Prolegomena 4 : An Open Dialogue With Nobel Laureates In Economics - The Road To A Third Revolution In The Economic Science 9781845444990, 9780861768196

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International Journal of

ISSN 0306-8293

Social Economics

Volume 30 Number 4 2003

PROLEGOMENA 4: AN OPEN DIALOGUE WITH NOBEL LAUREATES IN ECONOMICS The Road to a Third Revolution in the Economic Science Anghel N. Rugina

Access this journal online __________________________ 324 Preface ___________________________________________ 327 Abstract and keywords ____________________________ 335 INTRODUCTION: NEW CONTRIBUTIONS TO THE SCIENCE OF ECONOMICS 1. The concept of ‘‘integrated logic’’ _______________ 337 2. Quinta Methodica: a more comprehensive methodology and truth in the abstract versus truth in the concrete ___________________________ 338 3. The law of logical consistency in scientific arguments _____________________________________ 339 4. The universal hypothesis of duality _____________ 340 5. The problem of continuity in science and the initial fathers of the universal hypothesis of duality ________________________________________ 340

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CONTENTS

CONTENTS continued

6. The general possibility theorem ________________ 344 7. The concept of the orientation table in economics _____________________________________ 345 8. The universal law of the natural parameter (NaPa) ________________________________________ 345 9. The universal law of consistency within a system 346 10. The natural (non-Keynesian) law of full employment ___________________________________ 347 11. Pure theory versus empirical reality ____________ 348 12. The impossibility theorem in analysis___________ 349 13. The impossibility theorem in practice ___________ 353 14. The fundamental problem of economic calculation ____________________________________ 354 15. Two different concepts of stability______________ 356 16. Two different types of economic analysis and practical reasoning ____________________________ 357 17. The equation of unified knowledge as the ultimate solution_______________________________ 358 18. The distance between a position of stable versus unstable equilibrium ___________________________ 361 19. Clarification of two laws of supply and demand__ 363 20. The Say law of the markets reconsidered and completed _____________________________________ 365 21. The classical laws in economics were never tested properly ________________________________ 367 22. Requirements and conditions for a system of general stable equilibrium______________________ 369 23. How much can mathematics, econometrics and computers help? _______________________________ 373 24. The ultimate goal of a free, just and stable society and economy ___________________________ 376 25. The great transformation and a new covenant of universal socio-economic human rights__________ 378 Final remarks: an open road for the methodological unification of all sciences __________________________ 384 References ________________________________________ 385

NOBEL LAUREATES – MEMORIAL LECTURES 1. Ragnar A.K. Frisch (1969) From Utopian theory to practical application: the case of econometrics _______________________ 389 2. Jan Tinbergen (1969) The use of models: experience and prospects ____ 410 3. Paul A. Samuelson (1970) Maximum principles in analytical economics_____ 424 4. Simon Kuznets (1971) Modern economic growth: findings and reflections_____________________________________ 453 5. Kenneth J. Arrow (1972) General economic equilibrium, purpose, analytic techniques, collective choice ____________________ 479 6. Sir John R. Hicks (1972) The mainspring of economic growth_____________ 527 7. Wassily Leontief (1973) Structure of the world economy. Outline of a simple input-output formulation_________________ 548 8. Friedrich A. Hayek (1974) The pretense of knowledge _____________________ 559 9. Gunnar Myrdal (1974) The equality issue in world development ________ 581

CONTENTS continued

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The trilogy of the Prolegomenas The trilogy of the Prolegomenas appeared in the International Journal of Social Economics (IJSE), as follows: (1) “Prolegomena 1: To Any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking”, IJSE, Vol. 25 No. 5, 1998. (2) “Prolegomena 2: To Any Future Study in ‘Integrated Logic’ and a More Comprehensive Methodology for the Unification of all Sciences, Natural and Social. An Orientation Table for Economics and Any Other Science, and Its Application in Theory and Practice”, IJSE, Vol. 27 Nos 5/6, 2000. (3) “Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary, Financial and Social Stabilization Plans”, IJSE, Vol. 28 Nos 1/2, 2001. All quotations from the Nobel Memorial Lectures are identified with the respective text from Les Prix Nobel in 1969, 1970, 1971, 1972, 1973 and 1974, and usually published one year thereafter by Imprimerie Royale P.A. Norstedt & Soner, Stockholm, Sweden. Since the Imprimerie Royale P.A. Norstedt is no longer in existence, a permit for copyrights was requested from the Nobel Foundation, Stockholm, Sweden.

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Preface Prolegomena 4, in its own way, is a continuation of the previous trilogy with the same title (1998, 2000 and 2001) but on a different platform and with its particular perspective. The previous trilogy attempted to present the essence of a new, more complete system of economic, monetary, financial, social and political order based on general stable equilibrium conditions. In Prolegomena 4 we enter a new territory of research, called “The History of Contemporary Economic Thought”, in the form of an open dialogue with Nobel Laureates in Economics starting with 1969, specifically in their Memorial Lecture delivered when they received the Prize in Economic Science, dedicated to the memory of Alfred Nobel. During the Great Depression of the 1930s, we struggled through a global economic crisis, characterized by an open conflict between the economic and financial realities of that time and the dominant classical economic science, which was not wrong per se but rather imperfect, unfinished business. Two generations later, in 2001, we are again faced with a global crisis characterized by a similar conflict between the actual economic and financial realities and the now dominant modern school of Keynesian macroeconomics, which per se is not wrong in the short run. However, when used in the long run beyond its limit of normal efficiency, it may create, as it did, new, more complicated problems. Keynes called this “secular stagnation” and thought that his theory and policies would solve it, but now we see that it did not! It is enough to mention that the monetary policy of the USA has been changed ten times during ten months in 2001, yet the economy has not changed its course. Recently the National Bureau of Economic Research in the USA has announced that a recession had already begun in March, 2001 (see Boston Globe, 2001). In view of these conditions, it is legitimate to raise the question that something is deficient, not in order, in the House of Economics. Indeed, almost the whole of the twentieth century was dominated by a Great Methodological Argument similar to that in the physical sciences. It was, and still is, an open conflict in the sense that the results of modern macroeconomics are viewed as being contradictory to classical economics. In other words, the final results of macroeconomics are considered to be a better substitute for the results given by classical economics. The position of modern, Keynesian economics appears to be rather strong because of the fact that in the physical sciences – speaking methodologically – there is a similar situation. Consequently, we are dealing here with a crisis in methodology and in logic, “the queen of all sciences”, as John Stuart Mill called it. Kurt Go¨del (1931) gave a signal that something was not in order in the house of modern, symbolic, mathematic logic as presented in Principia Mathematica (Whitehead and Russell, 1910). Go¨del, by formulating his now famous

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incompleteness-proof, actually did not solve anything from the substance of the argument. He only showed beyond doubt that modern formalist logic in application leads nowhere but to a dead end, to an impasse in which obviously we find ourselves today, not only in economics but in physical, natural sciences as well. Go¨del did not have the concept of the orientation table as applied also to logic, and, therefore, he provided only the proof that we are unable to confirm or to negate propositions of the Principia Mathematica type. He lacked the tools to see that his contribution actually was valid only for modern, formalist logic of truth-form but not classical logic of truth-content or any new logic of the future, which includes both truth-form and truth-content as a synthesis. When we finally developed and applied a new, more comprehensive type of logic, actually a sui generis synthesis between classical and modern logic which we called “Integrated Logic”, then the picture of the argument changed radically. The results of modern economics as well as modern physics were not contradictory but rather complementary to their classical sisters. By one stroke in logic and methodology, the Great Methodological Argument of the twentieth century has been solved, and we hope forever. But a warning is necessary. The wise Schumpeter used to say: “It is hard enough to discover a new concept or theorem, but sometimes it is even more difficult to convince the peers in the field that indeed you have discovered something new and valuable.” More detail about “Integrated Logic” can be found in: Rugina, (1998, 2000). Other problems in economics appear in a similar situation when the new concept of “Integrated Logic” is applied. A logical place where we can find an original source of new ideas and interpretations is in the lectures delivered by recipients of the Nobel Prize. This is why we decided to write “Prolegomena 4: An Open Dialogue with Nobel Laureates in Economics”, with the scope: the quest for more logical and empirical precision (evidence) in the present and future development of the economic science. In point of evaluation during the dialogue, we chose a composite standard formed of 25 elements, i.e. concepts and theorems, where we thought there is a problem to be solved, partially or totally. The full clarification of the composite standard is provided in a rather long Introduction, entitled “New contributions to the science of economics”. Indeed, the composite standard is long because of the complex nature of the subject matter involved. With regard to the Introduction, we may recall the wise advice of Lord Keynes, which is as valid in 2002 as it was in 1936: The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our mind (Keynes, 1936).

We cannot close this Preface without expressing our thanks to Professor Barrie 0. Pettman, Baron of Bombie, Director of the International Institute of Social

Economics, and Lady Maureen of Bombie, who understood and supported new ideas and new methods of how to solve old and new problems. Not less significant are the thanks to my life partner, Irene Aurelia Rugina, for her continuous interests, observations and editorial help in the preparation of this Prolegomena 4. References Boston Globe (2001), 27 November. Keynes, J.M. (1936), “The Preface”, The General Theory of Employment, Interest and Money, Macmillan and Co., London. Rugina, A. (1998), “The quest for independence of principia logica”, International Journal of Social Economics, Vol. 25 No. 5, Prolegomena 1: To Any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), Ch. 7. Rugina, A. (2000), “Principia methodologica: a bridge from economics to all other natural sciences”, International Journal of Social Economics, Vol. 27 No. 5/6, Prolegomena 2: To Any Future Study in Integrated Logic and a More Comprehencive Methodology for the Unification of All Sciences, Natural and Social. An Orientation Table for Economics and Any Other Science, and Its Application in Theory and Practice (monograph), Ch. 2. Whitehead, A.N. and Russell, B. (1910), Principia Mathematica, Cambridge University Press, Cambridge.

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Dedicated in honor of Henri Guitton (1904-1992) Former Member of L’Institute de France and President of the Academie des Sciences Morales et Politiques, Paris, France Sir Dennis Robertson (England), Jacques Rueff (France), Luigi Einaudi (Italy), Nobel Laureates Friedrich A. Hayek (USA), Jan Tinbergen (The Netherlands), Wassily Leontief (USA),Tullio Bagiotti, Editor of Rivista Internazionale di Scienze Economiche e Commerciali, Napoli, and Rene´ Courtin, Editor of Revue d’Economie Politique, Paris, all warned and encouraged me that I should provide a finished product of the planned Prolegomena. The one, however, who envisioned and made public the third revolution in economic thinking based on the new research program of a simultaneous equilibrium versus disequilibrium approach and the concept of the Orientation Table for Economics, was Professor Henri Guitton, Sorbonne, Paris, who announced in his last book, Le Sens de la Dure´ (1985, pp. 196-9) “La troisie`me revolution selon Rugina” (“The third revolution according to Rugina”). Unfortunately, none of the above-mentioned illustrious economists lived to see the first version of the finished product of the trilogy of Prolegomenas (1998, 2000 and 2001) which took just about half a century (1950-2000) of research and continuous observation of the USA and world economy.

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Prolegomena 4: An Open Dialogue with Nobel Laureates in Economics Anghel N. Rugina Keywords Economics, Economic theory, Social economics A long Introduction provides a composite methodological standard of 25 elements (concepts, theorems and basic relationships) which actually represent in analysis a system of general stable equilibrium in economics and other social sciences. In practice, the same composite standard refers to a possible regime of a free, just and stable economy and society. This double composite scientific objective standard was used to examine the content of the Memorial Lectures presented by nine Laureates who received the Nobel Prize in Economics from 1969 to 1974. Specifically, the purpose was to see how much these lectures have contributed to the clarification and the solution of the major problems of our time.

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Introduction New contributions to the science of economics: a new research program of a simultaneous equilibrium versus disequilibrium approach and some basic results

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On ne doit pas e´crire, que pour faire connaıˆtre la ve´rite´. (One must not write, except for making known the truth) (Nicolas de Malebranche, 16381715).

There is a mountain of all sorts of information about human economic activity and systems of economic thought and yet, we are far from the optimum point of knowledge, that is of being able to provide a reasonable answer beyond any doubt – as should be in science – to the very simple but basic problems of what determines the rate of wages, rent, interest, profit, taxation and foreign exchange, all consistent with each other, implicit prices, in a clearly identified model or system (analytically) or in a given regime (in practice). It is this fundamental question which preoccupied this author for half a century (1950-2000) of incessant research and observation on US soil, being an emigrant from Romania and without any financial help of any foundation or government subsidy. Here follows the final results in a capsule form for the judgment of the profession.

1. The concept of “integrated logic” The whole research program is based on a new “integrated logic” in science, which is nothing else but a sui generis synthesis between classical logic, as inherited from the premodern era of Immanuel Kant (1724-1804), G.W. Friedrich Hegel (1770-1831) and John Stuart Mill (1806-1873), among others going back to Aristotle (384-322BC ) where the major concern was about the content of propositions.To this we add the modern logic inherited in particular from Bertrand Russell (1872-1970) and Ludwig Wittgenstein (1889-1951), including Go¨dell’s (1931) “Proof on formally undecided propositions of Principia Mathematica and related systems”, that is modern, formalist or nominalist logic where total attention is concentrated on the form of propositions. The new integrated logic pays equal attention to both form and content of propositions (for more detail see Rugina (1998, Ch. 7)

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An orientation table for logic was developed, which in a way is completing Wittgenstein’s Truth-functions Schema, with the full meaning of the integrated logic. This logical concept of the orientation table is applicable to all sciences. The new contribution in logic and other new results in Prolegomena 1, are related, in particular, to what was not said by great thinkers of the past, both in social and natural sciences. But this “what was not said” has become now absolutely necessary in order to be able to solve, in a more meaningful and more complete way, the major problems of our time, both in theory and practice. 2. Quinta Methodica: a more comprehensive methodology and truth in the abstract versus truth in the concrete Adjacent to the integrated logic, a more comprehensive methodology has been added. It is called Quinta Methodica. According to Quinta Methodica, all possible problems in economics and other social disciplines, including natural sciences, can be concentrated in five categories of problems, exhaustive in the Kantian sense as follows: (1) History, statistics concerned with discovery and description of facts, actual realities of today and yesterday, going back in history as far as we can find records. (2) Theory (analysis) with the object of clarification of empirical realities: . Why are they as they are? . Can they be different? . If the answer is yes, how different can they be? . If the answer is no, then why not? The concept of theory sometimes is misinterpreted. The object of study in theory is the reality, but conceived on a higher plateau (abstract reasoning). The analytical concept of reality is dual: on the one hand, we have actual, existing, concrete reality and on the other hand, potential, possible, reasonable, future reality. This leads to a distinction between truth in the concrete (historical) and truth in the abstract (analytical) which is about the same thing as practical rationality and pure rationality, in the sense of Kant. The concept of truth in the abstract is larger than truth in the concrete. Thus truth in the concrete, logically represents a deviation from truth in the abstract. (3) Ethics or morality, conceived as a part of science is concerned with the quest of what is true or right versus what is false or wrong as related to the ultimate values for homo sapiens, la condition humaine or humanity, in its full meaning. Ethical knowledge, officially, is not accepted under the same roof of science, because – in our view – of misinterpretation of a theorem called

“value free science,”, formulated in 1904 by Max Weber which says: “There is no place in science for values and value judgments”. The misinterpretation consists in the lack of a clear distinction between personal, subjective, and social, objective values and value judgments in science. In a long article: “The problem of values and value judgments in science and a positive solution, Max Weber and Ludwig Wittgenstein revisited” (Rugina, 1984) included in Prolegomena 1 (Rugina, 1998, Ch. 8), we hope that this problem has been solved. The Max Weber theorem, has been reformulated as follows: . there is no place for personal, subjective values and value judgments in science because there is no way to present a logical proof; and . there is and must be a place in science for social, objective values and value judgments with the requirement that a logical and/or empirical proof be provided. (4) Practice, or matters of policy, concerned with practical solutions for given problems, following directions given by analytical and/or ethical principles. (5) Doctrines or history of thought is related to clarification and development of concepts, theorems and reasoning, in terms of contributions brought by individuals or schools of thought. 3. The law of logical consistency in scientific arguments From the Quinta Methodica, we can formulate the law of logical consistency in scientific arguments which says: whenever a concept, theorem or reasoning begins to be doubted or questioned then, the counterargument has to be of the same nature. For instance, if a theorem is in doubt or contested, then the counter-argument must be of the same nature, that is, theoretic. Otherwise the argument becomes an insoluble antinomy. As a classic example we have the Methodenstreit in the German economic school which has never been properly and fully solved because historical knowledge – defended by G. Schmoller from the School of Berlin – was used to question or negate the priority of analytical (theoretical) knowledge – defended by Carl Menger from the School of Vienna. Another good example was the argument between Thomas R. Malthus who also used a historical observation of the existence of the phenomenon “glut in the markets” to question a theorem formulated by J.B. Say which says that “supply creates its own demand”. This argument also was never solved being an antinomy, the way it was used, that is, breaking the law of logical consistency in scientific arguments. Nevertheless, Malthus was right with his observation which was correct in point of history of the business cycle in the capitalist regime. Jean B. Say also

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was correct in point of theory, that when all conditions of general stable equilibrium are fulfilled then, both in analysis and practice, it is true that “supply creates its own demand” (see Rugina, 1998, Ch. 2, pp. 84-5).

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4. The universal hypothesis of duality As a matter of specific object of study, the basis of the new research program begins with the universal hypothesis of duality which says: The physical universe where we are living as well as human societies and economies are composed of stable (equilibrium) and unstable (disequilibrium) elements, forces, values, behavior, arranged in diverse proportions.

This we consider to be an axiom which can be tested, both analytically and empirically, and therefore represents a self-evident truth which needs no further proof. In microanalysis, we can use the theory of ideal types, which commonly is attributed to Max Weber but in reality it was clearly stated by Walras (1954) in Elements of Pure Economics. Here is the voice of Walras (1954, p. 71): From real-type concepts, the (physico-mathematical) sciences abstract ideal-type concepts which they define, and then on the basis of these definitions they construct a priori the whole framework of their theorems and proofs. After that they go back to experience not to confirm but to apply their conclusions. . . . Following this same procedure, the pure theory of economics ought to take over from experience certain type concepts, like those of exchange, supply, demand, market, capital, income, productive services and products. From these realtype concepts the pure science of economics should then abstract and define ideal-type concepts in terms of which it carries on its reasoning. The return to reality should not take place until the science is completed and then only with a view to practical application.

Walras is describing above very clearly the procedure we follow in analysis from concrete, empirical to abstract, ideal reality. In any case, in microanalysis every single concept can be identified in its stable (equilibrium) and unstable (disequilibrium) aspect. In macro-analysis, the problem of how to acquire a more precise knowledge becomes more complicated but not impossible. A new, very simple but most powerful methodological instrument – the orientation table – shown in Table I will help us to disentangle this more complicated problem of macroanalysis. 5. The problem of continuity in science and the initial fathers of the universal hypothesis of duality We did not invent from the blue sky the universal hypothesis of duality nor the first pillar of the new research program. We found them clearly identified both in the physical and social sciences, respectively economics. Unfortunately they were not further explored to reach the higher plateau of the orientation table. What we have done is to bring to light these old but powerful concepts and develop a sui generis synthesis between the classical and modern school of thought. It took half a century of incessant work and observation, but we hope that it was not in vain, in the sense that it opened a door to see that the great

Introduction

Models M1 =

M2 =

M3 =

M4 =

M5 =

M6 =

M7 =

A system of 100 percent (Co + Nu) + R1 This is the Walrasian model of general stable equilibrium at its limit of perfection and in its more complete form. It is immune to anomalies, relativity and uncertainty. This is the “economics of pure and perfect competition” (certainty) A system of 95 percent (Co + Nu) + 5 percent (Mo + anti-Nu) + R2 This approximates to the model that Quesnay, Adam Smith and other classical thinkers up to Marshall included, have used in their analysis. It may be called the “economics of classical laws” with minor deviations. This is the area of weak minor disequilibria. A system of 65 percent (Co + Nu) + 35 percent (Mo + anti-Nu) + R3 This is a mixed economy where equilibrium elements still prevail but relativity begins to play a significant role. It belongs to the “economics of simple relativity” or relativity I. This is the area of strong minor disequilibria. A system of 50 percent (Co + Nu) + 50 percent (Mo + anti-Nu) + R4 This particular combination represents a mixed economy of static nature and hidden stagnation. It is the true model that Keynes improperly called “equilibrium with unemployment”. Actually it is the domain of the economics of unstable equilibrium. In his dynamic analysis Keynes left out the limit 50:50 and dealt with the “economics of relativity” in general terms Modern capitalism moved up and down around Model M4 or between Models M3 and M5 and thus Keynes observation of “involuntary unemployment” was correct, both empirically and analytically This is the area of weak major disequilibria A system of 35 percent (Co + Nu) + 65 percent (Mo + anti-Nu) + R5 This is a mixed economy where disequilibrium elements prevail. Below this line the business cycle becomes unmanageable. It is the domain of what may be called the “economics of compound relativity II” This is the area of strong major disequilibria A system of 5 percent (Co + Nu) + 95 percent (Mo + anti-Nu) + R6 This is the model of a decaying mixed capitalist economy in a country where a Marxist or fascist revolution succeeded in overthrowing the old system and instituted a brand new social or fascist regime. It is the domain of the “economics of compound relativity III” or more explicitly, the “economics of a centrally planned and controlled economy and society” A system of 100 percent (Mo + and Nu) + R7 This is the limiting Marxian model of total revolution, disequilibrium, and uncertainty which requires a government of absolute powers to hold the system together. It is the domain of the “economics of pure and perfect state monopoly” (uncertainty)

Notes: Budding blocks necessary to construct the Table: Co¼ pure competition; Nu ¼ numeraire-currency; Mo ¼ pure monopoly; anti-Nu ¼ anti-numeraire-currency (papermoney and monetized bankcredit); R1, R2, R3 . . . R7 ¼ the institutional and legal framework consistent with each model

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Table I. An orientation table for economics

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conflict or argument of the twentieth century between classical and modern science was not only unproductive, but also unnecessary and now has become a stumbling block in the further real progress in both physical and social sciences, respectively economics. Of course, we are aware of the problem raised here and the complexities involved, both in the material world (vested interests in national and international finance) and not less difficult in the world of ideas where certain views have become a dogma and large amounts of funds provided by various foundations are at stake. But the fact that the major problems of our time, both in physical and social sciences are not and cannot be solved by the use of old concepts and reasoning, cannot go on indefinitely. A third revolution to bring peace and cooperation between classical and modern science is absolutely necessary. The rest we shall leave for the judgment of history. Let us hear first two voices in the physical sciences: Sir Isaac Newton (16421727) and Albert Einstein (1879-1955). Newton (1686, p. xviii) wrote in his Principia: . . . For I am induced by many reasons to suspect that they (the rest of the phenomena of Nature, besides celestial bodies) may well depend upon certain forces by which the particles of bodies, by some causes hitherto unknown, are mutually impelled towards one another, and cohere in regular figures, or are repelled and recede from one another.

What are the particles which “are mutually impelled towards one another and cohere in regular figures” but the 92 stable, equilibrium elements in the Mendeleyev Table (1869) based on gravitational fields, as expressed in modern terminology? What are the particles which “are repelled and recede from one another” but the transuranic elements whose atomic number exceeds 92 and which are inherently unstable, disequilibrium elements, associated with electromagnetic fields, in modern terminology? (See Bullock and Stallybrass, 1977, p. 42.) With what we know today, the distinction between stable (equilibrium) and unstable (disequilibrium) elements is clear, but when Newton did his reasoning, the technical tools necessary to prove the existence of particles of unstable, disequilibrium elements were not available. Thus Newton was justified prima facie to work and consider only stable elements. Consequently, his theory of universal gravity is valid in the year 2000AD as much as it was valid in 1686, only that in view of current information we should add the qualification: “only for stable matter”, as defined by Newton. But even if Newton were sure empirically of the existence of unstable matter – as we are sure today – still, logically there was no other way but to separate the two different categories of elements in order to be able to develop his natural law of universal gravity. (For more detail see Rugina (2000, Ch. 2).) Here is also the voice of Albert Einstein (1879-1955) expressed in his book, Out of My Later Years (Einstein, 1950, pp. 102-3):

But it can not be claimed that those parts of the general relativity theory which can today be regarded as final have furnished physics with a complete and satisfactory foundation. In the first place, the total field appears in it to be composed of two logically (and we add also empirically) unconnected parts, the gravitational (we add stable equilibrium) and the electromagnetic (we add unstable disequilibrium elements). And in the second place, this theory, like the earlier field theories, has not up till now supplied an explanation of the atomistic structure of matter. This failure has probably some connection with the fact that so far it has contributed nothing to the understanding of quantum phenomena.

Einstein, toward the end of his life, in his reasoning came very close to confirming the veracity of Newton’s observation about the dual nature of the physical universe, this time not by pure reason as in 1686 (Newton), but by experimentation with transuranic, unstable elements. He was faced by 1950 with the impossibility theorem in practice to identify the real, dual atomistic structure of matter: gravitational versus electromagnetic fields, “two unconnected parts”, as he called them. After all, he shared all his life a monastic philosophy in science. It is enough to remember his famous aphorism: “God did not play dice!” used in his never settled argument with Niels Bohr. In economics, even though not so dramatic scientifically as in physical sciences, the initial fathers of the universal hypothesis of duality were Francois Quesnay (1694-1774) with the French school of the Physiocrats and Adam Smith (1723-1790). When Quesnay and his disciples made a distinction between “droit naturel” (natural law) and “droit positif” (positive law), they in fact perceived the conceptual distinction between stable equilibrium elements and forces (as in the physical universe) and unstable, disequilibrium elements, values, institutions in human societies and economies of that time (how about today?) with a strong hint that the latter should be brought, as close as humanly possible, to the former. That is what they meant by “natural order” or a “government of nature”. Quesnay, in addition to individual freedom in economic life, specifically added “le bon prix” (the good price) which was the equivalent of stable equilibrium price even though their concept of general equilibrium, as formulated later by Walras and completed by this author, was still in a rudimentary form. The influence of the Newtonian philosophy is visible in the aphorism of Gournay: “Laissez faire, laissez passer, le monde va de lui-meˆme” (see Quesnay (1965) and Weulersee in Sills (1967, Vols 5 and 13)). Smith (1937) in his treatise An Inquiry into the Nature and Causes of the Wealth of Nations wrote: The distinction between the real and the nominal price of commodities and labour, is not a matter of mere speculation, but may sometimes be of considerable use in practice. The same real price is always of the same value; but on the account of the variations in the value of gold and silver, the same nominal price is sometimes of very different values (Smith, 1937, p. 33). But though the market price of every particular commodity is in this manner continually gravitating towards the natural price, yet sometimes particular accidents, sometimes natural causes, and sometimes particular regulations of police, may, in many commodities, keep up the market price, for a long time together, a good deal above the natural price. (Smith, 1937, p. 59).

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What Smith, in the above description, called real or natural prices, truly represent stable equilibrium prices but, with the knowledge we have today, we should add the further clarification, namely only when in a model (analytically) or in a political regime where all the conditions of general stable equilibrium are fulfilled. Nominal, market prices in Smith represent disequilibrium prices. Later Karl Marx used the same technique of equilibrium versus disequilibrium when he distinguished between “money that is money only” and “money that becomes capital”, and also between “simple circulation”, and the “inverted order of circulation”. Indeed, in this way Marx identified the equilibrium versus disequilibrium form of money and exchange of commodities. But this analysis went only up to Chapter IV and after that follows only his interpretation of disequilibrium. When even later Knut Wicksell introduced the distinction between real, natural and nominal, official rate of interest he could have said simply between the stable equilibrium and disequilibrium rate of interest (Wicksell, 1965). Finally when Lord Keynes popularized the application of real versus money wages, he too carried in the back of his mind the distinction between equilibrium and disequilibrium wage rates. All these examples cannot be simple coincidences. In fact, they are matters of principle, that is, of fundamental importance for monetary and financial analysis. These samples show beyond doubt that the universal hypothesis of duality was known and used partially from the inception of economics as a modern science. What previous thinkers did not do was to explore further consequences derived from the duality of equilibrium versus disequilibrium elements and forces in the physical universe and values, behavior and institutions in human societies and economies. What we did was to use the new integrated logic, provide a clearer and stronger formulation of the old concepts and dig out further consequences which form the body proper of the new research program as applied in economics. In one sentence, what follows refers to what great thinkers of the past and present did not say and yet, this has become absolutely necessary to be said in order to be able to solve adequately and fully – as far as humanly possible – the major problems of our time, both in theory and practice. 6. The general possibility theorem The general possibility theorem says: If we accept the universal hypothesis of duality as an indisputable axiom then, logically and empirically, there is an infinitely large number of possible cases, combinations, models or systems, a situation which is forcing us to develop a logical instrument that is helping us to avoid the sign of infinity with which we cannot work.

This logical and methodological instrument is the concept of the orientation table.

7. The concept of the orientation table in economics The orientation table is nothing but a methodological map of all possible models, “possibilities” – as Einstein called them – systems, which for study purposes are limited to seven basic models, leaving room for the rest of all other possible cases. Our orientation table indeed fulfills the dream of Albert Einstein who saw the necessity and importance of such a methodological instrument in physics. And, of course, our table can easily be constructed for physics as well as any other science (see Rugina, 2000, Ch. 2) Here is the voice of Einstein (1950, p. 100) : In order to construct a theory, it is not enough to have a clear conception of the goal. One must also have a formal point of view which will sufficiently restrict the unlimited variety of possibilities. So far this has not been found; accordingly the field theory has not succeeded in furnishing a foundation for the whole of physics.

The orientation table is a very simple, but most powerful, instrument which can help to solve many problems of the past and present including the great argument of the twentieth century: modern vs classical economics. A sample of the orientation table in economics can be seen in Table I. 8. The universal law of the natural parameter (NaPa) The universal law of the natural parameter (NaPa) says: Any system, composed of many parts, in the physical universe or human societies and economies, in order to reach and maintain a position of stable equilibrium, that is, stabilityfrom-within the system, must have a very strong (at the limit 100 percent) natural parameter, i.e. a constant (more or less perfect) axis or center of weight, which in conjunction with a suitable force and adequate environment (space-time or institutional and legal framework) holds the whole system together.

The natural parameter is not just an assumed “constant”, as in pure mathematics, but rather a concrete, really constant magnitude, institution or social value, which in real life may not be at the limit of perfection (100 percent) but close to it, in human societies as much as humanly possible and in the physical universe, as much as the Good Lord or the initial Creator wanted. This is true not only for human societies and economies, but also for Mother Nature. As an example for the physical universe, we have the anomaly of the planet Mercury, even though the solar system has not been disturbed, existing together with the anomaly in question for hundreds of millions of years. This confirms the scientific view that in our physical universe, stable equilibrium elements and forces must prevail to a large extent over the unstable, disequilibrium ones, over a long time if not from the beginning, and for always. For a national economy and a truly free, just and stable society, the natural parameter is the numeraire or 100 percent backed commodity money in gold, silver or any other suitable commodity, as defined by Walras, as an indispensable condition for the law of general stable equilibrium. In addition to the Walrasian two basic conditions (pure competition and numeraire-currency)

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we added the third basic element which was missing, namely an institutional and legal framework consistent with the first two. We called the third indispensable element (both analytically and practically) factor “R” (from right). The numeraire-currency has to fulfill a double function: (1) To provide a strong axis, capable of holding together a dynamic economic system in action. (2) To serve as a shock-absorber in reducing the intensity of possible, sudden changes and deviations – small, medium or large – converting them into simple and finite fluctuations. It would be, therefore, a grave methodological mishap if one would use the NaPa of numeraire as a simple assumed mathematical constant (equal 1) which, for all practical reasons, does not change the rest of reasoning in a problem. This is probably one of the reasons why many mathematical economists later on, erroneously found faults with the Walrasian model of reasoning. On the other hand, it is true that Walras himself did not explicitly indicate the second function as a shock-absorber.

9. The universal law of consistency within a system The universal law of consistency within a system says: No force in any system, in Nature as well as in human societies, can act in such a regular way as to produce and maintain over time a position of stable equilibrium (stability from within the system) without the permanent existence of a suitable milieu or space-time framework. In human societies and economies we have the requirement of an adequate institutional and legal framework, consistent with the NaPa of numeraire and pure competition.

This fundamental third factor, identified on the orientation table as: R1, R2, R3 . . . R7 is missing from the original Walrasian law of general equilibrium. On the other hand, the NaPa of Nu combined with competition could never function by themselves properly, especially not where Nu-currency is replaced by paper money and monetized bank credit. In other words, the third factor “R” is absolutely required for a normal and socially beneficial function of a system of free markets. Here lies the explanation of the economic and financial drama of Eastern European countries, including Romania after 1990. Foreign economic experts consulted by domestic professional economists recommended so-called free markets with a “shock therapy” which was applied combined with drastic austerity policies. The end results were a patented failure. How right he was, when a Polish sociologist called this experiment “wild capitalistic markets”. This happened at a time when national economies were rather weak and people were promised and expected by the influx of “Western capitalism and Democracy”, a better life than under the communist regime. What an illusion!

In the spirit of the scientific heritage left by Nobel Laureates Gunnar Myrdal and Friedrich A. Hayek it is proper here to recall the voice of Smith who, more than 200 years ago warned us: The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it (Smith, 1937, p. 423).

There is, however, something to be added as a necessary qualification, in view of what we know today, i.e. that the spirit of this quotation is true and valid – in analysis as well as in practice – but only in a system of really free (noncapitalistic) markets where all the conditions for general stable equilibrium are fulfilled ab initio. And Adam Smith, in his time, could not provide this qualification but he identified the true spirit. Thus his statement is not, and cannot be, refuted but rather needs to be only completed, following the law of logical consistency in scientific arguments. 10. The natural (non-Keynesian) law of full employment The natural (non-Keynesian) law of full employment says: In a system of general stable equilibrium, the aggregate volume or real investment, output and employment can never shrink in a haphazardly way (as under modern mixed capitalism or mixed socialist democracy) but rather will adjust itself to the existing conditions in the economy and society, specifically to the actual situation between effective supply and demand, without the phenomenon of the business cycle.

This law functions in conjunction with the second part of the numerairecurrency behavior. We must be aware of the fact that in a system of complete stable equilibrium, as conceived here, there is a double circular flow of real investment, output, income and employment that moves continuously back and forth between the non-monetary (real) and the monetary sector of the economy. This is possible because numeraire-currency is issued on the basis of a special commodity (gold, silver or any other suitable commodity) and in order to produce it, full cooperation of the same factors (nature, labor, capital, management and government) is required. In the course of economic activity, at times it may be more profitable to produce any other commodity or service, whereas at other times it may be more beneficial to invest in the production of the numeraire-commodity. Yet, the final decision in a system of general equilibrium will not be manipulated by the government, central bank or large corporations (national and international) but rather it will result from free, voluntary everyday economic activity. In other words, it will be the result of really free and fair competition, each economic agent, playing the role of consumer or producer, and trying to achieve the highest possible degree of utility or efficiency for his or her own benefit,

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without realizing that simultaneously they cooperate to increase the gross and net social product. Without any exaggeration, this is the unique case when the dream about the “invisible hand” of Adam Smith from theory becomes reality. When so many experts in economics nowadays have nothing to offer but the advice that government is the key to our problems, it is worthwhile to recall again the wise thoughts by the first master of economic analysis, Adam Smith. Here is his voice: By preferring the support of domestic to that of foreign industry he, (the unknown citizen and business man) intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain and he is in this, as in many other cases led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good (Adam Smith, 1937, p. 423, emphasis is ours).

We have to repeat here the previous qualification that these wise and ever actual thoughts are true and valid only in a system of general stable equilibrium, which Adam Smith could not provide in his time. It is not intended as a joke to suggest that one year the Nobel Foundation may grant a Nobel prize post-mortem in the name of Adam Smith to encourage and support those young or old economists who are laboring to forge, for the sake of truth, new and better economic, monetary, financial, social and political ideas: concepts, theorems, interpretation and practical application. And it would not be a wrong recommendation that those who already received a Nobel prize and are alive should join such a project and donate for the same purpose a voluntary contribution. Finally, the application of the natural law of full employment, in this sense, can fulfill also the dream of Lord Keynes for full employment, this time at no extra cost with expensive (and still not sure) macro monetary and fiscal policies, simply through a normal functioning of a system of general stable equilibrium. 11. Pure theory versus empirical reality According to the universal hypothesis of duality, the nature of man and human societies is dual and therefore we must be aware of the requirement that, in real life, in order to obtain all the fruits promised by a system of general stable equilibrium, beforehand we have to undertake all the necessary reforms to convert the actual, existing, mixed inconsistent, disequilibrium realities, as close as humanly possible, to the Walrasian law of general equilibrium in its more complete form. However, no matter how rigorous and conscientious are the reforms and no matter how well we shall succeed in educating the people that such a most perfect system is in their interest and not at more but definitely less taxation

than today, there will still remain a small residual of imperfection. It is the phenomenon of natural, special relativity as observed by Newton and also by Walras, which, however, is of such a small magnitude that for all practical reasons it can be ignored. In any case, we have to be aware that with all our good will and effort during preparations and thereafter, we may never reach the limit of 100 percent stability, as indicated by model M1 in Table I. 12. The impossibility theorem in analysis From the orientation table, we can formulate the impossibility theorem in analysis, which says: It is impossible by definition to develop one single general, universal theory, capable to explain all possible systems, models or combinations, as Einstein attempted in physics unsuccessfully with his unified field theory, and Keynes in economics with his general theory of employment, interest and money, or what Nobel Laureate Paul A. Samuelson called “a general theory of economic theories” (Samuelson, 1983, p. xxvi).

Reason. Any general theory developed to include all possible models on the upper part of Table I would be logically refuted by its counterpart on the lower part and there is no way to avoid this antinomy, except by leaving out a part of the table. Very probably, Einstein (1950) saw this antinomy when in Out of My Later Years, as mentioned earlier, he expressed serious doubts that a unified field theory can unite gravitational and electromagnetic fields. The legitimate question emerges: “How can we justify or what is the explanation that such great thinkers like Einstein and Lord Keynes were so assured in using the term of ‘General Relativity Theory’ or ‘The General Theory of Employment, Interest and Money’?” We are leaving out for the moment Nobel laureate Paul A. Samuelson since he is alive and alone can tell us the origin of the attractive expression of “general theory of economic theories”. First of all, neither Einstein nor Lord Keynes had the concept of the orientation table. Perhaps, it is also necessary to indicate that our impossibility theorem in analysis has no connection with Nobel Laureate Kenneth Arrow’s Impossibility Theorem in political science which is formulated by using formal, modern nominalist logic, whereas ours is the result of application of the new integrated logic. Let us go back to Einstein, because he has priority in the use of the same methodological technique that we find in Keynes. If one would take the time, he or she could easily construct an orientation table for geometry by using the universal hypothesis of duality, in this case the Euclidean axiom: two parallel lines on a plane surface never meet. We can make this the equilibrium, stable type of geometry or using our terminology model M1 in geometry used successfully now and for 2,000 years before. Then, making use of the bipolar technique we can reverse model M1 and convert it into model M7 where the

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Euclidean axiom is totally negated and we have the formal paradox of antigeometry. In between M1 and M7, we can construct M2, M3, . . . M7 and the orientation table for geometry is completed. The specialist can attempt to find a place for Riemannian geometry where the surface is curved, but the curvature could be of various degrees, and with that in mind we can integrate those degrees in M2, M3, etc. What did Einstein invent or imagine in order to be able to land in the territory of general relativity? Let him say in his own words: The question of the “truth” of the individual geometrical propositions is thus reduced to one of the “truth” of the axioms. Now it has long been known that the last question is not only unanswerable by the method of geometry, but that it is in itself entirely without meaning. We cannot ask whether it is true that only one straight line goes through two points. We can only say that Euclidean geometry deals with things called “straight lines”, to each of which is ascribed the property of being uniquely determined by two points situated on it. The concept “true” does not tally with assertions of pure geometry, because by the word “true” we are eventually in the habit of designating always the correspondence with a real object; geometry, however, is not concerned with the relation of the ideas involved in it to objects of experience,but only with the logical connection of these ideas among themselves (Einstein, 1961, p. 2, our emphasis).

What can we say about this explanation from the horse’s mouth, as one might say? Of course, Einstein did not know the concept of the orientation table. He was not aware of the distinction between truth in the abstract as in model M1 and truth in the concrete as in the rest of other possible models, at least not when he wrote these lines. The orientation table, however, explains clearly what he did. In one sentence, Einstein left out model M1 and with this operation he was free in the territory of general relativity. On the other hand, he had no way to envision the vast area, more specifically a great ocean of possible minor disequilibria, on the upper part of the table versus another great and tumultuous ocean of possible major disequilibria (on the lower part of the table) plus in between another ocean of frozen calm waters in a neutral position of unstable equilibrium, or perhaps better said “stable disequilibrium” (a term not used in the profession) as in model M4, an organic, static model similar to most electromagnetic fields in our physical universe. He was correct with the special theory of relativity, which in itself is close to, if not the same as, the relativity theory clearly formulated in Newton but not mentioned at all in the literature of our days. With the general relativity theory, as formulated by Einstein, however, a difficult problem of strict methodology emerges, which cannot be taken here. A few more clarifications are required by the long quotation given above. Because Einstein missed a clear distinction between “truth in the abstract” and “truth in the concrete”, he failed to see that the Euclidean propositions were not in themselves “entirely without meaning”, but on the

contrary have full meaning simultaneously in pure reasoning (truth in the abstract) and practical reasoning (truth in the concrete). With the new integrated logic, scientifically one cannot be conceived without the other. This is what Einstein did not see when he wrote that in using the word “true we are eventually in the habit of designating always the correspondence with a real object”. His general theory is in need of some clarifications, not in the sense of negation, but rather to establish more stringent conditions for its proper and more precise validity. The great contribution of Einstein in pure reasoning lies in the logical and methodological discovery that if we change the framework or model of thinking then automatically the solution of the same problem also changes, one might say, becomes relative. However, the concept of relativity, scientifically cannot be perceived at its foundation (roots) without the knowledge of truth in the abstract, specifically model M1 of absolute truth, in the Newtonian sense. In other words, in historical and conceptual perspective, Newton is first and Einstein after, without any intention to diminish in any way the original contribution of Einstein. Let us look at how Lord Keynes proceeded when faced with a similar situation and dealing with the same problem of the necessity to feel free in the use of the term “general theory”. The answer is immediately available: Keynes used absolutely the same technique of pushing aside model M1 (Walras) in pure theory (the equivalent of Euclid and Newton) and model M2 (Adam Smith, Alfred Marshall and other classics) in the concrete, and after that he felt comfortable with his model and mode of reasoning, which at the limit was model M4 or a regime of “unstable equilibrium with involuntary unemployment”, properly defined. Here are Keynes’ precise words: I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject . . . I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium [our emphasis] Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to facts of experience (Keynes, 1936, p. 3).

There is not much to be said at first glance. Keynes is refuting the classical theory of model M1 and M2, in much sharper language than Einstein did with the Euclidean geometry. Since Keynes too did not have the concept of the orientation table, he could not envision how far away his model of thinking was located on a map of all other possible systems. His rather sharp remarks about the classics, including his own teacher Alfred Marshall, whose name was mentioned on the same page, are surely untenable and not justified. His model

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of reasoning, that is, M4 (at the limit) compared with the truly classical ones, respectively M1 and M2, is bent close to 90 degrees. Consequently, according with the law of logical consistency in scientific arguments, which he did not know, are untenable by any scientific standards. Again, this does not mean that the contribution of Keynes, like that of Einstein, was not extraordinary by the rapid influence of changing the economic thinking of his time and after, all over the world! It does not mean to diminish his merit in saving the Western world from a potential Marxist revolution during the Great Depression, well fomented by some European radicals who immigrated to the USA in the 1920s and in particular because no other prominent economist, at that time, offered a positive solution to the ravaging financial and economic crisis. One story circulated at that time that Keynes was at a public gathering and one of his former teachers by the name of A.C. Pigou asked him informally: “Why are you so impatient? There were other economic crises in the past but they went away by themselves. This one will follow the same course”. After a split-second reflection Keynes retorted: “You mean to wait for the long run?” Pigou made a false step by answering: “Yes, why not?” Keynes, in turn, with his specific verve, completed the dialogue: “In the long run we are all dead! What’s the use to argue?” This conversation shows the spirit of the time in the profession which, due to Keynes and his followers, soon would change radically. In retrospect, Keynes as a scientist has fulfilled his duty by telling the truth as he saw fit, as all scientists do. However, the rising generation of economists in the 1930s and 1940s, after they received the new Keynesian message, failed to fulfill their duty, that is to ask the master certain questions about the interpretation and validity of the new theory, especially during and after the mini-crisis of 1938. During those tumultuous times, the avalanche of public spending in the preparations for war mobilization due to Hitler’s provocation of the Second World War, the mini-crisis was hidden and long forgotten. One single exception could be mentioned, but with no intention of criticizing Keynes, an extraordinary personality. It was another rising British economist, who later received the Nobel prize, Sir John R. Hicks, who wrote an article: “Mr Keynes and the classics, a suggested interpretation”, published in Econometrica (Hicks, 1937). Here Sir John used for the first time his famous IS-LM curves and came to the conclusion that the Keynesian General Theory actually represented the economics of depression. Being good friends, Hicks sent the manuscript of this article to Keynes for possible revision but Keynes answers only with customary thanks and no objection to his conclusion. We leave this issue to the reader for more reflection. There is one other correction which should not be missed, in terms of pure analysis. Keynes, in the given quotation, speaks of “possible positions of equilibrium” (in the plural), as if there were many. In truth to the orientation table there are only two positions of equilibrium: one in models M1 and M2 of

stable equilibrium with full employment and the other in model M4 of unstable equilibrium with involuntary unemployment. There is no other model where the term of “equilibrium” can be used in analytical terms. The great criticism of the Keynesian doctrine comes from the practical point of view and it will be discussed next.

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353 13. The impossibility theorem in practice This theorem is developed from a long (at least half a century) observation, filtered through pure analysis, since there is no other way scientifically to judge history. Thus a critical examination of the economic, monetary and financial history of modern times, and in particular the era of the twentieth century after the Great Depression, can, and does, provide sufficient background for the formulation of the impossibility theorem in practice, which says: In a mixed economy, composed of stable (equilibrium) and unstable (disequilibrium) elements, forces, practices, values, institutions and where paper money and monetized bank credit (anti-numeraire) are used on a large scale, it is impossible by definition to calculate and implement institutionally, at any given time, the stable equilibrium supply of monetary circulation, consistent with price stability (neither inflation nor deflation but only simple, one time limited adjustment-fluctuations) full employment (the dream of Keynes), a balanced budget, a balance of international payments in order and not less important, a most equitable distribution of national income, as far as humanly possible.

What are the primary causes which justify the impossibility theorem in practice? The answer can be concentrated in one single statement: paper money and monetized bank credit or anti-numeraire have an inherent instability that cannot be corrected properly and fully by any rational policies. The supposedly rational policies included in the now traditional macro monetary and fiscal policies that are defended on any occasion so vehemently, have become a sort of “social plague”, as we shall see immediately, and have little scientific basis. Lord Keynes knew about this inherent instability but he did not take it seriously because he relied on “good judgment” on the part of competent economists. But good judgment, under the given circumstances, is of no real help. Nor was Keynes challenged by the profession on this point when he was alive or thereafter, to our knowledge. His new macro-economics was so powerful in its conceptualization that nobody dared to challenge him. It was not his personal weakness as a scientist, but rather the weakness of the economic profession at that time. Here are the two most damaging reasons to the Keynesian macro monetary and fiscal policies: (1) There is no reliable, objective instrument or standard to determine the exact timing when a given monetary policy instituted by the Central Bank or a fiscal policy recommended by the Secretary of the Treasury or Parliament should enter into action, and for how long in order to solve the given problem fully and efficiently. In today’s practice, the timing is

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a simple guess (not a scientific precept), which in real life is either too early or too late, in both cases producing mixed expectations and confusion. The given problem, in reality is not solved but shifted into the future. (2) An even more complicated issue arises at the same time, that is, the quest for a reliable, objective instrument or standard to measure the exact proportion in a given monetary or fiscal policy. It is easy to say that given complaints by the people or the business and financial community, for instance, about an inflationary pressure, the official rate of interest, manipulated by the Central Bank following the advice provided by Keynesian experts, should be raised. But the real, insurmountable difficulty (in fact insoluble) lies in the clear question, by how much: 1/4, 1/2, 3/4, 1, 2, 3, etc. percent, in order to contain the given inflation fully? Until the two basic problems of “exact timing” and “exact proportion”, are solved properly and fully in practice, the traditional macro monetary and fiscal policies are condemned to be an inevitable failure – a scientific illusion – during a losing battle with the powerful impossibility theorem in practice. 14. The fundamental problem of economic calculation Most, if not all, of our economic, financial and social difficulties are associated with the problem of economic calculation of prices and incomes, actual costs and future expectations. More explicitly, it is the lack of an objective and reliable monetary standard necessary for a proper and accurate economic calculation. Every single day, all over the globe, practically every hour or minute of the day, millions upon hundreds of millions of producers and consumers, entrepreneurs, managers and executive officers, in the private as well as in the public sector, face and struggle with one and the same problem of how to obtain an accurate economic calculation, even though, under the present day monetary and financial system, none can obtain a really fair equilibrium price, income or cost of expected transactions. Some gain a differential profit which is illegitimate, and a large number suffer innocently a loss which is absolutely unjustified. A malfunctioning capitalist, socialist or any other political regime where paper money and monetized bank credit are used on a large scale, is the real culprit. In order to understand the importance and the full meaning of the fundamental problem of economic calculation, let us take a look for a moment at the same issue in other areas of measurement. For instance, in order to measure length, it was proposed and agreed by the French Academy of Sciences by the end of the eighteenth century (1794) that the meter, equal to 1/10,000,000th of the distance from the North Pole to the Equator, should be the standard unit for measuring length. This was used to build the metric system,

which thereafter was accepted by many countries throughout the world. In English-speaking lands, it is the foot, the terminal part of the leg of an average person below the ankle, again a concrete magnitude. In order to measure weight, the standard unit, again a concrete magnitude, was called the gram. In the same way, a concrete standard unit called a litre was selected as a standard unit to measure liquids. The pound, yard or gallon, in the Anglo-Saxon world are also concrete, real magnitudes used as standard units of measurement. The reader should just contemplate for a moment about what would or could happen today to modern civilization if all these standard units of measurement should change every day, every hour of the day. The answer is clear: definitely, we would encounter an economic and social chaos, turning humanity to a primitive way of life. A basic question can be raised: why should it be different with the measurement of prices, incomes, cost or foreign exchange values when, technically speaking, we are faced with the same problem that requires a concrete, constant, stable monetary standard that Walras called numerairecurrency, 100 per cent covered by a certain suitable commodity? For more than 2,000 years the answer to this question was: it is not, and cannot be, different. Yet, since 1930 and due to the influence of one single economist by the name of John Maynard Keynes, with his book, A Treatise on Money (Keynes, 1971) turned upside-down, or practically eliminated the real, natural, classical concept of money and monetary theory. Ch. I of this book begins with the statement: Money of account, namely that in which debts and prices and general purchasing power are expressed, is the primary concept of a theory of money (Keynes, 1971, p. 3).

“Money of account”, means nothing but paper money and monetized bank credit or anti-numeraire, i.e. an artificial, disequilibrium type of money. Why Keynes selected this type of money and why the economic profession did not object to this kind of scientific conversion at that time and thereafter, are subjects that require a special investigation. What is important here lies in the fact that by using “money of account”, or paper money and monetized bank credit, we are stuck, immobilized in an “invisible but real, enormous hole” being unable to solve properly and fully the fundamental problem of a fair and just economic calculation, in everyday life. There is no advantage serious enough to compensate even partially for the incredible economic and social harm produced by the use of “money of account”, alias paper money and monetized bank credit, for the large masses of the population. First of all there is the falsification of all prices, incomes and projections and expectations for the future economic activity. Then there is an expropriation of a fraction of the real income of the large masses of consumers, during the inflationary process of capital formation through the complex effect called

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“forced savings”, a euphemistic expression which actually represents “negative savings” without any due process of law and just compensation. The great Joseph A. Schumpeter, who besides being an eminent economist was also a former banker, described very well and clearly the phenomenon of “forced savings”, as far back as 1918, but the economic profession of today pays him no attention on this very important point which hints at the mixed nature of modern capitalism with two faces (see Schumpeter, 1956, p. 203-6). The self-evident conclusion is that a real, objective and reliable monetary standard in a civilized society must be 100 percent covered by a suitable commodity traded in international markets like gold, silver or any other similar commodity. There is no other substitute to solve more effectively and efficiently the fundamental problem of economic calculation, for the good of the people everywhere on the globe. 15. Two different concepts of stability According to the new research program, there are two different concepts of stability: (1) A stable equilibrium concept of stability which may be called “stabilityfrom-within the system”. (2) A disequilibrium or unstable equilibrium concept which may be called “stability-from-without the system”. Often, the confusion emerges from the fact that the two concepts actually are bipolar and yet they are used interchangeably without the suffix “from-within” and “from-without” or at least add the qualification that they belong to two entirely different economic worlds. Stability-from-within the system is associated with a regime of general stable equilibrium conditions as represented by model M1 (in pure analysis) and model M2 (in practice). It is that model where economic activity is free but, as a point of orderly civilized system, it is limited to its natural equilibrium borders, guided not by government officials or managers of large corporations. Instead, we have a number of self-regulating mechanisms embedded into the system which assure a normal functioning of the regime as a whole so that the end result displays an optimum use of available human and natural resources, at the point of full employment (the dream of Keynes) and maximum attainable personal and social welfare. There is, however, a second, disequilibrium concept of stability, so to say “man made” or “stability-from-without the system”. As a concept, speaking analytically, this may refer to a multitude of combinations or mixed systems, apart from models M1 and M2 on the orientation table. It may be connected with one of the cases in the vast ocean of possible disequilibria – minor on the upper part of the table and major on the lower part – including the strange combination of unstable equilibrium represented by model M4.

Once a socio-economic regime has lost or is lacking some basic self-regulating mechanism, that system is exposed to open and/or hidden cumulative or indeterminate, disequilibrium fluctuations, more or less severe, depending on whether the system is faced with a minor or major disequilibrium. This gives to the man-made stability an artificial character, a sort of permanent social instability. Economic policies always appear to be imposed on the people, even though the decisions in question may be initially wellintended. There is an anti-human element in the whole concept of man-made, disequilibrium or artificial stability-from-without the system; and that is why ordinary people, under such conditions, do not put their heart in their daily work, do not cooperate voluntarily. They do the work because it is required by the necessities of life, but otherwise they are resentful since they feel that something is not right in the system and consequently they do not care and express open or hidden opposition. This in turn becomes an additional source of problems for a government searching in vain for a long-term, macro stabilityfrom-without the system, which may never come and indeed on this road can never come. It is a deception for the people who otherwise like to be active and enjoy life but, under the given conditions, go through a struggle in futility. 16. Two different types of economic analysis and practical reasoning Few economists and, for that matter, sociologists and political scientists are aware of the spirit of our time, that is, the fact that we are using quite a different, not to say totally different, but inverted, kind of analysis and practical reasoning than our classical predecessors. There is less awareness, if at all, among economists of today that the classics used a specific method of approach and mode of reasoning – the forward thinking or ex ante type of analysis, quite different when compared with the modern, ex post, thinking-inreverse or inverted type of analysis. The classics conducted their reasoning by starting from the primary causes and followed the sequence of events until the final effects were reached that seemed to be free of any logical contradiction. In fact, classical logic required this type of analysis and reasoning. The final product, in terms of application to real life through individual economic agents and/or government decisionmaking process may be called cause-and-effect policies. Modern economists are using a different type of reasoning. By the time Keynes was doing his work, classic logic was already set aside and replaced by the new modern, formal, symbolic logic. Moreover, the main interest of economists even in the 1920s (Frank Knight and Piero Sraffa) and more and more in the 1930s, shifted from the study of equilibrium to the investigation of disequilibrium models and problems. In the latter type of models the law of causality and the natural sequence of events no longer hold explicity because

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economic activity under disequilibrium conditions is exposed to asymmetrical, cumulative and indeterminate fluctuations of the business cycle type. No doubt Keynes was troubled by methodological difficulties. The new formal logic advanced by his friend Ludwig Wittgenstein (whom he admired and held in high esteem) and the new anti-classic climate nurtured by the Great Depression helped him to initiate with other colleagues a new revolution of a different style ex post or effect-counter-effect type of policies. For instance, if or when there is unemployment, then government should create new jobs by deficit-spending or other special programs. If there is an inflationary pressure then deflationary policies are recommended. Whenever there are large deficits in the budgets then cuts in the public expenditure (austerity programs) or increase in taxation or both are recommended. There is no concern whatsoever that “unemployment”, “inflation”, “budget deficit”, “difficulties with the balance of payments” and innumerable other economic, financial and social problems are the result of certain causes, usually deficiencies in the institutional and legal framework – factor “R” on the orientation table which, if not removed, will produce the same ill effects (problems) again and again with no end in sight. It is this same blind belief in an artificial, man-made stability-from-without the system which plagued the entire twentieth century. The now traditional, macro monetary and fiscal policies, no matter how they are manipulated, cannot solve properly and fully the major problems of our time. With the way they are treated today, the real problems are not cured, but rather postponed and made even more complicated in the future. Furthermore, the sad story is that the same discredited macro monetary and fiscal policies are now applied practically on a global basis by the International Monetary Fund and the World Bank, in a desperate effort to establish and reinforce rigorous international financial controls. In reality, they are fighting a losing battle with the impossibility theorem in practice which exactly as at the national level may end with an open or hidden fiasco. Humanity may be exposed to, and punished with, a new form of international financial and economic dictatorship. This is a part of the economic and financial drama of our time, whose solution requires new, better ideas and interpretations. 17. The equation of unified knowledge as the ultimate solution Just as Einstein attempted to express the relationship of mass energy by a simple formula of e ¼ mc 2 in terms of his relativity theory, similarly, but going beyond relativity, we can identify the proper methodology for searching practical solutions to economic, financial and social problems of our time and tomorrow by the application of a clear and simple formula called the equation of Unified Knowledge as follows: S ¼ f ðA; PÞ. This equation says that a solution (S) to a practical problem in economics, finance and other social sciences is a function of two important elements: factor

“A”, i.e. the consideration of actual, existing realities in the given problem which, as a matter of fact, are in a state of disequilibrium since otherwise we have no problem; and factor “P”, that is, potential realities under the best possible conditions. And the latter cannot be anything else but those conditions which satisfy all the requirements of the model of general, stable equilibrium conditions, as formulated by Walras but in a more improved and complete form, as shown earlier. In other words, factor P stands for those pure and clean conditions when the problem in question does not exist. The solution (S) represents those practical means (reforms, policies or any other sort of intervention) which would carry over or move the existing disequilibrium realities, as fast as humanly possible and with a minimum of social disturbances to a final station, i.e. a complete realization of factor P in real life. The equation indeed stands for unified knowledge since factors S and A mirror empirical, practical knowledge, whereas factor P represents analytical, theoretical knowledge. In other words, we have here pure and practical reason (in the Kantian sense) united. Factor P fulfills also the function of a constant guidance or standard of orientation in order to avoid possible mistakes in our practical judgment when searching for the best possible solution to the given problem. The equation of unified knowledge is applicable not only in economics and other social sciences, but also in the applied part or technology of natural sciences as well. As a concrete example, let us take a look at what a medical doctor does when he/she is faced with a suffering patient, i.e. in a position of medical disequilibrium. Before anything else he/she will ask the patient a number of questions about his or her complaints. Then he/she will order a number of tests to be made in the laboratory in the same direction. In other words, the medical doctor will investigate first the actual, existing conditions of the patient which is nothing but the identification of factor A in our equation. When the result of all tests is in, the same medical doctor has to establish a correct diagnosis of the patient in question. How can he/she determine a correct diagnosis if he/she does not carry in the back of his/her mind a clear image of the ideal conditions of stable equilibrium in a completely healthy individual (male or female), acquired from his/her professional education including practice? Who can deny a positive answer to this question? If that is true then this is the factor P of our equation. With these two factors completed, our medical doctor is able to prescribe factor S, indicating the medicine and/or other recommendations necessary to bring our patient from the stage A to the final station P. And that is all there is to the story. Let us take another example from engineering and mechanics. A certain complicated or less complicated machine does not work properly or stops functioning at all. A qualified master engineer will be summoned to discover what is wrong and how the respective machine can be put back in practice. A

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thorough examination of the malfunctioning machine will be the first step. This is the task required by factor A of our equation. During the second step, the master engineer must carry in the back of his/her mind the ideal stable equilibrium image of that machine and that is represented by factor P of our equation. By comparing the result of factor A with the clear image of factor P, our master engineer is able to prescribe the solution (S) of how to convert the machine in question from a disequilibrium position in A to a position of stable equilibrium at P where the machine can work again at full speed and with no difficulties. All professional people with good training are applying daily our equation of unified knowledge, even though they may not be aware of its existence. We did not invent it out of the blue sky; we just formulated it in a clear-cut fashion so that everybody can understand and use it more intelligently and more productively for him/herself and not less for society as a whole. Now the big question arises: if economics is a science – and we think it is – then why could not or should not the same equation of unified knowledge be practiced also by professional economists and other social scientists? A negative answer does not make sense. On more reflection, a keen observer with good professional training may notice that factor A actually represents Keynesian and Marxian economics, limited or restricted here to fulfill their proper function in identifying disequilibrium aspects of modern economy and society. Institutional, social, historical, evolutionary economics, all belong to the same category of studies in disequilibrium problems or aspects of a modern economy and society, that is factor A. On the other hand, factor P stands for classical economics epitomized by the Walrasian law of general equilibrium in its more developed and improved version. In other words, factor P serves as a precise and stable indicator for the clarification of the ultimate goals or values for a civilized society where the majority of people want to live in freedom, social justice of equity, monetary and financial stability together with peace, inside and outside of their own country. The same equation, under more scrutiny, can vividly disclose the methodological weakness in both classical and modern economics. The classics failed because they conceived and reasoned the economic problems only in terms of factor P, i.e. the ideal conditions of stable equilibrium. However, they never showed us how – under the given conditions of disequilibrium (inherited from the mercantilist regime) – we could realize and maintain such an ideal system in practice and especially dynamic over time. The moderns and contemporaries failed and are failing for the same methodological error in reverse. Indeed, they reason the economic and financial problems only in terms of the actual, existing, empirical conditions, that is,

factor A and ignoring completely factor P. In this way they lose the sense of direction toward the final station where they should arrive, namely, conditions of general stable equilibrium or factor P. How right was the master logician, Wittgenstein (1961, p. 149), when he wrote in his Tractatus LogicoPhilosophicus “The facts all contribute only to setting a problem, not to its solution”? The equation of unified knowledge, has the purpose to correct this methodological error of the past and present and offer for the judgment of the profession a sui generis synthesis where classical and neoclassical economics do not appear any longer in conflict with or contradictory but rather complementary to modern economics of disequilibrium. With the help of the equation it is so simple and clear that the two revolutions in economic thinking – the classical and the modern, were and are completing each other, are complementary and indispensable in solving problems in a modern society and economy, if they are properly interpreted and applied. In fact, a systematic application of the equation of unified knowledge may become a landmark for the start of a third revolution in economic thinking when the problems will be studied in terms of a simultaneous equilibrium versus disequilibrium approach both in analysis and also in practice.

