rawlsian 59
Difference Principle
James M. Buchanan
Galbraithian Economics: The Methodology and 79
Political Economy of Neoinstitutionalism or a
New Vulgar Economics?
Gerard Giifgen
"Economics and the Public Purpose" 105
Some Discussion Points Related to Chapter Three
of John K. Galbraith's Homonymous Book
Hans G. Monissen
The Capitalist Corporation and the Socialist Firm; 131
A Study of Comparative Efficiency
Svetozar Pejovich
Theory of the Firm: Managerial Behavior, Agency 163
Costs, and Ownership Structure
Michael C. Jensen and William H. Meckling
Some Implications of Recognition of Property 233
Right Transactions Costs
Armen A. Alchian
The Antitrust Dilemma 255
Harold Demsetz
Toward a Theory of the Press 267
Michael C. Jensen
v
Contributors
Hans Albert-Lehrstuhl fUr Soziologie und Wissenshaftslehre, Un i
versitat Mannheim
Armen Alchian-Department of Economics, University of Cali
fornia, Los Angeles
Peter T. Bauer-Department of Economics, London School of Eco
nomics and Political Science
Karl Brunner-Center for Research in Government Policy and
Business, Graduate School of Management, University of
Rochester and Universitat Bern
James M. Buchanan-Center for Study of Public Choice, Virginia
Polytechnic Institute and State University
Harold Demsetz-Department of Economics, University of Cali
fornia, Los Angeles
Gerard Gafgen-Fachbereich Wirtschaftswissenshaften unci Sta
tistik, U niversitat Konstanz
Michael C. Jensen-Managerial Economics Research Center,
Graduate School of Management, University of Rochester
William H. Meckling-Graduate School of Management, University
of Rochester
Hans G. Monissen-Justus Liebig Universitat-Giessen
Svetozar Pejovich-Department of Economics, University of Dallas
VI
Introduction
The productive work of widely distributed academic research
has contributed substantially, over the postwar period, to
important advances in our understanding. It has also offered
a clearer recognition of many unresolved problems. Never
theless, the progress achieved over the last decades, ex
hibited by the systematic application of "theory" to actual
issues and observable problems, could not overcome a per
vasive sense of dissatisfaction. Some academic endeavors
pursued within a traditional range of economic analysis have
appeared increasingly remote from broad social issues,
motivating the social and intellectual unrest experienced in
recent years. Conditioned by the traditional use of economic
analysis, many have naturally concluded that the "most
relevant" social issues agitating our times are beyond the
reach of economics. Purist advocates of a traditional view
thus condemn any extension of economic analysis to social
issues as an escape into "ideology". Others argue the need
for an "interdisciplinary approach" involving sociology,
social psychology, or anthropology as necessary strands in
a useful understanding of social, institutional, and human
problems of contemporary societies. We note here, in par
ticular, the subtle attraction inherent in Marxian thought. It
appears to offer a unified approach, with a coherent inter
pretation, to all matters and aspects of human society, in
cluding even nature. It is quite natural under the circum
stances for eager young scholars, concerned with the broader
social issues of our times and impressed by the allure of an
encompassing vision, to turn to Marxian thought, disgruntled
by the prevalent "Platonic exercise" in formal economics.
These developments are not imposed on us as our uncon
trollable fate. Weare offered a choice. There is an alternative
to the illusion or reality of ideological miasmas, interdisci
plinary convolutions, or salvation through Marxian dogma.
This alternative was defined by Adam Smith's vision of
economics as the social science. The successful development
of a coherent analytic framework in the context of economic
analysis-contrasting with shifting ad hoc constructions in
social or behavioral psychology and empirical sociology,
and contrasting also with the essentially programmatic and
nonanalytic outlines and speculations in theoretical soci
ology and the pronounced analytic flaws or metaphysical
VII
intrusions in Marxian thought-suggests the useful explora
tion of a far-reaching intellectual program.
There are no inherent reasons for limiting the application
of economic analysis to the narrow range codified by a
tradition formed in this century. There are, in particular, no
a priori grounds why the perception of man elaborated in
economic analysis since its origins in the writings of the
Scottish philosophers of the 18th century could not be use
fully extended over the widest range of human experiences.
This research program has been initiated by a small number
of economists and has gained substantial momentum in
recent years. It offers many opportunities for coping with
serious social issues or institutional problems beyond the
traditional marketplace. It promises, moreover, to yield use
ful analytic evolutions in the adaptation of inherited formu
lations to new ranges of human endeavors and expressions.