18. The distance between a position of stable versus unstable equilibrium This is another unsolved problem in the science of economics which, however, can be solved with the help of our orientation table. Under a set of ideal conditions, as model M1, there is no room for ambiguities, paradoxes or personal views or values. Here any solution to a given problem is determinate. A given concept or theorem is either consistent with this particular model and therefore true and valid, with the qualification of stable equilibrium, or inconsistent and therefore it falls into the category of disequilibrium or unstable equilibrium, which perhaps deserves to be called “stable disequilibrium” since it is represented by model M4 which in turn is a natural, static disequilibrium. As far as the classics are concerned, without exception, when they dealt with equilibrium as a concept, they meant implicitly or explicitly stable equilibrium, with the possible exception of Malthus when he questioned the Say law of the markets. Walras (1954, pp. 109-10) used the law of pendulum (from physics) to describe a position of stable equilibrium as follows: Such an equilibrium is exactly similar to that of a suspended body of which the centre of gravity lies directly beneath the point of suspension, so that if this centre of gravity were displaced from the vertical line beneath the point of suspension, it would automatically return to its original position through the force of gravitation. This equilibrium is, therefore, stable.

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In order to apply the law of pendulum in economics, we have to substitute the force of gravity with the force of competition and the point of suspension (which is a constant) with the natural parameter of numeraire-currency. The position of stable equilibrium is characterized by that unique set of conditions where the major forces in the system converge toward one and the same point or position where there are no problems. The concept of unstable equilibrium is less understood because, in our opinion, it was never clearly nor well documented, defined. The orientation table can help to elucidate this issue as well. Walras, for instance, described unstable equilibrium by referring to an inverted position of the pendulum when the centre of weight is above and not (as usual) below the suspension point. Walras took that for granted by assuming the inverted position of the pendulum was sufficient to explain a position of unstable equilibrium, but we do not think that this is enough. First of all, it is impossible to conceive equilibrium (Walrasian thinking) in that position unless we assume further that at the same point where the centre of weight is located, two opposing and equally strong forces (50:50 percent) are acting simultaneously. Only two such opposing forces (equilibrium versus disequilibrium) can bring the inverted pendulum into a position of apparent (static, frozen) equilibrium which is not stable but rather unstable. Indeed, the position is an unstable one because once the proportion (50:50) is broken, the pendulum will be automatically in a position of disequilibrium which will tend to be farther and farther away from its initial position. Yet, Walras concluded that through the force of gravity eventually “it reaches the position vertically beneath the point of suspension”, i.e. stable equilibrium. The application of the pendulum may be correct in physical sciences but in economics the situation appears much more complicated than Walras envisioned it. In the physical universe where we are living, the natural parameter probably is around 95 percent or even above assuming that most of unstable matter (electromagnetic fields) is inactive (see Hoyle, 1950). In such a natural case, of course, logically and empirically, a position of unstable equilibrium could never happen, because that would mean the end of our universe. In all probability, Walras thought, that a position of unstable equilibrium was somewhere close to that of a stable equilibrium and that it corrects itself after some disturbances. The orientation table shows very clearly a long distance between a position of stable equilibrium (model M1) and a position of unstable equilibrium (model M4). Consequently, fluctuations which go farther and farther away from initial position (M4) cannot be self-correcting. The cumulative fluctuations observed by Wicksell and Keynes’s observation of (unstable) equilibrium with involuntary, growing unemployment, lead to the same conclusion as that indicated by our orientation table, i.e. a situation of unstable equilibrium cannot correct by itself. Marshall, using a different road – the watersheds dividing two

river basins – instead of an inverted pendulum, comes to the same conclusion as Walras that an unstable equilibrium corrects by itself. The truth is that a situation of unstable equilibrium cannot improve by itself. Walras and Marshall were wrong on this issue and Keynes was right, with the qualification to add the prefix “unstable” to the Keynesian model called “equilibrium with unemployment”. 19. Clarification of two laws of supply and demand Another much debated and yet not settled issue refers to the question of how far the classical law of supply and demand is scientifically true and valid and when, in practice, can we expect the promised land of its normal functioning? An older belief is that the law of supply and demand will function properly if only government regulations and interference were not in the way, regardless of the rest of monetary, financial and other economic conditions in the country. This older belief is open for debate, both in theory and practice. Walras was the first who questioned scientifically this old belief when in his law of general equilibrium pointed out the necessity of having in the system not just any sort of competition but a “pure competition” with no form of monopoly (private or public, national or international) plus that all prices (and implicitly incomes) are expressed only in terms of numeraire-currency, i.e. 100 percent covered money with no monetization of nominal bank credit. And even that was not enough. This author added a third factor R (see Table I), that is, an adequate, stable equilibrium institutional and legal framework consistent with the first two basic elements. With this supplementary information, we can distinguish two quite different laws of supply and demand: (1) A truly classical law in a market economy where all three basic conditions for general stable equilibrium are fulfilled rigorously and completely; this is what the classics had in mind – a stable equilibrium type of law of supply and demand, which unfortunately they did not formulate in its more complete form. (2) A modern (in spirit) disequilibrium or unstable equilibrium type of law of supply and demand where all three basic elements (pure competition, numeraire-currency and factor R) are diluted, chopped off to a certain degree, as a result of vested interests in the world of finance and not less in the world of ideas. Rule 1 Supply and demand curves in a system based on conditions of general stable equilibrium in its more complete form, as represented by model M1 (pure theory) and M2 (in practice) are smooth, reflecting normal, natural behavior by consumers and producers, converging toward a unique equilibrium, only with one time, simple, limited adjustment fluctuations and no trace of the business

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cycle phenomenon as we know it under the mixed, two-faced modern capitalist regime. The well known curves, defined in their proper framework are shown in Figure 1. In Figure 1, the consumers buy more at lower prices and less at higher prices whereas the producers offer less at lower prices and more at higher prices. In other words, the demand curve has a negative and the supply curve a positive slope. They cross each other only at a point where effective demand equals the available supply and that is the real, equilibrium price. These are known as the normal Marshallian supply and demand curves. Rule 2 Modern, disequilibrium law of supply and demand is concerned with what may be called inverted, rugged, non-Marshallian or Keynesian curves, representative in model M4 and around on the orientation table, that is, the territory of a mixed capitalistic economy with the business cycle phenomenon at its center. Supply and demand curves on disequilibrium (imperfect, mixed) markets move away (disperse) from (unstable) equilibrium, either to the north in a territory of minor disequilibria, but not too far, since the equilibrium elements are still weak; or to the south in a territory of major disequilibrium. Figure 2 shows the new inverted, rugged Keynesian curves. The well-known Marshallian curves acquire first holes and discontinuities; then they bend and finally take an abnormal, inverted shape whereby the demand curve displays a positive slope during a period of excess demand, inflation or boom. The supply curve in turn receives a negative slope, during a period of excess supply, deflation, depression or “leakage of demand”, as Keynes called it; “glut of markets” as Malthus correctly identified them.

Figure 1. Supply and demand curves

Figure 2. The new inverted, rugged Keynesian curves

For some time economists have been trying to justify the possibility of such inverted curves. Marshall, for instance, used the Giffen paradox to explain a forward-bending demand curve with a positive slope. He gave the example of poor people who buy more bread at inflationary prices because they cannot afford to spend more for expensive food, for instance meat (Marshall, 1952, p. 132). Contemporary economists use the example of workers who at a higher rate of wages, decide to work fewer hours and thus a backward bending supply curve of labor with a negative slope. Actually, we do not need to hint at such isolated cases. The best and easiest way is to point out the economic and financial conditions of a system during a major disequilibrium, like modern capitalism or democratic socialism, which can provide a plethora of statistics to construct inverted, rugged, true Keynesian curves. There is no difficulty under modern capitalism or democratic socialism of today, in observing during a more intensive inflation or when there is fear of possible rationing consumption that rising prices are associated with increasing demand. Thus, under conditions of a significant disequilibrium, at higher prices (even on a black market in a socialist country), demand grows and the curve takes a positive slope as if it were a normal supply curve, but it is not! Under the same conditions, the supply curve bends backward to the left and takes a negative slope, as if it were a normal demand curve, but it is not! We can see how the inverted curves disclose the real situation in a system in disequilibrium. But alas, how many economists in the class room and publications, referring to the Keynesian model are using normal, Marshallian curves to explain problems of disequilibrium! 20. The Say law of the markets reconsidered and completed One of the most debated issues in economics was also the Say law of the markets. The theorem was formulated by the French economist Jean B. Say (1803) in his Traite´ d’Economie Politique. It states simply: Supply creates its own demand. If so, goes the further reasoning, then eventually and inevitably demand will equal supply and in this way equilibrium and full employment will be secured in the form of a natural law.

Let us take a look at the scheme of the Say law with the natural sequence of events, from primary causes to the end effects: (1) New capital goods based on voluntary savings – $10.00. (2) Old capital reinvested or reproduced at the beginning of the period – $90.00. (3) Real gross investment – $100.00. (4) Output with increase in productivity at the end of the period – $110.00. (5) Real income in the economy – $110.00.

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(6) Distribution of income and spending over the same period: . personal consumption from wages and normal (equilibrium) profits, cost of management – $75.00; . taxes and government spending – $25.00; . new savings or new capital formation – $10.00. . Total real income and spending – $110.00. If we examine the whole scheme by the use of the classical forward thinking type of analysis, which we should to fulfill the law of logical consistency in scientific arguments, then the result is that the supply (output) at the end of the period is $110.00 and equals the final demand of $110.00. Thus the theorem of Say appears to be analytically correct, beyond any reasonable doubt and therefore also scientifically. Where is the trouble located? Some, and in particular a Keynesian disciple, would say: the new savings may not be invested during the next period and that alone creates a “leakage of demand”, and therefore less investment and “involuntary unemployment”. That would mean the introduction of a new assumption, that is, in the next period there was a depression, which in the Say classical model of reasoning is not permissible, is not possible! Then the same follower of Keynes may turn around and say: “Let us look at the existing, actual, empirical conditions in the time when Say formulated his theorem. What were those conditions?” Without any doubt, there was the same mixed capitalist regime in disequilibrium during a recession or depression. That is exactly what Malthus did and came with the observation – which empirically was correct – of the existence of a “glut of the markets” from time to time. It was the observation of the business cycle phenomenon in its second leg of depression. The methodological error of Malthus was breaking the law of logical consistency in scientific arguments by taking a historical, empirical knowledge – the glut of the markets that appears from time to time in the capitalist regime – and trying to refute a theoretical, analytical knowledge as that laboriously worked theorem by J.B. Say which also was correct, even though not complete. Malthus, with his intervention created actually an insoluble antinomy, which was not and could not be solved in the way the argument was formulated in their time. We hope that our clarification in Prolegomena 1 (Rugina, 1998, Ch. 2, pp. 84-5) would put an end to this old controversial debate. The Say law of the markets is true and valid – both theoretically and practically – but only under more stringent conditions of general stable equilibrium conditions. It is also clear that the new research program clarifies other consequences, for instance, evidently that the phenomenon of “forced savings” and the use of paper money and monetized bank credit on a large

scale and the pure speculations on the organized markets, all disequilibrium elements and forces in a modern economy break the Say law of the markets.

21. The classical laws in economics were never tested properly Still another source of confusion and endless arguments lies in the lack of an objective, systematic and full evaluation of the results of classical science in economics. They were either blindly accepted or furiously rejected, without sufficient reasons. Among the most disputed laws in classical economics is the law of supply and demand which is so simple and convincing (superficially) to any citizen in the street. It is applied to almost anything produced, requires use of human and natural resources which of course can be consumed for some purpose. In reality and scientifically conceived, the law of supply and demand is not that simple. In order to function properly and bring all the promised and possible social benefits, it should satisfy, from the start, all the conditions for general stable equilibrium. On this argument about the law of supply and demand – pros and cons – an immense quantity of literature has been written. There is no intention here of reviewing any part of it. The reason why we refer again to this subject is just to stress once more the main aspect discussed here – that the classical laws in economics were never properly tested, as is customary in physical sciences. Assuredly, the classical economic laws are not dead in theory nor in practice but just pushed aside because the historical evidence against their presupposed normal functioning leaves the door open for the acceptance of supposedly more attractive surrogates. These surrogates, however, with the passing of time prove to be ambiguous and socially harmful in the long run. This is the explanation of why historically the law of supply and demand in various social systems dominates for a while and comes to the forefront in order to be pushed aside again in the future. What is the truth in this merry-go-round with the law of supply and demand? Both defenders and critics are to blame for this ambiguous state of affairs. The defenders are responsible because neither in the past nor in the present do they recognize the fact that the law in question may be debatable and thus criticized just because one single condition for its validity was not given or disappeared, either in theory or in practice. The critics are to be blamed too because, again and again, in their continuous attack on the gap or conflict between theory and empirical realities related to this law, they speculate on a dubious methodological procedure in breaking the law of logical consistency in scientific arguments. It is pitching empirical knowledge, taken from sick economic realities of a mixed capitalist regime in disequilibrium, and using it to refute a theoretical, pure analytical knowledge, derived from abstract (potentially real) analysis and reasoning.

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We do not seem to have learned enough from the experience of the German economists during the Methodenstreit in the second half of the nineteenth century when economic history was pitched against economic theory. If both defenders and critics of the law of supply and demand had fulfilled their task properly and completely, we would have discovered long ago that: (1) The formulation of the law of supply and demand was not a simple statement of tearing down existing or inherited government controls and regulations (like from the mercantilist regime or the communist experiment in Eastern Europe after 1990) but rather a basic principle or law, whose validity requires a correlation of consistency with all other principal elements and forces in the economy. (2) Its application in practice for a normal functioning demands extensive structural reforms during a short transitional period. The real and scientific testing of the law of supply and demand can be undertaken in any country of the world, by having first a small group of professional economists dedicated to follow and fulfill the moral responsibility of a scientist, with official approval of course, in testing simultaneously the validity of all the principal conditions of general stable equilibrium which are the basis of the law of supply and demand in practice, on a relatively small area in a city or seaport. This experiment on a small area, could be used in testing in the future any project of a political, administrative law which may be affecting the daily life of the citizens. And we do not need to expect strict scientific precision as in the physical sciences. It is enough that, for instance, 75 percent precision is giving a signal that a certain law may have a chance of success or failure, in order to avoid the suffering of millions and millions of industrious and honest citizens who are at the mercy of so-called experts who may or may not have wise and professionally correct advice in certain recommendations. The truth of the matter is that every piece of legislation and every government policy and regulation is an experiment, conducted more or less in darkness. Indeed, all such legislation or regulations are put into practice with the hope that the people will cooperate and the illusion that other unknown circumstances might help the experiment to succeed. Unfortunately, in real life of today or yesterday the socio-economic system (modern capitalism or democratic socialism) is in a state of perpetual disequilibrium so that neither a voluntary cooperation nor favorable circumstances are guaranteed. It is no surprise, that more often than not, the final result is either total failure with a change in government or an illusionary success in the short run to be accompanied by more compound difficulties in the future, when a change of regime through new democratic elections is routine. However, because the professional advisors did not change in spirit, the same game is repeated sine die until a fascist or Marxist revolution hides the game and the whole argument is pushed aside.

Have we not suffered enough from such misguided political experiments in the unknown? The time has come to put an end to such unworkable procedures of the past and first use, instead, enlightened experiments on a small comprehensive area with a new stable equilibrium type of truly scientific policies, free of vested interests in the world of finance or old doctrinaire views, policies conducive to stability-from-within the system, which requires a minimum of social cost in taxation. By conducting experiments on a small area and taking care to reimburse those citizens who were harmed, we have a chance to observe the immediate reaction of the people to proposed policies and gain their confidence that such reforms are really in their own interest. If, or whenever, the mini-experiment is successful, then those reforms or legislative acts can be applied with confidence and assurance that they may be successful for the entire country. Switzerland is a country where this procedure is applied to a certain degree. This is, in essence, the special message left to us by the classical tradition, unfortunately transmitted in an incomplete form. Sadly enough, we did not contribute sufficiently to the spirit of moral responsibility of a scientist. We have done more negative than positive work in this direction. We hope that in Prolegomena 1 and 2 it has been made clear that the law of supply and demand and other classical laws, as far as they have some truthcontent, need a more complete formulation and should be tested properly, in theory as well as in practice. In theory, the standard of evaluation lies in a more complete law of general, stable equilibrium. In practice, the best possible and legitimate test is in conducting a wellprepared experiment on a small comprehensive area. The ideological vendetta against classical theory and application resides in the excuse, repeated over and over on every occasion, that we cannot experiment in the economic and social field because the operation would be too complicated and expensive, which is not true. This negative attitude in the profession, inherited from the past, has to be abandoned because scientifically it is neither justified nor socially beneficial. On the contrary, it is socially harmful, overlooking a possible new economic light to prepare a better world of today and tomorrow.

22. Requirements and conditions for a system of general stable equilibrium A system of general, stable equilibrium is a composite entity of a number of extensive simultaneous equilibria in all sectors of society and economy. Here we can give only a list of more important elements and aspects: (1) A set of really free, open markets, where monopoly or oligopoly elements are reduced, as much as humanly possible, close to zero at the limit, i.e. pure competition.

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(2) A 100 percent numeraire-currency standard, where all prices and incomes are expressed only in terms of numeraire, i.e. a constant natural parameter embedded into the system. (3) Under such conditions effective demand will have a tendency to be equal to the available supply of goods and services. (4) In this system the governing rule of economic activity is the attainment of the greatest possible utility or satisfaction to consumers and the optimum, legitimate rate of profit to producers. (5) For each product or service of the same quality there will be only one price. (6) The selling price for each product or service will have the tendency to be equal to its marginal cost of production, marginal revenue and average cost per unit of output. That is as far as Leon Walras, the father of the first (incomplete) formulation of the law of general equilibrium, went with his system of thought, which Schumpeter (1954, p. 242) considered to be the “Magna Charta of economic theory”. Walras was not aware of the fact that in real life, the force of pure competition could not act in an orderly manner in a vacuum, i.e. in a purely formal (imagined) model, even though his formulation – as far as he went – was correct in the abstract. He failed to recognize that even in pure analysis, there was a need to introduce a third basic element, namely, a consistent institutional and legal framework in harmony with the other two primary elements: pure competition and numeraire-currency. With this supplementary information, the original Walrasian law of general equilibrium needs to be reformulated as follows: given a set of free markets governed by pure competition, where all prices and incomes are expressed only in terms of numeraire-currency and given also a consistent institutional and legal framework, then the basic conditions for general, stable equilibrium are fulfilled ipso facto, as Walras put it. The problem of a consistent institutional and legal framework is complex. It requires first the task of envisioning conceptually the ideal, stable equilibrium form of private and public institutions, practices and values which are consistent with the other six elements mentioned above. Here is a sample of the most important ones: (1) Capital formation equals free, voluntary savings of the people, of business agents, and no “forced savings” through the inflationary effect produced by the issuance of paper money and monetized bank credit or any other devices, private or public. (2) Banks and other financial institutions (domestic or foreign) should conduct regular business within the given supply of numeraire-currency provided by the Central Bank. Private and public banks, domestic and foreign should be explicitly

(3)

(4) (5)

(6)

(7)

forbidden by law to monetize credit in any form because this kind of business is socially harmful through the inflationary effect and redistribution of national income at the expense of large masses of consumers. Credit used in the economy should always be real, in the sense of being fully covered by a commodity, service or an equal amount of numerairecurrency. Real credit is an equilibrium element in the economy because it does not change the supply of money in circulation and therefore it cannot be inflationary or deflationary. Real credit is limited to the amount of real income in the economy, as it should be. The volume of new, real investment should be equal to voluntary savings or have a natural tendency to approach that point. The money market, composed of short-term loans and obligations shall be 100 percent liquid at all times. Consequently, private and public banks, domestic and foreign branches dealing in or with demand deposits or current accounts, shall be required by law to be covered 100 percent by official money at all times. The owners of such liquid funds or accounts shall pay a reasonable fee to the bank for this service since they can use those funds whenever they want. The monetary circulation is not changed. The liquid funds in the banks together with the liquid funds in the porte-monnaie of the citizens and safety-box of businessmen constitute the working capital or liquid capital in the economy which eases the smooth distribution of the annual production. This idea is not an innovation. It is the realization of the “Chicago Plan” of 1934. Private banks, on the other hand, can engage in real credit transactions in conjunction with companies, factories or any business which practice “sales on credit” but respecting rules (1), (2) and (3) in this list. Capital markets (medium- and long-term loans and investments) shall be required by law to be liquid only at the maturity date, as usual. The investments in the capital markets, can be bought or sold freely in open markets. In any case the maturity of loans and other obligations has to correspond to the maturity of available savings entrusted to the banks. The money markets have to be separated from the capital markets in the books of a bank because, first they have to fulfill two different functions: one to provide liquidity and the other to furnish real capital for real investment. Only when the two markets are separate is there an opportunity to develop a real, equilibrium rate of interest for each type of market. In this way no financial crisis is possible.

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(8) The official rate of interest is equal to real, natural rate of interest in the Wicksellian sense. (9) Money (numeraire) capital is equal to real capital in the form of savings, capital goods or inventory of finished goods. (10) Money (numeraire) wages, rent, profit and taxation equal real wages, rent, profit and taxation. (11) The function of management or entrepreneurship must be recognized as the fourth factor of production, entitled to a normal, legitimate profit determined by the opportunity cost of management, respectively, the marginal utility, exactly like the other three factors (labor, land and capital). (12) The government also, up to a certain point, must be recognized as a fifth factor of production with a legitimate income, i.e. an equilibrium rate of taxation. Indeed, without the institution of government no regular economic activity could take place. (13) On the organized commodities, securities and foreign exchange markets by law are allowed only real, outstanding transactions. Pure speculations, i.e. nominal, artificial or formal betting are not allowed because they create artificial, disequilibrium prices which in addition to bringing about confusion in real investments they also lead to acquisition of illegitimate profits and a redistribution of national income on the account of the large masses of people who did not participate in such gambling. (14) As far as government is concerned, no public expenditure can be undertaken without a prior adequate income from current taxation or market borrowing. The equilibrium rule: first income and then spending shall be applicable to both private and public domain. (15) For sure, there is in business a deep capitalist feeling that profit has to be free and can be as high as the sky, as long as the market can take it – a feeling which for long was justified in the mixed capitalist regime because of existence of an additional risk springing from the financial instability of the system. Since in a regime based on conditions of general stable equilibrium such a risk does not exist, then there is no reason for an extra profit, over and above the legitimate equilibrium one. Thus until the people adjust to the new stability conditions, it is necessary to pass a constitutional law requiring the calculation in daily transactions of real, equilibrium prices composed of paid and/or imputed wages, rent, interest, taxation and a legitimate rate of profit equal to the opportunity cost of management. A court of social and economic justice with professional help will assure that the law is applied fairly to all concerned.

(16) A law for social and economic justice would solve also the problem of concentration of economic and financial power, which more often than not (if not always) is searching for more power in order to attain an extra profit. In the spirit of this law, concentration of any sort of business should be allowed only up to the limit where the proof is provided that the same merchandise or service of the same quality could be sold at a lower price. Only this kind of concentration and only up to that limit is it socially beneficial. 23. How much can mathematics, econometrics and computers help? Another important problem is the question of how much mathematics, econometrics and computers can help us to solve adequately the major problems of our time. In principle, the orientation table again is helpful for the clarification of this issue too. There is no doubt that mathematics and computers, all conceived as technical tools, can be applied with complete success up to a certain limit in physical sciences. As far as economics is concerned, the limit is even more restricted, respectively to model M1 which is 100 percent consistent (truth in the abstract) and also to model M2 (truth in the concrete) when realized in practice but with a small residual that mathematically can be accounted for (an issue of exact measurement) and for all practical reasons can be ignored in real life. The best proof that this conclusion is correct lies in the fact that Newton successfully applied mathematics in physics and had no difficulties. In a similar fashion, Walras applied mathematics in pure economics and also had no trouble. Later in this century, Nobel laureates Paul Samuelson, Kenneth Arrow and Gerald Debreu, among others, also successfully applied mathematics in economics because their model formally (according to modern logic) was close to the Walrasian one. The force of pure competition acting in an adequate environment (consistent factor “R1”) converges toward one and the same point, where effective demand equals available supply, i.e. the equilibrium price, whereby the natural parameter of the numeraire plays the role of an axis, a concrete, constant magnitude which holds the system together. In the same way, the force of pure gravity in action is converging toward one and the same axis or centre of weight of a planet or of the entire solar system. It is the merit of Walras, who for the first time in economics linked the force of competition to the force of gravity and formulated the first version of the law of general equilibrium. However, if we leave the territory of models M1 and M2 in economics and move toward the vast oceans of minor and major disequilibria, insurmountable difficulties emerge because we are dealing simultaneously also with adverse forces of anti-numeraire and anti-competition, respectively, paper money, monetized bank credit, monopoly, oligopoly and, above all, vested interests

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with extra illegitimate power in growing proportions. That means that we are encountering the phenomenon of relativity and uncertainty and the solution to the given problems becomes cloudy and indeterminate. The difficulties are less significant in the physical sciences because the natural parameter or the axis of the system (in nature) is implanted in the act of Creation and remains constant over very long periods of time, with rather insignificant variations. On the other hand, the difficulties are more serious in economics and finance, since the axis of the system – natural parameter of numeraire-currency – based on gold, silver or any other other suitable commodity, was disbanded in the course of the Great Depression. Instead we adopted officially an anti-numeraire form of currency: paper money and monetized credit by private banks and the Central Bank. Thus the force of competition, already, diminished by monopolies and oligopolies, does not and cannot move and converge toward one and the same point of stable equilibrium prices. And there is no substitute for numeraire-currency. Under these conditions in the economic sphere of implanted disequilibrium, analytically and practically, especially on a model in the lower part of the orientation table where the major disequilibria are located, we are floundering like a boat on a stormy sea, without a reliable rudder. In the economic and financial world of today we are living in an artificial (speculative) environment where practically anything could happen, at any time and without any warning beforehand. It is true that, at this precarious moment in history, at the highest level of scientific research and in places of ultimate decisions in national governments, all over the world, including global organizations like the International Monetary Fund, the World Bank and other large organizations, great, almost absolute, trust is put in the aid of computers. In fact, the most alarming fact is that the necessary reasoning to support such ultimate decisions is no longer human but provided mechanically by huge computers. The common people, who pay for the cost of government, in general believe that the strength of the official experts, called also technocrats, consists in their skill to use mathematical equations and/or select adequate econometric estimates. The truth is that there is a lot of wishful thinking in this procedure, because no matter how refined are the equations, the computers cannot grasp more than snapshots, static pictures of the given economic and financial conditions. Before anything else, from these static pictures alternative policies are devised which are supposed to be dynamic and adjustable to changing conditions. But above all, we should not forget that the collected information in the form of ordinary statistics or elaborate econometric estimates, what we call data, are extracted in the final analysis from a set of disequilibrium conditions which are already contaminated by myriad viruses of inherent instability.

Of course, mathematically speaking, the equations used have to fit, as they say, meaning they must have mathematical consistency. This in turn can be attained by various techniques. It is a sort of mathematical window-dressing which is technically required since otherwise the set of equations would be refuted by the computers. All right, one might say, but the very fact that the statistics or estimates originally carry inherent instability through their disequilibrium nature, implies, both analytically and empirically, that the solution to any problem worked in this way must be to a certain degree indeterminate. Yet, the mathematical window-dressing makes the equations consistent and consequently, the computers are delivering a determinate solution, as if that were the true answer but in reality that may not be so. There is here a conflict between mathematical results and reality which shows that the role of mathematics and econometrics in model M1 is perfect, in model M2 is acceptable, but beyond that limit its validity decreases more and more until in model M7 becomes zero. The story of the issue, however, does not end here. The invisible roots of many, if not all, contemporary problems in a mixed capitalist or democratic socialist society and economy, are not and cannot be expressed in quantitative terms. The real, primary roots of the problems in question reside in the quality (good or bad, right or wrong) of the institutional and legal framework: money, banking, the organized securities, commodities and foreign exchange markets and a whole chain of private and public institutions, including public budget and budgetary procedures. This quality-factor of institutions and daily human behavior of people with erratic fluctuations of rational combined with irrational decision-making process, which change substantially day by day, hour by hour and, in fact, minute by minute, cannot be determined in quantitative terms and therefore cannot be caught in statistics or mathematical equations, no matter how refined or complex they may be now or in the future. In conclusion, useful application of mathematics, econometrics and computers, in the mixed world of today is not only a difficult but also, up to a certain point, a tricky, obscure operation because of the dominating modern, formal logic that gives too much freedom to pure reasoning and eludes the natural limits of potential, equilibrium reality. Go¨del’s proof is the warning, but even he did not see clearly the entity of equilibrium versus disequilibrium aspect of reality and implicitly of logic. Wittgenstein saw this entity, but, unfortunately, he was committed so much, so deeply to modern, formal logic to which he himself contributed, that practically he could not see further consequences. By using the new, integrated logic, the problem is not to eliminate mathematics from economics – as, for instance, some institutionalists do – but rather to integrate and keep it within its proper role and limits, and the equation of unified knowledge: S ¼ f ðA; PÞ shows its proper role.

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Methodologically speaking, beyond this argument between modern, formal and integrated logic, it is not clear in economic debates that our ultimate problem in the real world of today is not one of adjustment within the capitalist, socialist-communist or militarist-fascist regime, but rather our fundamental problems are related to the basic structure of the social, economic and political order of our time which is double-faced. It is trying to serve, so to say, two lords at the same time: one is pure democracy (to which we pay lip-service on every occasion), and the other, in practice, we follow and apply economic and financial policies based on macro monetary and fiscal nature in a losing battle with the impossibility theorem in practice. It looks as if we actually do not want to solve the problems of perennial instability properly and fully and allow them to become cumulative and chronic. But, in that way, we are moved by blind historical forces and vested interests farther and farther away from the realization of the ultimate ideal of a free, just and stable society and economy for which the family of man and whole humanity have struggled so hard and sacrificed so much for, at least during the last two millennia. 24. The ultimate goal of a free, just and stable society and economy The eighteenth and nineteenth centuries are known for the unabated struggle to attain and preserve individual and/or national freedom and independence. Through the French Revolution of 1789, the American War of Independence with the Constitution of 1781 and the First World War the ideal of freedom, to large extent, has been realized and preserved with a few exceptions. The twentieth century with the Russian Bolshevik Revolution of 1918 followed by the Chinese Red Revolution under Mao Tse-tung and the rise of socialist democracy, all were supposed to solve the social question, i.e. social justice of equality. In the end, in practice, neither the ideal of social justice nor that of freedom were improved in any way. The third millennium, or the twenty-first century, has inherited a large agenda of unsolved problems, in fact all the basic ones. With the help of the new integrated logic, the fundamental problems for the purpose of pure analysis can be separated; but in real life they are organically interrelated in such a way that one cannot exist in its full profile, except in conjunction with the rest of them. Of course, we are talking here about the concept of a free, just and stable society and economy in its full meaning, i.e. model M1 and model M2 where all conditions of general stable equilibrium are fulfilled as a truth in the abstract (M1) and/or as a truth in the concrete (M2) application to real life. One other question can be raised in this issue: how can we decide quickly, without going into complex research, that a given value, institution, practice or behavior represents in real life really a stable equilibrium element and therefore is acceptable from the social point of view? This is a central issue in social economics.

In order to solve this question, we have devised a composite methodological standard called the “pyramid of human wisdom”, which is composed of much accumulated wisdom from the past and present, but designed as a logical and living entity, as represented Figure 3. The application of the pyramid is simple but with far-reaching analytical and practical consequences. The three corner principles of the pyramid: human freedoms, social justice of equity and human solidarity with peace, plus the basis of the pyramid, i.e. the natural parameter of the numeraire-currency, plus an adequate institutional and legal framework, have to be conceived as a logical and empirical entity. Thus we have an equilibrium definition of human freedoms, social justice of equity, human solidarity with peace including the government and representing a consistent, adequate institutional and legal framework. In this way, we are avoiding the perennial arguments of the past on where freedoms stop and where social justice and stability with peace begins. Actually, all are fulfilled being limited or determined by the nature of a balanced system and all start from their own corner, but in functioning meet at a central point of equilibrium where there are no conflicts. The natural parameter of the numeraire-currency is a constant magnitude which holds the foundation of the system and is both neutral to, and consistent with, the other three ultimate values or principles. Looking at the pyramid we can draw three rules: (1) Rule No. 1. An economic value (institution, practice, behavior) is socially acceptable, i.e. conceptually and empirically, in any free civilised society and economy, if it is consistent with all elements included in the pyramid. (2) Rule No. 2. If an economic value (institution, practice, behavior) does not satisfy any of the basic requirements specified on the pyramid, in any free society it must be rejected right away entirely, both in analysis and practice. (3) Rule No. 3. An economic value (institution, practice or behavior) which satisfies only partially the requirements on the pyramid, has to be viewed and judged in need of, or susceptible to correction by adequate reforms.

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25. The great transformation and a new covenant of universal socio-economic human rights There is one subject which was omitted intentionally: central economic planning and controls by the government (public authority, national and/or international). The reason was that this kind of socio-economic order by far does not represent a good method or an institution for a better world of tomorrow. Through the Communist experiment in the East from the Soviet Union to the Far East Red China, and the isolated case of Cuba in the West, the evidence beyond any doubt speaks for itself. This is not the road for a better individual life, a more prosperous nation or a more advanced civilization. In view of the fact that the major problems of our time are not solved properly and fully, neither in the East and only partially in the West, many are concerned with the question: “Where do we go from here?” Of course, without any doubt the life of the common man is better in the West than in the East. But disequilibrium conditions are cumulative – both in the East and the West – even though not of the same degree or nature. This situation of inherent instability, with problems of the system and not within the system, i.e. simple adjustments, as the political leaders and many in the economic profession believe, both in the West and the East, carries a great social risk if we continue on the present road because it is conducive to erroneous, dubious policies. On the other hand, the same situation may become a unique opportunity to turn the clock of history in the right direction. The economic and financial situation of today, full of disequilibria all over the globe, cannot go on indefinitely and no country is safe. We have the example of Japan – the second most powerful economic and financial country in the world – over a short period of time fell into a financial crisis and five years thereafter, with all the extra reserves in US dollars (the largest creditor country in the world) could not extricate itself of the contradictions of modern, mixed capitalist regime. Consequently, sooner or later, any country may be faced with an unexpected guest: a great transformation. Furthermore, we are not prepared at all for the great transformation, simply but basically because the economic profession, both in the West and the East, thinks that the problems are within the system and therefore manageable (Capitalism in the West and Communism in the East). In reality, however, the equation of unified knowledge, the impossibility theorem in practice and the pyramid of human wisdom, all reliable analytical indicators, show beyond any doubt that the major problems of our time, all over the globe, are not within the system but rather of the system, i.e. we are using, to say the least, a debatable, questionable diagnosis. Consequently, the policies we are forging and applying are really not solving but postponing the given problems and making them even more complicated for tomorrow.

This is the profile of a confusing world of today. We know now the historic challenge at the beginning of a new millennium – or do we? We are faced with a global financial, economic and social disequilibrium, and the principal question is how to extricate ourselves from this dangerous situation. The great transformation, for better or worse, will come. The final result will depend, in the spirit of the British historian Arnold Toynbee, on the answer given by the present generation of intellectuals and scientists to the given historical challenge. Happy are those countries where their political, professional and intellectual leaders envision the great transformation as coming and take all necessary measures, not to isolate their country from the rest of the world but, on the contrary, to intensify the economic, social and financial relations with other nations by providing the living proof that it is possible (emphasized!) to live in a new, best conceivable, regime of general stable equilibrium, which is protecting their national economy and society from undesirable imported crises. And the novelty is that the new regime, once activated systematically on a single “D”day, will function not by government intervention with expensive macro policies, but from its own daily free activities by its citizens and corporations within natural limits provided by a number of self-regulating mechanisms embedded into the system. There is so much talk and writing nowadays about “globalization”, as if it is here to stay and there is no way to turn back the clock of history. In our view, the whole problem is not presented by far as systematic and complete. We have already an open argument between two schools of thought (Friedman, 1997): (1) Those who are in favor of globalization by the development of so-called “global capitalistic free markets” at any cost, in the spirit of the old school of “laissez-faire capitalism”, invigorated in recent times by the school of Chicago, promoters who are called “integrationists”. (2) The others who are opposed to globalization on different grounds, not always quite clearly formulated, who are called “separatists”. In our view, to be for or against globalization as such, without a precise qualification, is a wrong position. The right question is: “What kind of globalization?” Globalization per se is not an evil but it may become one, if it is promoted by using disequilibrium procedures and institutions. At this moment, unfortunately, the global financial markets are governed by disequilibrium, capitalistic methods and institutions, concentrated mostly on socially harmful pure speculations on a global basis. In other words, those countries which are strong (by legitimate and illegitimate policies and procedures) are not encouraging by fair competition the relatively weaker ones to attain and preserve financial independence, within a larger stable international framework with social justice of equity in the distribution of international income. In the existing conditions of today “the big fish is eating

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the small fish”, and there is no way to humanize this rule because the whole procedure is applied in the name of a presupposed free market and there is nothing more to say. Yet, nobody says that this kind of free, mixed capitalistic market is wild, has two faces, is perverted. We are living in new times with much confusion and uncertainty, faced with new problems which require new thinking, new, better ideas and new more efficient solutions. In addition to globalization running wild in diverse directions, another great danger lies in the artificial acceleration in the tempo of modern civilization, financed through the Schumpeterian technique of “forced savings”. In reality, as shown earlier in the text, the people are not saving anything. In fact, they are losers because the technique represents an ingenious expropriation of a fraction of real income from the large masses of consumers, without due process of law and/or a just compensation. The over-mechanization of modern civilization has become a source of other social problems for our time and for the future. It creates involuntary unemployment and other social inequities associated with the phenomenon of forced savings. Not less important is the fact that man exposed to overmechanization, becomes indifferent in thinking and is thus more liable to lose independent critical judgment and in this way can be easily manipulated by unscrupulous politicians and experts, whose ideas are far from the truth. This danger was envisioned by the French philosopher Julien Benda as far back as 1928 in his book, La Trahison des Clercs, which was translated into English with the title The Treason of Intellectuals (Benda, 1969). There are already science-fiction writers who describe a fantasized world of tomorrow. It was reported that, “Engineers for the Xerox Corporation unveiled plans for what their micro-electromechanical system (MEMS) would be able to create tomorrow”. What is curious about these fantasies – wrote the reporter in continuation – “is that they are backward socially as they are forward technologically. This curious fusion of high tech and retro culture already has a name: Steampunk” (Nash, 1997). There is a hidden danger here of a new form of slavery, mechanical subordination of man to his own tools in activity. A Nobel laureate has already published a book related to this problem but without a warning (see Simon, 1988). Fortunately, as long as we have our freedom of thought, we also have one inexhaustible resource: human imagination. The great transformation and globalization can be turned in the right direction, and we are optimistic that eventually we shall do it. With a clear optimistic view of a better tomorrow and equipped with new, better ideas and interpretations, we shall be saved. In and with this spirit, it is worthwhile to recall here a fragment of the illuminating legacy left by Del Vecchio (1953, p. 53), who wrote:

The unity of our spirit makes it impossible to work toward a certain end without thinking that this end can and must be achieved, even if only in the distant future and through the work of later generations . . . Objective examination of the ups and downs in the history of law can and must not extinguish our faith in justice as a supreme human ideal. Even in the face of events which represent a setback or deviation, that ideal remains unshaken as a criterion of value; without it, deviation is meaningless. Even if contradicted by empirical facts, this ideal does not lose its ethical and deontological truth. These contradictions between “is” and “ought to be” can be neither permanent nor general.

Without any more commentary, what Del Vecchio said above so masterfully about justice, can and must be said about the other great ideals included in the pyramid of human wisdom. Indeed, freedom, social justice of equity, human solidarity, peace, numeraire-currency and a consistent institutional and legal framework, side by side with a democratic form of government, must be specifically included in the constitution of any free country, governed by positive laws converted into natural, inalienable rights of the people. In continuation of Del Vecchio and other great thinkers of the past concerned with the same problems, we are offering for debate a sketch of “a new covenant of universal socio-economic human rights”: . The phenomenon of “forced savings”, practiced by private institutions or corporations (domestic or foreign), national governments or international organizations, that is an expropriation of a fraction of real income (cheating) of the masses of consumers, in any form and without due process of law and proper compensation, should be declared illegitimate and illegal anywhere on the globe. . A one time reasonable and limited social reform is necessary in any former capitalist, socialist, communist or militarist dictatorship. It has to be conducted by informing the populace that it is necessary in their own interest. It has to be applied therefore peacefully, legally and in an orderly way with the final goal of creating a set of maximum conditions for social justice in the distribution of nation income, i.e. first to compensate, as far as humanly possible, the living generation for social inequities inherited from the past. As far as the future is concerned, specifically, to reduce to a minimum any possible social inequities, a law of social and economic justice should require all kind of business to be conducted at normal, real equilibrium prices where are included: paid or imputed wages, rent, interest, taxation and a legitimate rate of profit equal to the opportunity cost of management and nothing else. . To prohibit by law the issuance of pure paper money and monetized credit in any form (nominal, abstract purchasing power) since this kind of money is socially harmful by igniting inflation-deflation and with it the Schumpeterian phenomenon of capital formation through “forced savings”.

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Actually, forced savings is to a certain extent a deceiving expression because the people do not save anything (an asset) in the common sense of the term. Forced savings, in this case are negative savings (a loss) for the people at large. In addition, we must consider here a fundamental, moral issue. When banks and other domestic or foreign institutions grant loans in the form of monetized credit, they are lending no more than pure, abstract, artificial purchasing power. For this, alas, they are charging a regular rate of interest. How incredible, that for so long the economic profession has not raised this fundamental problem in the science of economics and finance: to allow public or private institutions (domestic or foreign) to lend immense sums of funds – practically nothing more than empty figures in the books of a bank – while charging a regular rate of interest! What kind of morality is being practiced by modern banking under capitalism, social democracy, communism or fascism? It would be an interesting study to research, that this practice may be in contradiction with the spirit and letter of the official constitution in the respective countries. To prohibit pure speculations (as distinguished from real, equilibrium transactions) in any form on the official securities, commodities and foreign exchange markets, for the same reason that they are socially harmful. Indeed, pure speculations are nominal, artificial, fictitious disequilibrium types of transactions, which create financial and economic instability in the system together with artificial price fluctuations and social inequities through a redistribution of national income on the account of the large masses of population, who either do not have the means or do not like to participate in this kind of activity. One thing is sure: the pure speculators (individuals and on a large scale, banks, large corporations and even universities with endowment funds) can make money only by fabricating and intensifying disequilibrium conditions. Every single day, immense amounts of funds are kept on the side as a basis to cover pure speculations and thus the national economy is deprived of the possibility to attain full employment of all available human and natural resources. To prohibit by law abnormal accumulation of economic and financial power, in the form of monopolies, holding companies and any similar organizations, created with the questionable purpose to practice market strategy in order to grab an extra, differential but illegitimate profit. Accumulation of economic and financial power usually is financed through cheap credit money manipulated by a consortium of private

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banks. Government controls and regulations in the past and present proved to be expensive and ineffective. A special anti-trust division at the justice department should make certain that larger conglomerates cannot develop, except with the obligation and proof that for a determinate period (20 or 30 years) a merchandise or service will be offered to the consumers at a lower price than the current one and of the same quality. A law of social and economic justice, in accordance with a Romanian popular expression “omenia” (one must behave in such a way that he or she – including business firms – do not produce problems for his/her neighbor or community) should require that all commercial transactions be concluded at real, equilibrium prices composed of paid or imputed wages, rent, interest, taxation and a normal legitimate rate of profit, determined by the opportunity cost of management and nothing else. This is a simple but efficient and inexpensive solution to make social justice of equity the law of the land. In addition this can help also to solve the problem of abnormal concentration of economic and financial power which perpetuates the social question. A law to protect Mother Nature and the physical environment everywhere on the globe is also imperative. The new covenant of socio-economic universal human rights should be included side by side with the democratic political rights in the existing constitutions. Unless these socio-economic universal human rights together with the political rights are respected everywhere on the globe, there is no chance for social peace, order and harmony in the world, neither now nor in the future.

During the whole twentieth century and before, we have sufficient evidence to draw the conclusion that the masses of common people resent the idea of being controlled, managed or manipulated by any institution, national and even less international. This should be a warning to those who, under the new slogan of “globalization”, think that it is possible through traditional macro monetary and fiscal policies or through global economic planning and controls, to solve the problems of our time. Such an opinion is an unrealistic and preposterous illusion. Even if by clever manipulation of public opinion through mass media and on nominal promises that global competition may bring a better life and thus under emergency circumstances, such a global experiment may be pushed to become a global law, still the experiment is condemned to failure soon thereafter, simply but basically because the global rulers would promise something they cannot deliver. They will fight – as they do now – a losing battle with the impossibility theorem in practice.

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This is the truth, the whole truth, illuminated by the new integrated logic and a more comprehensive methodology, and which has to be debated openly and without any prejudice in economics and all other sciences, both social and natural. This is the new message to be carried on in the third millennium. If Adam Smith, Leon Walras, Alfred Marshall and Lord Keynes among economists, Karl Marx as a political scientist and reformer, together with Albert Einstein, Niels Bohr, Werner Heisenberg, Bertrand Russell, Ludwig Wittgenstein and George E. Moore, among the great scientists who shaped the thinking of the twentieth century, would have an opportunity to return to the planet earth and reflect on the new conditions of global disequilibrium at the beginning of the twenty-first century, they would shake their heads in disbelief. This is not the world they perceived to be possible (the classics), nor a world where the modern man could create what he wanted in terms of changing Mother Nature and the social order in any way desired (the moderns). We are sure that they would have a second thought, and that is exactly what we need, to repeat a second thought on the future. The new research program of a simultaneous equilibrium versus disequilibrium approach is providing the tools to re-examine both the classical and the modern revolution in thinking and find out the strength and the weaknesses of each one, in order to open a third road for a new revolution where the previous two do not appear contradictory – as in the majority of scientific circles of today – but rather complementary in a sui generis synthesis. Furthermore, the orientation table in economics and all other sciences (social and natural) fulfills the dream of Nobel laureate Paul Samuelson that his heritage could achieve success “in formulating a general theory of economic theories”. Indeed, our Prolegomena 1 (Rugina, 1998), Prolegomena 2 (Rugina, 2000) and Prolegomena 3 (Rugina, 2001) are an attempt to provide a methodological framework for a more complete identification and application of theories in economics and all other sciences.

Final remarks: an open road for the methodological unification of all sciences Regardless of how serious is the financial and economic situation at the global level of today, and not less serious in the development of physical sciences through use of atomic power for destructive purposes in war or abuse of it in peace-time for civilian frivolities and a partially artificial way of life, we have confidence and still remain optimistic that we are not lost. We have one resource which the good creator has left inexhaustible: human reason and imagination. A new generation of scientists is now developing, both in the West and East, in the North and South, who are less committed to any dogma of the past or present. After all, they can see that the problems of our time in science and

modern society cannot be solved properly and satisfactorily by the application of the prevailing modern philosophy, logic and mode of reasoning alone. The very fact that the problems of our time are not solved properly and fully, constitutes a most powerful force which will move the new generation to consider new ideas and new interpretations needed to overcome the present impasse. In the same spirit, there is neither much time nor necessity to engage in unproductive arguments about a conflict between classic and modern logic, philosophy and science, a conflict which actually was not there. It was only an unfinished result of our imperfect tools of analysis. The really important issue to repeat lies in developing a new, more comprehensive methodology where both classic and modern heritage can be housed within the context of a larger framework, where the identity and validity of each one is clearly established, preserved and even enhanced in a new, brighter line of presentation. The new methodology we proposed is providing enough space for new roads, ideas and interpretations that might occur in the future. Now, perhaps the time has come that a new spirit and a new outlook may be initiated in economics and from there be transplanted into natural, physical sciences, our older sisters which are passing also through similar methodological difficulties (see Rugina, 2000, Ch. 2). In this way, a longstanding intellectual debt may be paid back by the economic profession. As to the hundreds of thousands of similar researchers all over the globe, a word of encouragement is due. They are struggling hard with many obstacles, some financial but the most serious coming from the prevailing dogma of our time. They are the ones who keep alive the hope for discovering new, better ideas. For these lonely workers in the garden of new ideas, we offer the advice by the first President of the USA, George Washington, who said: “Truth will ultimately prevail, where there is pains taken to bring it to light”. And even if one does not have the good luck to see a beacon of new light his work still belongs to the same never-ending intellectual chain, so magnificently expressed by Weber (1922): To be overcome in science is not only our own destiny but also our own purpose. We cannot work without hoping that others will come further than us. References Benda, J. (1969), The Treason of Intellectuals, La Trahison des Clercs (originally published in French in 1928), W.W. Norton and Company, New York, NY. Bullock, A. and Stallybrass, O. (Ed.) (1977), The Harper Dictionary of Modern Thought, Harper & Row, New York, NY. Del Vecchio, G. (1953), Justice. A Historical and Philosophical Essay, trans. by Campbell, A.H., Philosophical Library, New York, NY, p. 53 Einstein, A. (1950), Out of My Later Years, The Wisdom Library, New York, NY. Einstein, A. (1961), Relativity: The Special and General Theory, Crown, New York, NY, p. 2.

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Friedman, T.L. (1997), “Roll over hawks and doves”, OpEd page, The New York Times, 2 February. Go¨del, K. (1931), “Uber formal unentscheidbare Sa¨tze der Principia Mathematica und verwandter Systeme” (“Proof on formally undecided propositions of Principia Mathematica and related systems”), Monatshefte fu¨r Mathematik und Physik, Vol. 38, pp. 173-98. Hicks, J. Sir (1937), “Mr Keynes and the classics, a suggested interpretation”, Econometrica, Vol. 5. Hoyle, F. (1950), The Nature of the Universe, Harper Bros, New York, NY. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan and Co., London. Keynes, J.M. (1971), A Treatise on Money (originally published in 1935), Royal Economic Society and Macmillan Co., London. Marshall, A. (1952), Principles of Economics, 8th ed. (originally published 1890), Macmillan, New York, NY, p. 132. Nash, E. (1997), “It’s going to be a smaller world, after all”, OpEd page, The New York Times, 2 February. Newton, I. (1686), “Preface”, Principia, 1st ed., Trinity College, Cambridge, 8 May, p. xviii. Quesnay, F. (1965), Oncken, A. (Ed.), Oeuvres Economiques et Philosophiques, B. Franklin, New York, NY. Rugina, A. (1984), “The problem of values and value-judgments in science and a positive solution: Max Weber and Ludwig Wittgenstein revisited”, International Journal of Sociology and Social Policy, Vol. 4 No. 3 (special issue). Rugina, A. (1998), Prolegomena 1: To Any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), International Journal of Social Economics, Vol. 25 No. 5. Rugina, A. (2000), “Principia Methodologica: a bridge from economics to all other natural sciences”, Prolegomena 2: To Any Future Study in “Integrated Logic”, and a More Comprehensive Methodology for a Unification of all Sciences, Natural and Social (monograph), The International Journal of Social Economics, Vol. 27 No. 5/6, Ch. 2 Rugina, A. (2001), Prolegomena 3: Fundamentals to Any Present and future Economic, Monetary, Financial and Social Stabilization Plans (monograph), The International Journal of Social Economics, Vol. 28 No. 1/2. Samuelson, P. (1983), Foundations of Economic Analysis, enlarged edition, Harvard University Press, Cambridge, MA, p. xxvi. Say, J.B. (1803), Traite´ d’Economie Politique. Schumpeter, J.A. (1954), History of Economic Analysis, George Allen and Unwin, London, p. 242. Schumpeter, J.A. (1956), “Money and the social product”, trans. from German by Marget, A.W., in International Economic Papers, No. 6, Macmillan, London, pp. 20-36 Sills, D.L. (Ed.) (1967), International Encyclopedia of the Social Sciences, Macmillan/Free Press, New York, NY, Vols 5 and 13. Simon, H.A. (1988), The Sciences of the Artificial (originally published in 1969), MIT Press, Cambridge, MA. Smarandache, F. (1998), Neutrosophy. Neutrosophic Probability, Set, and Logic, American Research Press, Rehoboth, NM.

Smith, A. (1937), An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan edition (originally published in 1776), The Modern Library, New York, NY. Walras, L. (1954), Elements of Pure Economics or the Theory of Social Wealth (originally published in 1874), trans. Jaffe, W., Richard D. Irwin, Homewood, IL. Weber M. (1922), “Wissenschaft als Beruf”, in Gesammelte Aufsa¨tze zur Wissenschaftslehre, Paul Siebeck, Tu¨bingen. Wicksell, K. (1965), Interest and Prices (originally published in 1898), August M. Kelley, New York, NY. Wittgenstein, L. (1961), Tractatus Logico-Philosophicus, trans. Pears, D.F. and McGuinness, B.F., Routledge & Kegan Paul, London.

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1. Nobel Laureate: Ragnar A.K. Frisch (1895-1973)

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We are interested here in an open dialogue with Laureates Ragnar Frisch and Jan Tinbergen in an evaluation of their contribution to the science of economics, a contribution restricted to the source of information as presented by themselves in their lecture of accepting the Nobel Prize in Economics for 1969. It was a prize in economic science, instituted by the Bank of Sweden and awarded for the first time in 1969. Ragnar Frisch of Norway and Jan Tinbergen of The Netherlands were the first recipients. In the citation (Laudatio) written for the recommendation of the two wellknown economists, Professor Erik Lundberg of the Royal Academy of Sciences said: Since the late twenties, Prof. Frisch and Tinbergen have been working along essentially the same lines. Their aim has been to lend economic theory mathematical stringency, and to render it in a form that permits empirical quantification and a statistical testing of hypothesis (Les Prix Nobel en 1969, Stockholm, 1970, p. 192).

The characterization, up to this point, is alright, correct. But Professor Lundberg adds his own judgment by saying: One essential object has been to get away from the vague, more “literary” type of economics. The arbitrary “naming” of causes of cyclical fluctuations and the concentration upon certain simple chains of causal connections, has given way in the work of both Frisch and Tinbergen to mathematical systems that state the mutual relationships between economic variables (Les Prix Nobel en 1969, Stockholm, 1970, p. 192).

Neither Frisch nor Tinbergen in their lecture – as we shall see in continuation – has considered such a sharp and rough language using the expressions “the vague, more literary type of economics” or the arbitrary “naming” of causes of cyclical fluctuations. These, more or less pejorative propositions, refer evidently to classical economists. But with the exception of Walras and Cournot, all classics did not use mathematics in their mode of reasoning. However, they constructed their reasoning with the help of classical logic which put the emphasis more on truth-content of propositions. Their results may not have been complete but as far as they went they were correct, in view of what knowledge was available in their time. Nevertheless, we can see here the open conflict between classical and modern mode or method of reasoning in economics. The model used by the classics is oriented by the logic of truth-content whereas the model used by the moderns and contemporaries is guided more by the logic of truth-form. No

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surprise that the evaluation of a problem and the results are different in one case from the other. Professor Lundberg said in continuation: Prof. Tinbergen was concerned primarily to confront dynamic economic theory with statistical application. His great pioneer work in this field is an econometric study of cyclical fluctuation in the United States . . . Tinbergen built up an econometric system involving some 90 equations, and determined reaction coefficients and “leads and lags” with the help of statistical analysis. It has been natural for both Prof. Frisch and Prof. Tinbergen, with the support of macroeconomic analysis, to construct theories of stabilization policy and long-term economic planning (Le Prix Nobel, 1970, p. 193).

There is no doubt that Ragnar Frisch and Jan Tinbergen have produced new and interesting contributions to the science of economics, and we shall take a look at them in more detail during the subsequent presentation. Here we want to correct a much repeated error of interpretation, namely, that classical economics studied a static model, whereas the modern macroeconomics is concerned with a dynamic model. That is not quite correct. We have to make a clear distinction between what may be called normal or stable equilibrium dynamics and abnormal or unstable equilibrium plus two vast oceans of disequilibria (minor or major) dynamics. According to our orientation table the classical school is concentrated around models M1 representing the Walrasian system and around model M2 representing the Marshallian system. At the limit both are static without problems, flexible, and therefore in motion (introducing the time-element), both belong to normal dynamics. The Keynesian system of thought or what he called “equilibrium with unemployment” (the true and complete name of “unstable equilibrium”) is located with the mixed capitalist regime, at the limit in model M4 (what Keynes called “secular stagnation”) where it is organically static with an unstable equilibrium. When it is in motion (including the time element), then it is wandering erratically on the lower part of the orientation table where major disequilibria are located. The personality of Ragnar Anton Kittil Frisch (1895-1973) Ragnar Frisch was born on March 3, 1895. His father was a businessman, a gold and silversmith. His mother, Ragna Fredrikke Kittilsen, also came from a family of businessmen and shipowners, as Frisch himself testified, “and this has had a great impact on my general outlook and life” (op. cit., p. 205). Initially he was supposed to follow the “gold and silver tradition”, in the family. “For that purpose”, he wrote, “I started as an apprentice in the workshop of a famous Oslo firm, David Andersen, and at the end of apprenticeship in 1920 I completed my handicraftsman’s probation work as a goldsmith.” His mother, however, insisted that when he finished his apprenticeship he should also attend a university. Together with his mother, as he pointed out

later, they examined a catalog of the Oslo University and “found that economics was the shortest and easiest to study” (Frisch’s emphasis). He finished his study at the Oslo University with a degree in economics in 1919, when he was 24 years old. About a year later, he wrote “I went abroad to study economics and mathematics in earnest. I visited France, Germany, Great Britain, the United States and Italy”. He stayed in France for nearly three years and he loved the country so much that later he wrote: “I got so familiar there that whenever I get to France I somehow feel that I have ‘come home again’”. He received a doctorate (PhD) at the Oslo University in 1926 on a mathematical-statistic subject. Then he became full professor at the same university by 1931 and also director of research at the newly established Economic Institute at Oslo University. This is, in short, the story of how Ragnar Frisch became an economist. He received many awards before the 1969 Nobel prize and was invited by a great number of learned societies in different countries. He was granted several Honoris Causa, but in particular he quoted only one, namely, the Antonio Feltrinelli prize awarded in 1961 by the Academia Nazionale dei Lincei. He must have liked this award very much because he added a notation: “a famous Italian Society of which Galileo Galilei was one of the first members” (ibid., p. 206). Finally, the great personality of Ragnar Frisch appears not only as a scientist, but also as a rare human being who is aware that the gift of discovering new ideas in addition to good training and experience contains a residual which remains a mystery of the first Act of Creation. Here is the voice of Laureate Ragnar Frisch which needs no further comment: When I think of a long list of problems of which I have in vain tried to find the solution, and think of the honours that have nevertheless been bestowed upon me, I understand with deep thankfulness to Whom all this is due: To the Lord Who has steered my steps over the years, and Who has been my refuge in the superior matters which no science can ever reach (ibid., p. 206).

From Utopian theory to practical application: the case of econometrics by Ragnar Frisch, University of Oslo, lecture to the memory of Alfred Nobel, June 17, 1970 Introduction Laureate Ragnar Frisch is correct by stressing right at the beginning that the subject of his lecture, and in fact any subject in every domain in science, no matter how specialized, has to be viewed not just as a particular technical issue, but also as a link to a larger philosophical context of universal human knowledge destined to improve “la Condition Humaine” as the French say, in every respect and here on this planet, in the first place. Here is the voice of Ragnar Frisch:

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In this essay on econometrics in its conception and use in economic planning for the betterment of man’s fate, I will try to cover a very broad field. When talking about the methodology in the particular fields mentioned – about which I am supposed to have a little more than second-hand knowledge – I have always found it utterly inadequate to focus attention only on these special fields without seeing them in a much broader perspective . . . So this paper will include by way of introduction some reflections on human intelligence and wisdom (two very different things), and on the nature of natural laws, including some general reflections of a “Kritik der reinen Vernunft“ – sort (op. cit., p. 213).

As to the difference between “intelligence”, and “wisdom”, he gives the example of Evariste Galois (1811-1832), in his words “one of the greatest mathematical geniuses that ever lived”, who as a younger man got into an argument with another fellow because of a girl, who by the way was “an infamous prostitute”. Galois accepted a duel with pistols when he was not a good marksman. He was aware that he might be killed in that duel. Therefore, reports Frisch, “he spent the night before the duel in writing down at a desperate speed his mathematical testament. Here we find a brilliant expose´ of his mathematical ideas. The next day he was shot and then died the following day at the age of 21”. Ragnar Frisch’s comment: “This was a striking example of supreme intelligence but also a striking example of lack of wisdom” (op. cit., p. 214). 1. The lures of unsolvable problems To begin with, Laureate Frisch wrote a great truth when he said: Deep in the human nature there is an almost irresistible tendency to concentrate physical and mental energy on attempts at solving problems that seem to be unsolvable (op. cit., p. 214).

In order to illustrate his case he used three examples: (1) the old and new mountain climber; (2) the alchemists; and (3) the alluring symmetry problem in particle physics. There seem to be no serious difficulties with example (1), where practically every mountain climber has the tendency to reach peaks that have not been conquered before. The second example is not so easy. Laureate Frisch wrote: The alchemists spent all their time and energy on mixing various kinds of matter in special way in the hope of producing new kinds of matter. To produce gold was their main concern. Actually they were on the right track in principle, but the technology of their time was not advanced far enough to assure a success (ibid., our emphasis).

The alchemists were wrong, first in principle and subsequently also in practice. There is a deficiency here of which Frisch was not aware, namely, in logic and simultaneously in pure theory or analysis. He is using modern, symbolic, nominalist logic and therefore his reasoning is exposed to Go¨del’s proof of incompleteness and lack of a clear distinction in pure theory of physics,

namely, between stable elements or matter (the 92 elements included in the Mendelyeev table) governed by the law of general stable equilibrium, attraction, gravitational fields, symmetry and reversibility and transuranic elements, artificial matter, radioactive elements, governed by the law of unstable equilibrium or open disequilibrium, dispersion, electromagnetic fields, assymetry and irreversibility. With all respect to the memory of Laureate Frisch and according to the use of the new more comprehensive methodology, integrated logic and the law of logical consistency in scientific arguments, there is not and cannot exist a general (universal) symmetry in our physical universe, as envisioned by Ragnar Frisch, and the explanation lies in the universal hypothesis of duality, conceived as an axiom, both empirically and analytically (see Rugina, 2000). Laureate Frisch mentioned deuterium, as an object used for experimenting with the problem of symmetry. Here is his own voice: More generally: Did there exist a general symmetry in the sense that to any positively charged particle there corresponds a negatively charged counterpart, and vice versa? Philosophically and mathematically and from the viewpoint of beauty this symmetry would be very satisfactory. But it seemed to be an unsolvable problem to know about this for certain.

Up to this point the problem is correctly formulated. But his answer is not only questionable, but is also directly wrong. Here is again his voice in continuation: The unsolvability, however, in this case was only due to the inadequacy of the experimental technology of the time. In the end the symmetry was completely established even experimentally (op. cit., p. 214).

On the next page he gives a table which he considers as being “the final experimental victory of the symmetry principle”. But when we examined this table with the standard of integrated logic, we found that it was constructed with the help of modern, symbolic, formal logic and therefore is exposed to the Go¨del’s proof of incompleteness. Indeed his table gives an incomplete answer to the problem of his “general symmetry”. On page 214 he started with the statement that “around 1900, when the theory of the atom emerged, the situation was relatively simple”, i.e. to begin work with two particles: proton and electron, followed by neutron. On page 215 Ragnar Frisch introduced a new, long paragraph entitled: “The population explosion in the world of elementary particles. As research progressed a great variety of new elementary particles came to be known. They were extremely short-lived (perhaps of a microsecond or shorter), which explains why they had not been seen before”. These short-lived elementary particles cannot be stable matter, as we see around us every single day, every hour of the day. These are what we mentioned: transuranic elements, artificial disequilibrium form of matter, governed by the law of unstable equilibrium or open disequilibrium with dispersion and irreversibility.

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The truth, consistent with the real, dual constitution of our physical, economic, social and intellectual universe is that stable matter or elements, up to now and with the help of modern technology, can be destroyed at super-high temperatures or speed, being converted into unstable, disequilibrium, artificial elements or particles but not into another form of stable matter, like, for instance, gold which is desired so much not only by people, but also by governments. Indeed, the number of stable elements mentioned in the Mendelyeev table (1869) did not increase at all, whereas the unstable, disequilibrium particles, as the renowned physicist from the Institute of Advanced Studies at Princeton, Professor Freeman Dyson reports, from “three species, of elementary particles which were known in the 1920s, we now have sixty-one” (see Dyson, 1988, p. 7). When we read in the newspapers or other books that a given particle in experiments in physics was observed for a few seconds or a “microsecond or shorter” (Ragnar’s expression), was called “stable”, then we have to understand that the respective particle appeared but disappeared almost simultaneously. It may disintegrate into other disequilibrium particles or return to its initial state of unstable equilibrium as model M4 on our orientation table or zero total dormant energy. Even if subsequently Laureate Frisch reported that in “1955 in the big Berkeley accelerator the antiproton was produced”, this does not change the law of consistency of stable matter (elements or particles) attraction, convergence, gravity, symmetry and reversibility. In this respect, Einstein’s formula to express mass-energy equation e ¼ m:c 2 should be clarified: e¼ energy, m ¼ matter, c 2 ¼ the square of speed of light. At the velocity of c 2 any form of matter becomes unstable, disequilibrium particles. And this is something else than the common interpretation of Einstein’s formula, without the qualification of being irreversible. In continuation, Ragnar Frisch, after mentioning that “Professor Murray Gell-Mann, Nobel Prize winner 1969, had made path-breaking work at this higher level of systematization”, raises the question: “When will this drive for systematization result in the discovery of something still smaller than the elementary particles?” (Le Prix Nobel en 1969, Stockholm, 1970, p. 215). When Ragnar Frish raised this question some other physicist was already at work to fulfill his vision. The answer is “Yes”, but with a very precise qualification: with the help of modern, symbolic logic, physicists have accepted the nominal hypothesis that mathematically there must be “something still smaller than the elementary particles, that is, ‘strings’ which are ‘just simple vibrations with no mass’, and we add, like in music” (see Weinberg, 1992, p. 211 ff.). This is the “beauty” but not the complete answer to the given question. It is standing under the Go¨del proof of incompleteness. According to the new concept of integrated logic, it may have nominal, modern truth-form, but it is

lacking real truth-content to be included in the science of physics. And yet, the concept of “strings” has been already accepted in certain scientific circles. We leave this news to the reader to decide about the consequences. Further, Ragnar Frisch, in a new paragraph called “Matter and antimatter”, is wandering in murky territory where any “real” scientific light disappears almost completely. It is the result of using again uncritically the modern formal, symbolic logic. Here is the voice of Laureate Frisch in extension: Theoretically one may very precisely consider the existence of the “anti”-form of, for instance, a normal hydrogen atom. This anti-form would have a nucleus consisting of one antiproton around which circulated one positron. And similarly for all the more complicated atoms. This leads to the theoretical conception of a whole world of antimatter. In theory all this is possible. But to realize this in practice seems again a new and now really unsolvable problem. Indeed, wherever and whenever matter and antimatter would come in contact, an explosion would occur which would produce an amount of energy several hundred times that of a hydrogen bomb of the same weight. How could possibly antimatter be produced experimentally? And how could antimatter experimentally be kept apart from the normal matter that surrounds us? And how could one possibly find out if antimatter exists in some distant galaxies or metagalaxies? And what reflections would the existence of antimatter entail for the conception of the “creation of the world”, whatever this phrase may mean. These are indeed alluring problems in physics and cosmology which – at least today – seem to be unsolvable problems, and which precisely for this reason occupy some of the finest brains of the world today (op. cit., pp. 215-16).

From this long quotation, one thing is sure that on our planet antimatter in the conception viewed by Laureate Frisch does not exist and that is good for man and humanity because otherwise we would have disappeared a long time ago. The description has truth-form, if we use modern, formal symbolic logic but it does not have real truth-content, if we use integrated logic. Antimatter does exist in our physical universe, respectively on our planet but only in form of radioactive elements. The Good Lord, using the language of Frisch, took care at the Act of Creation that such disequilibrium elements in nature are inactive, in a neutral state of a mixture, a 50:50 combination of positive and negative charge exactly like our model M4 on our orientation table, that is, in a condition of unstable equilibrium. Static electricity in the atmosphere is in the same neutral state of model M4 as if it would have no visible mass, but as soon as an extraneous element or force is touching the neutral state, then an open disequilibrium is created. That is why the condition of unstable equilibrium of model M4 may be called also “stable” or “static disequilibrium”. In any case, the original master has created this world – the good Mother Nature – for our own benefit, and it is composed of stable equilibrium matter (the 92 elements of the Mendelyeev table) in such a quantity and of such a degree of consistency, symmetry, homogeneity resistance and reversibility that the rest of unstable elements or matter, including antimatter or radioactive

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elements in natural form do not harm human existence and free development of human societies. Given modern technology nowadays in trying to construct space-stations, multiple satellites and even pure, artificial antimatter (in the sense of Frisch) we may run the risk of breaking the harmony which the initial Creator gave us as a gift of natural Divine protection. As far as economics is concerned, Frisch gives as an example the case of Stanley Jevons. The English mathematician and economist Stanley Jevens (1835-1882) “dreamed of the day when we would be able to quantify at least some of the laws and regularities of economics. Today – since the breakthrough of econometrics – this is not a dream anymore but a reality” (see op. cit., p. 216). Laureate Frisch is very generous with econometrics. After all he – together with Laureate Jan Tinbergen and a few others – was the father of econometrics. But to believe that with the help of mathematical economics and/or econometrics, we can identify “laws and regularities” in any given economic, social and political system, and therefore on this road we could solve any economic and social problems constitutes not only a scientific illusion, but also a direct methodological error. The vision of Laureate Frisch can be realized in practice with the help of mathematical economics and/or econometrics; however, not in every economic system, including a centrally-planned economy, but only in an economic regime based on full conditions of a Walrasian general stable economic system in its more complete form. This corresponds to model M1 on our orientation table, conceived practically in terms of model M2 brought as close as humanly possible to the limit of M1. Such a regime, of course, is possible, according to both Kantian principles of “reine Vernunft” (pure reasoning) and “praktische Vernunft” (practical reasoning) if all the conditions (about 25 indicated in the Introduction on pp. 369-84) are fulfilled beforehand through adequate reforms. In such a regime there are only simple, limited fluctuations or minor disequilibria of 1/4 percent or less intensity which can be solved by simple arithmetic. Such a regime, in its own and by its own nature and structure, satisfies automatically the rule of what Frisch himself called “general symmetry”, and we add also other principle rules of consistency, homogeneity, convergence and reversibility. Unfortunately, there is no trace in Laureate Frisch’s lecture about the Walrasian law of general equilibrium or the new integrated logic. He believed in modern, formal, symbolic logic and the necessity of central economic planning which he applied rigorously and with all his intellectual force. The two important but dangerous analytical tools led him to a dead end – a philosophy of chaos – as we shall see immediately. On the other hand, there is no doubt in the mind of this writer that Laureate Frisch was really a great man and a great original thinker. He was very much concerned for the hard life and sufferings of the large number of innocent

people who are not lazy, but cannot enjoy life and do not know that the reason lies in a technical deficiency, a malfunction of the prevailing social system composed of stable equilibrium but also disequilibrium elements, practices, values and institutions. However, instead of searching the two categories of elements, practices and values – some positive and others negative – and attempting to eliminate the latter, as far as humanly possible, he thought, like his companion, Laureate Jan Tinbergen, that this great problem could be solved by economic planning, national and international, and, of course, using political power and professional advice. Both original thinkers were not sufficiently aware of the inherent problem and social necessity of a fair and “equal for all under the law of social justice of equity”, namely, a precise, “economic calculation”, which is not possible without the general use of “numeraire-currency standard”, 100 percent covered by a special commodity: gold, silver or any other suitable “la marchandise mth”, as Walras called it. Without a constant (natural parameter) type of numeraire-currency, always fully covered there is no other way to obtain a fair and just economic calculation, i.e. stable equilibrium prices, regardless whether we have a free-market economy or a centrally-planned economy. In addition there is a second barrier, which is the impossibility theorem in practice, not known to Ragnar Frisch but of which Tinbergen was aware (see: sections 13 and 14 in the Introduction). With Laureate Tinbergen, this author had a long conversation at his home in the Hague, but with no positive results. He saw the radical consequences and in the end “we agreed to disagree!” We may disagree with them, however, they are and remain great scientists because through them we can learn new ideas. There is one point on which we agree with Frisch unconditionally, and that is a tribute he paid to his partner in life, his wife. The tribute is written under the title: “Struggle, sweat and tears”. Here are his own words, without any further commentary: This slight modification of the words of Winston Churchill is admirably suited to characterize a certain aspect of the work of the scientists – and particularly of the kind of scientists who are absorbed in the study of “unsolvable” problems. They pass through ups and downs. Sometimes hopeful and optimistic. And sometimes in deep pessimism. Here is where the constant support and consolation of a good wife is of enormous value to the struggling scientist. I understand fully the moving words of the 1968 Nobel prize winner Luis W. Alvarez when he spoke about his wife: “She has provided the warmth and understanding that a scientist needs to tide him over the periods of frustration and despair that seem to be part of our way of life” (op. cit., p. 216).

2. A philosophy of chaos. The evolution towards a mammoth transformation Laureate Frisch starts with a quotation from the Concise Oxford Dictionary, which he recommends as “a most excellent book where philosophy is defined as ‘love of wisdom or knowledge, especially that which deals with ultimate reality, or with the most general causes and principles of things’” (op. cit., p. 216).

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The definition is perfect and there is nothing more to be added, except to say that it satisfies also the new integrated logic, or the synthesis of classic and modern logic. He gives further information that “a very general point of view in connection with the ‘ultimate reality’ was presented in lectures given at the Institut Henri Poincare´ in Paris in 1933.” In the subsequent presentation the road followed by Laureate Frisch changes, in the spirit as well as logical content, from that used by the craftsman who formulated the definition of philosophy in the Concise Oxford Dictionary. Specifically, he puts aside the classical logic bent more on truth-content of proposition. Instead he relies thoroughly on modern, formal or symbolic logic, and we shall see that he loses the sense of direction and is pushed by his own reasoning into a territory of untenable, contradictory conclusions in science. And all is due to the fact that he puts all his confidence in intellectual power in the application of modern, formal logic which is concerned with truth-form of proposition and leaves out real truth content. In this way he became a victim of Go¨del’s proof. What is the “ultimate reality”? He takes a mathematical model of two variables: x1 and x2 during a series of observations. “The generalization to many variables” – he thinks – “is obvious. It does not matter whether we consider a given deterministic, empirical distribution or its stochastic equivalence” (op. cit., p. 217). Yes, it does matter if we think first in a model of “deterministic”, conditions where the solution is determinate, and then in a model of stochastic conditions where the solution is indeterminate. Then he takes the transformation of x1 and x2 into a new set of two variables, y1 and y2 . On the next page he changes the situation, landing into a bizarre territory of make-believe conclusions, if we judge them by the use of integrated logic. We learned before, that reversibility is possible only when the model is 100 percent consistent and symmetrical but here the two models in question (x1 and x2 versus y1 and y2 ) are not. But let us hear the voice of Laureate Frisch: Now let us reverse the viewpoint and assume that y1 and y2 are directly observed, perhaps with a strong correlation. It seems that we have no way of excluding the possibility that the observed variables y1 and y2 are in fact derived from an essentially chaotic distribution of two variable x1 and x2 . . . How could we then exclude the possibility that the chaotic world of the xs is “the ultimate reality.”?

In continuation here is his explanation: What would the transformation mean in this case? For one thing it would express the present status of our sense organs as they have emerged after a long development over time. It is quite clear that the chances of survival of man will be all the greater the more man finds regularities in what seems to him to be the “outer world”. The survival of the fittest will simply eliminate that kind of man that does not live in a world of regularities. This development over time would work partly unconsciously through the biological evolution of

the sense organs, but it would also work consciously through the development of our experimental techniques (op. cit., p. 218).

The peak of the application of modern, formal, without real truth-content-type of logic by Laureate Frisch is reached by raising the question whether the laws of nature have an objective existence or are a creation of the human mind? Here again we let his voice speak up: If “the ultimate reality” is chaotic, the sum total of the evolution over time – biological and scientific – would tend in the direction of producing a mammoth singular transformation which would in the end place man in a world of regularities. How can we possibly on a scientific basis exclude the possibility that this is really what has happened? (op. cit., p. 219). This is the crucial question that confronts us when we speak about an “ultimate reality”. Have we created the laws of nature, instead of discovering them? (Cf. Lamarck vs Darwin (ibid., p. 219).

First, he does not clarify what “regularities” really mean? Is it a state of “stable equilibrium” which later, with the passing of time, has become “chaotic”? That would be in conflict with that “mammoth singular transformation”, which was not necessary! Was it at the beginning a “chaotic state of affairs” then the existence of so many problems of disequilibrium in modern society and economy does not confirm that “mammoth singular transformation”! Go¨del’s proof is again in action. By the use of modern, formal logic, we cannot give a determinate answer. On the other hand the laws of nature exist, regardless of our attitude or kind of interpretation. In continuation, Frisch asked the question: “What will be the impact of such a point of view?” His answer was: “It will I believe, help us to think in a less conventional way. It will help us to think in a more advanced, more relativistic and less preconceived form (ibid., p. 219) Unfortunately, “more advanced” and “more relativistic, do not fit together. Indeed, more advanced means progress in science, whereas more relativistic indicates less precision. In any case, what we read next shows a sort of retreat from the previous position. Frisch wrote: But as far as concrete day to day work in the foreseeable future is concerned, that idea of a chaotic “ultimate reality” may not exert any appreciable influence.

In the finale, he brought in an aphorism which unites pure economics with ethics under the formula: “Understanding is not enough; you must have compassion”. He uses “search of regularities” as the essence of understanding in one aspect of man’s activity. To this he added another factor, “a vision of the purpose of understanding”. And this is the moral responsibility of a scientist as emerges from a revision of the Max Weber theorem: “There is no place in science for values” (see Rugina, 1998, pp. 301-50). Once again we can see the greatness of the personality of Ragnar Frisch from what he wrote in continuation:

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Is the purpose just to produce an intellectually entertaining game of those relatively few who have been fortunate enough through intrinsic abilities and an opportunity to top education to be able to follow this game? I, for one, would be definitely opposed to such a view. I cannot be happy if I can’t believe that in the end the results of our endeavor may be utilized in some way for the betterment of the little man’s fate (op. cit., p. 219).

Following his thoughts, he gives the source of the aphorism: I subscribe fully to the words of Abba Pant, former Ambassador of India to Norway, subsequently Ambassador of India to the United Arab Republic, and later High Commissioner of India to Great Britain: “Understanding is not enough; you must have compassion” (ibid.).

As far as the identification of the moral responsibility of a scientist toward “La Condition Humaine” – as Andre Malraux called it – the issue is clear and perfect. But the even bigger problem on how the betterment of the little man’s fate” (and there are millions and probably billions on the whole planet in this situation) can be realized, not only on the short, but also on the long run, that is permanently? For this purpose, there are two major roads: (1) a centrally planned and controlled economy and society with a politically strong government of unlimited powers and discretion; or (2) a constitutionally free, just and financially stable economy and society with a government of limited, delegated powers. We are leaving it to the reader to reflect more about this issue. Ragnar Frisch, with no hesitation, would favor the first solution because he believed that mathematical economics, respectively econometrics, can solve all necessary problems of detail, if only the professional economist would prescribe the right equation. The same belief was shared by Laureate Jan Tinbergen, as I personally had the occasion to discuss this issue with him. Not less, the greatest economist of the twentieth century Lord Keynes may have supported the same direction but all three preserving the democratic method. With all respect toward all three famous economists from whom I learned so much myself, I dare to say that all three, in the name of the science of economics erred. The full and complete justification for such a strong and almost incredible statement, especially on Keynes who today is considered irrefutable, lies in the application of the impossibility theorem in practice (see: Introduction, pp. 353-6) it is a matter of principle and not a personal opinion. 3. A brief survey of the development of economics in the last century Laureate Frisch belongs definitely to the modern school of economics which studied economic and social problems within the framework, that is, model of an economic system in disequilibrium. This is all right, as a first empirical approximation. From the pragmatic point of view, this approach appears to be

free of contradictions. But from the pure, analytical point of view, the approach of the modern school is not wrong in itself, but imperfect or more exactly, incomplete. We are dealing here again with a strong and likely debatable statement, because it refers to the whole contemporary economic profession. The justification in this case is provided by the formulation of the equation of unified knowledge, S ¼ f ðA; PÞ (see Introduction, pp. 358-61). Here we have a problem of methodology, which the moderns (Marx, Keynes and a large number of contemporary economists) simply do not see, because their reasoning and attention are concentrated thoroughly on factor “A” (the quantitative aspect of the given existing, actual conditions in disequilibrium). In this way, the problems appear more simple but at the same time more difficult to be solved, in the sense that the offered solution is more or less indeterminate, specifically “more” when the system or regime is in a kind of major disequilibrium, or, “less” when the same system or regime lies within the limits of minor disequilibria. In order to see clearly the difference between one case and the other, one needs the new concept, of the orientation table (see Introduction, pp. 341, 345). The equation of unified knowledge, on the other hand, requires that in order to find the right and complete solution to a given economic or social problem, we need both factors “A” and “P”. To our knowledge, only the equation of unified knowledge properly interpreted, can show a methodological weakness, if not an error, in the modern school of thought, specifically the loss of a sense of direction, that is, the neglect of factor “P,” which is supposed to fulfill this function. After all, factor “P” represents the final station of general stable equilibrium, where the problem in question is solved or does not exist by definition. But when modern thinkers do concentrate almost exclusively on disequilibrium problems in their empirical garb (factor “A”), they are prisoners, if not victims, of their own approach. If we want to expect real progress in the economic science – both practically and also analytically – we have to solve this methodological deficiency, properly and fully. It is interesting to notice that members of the classical and neo-classical school committed a similar methodological error, only in reverse. The classics concentrated their full attention on the study of factor “P” (even that not completely) and neglected factor “A”. In other words, the classics failed to develop the second part of their study, which was “applied macro and microeconomics”. In short, the classics in their own way were also prisoners or victims of their own approach. Ragnar Frisch did not have either the concept of the orientation table, nor that of the equation of unified knowledge, therefore, we cannot and should not expect the explanation given above from him. In his “brief survey” he did not start with Adam Smith and Francois Quesnay, the two fathers of the science of .

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economics, but rather with John Stuart Mill, who committed the blunder in his otherwise famous work, Principles of Economics, where he wrote, “so far as general principles are concerned the theory of value and price was now [1848] completely elaborated” (op. cit., p. 219). Regarding the problem of value, what the neo-classics like Carl Menger (1840-1921) of the Vienna School, Leon Walras (1834-1910) of the Lausanne School and Stanley Jevons (1835-1882) of the London School, followed shortly by Alfred Marshall (1842-1924) did was to raise the problem of pure value, over and above the empirical concept in the form of “value of exchange,” or prices. That is what revolutionized the heritage of the old classics but not in the sense to negate but rather to complete the classical theory. It was a problem of “pure analysis” and not of applied science. Now comes Frisch with his criticism, which is valid up to a certain point and with proper qualification. He wrote: Neither the classicists nor the neo-classicists did much to verify their theoretical results by statistical observations. The reason was partly that the statistics were poor, and partly that neither the classical nor the neo-classical theory was built out with the systematic statistical verification in view. The architectural plan of the theory had so to speak not made room for this verification. This fact was criticized by the German historical school under the leadership of Gustav Schmoller (1838-1917) and by the American institutionalists (op. cit., p. 220).

There are two ways to criticize a theory. The legitimate way is to prove that the assumptions of that theory (model) are contradictory to the conclusion. The illegitimate way is to use rough statistics and try to negate a theory. Then you create an antinomy. In point of methodology, all possible major problems can be concentrated in five categories of problems, exhaustive in the Kantian sense: (1) economic history and statistics; (2) economic theory or analysis; (3) economic ethics; (4) economic policy; and (5) doctrines or history of economic thought. We called this Quinta Methodica. From the Quinta Methodica we can formulate the law of logical consistency in scientific arguments, which says: Whenever a concept or theorem or any other kind of knowledge or process of reasoning begins to be doubted or questioned, then the counter-argument has to be of the same nature, as identified by Quinta Methodica. Otherwise,we run the danger that our argument becomes fruitless, an insoluble antinomy.

The criticism raised by Laureate Frisch against the classics and neo-classics is not quite legitimate, because it runs counter to the law of logical consistency in

scientific arguments and thus becomes an antinomy. It is related to the famous Methodenstreit in the German economic school, that is, an argument between Gustav Schmoller (the School of Berlin) and Carl Menger (School of Vienna) which was never solved properly and fully. It became an insoluble antinomy. Exactly the same happened with the argument between J.B. Say and Robert T. Malthus about the Say law of the markets. The great Immanuel Kant hinted at the same problem and made the observation that “if a theory does not fit to explain certain facts or realities, then the cause was not in the respective theory but in the fact that not sufficient theory was available which man should have learned from experience” (see Kant, 1797). Yet, Laureate Frisch has a legitimate criticism but not the one he raised – namely, the fact that the classics did not study with the same diligence problems of disequilibrium, or more exactly the second part of applied classical macro-economics, as mentioned earlier. After he mentioned the German historical school and US institutionalists, Frisch wrote: These schools, however, had an unfortunate and rather naive belief in something like a “theory-free” observation. “Let the facts speak for themselves”. The impact of these schools on the development of economic thought was therefore not very great, at least not directly. Facts that speak for themselves, talk in a very naı¨ve knowledge (op. cit., p. 220).

Laureate Frisch is absolutely right in this paragraph, that facts cannot talk by themselves and therefore both German historical school and US institutionalism do not provide a complete method to solve adequately economic-social problems, in the sense that they are incomplete. In this respect, how right was the master logician Ludwig Wittgenstein when he wrote: “The facts all contribute only to setting the problem, not to its solution” (Wittgenstein, 1961, p.149). In continuation Frisch wrote: In the first part of the 20th century the picture changed. Partly under the influence of the criticism of the historical school and the institutionalists the theoreticians themselves took up a systematic work of building up the theory in such a way that the theory could be brought in immediate contact with the observational material. One might say that from now on economics moved into a stage where the natural sciences had been for a long time, namely the stage where theory derives its concepts from the observational technique, and in turn theory influences the observational technique” (op. cit., p. 221, Frisch’s emphasis).

When we read this paragraph for the first time, we thought that here we can identify similar roots related to our equation of unified knowledge, but subsequently on more reflection, we came to the conclusion that it does not or if it does, then this is only a marginal observation. In point of methodology, in our equation factor “A” represents actual, existing realities or what Laureate Frisch called, observational material, but this is identified as being separate from

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factor “P ” which is pure theory in the Walrasian sense or “reine Vernunft” (pure reason) in the Kantian sense. In Ragnar Frisch’s work, the independence of the two factors is lost. In our equation, factor “P ” serves as a standard of indication where the final station is: it gives the sense of direction where our practical solution (factor “S ”) should work and the solution of the problem is determinate, in accordance with the conditions of general stable equilibrium, envisioned by Walras but left incomplete, now improved by this author. When Frisch wrote that “theory derives its concepts from the observational technique, and in turn theory influences the observational technique”, this means that in his model of reasoning the two factors, which otherwise are well identified, are amalgamated into one hybrid combination where the sense of direction disappears and the solution of the problem is not and cannot be determinate. At this point there begins a great methodological argument inherited from the twentieth century and which has become an immense impediment for the twenty-first century. What Frisch described here refers to the period of transition from the classical method of approach to the modern kind of approach initiated in the early 1920s by Frank R. Knight and Piero Sraffa and completed by Lord Keynes and followers of his revolution. Let us hear more from Laureate Frisch, who like all great original thinkers, is very clear in exposition of his point of view: For the first time in history it now seemed that the work on the theoretical front in economics – now to a large extent mathematically formulated – and the work on the outer descriptive front should converge and support each other, giving us a theory that was elaborate enough to retain the concrete observational material, and at the same time a mass of observations that were planned and executed with a view to be filled into the theoretical structure (op. cit., p. 221).

In order to understand this revolutionary event, not only in economics, but a little bit earlier starting also in physics and other natural sciences, we need to have a clear vision about the difference between the classical versus the modern method of approach and mode of reasoning. We are talking here about a period of transition when classical logic oriented at the truth-content of propositions gave priority to modern, formal, mathematical logic oriented only at the formal aspect of propositions; this procedure allowed more freedom to manipulate concepts, but not without certain risks, one of which was identified by the Go¨del proof, when the solution of the problem becomes indeterminate. In the classical time and school, the observer (scientist) had to struggle with the accumulation and description of actual realities (historical facts) until he – or somebody else before him – saw a beacon of light, on a higher level of abstraction independent of, but still related to, the crude historical facts. Pure theory was conceived like an invisible but real lamp (filled with spirit) which could help us to make those facts speak a clear and consistent language.

We can see here in the classical approach two different and separate functions: an empirical accumulation of historical facts and an abstract process of reasoning. This is in essence the nature of classical theory, not only in economics, but also in all other sciences. In application the classical procedure (not always clearly stated) was characterized by an ex ante or forward type of reasoning, starting with causes and ending with results (effects). These are the cause-and-effect type of policies. Our equation of unified knowledge satisfies all these conditions. From all the great economists, including the natural, physical scientists, only in Walras have we found that the division of the two functions included in pure theory and the methodological relationship between theory and practice, both in economics and all other sciences, were very clearly identified in a spirit close to the equation of unified knowledge. Here is the voice of Walras: The mathematical method is not an experimental method; it is a rational method. Are the sciences which are strictly speaking natural sciences restricted to a pure and simple description of nature, or do they transcend the bound of experience? I leave it to the natural scientists to answer this question. This much is certain, however, that the physico-mathematical sciences, like the mathematical sciences, in the narrow sense, do go beyond experience as soon as they have drawn their type concepts from it. From real type concepts, these sciences abstract ideal-type concepts which they define and then on the basis of these definitions they construct a priori the whole framework of their theorems and proofs. After that they go back to experience not to confirm but to apply their conclusions . . . Following the same procedure, the pure theory of economics ought to take over from experience certain type concepts, like those of exchange supply, demand, market capital, income, productive services and products. From these real type concepts the pure science of economics should then abstract and define ideal-type concepts in terms of which it carries on its reasoning. The return to reality should not take place until the science is completed and then only with a view to practical applications (Walras, 1954).

This is a masterful piece of classical explanation of the nature of pure theory (theoretical knowledge) versus historical, empirical reality (historical knowledge) and the two different functions, separated one from the other. He could have formulated the equation of unified knowledge but he did not. He did not have and did not use the new methodology of a simultaneous equilibrium vs disequilibrium approach. Let us examine the methodology used by Laureate Frisch. First, his model of reasoning is different from the classical one. The two different functions are mixed into one combination with the result of a theory which is “elaborate enough to retain the concrete observational material (historical, empirical reality) and at the same time a mass of observations that were planned and executed with a view to be filled into the theoretical structure”. And one paragraph later he specifically pointed out: “A crucial point in this connection is the quantification of the economic concepts, i.e. the attempts at making these

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concepts measurable”. (op. cit., p. 221). Still further on the following page and in connection with the same issue he added: In a global analysis that shall be useful for practical applications in economic policy in the nation as a whole, the gist of the matter is to study the relative strengths of all relevant effects and counter effects, hence the need for quantification of the concepts. This perhaps is the most general and most salient formulation of the need for econometrics. How far we would be able to go in this direction was of course another question. But at least the attempt has to be made if economics were to approach the state of an applied science (op. cit., p. 222).

We are now in the territory of modern methodology where the procedure of analysis is characterized by an ex post or inverted type of reasoning in the sense that we take the end results (effects, inflation, unemployment etc., all disequilibria) and begin to reason backwards, in point of application. If an inflation is the problem, then we think about deflationary countermeasures. In other words, here we have an effect-counter-effect type of policies. Indeed, compared with the classical methodology, here we are using an inverted order of reasoning. Even though Frisch appears very enthusiastic about econometrics, after all he was one of the fathers of this kind of study, nevertheless as a great original scientist, he realized that “applied science” is not a simple thing and econometrics cannot solve any problem. In this spirit he wrote in continuation: It goes without saying that econometrics as thus conceived does not exhaust all the contents of economics. We still need – and shall always need – also broad philosophical discussions, intuitive suggestions of fruitful directions of research, and so on. But this is another story with which I will not be concerned here.

The real story which does not belong alone to Frisch but to the entire modern methodology school, does not end here. The modern school deserves credit for bringing to debate the study of disequilibrium which was ignored by the classics who were interested in searching the laws of stable equilibrium, first in the physical sciences (Newton and others before and after him) and later in economics (Adam Smith and Francois Quesnay). Unfortunately, the moderns including the contemporaries committed a methodological sin in reverse. Whereas the classics concentrated on factor “P ” of our equation of unified knowledge and neglected factor “A”, they were deficient by missing to solve properly and fully practical problems (applied science). The “moderns” and “contemporaries” concentrated on factor “A”, neglected factor “P” and in this way they too failed to solve properly and fully practical problems, matters of policies or applied science. The economic drama of the Great Depression of the 1930s was characterized by an open conflict between, the, at that time, dominating classical school of thinking and the given economic and financial conditions of that era. The economic drama of the Great Recession announced in 2001 by the USA National Bureau of Economic Research again is characterized by an open

conflict between the, in our time, dominating modern Keynesian school of thinking and the actual existing economic and financial conditions in 2001, as if we did not learn the right lesson from the experience of the 1930s. The former sage, Spanish-American thinker from Harvard University George Santayana, warned us long ago: “If we do not learn the right lesson from history then history will be repeated”. How right was Santayana, especially in this particular case! And what is the correct lesson that we should have learned from the 1930s? It will be hard for most contemporaries to accept the verdict that Keynesian macro-economics may help to extricate us from a big hole of a depression, i.e. for the short-run, until we prepare the right solution for such extraordinary conditions. The right solution by 1930 or 1938 was to reconstruct the old mixture of equilibrium vs disequilibrium regime, known as modern capitalism, into a system of general stable equilibrium. After all, this was, and remained, the best conceivable regime. This solution, however, is incorporated in our equation of unified knowledge: S ¼ f ðA; PÞ, applicable in the 1930s or 2002 or any other time in the future and in any country where people want to live in freedom, social justice and financial and political stability. Let us go back and see what was wrong with the Ragnar Frisch position. When he recommended putting “on the theoretical front in economics . . . quantification of the economic concepts”, that is, only factor “A” from our equation, first of all he ignored that wise advice by the master logician Wittgenstein: “The facts all contribute only to setting the problem, not to its solution”, even though we do not agree with other parts of his system of modern logic. He is also breaking our law of logical consistency in scientific arguments mixing two different categories of historical and theoretical knowledge. Finally, when he wants to put at the center, or “on the theoretical front in economics” empirical, quantified concepts, he is not aware of the fact that regardless how these “real type concepts” (as Walras called them) are manipulated, they still represent disequilibrium data and are contaminated with inherent instability. Therefore any given solution will be indeterminate, depending on the degree of disequilibrium. More than that, when the stage was reached “where theory derives its concepts from the observational technique, and in turn theory influences the observational technique” then an imminent and ominous Pandora’s box is implanted in the system. In other words, theories are constructed nolens volens to justify and make legitimate operational tools. To do the opposite creates a vicious circle of perpetuating a system in disequilibrium. This is exactly what we have done during the twentieth century, and now in 2002 we returned to the same kind of problems as those in the 1930s but in a much more complicated social, economic and financial milieu, as if we learned nothing from the past.

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To repeat, the Keynesian macro monetary and fiscal policies were good in the 1930s but only to give us more time to reflect on the best solution in the long run which could not be any other but structural reforms of the mixed capitalist regime in the direction of a system of general stable equilibrium conditions. Unfortunately, the generation of economists in the 1930s and thereafter failed to do their homework. Consequently, millions and millions of innocent but industrious people, all over the world, have to suffer the rigors of – to say the least – questionable economic, monetary and financial policies. Laureate Ragnar Frisch did not believe in the realization of a system of general stable equilibrium, inherited from Walras. On the other hand and on more reflection, the pure and practical reasoning, in the Kantian sense, shows that such a system is possible anywhere on the globe, leaving to the government only two major economic functions: (1) to undertake the necessary structural reforms for the introduction of the new system; and (2) to watch constantly that the basic equilibrium conditions are fulfilled and function normally by correcting immediately any disruptions and thus avoiding well-known cumulative Wicksellian fluctuations in the capitalist and socialist regimes. This system, based on general stable equilibrium in practice, once put in motion, functions by itself and through itself because of a number of selfregulating mechanisms. This is also the most economical form of democratic government with the minimum level of taxation. Ragnar Frisch does not believe in such a self-regulating system, perhaps after taking into account what happened during his lifetime. His vision is based on the concept of national and international central-planning and controls and with an amiable collaboration between professional economists and political men in power retaining the democratic form of government and society. As far as we can see, there was a conflict between his personal views, which were in favor of a free society, and his scientific tools of analysis which he used and strongly recommended. We tried to disentangle this conflict, but since he is no longer alive, we shall stop here, leaving to readers of today and tomorrow the freedom to make their own judgment. In our view Ragnar Frisch remains a great humanist. The rest of the Laureate’s Lecture is devoted to “Some historical notes on the founding of the econometric society”, that are of interest to any economist but do not specifically change the exposition thus far. Consequently, we decided to omit the historical notes. References Dyson, F. (1988), Infinite in All Directions: Gifferd Lectures Given at Aberdeen, Scotland, AprilNovember 1985, Harper & Row, New York, NY.

Kant, I. (1797), Da lag es dann nicht an der Theorie. Rugina, A. (1998), “The problem of values and value judgments in science and a positive solution”, Prolegomena 1: To Any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), International Journal of Social Economics, Vol. 25 No. 5, Ch. 8, pp. 301-35. Rugina, A. (2000), “Principia Methodologica: a bridge from economics to all other natural sciences”, Prolegomena 2: To Any Future Study in “Integrated Logic” and a More Comprehensive Methodology for the Unification of All Sciences, Natural and Social. An Orientation Table for Economics and Any Other Science (monograph), International Journal of Social Economics, Vol. 27 No. 5/6, Ch. 2, pp. 77-149. Walras, L. (1954), Elements of Pure Economics or the Theory of Social Wealth, trans. by Jaffe, W., Richard D. Irwin, Homewood, IL, (originally published in 1874). Weinberg, S. (1992), “The shape of a final theory”, Dreams of a Final Theory, Pantheon Books, New York, NY, Ch. IX. Wittgenstein, L. (1961), Tractatus Logico-Philosophicus, trans. by Pears, D.F. and McGuinness, B.F., Routledge & Kegan Paul, London.

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2. Nobel Laureate: Jan Tinbergen (1903-1994) In the Introduction to his lecture he gives relatively less information, for instance, in comparison with Laureate Ragnar Frisch, his companion for the Nobel Prize for 1969. That was his nature: a great scientist but a very modest person. This author had the opportunity to know him personally. He shared strongly the same desire with Ragnar Frisch, that is, humanity was in need of help by scientists to correct errors of the past or present, and believed that a better world of tomorrow was possible; however, he was unwilling to leave the territory of science to fight for his ideas. He was born in the Hague, The Netherlands, in 1903. At the age of 26 he received a PhD in Physics (1929) from the University of Leyden. He worked in the Central Bureau of Statistics of The Netherlands from 1929-1945 as a statistician for business cycle research. From 1936-1938 he served as an expert in statistics with the League of Nations Secretariat. From 1945 to 1955 he was the Director of Central Planning Bureau of Netherlands Government. In 1933 he became Professor at the Netherlands School of Economics, teaching various subjects. From 1956 on, his full-time teaching was about development programming. Jan Tinbergen served as advisor to governments of various developing countries: United Arab Republic, Turkey, Venezuela, Indonesia, Pakistan and other countries occasionally. He served also, in the same capacity, other international organizations such as the European Coal and Steel Community, International Bank for Reconstruction and Development, United Nations Secretariat and other specialized organizations. He was a member of the Royal Netherlands Academy of Science and some foreign academies, honorary doctor of 15 universities, mostly European. Among his rich publications he mentioned: . Business Cycles in the United States, 1919-1932 (Tinbergen, 1939). . Business Cycles in the United Kingdom, 1870-1914 (Tinbergen, 1951). . Economic Policy:Principles and Design (Tinbergen, 1956). . The Element of Space in Development Planning (Tinbergen et al., 1969).

The use of models: experience and prospects by Jan Tinbergen, The Netherlands School of Economics, Rotterdam, lecture to the memory of Alfred Nobel, December 12, 1969 1. Essence of models Laureate Jan Tinbergen announces his subject as an experience by the profession “with the method of model building as a contribution to the economic science and the prospects for its further application”. Here is how Tinbergen describes the essential features in the technical construction of models and, of course, of mathematical models: (i) “drawing up a list of variables to be considered; (ii) drawing up a list of equations or relations the variables have to obey; (iii) testing the validity of equations, which implies the estimation of their coefficients, if any (Le Prix Nobel en 1969, Stockholm, 1970, p. 244).

In continuation, Laureate Tinbergen is careful to add a specification with regard to any further questions which may be raised. Here is his qualification: “As a consequence of especially (iii), we may have to revise (i) and (ii) so as to arrive at a satisfactory degree of realism of the theory embodied in the model. Then, the model may be used for various purposes, that is, for the solution of various problems” (op. cit., p. 244). The first question which may be raised: What is “a satisfactory degree of realism?” Does it mean to measure factor “A” from our equation of unified knowledge: S ¼ f ðA; PÞ? That is a very difficult operation, if possible at all. Hayek would say that it is impossible because of an unlimited, unknown number and facets of variables. But even if we select a number of relevant variables – as Laureate Tinbergen suggested during a long dialogue with him in his home in the Hague – what do we achieve, since these variables carry inherent microbes of instability, disequilibrium? Second, he wrote: “Then, the model may be used for various, that is, for the solution of various problems”. Unfortunately, he did not see that serious difficulties were in the way, including the impossibility theorem in practice (see Introduction, 13, pp. 354-6). The real difficulties with “testing the validity of the equations” are insurmountable, if we consider the new, more comprehensive integrated logic. Strict mathematically, the equations formally must be consistent (modern logic), since otherwise the computers will not work, because the basic data are contaminated by disequilibrium information. The economist or statistician therefore has to use some dummy variable or other techniques in order to make the equations artificially consistent. By doing that, the end result is a solution which the statistician or mathematical economist interprets as a determinate solution, but in fact it is not! It is artificial because at the roots it is derived from disequilibrium information or data.

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A determinate solution to a given economic or financial problem is possible or can exist only when we have a model where all conditions of general stable equilibrium in the Walrasian more complete system are fulfilled, analytically and practically conceived. (See the orientation table (Table I) in the Introduction, pp. 341, 345.) There is a hidden conflict here between the mathematical (strictly formal) model and consistency which went through a sort of “window dressing” versus the real, initial empirical model and consistency, that neither Laureate Tinbergen nor Ragnar Frisch noticed. How could this happen when we are faced with two great original thinkers? The roots of this hidden conflict are in the fact that both scientists used indiscriminately modern, formal, mathematical logic where only the form of propositions is included, whereas the truth-content of propositions is left out. Our interpretation is based on the use of a new, more comprehensive, integrated logic, where both the form and the truth-content of propositions are considered simultaneously (see Rugina, 2000, 2, Chs 1 and 2). The great Tinbergen, when I had an opportunity to entertain an open dialogue (1990) about this conflict between mathematical models and the empirical realities in a modern capitalist regime which, more often than not, are in a state of disequilibrium, did not accept that such a conflict exists, or if it does, then it can be solved properly by the use of mathematics. Then I tried to convince him by using the orientation table, that such a special case exists only in model M1 (the Walrasian system of general stable equilibrium which at the limit is 100 percent consistent) but again he was not willing to accept the comparison between the two cases. Being a guest in his home, I could not insist too much on this open conflict since he sent me to his lecture of December 12, 1969 when he received the Nobel Prize. Here he said: The advantages of models are, on one hand, that they force us to present a “complete theory” by which I mean a theory taking into account all relevant phenomena and relations and, on the other hand, the confrontation with observation, that is, reality (Le Prix Nobel, 1969, p. 244).

I could not abstain from raising another question about what he called “a complete theory” using also the orientation table, specifically the impossibility theorem in analysis, which says: It is impossible by definition to develop one single, general, universal theory, capable to explain all possible systems, models, or combinations, as Einstein attempted unsuccessfully in physics with his Unified Field Theory, and Keynes in Economics with his general theory on employment, interest and money, or what Nobel Laureate Paul Samuelson called “a general theory of economic theories (Samuelson, 1983) (Rugina, Introduction, p. 349 and the orientation table (Table I), on p. 341).

Reasoning. Any general theory developed to include all possible models on the upper part of the Table would be logically refuted by its counterpart on the lower part, and there is no way to avoid this antinomy. But as soon as I mentioned the name of Laureate Samuelson, I noticed a sort of reticence in discussing this facet of the issue. Sometimes silence, even for a few seconds, can be interpreted as an answer. A final question in my open dialogue with Laureate Tinbergen was a direct liaison in point of methodology between the physical and the economic sciences. It refers to the universal law of the natural parameter (NaPa) which says: Any system, composed of many parts, in the physical universe or in human societies and economies, in order to reach and maintain a position of stable equilibrium, i.e. stability-fromwithin the system, must have a very strong (at the limit 100 percent) natural parameter, that is, a constant (more or less perfect) axis or center of weight, which in conjunction with a suitable force and adequate environment, (space-time or institutional and legal framework) holds the whole system together (Rugina, Introduction, p. 345).

The NaPa is not just a formal or assumed “constant”, as in pure mathematics, but a concrete, really constant magnitude, institution or social value, which in real life may not be at the limit of perfection (100 percent strong) but close to it, in human societies as much as humanly possible and in the physical universe as much as the initial Architect, the Creator wanted. For a national economy and a truly free, just and stable society, the function of the NaPa is fulfilled by what Leon Walras, the original father of the law of general stable equilibrium called the numeraire (Nu) or 100 percent-backed commodity money, in form of gold, silver or any other suitable comodity traded in international markets. Unfortunately, even with the law of the NaPa I still could not go further with my open dialogue on the conflict between mathematical model and given empirical realities in a mixed, capitalist system. Toward the end of the conversation, I tried to inject in the argument the point that in the physical sciences the NaPa is given, is implanted in the system by the initial architect. In the social sciences, respectively in economics, the NaPa was not given; on the contrary it is negated by most of the present generation of economists in accepting an anti-numeraire type of nominal currency (paper money and monetized bank credit or, as Lord Keynes called it, “representative” or “money of account”). Consequently, regardless of whether we use mathematical economics or econometrics, the real solution to any economic problem is and remains indeterminate to a certain degree, depending on the size of the actual disequilibrium. The great economist – and great he was – Jan Tinbergen endured me to the last with this advice: “If you want to get a hearing by the present establishment, you must have and offer a finished product”. He was very calm and smiling when I left his home. I am sorry that the good Jan did not live long

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enough to see the finished trilogy of the Prolegomenas. When I left his home on a sunny day, I repeated in my mind the famous dictum inherited from Galileo Galilei: “E pur si muove!” With all the divergence in our methodology of science, the good and great Laureate Tinbergen supported me by accepting to be an honorary member of the upcoming International Society for Intercommunication of New Ideas (1988) and sent a message to the first Congress at the Sorbonne in Paris in 1990. The time for the dictum “E pur si muove” came when Tinbergen continued in his Nobel Memorial Lecture: While building models econometricians were often forced to supplement “literary” theories, since these often did not specify all relationships they were implicitly using (ibid., p. 244).

“Literary theories” – mentioned here by Tinbergen – refer evidently to classic and neo-classical theories which contained logical consistency, more by implication than explicit statement. It is true that the classics did not specify clearly all the relationships they were implicitly using, in the sense that their model of thinking was not complete. Even the great Walras, the initial father of the law of general equilibrium, failed to include factor “R”, that is, the ideal institutional and legal framework consistent with the other two Walrasian basic elements: pure competition and pure numeraire-currency. However Walras’s reasoning was better than any other classic or neo-classic, was correct, with the silent (tacitly included) assumption that the third essential element was given or was a separate problem of application. Tinbergen, like Frisch and other econometricians and mathematical economists, did not include factor “R ” in their model of reasoning. In other words, they did not go further than the empirical factor “A” from our equation of unified knowledge S ¼ f ðA; PÞ. The missing factor “P ” represents the model of general stable equilibrium which shows in what direction factor “S ” (solution) should run to reach the final station where the problem is solved or – which is the same – the problem does not exist. The missing factor “P ” and the loss of direction appears to be a sort of “Gordian knot” which explains why mathematical economics including econometrics did not provide a complete breakthrough in application to solve properly and fully the economic and financial problems of our time. 2. Some experiences Laureate Jan Tinbergen, like his partner Ragnar Frisch, and, in general, great thinkers, did not hide or avoid to indicate weaknesses and imperfection in the method of investigation used or the final results obtained. Here are a few observations from his own experience and in his own language: First, I am going to discuss a number of experiences econometricians had with the activity of model building. Some of us were masters in hunting after high correlations, that is, good fits with observed values. In fact this was part of the art . . .

Some of the fits in our models never became very good, or, if finally they had been forced into a high correlation, broke down a few years later . . . I am afraid that the first subject I tackled in my work for the League of Nations, namely, to explain the fluctuations in investment activity never has become a great success. In the Netherlands Central Planning Bureau we found it safer, after some years, to ask industrialists for their investment programs rather than rely on an econometric explanation. Also government expenditures were among the variables difficult to explain . . . Ragnar Frisch introduced random shocks as an essential element of the business cycle, leaving the cumulative process between turning points rather than the latter themselves as a thing that really could be explained by the models . . . During our hunting for good fits we did sometimes learn,as it should be . . . In several parts of our science, and I presume in other sciences as well, we must be aware of following vogues too easily . . . Sometimes indeed some of our followers overdo model building (op. cit., p. 245).

All this process of “hunting for a fit of high correlation” speaks a clear language that mathematical economics or econometrics are scientifically not that precise as a layman or the citizens who pay taxes may believe. With what Tinbergen said in continuation one can draw the conclusion that the two new studies are still in the domain of relativity. No doubt Tinbergen is right to say that “model building has contributed to the theory and practice of economic science”. For instance, in teaching, the use of models plays a great role, regardless of whether the assumptions are mathematical or simply real, integrated logic. In a centrally-planned economy mathematical or econometric models are a valuable instrument of communication. He does not forget to add also the relative connotation when he wrote in continuation: . . . the utility of models goes behind their didactic value. They are a real and essential element in the preparation of well-coordinated policies. But they cannot do this job all by themselves. Models constitute a framework or a skeleton and the flesh and blood will have to be added by a lot of common sense and knowledge of detail (op. cit., p. 246).

The theoretical model is a methodological tool composed of a number of assumptions (at least one) which are organically inter-related with each other. From here we can align historical “flesh and blood”, but must be consistent with the given model and not the other way around. Otherwise the model is not sufficient enough to work on a given problem. The theoretical model must have its own abstract identity, independent from historical realities, or concrete detail, but of course related on a different level of pure reason in the Kantian sense. This clear distinction between “concrete” and “abstract” reasoning, between historical, quantitative and theoretical, qualitative knowledge, is missing or it appears as a blurred, obscured representation. It is in the nature of the pure empirical, quantitative approach or isolated factor “A” from our equation of unified knowledge. This is a serious weakness of methodology we found in both Jan Tinbergen and Ragnar Frisch. One could interpret the “framework” or “skeleton” as factor “P” of our equation and the “flesh and blood”, as the factor “A”. If it were so, then Tinbergen and

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Frisch would be the pioneers of our equation and I would be happy to share such an interpretation. Unfortunately, neither our open dialogue with Laureate Tinbergen nor the position of Frisch can confirm this interpretation. But let us hear the voice of Tinbergen in this matter: The framework I am referring to supplies the main ingredients for coordinating government policies at the level of a central government, that is, coordinating the policies of the various ministries. Already many of the details concerning one ministry only would require the introduction of partial models, or could at least be left to them . . . A need generally felt by model builders and their critics is the need for refinement, that is, for the introduction of many more variables. In a way this experience again was a lesson also to economists in general, since often their arguments run in terms not showing this degree of detail. One example we in Benelux experienced: real development showed that the grossly increased volume of trade between the three countries did not imply that whole two-digit industries were wiped out in one or the other country, but only much smaller subsectors. Here one has to introduce hundreds if not thousands of different products in order to do justice to reality. The same applies to the problem of the optimal division of labour among all countries of the world . . . The other additional example of the need for more refined models and information can be taken from the experiences of the United Nations Research Institute for Social Development (UNRISD). The essential feature of this Institute’s work is to include a number of so-called social variables . . . Precise knowledge about interrelationships can be obtained only by the technique of quantitative models; but the lack of homogeneity of crude information is the reason for the lack of success in the social area and hence refinement of the base material is the real need here. All these refinements will make for ever more complicated models and therefore threat to make models unmanageable (Le Prix Nobel, 1969, pp. 246-7).

From this long quotation three major points come to our attention very clearly. One point refers to the conclusion that the econometric model, as exposed by Ragnar Frisch and Jan Tinbergen is and remains bound to the quantitative approach and aspect of individual and social life. On the other hand, the ultimate values of man and humanity (freedom, justice, honesty, right or wrong, beautiful and ugly, etc.) cannot be quantified and consequently they are more or less omitted from the domain of pure science. The second point appears in the fact that the solution to the given problem is more or less indeterminate. That is the reason why, in point of refinement, we need more and more social variables until we reach a limit where we are faced with “unmanageable models” and the respective solution still remains indeterminate, to a certain degree. The accumulation of more and more information, and this is the third major point, cannot solve the difficulties of the quantitative approach. Indeed, whenever we have a problem, the system is in disequilibrium and the original data are contaminated with bugs and viruses of inherent instability, which within such a system cannot be corrected by any rational policies. Then we

have to remember that in a system of disequilibrium, the conditions and with them the variables are changing every day, practically every hour and every minute of the day. Consequently, the results given by econometric models are not reliable, are in conflict with the empirical realities, for ever changing under disequilibrium. Professor Erik Lundberg in his analysis of anti-cyclical policies is quoted by Tinbergen, as recommending the collection of “much smaller time units and corresponding information”. How small should be the geographical units: a restricted area of region, a little city or a small village? What is the use of selecting a small unit when this is an organic part of a larger unit (province, country or international markets) when the larger units are characterized by an incongruous mixture of equilibrium and disequilibrium elements and aspects? No matter how we turn around the quantitative approach the results are still indeterminate, both analytically and practically. We are faced with an impossible problem, an open conflict between the mathematical tools used and the given economic and social complex of realities which in contrast with the physical universe, or Mother Nature, during the twentieth century has been dismembered of the centuries old natural parameter of the numeraire, without which no determinate solution in social and economic matters is possible. In this respect Leon Walras was 100 percent right and both Jan Tinbergen and Ragnar Frisch, with all the respect we have for both were – methodologically speaking – deficient. When Laureate Tinbergen said that “precise knowledge about interrelationships can be obtained only by the technique of quantitative models”, he told only a half truth. The full truth is that “precise knowledge” can be obtained not only empirically by the quantitative approach (historical knowledge) but also qualitatively by the conceptual analysis (theoretical approach) in the Walrasian system. The lack of a clear notion of Quinta Methodica and the law of logical consistency in scientific arguments also appears to be missing in both Tinbergen and Frisch. For instance, the quality (good or bad, right or wrong) of the institutional and legal framework, that is, stable or unstable, cannot be expressed quantitatively. According to the Quinta Methodica, all problems in economics and other social sciences can be reduced to five different, interrelated categories, identified not empirically but conceptually: (1) history and statistics; (2) theory; (3) ethics; (4) practice or policy matters; and (5) doctrine or history of thought. The quantitative point of view prevails only in the first category; history and statistics.