The Interlaken Seminar on Analysis and Ideology was
conceived in 1973 as a forum encouraging an explicit and
searching extension of economic analysis to the full sweep
of social phenomena. The Interlaken Seminar thus ad
dresses, in Hans Albert's words, a "sociology" with the
analytic means developed by economic analysis.
The first meeting was held in 1974, and the sessions con
tinue every year during Mayor June. A wide range of topics
has been considered and vehemently argued in past years.
A number of papers have been collected for a first volume.
The authors are mostly academic economists but also in
clude a philosopher of science and sociologist (Hans Albert).
The issues covered range from economics as a social sci
ence (Hans Albert, Karl Brunner), to critical evaluations of
Galbraithian notions of the world (Gerard Gafgen, Hans
Georg Monissen) and interpretation of Rawlsian ethics
(J ames Buchanan); from social and political incentives en
couraging disregard of economic analysis (Peter Bauer), to
the working of specific social institutions (Annen Alchian,
Michael Jensen, William Meckling, Svetozar Pejovich). The
reader may not be convinced of the validity of the broader
purpose of this volume and of the Interlaken Seminar. But
the participants of the seminar may reasonably hope that
the outcome will stimulate further probing and pondering
of the basic questions.
Karl Brunner
VIll
Hans Albert
The Economic
Tradition
Economics as a Research
Programme for Theoretical
*
Social Science
Methodological Remarks
In general the growth of knowledge takes place within the
framework of comprehensive theoretical traditions that are
connected with more or less explicitly formulated research
programs. Tradition means for knowledge about the same
as capital means for the economy. Methodology has to take
account of this fact.
A methodological conception can only be judged in rela
tion to aims-the aims of scientific activity. These aims are
controversial among scientists; therefore, we have to take
sides on this question. I prefer critical realism as an episte
mological conception, as Adam Smith did about two hun
dred years ago.! According to this view, the central aim of
scientific activity is to discover the structure of reality by a
systematic search for comprehensive, deep, and precise
knowledge. It is thus necessary to strive for theories with
great explanatory power; that is, theories that are as simple
'" Presented at the Third Annual Interlaken Seminar on Analysis and Ideology,
Switzerland, June 1976. I am thankful for the assistance of Marty Zupan in re
vising this article.
1 Adam Smith, "The Principles Which Lead and Direct Philosophical Enquiries
Illustrated by the History of Astronomy," in The Works of Adam Smith, ed. Du
gald Stewart (1811-12; reprint, Aulen: Otto Zeller, 1963), vol. 5.
21 ECONOMICS AND SOCIAL INSTITUTIONS
as possible while explaining very much. Most methodologi
cal problems can be related to this aim.
The first problem seems to be to answer the question,
Which are the properties such a theory must have? It would
be plausible to say, certainly, that it has to be simple, gen
eral, and true. But with all these properties we get into diffi
culties, because no adequate explication exists at present.
Simplicity seems to be important,2 but it is a rather vague
idea, not completely reducible to information content.
3
Generality seems to be relevant as well, but the attempt to
reduce it to independence from spatiotemporal restrictions
is insufficient.4 As to truth, there is not only a problem of
explication. Another problem seems to be even more impor
tant. If we agree that fallibilism is inherent in modern sci
ence and philosophy, then there can be no criterion of truth.
Truth can only be a regulative idea-the idea of adequate
representation-which leads to a particular orientation for
the methodology of testing: All attempts at testing should
be organized so that the "resistance of reality" is used to
find out the strong and weak points of our problem solu
tions. It is always possible, by using alibi formulas or ad hoc
assumptions, to immunize a set of propositions against criti
cism. But corroboration is only possible via serious attempts
to test.5
Another problem is to formulate an adequate characteri
zation of theories themselves. A theory may be conceived of
as a system of interconnected nomological statements that
depend on some simple, unifying ideas and are formulated
in terms of a coherent conceptual apparatus. It implies as
sertions to the effect that under certain general conditions
certain events are to be expected, perhaps with a certain
probability. Because of their nomological content, counter
factual or subjunctive conditionals can be deduced from them
(example: if in the space-time region x, y, Z, t the quantity
of money was increased rapidly, an inflationary develop-
2 Ibid.; Karl Popper, Conjectures and Refutations (London: Routledge & Kegan
Paul, 1963), p. 241.
3 Carl Gustav Hempel, Philosophy of Natural Science (Englewood Cliffs, N.].:
Prentice-Hall, 1966), p. 44.
4 Karl Popper, The Logic of Scientific Discovery (originally published as Logik der
Forschung, 1934) (London: Hutchinson, 1959), pp. 420-41.
5 Popper, Scientific Discovery.