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The law of logical consistency in scientific arguments requires not to oppose nor to negate one type of clearly identified knowledge by another type, because in that case an insoluble antinomy is created. For instance, in the famous argument in the German economic literature known under the name Methodenstreit, historical knowledge was opposed to pure theoretical knowledge. This argument was never solved properly and fully. Actually it could not be solved because it was an antinomy to begin with (see Introduction, pp. 338-40). Laureate Frisch was faced with the same methodological difficulty in working to develop the “formulation of the preference function”, i.e. a subject of searching the optimum “path of an economy”, and using also exclusively the quantitative, econometric method. The result was a list of possible development paths which could have run into millions and millions of alternatives. Such a list of possible cases would be impossible by the fact that available experts would be physically unable to analyse and present these alternatives. And even if all alternatives, with the help of computers, would be analysed and put on the table for the politicians, the politicians would be absolutely drowned in information. It is – concluded Frisch – what on the electronic computer one calls “information death”. Laureate Tinbergen further describes the same methodological difficulty where crude statistical information of lacking homogeneity requires more and more refinements without a definite limit until the experts as well as politicians are faced with unmanageable models. This – concluded Tinbergen – “once again underlines the need for several stages of decision-making and hence of planning” (Le Prix Nobel (1969), 1970, p. 147). Our equation of unified knowledge: S ¼ f ðA; PÞ, avoids all these methodological difficulties since factor “A” represents and plays the role of the quantitative method limited to the identification of the problem and its size, but not as the sole basis of its solution, as the master logician Wittgenstein warned us as far back as 1921. Factor “P”, on the other hand, indicates the direction of the final station where the solution indicated by factor “S” has to bring us in the end. The final station represents a position of general stable equilibrium, that is, a conceptual image of an ultimate value. One might say that Tinbergen in a “split second” envisioned the possibility of our equation, but unfortunately the vision disappeared. Here is his own voice: As already said, the need of communication with the people and groups involved also points into the direction of this step-wise use of models. So also does the organizational aspect of decision making; a correspondence between the organizational setup of an optimum socioeconomic order and the levels or stages of planning and the use of models for it is desirable (op. cit., p. 247).

The use of the expression “organizational aspect of deicision making” may refer to our equation as a whole, respectively factor “S”, but the separation of

factor “A” (the limited aspect of the quantitative method) and factor “P ” (the specific conceptual, qualitative aspect) is not evident. Also the use of the concept “an optimum socio-economic order” implies the Walrasian system of general stable equilibrium, which “is desirable”, but it does not fit with “stages of central planning”. Tinbergen believes in and remains with the quantitative, econometric approach and central planning. 3. Prospects of model building Laureate Tinbergen, like all great thinkers, is not hiding or attempting to avoid the difficulties in working with quantitative, econometric models. He confesses, right from the beginning, that: The primitive state of the art has become clear from our preceding remarks. We have already indicated some of the directions in which models will have to be developed. Our present subject, the prospects of model building, of course overlaps with the subject so far . . . Our central question will now be what extension should be given to the scope of model building . . . A first subject to deal with refers to the necessity to introduce the element of space into socio-economic models. For a long time this aspect of economic science has been neglected. Relatively few authors have dealt with it. As a consequence there is a clear gap between economic models on one hand and the practice of town and country planning or transportation on the other hand. Town and country planning is carried out more often by engineers, architects geographers and sociologists than by economists (op. cit., p. 248).

An immediate question can be raised: is there a necessity to introduce the space-element in any conceivable model? The classical economists did not! Was this a methodological error on the part of the classics? The answer is no! The classical model, even though imperfect or incomplete, was consistent. The Walrasian model at the limit (M1) was more consistent than any other model (see Introduction, p. 341) and being 100 percent consistent, it makes no difference whether we take a village, a city or whole country. If we take a country with central planning – as Tinbergen did – then the existence of disequilibria makes the space-element become relevant. Other additional subjects recommended by Tinbergen are: social and political variables, education, external effects and income distribution. On income distribution he is concerned with two different kinds of models: one is analytical about the explanation of the income distribution in a given system, and the other is practical about the “manipulation” of the level of income distribution. In the latter he is recommending “a large volume of information, especially with regard to the description of jobs offered by the production process and of skills available with the population”. But this is nothing more than descriptive, historical knowledge. “A third subject” – continues Tinbergen – to be discussed under the heading of widening the scope of models is the one specifying optimum socioeconomic orders, but he gives little substance to define the concept of “optimum”. He mentioned the name of Phelps (1966) with his Golden Rules of

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Economic Growth, and Koopmans (1967) with his “Intertemporal distribution and ‘optimal’ aggregate economic growth” but a clear definition of the concept is missing. For the sake of the argument we refer to the 23 requirements and conditions of the Walrasian system of general equilibrium in its more complete form (see Rugina, Introduction, pp. 369-73):

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If or when all 23 Requirements and Conditions are fulfilled then analytically and practically we have optimum of output, employment, wages, rent, interest, taxation, profit and foreign exchange.

According to our orientation table, this and no other definition can be justified. Neither Phelps, nor Koopmans provided an acceptable definition. Tinbergen also quotes one of his students, M. Inagaki, who in his dissertation from Rotterdam (to be published) came to the idea that “some older models only apply to a ‘society of immortals’ though not meant for the French Academy” (see Prix Nobel, 1969, p. 250). If Mr Inagaki refers his “older models” to the classics, then we could say with mathematical precision that he was completely wrong! With regard to the social welfare function, Tinbergen has this to say: “I share the opinion of those, like Frisch and Bergson, who think that the scientific strategy of official welfare economics has not been optimal”. In quoting Kornai (1967), Tinbergen offers the proposition that “both East and West try to specify their social welfare function so as to see whether the ultimate aims are very different or not. Hopefully some thorough work will be done on this subject in the coming years” (op. cit., p. 250). Finally, Laureate Tinbergen wants to “reformulate the problem of the socioeconomic optimum,” about which he wrote: The true unknowns of the problem are not so much the quantities of consumption and productive effort to be made and a few more traditional unknowns, but rather the set of institutions which taken as a set are able to approach the welfare economic optimum as well as possible. So far the method followed by some of us interested in this version, has been to formulate the conditions the optimum has to fulfill, and then indicate a set of institutions which, by their behaviour equations would produce the same conditions (Prix Nobel, 1969, p. 251).

Up to this point, the indication of the road or the method to be followed is perfect, is perfectly all right, that is, first determine analytically “the conditions” or formula of definition of the optimum (pure theory) and then construct practically the set of institutions which will produce “the socioeconomic optimum”. Unfortunately, Tinbergen is not following his own indication. Instead, he is arguing about the difference between the classical model of reasoning in terms of ideal conditions of stable equilibrium versus the modern Keynesian and/or Marxian model of reasoning, concentrated only on the actual, disequilibrium, empirical realities or factor “A” from our equation of unified knowledge, a world which is entirely different. Again, his view follows:

Thus, in olden days, when too simple production functions were assumed to represent the available production processes, men like Adam Smith or Vilfredo Pareto suggested that private enterprises and competitive markets would do the job. Today we look at these things somewhat differently and arrive at other suggestions. One particular sub-problem worth being mentioned is the problem arising from the existence of costs of institutions. Some types of taxes, for instance, show quite considerable costs to collect them. How do we have to deal with these costs if the institutions to be chosen are unknown beforehand? (op.cit., p. 251).

Laureate Tinbergen committed a methodological sin, once because he broke the law of logical consistency in scientific arguments by opposing “the olden days”, that is the classical school, old and modern, by the “Today” (1969) modern school of economics in the sense as if the latter were a better substitute for the former, which is not true, and thus creating an insoluble antinomy. The modern school is not contradictory but rather complementary to classical economics (see Introduction, The equation of unified knowledge as the ultimate solution, pp. 358-61). The second methodological sin was the lack of precise identification of the two models in question. The classical model is characterized by the basic assumption of stable equilibrium conditions, whereas the modern, Keynesian and/or Marxian models are based on disequilibrium or unstable equilibrium. By introducing a new element, “the cost on institutions”, actually, of government “as a solution to the optimum problem”, he certainly assumed disequilibrium conditions, an economic world different from that assumed in the classical model. The third methodological sin committed by Laureate Tinbergen, with all the respect that we have for him, is the fact that in this case he does not preserve a clean and clear line between pure analysis or theory and applied science or practice. First of all he did not give a theoretical definition of the concept of socio-economic optimum to see the nature of the problem. He jumped to the “set of institutions” (government and manipulation of taxes) which is a matter of applied science, meaning, a matter of practice, or policies. The very question he raised: “How do we have to deal with these costs if the institutions to be chosen are unknown beforehand?” indicates that he did not solve the first part of the problem which is of pure analysis or what is the real nature of “socio-economic optimum”? The proper methodology is to first solve the problem analytically beyond any doubt, and then one can see clearly the practical means (institutions) which will solve the problem. Tinbergen is caught here in a vicious circle because he uses the modern, inverted order of reasoning, backward or ex post thinking. It is the effect-counter-effect type of policies instead of the classical or normal type of cause-and-effect policies. Here a vicious circle exists since one is using a proposition (socio-economic optimum) to create a second proposition (set of institutions) which in turn is used to define the first. This is exactly what

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Laureate Tinbergen did. Here are his own words as an answer to the above question (“How do we have to deal with . . .”): The phenomenon of costs of institutions requires a reformulation of the optimum problem so as to take into account these costs if and only if the institution causing them is chosen as an element of the set of institutions constituting a solution to the optimum problem (op. cit., p. 251).

This is a typical case of a vicious circle. The reader should be warned that if we use modern, symbolic, nominal, pure mathematical logic, as inherited from Russell (Whitehead and Russell, 1910), then it is hard to see the “vicious circle” because the variables and equations respect certain rules of form, but the real content of propositions is left out. We can catch the deficiency of modern logic only at the final station with the Go¨del-proof, that is, the solution to the problem is indeterminate in the form of a paradox of the “either-or-form” as in model M4 of our orientation table (see Introduction, p. 341), that is, “unstable equilibrium” or “equilibrium with unemployment” as the Keynesian model is called. In the above interpretation we used the new concept of integrated logic where both the form and the real-truth content of propositions are included (see Rugina, 2000, Ch. 2). Laureate Tinbergen, no doubt made use of the modern, symbolic, mathematical logic and thus he remained an optimist that a set of institutions, respectively government with sufficient power and financial means, “constitute a solution to the optimum problem”, whereas we think that it is no more than a “scientific illusion” based on a paradox. Here again is the voice of Tinbergen as an optimist: It is also our hope that the interpretation of the socio-economic optimum as a set of institutions may help to get under way a discussion of a more scientific character than was usual so far about the relative merits of various existing socio-economic orders, especially those of Eastern and Western Europe, including such interesting cases as Sweden, Switzerland and Jugoslavia (see: op. cit., p. 251).

Laureate Tinbergen remained an optimist with two hopes. One hope was that better information will help. The second help may come from more dialogue on the “merit rating of various systems”. His last thoughts were in his own language: It is my hope that in such a way we may again, as Marx claimed, find scientific arguments in the competition between various systems, but up-to-date scientific arguments rather than obsolete ones (see: op. cit., p. 251).

Jan Tinbergen was one of the great original economists of the twentieth century who left a remarkable legacy from which the present and future generations may learn how far we can trust the econometric approach or the quantitative, mathematical method to solve properly and fully economic and social problems of our time and in the future.

References Koopmans, T.C. (1967), “Intertemporal distribution and ‘optimal’ aggregate economic growth”, in Ten Economic Studies in the Tradition of Irving Fisher, John Wiley & Sons, New York, NY. Kornai, J. (1967), Mathematical Planning of Structural Decisions, Akade´miai Kiado´, Amsterdam. Phelps, E.S. (1966), Golden Rules of Economic Growth, Norton, New York, NY. Rugina, A. (2000), Prolegeomena 2: To Any Future Study in “Integrated Logic” and a More Comprehensive Methodology for the Unification of all Sciences, Natural and Social. An Orientation Table for Economics and Any Other Science, and Its Application in Theory and Practice (monograph), International Journal of Social Economics, Vol. 27 No. 5/6 Samuelson, P. (1983), Foundations of Economic Analysis, enlarged edition, Harvard University Press, Cambridge, MA. Tinbergen, J. (1939), Business Cycles in the United States, 1919-1932, League of Nations, Geneva. Tinbergen, J. (1951), Business Cycles in the United Kingdom, 1870-1914, North-Holland, Amsterdam. Tinbergen, J. (1956), Economic Policy: Principles and Design, North-Holland, Amsterdam. Tinbergen, J., Mennes, L.B.M. and Waardenburg, I.G. (1969), The Element of Space in Development Planning, North-Holland, Amsterdam. Whitehead, A.N. and Russell, B. (1910), Principia Mathematica, Cambridge University Press, Cambridge.

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3. Nobel Laureate: Paul A. Samuelson (1915) Nobel Memorial Lecture, December 11, 1970 Biography and personality by Erik Rudberg, Secretary of the Academy Introduction. Professor Rudberg begins his report with a confession by Laureate Samuelson who describes himself “as the last generalist in economics, with interests that range from mathematical economics down to current financial journalism, including research and teaching”. In terms of economic philosophy, Samuelson calls himself “a modern economist . . . in the right wing of the Democratic Party New Deal economists”. Before this quotation, the rapporteur indicated that his work “in economic theory has been in modern welfare economics, linear programming, Keynesian economics, economic dynamics, international trade theory, logic choice and maximization” (Le Prix Nobel en 1970, Stockholm, 1971, p. 265). He was born in Gary, Indiana in 1915. When he was 20 years old he received a Bachelor degree in Arts (1935) from the University of Chicago and from the same place a Master of Arts in 1936. In 1941 he received a PhD from Harvard University. He started in 1940 as an assistant professor of economics at MIT and in 1947 was full professor. In 1947 he received the John Bates Clark Medal from the American Economics Association, with a citation that he was the living economist under 40 “who has made the most distinguished contribution to the main body of economic thought and knowledge”. The rapporteur wrote that “confronted by contradictions, overlaps and fallacies in the classical language of economics, Samuelson sought unification and clarification in mathematics (op. cit., p. 265). There is some unjustified exaggeration – both in the negative and positive sense of the evaluation by the rapporteur, but for the moment we leave the statement as it is, and we shall come back with more text from the original Memorial Lecture to clarify the evaluation in question. In 1947 he published his first major work Foundations of Economic Analysis (Samuelson, 1947), with a second enlarged edition in 1983 containing the personal confession that “what I have tried to keep in mind in preparing this enlarged edition was the success it could achieve in formulating a general theory of economic theories” (Samuelson, 1983, p. xxvi, his own emphasis). This personal objective of Laureate Samuelson seems to be even more ambitious than that of his master Lord Keynes (1936) who succeeded in writing The General Theory of Employment, Interest and Money, and for that matter

also of Einstein (1916) who wrote The General Theory of Relativity and later aspired also to lay the foundation of a “unified field theory” in a similar fashion of a general theory of physical theories, which he withdrew later in life (Einstein, 1950, p. 100). Whether the trio were successful or not, we shall postpone for a while an open debate. What was and still is certainly a great success lies in the fact that in 1948 he published his economics textbook, Economics: An Introductory Analysis (Samuelson, 1948), considered in the profession as “the best selling economics textbook of all time”. Indeed, this textbook became famous Having sold more than a million copies and also translated in many languages. Samuelson worked for more federal committees and boards than any other American economist, but the problems involved still remained, more or less unsolved until we reached 2001AD . In 1961 he was elected President of the American Economic Association, and in 1965 he was elected the President of the International Economic Association. In addition to being an advisor to Senator, Candidate and President-Elect John F. Kennedy, he was also the author of the Samuelson Report on the State of the American Economy to President-Elect Kennedy (Samuelson, 1961). Samuelson contributed in 1958 to a symposium sponsored by the Committee for Economic Development. The theme of the symposium was: “What is the most important economic problem to be faced by the USA in the next 20 years?” Laureate Samuelson gave the answer on the spot: “the threat of inflation”. What he was afraid of most was not the old type of inflation of escalating monetary prices. Let us see what he said: Inflation is itself a problem. But the legitimate and hysterical fears of inflation are – quite aside from the evil of inflation itself – likely in their own right to be problems. In short, I fear inflation. And I fear the fear of inflation (p. 267).

So far his ideas, formally, seem to be all right; but the next quotation raises serious questions for debate: Avoiding inflation is not an absolute imperative, but rather is one of a number of conflicting goals that we must pursue and that we may often have to compromise. Even if the military outlook were serene – and it is not – modern democracies must expect in the future to be much of the time at or near the point where inflation is a concern. Our greatest economic problem will be to face that concern realistically, to weigh inflation’s quantitative evil against the evils of actions taken against it, to develop methods of adjusting to the residue of inflation which attainment of the “golden mean” might involve. The challenge is great but the prognosis is cheerful (p. 267).

With all respect to Laureate Samuelson, the above text leads to the conclusion that its author does not have a clear-cut solution to the problem of inflation, regardless whether with or without fear of it. Here are a few unanswered questions raised by the above text:

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Why is not “avoiding inflation an absolute imperative” when this social evil is producing so much harm to millions and millions of people all around the globe? Should the economic profession abandon the cause of humanity just because of a social and political ideology which promotes continuous disequilibrium in order to justify permanent government planning and intervention? What are those “conflicting goals that we must pursue” regardless of whether we have “inflation” or not? Samuelson has mentioned the subject of military expenses, but this is not acceptable. If there is an imminent war and preparations are needed then, again invoking the cause of humanity, why should the burden of inflation fall on the large masses of people with meager financial means and protect the rich ones? It is enough to introduce a special “war contribution” according to the level of income. There are no other conflicting goals that we could not avoid in pure theory (Walras). If there are, then the social system is so much perverted that the real problem is not to manipulate the supply of paper-money and monetized bankcredit but rather to undertake the structural reforms for the stabilization of the whole system. “Our greatest economic problem” in 1970 (when Samuelson wrote his Nobel Lecture) as well as in 2002, is to conceive and apply a real, general stabilization plan of the whole system in both capitalist and socialist countries. There is no such thing as the “golden mean” as a solution for social and economic problems, in the sense of a complete cure to repeated disequilibria. When we compare the situation in 1970 of the USA with the situation in 2002, we find that the vision of Laureate Samuelson of that time, “The challenge is great but the prognosis is cheerful”, fell far short of corresponding with the later empirical facts. The rapporteur Erik Rudberg brought up the news that Professor Samuelson in an interview published in 1960 in the US News and World Report developed a new kind of inflation that he called “cost-push” as distinguished from the familiar “demand-pull” inflation. In one case, respectively, demand-pull inflation, “too much spending power pulls up prices and wages and in the other case of ‘cost-push’ inflation, there is a force that operates, whenever we are at high employment, to push up prices” (op. cit., p. 267). The distinction between “cost-push” and “demand-pull” inflation was en vogue for a while in the 1970s, but after that gradually it disappeared since both have as origin the same source of an unproductive increase in the supply of anti-numeraire currency. In the same interview in December 1960, Laureate Samuelson expressed the view:

I think, without question, that unemployment of more than 6 per cent is something to be concerned about. You don’t push the button, but you don’t relax and enjoy it either . . . I myself don’t believe in numbers game in which you give a maximum tolerable percentage, because I think, truly, it does vary with the times. . . Summing up: I think the 1960s will give us the potentiality of very good growth. More and more of our social problems of the past are, in fact, being licked. So I would face the ’60s not complacently, but optimistically (op cit., p. 268).

By any standards, the above prediction did not prove to be realistic enough in practice. Maximum principles in analytical economics by Paul A. Samuelson, MIT, Cambridge, MA, USA, Nobel Memorial Lecture, December 11, 1970 Introduction Laureate Samuelson begins his Memorial Lecture as follows: The very name of my subject, economics, suggests economizing or maximizing. But Political Economy has gone a long way beyond home economics. Indeed, it is only in the last third of the century, within my own life time as a scholar, that economic theory has had many pretensions to being itself useful to the practical business man or bureaucrat. I seem to recall that a great economist of the last generation, A.C. Pigou of Cambridge University, once asked the rhetorical question, “Who would ever think of employing an economist to run a brewery?” Well, today, under the guise of operational research and managerial economics, the fanciest of our economic tools are being utilized in enterprises both public and private (Le Prix Nobel en 1970, Stockholm, 1971, p. 273).

First of all, we must establish the meaning of and the difference between the terms “maximum” and “optimum” as well as “maxima and minima” in economic analysis. “Maximum” in mathematics, represents “the greatest number or quantity attainable in any given case, opposed to minimum. Maxima and minima, in mathematics and physics, represent values of a function at the moment of its ceasing to increase and beginning to decrease, and at the moment of its ceasing to decrease and beginning to increase (Meriam-Webster, 1950, p. 1045). The term “optimum” in biology means the best condition for the growth of an organism (op. cit., p. 1174). Since a national economy, and, for that matter also an international economy, is a living organism (both organizational and human) we can define “optimum” in economic analysis as the best possible conditions for economic growth, which cannot be anything else but the Walrasian system of general stable equilibrium in its more complete form (see Introduction, pp. 369-73). The optimization theory, in this sense, is the problem of making the best possible choice out of a set of alternatives. It can be used in operational research within the limits of the same Walrasian model of general stable equilibrium and in no other model as indicated by our orientation table (see Introduction, p. 341, model M1). In any other model the solution to a given problem is

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indeterminate, to a certain degree except model M7 of total disequilibrium (chaos) where the solution is 100 percent uncertain. A national economy, to repeat, is in itself a “living organism” composed of many actors (agents, producers and consumers) and many resources (natural and human) used for different purposes; human needs which are unlimited and resources which are limited. Thus, we are faced with the necessity of making rational decisions (as far as humanly possible) both in consumption as well as in production. If we talk about one single agent or element (micro-analysis), independent of all other agents or factors, we can envision and practically use, the term “maximum” in the quantitative sense, like the “maximum of profits” or of “output”. But, if we talk about a national or international economy, composed of a large amount of agents and resources which are dependent on each other in order to conclude transactions, then the quantitative approach has constraints, limits. In other words, in addition to the quantitative aspect we have to consider the coordination of this large number of actors and resources, specifically, quality and values (good or bad, right or wrong, or something in between) of the system as a whole. And that is the full meaning of the term “optimum” indicating the best possible conditions of growth for a national or international economy. In brief, the two terms of “maximum” and “optimum” are not overlapping and should not be confused; one is not and cannot be used as a substitute for the other, without the necessary qualification of the Walrasian system in its more complete form. With this rather long introduction to clarify the concept of maximum and optimum in economic analysis and practice, let us go to the text of Laureate Samuelson’s Memorial Lecture of December 11, 1970. What does he mean by “home economics”? It looks as if he was inclined to refer to old classical economics or even before that to Karl Bucher, one of the members of the old German historical school who put “home economics” as the first step in the development of a national economy. But this may not be true, because he mentioned “economic theory” with the quality “to being itself useful to the practical business man or bureaucrat”. In addition he also states the time: “only in the last third of the century, within my own lifetime as a scholar” which could refer either to the book of General Theory (Keynes, 1936) by Lord Keynes, or to his own book, Foundations of Economic Analysis (Samuelson, 1947). We cannot say with precision which one of these interpretations is true, but Laureate Samuelson, who is alive, can. The rest of the quotation, in our view, directly or indirectly, refers to the classical school and Samuelson’s statement is debatable, at least to a certain extent. The classical school began in the eighteenth century with Quesnay’s (1758) Tableau Oeconomique, together with the contribution of a number of his

disciples and Smith (1776) with The Wealth of Nations and a long list of prominent economists during the nineteenth century whose works served as a guidance in decision making by “the practical business men” and leaders in government (in power as well as in opposition) together with their advisors. We cannot ignore this early contribution by the classics who dominated the economic thinking for at least a century and a half. It is true that during the nineteenth century the seeds of mathematical analysis in economics were planted by Cournot’s (1838), Researches into Mathematical Principles of the Theory of Wealth, von Thu¨nen’s (1826) Der Isolierte Staat, Gossen’s (1854), Entwickelung der Gesetze des Menschlichen Verkehrs, later independently by Leon Walras (1874-77) with his Elements d’Economie Politique Pure. But all these early mathematical and valuable contributions have had very little, if any, influence on practical economic decisions by business men and/or government leaders. As to the joke – and joke, it is! – by Professor A.C. Pigou, we can say that it sounds “funny” but it cannot be taken seriously in a scientific discussion. Samuelson, however, answered Pigou’s question by saying: “Well, today, under the guise of operational research and managerial economics, the fanciest of our economic tools are being utilized in enterprises both public and private (op. cit., p. 273). The statement, of course, is correct; we should add the difference that the classics used in their reasoning, the classical logic of truth-content in their propositions, and therefore what they had to say was understood by any citizen with a minimum degree of public education. Nowadays, mathematical economists, by using modern, symbolic logic of truth-form (leaving out truthcontent) translated into “fancy formulas and equations” ready to be put in the computer, no business man or government leader understands what it is all about. They take for granted that what the computer says is true, in the sense of being a determinate, scientific answer but in reality it is not; it is only in form (figuratively) but not in content of real truth. That is what modern, symbolic logic delivers. Only the application of integrated logic where both the form and the content of real truth in propositions are considered, can actually give a complete answer that is true, both logically and empirically, in any given model. I am afraid that Laureate Samuelson, as other economists, uses modern, symbolic logic and therefore the problems and solutions appear to be rather simple and convincing for a mathematical economist of modern school. But, alas all are exposed to the Go¨del proof that the respective solutions are indeterminate and run the risk of becoming natural paradoxes that require more clarification. Let us take a look at what Samuelson said further in the text: I must not leave you with the impression that analytical economics is concerned with maximization principles primarily in connection with providing vocational handbooks for the practising decision maker.

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Even back in the last generation, before economics had pretensions toward being itself useful to practitioners, we economists were occupied with maxima and minima. Alfred Marshall’s Principles of Economics,the dominating treatise in the forty years after 1890, dealt much with optimal output at the point of maximum net profit. And long before Marshall, A.A. Cournot’s 1838 classic, Researches into the Mathematical Principles of the Theory of Wealth, put the differential calculus to work in the study of maximum-profit output. Concern for minimization of cost goes back a good deal more than a century, at least back to the marginal productivity notions of von Thunen (op. cit., p. 274).

The quotation of Cournot seems to be all right. The information that von Thunen had the concept of “marginal productivity” as defined later by Leon Walras, Alfred Marshall, Carl Menger and Stanley Jevons, is open for debate, taking into consideration the German historical school. The quotation of Marshall, however, needs also more interpretation. Marshall’s (1952, Ch. II) Principles of Economics was a principal source which called the attention of the profession that quantification (measurement) alone “refers only to the quantities of forces: the qualities of motives, whether noble or ignoble (to which we like to add ‘stable’ (equilibrium) or ‘unstable’ (disequilibrium), are from their very nature incapable of measurement”. Exception is model M1 realized in practice. In the mathematical Appendix of the same Principles, Marshall again sharpens the argument, being skeptical that mathematical economics alone could provide an adequate and full solution to economic problems. Here is the voice of Marshall which is confirmed also by our equation of unified knowledge S ¼ f ðA; PÞ presented in the Introduction, pp. 358-61: It would be possible to extend the scope of such systems of equations as we have been considering, and to increase their detail, until they embraced within themselves the whole of the demand side of the problem of distribution. But while a mathematical illustration of the mode of action of a definite set of causes may be complete in itself, and strictly accurate within its clearly defined limits, it is otherwise with any attempt to grasp the whole of a complex problem of real life, or even any considerable part of it, in a series of equations. For many important considerations, especially those connected with the manifold influences of the element time, do not lend themselves easily to mathematical expression: they must either be omitted altogether, or clipped and pruned till they resemble the conventional birds and animals of decorative art. And hence arises a tendency towards assigning wrong proportions to economic forces; those elements being most emphasized which lend themselves most easily to analytical methods (Marshall, 1952, p. 850).

In the Preface of the first edition and included in the following editions, Marshall repeated his position in regard to the use of mathematics when he wrote: The chief use of pure mathematics in economic questions seems to be in helping a person to write down quickly, shortly and exactly, some of his thoughts for his own use: and to make sure that he has enough, and only enough, premisses for his conclusions (i.e. that his equations are neither more nor less in number than his unknowns). But when a great many symbols have to be used, they become very laborious to any one but the writer himself . . . yet

it seems doubtful whether any one spends his time well in reading lengthy translations of economic doctrines into mathematics, that have not been made by himself (Preface, pp. x-xi).

In order to be fair to both Laureate Samuelson and Marshall, we have to keep in mind that we are talking here not so much about two schools of thought, even though it is true that Marshall is a classic. He viewed the economic and social problems in terms of a model of a system of general stable equilibrium, not overlapping but close to the Walrasian system, like model M2 on our orientation table. On the other hand Samuelson is a modern, empirical thinker who views the same basic economic problems in terms of disequilibrium or at the limit unstable equilibrium, i.e. the Keynesian model of “equilibrium with unemployment”. This is the result of a deeper reason. Marshall used the classical logic oriented at the real, objective content of propositions, whereas Samuelson has applied only modern, symbolic, mathematical logic oriented only at the form of propositions. Therefore, he had more room for speculative reasoning, which in Marshall is not possible or allowed. Yet, the results in Samuelson are exposed to Go¨del’s proof, that is, to solutions more or less indeterminate. It is true, as Samuelson said, that “Marshall’s Principles . . . dealt much with optimal output at the point of maximum net profit”. We have to understand that his classical model M2, (orientation table) is very close to the pure Walrasian model M1, and consequently “optimal output” was consistent not only with “net profit” but also simultaneously – what Marshall did not say – with “net rent”, “net wages”, “net interest”, “net taxation” and “net foreign exchange”. The Walrasian system (if it ever will be put in practice) is the only model where the meaning of “optimal” is the same as the meaning of “maximum net income” of all factors of production. Otherwise, in any model below M2 on the orientation table, optimal output does not correspond, is not equal to “maximum net profit” for entrepreneur or business or corporation. But Laureate Samuelson may not accept this conclusion because his model of reasoning is non-Marshallian. Again we are faced with a problem of modern logic as differentiated from classical logic or, more precisely, from integrated logic (Rugina, 2000, Ch. 2). Laureate Samuelson, in continuation, has raised an interesting issue with reference to the life and labor of a scientist. Here are his own words: What is it that the scientist finds useful in being able to relate a positive description to the solution of a maximizing problem? That is what a good deal of my own early work was about. From the time of my first papers on “Revealed Preference” through the completion of Foundations of Economic Analysis, I found this a fascinating subject. The scientist, as with the housewife, finds his work is really never done (Le Prix Nobel, 1970, p. 274).

What is it that a scientist finds useful in being able to find a solution to a maximizing problem? The question is well taken. We shall answer it by using the new integrated logic. The person in question, of course, must have professional background and good training. The first source of the solution

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may come from imagination of new ideas, something that Keynes would call “a flight of thought” which cannot be explained rationally, except by “creative intuition”. The second resource of new ideas lies in rational analysis departing from a thorough knowledge of the Walrasian system of general stable equilibrium conditions or model M1 on our orientation table in its more complete form (see Introduction, pp. 369-73),because in this model M1 the solution to any economic problem is determinate, clear and simple, without any “ifs”. This model is the only one which at the limit is assumed 100 percent consistent, homogenous, converging to a single point and reversible. If we use the mathematical expression, then, according to Marshall’s advice, we should avoid any “window-dressing” with “clipping, pruning” just to fit the equations until “they resemble the conventional birds and animals of decorative art”. Walras called this the Newtonian model in economics and he was right. In this model of ideal conditions and only in this model – be repeated – the maximizing problem at the limit equals “optimum” level of rent, wages, interest, profit, taxation and foreign exchange. Along the orientation table, we can study in more detail, any problem and we shall see that maximizing a given factor alone does not correspond to its optimization level. And yet Samuelson is thinking only of “maximizing net profit” and leaving out all other factors of production but calling the result “optimal output”. This procedure, speaking methodologically, is not quite correct; it is a sort of “unfinished business” or, less precise in his words: “work is really never done”. Let us take a look at his own way of presenting his solution to a maximizing problem: Just in these last weeks (1969) I have been working on the very difficult problem of understanding stochastic speculative price – e.g. how cocoa prices fluctuate on the London and New York exchanges. When confronted with an unmanageable system of non-linear difference equalities and inequalities, I could have despaired of finding in the mathematical literature a proof of even the existence of a solution. But suddenly the problem became solvable in a flash, when out of the strata of memory, I dredged up the recollection that my positive descriptive relations could be interpreted as the necessary and sufficient conditions of a well defined maximum problem. But I run ahead of my story if give the impression that maximum principles are valuable merely as a convenience and crutch to the less-than-omniscient analyst (Le Prix Nobel, 1970, p. 274).

What can we say so far as the Samuelson text above speaks by itself? We can say, with the help of the new integrated logic, even from the first paragraph, that the solution to the maximizing problem related to the stochastic speculative price will be indeterminate, i.e. failing under Go¨del’s proof. In the second paragraph, the same conclusion is strengthened by the indication of “an unmanageable system of non-linear difference equalities and inequalities”.

Regarding the third paragraph, the conclusion remains the same but with an additional ”if“ proposition. The further information given by Laureate Samuelson “but suddenly the problem became solvable in a flash”, recalls the Keynesian expression of “a flight of thought, about the same as creative intuition” (Bergson, H.). I am not so sure that Samuelson would accept such an interpretation since he is looking for a rigorously clear, clean mathematical solution. In continuation, the stochastic process, is not an easy or good example to solve the “maximizing problem”. In a way, the problem becomes even more complicated. What is the “stochastic process”? One source of information says about this process: In the probability theory, a system involving time-dependence. For example, suppose that a “drunkard’s walk” is defined by repeated tosses of a coin: when the coin lands heads, the drunkard takes a step forwards; when tails, backwards. This is a stochastic process of a particularly simple kind, in that its future behavior depends only on its present state and not on the route by which that state was reached – the process has no memory; such a process is called Marcov process. (Bullock and Stallybrass, 1977, p. 603).

It is simple, clear and true that the stochastic process represents a disequilibrium situation, where any problem including that of maximizing profit, by definition will have an indeterminate solution, regardless whether we use or not mathematical economics. However, if we do “the clipping and pruning” that Marshall warned us not to do, then we have a formal, mathematical but not a real scientific truth. An illustrative example From the stochastic process, as identified above, Laureate Samuelson is selecting an economic example which in principle is directly related to the same process. Let us look at his own writing: Let me illustrate the same thing in economics as a simplest imaginable case. Consider a profitmaximizing firm that sells its output along a demand curve in which the price received is a non-increasing function of the amount sold. Suppose further that output is producible by, two, three, or ninety-nine different inputs. To keep the example simple, suppose that the production function relating outputs to inputs is smooth and concave (Le Nobel Prix, 1970, p. 276).

Laureate Samuelson is an empirical economist who uses extensively mathematics, whenever possible. Although for him it may be, for other economists his example cannot be considered “a simplest imaginable case”. As an empirical economist, what he carries in the back of his mind is the image, the model of a mixed American capitalist regime. First, it is hard to imagine empirically that “a profit maximizing firm” is watching the market for its product, and sees demand is increasing, that is, the amount sold quantitatively grows and yet the firm is following the policy that “the price received is a non-

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increasing function of the amount sold”. It does dot make sense, except in the example of a “drunkard’s walk”. Second, the assumption that the output is producible by 99 different inputs, practically the production is unmanageable to be consistent with a smooth and concave curve. The two observations are sufficient to draw the conclusion that the problem of maximizing profit is indeterminate, if not impossible in this particular example. Samuelson thinks differently and of course by the use of modern, symbolic logic. Here, again is his voice: With the assistance of mathematics, I can see a property of the ninety-nine dimensional surfaces hidden from the naked eye. If an increase in the price of fertilizer alone always increases the amount the firm buys of caviar, from that fact alone I can predict the answer to the following experiment which I have never seen performed and upon which I have no observations: an increase in the price of caviar alone will increase the amount the firm buys of fertilizer. In thermodynamics such reciprocity or integrability conditions are known as Maxwell Conditions; in economics they are known as Hotelling conditions in honor of Harold Hotelling’s 1932 work.

With this description of the relationship between the price of the fertilizer and the consumption of caviar and, vice versa, the price of the caviar and the consumption of the fertilizer, the real problem for our firm becomes more and more complicated when we consider also the implication upon the other factors of production, respectively the incomes of rent, wages, interest, taxes and foreign exchange. It is a sort of “black magic”, and Laureate Samuelson himself used that expression in a following paragraph: As a last illustration of the black magic by which a maximum formulation permits one to make clear-cut inferences about a complicated system involving a large number of variables, let me recall the work I have done in formulating clearly and generalizing what is known in physics as LeChatelier’s Principle (Le Prix Nobel, 1970, p. 278).

What does the LeChatelier principle say? Let Laureate Samuelson answer: Squeeze a balloon and its volume will contract. But compare how its volume contracts under two different experimental conditions. First, imagine that its surface is insulated from the rest of the world so that none of the so-called heat engendered can escape. In the second alternative administer the same increase in pressure in the balloon, but let it come into temperature equilibrium with the unchanged temperature of the room. Then according to LeChatelier Principle the increase in volume when the insulation constrained is placed on the system will be less than when the temperature is constrained to end up constant.

In the finale, Samuelson himself asked the question: “Now what in the world has all this to do with economics?” To this question, this is the answer he gave: There is really nothing so pathetic than to have an economist or a retired engineer try to force analogies between the concepts of physics and the concepts of economics. How many dreary papers have I had to referee in which the author is looking for something that corresponds to entropy or to one or another form of energy.

Nonsensical laws, such as the law of conservation of purchasing power, represent spurious social science imitations of the important physical law of the conservation of energy; and when an economist makes reference to a Heisenberg Principle of indeterminacy in the social world, at best this must be regarded as a figure of speech or a play on words, rather than a valid application of the relations of quantum mechanics (Le Prix Nobel, 1970, p. 279).

Here is our interpretation by using the new integrated logic. First of all, there is here a really “forced analogy” between concepts in physics and concepts in economics. In French, there is an expression: “comparaison n’est pas raison” (comparison is not a reason); but here we are faced with a double error. Second, the model with a balloon is absolutely untenable to be used as a comparison with our firm which produces an output as related to 99 inputs. In every respect there is no real and objective relationship between the two cases. Consequently, the maximizing problem in the two cases (models) is totally different and no logical comparison could be made. Why and how could Laureate Samuelson not observe this logical contradiction? In our opinion, there is only one plausible reason, namely he uses in his scientific reasoning exclusively modern, symbolic, formal, logic of pure mathematics which excludes the real truthcontent of propositions. As to the fact that he had troubles in the past serving as discussant or referee on papers where the authors did not identify properly the object of investigation, that is nothing new in regard to our issue here. Two more corrections deserve to be mentioned. The law of conservation of purchasing power, known as the purchasing power parity theory, if properly connected with the Walrasian law of general equilibrium in its more complete form, is perfectly correct, and the use of the pejorative qualification, as if it were a “nonsensical law”, is not justified. The Heisenberg theorem of indeterminacy, known as the “uncertainty principle”, could be very well applied also in a social world – as today – contaminated by major disequilibria. The uncertainty principle is also related to Einstein’s theory of relativity. In this capacity, it can be applied both in physics and economics where we are faced with problems of measurement. But this cannot be called “a figure of speech” nor “a play on words”, as Samuelson condemned them. Samuelson, in continuation, wrote: However, if you look upon the monopolistic firm hiring ninety-nine inputs as an example of maximum system, you can connect up its structural relations with those that prevail for an entropy-maximizing thermodynamic system (Le Prix Nobel, 1970, pp. 279-80).

What can we say to this additional information? With this kind of monopolistic firm and plus the entropy (the dream of Professor Nicholas Georgescu-Roegen), we have the case, where “maximum of profit” is not only possible, but also natural. However, this model is lacking the effect of “convergence” and therefore can never be associated with “optimum”.

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Consumer demand theory Let Laureate Samuelson introduce the problem: This brings me to the theory of consumer demand. Unlike the maximizing profit situation that has been discussed up to this time, now we have a budgetary constraint within which maximizing has to occur. Prior to the mid-1930s utility theory showed signs of degeneration into a sterile tautology. Psychic utility or satisfaction could scarely be defined, let alone be measured. Austrian economists would insist that people acted to maximize their utility, but when challenged as to what that was, they found themselves replying circularly that however people behaved, they would presumably not have done so unless it maximized their satisfaction. Just as we cancel two from the ratio of even numbers, so one could use Occam’s Razor to cut utility completely from the argument, ending one up with the fatuity: people do what they do. I exaggerate only a little. It is true that the Russian Slutsky had in 1915 gone beyond this, but his work, published in an Italian journal, was forgotten in the backwash of the First World War (op. cit., pp. 280-1).

What can we say in reading this long quotation? First, he exaggerated to a certain extent. “The budgetary constraint” in the theory of consumer demand is not something unusual or special to consumption; it is the counterpart of “investment constraint” in production. In the next paragraph, the real subject is not “utility theory” as inherited from the old classics, but rather the new concept of “marginal utility” which appeared independently in three different locations: Leon Walras in Lausanne (Switzerland), Carl Menger in Vienna (Austria) and Stanley Jevons and Alfred Marshall in London and Cambridge (England). With all respect to Laureate Samuelson, he wrongly injected here the old concept of the utility theory. The right subject, to repeat, is the marginal utility theory which “prior to the mid1930s”, did not show signs of degeneration. On the contrary, “the marginal utility theory” became the crown of the modern neoclassical school and with proper qualification is still the crown of the Walrasian theory of general stable equilibrium. In order to understand properly the argument in this issue, we must have a clear distinction between the classical model refined by Walras and this author as model M1 on the orientation table (Introduction, p. 341), as representative of a system of general stable equilibrium, versus the Keynesian model of reasoning identified as model M4 on our orientation table, i.e. a mixed capitalist system of unstable equilibrium, or what Keynes called “equilibrium with unemployment”, a little bit confusing because of the missing prefix of “unstable”. Laureate Samuelson accepted the Keynesian model of reasoning unconditionally. For a more complete understanding and evaluation of the argument here in question, we have also to remember that the classics and neoclassics used a logic oriented at truth-content whereas modern thinkers, including Samuelson, make use of modern logic oriented only at the truth-form of propositions, and that makes a big difference.

On the consumer demand theory, after he refuted the utility thesis, he went back to the “flash of inspiration for Revealed Preference”. Here is again his voice: My early theory of revealed preference was by itself perfectly adequate to handle the problems of two consumption goods. I went on to conjecture that if we ruled out similar contradictions for choices of more than two situations, then the phenomenon of “nonintegrability” of the indifference field could be ruled out. Especially on occasions like this when one is only too likely to reminiscence about scientific victories, one ought to pause frequently along the way to express some lamentations over defeats and failures. Even with the aid of some of the world’s leading mathematicians I was not able to verify and prove the truth of the previous footnote’s conjecture, and I was persuaded to omit that material from the published version of “Revealed Preference”. All the more credit therefore must go to Hendrik Houthakker, who on his maiden venture into economics formulated the Strong Axiom and proved that it did exclude non-integrability ... How obscure the status of the integrability problem was in the mid-1930s when I arrived on the scene can be indicated by the fact that two close collaborators, Sir John Hicks and Sir Roy Allen, seemed actually to be at odds in their view on the subject. Now that the empirical implications of non-integrability are understood, most theorists are inclined to postulate integrability. How to make clear its meanings? My good friend Nicholas Georgescu-Roegen, from whose classic 1935 paper I gleaned so many insights into the integrability problem, would argue that it is impossible to state such complicated mathematical relations in mere words. I am on record with the contrary view, namely, that mathematics is language and in principle what one fool can comprehend so can another (Le Prix Nobel, 1970, p. 282).

I decided to give such a long quotation because I am sure that many mathematical and non-mathematical economists are interested to see if there is anything new and important which was not said before. And I think, there is something new and relevant which was not said and may end this argument on “integrability” that is still in the stage of a divided opinion. I am on the side of Laureate Samuelson with qualification and also on the side of Georgescu-Roegen with qualification, even though I am not a fool and not a mathematical economist. The integrated logic and the Walrasian law of general stable equilibrium in its more complete form, including a marginal utility theory, can help to disentangle this perpetuated unsolved argument. Samuelson was right on the conjecture that if revealed preference was “perfectly adequate” to deal with two consumption goods, and in continuation we assume also model M1 on our orientation table, i.e. the Walrasian system of general stable equilibrium in its more complete formulation, then the marginal utilities (mu) of all 99 inputs, starting with mu1, mu2, mu3 . . . mu99 will be and logically must be equal to each other. In that particular case of classical analysis, there is no problem or argument about “integrability”.

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On the other hand, if we assume, specifically or tacitly, the Keynesian model M4 at its limit, as representative for the empirical realities in a modern mixed capitalist regime, the utilities in question mu1, mu2, mu etc . . . mu99 no longer are equal but oscillating, up and down in an irregular manner every single day, every hour of the day. Then we have practically an insoluble problem, similar to a paradox and Georgescu-Roegen was right. Unfortunately, neither Laureate Samuelson nor Georgescu-Roegen and, for that matter, neither other participants – for or against the possibility of “integrability” – formulated the problem adequately. We hope that with the help of the new research program of a simultaneous equilibrium vs disequilibrium approach, the new methodology and the new integrated logic, the argument about “integrability” as well as other similar unsolved arguments will fade away for ever. Non-maximum problems In view of the confusing conditions of general disequilibrium created by the Great Depression which actually was composed of two strong recessions (one from 1929-1931 and the second from the spring of 1931 to 1933 included), Professor John Maynard Keynes, an inconoclast in his own way, from the Cambridge University in England and Editor of the important publication of the Royal Economic Society – The Economic Journal – from 1931 to 1936, wrote a book like no other book published before, called The General Theory of Employment, Interest and Money (Keynes, 1936). In this book, he broke from the classical model inherited from his beloved teacher Alfred Marshall. Literally, he turned upside down the classical school in economic thinking created in the eighteenth century by Adam Smith in England and Francois Quesnay on the European continent. The old classical school through the new contribution of what is known as the neoclassical school and represented by Leon Walras, Carl Menger, Stanley Jevons and Alfred Marshall during the last part of the nineteenth century brought the economic science close, but still not close enough, to perfection, i.e. a social, economic and political system based on individual and national freedom, social justice of equity including monetary and financial stability. There was, in particular, one methodological weakness which impeded the neoclassical school to attain perfection – in pure theory as well as in practice – and that was the idea inherited from the old school, namely, the conception that in economics exist “natural laws” in the same way as the natural laws in physics or biology, if only we get rid of the mercantilist doctrine of government controls and regulations and let free competition, so-called “free markets”, rule the economic life. Wrong, three times wrong, even though there are even Nobel Laureates – but not Laureate Samuelson! – who still insist on this old concept. The recent living example of this wrong, scientifically judged, opinion lies in the “shock-experiment” recommended by Western experts and rigorously

applied in East European countries after the fall of the Soviet empire. And the inevitable economic and financial disaster has not been corrected even a decade later because it is maintained under the rule of insistence by the representatives of the powerful International Monetary Fund and World Bank. What is the truth, the whole truth in this old and perpetuated argument? In the physical universe, including the biological sector, the natural parameter (the constant) which holds the system together is given, was implanted at the initial Act of Creation by the Good Lord (for those who are believers). In the economic and social universe the natural parameter (the constant) is not given in the same fashion as in the natural sciences. It requires the use of our knowledge and wisdom in order to discover or invent that NaPa or constant (value or institution) which makes living possible in a “world of regularities”, as Laureate Ragnar Frisch remarked. It is itself a world of economic, monetary, financial and social stability. It is the great merit of Leon Walras who formulated the first version of the law of general equilibrium (albeit not in a complete form) and pointed out specifically that it is not possible to attain and maintain over time (dynamics) general equilibrium until we have constructed a system of markets ruled by free, pure competition and that all prices (including incomes) are expressed in terms of a constant that he called “numeraire-currency” (NaPaNu). And numeraire meant 100 percent-covered money in a certain commodity like gold, silver or any other suitable commodity, standardized and traded in international markets (Walras, 1954, pp. 173, 185). That is why Schumpeter (1954, p. 827) called Walras “the greatest economist ”of his time. It is good to remember that even the great Walras did not provide a complete version of the law of general equilibrium because be did not include the third basic element, specifically what I called in my work the factor “R”, that is, the institutional and legal framework consistent with the other two basic factors: pure competition and numeraire-currency. Otherwise, his theory of general equilibrium was suspended in the air or in a vacuum, with no practical application. This fact, actually and very probably explains why the fundamental work of Walras published in French in 1874-77 had to wait almost a century until in 1954 an English version was published under the sponsorship of the American Economic Association and the British Royal Economic Society. Since immemorial times, man and humanity have struggled hard and many human sacrifices have been endured for the ultimate values and ideals of freedom (personal and national); social justice of equity and/or equality when necessary (for instance, before the law) and financial stability. The classical thinkers devoted their life, talents and energy to see these ultimate values and ideals realized also in practice and shared by all human beings regardless of nationality, race or religious belief. As already mentioned the classics lived

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under the same universal law of human imperfection, and therefore had their own mistakes and imperfections. The “great issue” or, as the British historian Arnold Toynbee would say, the “Great Challenge” during the Great Depression of the 1930s was to correct, improve and make more perfect the heritage left by the old as well as neoclassics. Unfortunately, the generation of the 1930s – most of them conservatives and old liberals – did not answer in a positive way to the challenge of that time. Then came Professor John M. Keynes, from the University of Cambridge in England, who instead of playing the role of a classic savior, to complete the work of his beloved teacher Alfred Marshall, turned upside down the whole old and neoclassical doctrine. In a masterful way he revived the old mercantilist system of thinking in a new version, a most sophisticated analysis, known as “The Keynesian Revolution”. The genius of Keynes appeared in two important points: (1) He rapidly dispersed the confusion and intellectual apathy at the time, not only in England and the USA but the rest of the world with the exception of the East, dominated by the Marxian doctrine. This was an extraordinary performance, since very few thinkers during their lifetime attain such success. As a matter of fact, no other economist but Adam Smith was privileged to such a good luck. (2) By offering a new message with an alternative positive, simple and convincing that “Government can do it!”, Professor Keynes, later Lord Keynes, actually saved the Western world from a possible revolution similar to that in Russia or in Nazi Germany. His solution was in its nature simplistic but attractive, that government active intervention through public deficit-spending in the context of macro monetary and fiscal policies, with sufficient financial means available, can solve any economic and social problem. There was no consideration about longrun consequences. Everybody was mostly concerned how to get out of the present dreadful situation. And this was the biggest mistake of the living generation of economists in the 1930s: they took for granted that the new solution of Keynes was valid for both the short and the long-run, and this was not true. This truth we learned the hard way, but did we really? For the short run, the application of the Keynesian policies was socially beneficial, but for the long run now in 2002 we learned – “sur le vif”, as the French say, that macro monetary and fiscal policies, not only cannot solve completely the problem of involuntary unemployment, but in addition, created new, even more complicated problems like chronic deficits in the public budget and balance of international payments, ever rising national and international debt and intricate and complex socialinjustice problems.

As long as Lord Keynes was alive, to my knowledge, no other prominent economist challenged him in a nice collegial but scientific way, about these additional problems which remained unsolved and brought us to where we are today, close to another 1929 challenge, much more complicated in the risks involved, now directly at the global level.

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With this background, we introduce a young American economist, 23 years old by the name of Paul Anthony Samuelson, who published his first article (1938): “A note on the pure theory of consumer’s behavior”, where among other things he wrote:

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I propose, therefore, that we start a new indirect attack upon the problem, dropping off the last vestiges of the utility analysis. This does not preclude the introduction of utility by any who may care to do so, nor will it contradict the results attained by use of related constructs . . . (Samuelson, 1938, p. 62).

And in the last paragraph he repeated the same message as a finished product: I have tried here to develop the theory of consumer’s behavior freed from any vestigial traces of the utility concept (Stiglitz, 1966a, p. 13,71).

It is good that Laureate Samuelson, even at that early age, recognized an open door to other research men who might be working on or have something to say in the same area when he wrote: “this does not preclude the introduction of utility by any who may care to do so”. We are just in that position to have something to say. First, the consumer’s behavior exposed in this paper is not quite “pure” in the Walrasian sense of model M1 on our orientation table (see the Introduction, p. 341). Samuelson’s theory is supposed to be constructed on an empirical basis as illustrated in the modern capitalist regime, which is a mixed system composed of equilibrium and disequilibrium elements and forces. According to the integrated logic, the solution to any problem in modern, mixed capitalism is indeterminate by definition. Laureate Samuelson, however, presents the final result as if were a determinate solution. There is here a conflict between theory and practice, that is, realities. How did he cope with this difficulty? On the one hand, he used modern, formal logic where the real content-truth of proposition is excluded so that the manipulation of “symbols” is free, in all directions. On the other hand, he assumes Walrasian “numeraire” as being a constant equal “1” (an empty symbol) which does not affect the reasoning (analytical and practical) at all. In Walras, “numeraire” represents a certain quantity of a certain commodity (gold, silver or any other suitable economic good) selected to serve as monetary standard (etalon) to measure all other commodities and services. In the first example (model) where modern, formal logic is used, numeraire being equal to “1”, plays practically no role, neither in analysis nor in practice. In the second example (model) where numeraire equals a certain quantity of a selected commodity, the monetary circulation may change any day or any hour when

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needed. Numeraire-currency therefore plays a great role in determining, the stable equilibrium prices with simple, limited and one-time sort of fluctuations. Laureate Samuelson, like other reputed mathematical economists, missed in his model of reasoning the double function of numeraire-currency: (1) one serving as a stable (constant) monetary standard to measure objectively, precisely and equitably (just) exchange values that is, prices; and (2) the other to serve as a “shock absorber” in the determination of, and keeping the balance of, limited, simple price fluctuations. At the age of 55 he received the Nobel Prize in Economics and became the Dean of the American economic profession. Earlier in his academic training he was faced with the empirical realities of the Great Depression in the 1930s. In the world of ideas Samuelson encountered a difficulty with the neoclassical heritage. There seems to be a cleavage between what the classical theory said (equilibrium) and the given economic realities (disequilibrium). The intellectual drama of the 1930s in the economic profession stemmed from the fact that the giants who created the neoclassical theory (Walras, Marshall, Menger, Jevons and Pareto among others) were no longer alive to deliver a proper replica to the conflict in question. A new generation of economists led by Keynes (1936) with his magnum opus: The General Theory of Employment, Interest and Money decided to abandon the classical theory. The Keynesian revolution followed and Samuelson joined the new movement. Two generations later a similar conflict erupted, this time between the Keynesian theory and the given realities in 2002. What was wrong or insufficient in 1936? Toward 1970 when he received the Nobel Prize, in his official lecture, like all great scientists, later in life, he became more cautious and stopped for a moment of more reflection. This happened when he wrote the section on nonmaximum problems. Here is his own voice: I must not be too imperialistic in making claims for the applicability of maximum principles in theoretical economics. There are plenty of areas in which they simply do not apply. Take for example my early paper dealing with the interactions of the accelerator and the multiplier (Le Prix Nobel, pp. 283-4).

The article in question carries the title: “A synthesis of the principle of acceleration and the multiplier” and it was reprinted in The Collected Scientific Papers of Paul A. Samuelson (Stiglitz, 1966, Vol. 2, pp. 1111-23). A more objective analysis of Wicksell’s cumulative price fluctuations, Keynes’s investment multiplier and J.M. Clark’s acceleration principle, would show that all three concepts refer to the same origin, that is, the phenomenon of cumulative disequilibrium in monetary circulation (Wicksell) but are organically interrelated. Indeed, an artificial increase in the monetary

circulation (use of any type of anti-numeraire sort of money on a large scale) can produce simultaneously either a multiple increase of consumption or a multiple increase in investment, depending whether the increase of monetization of bankcredit comes first into the hands of consumers or of producers and the process is repeated. Consequently, all these three cases actually refer to the business cycle phenomenon (in an open form in the capitalist system, and in a hidden aspect in the socialist regime). All three cases are associated with the empirical reality of disequilibrium, to repeat, in both capitalist and socialist regimes. But the phenomenon of cumulative disequilibrium in one case is open with a warning signal that something is wrong (capitalism) and in the other case is hidden but real (socialism). The phenomenon of cumulative disequilibrium, in all three cases, is absolutely the same. Only the verbal designation is different and the new, more comprehensive integrated logic confirms this conclusion. Let us take a look at how Laureate Samuelson presents the problem in the above-mentioned article: The principle of acceleration is one of the few tools of business-cycle analysis whose importance is universally conceded. Carefully stated, it can be made to yield information concerning the movements of investment from a knowledge of the movements of consumption. In particular, cyclical fluctuations in the latter will yield intensified period fluctuations in investment.

C.O. Hardy, Ragnar Frisch and other critics have rightly: [. . .] pointed out that it is a single relation between two series and does not constitute a selfcontained, determinate business-cycle theory. Fluctuations in consumption will yield fluctuations in investment, but how do the original fluctuations in consumption arise? It can hardly be maintained that the original propounders of the principle were unaware of this fact. J.M. Clark, for example mentioned explicitly that the volume of consumption demand is itself influenced by the level of investment through income payments to the factors producing investment goods (Stiglitz, 1966, Vol. 2, p. 1111).

In the conclusion, Laureate Samuelson is not quite clear and resolute. Here is again his text: It is a matter of indifference for the present purpose what terminology one employs with respect to savings and investment. These can be defined in the Keynesian manner to be equal, or the Robertsonian terminology may be preferred, in terms of which they can be unequal. Neither offers any advantage . . . The equality of savings and investment throws no light on the process; the inequality of the Robertsonian magnitudes is equally fruitless, being no more than a reflection of the fact that the level of income is changing. From the strictly logical standpoint controversy over terminology is sterile; the flexible mind will adopt the terminology of his opponent of the moment. In concluding I should like to point out, that throughout, all relations have been assumed to hold rigidly. Obvious qualifications must be made before the results can be applied to the real world (ibid. p. 1122).

There is a difference of interpretation again, and most of it is derived from the fact that two different kinds of logic were used. Laureate Samuelson made use

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extensively of modern, formal, symbolic logic whereas I applied the newer, more comprehensive integrated logic. For instance, in the first paragraph, a relationship between “movements of investment” from the information on consumption and vice versa is a part of Keynesian reasoning of a model of unstable equilibrium as in model M4 on our orientation table. But the same relationship does not hold if we apply integrated logic because both a new investment or an additional consumption cannot materialize unless there is first a corresponding change in the money supply. Laureate Samuelson nevertheless could remain safe in view of the last warning to the reader: “obvious qualifications must be made before the results can be applied to the real world”. In the Walrasian model M1 or the Marshallian M2, this problem does not exist, because the system by itself when, f.i., there is a positive change in the population, then the marginal utility of numeraire-currency increases automatically and the supply of money will grow to satisfy new investment necessary to cover the additional demand. This is what the Walrasian system of general, stable equilibrium can do at no extra expense to the public budget. The new Keynesian system of unstable equilibrium cannot do this by itself and a government deficit spending is necessary. J.M. Clark was wrong, or at least incomplete, in using modern, formal logic when he insisted that the volume of consumption was influenced by the level of investment. According to integrated logic, neither investment nor consumption could increase unless the supply of money and capital was available. Contrary to the opinion of Laureate Samuelson, we think that “terminology” is very important because it shows what kind of logic was used. For instance, it is true that in Keynes the amount of savings equals the volume of investment; but we have to understand that after 1930 (A Treatise on Money was published) Keynes adopted the modern, symbolic logic inherited from Bertrand Russell and Ludwig Wittgenstein. Consequently savings in the above equality does not represent the classical concept of voluntary, ex-ante,stable equilibrium type of capital formation but rather the modern, ex post, forced (involuntary), disequilibrium type of capital formation. This, the great Schumpeter explained clearly, as far back as 1918, but for some reason escaped the attention of the economic profession. However, we consider this, to be an indispensable source of information for understanding the nature and the real problems of mixed, modern capitalism (Schumpeter, 1956, pp. 205-11). In the finale, both Keynes and Sir Dennis Robertson were right, but only if we add ex post and ex ante properly. Again, with all respect due to Laureate Samuelson, we cannot accept his verdict that “from the strictly logical standpoint controversy over terminology is sterile” or that “the flexible mind will adopt the terminology of his opponent of the moment”.

After this long detour with more detail regarding the article “A synthesis of the principle of acceleration and the multiplier”, let us go back to the text of the Nobel Memorial Lecture. In any case Samuelson considers the article just mentioned “as an important topic in macroeconomic analysis”. Indeed he wrote in continuation:

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As I have recorded elsewhere this paper brought me a disproportionate amount of reputation. True the topic was a fundamental one, and mathematical analysis of stability conditions was able to give it a neat solution at a level that could be understood both by the intelligent beginner and the virtuoso in mathematical economics. But the original specification of the model had been made by my Harvard teacher Alvin Hansen, and the works of Sir Roy Harrod and Erik Lundberg clearly pointed the way to the setting up this model. My point in bringing up the accelerator-multiplier here is that it provides a typical example of a dynamic system that can in no useful sense be related to a maximum problem (Nobel Lecture, 1970, p. 284).

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Again, we cannot agree with Laureate Samuelson that “the acceleratormultiplier” is “a typical example” and that it does not have to do with the “maximizing problem”. Certainly, Wicksell’s cumulative price fluctuations due to a change in the monetary supply (abnormally high or low), the Keynesian multiplier effect and the domestic acceleration demand all belong together to the business cycle phenomenon where the boom has a maximum and the recession-depression a minimum – conceived historically. The unsolved problem again is the integrability; and Georgescu-Roegen – I wish he were alive to read these lines – was right, even though he did not give a complete answer. The trio – Wicksell, Keynes and Clark – did provide sufficient evidence for our conclusion. Thus we do not understand why Samuelson took such a radical position on this issue! If he has any other reason to contradict my interpretation, then that may come from the usage of modern, symbolic logic, including the results of Professor Richard Eckaus (his former student), quoted in the Lecture on p. 284. In the finale, our position is that in regard to the business cycle there is an indeterminate maximum (at the top) and indeterminate minimum (in the valley) but no optimum level of output, prices, employment and utility. “Optimum” is possible only and only in a system (analytically speaking) or in a regime (in practice) where all 23 requirements and conditions for a system of general stable equilibrium are fulfilled, as far as humanly possible (Introduction, pp. 369-73). Of course, this subject could be elaborated more but this is enough as a problem departure for any one who is interested to undertake more research. Dynamics and maximizing Before the finale of this Nobel Memorial Lecture, Laureate Samuelson treated again the subject of dynamics and maximizing. In a previous article, “A synthesis of the principle of acceleration and the multiplier”, he came to some

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(1) The combined action of the acceleration principle and the multiplier can result in cumulative movements. (2) For particular numerical values of the relations assumed there may result an asymptotic approach to the stationary equilibrium level justified by the amount of spontaneous net investment and the marginal propensity to consume. In other words, not all cumulative movements are disequilibrating. (3) There may result cumulative movements which go past the position of equilibrium . . . (4) Again, depending upon the numerical strength of the different factors, the cyclical patterns which result (if any do!) may or may not be self-perpetuating. They may well be damped, depending upon the initial conditions and numerical values of the system’s determinants. Moreover, successive cycles need not be similar in timing or amplitude. (5) Small values of the multiplier and “relation” are conducive to stability. Therefore, systems with a large volume of investment outlets and with small propensity to consume are least likely to be affected seriously by the acceleration principle. (6) From the long-run point of view Keynes was partially justified in ignoring the acceleration principle completely. The average level of the system is independent of its operation, depending rather upon the level of investment outlets (Stiglitz, 1966, Vol. 2, pp. 1119-20).

This whole summarized text shows that Laureate Samuelson can manipulate the modern, formal logic so masterfully that the position of stable equilibrium by Walras (model M1 on our orientation table (see p. 341, Introduction)) can stand together with the position of unstable equilibrium by Lord Keynes (model M4 on our orientation table). Even though Keynes in his own mind very probably envisioned Samuelson’s later interpretation, nevertheless the game or technique is dangerous because it may lead to confusion. There is a long distance between model M1 of stable equilibrium and model M4 of unstable equilibrium. The two positions are located in two entirely different economic worlds. In between there is a large number of weak and relatively strong minor disequilibria on one side and a large number of the same kind of major disequilibria on the other side.Laureate Samuelson does not see the two different positions because he uses only formal, symbolic, mathematical logic and does not have the orientation table. Let us examine more carefully the text with his results given from Stiglitz (1966, Vol. 2, pp. 1119-20) and taken point by point: (1) Using symbolic, formal logic it is true that the combination of the acceleration principle and the multiplier leads to “cumulative movements”. But this is true only in the Keynesian model M4 of

(2)

(3)

(4)

(5)

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unstable equilibrium with involuntary unemployment. By the same token if we use the “integrated logic”, that is, the Walrasian model M1 in its more complete form, the combination in question is wiped out in principle and in practice. “Stationary equilibrium” again is valid in the Keynesian model M4 of unstable equilibrium which Keynes called “secular stagnation” but definitely cannot be associated with model M1 of stable equibrium, both in principle and in practice. It must be stressed that the classical and neoclassical model and system of thinking are not “static” but rather “normally dynamic”. We shall return with more clarification on this subject. According to the orientation table “cumulative movements” could never go past the position of stable equilibrium (model M1), at the limit a perfectly stable regime with full employment. Cumulative movements evidently could go past the static position of “unstable equilibrium” into the area of major disequilibria. About “cyclical patterns” we have to make a distinction between “stable patterns”, as in model M1 which do not pose any problems and can be “self perpetuating” and “unstable, disequilibrium patterns” which definitely cause problems, as in the Keynesian model M4 and further down in the vast territory of major disequilibria. The whole experience of the twentieth century confirms this situation. As a matter of fact and principle the value of “x”, in a Keynesian model at its limit is and must be “indeterminate”. The Go¨del proof of indeterminacy also enters into action. Samuelson is also right that “successive cycles need not be similar in timing or amplitude” valid for both classical and Keynesian school of thought, of course with the necessary qualification. In the first case the fluctuations are limited, one-time changes whereas in the second, Keynesian case, the same changes are cumulative. Small values of the multiplier, at their limit being equal to one could be attributed to the classical model with specification. But assuming further “a large volume of investments and outlets and with a small propensity to consume” contains some seeds of contradiction. Of course, using modern, formal logic one can use perfectly the double assumption of Samuelson. But by using integrated logic (which requires real-truth) the contradiction is evident since a spontaneous “large volume of investment” may be easily associated with a Keynesian model but “a small propensity to consume” does not fit with a Keynesian model in action. The acceleration principle goes hand in hand with the Keynesian multiplier, and therefore there is no problem whether one affects the other or not: that is what Keynes probably had in mind. From the long-run point of view Keynes did not need to worry because the principle of acceleration in consumption was running neck in neck

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with the multiplier. That “the average level of the system is independent of its operation, depending rather upon the level of investment outlets, can be accepted formally, with qualification in symbolic, modern logic but it is hard, if possible at all, when the same statement is expressed in terms of real, integrated logic. In his Nobel Lecture and, of course, retaining the application of modern logic, the problem becomes even more complicated. Here is his own voice: How different were my preoccupations during the 1950s when I was on the fruitless search for a proof of the so-called “Turnpike Theorem”. Here one does deal with a maximizing model, at least in the sense of intertemporal efficiency. When you study a von Neumann input-output model, it becomes the case of a min-max, or saddle-point problem like that of von Neumann’s theory of games; and this destroys the possibility that your dynamic characteristic roots could all be damped (Le Prix Nobel, 1970, p. 285).

What can we say about this text? The turnpike theorem, the saddle-point problem and von Neumann’s theory of games, all are based on the application of modern, symbolic, formal logic and consequently fall under the same Go¨del proof. A personal anecdote by Laureate Samuelson follows with the same result. Here is the text: Although it is said I was a brash young man, I had only one encounter with the formidable John von Neumann, who of course was a giant of modern mathematics and who in addition proved himself to be a genius in his work on the hydrogen bomb, game theory, and the foundations of quantum mechanics . . . This sets the stage for my encounter with Goliath. Sometime around 1945 von Neumann gave a lecture at Harvard on his model of general equilibrium. He asserted that it involved new kinds of mathematics which had no relation to the conventional mathematics of physics and maximization. I piped up from the back of the room that I thought it was not all that different from the concept we have in economics of the opportunity-cost-frontier, in which for specified amounts of all inputs and all but one output society seeks the maximum of the remaining output. Von Neumann replied at that lightning speed which was characteristic of him: “Would you bet a cigar on that?” To this story, Samuelson added in 1970: “I am ashamed to report that for once little David retired from the field with his tail between his legs. And yet some day when I pass through Saint Peter’s Gates I do think I have half of a cigar still coming to me – only half because von Neumann also had a valid point (ibid., p. 286).

I must confess that I do not have the high mathematics of Goliath von Neumann or Laureate Samuelson, but I have the concept of integrated logic and with its help and the orientation table, I can explain in a more simple and clear way what Von Neumann and in particular Laureate Samuelson wanted to say in 1970. For this purpose we must have a clear distinction, with the help of the orientation table, between two concepts of stable and unstable equilibrium form of dynamics and maximizing. First, there is a dynamics of stable equilibrium in the Walrasian or Newtonian sense which may be really called

“normal dynamics”, with fluctuations like a pendulum. Second, there is a dynamics of disequilibrium, or at the limit model M4 of unstable equilibrium. In the Keynesian or Einstein’s sense appears with cumulative or, as Samuelson put it, “just as a rope suspended between two nails will hang in the shape of a catenary . . . with irregular, stochastic motion around a saddle point”. We are adding a large number of possible minor and major disequilibria, divided by the unique model M4 of unstable equilibrium or the saddle-point. We call this large complex set of models “abnormal dynamics”. The members of the old and modern neoclassical school. studied in fact normal economic dynamics, at the center being the system (model or regime) of general stable equilibrium, not quite complete in its formulation. The members of the modern and contemporary school, with few exceptions, studied and are studying abnormal economic dyanmics. Unfortunately, in the literature the distinction between normal and abnormal economics is minimally observed, if at all. This is one of the many confusions in economic debates when the classical model is considered “static”, and the modern model is viewed as being “dynamic”, without any further qualification. A similar type of confusion is produced when the Keynesian model is not clearly identified: a system of unstable equilibrium with involuntary unemployment, as it really is. Considering this additional clarification, Laureate Samuelson is correct when he, in 1970, envisioned that in his 1945 argument with John von Neumann, half of the truth was with von Neumann and the other half belonged to him, since the argument in question was located in a model of unstable equilibrium (as that envisioned by Keynes) where “x” has two values, one positive and the other negative, i.e. a paradox. In conclusion, Laureate Samuelson did not need to feel humbled for keeping quiet after the joke made by von Neumann. He also does not need to wait for the time when passing through Saint Peter’s Gate. The application of the new, more comprehensive integrated logic can explain the truth of that event right now, during his lifetime. In the same kind of explanation, that is, repeating the important distinction between model M1 of general stable equilibrium and model M4 of unstable equilibrium (or stable disequilibrium), enters also the concept of “maximizing”. There is a “normal, stable equilibrium maximization” at the optimum level of output and the other basic sources of income: wages, rent, interest, profit, taxation and foreign exchange. In addition there is also an “abnormal, unstable equilibrium maximization” at a disequilibrium level of output where one factor – in the capitalist regime, the business representative, individuals and/or corporations, and in a socialist or centrally-planned economy the government – receives a maximum profit and all other factors receive less than maximum or a minimum of income.

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In microanalysis, a single enterprise which enjoys monopoly power can obtain a maximum profit, at the expense of other firms in the same domain and/or the customers, the large masses of consumers. In the last paragraph he refers to “the student of classical mechanics” who deals with “vibrations around an equilibrium of a pendulum”, but Samuelson does not mention that this is “stable equilibrium”. In continuation, he refers to “the student of economics” who deals more often with motions around a saddle point of catenary shape, but he does not point out that this is modern economics of “unstable equilibrium” leading – according to him – toward the “turnpike”. The two models M1 (classic) and M4 (modern) represent two different economic worlds. Let us hear his voice on the “turnpike”: I might mention how the turnpike got its name. All Americans are used to the notion that in going from Boston to Los Angeles, the fastest way is to move quickly to a major highway and only at the end of your voyage depart to your local goal. So in economics: to develop a country most efficiently, under certain circumstances it should proceed rather quickly toward the configuration of maximum balanced growth, catch a ride, so to speak on this fast turnpike and then at the end of the twenty year plan move off to its final goal. An interesting triple limit is involved: as the horizon becomes large, you spend an indefinitely large fraction of your time within a small distance of the turnpike. I shall not spell out this tongue-twister further (The 1970 Nobel Lecture, p. 286).

What can we say about the structure of this model? It is ingeniously conceived and with the use of formal, modern logic probably could pass the exam, but the citizens of that country would not understand anything in what the government wants to do. The real subject here is that of a centrally planned economy for a period of 20 years. To tell the people that they have to wait for 20 years in order to see “the configuration of maximum balanced growth” and nothing else, means losing completely public cooperation – the large masses of workers. Let us further ask the question: “What is the true meaning of ‘maximum balanced growth’?” Using the new integrated logic it cannot be anything else but the application of practical conditions for the realization of a system of general stable equilibrium (see Rugina, 2001, Ch. 1). Then the people would know what the government wants to do, and will expect immediate fruits of “a maximum balanced growth” and not after 20 years! Otherwise, not only a program oriented at the “turnpike”-theorem but any other program created by the application of modern, symbolic logic is condemned, as Laureate Samuelson so well prognostigated, to be a “tongue-twister” type of project. On the other hand, we are grateful to him for providing in his Memorial Lecture a rich source of new problems in the economic science. And this is one characteristic of great original thinkers: to challenge their time and mode of reasoning, not only in economics but actually in all sciences. It is the true basis for real progress in analysis as well as in practice. If there are no challenges and

no challengers then easily intellectual stagnation leads to the formation of ideological vested interests in the world of ideas, much more dangerous than vested interests in the world of business, finance and politics. Finale In the last part of his Memorial Lecture, he stressed his “abiding concerns in the field of welfare economics” (emphasis is his). He paid a tribute in particular to Professor Abram Bergson of Harvard University, who in his view brought clarification to what is known as Pareto-optimality. Then he ventured to say something about the New Left. Here is the interpretation of Laureate Samuelson: Just recently I was reading an article by a writer of the New Left. It was written in blank verse, which turns out to be an extremely inefficient medium of communication but which a dedicated scholar must he prepared to struggle in the interest of science. The writer was scathing on the notion of Pareto-optimality. Yet as I digested his message, it seemed to me that precisely in a society grown affluent, where dissident groups are called toward a way of life of their own, there arises an especial importance to the notion of giving people what they want. An Old Left writer dealing with a socialist economy on the verge of subsistence has surely less need for the concept of Pareto-optimality than does the modern social observer in the United States or Sweden (The 1970 Nobel Lecture, p. 287).

A part of the message is that a “dedicated scholar” should be concerned also with views of dissenters because scientific truth and justice must be the same for all citizens of a country and for that matter, of the world, that is humanity. The second part of the message gives a hint that “the social question” exists, both in capitalism and socialism. The Pareto-optimality in an improved version is valid in both regimes. The model of general stable equilibrium is the standard of evaluation. References Bullock, A. and Stallybrass, O. (Eds) (1977), The Harper Dictionary of Modern Thought, Harper & Row, New York, NY. Cournot, A.A. (1838), Researches into Mathematical Principles of Wealth. Einstein, A. (1916) The General Theory of Relativity, Die Grundlage der allgemeinen Relativitatstheorie, Johann Ambrosius Barth, Leipzig. Einstein, A. (1950), Out of My Later Years, The Wisdom Library, New York, NY. Gossen, H.H. (1854), Entwickelung der Gesetz des menschlichen Verkehrs und der daraus fliessenden Regeln fu¨r menschliches Handeln. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan and Co., London. Marshall, A. (1952), Principles of Economics, 8th ed. (originally published in 1890), Macmillan, New York, NY. Meriam-Webster (1950), Webster’s New Twentieth Century Dictionary of English Language, Meriam-Webster, New York, NY.

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Quesnay, F. (1758), Table Oeconomique. Rugina, A. (2000), Prolegomena 2: To Any Future Study in “Integrated Logic”, and a More Comprehensive Methodology for a Unification of All Sciences, Natural and Social (monograph), International Journal of Social Economics, Vol. 27 No. 5/6 Rugina, A. (2001), Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary Financial and Social Stabilization Plans (monograph), International Journal of Social Economics Vol. 28 No. 1/2. Samuelson, P.A. (1938), “A note on the pure theory of consumer’s behavior”, Economica, Vol. 5 No. 17, pp. 61-71. Samuelson, P.A. (1947), Foundations of Economic Analysis, Harvard University Press, Cambridge, MA. Samuelson, P.A. (1948), Economics: An Introductory Analysis, MacGraw-Hill, New York, NY. Samuelson, P.A. (1961), Samuelson Report on the State of the American Economy to PresidentElect Kennedy, 5 January. Samuelson, P.A. (1983), Foundations of Economic Analysis, enlarged edition, Harvard University Press, Cambridge, MA. Schumpeter, J.A. (1954), History of Economic Analysis, George Allen and Unwin, London. Schumpeter, J.A. (1956), “Money and the social product”, trans. from German by Marget, A.W., in International Economic Papers No. 6, Macmillan, London. Smith, A. (1937), An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan edition (originally published in 1776), The Modern Library, New York, NY. Stiglitz, J.E. (Ed.) (1966), The Collected Scientific Papers of Paul A. Samuelson, MIT Press, Cambridge, MA, Vol. I and Vol. II. von Thu¨nen, J.H. (1826), Der Isolierte Staat in Beziehung auf die Landswirtschaft und Nationalo¨konomie. Walras, L. (1954), Elements of Pure Economics, (originally published in 1874), trans. by Jaffe, W., Richard D. Irwin, Homewood, IL.

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4. Nobel Laureate: Simon Kuznets (1901-1985)

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Introduction by Professor Bertil Ohlin of the Royal Academy of Sciences “In his scholarly work,” wrote Ohlin, “Kuznets has consistently addressed himself to giving quantitative precision to economic magnitudes which seem be relevant to an understanding of processes of social change. He has collected an extraordinarily large body of statistical material which he has analysed carefully and with a keen and screwed intelligence, and he has used this to shed new light on economic growth . . . Kuznets of course, makes use of models which demonstrate the connections between strategic elements in the economic system, but he shows a very limited sympathy for abstract and generalized models which provide few opportunities of empirical testing . . . Within the framework of these models, regard is also paid to institutional and noneconomic factors, for example changes in the population growth, in technology, in the industrial structure and in market forms. In this way also he seeks to reach a coherent interpretation of the growth phenomenon and of cyclical fluctuations (Le Prix Nobel en 1971, Stockholm, 1972, p. 299).

The above characterization by Professor Bertil Ohlin is well taken. It portrays Laureate Kuznets as a quantification economist. After all, he was primarily a statistician who used the theory of models but more in his own empirical orientation than in pure theoretical sense of developing analytical tools for clarification of the invisible and yet the ultimate causes of the “economic and social structure and the process of change and development”, where he preferred not to leave the empirical aspect. In other words, he was in the end an institutional economist with a good background in statistics.

His life and personality Simon Kuznets was born in Russia in 1901 of Jewish parents, according to his own information: He came to the USA in 1922 to join his father who emigrated before the first World War. He began university studies in Russia and in continuation in the USA at Columbia University. In any case, he must have been an exceptional student who in all probability learned English in Russia. That explains how he was able, being transplanted from a continent to another continent, to complete his education so fast and so eloquently. He received a MA in 1924 and a PhD in 1926 from Columbia University. It was here that the young Russian student met Professor Wesley C. Mitchell who appreciated his abilities and supported him scientifically. Laureate Kuznets, on his part,

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recognized the help received from Mitchell by saying: “to whom I owe a great intellectual debut”. Professor Mitchell at that time was, so to say, “the heart and soul” of the National Bureau of Economic Research (NBER). He invited the young student Kuznets to join NBER after he passed his PhD and stayed there from 1927 to 1960. He conducted research there in particular on national income and capital formation in the USA. His methodology was concentrated on comparative quantitative empirical analysis. During the Second World War, he was Associate Director of the Bureau of Planning and Statistics and Director of Research Planning Committee on the War Production Board. He was a member of the Board of Trustees and Honorary Chairman of Maurice Falk Institute for Economic Research in Israel from 1963 and the rest of his life, and Chairman of the Social Science Research Council Committee on the Economy of China, 1961-1970. As an educator he taught Economics and Statistics at the University of Pennsylvania (1936-1954), at John Hopkins University (1954-1960) and at Harvard University from 1960-1971. He was President of the American Economic Association (1954) and the American Statistical Association (1949). He was a member of the International Statistical Institute, the Royal Statistical Society of England and the American Philosophical Society. Modern economic growth: findings and reflections by Simon Kuznets, Nobel Memorial Lecture on December 11, 1971 1. Definitions Laureate Kuznets practically devoted his full scientific life to the study of population and advancing technology which he considered to be the key for the rise of modern civilization and by using a statistical method to produce the necessary information to guide the economic process and the results. Here is his own voice: A country’s economic growth may be defined as a long time rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands. All three components of the definition are important. The sustained rise in the supply of goods is the result of economic growth, by which it is identified (Le Prix Nobel, 1971, p. 313).

The three factors, population, advancing technology and institutional and ideological adjustment are important in defining modern economic growth, as Laureate Kuznets stressed. It is that the application of advancing technology can, and in fact does, increase the supply of economic goods and therefore may help to improve the economic life of the many. But, by the same token, Kuznets up to the last page of his lecture mentioned that parallel with blessings there are also disruptions, social evils – in one word, disequilibrium problems. The Gordian knot is not to complain about modern technology as such on which practically all modern civilization is based and by now we cannot

indiscriminately dispense of it in view of the increase in population. Technology is not bad per se, like any other tool or institution, but it may create social problems from two directions. One is the tempo, i.e.the speed at which it is introduced, the time-clock which measures the social adjustment of the people involved during the process of change induced by the use of machines and other technical gadgets. The second factor is the question of whether the people were sufficiently informed and consulted about the introduction and use of modern technology which requires a method of real capital formation in order to finance its production and usage, and for what purpose: to be socially useful or socially harmful, destructive? The tempo, the capital formation and the correct and sufficient information including consultation, when necessary, of the people, by far are not included in the Kuznets analysis which is more institutional than pure theory. We mean consistent and adequate theoretical analysis, as distinguished from empirical reality or application. Let us hear more from Laureate Kuznets himself: Advancing technology is the permissive source of economic growth, but it is only a potential, a necessary condition, in itself not sufficient. If technology is to be employed efficiently and widely, and, indeed, if its own progress is to be stimulated by such use, institutional and ideological adjustments must be made to effect the proper use of innovations generated by the advancing stock of human knowledge (ibid.).

From the text quoted, it looks as if Laureate Kuznets considered adequate “institutional and ideological adjustment” a very, if not the most, important factor after the concept of “advancing human knowledge”. Unfortunately, he is not clear enough about “institutional adjustments” (which institutions specifically should be changed and how) and even less about “ideological adjustments” where political parties of the left, of the right and of the center, should be changed and how to do this successfully in a democratic regime. He must have considered this factor of adjustments very important since he repeated it three times on the same page. Especially the political direction consistent with a successful application of modern technology is not clearly stated. Laureate Kuznets gives on this problem a few historical examples, some of which may be questionable. Let us lend an ear: To cite examples from modern economic growth: steam and electric power and the large-scale plants needed to exploit them are not compatible with family enterprise, illiteracy, or slavery – all of which prevailed in earlier times over much of even the developed world, and had to be replaced by more appropriate institutions and social views. Nor is modern technology compatible with the rural mode of life, the large and extended family pattern, and veneration of undisturbed nature (ibid.).

If we look at the countries with dictatorships (fascism or communism) during the twentieth century, we can observe an extensive drive for rapid economic

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growth through forced industrialization. But some of the characterizations of Kuznets “which prevailed in earlier times” are still there and were not replaced by “more appropriate institutions and social views”. Under a modern, mixed capitalist regime, composed of equilibrium but also disequilibrium elements and practices, some of the same negative characterizations are also still there but in a different form, partially hidden. Consequently, the ultimate problems of complete natural freedoms (personal and national), social justice of equity in principle and of equality when necessary (equality under the law) and monetary, financial and political, democratic stability are not only unsolved, properly and fully (as far as humanly possible), but also practically not clarified, even in scientific, analytical terms. That is really a primary issue of the relationship between modern technology and modern society, or between modern civilization and modern culture, conceived analytically because the institutional point of view. per se, is only empirical (historical) and therefore insufficent to solve the problems in question, properly and fully. For this purpose we need the equation of unified knowledge: S ¼ f ðA; PÞ (see Introduction, pp. 358-61). Kuznets used only factor “A”. Let us go back to the Gordian knot, that is, the trilogy of tempo, capital formation and correct, sufficient information, including consultation (direct or indirect) of the people, all analytically related to modern technology and society. At the center of the whole argument we set the problem of capital formation, because if properly selected and applied, this can solve by itself and through itself, many other problems. There are two roads, or actually methods, for the formation of capital in a national and international economy. The first method we call the “stable equilibrium”, a direct road which consists from accumulation of voluntary, free savings of the people that are deposited in the banking system or used directly by the people for investment purposes. The banking system in turn and in people’s name grants loans for investment. This is the stable equilibrium form of real capital formation which is socially beneficial to the saver (he or she receives interest), to the bank which makes a legitimate profit (the differential between the interest paid to savers and the interest charged to investors) and the national and/or international economy, having at its disposal the necessary capital. The operation is clear and simple, natural as bon jour and it does not create any social or individual problems. In the end modern technology appears as a blessing for all concerned. The second method we call the “unstable equilibrium”, an indirect road of disequilibrium in formation of nominal capital, which subsequently is converted into real capital through the process of negative forced savings by the large masses of the people. It looks almost a “financial miracle” but in reality it is a reduction of the real income of the masses with no indemnization for the loss. It is a kind of social fraud which escaped the attention of the

economic profession with the exception of one great economist by the name of Joseph A. Schumpeter who, as far back as 1918, described vividly the phenomenon of “forced savings”. Here is his voice: The price-rising effect of bank money gives rise to the phenomenon of “forced saving”. Without wishing to save, people are forced to do so by the reduction of their real income through the rise in prices. This releases means of production and the stock of goods at the disposal of the economy for productive purposes is increased, its fund for immediate consumption is diminished. This amends Ricardo’s oft-repeated statement that capital can not be increased by “banking operations”. Strictly speaking, the statement is correct; but “banking operations” can make possible an enrichment of the productive apparatus of the economy. They cause a shift in purchasing power among individuals and, if this shift favours the expansion of production, a transfer of means of production to those individuals to whom credits are granted by means of newly created money . . . The banking world constitutes a central authority of the economy whose directives put the necessary means of production at the disposal of innovators in the productive organism . . . The essence of modern credit lies in the creation of such money. It is the specifically capitalistic method of effecting economic progress. It gives scope to the capitalistic function of money, as opposed to its market-economy function (Schumpeter, 1956, pp. 205-6).

This is known in the banking literature as the phenomenon of monetization of bank credit or “bank money” as called also by Keynes and practically by all other economists, but without any hint that it has a direct connection with “forced savings”, equal to a hidden expropriation of real income of large masses without due process of law or proper indemnization. Without any further discussion, the formation of capital through monetization of bank credit and the phenomenon of “forced saving” constitutes a disequilibrium method of financing modern technology which in turn produces not only an increase in the production of goods and services as Laureate Kuznets and many, many other economists stress, but also simultaneously a host of social disequilibrium problems which put in danger the entire modern society. Furthermore, ironically enough the same disequilibrium method of “forced savings” is used much more drastically in socialist countries under the excuse that they have to do it in order to reach the same level of development as in the capitalist countries. Laureate Kuznets is insisting that an efficient and effective economic growth through technological progress requires “institutional and ideological adjustments”. He does not say anything about concrete reforms of how to solve properly and fully the intricate and complex problem of social injustice, financial and economic instability, all resulting from one major cause: the wrong method of capital formation through monetization of bankcredit and free issue and manipulation of a paper monetary standard. On the other hand, without the freedom of the government to manipulate (read “to manage”) the supply of paper money and monetized bankcredit, the Keynesian system in application does not and cannot exist. The legitimacy of the Keynesian solution with macro monetary and fiscal policies is open for debate. The impossibility

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theorem in practice (see Introduction, pp. 353-4) finally negates any possibility of success in the long run for the Keynesian solution. The only final solution to solve the wrong method of capital formation together with the other major disequilibria remains with the systematic and rigorous application of the equation of unified knowledge: S ¼ f ðA; PÞ, simply, the improved Walrasian solution of general stable equilibrium condition. This is pure analysis or theory and its application. Laureate Kuznets is not interested in this more complicated method of research and solution. He is by his nature and training an institutionalist, and consequently his attention is concentrated only on factor “A” (empirical realities, institutions) of our equation. 2. The six characteristics Let us take a look at the institutional analysis made by Kuznets in his own words: Six characteristics of modern economic growth have emerged in the analysis based on conventional measures of national product and its components, population, labor force, and the like. First and most obvious are the high rates of growth of per capita product and of population in the developed countries both large multiples of the previous rates observable in these countries and of those in the rest of the world, at least until the recent decade or two. Second,the rate of rise in productivity, i.e. of output per unit of all inputs, is high, even when we include among inputs other factors in addition to labor, the major productive factor – and here too the rate is a large multiple of the rate in the past. Third, the rate of structural transformation of the economy is high. Major aspects of structural change include the shift away from agriculture to non-agricultural pursuits and, recently away, from industry to services; a change in the scale of productive units, and a related shift from personal enterprise to impersonal organization of economic firms, with a corresponding change in occupational status of labor. Shifts in several other aspects of economic structure could be added (in the structure of consumption, in the relative shares of domestic and foreign supplies, etc.) Fourth, the closely related and extremely important structures of society and its ideology have also changed rapidly. Urbanization and secularization come easily to mind as components of what sociologists term the process of modernization. Fifth, the economically developed countries, by means of the increased power of technology, particularly in transport and communication (both peaceful and warlike), have the propensity to reach out to the rest of the world – thus making for one world in the sense in which this was not true in any pre-modern epoch. Sixth, the spread of modern economic growth, despite its world-wide partial effects, is limited in that the economic performance in countries accounting for three-quarters of world population still falls far short of the minimum levels feasible with the potential of modern technology (Le Prix Nobel, 1971, pp. 315-16).

All these six characteristics represent nothing but statistical and verbal information as a part of factor “A” of our equation which is important for a student who is studying economic history in his or her courses at a university during the first or second year. Certainly, this information is relevant, in fact required for more advanced courses in pure economic theory, in the Walrasian

sense. But here we are talking about “applied economic theory” in a country of our time (capitalist, socialist or fascist-militarist) which, right in the beginning, has problems of disequilibrium. This country has to go through a period of transition, of tranformation. What are those problems of disequilibrium which must be solved before the fruits of modern technology can be enjoyed by the population eagerly waiting to see the promised land of progress? From the institutional point of view, or factor “A” of our equation, we cannot deduce the essence and solution for that deeply seated disequilibrium or disequilibria. The master logician Ludwig Wittgenstein warned all scientists, not only in economics, but also in all sciences, that “The facts all contribute only to setting the problem, not to its solution” (Wittgenstein, 1922, p. 149). We mentioned earlier that the fundamental problem in this case lies in the issue of the wrong method of capital formation through forced, involuntary savings of the masses which are expropriated without due process of law and equitable reimbursement under capitalism and expropriated with means of crude political power under socialism-communism and fascism. This antihuman method of capital formation has to be replaced by free, voluntary savings of the people so that the ownership of the capital as well as the participation in the distribution of the increase in productivity which evidently exists due to the use of modern technology, should remain with the people. Unfortunately, in the presentation by Laureate Kuznets which is institutionalist, we cannot find the principal problem; we cannot identify the direction to be followed and the precise standard of evaluation of the means (policies) leading to the final station of a harmonious economic growth to raise the standard of living for all the citizens who participated in this process of real economic and social progress. Certainly, he is right from the institutional point of view, when he wrote in continuation: The six characteristics noted are interrelated, and the interrelations among them are most significant. With the rather stable ratio of labor force to total population, a high rate of increase in per capita product means a high rate of increase in product per worker; and, with average hours of work declining, it means still higher growth rate in product per manhour. Even if we allow for the impressive accumulation of capital, in its widest sense, the growth rate of productivity is high, and, indeed, mirrors the great rise in per capita product and in per capita pure consumption (Le Prix Nobel, 1971, p. 316).

According to Kueznets’s description and application of modern, formal logic, everything looks all right and no problem. But if we apply the new, more comprehensive version of integrated logic, then the picture appears different. Under capitalism, with all technological progress, an affluent society still, in the long run, displays large pockets of poverty. Under the socialist-communist regime, after three generations the average salary for the masses of workers,

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after the fall of the system in 1989, was reported by the Workers Union to be under the level of poverty. The “impressive accumulation of capital”, mentioned by Laureate Kuznets as an ex post phenomenon was paid in blood and sweat by the same workers. Following the same issue, Kuznets wrote:

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If the characteristics of modern economic growth are interrelated, in that one induces another in a cause and effect sequence or all concurrent effects of a common set of underlying factors, another plausible and significant link should be noted. Mass application of technological innovations, which constitutes much of the distinctive substance of modern economic growth, is closely connected with the further progress of science, in its turn the basis for additional advance in technology. While this topic is still to be studied in depth, it seems fairly clear that mass-uses of technical innovations (many based on recent scientific discoveries) provide a positive feedback . . . It is no accident that the last two centuries were also periods of enormous acceleration in the contribution to the stock of useful knowledge by basic and applied research which provided additional stimuli to new technological innovations. Thus, modern economic growth reflects an interrelation that sustains the high rate of advance through the feedback from mass applications to further knowledge. And unless some obstacles intervene, it provides a mechanism for self-sustaining technological advance, to which, given the wide expanse of the universe (relative to mankind on this planet), there are no obvious proximate limits (ibid., p. 317).

From this long testimony by Laureate Kuznets, a very bright and optimistic picture of modern technology appears with the magnifying glass of modern, symbolic logic. But one generation later in 2002, the real economic and social picture on our planet is not bright at all; in fact it is in danger of a global crisis. But the progress of modern technology is going on with “no obvious proximate limits” as Kuznets envisioned. One country has been completely destroyed with the help of the latest progress of modern technology in military war equipment. Now the victor is turning around and promised to spend a huge amount of funds to restore the cities and facilities for life and work. How about the mountains and rivers ruined with the most sophisticated bombardment? An enormous consumption of capital has been eroded in conducting this war, and now further consumption of capital is required for a reconstruction program. Where is another source for real capital except the additional inflationary effect, called by Schumpeter “forced savings” by the large masses of population? What about the International Space Station which is glorified as a triumph of modern technology and science? An enormous amount of capital has been used to construct this and another enormous amount will be spent to support it with regular air traffic, with changing astronauts and required repairs in the coming years and generations to come. Is the cause of humanity well served by this indeed spectacular progress of modern technology? We stop here leaving the issue to the reader for more reflection.

3. Some implications We said enough before about social implications by using the equation of unified knowledge: S ¼ f ðA; PÞ and the new more comprehensive integrated logic. Let us listen to what Laureate Kuznets has to say. Here is his voice on page 318:

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I turn now to a brief discussion of some social implications, of some effects of modern economic growth on conditions of life of various population groups in the countries affected ... The effects on conditions of life stem partly from the major role of technological innovations in modern economic growth, and partly from the rapid shifts in the underlying production structure . . . Two important groups of effects of this rapid transformation of economic structure deserve explicit reference. First the changes in conditions of life suggested by “urbanization” clearly involved a variety of costs and returns that are not now included in economic measurement, and some of which may never be susceptible to measurement. Internal migration, from the countryside to the cities (within a country, and often international) represented substantial cost in the pulling up of roots and the adjustment to the anonimity and higher costs of urban living . . . But if such costs were omitted from measurement, as they still are in conventional accounts, so were some returns. Urban life, with its denser population, provided amenities and spiritual goods that were not available in the “dull and brutish” life of the countryside; and the new skills, once learned, were often a more adequate basis for a richer life than the old.

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The balance of cost and returns during this change of environment is, up to a certain point, natural and inevitable. It is the task for each individual to decide, and in the capitalist regime he or she is free to move or not to move to a city. The agriculture is not to disappear. It can flourish along with the industrialization. On the other hand, the life and work in the country as compared with the life in the city is not “dull and brutish”, but on the contrary simple, yet more diverse, more enigmatic, more energetic and this author speaks from personal experience as being born in the country and living there. The real social problems emerge from the artificial method of capital formation through monetization of bank credit and paper money which create the inflationary effect with negative “forced savings” that push marginal countryside people to move to the city in a rush. The accelerated tempo is not giving these people enough time to adjust to the new conditions of life. The second problem, besides the question of adjustment to the new conditions of life in a rush, is the serious issue of redistribution of national income with a heavy blow on the large masses of the people at the lower scale of the distribution. Some social groups receive an illegitimate differential profit at the expense of other social groups and thus producing large pockets of poverty in the midst of wealth, a real social contradiction in the capitalist

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regime. This is what Laureate Kuznets raised as a second point in continuation but unfortunately not quite explicitly. Here is his own voice: The second intriguing aspect of structural change is that it represents shifts in the relative shares in the economy of the specific population groups attached to particular production sectors . . . Economic growth perforce brings about a decline in the relative position of one group after another – of farmers, of small scale producers, of landowners – a change not easily accepted, and, in fact, as history teaches us, often resisted. The continuous disturbance of pre-existing relative position of the several economic groups is pregnant with conflict – despite the rises in absolute income or product common to all groups.

He described very well the conditions as they are, that is, deficient up to a certain point by indicating conflicts. But he does not explain in clear language what the causes are and how to solve such evident conflicts ex ante and not ex post after the people were already injured. He conceived the “conflicts” in question as being an inevitable byproduct of the introduction of modern technology. Consequently, his solution lies in a sort of “goodwill” policy by the “sovereign state”, but he is wrong, scientifically speaking. Here we do not have a problem of simple adjustments within a system which otherwise is healthy and stable. The social and economic system in question (be it capitalism, democratic socialism, communism or fascism) in its institutional and legal framework has basic deficiencies of inherent disequilibria or instability. The cause: capital formation through “forced savings” actually produces sequentially all these social calamities. In conclusion, we are faced in our time with structural problems of the system and not within the system. To be fair and objective scientifically, let us hear also the voice of Laureate Kuznets: Only if such conflicts are resolved without excessive costs, and certainly without a long-term weakening of the political fabric of society, is modern economic growth possible. The sovereign state, with authority based on loyalty and on a community of feeling – in short, the modern national state – plays a crucial role in peacefully resolving such growth-induced conflicts . . . In that modern economic growth has to contend with the resolution of incipient conflicts continuously generated by rapid changes in economic and social structure, it may be described as a process of controlled revolution. The succession of technological innovations characteristic of modern economic growth and the social innovations that provide the needed adjustments are major factors affecting economic and social structure (Le Prix Nobel, 1971, p. 319).

Toward the end of this theme, Kuznets presented two more significant sequences with which we agree, more or less: First, the negative effects of growth have never been viewed as so far outweighing its positive contribution as to lead to its renunciation – no matter how crude the underlying calculus may have been. Second, one may assume that once an unexpected negative result of growth emerges, the potential of material and social technology is aimed at its reduction or removal (op. cit., p. 321).

We said “more or less” because the existence of the mixture of positive and negative effects, Kuznets envisioned as something natural, unavoidable, as problems of adjustment within the system. On our part, we think that here we have to deal with structural disequilibrium problems of the system, to begin with. Consequently, he is caught in a sort of dilemma and does not see any clear-cut way to get out of it. Again, to be fair, let us hear what he said: In many cases these negative results were allowed to accumulate and to become serious technological or social problems because it was so difficult to foresee them early enough in the process to take effective preventive or ameliorative action. Even when such action was initiated, there may have been delay in the effective technological or policy solution. Still, one may justifiably argue, in the light of history of economic growth, in which a succession of such unexpected negative results has been overcome, that any specific problem so generated will be temporary we shall never be free of them, no matter what economic development is attained (op. cit., p. 321, emphasis is ours).

What can we say about this additional observation by Laureate Kuznets? It is not true that “negative results” were “allowed to accumulate”. They came as a result of a system in disequilibrium. It is not quite correct to say that it was so difficult to foresee them. The full truth is that it was impossible as a matter of principle, according to the rules of the impossibility theorem in practice (Introduction, pp. 353-4). The cause was not a simple matter of delay but rather a wrong policy solution. The “light of history”, in this case was not reliable, was blurred in a system in disequilibrium. It is not quite true to say that any specific problem so generated in the past, present or future “will be temporary”, inasmuch as such problems were repeated in the past and are still ongoing. Finally, it is not quite correct to say that “no matter what economic development is attained . . . we shall never be free of” such negative results. The full truth is that, if we decide to have a regime of general stable equilibrium of the Walrasian type, improved and completed, certainly we can be free of “negative results” known in the past and present. 4. The less developed countries In general, we could say that in principle in the less developed countries we shall be faced with similar problems as those in more developed countries, with the observation that in the first case the difficulties may be more pronounced, speaking analytically. Laureate Kuznets being an institutionalist has concentrated less on pure analysis (theory) in the Walrasian sense, if at all, and more on the description. Let us again hear his view: Two major groups of factors appear to have limited the spread of modern economic growth. First, as already suggested, such growth demands a stable, but flexible, political and social framework, capable of accommodating rapid structural change and resolving the conflicts that it generates, while encouraging the growth-promoting groups in society. Such a framework is not easily or rapidly attained, as evidenced by the long struggles toward it even

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in some of the presently developed countries in the nineteenth and early twentieth centuries, Japan is the only nation outside of those rooted in European civilization that has joined the group of developed countries so far. Emergence of a modern framework for economic growth may be especially difficult if it involves elements peculiar to European civilization for which substitutes are not easily found (op. cit., p. 321).

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What can we say, about this text? First, from the historical record we have, Laureate Kuznets is right and precise, as one can be. But in point of correct analysis and application there are important comments to be added. What does, “a stable, but flexible, political, and social framework”, first analytically speaking, mean? If we take out of the context only this part of the statement, then the answer is, and cannot be anything else but, model M1 on the orientation table, that is, the Walrasian system of general stable equilibrium in its more complete version. This indeed, to repeat, has “a stable, but flexible, political and social framework”. However, the immediate question emerges: “Did Laureate Kuznets really mean the Walrasian system?” The answer is: definitely not! He is a genuine Keynesian economist. Indeed, when we read in continuation “resolving the conflicts that it generates”, the picture changes radically. The Walrasian system in analysis shows no self-generated conflicts to be resolved; in practice, hardly measureable small and one-time fluctuations can be recognized, which do not constitute a serious problem. The next information given by Kuznets is that “such a framework is not easily or rapidly attained as evidenced by the long struggle toward it”. This in turn makes evident that what he has in the back of his mind is not related to the conceptual factor “P” of our equation S ¼ f ðA; PÞ but rather to the empirical factor “A”. In conclusion, the first group of impediments to the spreading of modern economic growth are coming not from simple historical, political and social development or European heritage but rather from the very mixed nature and structure (stable elements dominated by unstable, disequilibrium effects and practices) of modern capitalism and later socialism. In particular, to repeat, it is the problem of capital formation, specifically that based on “forced savings”. Indeed, large masses of population, directly (as under communism or fascism) and indirectly (as under modern capitalism or democratic socialism) are ingeniously expropriated of a significant fraction (portion) of their real income. This is done under communism and fascism through regulated, relatively lower salaries to the masses of workers. Under modern capitalism and democratic socialism, the same thing happens through the regulated rate of interest and pure speculations, specifically “the inflationary effect”, described so masterfully by J.A. Schumpeter, as far back as 1918.

Many other disequilibrium elements are coming through, or are derived from, the same process of forced-savings type of capital formation. What is missing in Kuznets’s presentation is the conceptual standard of pure theoretical analysis, in the Walrasian sense of factor “P” from our equation of unified knowledge: S ¼ f ðA; PÞ. Because capital formation through “forced savings” is such a fundamental economic and social problem in modern society, almost completely neglected by the contemporary economic profession, let us revive the issue here in memory of the great economist Simon Kuznets, in seven principal past and current unavoidable effects: (1) Repeated disruptions in economic activity by returning “booms” and/or recessions/depressions with “involuntary”, forced unemployment, a genius observation by Lord Keynes. (2) Continuous disruptions in the distribution of national income and wealth: those who have much will get more and those who have little will get less. (3) An artificial acceleration of the tempo in modern technological progress depriving the people of a normal adjustment to the new economic and social conditions, very well described by Laureate Kuznets. (4) Regular business (small, medium or large corporations) are deprived of a normal, natural process of amortization of the invested fixed capital (owned or borrowed). Consequently, business is forced either to add an additional fraction of increased prices of the produced items or to get into more debt, i.e. more monetization of bankcredit which banks are happy to grant. After all, this credit is destined for the economic process, and the banks have a chance to earn a differential profit. (5) More rapid technological innovations financed by additional monetization of bankcredit induces a perpetual creeping inflationary effect or “forced savings” and this parallel with an increase in productivity. Unfortunately, this increase in productivity does not lead to a proportionate decline of prices and subsequently to real social progress with a better standard of living for the masses of consumers and savers who provide real, equilibrium form of capital. Only in a regime of general, stable equilibrium conditions does application of modern technology automatically induce a better standard of living for all concerned and without any discrimination in the distribution of national income. This is then a real social progress. (6) There is no doubt that modern technology, applied properly, increases national product and real income. But, unfortunately, this growth in real national income at its roots, slashed automatically by a lion’s share rule, goes directly to the banks, the entrepreneurs and not less to the modern state bureaucracy. In this way the large masses of workers and regular

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savers are left with a smaller portion of the real national income. This explains the phenomenon of existence of significant, large “poverty pockets” in the midst of affluence in modern capitalism and a lower standard of living for the masses in communism, fascism and so-called democratic socialism. (7) Not less important is the fact that modern technology through forced savings as the predominant instrument of capital formation has created a set of two crises. One is in the material world, simply, in the production and distribution of goods, services and incomes known as the business cycle phenomenon, in one word, modern civilization. The other crisis is in the world of ideas, briefly, modern culture. There is a discrepancy between the representation of modern civilization in the mind of the common people where the real challenge resides and the prevailing spirit in terms of disequilibrium which dominates the scientific and intellectual circles of our time. We think that we are living in a period of an open conflict between modern civilization and modern culture. The relatively easy financing of modern technology through the instrument of “forced-savings” method of capital formation has pushed modern civilization way ahead of modern culture and in this way a double crisis has been created, to repeat, one in the physical, material sense and the other in the world of ideas. Ahead of us is an impending phenomenon approaching what we called earlier “the great transformation”. It is propelled by blind historical forces, mostly vested interests in the material world as well as in the world of ideas. The public at large is not prepared at all for this great transformation. The house of science (both social and physical), the source of a new economic and physical light which we badly need, is divided. There is the “great argument” of the twentieth century between the classical school (the study of stable elements, matter or stable equilibrium) and the modern school (the study of unstable elements, matter or disequilibrium associated with unstable equilibrium). Unfortunately, this great argument even though a real battle in the world of ideas, speaking methodologically, is by far not identified to the full extent. Major contemporary thinkers believe that modern science is a better substitute for classical science, and this fundamentally is not true because the object of investigation in each school is different. Modern science is not contradictory but rather complementary to classical science, if properly and fully identified. (For more information see Rugina (1998, 2000).) Laureate Kuznets felt that something was not in order with modern civilization technology, capitalism and socialism but he fostered his selected subject, “modern economic growth” and technology and did not venture to explore deeper, stable equilibrium and disequilibrium roots in modern society and economy. He was satisfied with the institutional thesis that modern

technology and its application is creating some inherent conflicts and unstable interrelationships. But he thought that these problems – compared with the great advantages of modern technology – were rather small and could be solved by the modern state by using the Keynesian macro monetary and fiscal policies including other necessary regulations. The second group of elements which, according to Kuznets, impeded or delayed the spread of modern economic growth, are open for discussion and controversial to a certain degree, as he recognizes himself. But let us hear first his own voice: Second, the increasingly national cost of organization in developed countries made for policies toward other parts of the world that, while introducing some modern economic and social elements, were, in many areas, clearly inhibiting. These policies ranged from the imposition of colonial status to other limitations on political freedom, and, as a result, political independence and removal of the inferior status of the native members of the community, rather than economic advance, were given top priority (Le Prix Nobel, 1971, pp. 321-2).

Regardless of passionate and biased polemic on whether we have here a case of “imperialist exploitation” or “native backwardness”, Laureate Kuznets concluded that the “factual findings are clear. At present, about two thirds or more of world population is in the economically less developed group”. His conclusion in continuation: Obviously, this aspect of modern economic growth deserves our greatest attention, and the fact that the quantitative data and our knowledge of the institutional structures of the less developed countries are, at the moment, far more limited than our knowledge of the developed areas, is not reason enough for us to ignore it (ibid.).

Again, the institutional point of view is well represented but by the same token, there is need for more pure, analytical clarification of the problems of less developed nations. In fact, any problem, not only in economics and other social sciences, but also in physical sciences, has to be solved first, beyond any doubt, in theory. The real problem for less developed nations is not to imitate the inherited way of life of another country or continent but rather to develop first a program for economic growth based on conditions of general stable equilibrium. Here, freedom (personal and national), social justice of equity in principle and/or of equality in special circumstances, in the distribution of national income and wealth, monetary, financial, political and social stability with full employment and peace, internal and external are fulfilled, as a matter of principle as well as in practice, all have to be included in the program. A “modern framework” or program for economic growth must have two distinctive parts: (1) One analytical or pure theoretical, independent from European, Indian, American or African civilization and yet each one being conceived at a

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higher level of abstraction; after all, the human beings on all continents belong to Homo sapiens. (2) Another part practical, application or applied science where different civilizations can be adapted to the full realization of a free, just and stable economy, society and true democratic form of government (more detail is presented in Rugina (2001)). Even though it is true that, institutionally speaking, the policies used by developed countries to the rest of the world were, to a certain extent, inhibiting the less developed countries from participating fully in the new economic development of modern times, nevertheless, this point alone is not a sufficient explanation. Two more points deserve to be considered: (1) the mechanism of free markets in the spirit of the time; and (2) the international aspect of the phenomenon of forced savings. The mechanism of free markets misinterpreted and misrepresented. The “inhibition” that Laureate Kuznets mentioned existed and it was due in part to the spirit of the time, respectively, misinterpretation and misrepresentation of the mechanism of free markets. The origin of the misinterpretation goes back to the founders of the science of economics, Francois Quesnay in France and Adam Smith in England. It is true that Quesnay and his disciples shared the distinction between “ordre naturel” (natural order) and “ordre positif” (positive order) in the sense of stable (Newtonian) equilibrium versus disequilibrium. One of his disciples by the name Vincent de Gournay used the aphorism: “Laissez-faire, laissez-passer, le monde va de lui meˆme” (let the things go freely; the world is moving by itself). But the great Quesnay added to free economic doctrine also the condition of “juste prix” (equitable price) and that makes the difference. It is also true that Adam Smith used the much misinterpreted expression of “the invisible hand” which was nothing else but the British version of the French “laissez-faire, laissez-passer”. However, the same great Smith made a clear distinction between “natural” (stable equilibrium, in the Newtonian sense) price and empirical, market (disequilibrium) price, with the emphasis on the former. With reference to the normal, natural functioning of a system of genuine free markets with pure competition, a second basic factor was added: numeraire-currency (Walras). Adam Smith as a scientist, even though his system of thought was incomplete, nonetheless, he envisioned that the possibility of a “self-regulating mechanism” in a natural (stable equilibrium) economic order was rational, in the realm of the possible. Thus, Smith was not a French imitator, but rather an early anticipator of Walras and as such he was entitled to use the term of “invisible hand”. Subsequently, during the nineteenth century, the original concept of “free market mechanism” in economic life was, in a way, strengthened by the Robert Peel Act of 1844 in England. Initially, it was supposed to be, and in fact it was, a

victory between two schools of financial thought: the currency principle and the banking school. David Ricardo discovered that the cause of financial instability was fermented in the practice of issuing banknotes by private banks in competition with each other, banknotes which were not fully covered. The first part of the nineteenth century was dominated by an argument between two groups. One was the followers of the currency principle, or heritage left by Ricardo, that competition in the practice of free issue of banknotes by private banks was a malpractice which produced financial crises. The other group was the banking school, mostly professional people in business defended the view that nothing was wrong in this free competition in banking; on the contrary it was a good thing in granting credit to both sides of the economic activity – production and consumption. The Robert Peel Act of 1844 forbade private banks to print their own money. This was the strong part of the Peel Act. The privilege of issuing non-covered banknotes was passed to the Bank of England (at that time a private corporation) as a monopoly. For this privilege the Bank of England took a portion of the public debt in the amount of pound sterling 14.4 million with the provision that this was the maximum limit of free issuance of banknotes. The rest of monetary circulation was 100 percent converted in gold and that explains how the British pound became the strongest currency of the second half of the nineteenth century and was used as preferred reserves by other Central Banks of that time. Unfortunately, that limit was passed several times as a result of increase in the public debt, and thus the provision in question gradually weakened the Peel Act. Parallel with the technical flaw in the 1844 Peel Act, there was another event, specifically, the rise of a new direction in the spirit of the time – the development of what was called the Manchester School representing business and political interests supporting the formula of “hands-off” economic policy by the government. The combination of the French formula of laissez-faire with the British prefix of “hands-off” led to a degenerated, simplistic and dangerous conception that once the government declares and approves economic freedom or free competition, then economic activity is most productive guided by the law of supply and demand. This in turn would produce stable equilibrium prices whereby both the interests of the consumers and producers are best satisfied. This is in short the essence of modern formula of laissez-faire capitalism. The most simplistic conception of “free market mechanism” was restored post-Second World War and applied in less developed countries with the result of an inevitable failure. We said inevitable, since in reality it was a losing battle with the impossibility theorem in practice (Rugina, 2001, pp. 19-21). The same experiment was repeated in Eastern Europe after the fall of the Soviet Empire, including the new Russia and the independent former republics

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under the jargon of shock-economic therapy recommended by Western experts, and the result was a similar disaster. In the more recent economic and financial crisis in South-Asian countries including Japan and South Korea the same simplistic concept of an incomplete free market mechanism combined with vast pure speculations led to the same negative results. In South America on the same road Argentina similarly ended with failure. Finally, the much praised phenomenon of “global markets” and “globalization” pushes hard toward a repetition of a new sort of global stagnation, much more complicated when compared with the Great Depression of the 1930s through the same viciated concept. From the liberal experiment of the nineteenth century which was productive enough for that time, we did not learn the right lesson that freedom (individual or national) is not enough. From the supposedly social twentieth century, again we did not learn the right lesson that social justice of equity in principle and of equality required only in special cases, cannot be attained by simple (direct or indirect) government edict. Now we are faced with the problem of lacking financial stability which is directly affecting the other two basic problems. Parallel with the other fundamental problems, we also have the basic issue of peace which in turn is affecting the other three initial problems. For a whole methodological evaluation, there is need to have a clear-cut distinction between: (1) problems of simple and one time adjustment within a system which is assumed to be healthy and consistent structurally; and (2) problems of complex and cumulative aspects and/or effects when the system in question is contaminated by disequilibrium inherent instability. There is sufficient evidence to draw the conclusion that Laureate Kuznets envisioned and treated the problem of modern technology and economic growth within a model of type (1) with reference to the actual, existing mixed modern capitalism, socialism, communism, fascism and other existing systems. Thus, we have here a contradiction. We think, on the contrary, that the actual existing social, economic and political regime is contaminated with disequilibrium aspects and practices of inherent instability which have to be treated within a model of type (2). That is the true reason why the problems raised by Laureate Kuznets in his time when he received the Nobel prize (1971) were not solved and three decades later (2001) are still not solved. There is then a good reason to ask: “What is the right solution to this cloudy state of affairs in the contemporary world of ideas?” Leon Walras – speaking methodologically – saw the necessity of treating a basic problem first

analytically (pure theory) to find the roots of why that problem exists, and second to work out practically (applied science) a solution that will work to eliminate the cause of the problem. Walras was the one who formulated the first version (albeit incomplete or unfinished) of the law of general equililibrium. Let us listen to Walras:

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If we have a system of several commodities exchanged for one another in a free market ruled by pure competition (no monopolies, private or public) and the prices are cried in terms of numeraire (currency), then the condition of general equilibrium is fulfilled ipso facto (Walras, 1954, p. 173).

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The two principal factors are: pure competition (Co) and numeraire (Nu), 100 percent covered currency (gold, silver or any other suitable commodity to serve as monetary standard). The original book by Walras, Elements d’Economie Politique Pure was published in French in 1874-77. Why did it take almost a century until 1954 when the American Economic Association and the British Royal Economic Society published its first English version? When he was alive, Walras insisted that his work has application, in the sense of applied science, to solve practical problems (matters of policy) but this was not enough to attract attention on the part of the profession, not to mention political men in power or opposition. What was the reason for this delay in recognition of Walras’s work? Leaving out the political element, the Walrasian model, even though logically correct in truth content, nevertheless in a special way it was lacking the analytical link of liaison with the empirical, economic and financial realities. The original Walrasian model was not complete, even though otherwise correct. This author has provided the third basic element which escaped the attention of the great Walras. This is the institutional and legal framework which, speaking analytically, must be consistent with the other two primary elements: pure competition (Co) and pure numeraire (Nu). We called in our work this third element, the missing factor “R”. The Walrasian model, consistent with the law of general equilibrium in a more complete form, can be written as: M1 ¼ 100%ðCo þ NuÞ þ R1 (see the orientation table, Introduction. pp. 341, 345). As far as application is concerned, specifically, the correct method to solve properly and fully disequilibrium problems, can be completed with our equation of unified knowledge: S ¼ f ðA; PÞ given in the Introduction, pp. 35861. In concluding the analysis and practical application of the equation of unified knowledge, modern technology could provide natural, modern economic growth without serious social, economic and financial problems but only through the realization of the Walrasian model of general stable equilibrium in its more complete form. To repeat, this and only this

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combination fulfills all three basic conditions indicated by the above formula: Co þ Nu þ R1 . On the other hand, the modern, mixed capitalist or any form of socialist, fascist or militarist regime does not offer any of the three basic conditions for general stable equilibrium which means that all suffer, more or less visible or hidden, a real, empirical, high degree of inherent instability or disequilibrium. When Laureate Kuznets, as a good institutionalist, selected as a departure point a model of status quo of the existing social, financial and economic realities or factor “A” of our equation of unified knowledge, nolens volens, he arrived at the conclusion that modern technology and modern economic growth bring about parallel, at the same time “unexpected positive and negative results”. The Walrasian system in its more complete form in combination with the equation of unified knowledge – both analytically and practically – contain basic self-regulating market mechanisms and function properly and fully to produce stable equilibrium prices. Thus, Adam Smith’s “invisible hand” and “laissez-faire” adagio of the French physiocratic school could have empirical and theoretical validity. If he were alive today, Laureate Kuznets could say that he had nothing to do with such “pure speculations” in analysis. He was and remained an institutional and quantitative economist. The following quotations confirm this characterization: Finally, it may well be that, despite the tremendous accumulation of material and social technology, the stock of innovations most suitable to the needs of the less developed countries is not too abundant. Even if one were to argue that progress in basic science may not be closely tied to the technological needs of the country of origin (and even that may be disputed), unquestionably the applied advances, the inventions and tools, are a response to the specific needs of the country within which they originate. This was certainly true of several major inventions associated with the Industrial Revolution in England, and illustrations abound of necessity as the mother of inventions (Le Prix Nobel, 1971, p. 323).

Institutionally, there is not much to be said except the observation that in the beginning the Industrial Revolution raised social and economic problems even in the mother country, England. Thereafter, technical innovations were freely adopted and adjusted in every other country, if the respective people wanted the product or the service supplied. Yet, with the importation of technological product or service came also social and economic problems. Laureate Kuznets did not raise the analytical question of why. There must be a common cause for the coincidence of similar effects. Indeed, in both cases we find the same method of financing the operations, that is, “forced savings”. The institutionalist Kuznets could only say: If the observations just made are valid, several implications for the growth problems of the less developed countries follow. I hesitate to formulate them explicitly, since the data and the stock of knowledge on which the observations rest are limited. But at least one implication is

sufficiently intriguing, and seems to be illuminating of many recent events in the field, to warrant a brief note. It is that a substantial economic advance in the less developed countries may require modifications in the available stock of material technology, and probably even greater innovations in political and social structure (Le Prix Nobel, 1971, p. 324).

When he wrote in the first paragraph: “I hesitate to formulate explicitly . . . the growth problems of the less developed countries”, that speaks by itself! Laureate Kuznets did not have a clear-cut analytical solution to those growth problems, to be applied scientifically in practice. He was correct by writing in continuation that any “substantial economic advance” in those countries requires “modifications” or “probably even greater innovations in political and social structure”. In this respect he gave no indication about any other positive measures or policies except to mention the “highly forced industrialization under Communist auspices (the Five-year Plans in the USSR)”, which in his own words “are conspicuous illustrations of the kind of social invention and innovation that may be involved”. After warning that we should be aware of, and avoid, “oversimplification” in this kind of intricate relationships, he has nothing more to say but to conclude in his own words: It seems highly probable that a long period of experimentation and struggle toward a viable political framework compatible with adequate economic growth lies ahead for most less developed countries of today; and this process will become more intensive and acute as the perceived gap widens between what has been attained and what is attainable with modern economic growth (op. cit., ibid.).

Laureate Kuznets was right in predicting “a long period of experimentation”. Three decades later in AD 2002 the problem of economic growth, not only in “less developed countries”, but also in the much praised “developed countries”, that is at the global level, has not been solved in pure analysis, at least. In fact, it has become more complicated, with no visible sign that in the immediate future it will be solved properly and fully. We dare to write for the judgment of history and my generation of economists that the problem of economic growth, at the national and global level, cannot and will not be solved properly and fully as long as the method of forced savings of the people in capital formation is used to finance modern technology, and as long as pure speculations, as distinguished from the regular, real transactions, are allowed on officially organized securities, commodities and foreign exchange markets, in the name of free competition which in this case is an abuse of the principle of individual and social freedom. Both elements and practices represent socially harmful disequilibrium forces which inhibit the realization of a general stable equilibrium in the more complete Walrasian conception.

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We see no other solution to attain and maintain in the short and the long run a regime of general, stable equilibrium, except the application of the equation of unified knowledge: S ¼ f ðA; PÞ. In one sentence: Laureate Kuznets worked only with factor A, which is the quantified concept of empirical, actual realities – as did many other contemporary economists. This is the principal reason why he could not reach a determinate solution. It is due to the missing factor P of the Walrasian model in its more complete form, which gives the direction where the solution (factor S) lies at the final station when the problem is solved. It is a problem of a new methodology, and Laureate Kuznets is not concerned with this type of analytical economics. Briefly, what is the real problem? The real problem of negative, socially harmful, economic and financial effects due to application of modern technology is not to abandon it, even for a short time. That would mean a step backwards, because modern technology is already a part of our contemporary way of life. Indeed, such an unwise step would create social calamities. The real problem, to repeat, is to reduce, actually to slow down, the tempo, the speed at which modern technology is changing. In today’s world there is a danger of a crisis between modern civilization and modern culture, which in turn is affecting the future of man and humanity. Mechanization in the material world is infiltrating the human mind, reducing the power of creative, critical observation of what is happening around him, including the social organization in which he would like to live. Homo sapiens may become a sort of living robot managed by computers, a new form of slavery, much more difficult to get rid of, when compared with other, visible kinds of slavery in the ancient and medieval world. This one will hide in computers. Laureate Kuznets, if he were alive, very probably would dismiss this kind of analysis. He preferred the status quo of the actual, existing, mixed empirical world to which he attached the problem of modern technology, without any concern about a better alternative. Here is his own voice: The most distinctive feature of modern economic growth is the combination of a high rate of aggregate growth with disrupting effects and new “problems” . . . The disrupting effects are those imposed by the rapid rate of change in economic and social structure. The problems are the unexpected and unforeseeable results of the spread of innovations (with emphasis on the new and unknown indicated by that term). Added to this is the range of problems raised by the slow spread of economic growth to the less developed countries, all of which have a long history, separate and relatively isolated from the areas within which modern economic growth originated. Thus, concurrent with the remarkable positive achievements of modern economic growth are unexpected negative results even within the developed countries; while the less developing countries are struggling in the attempt to use the large potential of modern technology in order to assume an adequate role in the one and interdependent world (from which they cannot withdraw even if they wished to do so) (Le Prix Nobel, 1971, p. 325).

The above description is correct, as a piece of historical information. By the same token, it is lacking analytical precision in point of scientific clarification. Why should we have simultaneously “a high rate of aggregate growth” and “disruptive effects” with “new problems”? Why should we have “remarkable positive achievements” combined with “unexpected negative results” not only in less developing countries but also “within the developed countries”? Why do the developing countries have to be punished because of errors, inconsistencies or direct contradictions with the experiment of modern technology in developed countries? All these unanswered questions show strong evidence that there is something fundamentally wrong in the use of modern technology and its influence upon modern civilization and culture besides the good part. The international aspect of the phenomenon: “forced savings”. Laureate Kuznets called attention to two important “major groups of factors” which have delayed the “spread of modern economic growth” in less developed countries. The first group was the lack of a “stable but flexible, political and social framework, capable of accommodating rapid structural change and resolving the conflicts that it generates, while encouraging the growthpromoting groups in society” (Le Prix Nobel, 1971, p. 321). The wording is not quite consistent and the cause lies in the institutional and quantitative method of approach. But the meaning is clear and it refers more to a system of general stable equilibrium in the Walrasian more complete sense. Kuznets, however, is not referring to Walras but rather to Keynes, respectively only to factor A of our equation of unified knowledge S ¼ f ðA; PÞ, hypothetically, leaving out factor P with the hope that it can be handled by managerial skills. In fact, it cannot because of the impossibility theorem in practice, as shown earlier. We said, hypothetically since neither Keynes nor Kuznets knew the equation of unified knowledge. The second group of causes which Kuznets mentioned were located in policies followed by developed countries which in certain respects helped to introduce some modern economic and social elements in less developed countries, but “in many areas were clearly inhibiting” (Le Prix Nobel, 1971, p. 321). The inhibition in question Kuznets attributed to the “national cast of organization”, recalling the old colonial era. Laureate Kuznets failed to mention that after the Second World War a large part of the colonial status disappeared and hundreds of billions of US dollar investments in the form of credits (loans) offered in the first place by the International Monetary Fund (IMF) and the World Bank, plus other private financial organizations, poured into less developed countries. On the other hand, the results were minimal, more negative than positive. In addition, the IMF sold several times large quantities of gold from the reserves of member

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countries, supposedly to help financially to resolve the problem of poverty in less developed countries. By the year 2002, the financial condition not only in really poor countries, but also in other countries rich in natural resources but handicapped through large foreign debts, deteriorated to the point of financial bankruptcy. Under such conditions and with the fear that a global financial crisis may develop, the governing board of the IMF officially announced a session to discuss a proposal to decide whether the time has come to “rewrite the rules of global finance”, i.e. specifically to declare a “member country bankrupt” in the sense of “suspending debt payments or granting a stay” (The Boston Globe, 2002). Momentarily, nobody has raised the more fundamental question of whether the principal reason for the financial failure by debtor countries resides in poor administration of the respective lands in question or is it shared to a large extent by the international finance organizations, including the IMF and the World Bank and all other private corporations which appear as creditors? Indeed, the IMF, World Bank and other financial institutions are operating under the same rules of Keynesian macro monetary policies and within the same institutional framework based on noncovered nominal, symbolic paper money and monetized pure bank credit or what Keynes called “money of account”. This is an anti-numeraire or disequilibrium type of money, exactly as in all other countries of the world, member or non-member of the IMF and World Bank. By the same token, any form of anti-numeraire currency has no regular mechanism in functioning, in other words, has inherent instability, which cannot be corrected by any rational policies. This type of money has to be managed, but unfortunately the impossibility theorem in practice shows that it cannot be managed properly and fully. Thus the final result inevitably is financial instability and the phenomenon of “forced savings” exported to debtor countries, that is less developed national economies. What is the difference? The IMF, World Bank and other large financial corporations are protected through a monopolistic position and appear as creditors. The debtor countries are not protected and inevitably have to suffer the consequences of living together with a financial system which abuses “forced savings”. The populations of less developed economies are frustrated first by “forced savings” as an internal source of capital formation, and second, by an additional wave of “forced savings” imported from outside through foreign credits or loans. The final result is a pauperization of large sections of the population in debtor countries, most of them with less developed economies. Here are the seeds for a new area of research leading to more clarification of the problem of “forced savings” at the national and international level eventually leading to a new theory of cheating of the masses at the global level which has nothing to do with Marxian theory of exploitation.

This additional explanation of the relationship between developed and less developed countries is not against or negating the institutional presentation by Laureate Kuznets. In fact, it is an attempt to show that the institutional and the pure analytical exposition are complementary to each other, of course, keeping in mind the logical rule of indicating the nature of the problem and avoiding breaking the law of logical consistency in scientific arguments (see Introduction, pp. 339-40). 5. Concluding comments Finally, toward the end of his Lecture, Laureate Kuznets, like all original thinkers, himself recognized not that something was wrong or deficient, but rather that something was missing, and represented an unfinished business, a nice and acceptable excuse in science associated with the desire for more progress. In this spirit, we think that our additional exploration besides the basic problem of “modern economic growth” which, in addition to the problem of “value and value-judgments”, practically includes, or at least touches, directly or indirectly, any other problem, our primary goal all along this essay was not to criticize, but rather to complete a most valuable historical and institutional contribution by Simon Kuznets. All additional explanations are based on a new research program of a simultaneous equilibrium versus disequilibrium approach and in particular on the concept of the orientation table, Quinta Methodica, the impossibility theorem in analysis (theory) and practice, the equation of unified knowledge, a new type of a more comprehensive integrated logic and a law of logical consistency in scientific arguments. We are grateful that the work of Laureate Kuznets was challenging enough to provide the opportunity for this writer to express some new views and interpretations which were not said before and yet they are needed for a better solution to unsolved problems of the past, of the present and we hope also of the future. Let us now hear again his own voice: We have stressed the problem aspects of modern economic growth because they indicate the directions of further research in the field. These aspects, the “surprises” and the implicit explanatory “puzzles”, are problems not only in the sense of departures from the desirable (that may call for policy amelioration) but also in the sense that our quantitative data and particularly our analytical hypotheses do not provide us with a full view and explanation (Le Prix Nobel, 1971, p. 325, our emphasis).

In continuation on the next page one can feel the same spirit of unfinished business, when he wrote: It seems fairly clear that a number of analytical and measurement problems remain in the theory and in the evaluation of economic growth in the developed countries themselves; and that one may look forward to major changes in some aspects of the analysis, in national

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economic accounting, and in the stock of empirical findings, which will occupy economists in the developed countries in the years ahead (op. cit., p. 326, our emphasis).

His last wish for the less developed countries was:

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One may hope, but with limited expectations, that the task of refining analysis and measurement in the developed countries will not be pursued to the exclusion or neglect of badly needed studies of the less developed countries, studies that would deal with the quantitative bases and institutional conditions of their performance, in addition to those concentrating on what appear to be their major bottlenecks and the seemingly optimal policy prescriptions (op.cit., ibid., emphasis is ours).

In view of the fact, that three decades later (2002) after the advice given by Kuznets, no fundamental change in research (pure theory and applied science) happened, how right he was when he connected the “task of refining analysis” with “limited expectations”. References (The) Boston Globe (2002), “IMF mulls allowing bankruptcy filings”, No. 5, March. Rugina, A. (1998), “Dehumanization of modern civilization”, Prolegomena 1: To Any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), International Journal of Social Economics, Vol. 25 No. 5, Ch. 4 Rugina, A. (2000), “Principia methodologica: a bridge from economics to all other natural sciences”, in Prolegomena 2: To Any Future Study in “Integrated Logic”, and a More Comprehensive Methodology for a Unification of All Sciences, Natural and Social (monograph), International Journal of Social Economics, Vol. 27 No. 5/6, Ch. 2. Rugina, A. (2001), “Prolegomena 3: Fundamentals to Any Future Economic”, Monetary, Financial and Social Stabilization Plans (monograph), International Journal of Social Economics, Vol. 28 No. 1/2. Schumpeter, J.A. (1956), “Money and the social product”, trans. from German by A.W. Marget, in International Economic Papers No. 6, Macmillan, London. Walras, L. (1954), Elements of Pure Economics or the Theory of Social Wealth (originally published in 1874), trans. by Jaffe, W., Richard D. Irwin, Homewood, IL. Wittgenstein, L. (1922), Tractatus Logico Philosophicus (originally published in 1921), trans. by Pears, D.F. and McGuiness, B.F., with an Introduction by Bertrand Russell, Routledge and Kegan Paul, London.

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5. Nobel Laureate: Kenneth J. Arrow (1921) Nobel Memorial Lecture, December 12, 1972 Biography Laureate Kenneth Arrow was born in New York City on August 23, 1921. He graduated from the City College of New York in 1940 with a degree of Bachelor of Science in Social Science but a major in Mathematics. He received an MA in Mathematics at Columbia University in June 1941. Due to the advice of a statistician-economist, Harold Hotelling, he moved to the Economics Department, where subsequently he did graduate work. During the Second World War (1942-1946) he served as a weather officer in the US Army Air Corps rising to the rank of captain. His assignment was as a research man. He published his first paper: “On the optimal use of winds for flight planning”. From 1946-1949 he was a part-time graduate student at Columbia University and a part-time research associate at the Cowles Commission for Research in Economics at the University of Chicago. There, at the Cowles Commission, under the guidance of Tjalling Koopmans and Jacob Marschak, he was exposed – in his own words – “to a basic formative influence” in econometrics and mathematical economics. This was a good experience in the emerging game theory and mathematical programming he acquired at the Rand Corporation where he worked during the summer of 1948 and subsequent years. His research on social choice and Pareto’s optimum was performed in that period. In 1949 he was appointed Acting Assistant Professor of Economics and Statistics at Stanford University where he became Professor of Economics, Statistics and Operations Research. He remained there until 1968. He was a Social Science Research Fellow of the Center for Advanced Study in the Behavioral Sciences in 1952 and Economist on the Staff of the Council of Economic Advisors in 1956-1957, Fellow of the Churchill College (Cambridge, UK), Guest Professor at the Institute for Advanced Studies in Vienna, and in 1968 he joined Harvard University. He received the John Bates Clark Medal of the American Economic Association in 1957. He has been elected member of the National Academy of Sciences and the American Philosophical Society. He is also a fellow of the American Academy of Arts and Sciences Econometric Society, the Institute of Mathematical Statistics and the American Statistical Association.

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He received honorary degrees from the University of Chicago, City University New York and University Vienna. In 1956 he was President of the Econometric Society and in 1972 President of the American Economic Association.

General economic equilibrium: purpose, analytic techniques, collective choice, Nobel Memorial Lecture, December 12, 1972 1. The coordination and efficiency of the economic system At the beginning of his lecture, Laureate Arrow attempts to present the classical view of economic analysis. Here is his own voice: From the time of Adam Smith’s Wealth of Nations in 1776, one recurrent theme of economic analysis has been the remarkable degree of coherence among the vast numbers of individual and seemingly separate decisions about the buying and selling of commodities. In everyday, normal experience, there is something of a balance between the amounts of goods and services that some individuals want to supply and the amounts that other, different individuals want to sell. Would-be buyers ordinarily count correctly on being able to carry out their intentions, and would-be sellers do not ordinarily find themselves producing great amounts of goods that they cannot sell. The experience of balance is indeed so widespread that it raises no intellectual disquiet among laymen; they take it so much for granted that they are not disposed to understand the mechanism by which it occurs (Le Prix Nobel, 1972, p. 209).

What can we say about this presentation? From the classical point of view the description is correct, with the additional qualification that the classics old and new searched the economic life and process to find out those elements and forces which are consistent – as we would say – today with the ideal conditions of a model of stable equilibrium. In the final analysis they wanted to see the economic science based on natural laws of equilibrium in human societies similar – speaking methodologically – to those natural laws which govern the physical universe where we live, laws discovered and formulated by Sir Isaac Newton about a century earlier (1686). That is the philosophical vision shared by the first two fathers of economics (political economy in English and economie politique in French): Smith (1776) with his Wealth of Nations and Quesnay (1758) with his Tableau Oeconomique (Economic Table). In Smith’s work the expression of “invisible hand”, actually stands as a short notation for natural law in action. The same thing is valid for the French aphorism, “laissez-faire, laissez-passer”, with the same assumption, as long as the natural law in economics was in action. The terminology of “coherence” and “balance” used by Laureate Arrow are classical by definition. What are the natural laws discovered and formulated by the classics? They are well known but not always appreciated to their full significance: economic freedom, competition (free and fair), equality (balance, equilibrium) between demand and supply of goods and services, coherence, consistency, convergence, identity, in one word, the law of supply and demand

with a supplement in the Say law of the markets and the seeds for the concept Kenneth J. Arrow of inherent stability in an economic system later formulated by Leon Walras. Sure, there is indisputable evidence of influence by the great Newtonian revolution in the physical sciences with the appearance of Principia (Newton, 1686) in terms of methodology of science. Newton was the first who included in his system of thought only the stable matter identified later as the 92 stable 481 equilibrium elements in the famous Periodic Table (1869) by Mendelyeev. Speaking methodologically, there was no other way to construct the universal law of gravitation which is still 100 percent valid, according to the knowledge we have today, but of course – to repeat – only for stable elements as Newton (1686, p. xviii) himself pointed out in the Preface to his Principia. Here is his own voice: In the third book I give an example of this in the explication of the System of the World; for by the propositions mathematically demonstrated in the former Books, in the third I derive from the celestial phenomena the forces of gravity with which bodies tend to the sun and the several planets. Then from these forces, by other propositions which are also mathematical, I deduce the motions of the planets, the comets, the moon, and the sea. I wish we could derive the rest of the phenomena of Nature by the same kind of reasoning from mechanical principles, for I am induced by many reasons to suspect that they may all depend upon certain forces by which the particles of bodies, by some causes hitherto unknown, are either mutually impelled towards one another, and cohere in regular figures, or are repelled and recede from one another. These forces being unknown, philosophers have hitherto attempted the search of Nature in vain; but I hope the principles here laid down will afford some light either to this or some truer method of philosophy.

What are the particles which are “mutually impelled towards one another and cohere in regular figures” but the 92 stable equilibrium elements, identified in the Mendelyeev table? What are the particles which “are repelled and recede from one another” but the radioactive or transuranic disequilibrium elements whose atomic number exceeded 92 and which the research facilities in the time of Newton did not allow to be identified also empirically? As we can see, the genius of Newton conceived the possibility of existence of disequilibrium radioactive elements, but he kept them separate from the stable equilibrium elements in order to be able to develop and formulate the universal law of gravity which indeed governs the inherent consistency of stable equilibrium matter or elements in the physical universe where we have been living for the last 500 million years, as the well-known British astronomer Fred Hoyle has assured us (Hoyle, 1950, pp. 9, 30-1). But even if Newton would have had the opportunity to know also empirically the true nature of radioactive elements, his genius would have directed him to keep them separate since, according the new classical integrated logic, there was no other way to formulate the universal law of gravity, valid for any stable equilibrium form of matter – as defined in the Preface of his Principia – not only on our planet or universe, but also in any other universe which exists.

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The only lapsus that could be attributed to the great Newton – if that is not a matter of interpretation – is that he missed pointing out explicitly the Universal Law of Gravity for Stable Matter (elements and particles) which is clearly understood from the Preface of his magnum opus. His use of the term “universal” is absolutely correct. (For more detail see Rugina, 2000a). Why was it necessary to insert here Newton and the methodology he created in physical sciences? As we mentioned earlier the influence of Newton is indisputable. All classics – old and new – used the same Newtonian methodology in constructing their theory, specifically in separating the stable equilibrium elements and forces from disequilibrium elements and forces. None, to our knowledge, has mentioned Newton’s name except Leon Walras who considered his contribution a Newtonian replica in the science of economics. Here is the voice of Walras: Very few of us are capable of reading Newton’s Philosophiae Naturalis Principia Mathematica or Laplace’s Mecanique Celeste; and yet, on the word of competent scientists, we all accept the current description of the universe of astronomical phenomena based on the principle of universal gravitation. Why should the description of the universe of economic phenomena based on the principle of free competition not be accepted in the same way? There is no reason why the proof of the system, once established, may not be taken for granted, nor why the assertions involved may not be used in the study of questions of applied or practical economics. For my part, however, I have felt bound to give both the proof and the assertions, in order to present the main outlines of a truly scientific theory of social wealth (Walras, 1954, p. 428).

To consider that Adam Smith, Francois Quesnay and his group of phyisiocrats together with the whole ensemble of renowned old and new classical economists, including Walras, Marshall and Pareto among others, as imitators of Newton, would be a great and undeserved injustice. They were original thinkers, each one in his own way up to a certain point, but all united in the same position of attempting to provide – as Walras put it so precisely and concisely – “the proof and scientific assertions” that it is possible to realize and live in a society based on freedom (personal and national), social justice of equity in the distribution of national income and monetary, financial and political stability within the framework of general stable equilibrium. All classics, with no exceptions, were true and devoted soldiers in fighting in the world of ideas to affirm and defend the ultimate values and ideals of humanity. In this respect they were great visionaries. Unfortunately, the classics as great as they were in their performance, however, were living and working under the same universal law of human imperfection. Their system of thought, in one sentence, by far was not complete, even though many, if not all, believed the contrary. The critics also failed to see the truth that the classical heritage was incomplete and, consequently, their criticism instead of being

concentrated on improving or completing the missing part, also vitiated the Kenneth J. Arrow good part and nolens volens delayed the realization of the great ideals of humanity. It is good here to repeat simply and clearly the mistakes or deficiencies in the classical heritage, which sooner or later have to be corrected and/or completed if we want to avoid a new dark age. 483 Here they are: (1) The classics did not study with the same diligence and rigor the actual, existing disequilibrium conditions side by side with well observed stable equilibrium aspects (coherence, consistency, balance between supply and demand of goods and services, efficiency, etc.). Their blind belief in the law of supply and demand impeded their seeing the open conflict between their theory and the empirical realities contaminated by many disequilibrium practices and institutions, some of them being inherited from the mercantilist era. The critics of any sort have dwelled even to our time on this open conflict, but their negativity renders them also sightless, since they do not see that the social evil in question does not derive from the classical theory per se (which, be repeated, is not complete) but rather from the mixed, inconsistent nature of modern capitalism. The critics are violating the law of logical consistency in scientific arguments (see Introduction, pp. 339-40). In this argument how right was the famous German philosopher Immanuel Kant, when he wrote back in 1793: Whenever a theory does not fit to practice, the reason lies not in that theory but rather in the fact that there was not available enough theory which man should have learned from experience (Kant, 1793, p. 18).

Prophetic words, that should be taken seriously by all those who even today criticize the classical heritage. (2) The second weakness by the classics is that they did not develop the second part of their undertaken research, respectively the Applied classical macroeconomics. Their vision was absolutely correct in principle but deficient from the practical point of view. They depicted a wonderful economic and social world in terms of ideas, evidently not complete in retrospect of what we know today. Unfortunately, they did not show us how such a wonderful world order can be realized in practice and maintained over time in good custody. In other words, they did not see back in the eighteenth century and thereafter that the mixed, inconsistent capitalist regime inherited from the mercantilist era badly needed adequate, stable equilibrium type of structural reforms. That is what was needed back in 1929 when the big storm of the Great Depression hit the European Continent. The living generation of the

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classical school failed miserably the “Challenge and Response” of the time, as the British historian Arnold Toynbee would say. The story of the encounter of the dialogue between the new economist, John Maynard Keynes, and his old traditional classics teacher, A.C. Pigou, illustrates the spirit of the time. Pigou tried to calm his former student saying the storm would vanish like other storms in the past, without realizing that young Keynes was preparing a trap for him at that moment. The ingenious Keynes in return asked his former teacher: “Do you mean, in the long run?” to which Pigou answered “Yes” without realizing what might follow! And Keynes in a flight of thought, to use his lexicon, completes the dialogue by saying: “In the long run, we are all dead! What’s the use to argue!” To repeat, this dialogue expresses very well the spirit of a time in confusion. The classical heritage was not dead but retired for the moment in seclusion to reflect on the mistakes of the past since the classics carried, affirmed with sense and contributed in their own way, imperfect as it was, to the realization of the great ideals of humanity for all times, for all nations, for all races. (3) The classics, old and new, did not study with the same diligence the problem of social justice of equity in the distribution of national income and wealth and did not even touch the controversial issue of justice of equity versus justice of equality, with the exception of Leon Walras (see: Rugina, 2000b). (4) The classics, again old and new, did not study systematically, analytically and practically (in the sense of applied science) the complex problem of monetary, banking and financial stability within the framework of a consistent, stable equilibrium type of institutional and legal constitution. It is true that David Ricardo as a classic contributed with the concept that the free issuance of banknotes by private banks in competition with each other was inflationary. The Robert Peel Act of 1844 partially resolved this problem, even though a really stable private and public banking system was not available in Ricardo’s time. Leon Walras, for the first time, introduced the concept of the numerairecurrency as a 100 percent real, covered stable equilibrium type of money and pointed out specifically that pure competition and numeraire-currency are indispensable in formulating a law of general stable equilibrium in economics. In fact, numeraire-currency in Walras served as a natural parameter or the constant with two principal functions; one was to hold the system together and the other to assure as a “shock-absorber” only one time, simple and limited price fluctuations and make impossible the development of the business cycle phenomenon.

Unfortunately Walras, as great as he was, missed to introduce the third Kenneth J. Arrow fundamental element in his system of thought, namely to add analytically a proper connection with empirical realities, specifically an adequate, stable equilibrium institutional and legal framework, consistent with pure competition and numeraire-currency. In the context of and with the notation: Co (pure competition), Nu (natural 485 parameter of numeraire) and factor “R” (an adequate institutional and legal framework), the Walrasian model (M1) and the more complete Walrasian law of general stable equilibrium, can be written: M1 ¼ 100%ðCo þ NuÞ þ R1 and the text: Given pure competition (no monopolies, private or public) and all prices and incomes are expressed only in terms of numeraire-currency and also in conjunction with an adequate institutional and legal framework, then the condition of general stable equilibrium – in the words of Walras – “is fulfilled ipso facto” (Walras, 1954, p. 173).

In regard to the subject of a stable institutional and legal framework, Alfred Marshall raised also the problem of pure speculations in conjunction with his concept of “normal”, i.e. stable equilibrium demand and supply curves. On this subject Marshall wrote: It will of course be understood that the “law of demand” does not apply to the demand in a campaign between groups of speculators. A group, which desires to unload a great quantity of a thing on to the market, often begins by buying some of it openly. When it has thus raised the price of the thing, it arranges to sell a great deal quietly, and through unaccustomed channels (Marshall, 1952, p. 99).

One may raise the question: “Why was it necessary, this long detour about the classical heritage and in particular the contribution of Leon Walras?” First, the very title of Laureate Arrow’s Memorial Lecture: “General economic equilibrium: purpose, analytic techniques, ‘collective choice’”, is directly related to the classical heritage. In fact, the first economist who conceived and attempted to formulate a law of general economic equilibrium was Walras. Second, because Laureate Arrow used a different kind of logic, specifically modern, symbolic, mathematical logic inherited from Russell (Whitehead and Russell, 1910) and Wittgenstein (1922), whereas Walras used classical logic inherited from Kant and Hegel from the eighteenth century. This author used also a different kind of logic, specifically a sort of synthesis between classical and modern logic called “integrated logic” in association with a new research program of a simultaneous equilibrium versus disequilibrium approach. We maintain that the new research program together with the new integrated logic can help to solve positively all four previously mentioned deficiencies in classical heritage (for more details see: Rugina, 2001).

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Let us go back to the text of Laureate Arrow’s lecture. First, he recognized, as an empirical economist, that the capitalist system shows a “remarkable degree of coherence”, a “balance between demand and supply of goods and services” and at the end of the paragraph in parenthesis: “(There are undesirable consequences of a free market system, but sheer unworkability is not one of them)”. This description is correct and depicts the equilibrium side of the capitalist regime. In the next paragraph he added: I do not want to overstate the case. The balancing of supply and demand is far from perfect. Most conspicuously, the history of the capitalist system has been marked by recurring periods in which the supply of available labor and of productive equipment available for the production of goods has been in excess of their utilization, sometimes, as in the 1930s, by very considerable magnitudes (Le Prix Nobel, 1972, p. 209).

This observation by Laureate Arrow is also correct and depicts the disequilibrium side of the same capitalist regime. On the next page he still appears as an optimist when he said: All these phenomena show that by and large and in the long view of history, the economic system adjusts with a considerable degree of smoothness and indeed of rationality to changes in the fundamental facts within which it operates (ibid.).

Laureate Arrow raises further the most basic problem, both in analysis as well as in practice, namely: “Economic Coordination”. We would like to add “Economic Calculation”, both written with capital letters. For some reason, he considers only the first issue. Let us hear his view: The problematic nature of economic coordination is most obvious in a free enterprise economy but might seem of lesser moment in a socialist or planned society. But a little reflection on the production and consumption decisions of such a society, at least in the modern world of complex production, shows that in the most basic aspects the problem of coordination is not removed by the transition to socialism or to any other form of planning (Le Prix Nobel, 1972, p. 210).

With all respect due to Laureate Arrow, by using the more comprehensive integrated logic, the orientation table and the equation of unified knowledge (see Introduction pp. 337-45 and 358-61) more clarification is necessary for a better understanding of the above text. In order to be able to evaluate and get to the roots of the above problem we have to make a clear distinction between two different analytical types of coordination. On the one hand we have natural, normal stable equilibrium, classic, complete coordination with no basic problems but only simple and onetime limited fluctuations of adjustment in the Walrasian sense of “arbitrage” and on the other hand, an artificial, abnormal, unstable equilibrium or disequilibrium, modern, in the sense of man-made and managed, with inherent instability due to the business cycle phenomenon associated with cumulative and indefinite fluctuations, open in the capitalist system but hidden under

socialism, communism, fascism including any other managed or controlled Kenneth J. Arrow economic and financial system. In the spirit of the above text provided by Laureate Arrow and with the help of the two, we hope clearly identified types of coordination, we can say with scientific precision that under a mixed modern capitalist regime (read the common “free enterprise economy”) and not less under “a socialist or planned 487 society”, economic coordination is not only “problematic”, but also directly “dubious” for the fact that it is exposed to insoluble socially harmful problems. He is also right that “by the transition to socialism or to any other form of planning, the problem of coordination is not removed”. Laureate Arrow, on the same page, is clear and resolute about the ultimate value of personal ideal of freedom when he wrote in continuation: It might be that in an ideal socialist economy, all individuals will act in accord with some agreed ideas of the common good, though I personally find this concept neither realistic nor desirable, in that it denies the fact and value of individual diversity. But not even the most ideal socialist society will obviate the diversity of information about productive methods that must obtain simply because the acquisition of information is costly. Hence, the need for coordination, for some means of seeing that plans of diverse agents have balanced totals, remains (ibid.).

Here, Laureate Arrow is introducing a new problem of information for every individual producer and consumer which is “costly”. Hence, in his opinion, the problem of coordination “even in the most ideal socialist society” remains open for investigation. He is correct that coordination “has been a central preoccupation of economic theory since Adam Smith and received a reasonably clear answer in the 1870s with the work of Jevons, Menger, and above all, Leon Walras”. So far, so good, but all the authors are classics and they were using in their reasoning classical logic oriented more at the real-truth content of propositions. Laureate Arrow is a modern thinker trained and applying modern, symbolic, formal logic oriented at the empty-form of propositions. And that makes a big difference in scientific work and evaluation. Personally, I have great admiration for Laureate Arrow that instead of criticizing the classical theory immediately, like any true great scientist he provided the correct answer and solution given by the great classics mentioned above, to whom it is just to add at least Alfred Marshall and Vilfredo Pareto. Here is the solution by the classics expressed by Arrow: It was the fact that all agents in the economy faced the same set of prices (we added for more precision “stable equilibrium prices”) that provided the common flow of information needed to coordinate the system.

Up to this point everything is all right: Arrow the classic has spoken! Immediately thereafter, Arrow the modern thinker took the podium, so to say, and declared:

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There was, so it was argued, a set of prices, one for each commodity which would equate supply and demand for all commodities; and if supply and demand were unequal anywhere, at least some prices would change, while none would change in the opposite case. Because of the last characteristics, the balancing of supply and demand under these conditions may be referred to as equilibrium in accordance with the usual use of that term in science and mathematics. The adjective, “general”, refers to the argument that we cannot legitimately speak of equilibrium with respect to any one commodity; since supply and demand on any market depends on the prices of other commodities, the overall equilibrium of the economy cannot be decomposed into separate equilibria for individual commodities (Le Prix Nobel, 1972, p. 210).

Here comes, in discussion, the difference between modern, formal, symbolic, mathematical logic which allows the research man more freedom, more space to maneuver and exercise his reasoning since he has to worry only about “truth-form” and he can omit the concern for “truth-content” of propositions, whereas, in more recent integrated logic, the same researcher is constrained logically to observe both the “form” and real “truth-content” of propositions. The researcher who follows and applies modern, formal, symbolic logic has to pay a price for more freedom, i.e. to run the risk of being entangled with formal paradoxes of indeterminacy, of which the principal father of this type of logic – Russell (Whitehead and Russell, 1910) – warned in his Principia Mathematica. Go¨dell’s proof shows that this risk is unavoidable (see Rugina, 1998, 2000). Laureate Arrow, like probably many of his generation, was trained in modern, symbolic, mathematical logic, and, therefore, we are faced here with one principal subject: the concept and law of general equilibrium inherited from Leon Walras, and improved and completed by this author but treated with the help of two different types of logic: modern symbolic logic versus classical logic improved and completed by this author under the name of “integrated logic”. Let us examine objectively the text given by Laureate Arrow above. Before anything else in the neoclassical (Walrasian) model M1 in an improved, more complete formulation given before: M1 ¼ 100%ðCo þ NuÞ þ R1 , we have natural, stable equilibrium coordination, in principle and in practice. There is no room for an additional inequality of a permanent nature between supply and demand with cumulative price fluctuations as we know very well from experience in the capitalist regime. If that is what he meant by saying: “if supply and demand were unequal anywhere, at least some prices would change, while none would change in the opposite case”, then with all respect to Laureate Arrow, he committed a logical error of real truth-content. The logical error in question may be invisible when using modern, formal, mathematical logic in the sense of Russell. But definitely the error is clear and undisputable if we use “integrated logic”. It is identified from different directions. First, it breaks the second Pareto’s rule of stable equilibrium. Here is the voice of Pareto:

An economic system is called in equilibrium when the change in one of the conditions of the system produces other changes which will initiate exactly opposite counter-reaction. Such an equilibrium is stable when the change is of finite magnitude (Pareto, 1961, p. 26).

Second, it breaks the very nature of the Walrasian law of general stable equilibrium and the principle of marginal utility (Menger, Jevons, Walras and Marshall) to solve the fundamental problem of value of exchange (prices). This is valid for consumers and producers, for all commodities and services and for all factors of production. Third, the limited concept of “equilibrium” where Laureate Arrow included an additional inequality between supply and demand, falls under Go¨del’s proof where the solution is indeterminate, in the form of a paradox and refers not to stable (as in model M1) but rather unstable (as in model M4) equilibrium with unemployment in the Keynesian sense. Another disputable point in the model of reasoning followed and applied by Laureate Arrow is the conclusion derived from the same additional inequality introduced in the classical law of supply and demand, namely, that the adjective “general” attached to the Walrasian law of general equilibrium is not “legitimate” since, if it were true, it would create a real and most damaging “storm” within the compound of the neoclassical contribution by Walras. Fortunately, in reality that is not the case, but a clarification of this issue is necessary and the application of the new integrated logic can help. Because of the fundamental importance of this issue, let us hear first the voice of Laureate Arrow: The adjective, “general”, refers to the argument that we cannot legitimately speak of equilibrium with respect to any one commodity; since supply and demand on any one market depends on the prices of other commodities, the overall equilibrium of the economy cannot be decomposed into separate equilibria for individual commodities. Now even in the most strictly neoclassical version of price theory, it is not precisely true that prices alone are adequate information to the individual agents for the achievement of equilibrium, a point that will be developed later. One brand of criticism has put more stress on quantities themselves as signals, including no less an authority than the great Keynes (1936); see especially the interpretation by Leijonfvud (1968), especially Ch. II. More recently the same argument has been advanced by Kornai (1971) from socialist experience. Nevertheless, while the criticisms are, in my judgment, not without some validity, they have not given rise to a genuine alternative model of detailed resource allocation (Le Prix Nobel, 1972, pp. 210-11).

With all due respect to Laureate Arrow, we think in terms of the same spirit of scientific precision that we can speak legitimately of a general stable equilibrium theory, in Walras up to the very limit, and in Marshall relatively close to the limit, since his model of reasoning includes “representative size” of business firms and normal (stable equilibrium) supply and demand behavior. If we were to accept the formal, modern logic assumption that the prices on any one free market, located in a city or in a far away village, and for all commodities and services traded, are determined or depend – as Laureate Arrow said above – “on the prices of other commodities and services” in a

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whole national economy and that therefore “the overall equilibrium cannot be decomposed into separate equilibria for individual commodities”, is, in using his own vocabulary, “neither realistic nor desirable”. And to make the case stronger, we may add “neither in theory nor in practice”. First, the neoclassical model M1 (Walras) is 100 percent consistent at its limit and about 95 or 97 percent (Marshall and Pareto) and therefore in principle and in practice can and is “decomposed” into separate equilibria for individual commodities). Second, the cost of information and the time consumed for consultation of all this enormous amount of data, would practically make impossible all kinds of business. If a consumer, male or female, would try to consult before the act of demand for a commodity “X”, the price of all other commodities then he or she would struggle indefinitely for information and would not have the time to buy the goods or service in question. Such a strain would fall into the category of the absurd similar to the play Rhinoceros by the Romanian playwright, Ionesco (1960). In any case the problem of explaining the formation of prices would become insoluble by definition, or, which is the same, the prices on a free market are indeterminate. The truth is that in the case of free markets of the Walrasian or Marshallian type, an individual consumer who feels the necessity to buy a certain product “X” by intuition he or she knows the marginal utility of that product and also the marginal utility of his income, the budgetary restraint (Pareto’s rule), and the rest lies in the market; in this case stable equilibrium price. The buyer here has no interest or need to know any other prices. The matter in a system of model M1 (Walras-Marshall) is so clear and so simple that it needs no further elaborate proof. In the second paragraph quoted before, Laureate Arrow expresses a nuance of doubt that “even in the most strictly neoclassical version of price theory, it is not precisely true that prices are adequate information” but promised that later on he will return to this issue. In the third paragraph, Arrow attempts to revive his position by introducing instead of “concepts” (demand and supply) “to put more stress on quantities themselves as signals, including no less an authority than the great Keynes (1936)”. It looks as if this attempt is refuted by a good friend of Keynes, the master logician Wittgenstein, when he wrote “The facts all contribute only to setting the problem, not to its solution” (Wittgenstein, 1922, p. 149). Finally, in the fourth paragraph, like all great original thinkers, Laureate Arrow facing the quest for the whole truth, gives some credit to the critics of neoclassical theory, but in the end he recognizes that “they have not given rise to a genuine alternative model of detailed resource allocation”. On our part, we declare with scientific assurance that such a more complete and consistent model of detailed resource allocation exists. It is the Walras-Marshall neoclassical M1-M2 on our orientation table. All we need is to add the missing

part, respectively factor “R” of a suitable (analytically stable) institutional and Kenneth J. Arrow legal framework, as presented in Rugina, 1998, pp. 103-54). In continuation, Laureate Arrow changes the location of the argument from the neoclassical to the Keynesian model. For him “the fundamental question remains, how does an overall total quantity, say demand, as in the Keynesian model, get transformed into a set of signals and incentives for individual 491 sellers?” (Le Prix Nobel, 1972, p. 11). Unfortunately, he gives no direct answer to his question. Instead, he shifted the discussion to another subject. Let us take note: If one shifts perspective from description to design of economics, it is not so hard to think of non-price coordinating mechanisms; we are in fact all familiar with rationing in one form or another. Here, the discussion of coordination shades off in that of efficiency (op. cit., ibid.).

We are now in a different territory – that of a centrally planned and controlled economy where, according to the orientation table there is no trace of equilibrium (stable or unstable) but only artificial disequilibria, politically forced coordination and efficiency. Pareto’s optimum principle has not and cannot have any application. In addition, we are not sure that Laureate Arrow is aware of the fact that in the neoclassical model there is a chance for “stable” equilibrium, while in the Keynesian model M4 (equilibrium with unemployment) there is a chance only for “unstable” equilibrium. Without the help of the orientation table, it is quite difficult, if at all possible, to see this relationship. Next, follows a different subject. 2. The Hicks-Samuelson model of general equilibrium Right at the beginning, Laureate Arrow informs the reader: I will state more formally the model of general competitive equilibrium as it had been developed by about 1945, primarily through the detailed developments and syntheses of Hicks (1939) and Samuelson (1947). Competitive analysis is founded on two basic principles: optimizing behavior on the parts of individual agents in the presence of prices taken as given by them and the setting of the prices so that, given this individual behavior, supply equals demand on each market. The outcome of the competitive process is then to be evaluated in terms of Pareto efficiency and additional conditions on the resulting distribution of goods (op. cit., ibid.).

Right here at the departure point, Arrow pointed out very clearly that the concept of general competitive equilibrium he will refer to subsequently is that which prevailed by 1945, specifically, that used by Hicks (1939) in his Value and Capital, and Samuelson (1947) in Foundations of Economic Analysis. The first concept of general stable equilibrium by Walras (1954) exposed in his magnum opus, Elements d’Economie Politique Pure (1874-1877),was completely avoided, left out of the argument, at least at this point. For the benefit of the reader and the information of future generations of economists, let us recall the two concepts of equilibrium presented before with

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the help of the new research program of equilibrium versus disequilibrium and the orientation table: (1) General stable equilibrium as formulated first by Leon Walras but improved and completed by this author, represented in model M1-M2 on the orientation table has 25 conditions (Rugina, 1998, pp. 136-48) among them natural, inherent coordination, full employment, monetary and financial stability, balanced private and public budget, stable foreign exchange rate and the balance of international payments and not less important distributive social justice of equity in the distribution of national income. (2) General, mixed unstable equilibrium or what Lord Keynes called “equilibrium with unemployment” (a little unclear), which is represented in model M4 on the orientation table, where practically all 25 conditions are corroded with disequilibrium aspects and behavior, as we note visibly in everyday life in the existing modern capitalist regime of the past and in the present. This is the inevitable effect of the impossibility theorem in practice in action (see Introduction, pp. 353-4). By 1945, the Keynesian version of general unstable equilibrium was rising rapidly to conquer soon the voice of majority in the economic profession, both in analysis and in matter of policies. In this way a revolution took place in economic thinking. It was supported by the intellectuals who thought that the application of the Keynesian ideas of active government intervention was putting an end to economic and financial crises (the business cycle phenomenon). Politicians of the left, right or center were happy because more political power was recommended and made legitimate in the name of scientific truth. This in turn also nurtures corruption even though up to a certain point it is contrary to the concept of genuine democracy. Second, there are two different conceptions of logic and methodology in science: (1) Classical logic, as improved by this author, called integrated logic where not only the form, but also the real truth-content of propositions is considered side by side; and classical methodology as improved by this author in his Quinta Methodica, ex ante, or cause-and-effect type of analysis and the law of logical consistency in scientific arguments. (2) Modern, symbolic, formal, mathematical logic which considers in principle only the form of propositions, omitting the real truth-content. This supposedly gives more freedom to the researcher, but at the same time it is exposed to the Go¨del proof of indeterminate or paradoxical solutions to the given problems. In addition there is modern methodology with an unsettled relationship between pure theory and practice. Finally, an ex post or effect-counter-effect action closes an

inverted order of analysis. In other words, working on a problem the Kenneth J. Arrow researcher is waiting for empirical realities to develop to a critical point where a problem has become intolerable or acute, for instance, involuntary unemployment. Then he applies a sort of inverted order of reasoning policies to create more jobs by government deficit spending, instead of applying the classical approach of searching the causes which 493 have created in the first place unemployment and immediately eliminate those causes so that the economic and financial system can function normally in the Marshallian sense. Laureate Arrow, by following Hicks (1939) and Samuelson (1947), evidently applied the Keynesian version of general unstable equilibrium, modern symbolic logic and modern methodology with ex post analysis or inverted order of reasoning, and inevitably he came to results which formally, purely symbolic and mathematically appear to be true, but in terms of real truth-content they cannot escape Go¨del’s proof, that is, they are indeterminate. Under these conditions and with all respect due to Laureate Arrow, we would like to stress emphatically that the argument here is not between this author and Laureate Arrow, but rather between the modern symbolic, formal, mathematical logic and methodology and the new more comprehensive integrated logic and methodology which actually is intended to be a synthesis between classical and modern way of reasoning. It is the hope of this author that sooner or later this will open the road to a third peaceful revolution not only in economics, but also in all other sciences, natural and social. Let us go to the text of Laureate Arrow: The maximizing behavior of individuals has been surveyed by Samuelson in his Nobel Lecture (1971), and I will not go over that ground here. I just want to remind the listener of a few elementary points. The first is that the consumer’s choices are subject to a budget constraint (op. cit., ibid.).

In continuation, Arrow gives a mathematical formula which is supposed to represent the total disposable income, i.e. his budgetary constraint of an individual. We have no quarrel with the mathematical formula which quantitatively indicates the effective demand of this consumer “X”. But we do not feel at ease with the description of how this consumer “X” decides to act, that is, to spend his or her disposable income. Laureate Arrow, like his two predecessors (Sir John Hicks and Paul Samuelson) divides effective demand into bundles of pairs (two commodities) because requires the construction of indifference curves, which in turn is supposed to explain the problem of value. In the Walrasian and neoclassical school (Walras, Menger, Jevons, and Marshall) value was determined by the marginal utility of a commodity or service with the idea (assumption) that the marginal utility can be conceived by

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a Homo sapiens, both a priori (analytic), to have knowledge of pure reasoning, and also a posteriori (practically), in the Kantian sense. It is the argument of cardinal vs ordinal utility (Schumpeter, 1954, pp. 1060-7). Let us examine how a consumer “X” will decide about the use of a certain amount of disposable income “Y” for instance US$5,000 salary for a given month. Here is a simple example of US$5,000 spent as follows: rent $1,500; medical-insurance premium $500; payment for a previous loan $500; food $500; tuition for a young son or daughter $500; savings $500; and vacation $1,000. Marginal utilities: ml¼m2 ¼ m3 ¼ m4 ¼ m5 ¼ m6 ¼ m7, with limited approximation. Unfortunately, the pioneers in the theory of marginal utility (Menger, Jevons, Walras and Marshall a little later) did not have a completely clear image or simply did not think that it was necessary to point out that the concept of marginal utility simultaneously had two aspects: one is pure ideal, a priori, analytic, ordinal and the other is a posterori, empirical, justified by experience and therefore cardinal, that is, it can be measured, to the best of human ability. In addition, all classics, old and new, used in their reasoning classical logic where traditionally, going back to Aristotle in syllogisms, we find propositions which satisfy not only certain rules which refer to form but also simultaneously other rules of real truth-content. Kant and Hegel are representative of a rising renaissance in logic and philosophy. Vilfredo Pareto who took the chair of Walras at the University of Lausanne in Switzerland, was the one who invented (thinking also of Edgeworth), or at least applied on a large scale “indifference curves”, shifted from the classical logic inherited from Walras to modern, symbolic, mathematical logic in the 1890s, even before Bertrand Russell and Alfred North Whitehead published Principia Mathematica in 1910. The indifference curves of Pareto are the prototype of the first version of application of curves which have only form (like an empty box) and no real truth-content, like normal demand and supply curves as in Walras and Marshall. It is the application of modern, formal, mathematical logic, a completely free game of reasoning in science when in this case the boxes are empty, identified only by certain symbols which can be manipulated at the wish of the researcher, depending on his ability in mathematics. In this way modern logic has lost its classical independence and has become an appendix to mathematics (Rugina, 1998). We are surprised that neither Walras nor Marshall raised their voice for clarification of the relationship between the new type of logic and the science of economics. But the fact that Marshall and Walras did not protest does not mean that we should ignore the problem of the relationship between cardinal and ordinal utility. In the given example with an individual “X” who has to divide $5,000 in order to cover seven clearly identified expenditure items, there was no big problem for this individual to decide what to do, as long as he had the

$5,000. The modern theory of marginal utility explains very simply and Kenneth J. Arrow convincingly that the marginal utility (mu) in all those seven items has to be equal. And a Homo sapiens has the ability to distinguish and apply the analytical concept of ordinal utility versus the empirical or practical aspect from his own experience, even though he or she may have never heard of Walras, Menger or Marshall. This is the case that the Frenchman Henri 495 Bergson (1907) called “creative intuition”, and a well-known Romanian philosopher – Lucian Blaga – identified it as “popular”, but still creative philosophy. Under these everyday, natural human conditions, our individual “X” within an hour or less can solve his problem properly and fully. And, if overnight, he has some second thoughts about the evening decision, he can correct it in the morning in a few minutes during breakfast. The scientist, therefore, in such circumstances must have the skill to construct adequate concepts and use the right method of reasoning (logic) to explain what millions and millions of individuals do every day with speed and efficiency. In this respect Walras, Menger, Jevons and Marshall did their job well except that they missed pointing out explicitly the two simultaneous aspects of ordinal and cardinal utility and that the two concepts are not contradictory but rather complementary, with a “scale of preference” being included in the neoclassical theory. Even the great Schumpeter had some doubts when the problem of measuring “marginal utility” became a hot issue and the avalanche of “indifference curves” had its day. He wrote: As the reader knows, indifference-curve analysis has at long last become part of current teaching. The profession has got used to it, and even the controversy concerning its suitability for a sophomore course has died out. But it should have been clear from the first that things would not stop at indifference varieties and that they are after all but a midway house. They are more elegant and methodologically safer than was the old utility analysis but they have not helped us to results that the latter could not have reached; and no result of the latter has been proved definitely wrong by them. Moreover, if they “assume less” than does the utility analysis, they still assume more than, for purposes of equilibrium theory, it is necessary and comfortable to assume. And if they use nothing that is not observable in principle, they do use “potential” observations which so far nobody has been able to make in fact: from a practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions. Accordingly, it has been pointed out, as early as 1902, by Boninsegni, and a few years later (1908) by Barone, that for the purposes of writing the equations of equilibrium theory we do not need either. What then do we need for this purpose if we leave every other out of account? A little reflection shows that even the early utility theory of value never actually used any other postulate than this: faced with a given set of prices and a given income, everybody chooses to buy (or sell) in a uniquely determined way (Schumpeter, 1954, pp. 1066-7)

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If this long quotation is not enough to prove that the great Schumpeter did not find much use for the indifference curve in pure analysis of the theory of value then it is worthwhile to repeat what he said only four pages before in the same place: But nobody questioned people’s ability to compare satisfactions expected from the possession of different sets of goods with out measuring them, that is to say, people’s ability to array such sets in a unique “scale of preference.” This is what we mean by Ordinal Utility (op. cit., p. 1062).

With this additional observation, Schumpeter came one step before our realistic assumption, according to the new concept of integrated logic and methodology, that a man has the ability to conceive, distinguish and apply the analytical concept of ordinal utility simultaneously with the cardinal, actually a practical aspect from his own experience, in the full spirit of the Kantian distinction between the reine Vernunft (pure reason) and praktische Vernunft (practical reason), never having heard of Immanuel Kant, Leon Walras, Carl Menger and Alfred Marshall. We did nothing to complete what Schumpeter had in mind but did not say explicitly. After this long detour for a more complete clarification of the problem of value in the context of the application to the general stable equilibrium, let us return to the text of Laureate Arrow. We have to keep in mind the fact that he is using modern, symbolic logic. Let us examine the functioning of modern, formal, symbolic, mathematical logic and methodology as used in the theory of indifference curves (Pareto), the theory of marginal rate of substitution (Hicks), the maxima-minima (Samuelson) and the presentation by Laureate Arrow. First, in Pareto, Hicks and Samuelson the issue of equilibrium in demand (consumption) is reduced solely on two commodities: Pareto (wine and vinegar), in Hicks (“X” and “Y”), in Samuelson (two goods) and in Laureate Arrow (a pair bundle). The immediate observation to identify is the fact that in order to draw indifference curves or the marginal rate of substitution or a pair bundle, it requires two commodities and only ordinal utility, whereas marginal utility curves in the sense of Walras, Jevons, Menger and Marshall are applicable for each commodity and can be simultaneously ordinal and cardinal. Here is the voice of Laureate Arrow: Within this budget set of possible consumption bundles, the individual is presumed to chose his most preferred bundle. The most usual interpretation of “most preferred” in this context is that there is a preference ordering over all possible bundles, according to which, for every pair of bundles, one is preferred to the other or else the two are indifferent; and these pairwise judgments have the consistency property known to logicians as “transitivity”; thus, for example, if bundle A is preferred to bundle B and B to C, then A will be preferred to C. This “ordinalist” view of preferences was originally due to Pareto and to Irving Fisher, about 1900, and represented an evolution from the earlier “cardinalist” position, according to

which a measurable satisfaction or “utility” was associated with each bundle, and the consumer chose that bundle which maximized utility with the budget set. Obviously, a cardinal utility implies an ordinal preference but not vice versa; and if the only operational meaning of utility is in the explanation of consumer choice, then clearly two utility functions which defined the same preference ordering are operationally indistinguishable (Le Prix Nobel, 1972, p. 212).

Kenneth J. Arrow

In our concrete (empirically possible) example of an individual how are we going to draw an indifference curve (Pareto) or a substitution curve (Hicks) in the first bundle (rent) and the second bundle (medical insurance premium) or a scale of ordinal preferences when our individual “X” has no other choice but to pay $1,500 (rent) and $500 (medical insurance)? There is no indifference or subtitution or a scale of ordinal preference possible or reasonable as a natural phenomenon in our empirical, concrete case of our individual “X” who has a disposable income of $5,000, and he, and only he alone, decides how to use it. The task of a scientist in this case is to explain, as clearly as possible why and how he is completing the decision-making process. Of course “transitivity” is conceivable, as Laureate Arrow mentioned in the first paragraph, but in that case our individual “X” should proceed in his mind to rationalize that he could pay his two bills in the selected bundle starting with $3.00 (rent) and $1.00 (medical care) and continuing with $6.00 (rent) and $2.00 (medical care) etc., until he will reach the maximum of $1,500 (rent) and $500 (medical care). But what would be the scope for such mental gymnastics when our individual “X” in the end has no other choice but to pay the integral sum for rent and medical care? Surely, the modern, formal logic permits this exercise but the operation cannot escape Go¨del’s proof, where the solution of the problem remains indeterminate. In the third paragraph, Laureate Arrow wrote that “a cardinal utility implies an ordinal preference but not vice versa (emphasis is his). That is true but only if or when we use modern logic, because in that case the Keynesian model is not fully consistent: unstable equilibrium with unemployment, model M4 on our orientation table or modern mixed capitalism. Consequently, irreversibility (vice versa) is not possible. With the help of the new, more complete neoclassical logic or model M1-M2 which is fully consistent there is no problem as we explained earlier, because the ordinal preference is followed immediately by cardinal indication and vice versa, that is reversibility. And that is as far as we can go with the analysis. We would like to repeat, that here we are faced with an argument of fundamental importance. It is not between this author and Laureate Arrow but rather between two different types of logic: modern, symbolic, formal or pure mathematical logic versus a new, more complete integrated logic. The same kind of argument can he raised when Laureate Arrow said in continuation:

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The most preferred bundle then is a function of all other prices. Notice that, from this viewpoint, all prices clearly enter into the determination of the demand for any one

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commodity. For one thing, the rise in any one price clearly diminishes the residual income available for all other commodities (Le Prix Nobel, 1972, p. 212).

With the help of modern, symbolic logic there is no impediment to assume that the “most preferred bundle” is a function of all prices! But looking at our concrete example of individual “X” in deciding how to spend his disposable income of $5,000, specifically the bundle of rent and medical insurance, he will not look for all other rents and medical insurance charges in the whole country or even the whole city where he is living. He or she definitely will look at the other additional five items because the budgetary constraint forces them to do so, if they want to avoid other problems later. That is the result by following integrated logic. But that is as far as we can go with the analysis. The reader is free to do his own reasoning and draw his own conclusion. We may face the same kind of difficulties if we consider the next observation by Laureate Arrow: Evaluation of the performance of an economy with regard to distributive justice was far less studied, not surprisingly, since the deepest philosophical issues are at stake (op. cit., p. 213).

Laureate Arrow is right that this problem of distributive justice was “far less studied”. In our view it is because the old conflict between “justice of equitable shares” and “justice of equal shares” has not been settled. Among the great modern thinkers, Walras was the one who attempted to solve the conflict, but he too left unfinished business (Rugina, 2000). The concept of production and profit may also raise some difficulties. Laureate Arrow wrote: The optimizing of the firm is taken to be the maximization of profit among the points on its transformation surface . . . Two remarks should be made at this point: (1) Clearly, if all prices are multiplied by the same positive constant, the budget constraint for households is really unchanged, and hence so are the consumer demands. Similarly, the profits are multiplied by a positive constant, so that the profit-maximizing choice of a firm is unchanged . . . (2) The firms’ profits have to be treated as part of the income of the households that own them (op. cit., p. 214).

Maximization of profit by a firm, per se, with no further qualification, does not and cannot be consistent with Pareto’s optimum. We have to make a clear distinction between legitimate, equitable profits in a regime of general stable equilibrium where the maximum profit of business is consistent also with the maximum rate of wages, rent, interest and taxation versus illegitimate, extra, differential or disequilibrium profit, over and above the legitimate equilibrium profit. In a system of general stable equilibrium not only “excess demands” but also “extra, additional profits” must also equal zero, at the limit. When the prices “are multiplied by a positive constant” and similarly the firms’ profits, that also may create difficulties. Indeed, that constant could not be anything else but the numeraire-currency of Walras. With the use of modern

symbolic logic, the Wairasian “numeraire” is a constant (considered to be equal Kenneth J. Arrow to 1), and multiplied with prices and separately with profits, does not change both prices, profits and therefore also the reasoning. In reality and with the help of integrated logic, the result surely will be different. The numeraire-currency fulfills two different functions: one serves as an objective standard to measure exchange values (prices) and this may be 499 considered as ordinal. And the other function is to serve as a sort of shockabsorber in increasing or decreasing automatically the supply of money in circulation, thus avoiding cumulative price fluctuations – the business cycles phenomenon. The great Walras, however, committed an analytical error when he concluded: Thus in a state of equilibrium in production, entrepreneurs make neither profit nor loss. They make their living not as entrepreneurs, but as landowners, labourers or capitalists in their own or other businesses. In my opinion, rational bookkeeping requires that an entrepreneur who owns the land which he works or occupies, who participates in the management of his firm and who has his own funds invested in the business, ought to charge to business expense and credit to his own account (the corresponding) rent, wages and interest charges calculated according to the going market prices of productive services (Walras, 1954, pp. 225-6).

In the second paragraph, he is correct but in the first paragraph there is a lapsus, or if you want, an error, when Walras asserted “neither profit nor loss”. He should have said explicitly that extra, differential profits are zero, at the limit. However, Walras tempered his error by reference to a salary for the entrepreneur similar to regular payments to other employees.

3. The need for further development Laureate Arrow begins this section as follows: There were, however, several directions in which the structure of general equilibrium theory was either incomplete or inconsistent with doctrines which had strong currency in economic theory (Le Prix Nobel, 1972, p. 215).

In order to be able to share a fair, objective judgment on Walras’ contribution in the economic science, before anything else, one must make a clear distinction between: (1) classical and neoclassical logic and in particular the new more complete and explicit integrated logic which requires considering simultaneously both form and real truth-content in propositions; and (2) modern, formal, symbolic, mathematical logic which considers only an adequate form of propositions, leaving out completely the real truthcontent.

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In the first case, the solution to a problem is logically and empirically determinate. In the second case, the solution is more or less in principle and in practice indeterminate under the shade of the Go¨del proof (1934). We agree with Laureate Arrow that the Walrasian law of general stable equilibrium was “incomplete”, but not in “his sense”! It was incomplete, as we just saw, in lacking a proper theory on legitimate, equilibrium, normal, natural profit determined by the marginal utility of the factor of production management like the other sources of normal incomes: rent, wages, interest and public revenues in models M1 and with a small approximation in M2 (Marshall). The more serious and fundamental deficiency in Walras we found in the lack of a proper and explicitly identified factor “R”, that is, an adequate, stable institutional and legal framework, conceived first analytically, then practically and in turn consistent with the other basic elements: pure competition and numeraire-currency. This, we think, was the main reason why the Walrasian system of thought did not enjoy sufficient consideration by a large number in the economic profession of his time and thereafter up to our days. Many then and for sure even today, think that the Walrasian system in practice is “utopic”, which is completely erroneous. Walras, in several places, insisted that his theory is applicable in practice, but nobody among the great economists thereafter confirmed the new vision. The only exception of a great economist who recognized the high and unique value of Walras’ contribution was Joseph A. Schumpeter, who wrote: However, as far as pure theory is concerned, Walras is in my opinion the greatest of all economists. His system of economic equilibrium, uniting, as it does, the quality of “revolutionary” creativeness with the quality of classic synthesis, is the only work by an economist that will stand comparison with the achievements of theoretical physics. Compared with it, most of the theoretical writings of that period – and beyond – however valuable in themselves and however original subjectively, look like boats beside a liner, like inadequate attempts to catch some particular aspect of Walrasian truth. It is the outstanding landmark on the road that economics travels toward the status of a rigorous or exact science and, though outmoded by now, still stands at the back of much of the best theoretical work of our time (Schumpeter, 1954, p. 827).

This was the voice of Schumpeter which was right in every single word then, today, and according to our orientation table forever, since in the world of new ideas without the Walrasian model M1 economics cannot be a “rigorous or exact science”, exactly as physics cannot be analytically a pure science without Newton and his corresponding M1 model. Indeed, the concept of “relativity” in Einstein, and according to our orientation table, in physics, is inconceivable without the prior knowledge of “gravity”, in the study of stable matter and elements (Rugina, 2000). In this spirit, with all the respect one has for Laureate Arrow, we cannot accept the characterization that the general equilibrium theory by Walras was “inconsistent with doctrines which had strong currency in economic theory”.

If Laureate Arrow with his characterization wants to refer, which may be Kenneth J. Arrow very probable, to the works of Laureate Hicks and Laureate Samuelson or von Neumann and other contemporaries, his criticism of Walras is still not fair or right, because the contemporaries used the modern, formal, symbolic logic whereas Walras has applied the classical logic going back to Kant and Hegel. In continuation, Laureate Arrow, with reference to the general equilibrium 501 theory by Walras, said: There was no proof offered that the system of equations defining general equilibrium had a solution at all; that is, it was not known that there existed a set of prices which would make excess demand zero on every market. This was the most serious unresolved problem. The assumptions on production were not the same as those used in the analysis of production itself. In the latter, a common, though not universal, assumption was that of constant returns to scale; if any production process can be carried out, with given inputs and outputs, then the process can be carried out at any scale. That is, if the inputs are all multiplied by the same positive number, then it is possible to produce the same multiple of all the outputs. But in this case, there cannot be a unique profit maximizing position for any set of prices” (Le Prix Nobel, 1972, p. 215).

What can we say about these specific critical remarks? In the Walrasian system, as completed by this author, respectively model M1 on the orientation table (see Introduction, pp. 341, 345), there does not nor cannot exist or develop “excess demand” or “leakage of demand” in the sense of Keynes. Therefore, “excess demand zero” is implanted in the system nominally. In this way, for Walras there was no problem to be solved. Of course, in order to understand this situation and give credit to Walras, one, in all fairness, has to use classical, improved integrated logic. Laureate Arrow is using modern, formal logic and, therefore, inevitably in the first paragraph sees “a most serious unresolved problem” which actually is his alone, but not for Walras. What about the second paragraph? The text again is not quite Walrasian. To begin with, when he worked his theory of general equilibrium Walras did not attach such a central position as Laureate Arrow called “constant returns to scale” and in particular, a unique profit maximizing position”. For Walras the attention was concentrated on a unique marginal utility maximizing position for both consumers and producers with no extra differential profit for the entrepreneur. The other game introduced by Laureate Arrow, based on the assumption of “constant return to scale” and if all “inputs are multiplied by the same positive number and the process carried out at any scale” or multiple of all the outputs, never entered the mind of Walras. This is the game with “empty boxes” practised only by those who think about the economic problems in terms of modern, formal logic, but Walras truly was outside of this territory. The true Walrasian world is quite different from the world conceived by Laureate Arrow, because he looked at the same economic problems in terms of classical, real truth-content propositions, and it is no surprise that he applied a different mode of reasoning.

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For Walras, any new investment required real new capital formation in form of ex ante voluntary savings of the people (consumers), and any renewal of old investment required amortization of old capital. There is no such thing in the Walrasian system, either in theory or practice, that is, as Laureate Arrow assumed, “if the inputs are all multiplied by the same positive number, then it is possible to produce the same multiple of all the outputs”. This is not possible in the real world, regardless of what economic system we assume. Yet, Laureate Arrow comes to the conclusion that “there cannot be a unique profitmaximizing position for any set of prices”. In this way he thinks that “the structure of general equilibrium theory” in Walras is “inconsistent with doctrines which had strong currency in economic theory”. This statement is not fair, in fact not true, if we apply integrated logic in reasoning. But the story of the criticism of Walras does not end here. Once more let Laureate Arrow elucidate: The relation between Pareto-efficient allocations and competitive equilibria was less clearly formulated than might be desired. What had really been shown was that the necessary firstorder conditions for Pareto efficiency were the same as the first-order conditions for maximization by firms and individuals when the entire economy is in a competitive equilibrium (Le Prix Nobel, 1972, p. 216).

When all the conditions and requirements in the more complete formulation of the Walrasian law of general equilibrium – 25 in number (see Introduction, pp. 369-84) are fulfilled – both in theory and practice then and only then, Pareto’s optimum with most efficient allocation of resources (natural and human), that is, the use of the factors of production and the whole economic and social universe are governed by the same principle of competition and the maximization not only of the legitimate profit by firms, but also simultaneously of rent, wages, interest, public income and even foreign exchange. With this supplementary information, no criticism of inconsistency regarding Pareto’s optimum can be raised against Walras. Laureate Arrow still has more questions to debate about the Walrasian law of general equilibrium, as follows: Actually, the condition for individual optimization (equating of marginal rate of substitution to price ratios) required some modification to take care of corner maxima. It is obvious to everyday observation that for each individual there are some (indeed, many) commodities of which he consumes nothing. Similarly, for every firm, there are some commodities which are neither inputs to nor outputs of it. But then the argument that the marginal rate of substitution must equal the price ratio for each individual, breaks down . . . A small increase in the consumption of (i) with a compensating decrease in (j) to stay on the same indifference surface would involve an increase in costs. The only way to achieve a decrease in cost without moving to a less preferred position would be to decrease the consumption of (i); but this is impossible, since consumption cannot fall below zero. It is true, however, that the marginal rate of substitution of (j) for (i) cannot exceed the price ratio (Le Prix Nobel, 1972, p. 216).

What can we say about the above text? The difficulties here are directly with Kenneth J. Arrow the concept of marginal rate of substitution, a product of Laureate Sir John R. Hicks which, in turn is a result of the application of modern, formal, symbolic logic. At an international congress organized in Athens, Greece, by Professor Lazaros Houmanidis of the University of Piraeus, where I met Sir John R. Hicks and Professor Ursula Hicks, a distinguished Lady, I tried 503 privately to call to their attention that the concept of the marginal rate of substitution has very limited application. Very few commodities or services can be organized in pairs susceptible to substitution in precise proportions, but I did not get anywhere, since Lady Hicks, more than he thought that the concept is already known and applied by many economists, and there is no use in insisting on this subject. Here we are recalling again the difficulties which exist with this subject in pure analysis but also in practice. The example of coffee and tea as a pair of substitutes may be acceptable but in terms of a very limited number of cups. There is not much room, if at all, to work with this concept on a large scale, in the application of “integrated logic”. Laureate Arrow, however, in the above text makes use of the marginal rate of substitution on a large scale and, of course, by using modern, formal logic. We do not know whether he is aware or not that in this case the Go¨del proof is valid and therefore his results, nolens volens, are analytically indeterminate and have no relationship with the real economic world. The “corner maxima” refers to a mixed system composed of equilibrium and disequilibrium elements included in the same Go¨del’s proof with the same consequences. The next two paragraphs were given for the reader to see the difference between the usage of modern, formal logic versus the neoclassical logic or the more recent integrated logic. To repeat, in the case of modern logic the whole operation becomes a “game with empty boxes” where in any pair of commodities or services, there is a perfect, 100 percent substitution, which in real life by far is not given. In the second paragraph, he introduced an additional assumption that “for each individual there are some (indeed, many) commodities of which he consumes nothing”, and also “similarly, for every firm, there are some commodities which are neither inputs to nor outputs of it”. This assumption does not make the problem of general equilibrium easier but on the contrary more difficult, since it disrupts the relationship between the marginal rate of substitution and the price ratio. These difficulties actually have nothing to do with the Walrasian concept of general equilibrium in its more complete formulation in model M1 ¼ 100%ðCo þ NuÞ þ R1 . In our earlier empirical example of individual “X” who has to dispose of his net income of US$5,000 for one month, he needs no complicated marginal rate of substitution of pair of expenditures or all the prices in the country. It is sufficient that he has the amount of US$5,000, and with the help of his own natural, personal endowment (as a Homo sapiens), the

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concept of marginal utility, simultaneously emerges in two aspects: one is ideal, a priori, analytic, ordinal and the other is practical, a posteriori, empirical, cardinal, acquired from his life experience. Individual “X” does not need to know nor, does he need to have ever heard of Walras, Menger, Marshall or Sir John Hicks. Yet, he knows pseudoscientifically how to divide his disposable income so that he or she has peace of mind, has reached the position of stable equilibrium, where actually there is no problem for him or her. What our individual does is repeated every day, every hour or minute of the day, by millions and millions of citizens, no matter how big or small the country in question. In the end this is the way the Walrasian concept of general stable equilibrium in its more complete formulation becomes reality if, and only if, all 25 conditions indicated in the Introduction (pp. 369-84) are fulfilled. It is the function of a scientist to struggle day and night with how this simple citizen solves his problem of values. It took 100 years from the “invisible hand”, of Adam Smith, through the genius of Walras, Menger, Jevons and Marshall, to the concept of the marginal utility which was discovered and replaced the simplistic but true aphorism of Smith. Finally Laureate Arrow raised another, presupposed “inconsistency” in the Walrasian concept of general stable equilibrium. Here is his voice: Still another question is whether supply and demand are necessarily equal. Clearly, demand cannot exceed supply, for there would have to be unfilled demands. But as we look around us, we see that there are goods, i.e. flows which we prefer to have, which nevertheless are so abundant that we have no desire for more. Air and sunlight come immediately to mind. Characteristically, such abundant goods are free; no price is charged for their use (Le Prix Nobel, 1972, pp. 216-17).

What can we say about this proposition? If all 25 conditions for general stable equilibrium are fulfilled – in theory and practice – then supply and demand must and are equal. By the same token, in this case, the Say law of the markets is also true, beyond any reasonable doubt. In accord with the neoclassical economic theory and applying the integrated logic, demand can exceed supply (a boom period) or supply can exceed demand (a recession or depression period), and this is confirmed by the business cycle phenomenon. This statement cannot be negated or questioned. Every businessman all over the globe nowadays knows that this is true. The professional task of a scientist is to struggle day and night with this fundamental problem of a major disequilibrium which is located on the lower part of our orientation table (Introduction, pp. 341, 345). For more than 100 years now, economists all over the world are seeking a solution – analytical and practical – for this fundamental problem which affects negatively millions and millions of people all around the globe. But in vain, no right and efficient solution is acceptable by the majority in the profession because of vested

interests in business and finance, and, which is even worse, because of vested Kenneth J. Arrow interests in the world of ideas, that during the twentieth century became a most powerful dogma, both in the West and the East, in the North and in the South. We thought initially that Laureate Arrow will attack this dogma, which in the West is hiding the real problems under capitalism by using deceptive policies in the name of diluted democracy. In the East by employing crude 505 political power, are hidden even more complicated real problems under socialism. From this point of view, the entire humanity is at a crossroad. For a description of the problem we may refer to Rugina (1998). A possible solution with general stable equilibrium is presented in Rugina (2001a). Unfortunately, this author was disappointed but not completely surprised, that Laureate Arrow did not hit that fundamental problem which harms humanity so deeply today, practically in every nation under the sun, as they say. By a masterful manipulation of modern, formal, symbolic logic, he constructed a unique model that, to our knowledge, no other economist conceived, namely, a combination of a pair of two commodities, one (A) a scarce good, and (B) a free good. One would expect that the free good would not create problems but here in his model it does. Then, he concludes further, “the conditions for equilibrium have to be modified” . . . In the end “the commodities for which the inequality (disequilibrium) holds are the free goods. Equilibria in which there are free goods are referred to as corner equilibria” (Le Prix Nobel, 1972, p. 217). This is a typical game with “empty boxes” or pure formal assumptions with no real truth-content. Only modern, symbolic, mathematical logic can help to construct such a game where by assuming a formal technological innovation, commodity (B) which initially was scarce may become a free good, and commodity (A) which originally was a free good may become a scarce one. But the whole game actually is a mathematical fiction. This is what Laureate Arrow called “corner equilibria”. We do not question his mathematical reasoning; but according to the new, more comprehensive logic, “corner equilibria” may be possible only in the Keynesian model M4 of unstable equilibrium which for that matter can be called “stable disequilibrium” or what Keynes called “secular stagnation”. In any case all five supposed “inconsistencies” in the Walrasian law of general stable equilibrium, in its more complete reformulation, with all respect to Laureate Arrow, do not hold water but, at the same time, they are true in the Keynesian model M4. This interpretation is clear and justified if we make a distinction between classical logic in its new, more complete formulation of integrated logic, and the so-called modern, formal or symbolic logic. In order to be fair we should give Laureate Arrow a chance to express his opinion. Here is his voice: To avoid misinterpretation of this list (the five points) of the needs for further development, two points should be stressed: (1) the general aims and structure of general equilibrium

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theory have remained those already set forth by Hicks, and the subsequent development would have been impossible and indeed meaningless except on his foundations; (2) I have summarized here only the most general and foundational aspects of the work of Hicks and Samuelson, since those are most relevant for my present purpose, but the primary interest of both was rather in the laws of working of the general equilibrium system, results not summarized above, than in the questions of existence and the like (op. cit., pp. 217-18).

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On Sir John Hicks we shall come back when his Memorial Lecture will be examined. We want to stress here that the true foundations on the general equilibrium theory are to be found earlier in the work of Leon Walras. Without the knowledge of the Walrasian contribution (1874-1877) and the new modern symbolic, formal logic of which Walras did not know (he died in 1910), Sir John Hicks would have had nothing new to say or what he had to say would be less meaningful. Laureate Samuelson (1983), in the second edition of his Foundations of Economics Analysis confessed that in preparing this enlarged edition, what he kept in mind “was the success it could achieve in formulating a general theory of economic theories”. During my short dialogue with Hicks in Athens, it was easy to see that he, too, wanted a similar performance but he avoided taking a position when I presented to him my version of an “impossibility theorem in analysis”. I have the feeling that Laureate Arrow, by presenting Hicks and Samuelson as the pioneers of his contribution on the subject of general equilibrium and by making a distinction between “questions of existence” versus “the working of the general equilibrium system”, which he attributed to the pioneers, in fact he himself sought the realization of the same goal of a general economic theory valid for all systems. Unfortunately, one single, most comprehensive general economic theory, that Lord Keynes thought that he had constructed, is not possible by definition, neither in pure theory (analysis) nor in practice. (See in the Introduction, the impossibility theorem in analysis, pp. 349-53 and the impossibility theorem in practice pp. 353-4.) The irony of history is that the one who questioned first that the content of the Keynesian theory may not be really “general” but rather represents the economics of depression or “slump economics” was his own friend, John R. Hicks. Being good friends Hicks sent the manuscript of his article to Keynes for possible revision, but Keynes answered only with customary thanks and no objection to its conclusion (Hicks, 1937). The fundamental problem of the general stable equilibrium even now in 2002 by far is not settled. I dare to say for the present living generation of economists that it cannot be solved until a third, peaceful revolution in logic will be initiated. My proposition is to adopt an integrated logic, a sui generis synthesis between classical and modern logic which is needed not only in economics and other social sciences, but with the same intensity also in natural, physical sciences. The integrated logic is peaceful, because it does not negate anything true in classical and modern science, but it restricts its validity to its

proper model, according to the orientation table which is applicable to all Kenneth J. Arrow sciences, with no exception. We attempted to trace the first step toward a third revolution in analysis in: Prolegomena 2 (Rugina, 2000); and in practice, Prolegomena 3 (Rugina, 2001). 4. The German language literature In this section, Laureate Arrow makes what in French is called “tours de force”, a compressed re´sume´ of the German literature in which he seems to be also very familiar. He begins with a description of Gustav Cassel, a well-known neoclassical Swedish economist in Europe with his Theoretische Sozialokonomie (Cassel, 1918). Let us heed Laureate Arrow’s words: The whole literature might be described as an extended commentary on a formulation of general equilibrium theory by Cassel (1918), a statement rather different in nature from that of Hicks. In particular, maximizing behavior hardly appeared in Cassell’s model. With regard to individual consumers, Cassel also assumed that the demand of individual households was a function of prices; he did not, however, seek to derive this demand from a preference or utility maximization. With regard to production, he assumed a fixed-coefficient technology, so that there was in effect no scope for profit maximization by firms; the demands for inputs were completely defined by the outputs, independent of prices (Le Prix Nobel, 1972, p. 218).

When I was myself a student at the University of Berlin, back in 1942, the sociologist, Carl Brinkman, who took the Chair of Werner Sombart, considered Cassel more an institutionalist than theoretician, a sort of bridge between old classical and the new modern classical economics initiated by Walras, Menger, Jevons and Marshall. When I arrived at the University of Freiburg i. Br. and started to work with Professor Walter Euckens, I saw that Carl Brinkman was right. The characterization of Laureate Arrow that the general economic theory by Cassel was “rather different in nature from that of Hicks” is more than correct. I would add only the explanation in one sentence why it was so. Cassel used in his reasoning classical logic, whereas Sir John Hicks labored in his thinking modern symbolic logic. Cassel may have not identified specifically “preference or utility maximization” but he definitely included “profit maximization”. The re´sume´ on the rest of German economists, includes at that time mathematical economists, like H. von Stackelberg (1933), H. Neisser (1932), K. Schlesinger (1933-1934), Abraham Wald (1933-1935). Wald’s reasoning – wrote Laureate Arrow – “was formidably complex”. His work was published in a German language mathematics journal. It was only some ten years later that American mathematical economists began to be aware of it. Then came the Hungarian mathematical economist, John von Neumann (1937) whose published paper “had in the longer run a deeper impact, though

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its subject matter was less relevant”. Why was it “less relevant” when von Neumann was a 100 percent convinced disciple of the new modern, mathematical logic? The only explanation I could abstract from the text is the further information given by Laureate Arrow – that von Neumann in this article was concerned with “a development of Cassel’s model of steady growth economy”. There was an open conflict between Cassel’s neoclassical stable equilibrium model (incomplete as it was) and the new Keynesian model of unstable equilibrium with unemployment. Later, moving to the USA, von Newmann concentrated on the Keynesian model and together with Morgenstern published the great book on Theory of Games and Economic Behavior (von Neumann and Morgenstern, 1944). Professor S. Kakutani developed a few years later (1941) the fixed point theorem as a simplification of von Neumann’s more complicated theorem. The common denominator was the fact that both were constructed with the help of modern, symbolic logic. According to Laureate Arrow, Kakutani’s theorem “became the standard tool for proving existence of theorems” (emphasis is ours), like the one included and discussed in this lecture. After more reflection, we came to the conclusion that Kakutani’s fixed point theorem, in terms of the integrated logic, was the same as our universal law of the natural parameter (NaPa) for any form of stable equilibrium matter (like the 92 primary elements in the Mendelyeev table) including the Walrasian concept of numeraire-currency (NaPaNu) (see Introduction, pp. 345-6). In our simultaneous equilibrium versus disequilibrium approach, the NaPaNu was used, and in general can be used, to prove not only the existence, but also the working of a general equilibrium system. It is the “constant” in Newtonian mechanics, transplanted in economics. 5. Pareto efficiency, competitive equilibrium, and convexity Let us hear first the voice of Laureate Arrow: My own interest first centered on the relations between Pareto efficiency and competitive equilibrium. In particular, there was considerable discussion among economists in the late 1940s about the inefficiencies resulting from rent control and different proposals for arriving at the efficiency benefits of a free market by one or another transition route. Part of the informal efficiency arguments hinged on the idea that under rent control people were buying the wrong kind of housing, say, excessively large apartments. It struck me that an individual bought only one kind of housing, not several. The individual optima were at corners, and therefore one could not equate marginal rates of substitution by going over to a free market. Yet diagrammatic analysis of simple cases suggested to me that the traditional identification of competitive equilibrium and Pareto efficiency was correct but could not be proved by the local techniques of the differential calculus (Le Prix Nobel, 1972, pp. 220-1).

What can we say more or new about the text above? First, “the relations between Pareto efficiency and competitive equilibrium” has to be judged in terms of two different models:

(1) the Walrasian model M1 or Marshallian M2 close to it, in their more Kenneth J. Arrow complete form; and (2) the Keynesian model M4 at the limit and around it which characterizes the empirical aspect of mixed, modern capitalist regime. Pareto’s optimum efficiency and fair and stable competitive equilibrium, beyond any doubt, exist both in theory and practice in the first two models M1 perfect at the limit and in M2 with a small but practically negligible differential. In the Keynesian model M4 and around which depicts the modern, mixed capitalist regime, Pareto’s optimum is not valid except sporadically and with distortions. Laureate Arrow as an empirical economist shares the Keynesian model M4, and indeed this was a correct diagnosis in the late 1940s. The rent control was supposed to ameliorate a system in disequilibrium, but the mixed free market was distorted and consequently there were inefficiencies resulting from the rent control. This evidently was not the right solution, if we apply as a standard of judgment model M1. Pareto’s optimum efficiency was not valid in the case of rent control. Economists were debating different proposals on how to benefit from a free market. This is the first paragraph. In the second paragraph the argument shifted to the idea that people were buying the wrong kind of housing, actually, excessively large apartments. If the people made a wrong decision in significant numbers, then that would mean that the confusion was a problem of the framework of the system which was mixed, unstable, if we use the first model and integrated logic. Laureate Arrow who used the second model and modern symbolic, formal logic, discarded the problem of the unstable institutional framework and instead he oriented his observation at the empirical fact that “an individual bought only one kind of housing, not several, which means that the competition was distorted, was in disequilibrium”. In the third paragraph, from a disequilibrium position of the capitalist system, he reasoned that “the individual optima were at corners’, (we add: not for all citizens but for some!) “and therefore one could not equate marginal rates of substitution by going over to a free market”. The reasoning is correct but only if we use modern, formal, mathematical logic – which he does! – and do not consider, or leave outside of the problem the quest for the objective substance, i.e. the real truth-content in the proposition. The free market and competition in this particular case (model) are in disequilibrium, distorted and no matter what we do, the solution to the problem remains indeterminate under the shade of Go¨del’s proof. We would like to make it clear that the reasoning of Laureate Arrow is correct formally, but the diagnosis in real terms is missing and therefore the solution is indeterminate, if we want to apply it in practice. In a way, Laureate Arrow in his own words also confirms a similar conclusion:

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I soon realized that the theory of convex sets, and, in particular, the separation theorem, was the appropriate tool. Start with a Pareto-efficient allocation [we add for more precision the Keynesian model M4!] and consider all logically possible allocations which would be preferred to it by every one. Of course, no such allocation can be feasible; otherwise the allocation we started with would not be Pareto efficient. Each such allocation is a statement of demand or supply of each commodity by each individual or firm. Hence, by adding up over individuals and firms, with appropriate attention to signs, we can define the excess demand for each commodity (Le Prix Nobel, 1972, p. 221).

If he would have started with a “Pareto-efficient allocation” in an explicitly identified Walrasian M1 or Marshallian M2 model in its complete formulation, then there is no further problem, because logically there would be possible no other allocation “which would be preferred to it”. Laureate Arrow started, to repeat, with the Keynesian model M4 where he put in Pareto’s optimum and that was or became a source of a conflict of a paradox. “Of course – in that model and using his own words – no such allocation can be feasible.” On this road and using modern, formal logic he comes to the result that “by adding up over individuals and firms . . . we can define the excess demand for each commodity”. But excess demand in all commodities, in a true Keynesian model or in a mixed, modern capitalist regime, is indeed a paradox. In an exquisite use of modern, mathematical logic, on the next page he reached the conclusion by saying: “We begin to see that a Pareto-efficient allocation is an equilibrium of supply and demand in the generalized sense which includes corners”. (p. 222). Just as an additional note, it seems to us that the introduction of “corner equilibria” within the context of general stable equilibrium in the Walrasian more complete formulation, is a strange element for which there is no room and no necessity for its presence. In the Keynesian model M4 of unstable equilibrium or in his vocabubulary “equilibrium with unemployment”, there is room for “corner equilibria” but its introduction by using modern, formal logic hides the truth that the solution to any problem in it is indeterminate. In fact, “corner equilibria” serve as a sort of “dummy variables” used to give equations formal mathematical consistency but not real truth-content in the objective sense of the term. 6. The existence of competitive equilibrium We give priority to Laureate Arrow. Here is his view: Again working independently and in ignorance of each other’s activities, Debreu and I both started applying Kakutani’s fixed point theorem to the problem of existence. In this case we exchanged manuscripts in sufficient time to realize our common efforts and also to realize the need for relaxing an excessively severe assumption we had both made (Arrow and Debreu, 1954). An essential precondition for our studies was the basic work of Tjalling Koopmans (1951) on the analysis of production in terms of activity analysis. In this he extended von Neumann’s

work into a systematic account of the production structure of the economy. He saw it as a set of activities, each of which could be operated at any level but with the overall levels constrained by initial resource limitations. The crucial novelty was the explicit statement of the assumptions which insured that the feasible set of outputs would be bounded for any finite set of initial resources. It turned that this limitation is a “global” property (Le Prix Nobel, 1972, p. 223).

Kenneth J. Arrow

About the same time, specifically right after 1956 when I participated at the First Congress of the International Economic Association in Rome and took the podium to criticize the first paper presented by Sir Dennis Robertson (see Hague, 1958, pp. 35-6), returning to the USA as a fresh US citizen, I decided to devote more time to methodology of science, in particular to the relationship between economics and natural, physical sciences. It is true that the participation in this congress was a turning point in my research, in particular the wise advice I received from Sir Dennis Robertson, Jacques Rueff from the Academie Franc¸aise, Gottfried Haberler, the first President of the IEA, Tullio Bagiotti, Editor of the Rivista Internazionale di Scienze Economiche and later Laureate Fr. von Hayek, Laureate Jan Tinbergen and the good friend Henri Guitton, President of the Academie des Sciences Morales et Politiques and also of the Academie des Sciences, Paris, who was the first to anticipate “La Troisie`me Revolution selon Rugina” in his last work, Le Sens de la Dure (Guitton, 1985, pp. 196-9). Studying for a while Albert Einstein’s and Newton’s contribution I was struck by the fact that in Newton the assumed “constant” and the force of gravitation were the basic elements of his theory, whereas in Einstein these were missing. I was not disturbed by this fact, because this explained the difference between the two great thinkers, that is, the difference between “absolute knowledge” (in the sense of Newton) and “relative knowledge” (in the sense of Einstein). Going to economics and armed with the concept of integrated logic, speaking methodologically, it was not difficult for me to see the same methodical difference between Walras and Keynes. Without knowing yet the works of Laureate Arrow, Debreu and Koopmans, by 1967 I called the Newtonian “constant” natural parameter, and in economics I introduced the concept of the “natural parameter of the numeraire-currency” (NaPaNu). Also by 1967 or 1968 I attended a lecture at Syracuse University given by Professor Lionel McKenzie on general equilibrium and he mentioned Hicks but no word on Walras. During the discussion at the end, I raised the point that without the assumption of the numeraire-currency there was no possibility for a general stable equilibrium, but he refused to discuss this issue. I knew that McKenzie had some sort of difficulties, that deserve to be clarified, using the text of Laureate Arrow. Kakutani’s fixed point theorem formally looks as it is similar to our naturalparameter of the numeraire-currency and that is true, up to a certain point. The term “formally” is decisive for the identification of that certain point.

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Indeed, the Kakutani fixed point theorem implies in reasoning the modern, formal, symbolic logic together with the Keynesian model M4 of unstable equilibrium or “equilibrium with unemployment” where the Go¨del proof is active and, therefore, the solution for competitive equilibrium in this environment is and remains “indeterminate” in the form of a paradox where “X” has two values: one positive and the other negative. The additional assumption of “corner equilibria” does not change the disequilibrium nature of the model. In turn, our theorem of a natural parameter of the numeraire-currency implies in reasoning the improved neoclassical integrated logic together with the concept of general stable equilibrium, an environment where the solution to the existence of competitive stable equilibrium and any other problem is determinate in the Walrasian and Marshallian sense. Laureate Arrow and Debreu followed the application of Kakutani’s theorem. They never used the term of stable equilibrium, and they were correct, according to their model of reasoning. But in using the Kakutani theorem and the modern, formal logic to solve the problem of the existence of general equilibrium (omitting the adjective “stable”), there was a high price to be paid: the Go¨del proof and an indeterminate solution. That is as far as we can go with the argument, logically and scientifically. Beyond this limit, there are personal views and beliefs which are outside of science. We are bypassing the reference to Tjalling Koopmans since he too received a Nobel Prize, and we shall return to his position. 7. General equilibrium and uncertainty Let us have first a few preliminary notions about uncertainty and both in social and natural sciences. In the economic science, the problem of risk and uncertainty was introduced systematically by Knight (1921) in his magnum opus: Risk, Uncertainty and Profit, and we quote him: The fundamental uncertainties of economic life are the errors in predicting the future and in making present adjustments to fit future conditions (Knight, 1921, p. 259). The ordinary decisions of life are made on the basis of estimates, of a crude and superficial character. In general the future situation in relation to which we act depends upon the behavior of an infinitely large number of objects, and is influenced by so many factors that no real effort is made to take account of them all, much less to estimate and summate their separate significances. It is in very special and crucial cases that anything like a mathematical (exhaustive and quantitative) study can be made (Knight, 1921, pp. 210-11).

Knight identified two categories of measurable uncertainties with probabilities of insurance and unmeasurable uncertainties to which he attributes the nature of “pure profit”. He is excluding the notion of “perfect equilibrium”, in the sense of general stable equilibrium, as being no longer possible. He mentioned the name of Walras only once in a footnote about mathematical economists on the

same page where he stressed a “growing tendency to repudiate abstraction and Kenneth J. Arrow deduction altogether, and insist upon a purely objective, descriptive science (Knight, 1921, p. 6). On more reflection about the presentation by Knight, one can draw the conclusion that the risk of uncertanity can be attributed to: . personal error or mistakes made by the entrepreneur or the individual 513 consumer; and . social, that is, collectivity-errors and mistakes brought about by the unstable, disequilibrium (strong or weak, minor or major) the very nature of the system or regime which cannot be corrected by the individual entrepreneur or consumer. This situation induces the entrepreneur to charge an extra, differential profit at the expense of the mass of consumers. In short, the uncertainty and risk in economic life originate in the existence of disequilibrium elements and forces. In principle as well as in practice, it is a problem of the unstable (partially or entirely) structure of the system and not a problem of adjustments within the system. In continuation, there is no sufficient evidence that Knight was aware of, or recognized, the fact that “risk” and “uncertainty” were running parallel, in the sense that “risk” implied “uncertainty” and vice versa. Lacking the concept of the orientation table he could not see that risk and uncertainty could be measured, in relative terms, from model M1 (stable equilibrium) to model M4 (unstable equilibrium), in the area of minor disequilibria of various degrees but not below, on the lower part of the table, in the territory of major disequilibria. We also have, speaking methodologically, the similar problem in the physical sciences of the relationship between “relativity” and “certainty” respectively, “uncertainty”. For this purpose, as in economics, we must see clearly the distinction between equilibrium (stable) and disequilibrium (unstable) form of elements and forces (Rugina, 2000). Looking at the orientation table on pp. 341, 345 in model M1, representing the Newtonian system reserved only for stable matter, to wit: the 92 elements on the Mendelyeev Periodic Table (1869), certainty 100 percent (absolute concept) and relativity (Einstein) ¼ 0. After that, relativity and uncertainty run parallel. Werner Heisenberg raised the problem of the relationship between “observer and object”, which actually is a problem of measurement: imperfect, relative as observed earlier by Einstein and even much earlier by Newton (1962, pp. 7-8). Let us hear the voice of Heisenberg (1930, pp. 2-3): In atomic physics, the concepts “clock” and “measuring rod” need no immediate consideration, for there is a large field of phenomena in which i/c is negligible. The concepts “space-time coincidence” and “observation”, on the other hand, do require a thorough revision. Particularly characteristic of the discussions to follow is the interaction between observer and object; in classical physical theories it has always been assumed either that this

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interaction is negligibly small, or else that its effect can be eliminated from the result by calculations based on “control” experiments. This assumption is not permissible in atomic physics; the interaction between observer and object causes uncontrollable and large changes in the system being observed, because of the discontinuous changes characteristic of atomic processes. The immediate consequence of this circumstance is that in general every experiment performed to determine some numerical quantity renders the knowledge of others illusory, since the uncontrollable perturbation of the observed system alters the values of previously determined quantities. If this perturbation be followed in its quantitative details, it appears that in many cases it is impossible to obtain an exact determination of the simultaneous values of two variables, but rather that there is a lower limit to the accuracy with which they can be known.

This is the essence of the Heisenberg Principle of Uncertainty. Is there anything new to be said that Heisenberg missed or failed to see? I think there is something new in the form of a clarification to give more scientific substance to the Heisenberg Principle of Uncertainty. The great Heisenberg failed to recognize what in my work I called the universal hypothesis of duality, which says that the physical universe in which we live, including human societies and economies are composed of stable (equilibrium) and unstable (disequilibrium) elements, particles and forces. In the second place, he did not identify the object of study by the classics, specifically stable (equilibrium) matter or the 92 elements in the Mandelyeev Periodic Table, whereas the object of study by the moderns starting with Mme Curie, Planck and evidently Einstein, shifted to the study of unstable (disequilibrium) matter in form of transuranic, radioactive elements which under very high temperature and pressure produce the phenomenon of “chain reaction” with accelerated conversion of one state of disequilibrium into another stated different from the previous one. In the end, it is not the simple “interaction between the observer and the object” which produces that “illusory knowledge” – as Heisenberg thought – but rather the nature, the very kind of the material used in the experimentation, specifically radioactive elements with the phenomenon of “chain reaction”. The Heisenberg Principle of Uncertainty has to be reformulated into the impossibility theorem in physics. It is not possible by definition, as a matter of principle to construct a general theory in physics by experimenting with unstable (disequilibrium) radioactive elements or particles. The great difficulty in this issue is the fact that if we put stable matter (element or particle) in a cyclotron then it is at once converted into unstable matter, ending with the same phenomenon of “chain reaction” and we solve nothing. What is the real structure of an atom of an apple remains a great secret of Mother Nature. It may be that inside of an atom of an apple we shall find the solar system in miniature with the same force of Newtonian gravity (also in miniature) holding an apple together, until a disequilibrium form of a worm or old age invades its natural integrity.

The classics and in the front-line Newton were right that the interaction Kenneth J. Arrow between observer and object does not represent a big deal. Every scientist who respects him/herself, and in particular great original thinkers, is very careful in his/her work to avoid personal feelings, and conduct, each one in his/her own way, sort of “control experiments”. The great French scientist Antoine-Laurent Lavoisier, who was killed by an imbecile radical during the French revolution 515 of 1789, was right with his law of conservation of matter, if only we add the prefix “stable”. Heisenberg exaggerated his observation. Why was such a long detour necessary? The credit should be given to Laureate Arrow. He raised this fundamental problem of the relationship between general equilibrium and uncertainty. It is the conviction of this author that there is a clear and systemic bridge between economics with the other social sisters and the physical, natural sciences, keeping in mind obviously the difference in the object of the study. We would like also to remind the reader of the difference between modern, formal, symbolic logic and the more recent version of a more integrated logic with the clarification of stable versus unstable equilibrium and the long distance between the position of the two models, according to the orientation table. Let us return to Laureate Arrow’s text. In this section he is changing the model a little bit in the sense of omitting ordinary competitive assumptions and replacing them by what he called “contingent commodities”, that are “promises to buy and sell a given commodity if and only if a certain state of the world occurs”. By a “state of the world” we have to understand, in his own words “a description of the world so precise that it completely defines all initial holdings of goods and all technological possibilities. Uncertainty is not knowing which state will in fact hold” (Le Prix Nobel, 1972, pp. 226-7). We enter now the hazardous territory of “real transactions” combined with “pure speculations”. Here is the voice of Laureate Arrow: One can work out the implications of this model. Clearly, the contingent commodities called for do not exist to the extent required, but the variety of securities available on modern markets serves as a partial substitute. In my own thinking the model of general equilibrium under uncertainty is as much a normative ideal as an empirical description. It is the way the actual world differs from the criteria of the model which suggests social policy to improve the efficiency with which risk-bearing is allocated (op. cit., p. 227).

This is the real picture of modern, mixed capitalist system viewed in terms of modern, formal, symbolic logic, which includes the form of propositions, but the real truth-content is left out, supposedly to give more freedom to the researcher. As long as he respects certain rules of the game, practically he can assume anything he or she wants. But there is a price to be paid in the finale, namely the Go¨del proof with an indeterminate solution.

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Figure 4. Supply and demand curves

In the actual world of the existing capitalist regime and using “integrated logic” there are two different categories of transactions running parallel on officially organized commodities, securities and foreign exchange markets. On the one hand, there are real, equilibrium type of transactions, where the seller has the item in question and the buyer really needs and wants to take possession of that item and of course pay the full amount. The whole operation can be expressed by Marshallian normal demand and supply curves as shown in Figure 4. At the point where the two curves are crossing we have equilibrium prices which create no problems and are beneficial to both traders and not less to the national economy. This is the notion of general stable equilibrium. Unfortunately, in the capitalist regime, at the same time and parallel there are nominal, artificial, disequilibrium-type of transactions when the seller does not possess the item in question and the buyer does not have any intention to acquire that item and pay the full price. Both are pure speculators. The seller thinks that the price of the respective item will go down and thus he put an order with a brokerage house to sell a certain quantity (usually large quantities) of that item, delivery in the future (later, in a day, a week or a month) with a provision to liquidate the contract and pay a commission to the broker. This is a pure speculator a` la baisse. Another pure speculator, on the contrary, thinks that the price of the item will go up and, consequently, puts an order to buy a certain quantity (usually a large quantity if he wants to make a lot of money), delivery in the future which can be even the same day, a few hours later. This is a pure speculator a` la hausse. There is no way to know exactly which was a real and which was a nominal, artificial, disequilibrium-type of transaction. But we know with certitude from experience that the volume of pure speculations is 1,000, 10,000, 100,000 or a million times larger than the quantity of real, equilibrium-type of transactions. If, or when, the pure speculators a` la hausse are stronger than the pure speculators a` la baisse, then the price of the item in question will rise, irrespective of the real conditions of the economy. If, however the pure speculators a` la baisse (the bears, in English) are stronger than the speculators

a` la hausse (the bulls), then the price of the item in question goes down, Kenneth J. Arrow irrespective of the real conditions of the economy. These artificial, disequilibrium price fluctuations in the system are covered up in the literature under the inoffensive term of “technical conditions” of the free market, which, in this particular case of pure speculations, is infected and perverted by disequilibrium effects, as we shall see right away. The confusion 517 in the profession goes so far that in the literature it is asserted that in this manner – through pure speculations – lies the best and surest method to attain pure competitive, equilibrium prices. In reality, nothing in the science of economics is further from the truth, when compared with this common assertion. But we would like to warn the reader that if or when modern, formal, symbolic logic is applied, then the assertion in question appears formally as being true. It is only when we use the new, more comprehensive integrated logic, that we can see the contradiction between “formal” and “integral” truth. With my limited mathematical background, I looked at the carefully drafted exposition of Laureate Arrow in regard to the subject of general equilibrium and uncertainty, as interpreted with the help of “contingent commodities” and markets (which, by the way, are pure speculations in future markets), and I could not find any “formal” contradiction. I accept that he is a master of modern logic. However, we may recall the famous aphorism “e pur si muove” by Galileo Galilei. Like all great, original thinkers, Laureate Arrow is telling, if not the whole truth, at least an essential part of it by indicating difficulties in working with the formal model of “contingent commodities”. Here is his own explanation: In fact, it is not a mere empirical accident that not all the contingent markets needed for efficiency exist but a necessary fact with deep implications for the workings and structure of economic institutions. Roughly speaking, information about particular events, even after they have occurred is not spread evenly throughout the population. Two people cannot enter into a contract contingent on the occurrence of a certain event or state if only one of them in fact will know that the event has occurred. A particular example of this is sometimes known as “moral hazard” in the insurance and economic literature (Le Prix Nobel, 1972, p. 227).

Nobel Laureate Werner Heisenberg was disturbed by difficulties associated with the phenomenon of “chain reaction” and with the help of modern, formal logic he invented the reason as being the interaction between “observer and object”. This appealed to other well-known scientists and was accepted by a large majority in the scientific world establishment. It became the famous Heisenberg’s Principle of Uncertainty. The name of the principle is all right, but the essence or the real truth-content by far was not true or better said, it was incomplete. The full truth resided in the unstable, disequilibrium nature of the material (object) used in the experiments. Laureate Arrow seems to have been puzzled by difficulties, as transpired in the above text. The difficulties were associated with the concept of contingent

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Figure 5. The behavior of pure speculators

commodities and markets. With the help of modern, formal logic, he introduced a new factor, respectively the need for adequate and full information. The need for proper and full information sounds to be reasonable, but what is the use of more information, when that information is already contaminated by disequilibrium traits, as pure speculations are. Some professional economists are not only confused, but they are also convinced that pure speculations are nothing but a harmless game such as one betting within a family or group of friends about the result of a horse or dog race. In this case one participant is gaining and another is losing and that is all there is to it. That is absolutely not the case with pure speculations on the officially organized markets on stock, commodities and foreign exchange. In individual, personal betting on a horse or dog, the operation does not change the price of a horse or dog. Betting on a stock, commodity or foreign exchange traded on official markets, in the aggregate influences directly the price of that certain item. Let us take a look at Figure 5 which shows the behavior of pure speculators expressed in the form of a diagram. The behavior of pure speculators can be expressed in terms of what may be called inverted, abnormal, non-Marshallian, disequilibrium type of curves. During a bull market the demand curve of speculative bets looks like a supply

curve with a positive slope whereas the supply curve of speculative bets looks Kenneth J. Arrow like a demand curve with a negative slope. The Wicksellian cumulative fluctuations, speaking methodologically, are similar to the phenomenon of chain reaction in nuclear physics. We are dealing here in fact with a version of an economic principle of uncertainty which leads to the formulation of a part of the impossibility 519 theorem in economics which says: that it is not possible by definition, as a matter of principle, to construct a general equilibrium theory in economics, as long as we allow unstable (disequilibrium) pure speculation in the system. It is true that Walras mentioned immediately after he formulated his law of general equilibrium with only two factors (pure competition and numeraire-currency) that “otherwise arbitrage transactions are required for the attainment of general equilibrium” (Walras, 1954, p. 173). However, Walras and the other classics by “arbitrage” understood real, equilibrium transactions, which are relatively small and do not carry the Wicksellian cumulative fluctuations. The same economic principle of uncertainty and implicitly the impossibility theorem in economics is valid also for money, banking the public budget and foreign exchange. In connection with the next section (8) and how perverse and extended are the effects of pure speculations, we give in continuation a list of socially most harmful effects: . Pure speculations initiate artificial, disequilibrium prices which in turn create confusion, difficulties, and inevitable errors in the decision making process. . The huge extra profits realized through pure speculations lead to a redistribution of national income and wealth at the expense of the large masses of the population who do not take part in playing the market. . A large amount of liquid funds are held aside by pure speculators in the financial institutions, depriving the national economy in this way of working or investing capital necessary to attain and maintain full employment. . Artificial prices lead also to the phenomenon of “forced”, negative savings by the large masses of consumers. (For more detail, we refer to Rugina (1998, 2001).) In conclusion to this section, uncertainty and pure speculations cannot be included in the general economic equilibrium but certainly in a treatise on economic disequilibrium. Laureate Arrow has a different opinion, even though with additional formal assumptions which are acceptable in terms of modern, mathematical logic. The same assumptions are not sufficient when we apply the new, more comprehensive integrated logic and that explains two different views on the same issue. We are grateful to Laureate Arrow that his

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presentation was challenging enough in order to give us a chance to express a different point of view. 8. The theory of social choice Laureate Arrow is continuing in this final section a kind of summation of the subject of general economic equilibrium within the larger framework of society and applying the same modern, formal logic. Let us listen first to his opinion: General competitive equilibrium above all teaches the extent to which a social allocation of resources can be achieved by independent private decisions coordinated through the market. We are assured indeed that not only can an allocation be achieved, but the result will be Pareto efficient. But, as has been stressed, there is nothing in the process which guarantees that the distribution be just. Indeed, the theory teaches us that the final allocation will depend on the distribution of initial supplies and of ownership of firms. If we want to rely on the virtues of the market but also to achieve a more just distribution, the theory suggests the strategy of changing the initial distribution rather than interfering with the allocation process at some later stage (Le Prix Nobel, 1972, p. 228).

What can we say about the text above? First, we must be clear about a distinction between pure theory, in the Walrasian sense but improved and complete M1 ¼ 100%ðCo þ NuÞ þ R1 (see the orientation table (Table I) in the Introduction, pp. 341, 345), and the empirical reality of the existing mixed, unstable capitalist regime (pure history), which is the Keynesian model M4 of unstable equilibrium. Paragraph (1) is perfectly true in model M1 but it is only half true, if we should specifically identify the mixed, unstable capitalist regime or in theory the Keynesian model M4. Paragraph (2) also is perfectly true in model M1 but, it is only half true in the existing mixed, capitalist regime. Only with specific identification of the capitalist regime is what Laureate Arrow said true – that “there is nothing in the process which guarantees that the distribution be just”. Otherwise, there could be a misinterpretation that the culprit was the neoclassical theory, which is not so. Paragraph (3) is true, but again, with specific reference to the capitalist regime which in turn requires a peaceful, systematic and democratic social reform to correct, as far as humanly possible, social inequities inherited by the living generation from the previous one (see Rugina, 2001, Ch.1) Paragraph (4): we agree completely with Laureate Arrow, which is exactly what we just said about the necessity of a peaceful, democratic social reform. Let us hear Laureate Arrow in continuation with the text of his Memorial Lecture when he said: Thus even under the assumptions most favorable to decentralization of decision-making, there is an irreducible need for a social or collective choice on distribution. In point of fact, there are a great many other situations in which the replacement of market by collective decision-making is necessary or at least desirable.

In their different ways, both political scientists and economists have discussed the necessary role of the state. Among economists, these discussions have revolved around the concepts of externalities, increasing returns, and market failure. The clarification and application of these ideas have been among the major achievements of modern economic thought, but I have time now merely to recall them to you as helping to create the need for normative and descriptive analysis of collective decision-making (op. cit., p. 228).

With reference to paragraph (1) and with all respect to Laureate Arrow, “the replacement of market by collective decision-making” is neither necessary nor desirable. Even in the case of modern, mixed capitalism the problem is not to abandon or separate distribution of goods or incomes from the production process but rather to clean the system of all disequilibrium elements and practices and instead introduce and preserve a true system of general stable equilibrium. Otherwise, we run the danger that cumulative unsolved problems may push under the backdoor a centrally-planned and controlled economy together with political dictatorship of the right, of the left or the center, a social evil much worse than the existing mixed capitalist regime. This social evil of political dictatorship has to be avoided by all means and under all circumstances. On this last point, we shall see immediately that Laureate Arrow is in agreement. The application of “externalities, increasing returns and the capitalist market failure”, mentioned in paragraph (2) cannot solve the complicated problem of general stable equilibrium. We do not need to learn more about “normative and descriptive analysis of collective decision-making”. The communist and fascist experiment of the twentieth century provided sufficient evidence about what it means in theory and in practice. A further question is, or may be, nagging the reader: “Why does Laureate Arrow think about ‘the need for normative and descriptive analysis of collective decision making’?” Of course, since he is alive he alone could give a complete answer. We can only venture to say that being a master of modern, formal logic he was, and perhaps still is, convinced that it is possible to separate production from distribution and on this path realize social justice for the many. That he is in favor of a free society and he is using modern, formal logic, is clear from the following text: In the context of social choice, each individual may be assumed to have a preference ordering over all possible social states. This ordering expresses not only his desire for his own consumption but also social attitudes, his views on justice in distribution or on benefits to others from collective decisions (Le Prix Nobel, 1972, p. 228).

On the next page he introduced a new concept which he called “constitution”, which is, in his own words, “a rule which associates to each possible set of individual preference orderings a social choice rule”. And in continuation, “a social choice rule, in turn, is a rule for selecting a socially preferred action out of

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any set of alternatives which may be feasible . . . The real question is what conditions are to be imposed on the constitution” (p. 229). This type of survey implies that every single citizen must prepare and make public his scale of preferences. How much would such a survey cost, and how to use it in order to render collective decisions of social choice is hard to imagine practically, if possible at all. Such matters do not count, however, if we use modern, formal logic. Laureate Arrow is giving four conditions for the constitution. Here they are: (1) collective rationality; (2) Pareto’s optimum; (3) non-dictatorship; and (4) independence of irrelevant alternatives. The theory of social choice is not yet finished. Laureate Arrow after he identified the four conditions, in the spirit of modern, formal logic raised another complication: To see what is at stake, suppose that a society has to make a choice among some alternatives and does so. After the decision is made, an alternative which has not previously been thought of is mentioned as a logical possibility, although it is still not feasible. The individuals can expand their preference orderings to place this new alternative in its place on their ranking; but should this preference information about an alternative which could not be chosen in any case affect the previous decision? . . . (Le Prix Nobel, 1972, p. 229).

Only modern, formal logic allows one to construct such complications. What is the final result of this most expensive and complex survey to discover the “constitution” which will provide an optimum social choice? Here is again Laureate Arrow speaking: It turns out that these four reasonable-sounding requirements are contradictory. That is, if we devise any constitution, then it is always possible to find a set of individual orderings which will cause the constitution to violate one of these conditions. In one special form, this paradox is old. The method of majority voting is an appealing method of social choice. Like any other voting method, it satisfies Independence of Irrelevant Alternatives and certainly the Pareto principle and the condition on Non-Dictatorship. But as Condorcet pointed out as far back as (1785), majority voting may not lead to an ordering. More specifically, intransitivity is possible (op.cit., pp. 229-30).

What can we say about the above text? In the first paragraph, it appears we may be approaching a sort of dead end, and dead end it is! Fortunately for the economic science there is a way to avoid the dead end. After all the dead end exists only if we apply unconditionally modern, formal, mathematical logic. However, if we apply the new, more comprehensive integrated logic, the paradox of the dead end disappears. If we apply the structural reforms indicated in Rugina (2001, pp. 19-48) in order to clean the existing modern, mixed capitalist regime of all basic disequilibrium elements and practices, then we arrive analytically and practically at a

system of general stable equilibrium, as envisioned by Leon Walras but in Kenneth J. Arrow a more complete version. In such a system, corresponding to model M1 on the orientation table (Introduction, pp. 341, 345), all four conditions that Laureate Arrow required for his “constitution” are fulfilled and there is no way to “find a set of individual orderings which will cause the constitution to violate one of these conditions”. 523 As to paragraphs (2) and (3) the “method of majority voting” is not necessary, if or when adequate structural reforms are completed to convert modern capitalism or socialism into a really free, just and stable economy and society. In that case the voice of a vast majority of the people is included daily in the production and distribution of goods and services and it does not cost anything. The invisible, but real, vote of the majority of consumers and producers, every single day, every hour of the day, is registered in no survey-book but in solving automatically and precisely, both the ordinal and cardinal problem of value, indicated in our earlier example of individual “X” and how quickly he decided how to spend his disposable income of US$5,000 salary for one month. Finally, Laureate Arrow gives the following example for consideration: There are three alternatives x, y, and z, among which choice is to be made. One-third of the voters have the ranking x, y, z; one third, the ranking of y, z, x; and one-third, the ranking, z, x, y. Then a majority of the voters prefer x to y, a majority prefer y to z and a majority prefer z to x. Unfortunately, this result is not due to a removable imperfection in the method of majority voting. The four conditions of social choice are mutually contradictory (op. cit., ibid.).

What more can be said about this text? If we use modern, formal logic, then we are stuck with a “mutually contradictory” situation. If we change to the new integrated logic, then we repeat the voting until there are only two alternatives and the paradox is solved. As a matter of fact, this is the way in practice the problem is solved today, just as it was solved in the past. In the finale, Laureate Arrow, like all great original thinkers, is confessing the truth about how he felt at the end of his struggle with a difficult and complex problem like the theory of social choice. Here is his confession: The philosophical and distributive implications of the paradox of social choice are still not clear. Certainly, there is no simple way out. I hope that others will take this paradox as a challenge rather than as a discouraging barrier (p. 230).

This author also may confess that it took him just half a century (1950-2000) of continuous research and observation of real economic, financial and social life in the USA and the rest of the world with one major concern: “Is there anything new in the economic science which was not said before and yet it has become now necessary and indispensable to solve so many important problems of our time?” This is why and how a new research program of a simultaneous

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equilibrium versus disequilibrium approach (methodology), initially was born at the University of Freiburg i. Br. in Germany where I was doing post-doctoral work with Professor Walter Eucken. The initial work was improved and completed on US soil after 1950 as a Romanian emigrant. With the help of the new research program and the new, more comprehensive integrated logic, I hope that I have given a positive answer, in the spirit of “challenge and response” by Arnold Toynbee (1934), to the many problems raised by Laureate Arrow and other Nobel Laureates, in particular, the “paradox of social choice”. A difference of opinion on our part should not be misinterpreted as a negation of the results achieved by Laureate Arrow. Instead, it should be properly interpreted as another possible answer in the spirit of Albert Einstein, that is, if we change the framework (model) to a significant degree, as we did, then the result obtained – both in pure analysis and applied science – also changes significantly. Indeed, Laureate Arrow used modern, formal, mathematical logic as inherited from Bertrand Russell with Alfred North Whitehead (Whitehead and Russell, 1910) and Wittgenstein (1922). This author instead used a new, improved version of old and new classical logic inherited from John Stuart Mill (1806-1873), Georg W. Friedrich Hegel (1770-1831), Immanuel Kant (1724-1804), Re´ne´ Descartes (1596-1650) going back to Aristotle (384-322BC ). The continuity in science through the new research program and in particular through the new version of integrated logic and not less through the application of the equation of unified knowledge S ¼ f ðA; PÞ (see Introduction, pp. 358-61), is not broken nor interrupted. On the contrary, the continuity in science is secured on a stronger basis by solving through the equation of unified knowledge the great argument of the twentieth century – the conflict between the classical and modern school of thought. Up to now, the modern school of thought was considered to be contradictory to the classical school. From now on we have the proof that the modern school is complementary to the classical school. Indeed, the crown of the classic thinkers is the study of the stable equilibrium of the physical and social universe, whereas the specific research in the study of unstable equilibrium and disequilibrium remains the crown of modern and contemporary thinkers. The peace between the two schools of thought means to open the door to the third peaceful revolution in economics and other social sisters. Since the economic profession is an old debtor to the physical, natural sciences, perhaps the time has come to pay back the old debt and invite the natural scientists, who actually are faced with the same basic problems of methodology, to cooperate for more clarification of the new methodology based on a simultaneous equilibrium versus disequilibrium approach and all other consequences for all sciences.

References

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Cassel, G. (1918), Theoretische Sozialokonomie. Guitton, H. (1985), Le Sens de la Duree, Calmann Levy, Paris. Hague, D.C. (1958), Stability and Progress in the World Economy, The First Congress of the International Economic Association, Rome. Heisenberg, W. (1930), The Physical Principles of the Quantum Theory, trans. by Eckart, C. and Hoyt, F.C., University of Chicago Press, Chicago, IL. Hicks, J. (1939), Value and Capital, Oxford University Press, Oxford. Hicks, J.R. (1937), “Mr Keynes and the classics: a suggested interpretation”, Econometrica, Vol. 5. Hoyle, F. (1950), The Nature of the Universe, Harper Bros, New York, NY. Ionesco, E. (1960), Rhinoceros. A Play in Three Acts, trans. by Prouse, D., Samuel French, London. Kant, I. (1793), “Uber den Gemeinspruch: Das mag in der Theorie Leichtig sein, taugt aber nicht fu¨r die Praxis”, Berlinische Monatschrift, Vol. 2, pp. S.201-84. Knight, F.H. (1921), Risk, Uncertainty and Profit, Hart, Schaffner & Marx, Boston, MA. Marshall, A. (1952), Principles of Economics, 8th ed. (originally published in 1890), Macmillan, New York, NY. Newton, I. (1962), Philosophiae Naturalis Principia Mathematica, Vol. 1 (originally published in 1686), trans. by Cajori, F., University of California Press, Berkeley, CA. Pareto, V. (1961), Corso di Economia Politica (originally published in 1896), Editore Boringhieri, Torino, Vol. 1. Quesnay, F. (1758), Tableau Oeconomique. Rugina, A. (1998), Prolegomena 1: To any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), International Journal of Social Economics, Vol. 25 No. 5. Rugina, A., (2000), Prolegomena 2: To Any Future Study in “Integrated Logic”, and a More Comprehensive Methodology for a Unification of all Sciences, Natural and Social (monograph), International Journal of Social Economics, Vol. 27 No. 5/6, Ch. 2, pp. 75-149. Rugina, A. (2000), “The concept of social and economic justice: why are we not successful in analysis and practice?”, Rivista Internazionale di Scienze Economiche e Commerciali, XLVII No. 2. Rugina, A. (2001), Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary, Financial and Social Stabilization Plans (monograph), International Journal of Social Economics, Vol. 28 No. 1/2. Samuelson, P.A. (1947), Foundations of Economic Analysis, Harvard University Press, Cambridge, MA. Samuelson, P.A. (1983), Foundations of Economic Analysis, 2nd ed., Harvard University Press, Cambridge, MA. Schumpeter, J.A. (1954), History of Economic Analysis, George Allen and Unwin, London. Smith, A. (1937), An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan Edition, (originally published in 1776), The Modern Library, New York, NY.

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von Neumann, J. and Morgenstern, O. (1944), Theory of Games and Economic Behavior, Princeton University Press, Princeton, NJ. Walras, L. (1954), Elements of Pure Economics or the Theory of Social Wealth (originally published in 1874), trans. by Jaffe, W., Richard D. Irwin, Homewood, IL. Whitehead, A.N. and Russell, B. (1910), Principia Mathematica, Cambridge University Press, Cambridge. Wittgenstein, L. (1922), Tractatus Logico-Philosophicus (originally published in 1921), trans. by Pears, D.F. and McGuiness, B.F., Routledge and Kegan Paul, London.

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6. Nobel Laureate Sir John R. Hicks (1904-1989)

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Nobel Memorial Lecture, April 27, 1973 Introduction by Professor Ragnar Bentzel of the Royal Academy of Sciences Professor Bentzel began his introduction as follows: In a couple of years, we shall be able to celebrate the centenary of a remarkable event in the history of economic science. In 1874, the French economist Leon Walras made an extremely important contribution to economic thought by constructing a theory to explain the basic features in the economic mechanism which determine what quantities of different commodities will be produced in a country, what prices will prevail and how the incomes will be distributed between different groups in the community. This theory was presented in the form of a large system of equations, which was intended to illustrate the extensive network of relationships linking together different parts of the economy and creating a mutual interdependence between all the different prices, quantities of commodities and incomes. This theory laid the foundations of one of the most important structures in economic science – the general equilibrium theory. Its purpose is precisely to elucidate the mutual relations between different phenomena in an economy, in order thereby to create a basis for conclusions concerning prices, production structure, income distribution, etc. (Le Prix Nobel, 1972, p. 202).

Outside of Schumpeter, I never read such an objective and enlightening characterization of Walras’ contribution in the economic science. Joseph A. Schumpeter, another economist who, like Lord Keynes, did not live long enough to receive a Nobel prize, considered Walras to be the greatest of all economists. Here is the voice of Schumpeter: As has been emphasized before, economics is a big omnibus which contains many passengers of incommensurable interests and abilities. However, as far as pure theory is concerned, Walras is in my opinion the greatest of all. His system of economic equilibrium, uniting, as it does, the quality of “revolutionary” creativeness with the quality of classic synthesis, is the only work by an economist that will stand comparison with the achievements of theoretical physics (Schumpeter, 1954, p. 827).

Professor Bentzel in turn had added a different evaluation: Walras’ theory was later developed by many economists, including the Swede Gustav Cassel. However, up to the 1930s, the equations of the systems were formulated in such general terms that the analytical possibilities were strongly limited. The analysis was focused on formal conditions of consistency (Le Prix Nobel, 1972, p. 202).

A correction is necessary at this point. It is not quite true that up to the 1930s, “the equations of the system” as inherited from Walras “were formulated in such general terms that the analytical possibilities were strongly limited”. The

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Walrasian system was formulated in very precise terms: pure competition as a powerful force, methodologically speaking, similar to the force of gravitation in the Newtonian system, together with numeraire-currency, as a natural parameter equal to the “constant” in the physical universe. The Walrasian system was not complete. The great Walras missed including the third basic element, or factor “R”, being the institutional and legal framework consistent with the first two items, both in analysis and in practice (see: the universal law of consistency, in Introduction, pp. 346-7). By introducing factor “R” in the Walrasian system, the reasoning given by him is perfectly correct, as far as it was developed. The analytical possibilities were not “strongly limited” but on the contrary, they were open for further research and new possibilities. Professor Bentzel’s interpretation is open for discussion. At the time when Walras conceived and formulated the law of general equilibrium, classical logic dominated the spirit of the time. And classical – new and old – logic required “real conditions of consistency” in propositions. By the 1930s the spirit of the time had changed. A different type of logic, specifically modern, formal, symbolic logic was rising and in fact already dominated also the economic science. Bentzel’s view was in the spirit of the 1930s when economic analysis shifted from the use of classic logic to the modern, formal symbolic logic and not in the Walrasian system. That, however, changes the argument completely. There was nothing wrong in Walras in terms of pure theory, as Schumpeter already stressed, except the lack of a liaison with the actual, existing realities of a mixed combination or factor “R” which separates the equilibrium from disequilibrium elements, in analysis as well as in practice. The anti-classic spirit, however, during the twentieth century emerged earlier through the book of Knight (1921), Risk,Uncertainty and Profit and the article by Sraffa (1926): “The laws of returns under competitive conditions” which was directed against the classical school instead of mixed modern capitalism.

Biography Hicks was born in 1904 at Warwick, England; his father was a journalist. He studied at Clifton College (1917-1922) and at Balliol College, Oxford (1922-1926). His education, as he indicated, was financed by mathematical scholarships. “I was a mathematical specialist”, he said of his first year at Oxford. He was granted a lectureship at the London School of Economics, where Lionel Robbins was restructuring the Department of Economics. It was here that he met in addition to Robbins also Friedrich von Hayek, Roy Allen, Nicholas Kaldor, Abba Lerner, Richard Sayers and Ursula Webb, whom he married in 1935.

In 1935 he left London School of Economics and moved to a lectureship at University of Cambridge, where he wrote his Value and Capital (Hicks, 1939), based on the work done in London. From 1938 to 1946 he was Professor at the University of Manchester. This was the place where he completed his work on welfare economics and its application to social accounting. In 1946, he returned to Oxford as a Research Fellow of Nuffield College (1946-1952), Drummond Full Professor of Political Economy (1952-1965) and later as a Research Fellow at All Souls College (19651971). Sir John Hicks made contributions in several branches of theoretical economics, money, foreign trade, growth and business fluctuations. He was elected Fellow of the British Academy in 1942 and of the Royal Swedish Academy in 1948. He was President of the Royal Economic Society 1960-1962 and was knighted in 1964. He was an Honorary Doctor of several British universities and in 1971 an Honorary Senator of the University of Vienna. The mainspring of economic growth He began his Memorial Lecture with reference to an older book. He expounds as follows: In my Theory of Wages, first published in 1932, there is a chapter (VI) entitled “Distribution and economic progress”. It was the first to be written of the theoretical chapters in that book; so it is in a sense the first of my contribution to economic theory. I do not think much of it now; I think that I have learned a good deal since I wrote it. It has nevertheless had a considerable progeny. Work that is based upon it, or on other constructions of the same character, continues to appear; so it is far from being dead. Yet I myself moved away. It may be useful to take this opportunity of explaining how this has happened. It is not inappropriate to do so, since in doing so I shall describe what seems to me to be an important part of the work I have done, in all the time from 1932 to the present (Le Prix Nobel, 1972, p. 235).

There is nothing unusual in this introduction. All original thinkers start with some supposedly new idea, concept, theorem or observation. So did also Sir John Hicks. The initial subject of theory in his book, The Theory of Wages (Hicks, 1932), corresponded with the spirit of the time. The Great Depression was in the third year and there was need to deal with this unique financial and economic crisis. It was unique by the fact that actually there was not one strong recession (1929) but also a second recession (1931) which followed one after the other. No surprise that the young J.R. Hicks, in his first book considered in retrospect Ch. VI, “Distribution and economic progress”, as the “first of my contributions to economic theory”. He was by now (1973) almost 70 years old, and the confession of his view regarding his contribution is not unexpected: “I do not think much of it now; I think that I have learned a good deal since I wrote it”. And yet, he considered that the first book “had a considerable progeny”, and that it was “far from being dead”.

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Reminiscences of all his struggles with economic problems during a period of four decades, obliged him to add immediately: “Yet, I myself have moved away”, and the rest of the lecture is about a description in his own language on “what seems to me to be an important part of the work I have done, in all the time from 1932 to the present”.

530 1. The economic science and two types of logic: consequences Let us hear how Sir John Hicks described the beginning of his research program: It was characteristic of that approach, from which I began, that it treated the Social Product as being made by the two Factors of Production, Labour and Capital: the services of Labour and the services of Capital contributing to the Product in much the same way. An increase in the amount of either Factor that was applied would increase the Product, other things being equal. With given amounts of Factors applied, there would be a Production Function (as it later came to be called) representing Quantity of Product as a Function of Quantities of Factors applied. The return, per unit, to each Factor was equal to its Marginal Product, which diminished as the amount applied of that Factor increased, the amount of the other remaining constant. It followed at once that an increase in the quantity applied of one Factor (that of the other remaining unchanged) would increase the absolute share of the Product going to the other Factor; but since the absolute share of the increasing Factor might be either increased or diminished (according as its Marginal Productivity curve was elastic or inelastic) the distribution of the Product between the Factors (relative shares) might be shifted either way. Which way it went would depend upon the “shape” of the Production Function, a “shape” could be represented, as I showed, by what I called the “elasticity of substitution” (Le Prix Nobel, 1972, p. 235).

What can we say about the text above? Up to a certain point it looks as if Sir John Hicks was following or describing the Walrasian system with the marginal productivity of the factors of production and the marginal utilities of commodities and services traded. Such an interpretation does not hold too long. If we assume, as Walras did, that the prices are expressed in terms of “numeraire-currency”, then the marginal productivity of each and all factors of production (not just two factors as assumed by Sir John!) is and must be equal to the marginal utility in consumption of commodities and services by individual persons with a limited amount of disposable income. The production and the consumption process and curves have to be symmetrical, otherwise, the conditions of general stable equilibrium are not fulfilled. Walras was a master of reasoning in terms of general stable equilibrium, even though his model M1 was not quite complete, according to the orientation table (Introduction, pp. 341, 345). This was the classic spirit in Walras and the use of integrated logic (Introduction, pp. 337-8). Sir John Hicks shared the modern spirit of reasoning in terms of unstable equilibrium and disequilibrium conditions in the sense of the Keynesian model M4, or (unstable) equilibrium with unemployment. Hicks also used the modern,

formal, symbolic logic as inherited from Whitehead and Russell (1910) and Wittgenstein (1922). In the text above, the social product is assumed to be determined by two factors (labour and capital). This is only formally, when using modern logic, but in reality and using integrated logic the social product is determined by five factors: nature, labour, capital, management and social organization (government). When Sir John introduced the assumption that the productivity curve was either elastic or inelastic and that “the distribution of the Product between Factors (relative shares) might be shifted either way”, his model was no longer consistent, and left the territory of the Walrasian system of stable equilibrium. It corresponds to our model M4 of unstable equilibrium where we deal with a problem of a paradox of “as if” the equilibrium were stable but in fact or actually it is not; it is unstable. The solution for “X” (the unknown) in the equation is either positive or negative, but not both. This is the case of the Keynesian model M4 where the Go¨del proof applies (Go¨del, 1931). In the integrated logic, not only the form, but also the real truth-content is included; in the above case the productivity curve is elastic up to a certain point where there is a determinate solution. Beyond that point there is also a determinate solution for the inelastic part. In other words, each factor of production has its own elasticity or inelasticity in practice, which actually is utility and substitution. Substitution, always requires two factors A and B or X and Y. Otherwise, it has no meaning, or little sense if we assume only one factor or more than two factors. How much labour can we substitute for natural resources, voluntary savings as a source of capital formation, social organization or foreign trade? In real economic and social life the concept of “substitution” has relatively little application. Yet, in his principal contribution, Value and Capital (Hicks, 1939), Sir John Hicks does his reasoning only with two factors A and B or X and Y. One important point to be mentioned is the technique used in his research, of walking around difficulties or what he called “roundabout methods”. Here are his own words: Roundabout methods, it has been said, are sometimes more productive than direct methods; it is perhaps fitting that we should discuss the theory of capital in a setting which illustrates that famous principle (Hicks, 1939, p. 5).

The second important point to remember is a continuation of the first one just mentioned. Laureate Hicks through the use of “roundabout methods” was trying to avoid disequilibrium difficulties. But by applying also modern, formal, symbolic logic through his technique he could not escape the consequences of the Go¨del proof. Indeed, as we shall see following his exposition, his solutions are and remain indeterminate – meaning, exposed to

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the paradox of “formally undecidable” propositions in the sense of Go¨del (1962). On the other hand, the Go¨del proof does not apply to the improved neoclassical, integrated logic and the Walrasian or Marshallian system of thought, where the solutions are determinate in general. In modern times, among others, Hegel stressed the close relationship between form and real content of propositions. Here is the voice of Hegel: The essential point to keep in mind about the opposition between Form and Content is that the Content is not formless, but has the form in its own-self, quite as much as the form is external to it (Mure, 1975, p. 189).

The whole Hegelian logic is constructed on the classical premise that Form and Content of propositions are united. The well-known identity I ¼ I, Hegel divided into two different versions: one he called bare, abstract, mathematical identity, which has only form, and the other he called “true-identity”, which has also real content. The message of the neoclassical logic, as expressed in Hegel is very clear, when he wrote in the same place: So again, in connection with thought, the main thing is not to confuse the true-identity which contains Being and its characteristics ideally transfigured in it with an abstract identity, identity of bare form (op. cit., p. 168).

Sir John Hicks, however, did not follow the neoclassical logic inherited from Hegel and Kant. Instead of classic, he applied the new, modern, symbolic logic inherited from Whitehead and Russell (1910), where only the form of propositions is used and the real-content of truth is left out. There follows Whitehead and Russell’s (1910, p. 39, author’s emphasis) words: It would seem, however, that the essential characteristic of a function is ambiguity. Take, for example, the law of identity in the form of “A is A”, which is the form in which it is usually enunciated. It is plain that, regarded psychologically, we have here a single judgment. But what are we to say of the object of the judgment? We are not judging that Socrates is Socrates, nor that Plato is Plato, nor any other of the definite judgments that are instances of the law of identity. Yet each of these judgments is, in a sense, within the scope of our judgment. We are in fact judging an ambiguous instance of the propositional function “A is A.” We appear to have a single thought which does not have a definite object, but has as its object an undetermined one of the values of the function “A is A.” It is this kind of ambiguity that constitutes the essence of a function.

“Ambiguity” is a characteristic of model M4 on our orientation table (Introduction, pp. 341-345), which is unstable equilibrium in all sciences, including logic. Another master logician, Wittgenstein (1922), with his Tractatus Logico-Philosophicus, strengthened the Russell contribution and influence. In the early 1930s both John R. Hicks and John Maynard Keynes adopted the new modern, formal, symbolic logic; Hicks with inclination toward mathematical version inherited from Russell and Keynes toward symbolic logic directed by Wittgenstein. In the citation for receiving the Nobel Prize, Professor Ragnar Bentzel mentioned the “extremely important contribution” of Walras’s theory of

general equilibrium. “However”, wrote Professor Bentzel in continuitation “up to the 1930s, the equations of the system were formulated in such general terms that the analytical possibilities were strongly limited. The analysis was focused on formal conditions of consistency. When in 1939 John Hicks published his book Value and Capital, he breathed fresh life into general equilibrium theory. He constructed a complete equilibrium model . . .”. This characterization is not quite true, or at least is open for debate. The Walrasian system as a model is composed of three pillars: (1) pure competition as a force comparable with the gravitation in Newton; (2) numeraire-currency as a constant magnitude which is holding the system together; and (3) factor “R”, a suitable institutional and legal framework, consistent with the other two basic, elements. It is true that Sir John Hicks paid a tribute in several places in his book Value and Capital, to Leon Walras. But right in Ch. 1 he dispensed of a principal element of the Walrasian system, respectively, the marginal utility concept as a major foundation in the theory of value. Hicks replaced the concept of marginal utility with that of marginal rate of substitution between two commodities or two factors of production, X and Y empty symbols. Thus, he leaves out the problem of what really determines the value of other real, empirical commodities or factors. In continuation, Hicks also disposes of the concept of “numeraire-currency” as the second pillar of stable equilibrium and instead he uses the Keynesian concept of “money of account”, actually, paper money and monetized bank credit. The marginal rate of substitution, by definition cannot replace the concept of marginal utility which is applicable for each commodity, service or factor of production with very few exceptions. In the end the problem of value remains unanswered, indeterminate or in ambiguity (Russell). Indeed, in the Hicksian system of thought there is no place for Walras. Sir John Hicks constructed a new model to further explain the Keynesian “New Economics”, by using a walk around difficulties, i.e. his “roundabout method”. In short what Sir John Hicks attempted to do was not to complete the Walrasian theory of general stable equilibrium but rather to bring about a new theory of general unstable equilibrium, as represented by model M4 on our orientation table, or what Keynes identified as “equilibrium with unemployment”, a formula which does not and cannot exist in analysis or practice unless we add the prefix of “unstable”. In order to avoid any misunderstanding for the rest of discussion of his Nobel Lecture and his contribution to economics as a science, which nobody can take away from him and in addition because this author had the privilege to know him personally, the reader must be aware of the fact that this long

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detour and others do not represent a conflict between two scientists but rather a very objective and deep argument between two different types of logic and methodology. This argument is impeding us to resolve properly and fully the many big problems of our time, both in pure analysis as well as in practice. We could bet that not even one in a million of citizens on the entire globe share a proper vision that the roots of our impediment to solve properly and fully the cumulative problems of our time lies not directly in the empirical, existing disequilibrium condition which are spread at the global level. The true reason lies in the way we do our reasoning, in other words, in the type of logic and methodology we are applying and evaluating our thinking and our actions, both in theory and in practice. 2. A new technology, the production process and the social product Let us hear first the voice of Sir John Hicks: It was not supposed that the Production Function would remain unchanged over time; it would be shifted by the discovery of new techniques – that is to say, by invention. Inventions, so Wicksell appeared to have shown (and I followed him), would not be adopted unless they raised the Social Product; but the shifts in the production function, due to invention, might be “neutral”, as far as distribution between the Factors was concerned, or might be biased either way. It seemed to me that rises in wages (rises, that is, in the share of the Product going to Labour per unit of Labour) would encourage the adoption of inventions which economized in Labour and so were biased against labour; but whether such “induced inventions” were to be regarded as shifts in the Production Function, or as substitutions within an unchanged Production Function, was left rather obscure (Le Prix Nobel, 1972, pp. 235-6).

What can we say about the text above? The first paragraph introduces the time element, that is, dynamic analysis which is consistent with the change in the production function. In the second paragraph the Wicksell view is also correct, because he used classical logic. Sir John Hicks, on his part, using modern, formal logic, introduced a new nonclassical assumption, namely, a disequilibrium clause that “the shifts in the production function due to invention, might be neutral” in point of distribution between the two factors, or might be biased either, way. The Hicksian new assumptions are pushing aside the Wicksellian correct statement. A “neutral” distribution in a dynamic system with “induced inventions” or which “might be biased either way” (for good or bad, regarding factor labour) lead to a much more complicated model where the final solution is a paradox of the “as if” or “either . . . or”-type. This is the characterization of model M4 of unstable equilibrium or “equilibrium with unemployment”, using Keynesian terminology. Hicks, in continuation, has a problem with the production function of how to quantify or, more precisely, how to introduce some sort of uniformity in the quantification of social product, labour and capital which he identifies as “physical capital goods”. The crucial problem, in his view, is that of “physical capital goods”. Let us have first his voice:

For none of the three is the reduction (to some kind of uniformity) a simple matter; it cannot be solved, even in the case labour, by counting heads or by counting man-hours. Capital, here, must mean physical capital goods; it is an aggregate of physical goods which we have to represent by a single quantity. As is now well known (but was not so well known in 1932) there are just two cases in which this can be done without error without any error, that is, for it is not denied that if either case is approached, without being actually reached, the error may be tolerable. One is the obvious case in which all components change proportionately; the other – which I myself may claim to have clarified in 1939 – is that in which the price-ratios between the goods, or their marginal rates of substitution, remain constant (Le Prix Nobel, 1972, p. 236).

Only when modern, formal logic is used, the assumptions can be changed more easily and therefore also the model, without concern whether the change in question is consistent with the nature of a problem and implicitly of the overall system of five (not two!) factors of production. Now by assuming that “the price-ratios and the marginal rates of substitution remain constant”, this means as if we were in a state of equilibrium but in reality we are not in a stable but rather unstable equilibrium, in the sense of Keynes: equilibrium with unemployment. The instability of the Hicksian model can be seen on the next page of his lecture (p. 237) where he said: If capital increases relatively to labour, other things being equal (so the Production Function theory appears to tell us) the marginal product of capital must fall, so the rate of return on capital must fall. But a fall in the rate of return on capital carries with it a fall in the rate of (real) interest, as a result of which the capitalised values of different goods (goods of different durability, for instance) must change disproportionately. So the marginal rates of substitution between them cannot be kept constant. The constant-price condition cannot be maintained; it involves a contradiction.

This is supposed to be a criticism of the classical theory, but based on the application of modern, formal logic. However, if we apply the improved, neoclassical integrated logic (Introduction, pp. 337-8) attached to the more complete Walrasian system (model M1 on the orientation table) the situation and the result change radically. The concept of capital in the Hicksian model is not clarified enough. He takes an intermediary form that represents “physical capital goods” which better suited his concept of “substitution”. The initial form of capital lies in a fund of consumer goods reserved for future production. But in a modern economy and society capital appears in the form of money. The problem of capital formation in a modern economy appears as a central issue, depending on what kind of money is used as a monetary standard. In the Walrasian system or model M1, money is 100 percent covered numeraire, and therefore, “money capital” and “real capital” in the form of “physical capital goods” are the same. For the same reason “money prices” are equal to “real prices”, and in continuation “money interest” and “real interest” or “money wages” and “real wages or “money rent” and “real rent” and not less “money

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profit” and “real profit”, “money taxes” and “real taxes” and finally “money foreign exchange” and “real foreign exchange”, including all other data in a national or international economy, are equal to each other as a matter of fact and principle. Consequently, all the difficulties and contradictions that Sir John Hicks encountered, in the Walrasian system do not and cannot exist. All that Laureate Hicks back in the 1930s needed to do, in view of the fact that he was knowledgeable of the Walrasian system, was to re-examine in a positive critical manner the heritage left by Walras and discover the missing third basic element in the system, respectively, a stable institutional and legal framework or factor “R” as designated by this author. That was the really great challenge of the 1930s. He would have discovered that modern technology could have been financed only through free, voluntary savings, and the final result would have been technological progress without social, economic and financial problems. This was the old and new classical road for the realization of a system of general stable equilibrium in order to solve the Great Depression of the 1930s and make impossible its revival in the future. Unfortunately, Hicks did not follow the Walrasian model M1 of general stable equilibrium (unfinished as it was), even though he started with Walras, Bohm-Bawerk and Wicksell, all classics. Instead he shifted to a new road in the economic science opened by John Maynard Keynes and identified by this author with the help of the orientation table as being model M4, located far away from the Walrasian model. It is the territory of unstable equilibrium or “equilibrium with unemployment”, using Keynesian terminology. This is a man-made, managed economic order with neo-mercantilist roots, guided by politicians with advice of professional economists. The prototype is the mixed, modern capitalist regime where the solution to any problem is indeterminate, in the sense that formally it appears “as if” it were equilibrium, but in fact it is “unstable equilibrium”. Why did Hicks take this road which appears to be much more complicated in comparison with the Walrasian road? Only he could answer this question, but he is no longer alive. We theorize that it was the friendship with Keynes and the spirit of the time which started to be dominated by the new modern, symbolic logic. 3. The intellectual friendship between Hicks and Keynes There was a true friendship between the two scientists. The strong personality of Keynes dominated a larger circle of intellectuals beyond the well-known Bloomsbury Group. The confusion of the Great Depression and the lack of new, better ideas by the living generation of classics was in favor of Keynes with his new ideas. The younger Hicks inevitably could not escape the attractive spirit of the time so favorable to Keynes. Here is the voice of Laureate Hicks with reference to his book, The Theory of Wages,one year (1933) after it was published:

I discovered a head-on collision between what I was saying and the “New Economics” which even then, three years before the General Theory,was already beginning to be the Economics of Keynes. When I wrote the Theory of Wages, I was completely innocent of these ideas; I had scarcely a notion of what was going on at Cambridge, or for that matter in Sweden. But hardly had my book left my hands when I began to move in that direction myself (Le Prix Nobel, 1972, p. 238).

Laureate Hicks was so deeply impressed by the new economics of Keynes that by 1933-1935 when he reached the new point of view, he “realised (too late) how inappropriate was” what he wrote in the Theory of Wages about unemployment. The primary thesis he advanced in his 1932 book was based on the assumption that “Trade Unions, or Government wage-fixers, can raise ‘real wages’”. Keynes and his followers, on the other hand, denied the Hicksian position, on the ground that Trade Unions were concerned with money wages and not real wages. There was a merry-go-round with this argument because actually in both cases, we have to deal with a system in disequilibrium (mixed, modern capitalism) and the solution offered was also a disequilibrium one. In the Keynesian diagnosis the unemployment is identified as the inelasticity in the money supply, whereas in the Hicksian case unemployment is supposed to be initiated by inelasticity in the behavior of the Trade Unions. There is no determinate solution in either case. We have a problem not of adjustment within the system but rather a more complicated problem of the internal structure of the system which produced involuntary unemployment. There are two sides of the same model M4 on the orientation table. Laureate Hicks had no way out but to accept here a dilemma in his following question: “Is the resulting unemployment due to the monetary constraint, or to the wage-push (inflation) which led to the monetary constraint being imposed?” (p. 238). His answer was: “One can look at the matter either way, but it can well be argued that the latter way is more fundamental”. On the next page, Hicks mentioned the case of normal growth or “the healthy growth, of an economy”, which cannot be anything else but the Walrasian system of general stable equilibrium in practice. With the additional clarification, it is correct to say – as Hicks does – “In healthy growth real wages should be rising”. The next statement, however, is open for debate, when he wrote: My 1932 analysis was concerned with rises in wages off the normal path; but the rises that are on the normal path should have similar effects, though they will not include the causation of unemployment. Rather similar methods should be usable for their analysis; it should deepen our understanding of the growth process in general (op. cit., p. 239).

We can say at this point that the rise of real wages in the case of normal, healthy economy (under general stable equilibrium) cannot be mixed or considered to be similar to that “off the normal path” which belongs to a

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different model or system under disequilibrium conditions. That would be a clear methodological mistake, if we use the new, more complete integrated logic. We are afraid, however, that Laureate Hicks may run into a methodological trap by using the modern, formal logic when he said that “similar methods should be usable”, in both cases – normal, healthy growth (stable equilibrium) and “off the normal path” (disequilibrium or unstable equilibrium). (For more detail see: the impossibility theorem in analysis in the Introduction, pp. 349-53.) Hicks, on the contrary, thought that this blending of two different models and methods “should deepen our understanding of the growth process in general”. Here is his own voice: This is the aspect in which I have lately been mainly interested. I will try to sketch some of the results I seem to have been reaching. This will be the subject of the rest of this lecture (Le Prix Nobel, 1972, p. 239).

Let us hold on the distinction he made between “normal, healthy growth” (stable equilibrium) and “off the normal path” (unstable equilibrium). Hicks begins the next paragraph as follows: A rise in real wages, however caused, tends in itself to diminish the real rate of profit. This has two effects which work, in a sense, in opposite directions. One is to encourage the substitution of what are usually more capital-intensive methods; the other, because of the transfer of income from profits to wages, is to diminish “savings” (op. cit., ibid.).

In his model of unstable equilibrium (mixed modern capitalism or socialism) this may be or may not be true formally. If there are some monopolies on the business side, then the prices may be raised more than the rise in real wages. In that case the rate of profit and of savings may not decline as it does when “off the normal path”. In the case of “normal, healthy growth” a rise in real wages can take place when there is an increase in productivity by the use of new technology. But in the model of stable equilibrium when there is an increase in productivity, then not only wages and profit but also rent, interest and public income will grow. So, when we include all five factors of production and we apply the integrated logic, then the economic and financial picture is quite different from the Hicksian model of using only two factors, required by his concept of substitution and the modern, formal logic. There is a collision here between the application of the new, more complete integrated logic and the now older modern formal, symbolic logic. That is as far as we can go. The reader is free to reflect more about how important it is to consider the type of logic used in working on a problem, not only in economics but in all sciences. 4. Further considerations and results In dealing with the same subject, Laureate Hicks is changing the perspective by introducing a new factor, “the future and the new investment”.

Let us listen first to his own voice in restating his 1932 position in “a more modern form”: The first thing on which to insist is that it is quite unnecessary, because we use terms like “capital-intensive” and “rate of profit”, to trouble ourselves about the valuation of the capital stock as a whole (as we appeared to have to do on the production function method). What matters is not the average rate of profit on the whole capital stock (which cannot be determined without such valuation); what matters is the rate of profit on new investment. When the new investment is undertaken, that profit is no more than an expected profit, and what is realised may not be the same as what is expected. It seems reasonable, however, if we are concerned with healthy growth, to suppose that there is some broad concordance between what is expected and what is realised. Most ventures come out more or less right (Le Prix Nobel, 1972, p. 239).

What is the final result by introducing the new investment? In the first two paragraphs, the solution to the problem appears to be indeterminate. In the last paragraph, he joined the assumption of “healthy growth” which is inconsistent with the first part if we add the condition of general stable equilibrium. Here is a mix-up of two different types of logic. Working with a formal model, there is no surprise that he ends up with the same conclusion as before: In any production plan, so considered, labour is input and the final product is output; so a rise in wages, in terms of final product, must diminish the rate of profit on the plan, in terms of final product. To this rule there is I believe no exception. It holds for any plan that could be viable at the rate of wages in question (op. cit., ibid.).

Formally may be so, but what about the other factors of production which were left out? With the application of the “roundabout method” and the modern, formal logic, it is possible mathematically to avoid difficulties but a high price must be paid: the researcher cannot escape the Go¨del proof and the real solution to the problem remains indeterminate. Sir John Hicks, in continuation, shifted the argument by considering the “technology as given and that there are just so many production plans, from which choices can be made. Each such plan will have an efficiency curve”. What can be said in this particular case? If or when “technology is given”, then, in reality (not just formally), there are not so many production plans for a variety of choices because technology itself, in conjunction with the other factors of production, gives specifically one direction where it is possible to attain the most desired goal of the optimum rate of output. The substitution effect that he has in mind does not apply really and simultaneously to all factors of production. In The Theory of Wages Hicks used the traditional, inherited classical view that “more savings meant more capital accumulation, and that capital accumulation was favourable to rising wages. But in Keynes’s system of thought, which was so soon to be sprung upon me, the effect of saving seemed to go the other way round” (op. cit., p. 240).

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In the Keynesian doctrine, “savings” indeed represents a social evil, a paradox, exposed in the famous “banana story”. There was a community of banana plantations where the people were working to cultivate and consume only bananas. Then a thrift campaign was begun to economize bananas. And the savings in bananas grew more and more, until an exorbitant excess over new investment accumulated. An unprecedented situation of social disaster developed, where in the wording of Keynes: Thus there will be no position of equilibrium until either (a) all production ceases and the entire population starves to death; or (b) the thrift campaign is called off or peters out as a result of growing poverty; or (c) investment is stimulated by some means or another so that its cost no longer lags behind the rate of saving (Keynes, 1971, p. 160).

Clearly, here we are faced with a head-on collision between Keynes and Hicks and the whole classical tradition. That the banana story was an extraordinary mockery against the classical theory, is beyond the point. We are interested to see how Laureate Hicks managed this head-on collision with his good friend Lord Keynes who in a way was also his mentor. Here Laureate Hicks speaks: The trouble was not (as might easily be supposed) that Keynes’s theory was monetary, while my “classical” theory was non-monetary. One can construct a “barter” system, in which money plays no essential part, but which can still behave in the manner that Keynes identified. (It is not incidentally, such an unrealistic construction; the world, in 1970-1, produced quite a good imitation of a Keynesian slump in real terms.) It has taken some time for this to be clarified – since Keynes himself, by unfortunate definitions which made saving and investment always equal, obscured the significance of a part of what he was saying (Le Prix Nobel, 1972, p. 240).

The answer of Laureate Hicks so far is not ingenious but somehow under expectations, compared with Keynes as a mentor. He could have accepted the characterization of Keynesian theory being monetary and, the old classical theory being non-monetary. The example of a barter system, scientifically, is not productive, because, by and large it is a primitive system, not necessarily in the historical sense. The German economy at the end of the Second World War with a chronic inflation of paper money depreciated (German mark) reached the point when the regular exchanges were converted into a primitive barter system. The construction of a barter model where money exists but plays no essential part, was just a formal, empty box, in order to excuse his mentor. On the other hand, considering the fact that Hicks used in his reasoning the modern, formal logic, then “such an unrealistic construction” can be associated with a Keynesian slump in real terms, which existed in 1970-1971. It is a matter of interpretation which goes back to an article, “Mr Keynes and the classics: a suggested interpretation” (Hicks, 1937) where the content of the new economics in “the general theory” was associated with “economics of depression” or “slump economics”. Being good friends, Hicks sent the manuscript to Keynes

for revision before going to the printers. Keynes read the manuscript, and answered with thanks without raising any objection against the comparison. The explanation of the fact that in Keynes “saving and investment are always equal” is not due to “unfortunate definitions” but rather is an essential part of his anti-classical system of reasoning. The classical method of reasoning – both in theory and practice – is ex ante, forward-looking, from cause to effect. The Keynesian manner or technique of reasoning – both in theory and practice – is anti-classical all the way: ex post, backward-looking in analysis and effect-counter-effect in practice. In short, it represents an inverted order of reasoning and leaves the argument unsolved, in litigation. The argument, to repeat, is about the Keynesian statement that “saving and investment are always equal”. The truth is that this statement is not complete – methodologically speaking – like the formula “equilibrium with unemployment”. Keynes knew what he was doing but the economic profession of the 1930s was not prepared to ask the master adequate questions for more clarification. With the help of the orientation table and the new integrated logic we hope that we settled the above formula by indicating that its proper and complete meaning is “unstable equilibrium with unemployment”. Its territory of validity is model M4 and nowhere else. Using the same methodological tools we can disentangle also the former Keynesian statement that “saving and investment are always equal”. First, there is a problem of capital formation, and second of the relationship between saving an investment. Capital formation may come – analytically speaking – from two different sources: (1) free, voluntary, ex ante, stable equilibrium type of savings, positive in the sense that they represent an asset for the people and the economy; and (2) forced, involuntary, ex post, unstable equilibrium or disequilibrium type of savings, negative in the sense that they represent an invisible but real liability for the people and a mixed picture for the economy. From all the great economists only Schumpeter has presented a clear and distinct picture of the two types of savings in relation to the internal, mixed nature of modern capitalism (Schumpeter, 1956, pp. 203-10; Rugina, 2000). The relationship between savings and investment – analytically and practically – can be of the order: first, free, voluntary, ex ante, stable equilibrium savings and then real, equilibrium type of investment socially beneficial to the savers, the entrepreneurs, the labour and the whole economy, government and society. Second, nominal, disequilibrium type of investment via monetization of pure bankcredit which in turn through the inflationary effect reduces automatically

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a fraction of the real income of the masses of consumers. This reduction of the real income of the masses forms a fund of forced, involuntary, ex post, disequilibrium or unstable equilibrium type of savings. In this way, and independent of free, voluntary savings, through the banking mechanism nominal capital (monetized pure bankcredit) is converted into forced savings as an additional source of real capital but producing a host of disequilibria in economic and social life. What is the more complete form and content of the Keynesian statement? “Saving and investment are always equal” without creating additional economic and social problems only and only in the territory of model M1, that is, a system of general stable equilibium where the solution to any problem is determinate ex ante and ex post. The same statement may be also true but only formally in the Keynesian model M4 with the specific qualification of ex post capital formation through forced savings and other economic and social disequilibrium problems. In other words, the statement is valid only in the territory of a model of unstable equilibrium where the solution to any problem is indeterminate, under the Go¨del proof. Laureate Hicks is trying his own “round-about” technique in avoiding difficulties by introducing the Swedish distinction between “desired and realised saving and investment”. The result, however, is only formal and not satistactory by far, in his own words: Saving-investment equilibrium, so defined, does not imply the Full Employment of Labour; for that also to be attained, further conditions are necessary. One of the conditions is that relative prices should be right (op. cit., p. 241).

Looking for “further necessary conditions” and “right prices” actually means to change the initial position from model M4 (Keynes) toward model M1 (Walras) and that is not acceptable, without an adequate warning. This shifting between the two basic models by Hicks leads to indeterminate conclusions governed by paradoxes. The following text speaks for itself: “One can suppose that there is saving-investment equilibrium, maintained continuously”; (this is in Walras) and yet can be unemployment, if the ratio of prices to wages is inappropriate (this is in Keynesian model). His conclusion is: “That is what I ought to have said in Theory of Wages. So interpreted, the Keynesian view and the ‘classical’, view fit together (p. 241).

This statement that “the Keynesian view and the classical view fit together” does not seem to be true, but that is what Laureate Hicks wants to say. On the other hand, nothing hinders us from listening to what Keynes has to say on the same subject. Here is his voice: I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject (Keynes, 1936,Ch. 1, p. 3).

The reader can draw his or her own conclusion but what deserves to be mentioned is how far the use of modern formal, symbolic logic can lead a researcher away from the real truth-content of propositions. And the end is not here. In continuation Hicks (1950) added a new concept from his book Contribution to the Theory of the Trade Cycle as follows: [. . .] a saving-investment equilibrium path and a full employment path which lay above it. I was interested only in departures from equilibrium; so the only function attributed to the full employment path was to act as a Ceiling, which imposed a constraint upon the disequilibria which could occur. I did not ask why the equilibrium path should lie below the Ceiling. Indeed, I said much too little about each. I just drew them as straight lines – which is a simple way of say nothing about them! (Le Prix Nobel, 1972, p. 241).

This is another sample of oversimplification of the problem when the marginal rate of substitution between two factors (labour and capital) is leaving out the other three factors (nature, management and social organization or government). How could the “full employment path” be treated separately from the savings-investment equilibrium path and used as a “ceiling” for avoiding or mitigating “disequilibria which could occur”? Only with the help of modern, formal logic such combinations could be credible. But what is the value of such combinations if the solution is only formal and has no real truthcontent? After Sir John introduced the concept of double-equilibrium path, composed of saving-investment equilibrium and “full employment path” he asked the question: “What will be the consequences if both conditions have to be fulfilled?” His answer was: “Real wages will have to be flexible”, but he raised a second question: “Can they be kept flexing always upwards? . . . if they cannot, if there must be fluctuations in real wages when both conditions are satisfied, there will surely be greater difficulties (op. cit., p. 241). What can we say about these new questions? First, they are pure speculations of formal concepts, as long as the other factors of production are not included in the problem of the relationship between saving-investment equilibrium and full employment. Second, who is to regulate (and how practically) “real wages and so to be kept “flexing always upwards”? Since “full employment” is at the center, evidently Hicks had in mind the model M4 of unstable equilibrium? Can a democratic government fulfill this function properly and fully? The impossibility theorem in practice says that the government in question cannot do it, that is, properly and fully (see Introduction, pp. 338-54). On the other hand, a new message must be considered for more understanding the spirit of our time and its so many unsolved problems. In a socio-economic regime based on conditions of general stable equilibrium, following the Walrasian model M1 in its more complete form, none of the

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difficulties and problems with which Sir John has struggled a whole life do exist. If they appear accidentally then they are solved mechanically at no extra cost by a multiple set of self-regulating mechanisms which impede further development of possible disequilibria (see Rugina, 2001). In order to dissipate any sign of a personal negative interpretation of the scientific contribution of Laureate Hicks which nobody could take away from him, we give another sample of a zig-zag description or inverted order of reasoning which is possible by using modern, formal, symbolic logic. Let us hear the voice of Hicks: We can at last begin to see how the substitution effect and the saving effect fit together. It is essential to hold fast to the behavior of final output. This is the chain of causation: From investment to final output, from final output to wages, from wages to the rate of profit on new investment, and hence back on investment itself. There is much to be said on each of these steps. I cannot go into detail, but must confine myself to giving a general impression (Le Prix Nobel, 1972, p. 242).

And here is the scientific verdict. This back-and-forth type of analysis is possible only when we use modern, formal logic within the Keynesian model M4, specifically because in that case we leave out the real truth-content of propositions. If, however, we use the new, more comprehensive integrated logic where real truth-content is included in the same Keynesian model M4, it is impossible by definition to apply back-and-forth type of analysis because the Keynesian mixed system is consistent about 50 percent at its limit and the other 50 percent is inconsistent, in disequilibrium. Any solution in this system is a paradox, being 50 percent true and 50 percent false and that means the Go¨del proof is in action. Only in the Walrasian model M1, which is 100 percent consistent, the back-and-forth type of analysis is possible, valid without any ifs or qualification. The rest of the lecture is devoted with much detail of analytical nature but the same type of formal analysis on what could happen when new machines are introduced. The new machines will bring about a rising rate of real wages and a decline in the rate of profit until there is no further invention. A period of a steady state follows with a different distribution of income. This, however, is not the end of the game, according to Laureate Hicks, to wit: Now we can bring in substitution. If there is substitution along a spectrum of techniques – new techniques which would previously not have been profitable becoming profitable because of the rise in wages – the fall in profits will be slowed up. The effect of substitution (in most cases at least) will be in the direction of adopting more capital-intensive techniques (op. cit., p. 244).

He does not say anything that the adoption of “more capital intensive techniques”, requires more capital. Where is the source of new capital, and under what conditions: free voluntary savings (where there are no new problems) or “forced savings” with additional economic and social problems?

Working with modern, formal logic and his “round-about” technique, he does not see these difficulties of real life. Leaving aside the basic problem of new capital he continues his description with no sign of a determinate solution. Here is again his voice: What I have just been giving is no more than an exercise; it does no more than distinguish one causal sequence which in actual experience will be crossed and mixed up with many others. It does nevertheless appear that this sequence may be rather fundamental. The mainspring of economic progress, it suggests, is invention; invention that works through the rate of profit. Each invention gives an Impulse, as we may call it; but the Impulse of any single invention is not inexhaustible. The exhaustion is marked by falling profit; but the cause of the exhaustion (on the Full Employment, or double equilibrium path) is scarcity of labour (op. cit., ibid.).

The picture is ambiguous; positive aspects (equilibrium) are mixed with negative aspects (disequilibrium). How could an impulse come at a time when profit is falling and how does “scarcity of labour” fit with “falling profits”? A surplus or excess of labour appears to be more reasonable under such conditions, in view of the Keynesian model. In between, Laureate Hicks is injecting a note that his view was different, to some extent, from that of Keynes. For instance, in regard to the causes of the Great Depression, he mentioned that “many economists (including sometimes Keynes) thought the Depression of the 1930s to be a Pause” of a previous impulse, like the railway age. Hicks added the following conclusion: It is impossible to tell its story without laying great stress upon the monetary aspect, which I have been disregarding; it may well be that it is right to tell the whole of its story in those terms. Yet there may be something more. It would be a great help if we knew, better than we do, if there was something more; for it would help us to understand the innovative process, as it works in this century, and so to know, better than we do, how far we can count upon steadiness in the flow of innovation. The study of past Impulses, with the aid of a better classification, might well throw much light upon this vitally important matter (op. cit., p. 245).

The advice given by Laureate Hicks is well taken, but in addition to the monetary aspect we should add also the banking system with its practice of monetization of pure bank credit and not less important the pure speculations on stock, commodity and foreign exchange markets. Actually, the study of impulses is nothing but the study of the business cycle. A simple “better classification” in the study of past impulses is not sufficient when only two factors of production are included and the other three factors are ignored. In addition, what he wanted, going back to his Theory of Wages, is to research the “consequences of maintaining a level of real wages that is higher than that which is appropriated for double equilibrium”. The double equilibrium – to recall – refers to a saving-investment equilibrium path and a full employment path, which must be kept above it. This would require a special wage policy. The situation could be matched by lower profits, or “takeout”, as he called them. But he realizes that this route is limited. As an

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alternative he mentioned the application of new, better techniques in the choice of new investment which in turn requires more capital-intensive use. In the end, it is interesting to note that Laureate Hicks arrives at a position which confirms earlier (1932) the Keynesian “equilibrium with unemployment”. Such techniques will in the end raise final output, per unit of labour employed, more than it would have been raised by less capital-intensive investment. But, all along, the volume of investment (in saving-investment equilibrium) will be lower than it would have been otherwise. Thus, although the economy is “aiming” at a steady state in which final consumable output, per unit of labour employed, is higher, employment along the path to that state (and – in principle – even in that final state) will be lower than it would have been. This, I now believe, is what I was trying to say in Theory of Wages; as will be seen, it is subject to many qualifications of which, when I wrote, I had no idea. But in substance the main point stands (Le Prix Nobel, 1972, p. 246).

The fundamental point that Laureate Hicks, by his method of approach, left out the other three important factors of production (nature with its resources, management and social organization, government), remains valid for debate. Evidently, their inclusion will change many of his results. Why or how Hicks could arrive at a similar position with Keynes, should be no surprise, because about the same time both applied the same type of modern, formal, symbolic logic. Laureate Hicks was and remains an original thinker who tried in his own way to apply indifference curves and the principle of marginal substitution between capital and labour supposedly to replace the neoclassical principle of marginal utility. We are thankful for his contribution, because he gave us an opportunity to test the new more comprehensive integrated logic and the new framework of a simultaneous approach of equilibrium versus disequilibrium and all other consequences. References Go¨del, K. (1962), On Formally Undecidable Propositions of Principia Mathematica and Related Systems (originally published in 1931), trans. by Meltzer, B., Oliver & Boyd, Edinburgh. Hicks, J.R. (1932), The Theory of Wages, Macmillan and Co., London. Hicks, J.R. (1937), “Mr Keynes and the classics: a suggested interpretation”, Econometrica, Vol. 5 April. Hicks, J.R. (1939), Value and Capital. An Inquiry into Some Fundamental Principles of Economic Theory, Clarendon Press, Oxford. Hicks, J.R. (1950), Contribution to the Theory of the Trade Cycle, Clarendon Press, Oxford. Keynes, J.R. (1936), The General Theory of Employment, Interest and Money, Macmillan and Co., London. Keynes, J.R. (1971), “A treatise on money”, Vol. 1. The Pure Theory of Money, The Collected Works of John Maynard Keynes (originally published in 1930), Macmillan St Martin’s Press, Royal Economic Society, London. Knight, F.H. (1921), Risk, Uncertainty and Profit, Hart, Schaffner & Marx, Boston, MA.

Mure, G.R.G. (Ed.) (1975), Hegel’s Logic, 1830, Part One of the Encyclopedia of Philosophical Sciences, trans. by Wallace, W. Clarendon, Oxford. Rugina, A. (2000), “The theory of cheating of the masses in modern times”, Prolegomena 2: To Any Future Study in Integrated Logic and a More Comprehensive Methodology for the Unification of all Sciences, Natural and Social (monograph), International Journal of Social Economics, Vol. 27 No. 5/6, Ch. 6, pp. 308-22. Rugina, A. (2001), Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary, Financial and Social Stabilization Plans (monograph), International Journal of Social Economics, Vol. 28 No. 1/2. Schumpeter, J.A. (1956), “Money and the social product”, trans. from German by Marget, A.W., in International Economic Papers No. 6, Macmillan, London. Sraffa, P. (1926), “The laws of returns under competitive conditions”, Economic Journal, Vol. 36, pp. 535-50. Schumpeter, J.A. (1954), History of Economic Analysis, George Allen and Unwin, London. Whitehead, A.N. and Russell, B. (1910), Principia Mathematica, Cambridge University Press, Cambridge. Wittgenstein, L. (1922), Tractatus Logico-Philosophicus (originally published in 1921), trans. by Pears, D.F. and McGuiness, B.F., Routledge and Kegan Paul, London.

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7. Nobel Laureate: Wassily Leontief (1906-1999) Nobel Memorial Lecture, December 11, 1973 Biography Wassily Leontief was born on August 5, 1906. He spent his childhood and youth in St Petersburg (Leningrad) where his father was a professor of economics. “Among my early indelible memories”, he wrote, “are the country plunged into deep mourning the day of Leo Tolstoy’s death; stray bullets whistling by during the first days of the February Revolution; and Lenin addressing a mass meeting from a high tribune in front of the Winter Palace.” Leontief entered the University of Leningrad in 1921 and received a degree of “Learned Economist” in 1925. He continued at the University of Berlin with Werner Sombart and Ladislaus Bortkiewicz and received a PhD with a theoretical subject, “Wirtschaft als Kreislauf”. From 1927 to 1930 he was a Researcher at the Institute of World Economics at the University of Kiel, in Germany. In 1929 he left Germany for a long trip with his parents to China where he served as advisor to the Ministry of Railroads. In 1931 he moved to the National Bureau of Economic Research in New York City, and in 1932 he was hired by Harvard University where he became a Professor in the Department of Economics in 1946. He organized the Harvard Economic Research Project of 1948 and served as its Director until 1973. He married Estelle Marks (a poet) in 1932. According to his own information and after he came to the conclusion that the so-called “partial analysis” (Alfred Marshall) could not “provide a sufficiently broad basis for fundamental understanding of the structure and operation of economic system”, in 1931 he decided to work on and formulate, a general equilibrium theory capable of empirical implementation”. In all probability Leontief, in his early training, was unaware that Walras had already formulated such a general theory (although not completely) back in 1874, or he did not agree with the point of view of Walras in separating the pure analytical aspect (pure theory in the Kantian sense of “reine Vernunft”) from the practical or empirical aspect of given realities, in the sense of “praktische Vernunft”. It is not quite clear what Leontief meant by “a general equilibrium theory capable of empirical implementation”. Did he clearly separate “pure theory” for the purpose of explanation of empirical realities from “practice” that is, applied theory to solve practical problems? In other words, what is the

sequence: first theory and then applied science for solving practical problems Wassily Leontief or construct a theory to be fitted to the given empirical conditions? The classics, old and modern, followed the logical rule: first study the empirical realities ex ante or cause-and-effect analysis until you construct a theory to include many possible cases of the same nature, that is, a general theory, and then apply it to a specific case consistently and systematically. 549 Walras was one of the great classics. Modern and many contemporary thinkers follow a different road of a new, formal or symbolic logic. They look first at empirical facts where there is a problem and then proceed with an ex post effect-counter-effect analysis. In fact, they select a specific empirical set with disequilibria and then by an inverted order of reasoning they end up with a general theory of disequilibrium disguised in a mathematical equation. There is a danger in the modern ex post analysis that a general theory of real disequilibrium, in practice may perpetuate disequilibrium conditions. The best example is the general theory of unemployment (Keynes) in the long run during the twentieth century. All along this open dialogue, we shall examine the text of the Memorial Lecture by Laureate Leontief to ascertain precisely what he meant by “a general equilibrium theory capable of empirical implimentation”: a really and truly general stable equilibrium, as Walras envisioned, or a generalized theory of disequilibrium or unstable equilibrium? In 1932, he received a research grant for developing the first input-output tables of the US economy for the years 1919 to 1929. After his book on The Structure of the American Economy, 1919-1929 (Leontief, 1941) was published in 1941, he continued to work on the application of the input-output theory. He was President of the Econometric Society in 1954 and President of the American Economic Association in 1970. He was a Fellow of the International Statistical Institute of the Royal Statistical Society in London, Fellow of the British Academy and Member of the L’ Institute de France in 1968. Structure of the world economy (1973): outline of a simple input-output formulation Introduction by Professor Assar Lindbeck of the Royal Academy of Sciences Let us hear first what Professor Lindbeck has to say in the first part of the Introduction: One of the most characteristic features of an economic system is the mutual interrelations between the various parts of the system – what is usually called the interdependence within the economic system. Such an interdependence is characteristic also for the conditions in the production sector of an economy. For instance, in order to produce steel we need not only labour but also coal and thousands of other intermediary products, or “inputs”, in the production process. But to produce the necessary coal and other inputs we require, in turn, steel and other intermediary products in addition to labour.

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This means that if we want to increase the production of steel we must at the same time increase the production of coal, which in turn requires increased availability of steel, etc. in an infinite series and similarly for the thousands of other products which are directly or indirectly involved in the production of steel and coal . . . Let us now remember that a modern economy produces hundreds of thousands, or even millions of different commodities and services, of which most of them are used, directly or indirectly, as inputs in the production of other commodities and services . . . It is precisely in order to analyze these complicated, mutual interdependences within the production system that Wassily Leontief has developed his so-called input-output method, which is a mathematically and statistically formulated model designed for the purpose of capturing in empirical analyses the complicated interdependence within the production process (Le Prix Nobel, 1973, p. 232).

Professor Assar Lindbeck described very well the interrelationship between the various parts of the economic system and including the various parts of the production sector of the economy. As a matter of fact, this may appear a simple quantitative operation, but actually it is as complicated as the reality of life in a modern society and economy. Of course, it is the merit of Laureate Leontief who raised the problem of empirical interrelationships within an economic system and in particular the production sector of a modern economy. In order to solve this problem he offered the input-output method and the use of a mathematically and statistically arranged model. Is there anything important for the science of economics and the well-being of society in a modern economy which Laureate Leontief did not mention or was not aware of? We have to recall that in the biography, he indicated that he was not satisfied with the Marshallian – according to him – “partial analysis”, and back in 1931, he decided to work on a “general equilibrium theory capable of empirical implementation”. Professor Lindbeck raised a similar problem about the welfare of society. Here is his observation: An obvious question now is, of course, what is all this good for. In a market system, such as Sweden’s, we know that we do not need any central decisions on how much to produce of each individual commodity. The composition of outputs in the economy is, as we are aware, mainly determined by a market process via the firms’ supply of commodities and services and the demand for these by households and other firms in various markets for commodities and services. As we shall see, however, the input-output method can be used as a complement to the market process – mainly for forecasting and economic planning. A few examples may illustrate the point (Le Prix Nobel, 1973, p. 232).

Professor Lindbeck is correct in describing the case of the Swedish economy. Difficulties may arise with the last paragraph which does not say so directly but is giving a strong hint that the input-output method could be used as a complement to the free, mixed capitalist market process and beyond in “forecasting and economic planning”.

If it were so, then this would justify that on this road we could hope to arrive Wassily Leontief at a “general equilibrium theory capable of empirical implementation”. Unfortunately, we do not know yet what kind of “general equilibrium” Laureate Leontief had in mind – a stable equilibrium as envisioned by Walras or unstable equilibrium in the sense of Keynes with involuntary unemployment? This problem may be clarified when we go to the text of the 551 Memorial Lecture. The three examples given by Professor Lindbeck are not sufficient to justify a “general equilibrium theory” in the sense of Walras, nor of Keynes who never included openly “central planning” in his system. The first example refers to the case of the US Government which, during the Korean War, used the input-output method to determine a direct relationship between the level of investment in the defense industry and the investment in the civilian sector of the US economy. In such special cases the principal target is to win the war and all other questions become secondary. The defense industry had priority. The second example given by Professor Lindbeck is the possibility that the input-output method could be used “to study how changes in production costs in one sector are spread to other sectors of the economy, again, in an infinite series of effects”. This is another special case where the Leontief method could be used but such experiments for a national economy would be prohibitive in terms of the costs involved. In addition, forecasting in the mixed capitalist regime contaminated with disequilibrium elements and defects, becomes unreliable. The third example is related to the case of a centrally planned and controlled economy but without mentioning the Soviet and Nazi regime. The position of Professor Lindbeck is not quite clear, in all probability because earlier he assumed that the input-output method may be used as a complement to the market process. If Laureate Leontief were alive, he would defend the view that his inputoutput method could be used for stabilization in both the mixed capitalist economy as well as in a centrally planned economy. Three decades later in 2002 AD , after the Soviet economy disappeared and Red China’s centrally planned economy is not in a better condition compared with US capitalism, no longer does anyone mention the input-output method as an instrument for world economic stabilization. In point of economic analysis all three examples do not justify that on the basis of the input-output method we could construct a true and reliable general stable equilibrium theory in the economic science. On our part, we think that a general stable equilibrium theory for a free, just and stable economy and society is possible if we improve and complete the inherited first version of a general theory formulated by Walras (see Rugina, 1998, 2000, 2001).

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Structure of the world economy: outline of a simple input-output formulation. Nobel Memorial Lecture, December 11, 1973 by Wassily Leontief, Harvard University, Cambridge, Massachusetts, USA 1. Project of a systematic input-output study of the world economy Laureate Leontief was involved in a most interesting but also most complicated project to organize an input-output study of the world economy. In fact, Leontief was the heart and the soul of this project with his ambition, in the finale, to construct a new general equilibrium theory in economics, based on quantitative analysis. In order to evaluate this unique project we shall use the traditional version of a general stable equilibrium, as conceived by Leon Walras (1874-77), the subsequent changes in the development of modern, formal, symbolic logic, and a new research program based on a simultaneous equilibrium versus disequilibrium approach leading to the development of an orientation table for economics and all other sciences. The reader should be aware of the great argument of the twentieth century between the promoters of the modern school versus the defenders of classical school, not only in economics, but also practically in all sciences. The classics, old or new, were perceiving the problems in terms of a model of stable equilibrium, actually not complete but correct as far as they worked on it. The moderns, also old and new, conceived and are still continuing to examine the economic and social problems in terms of a different model, specifically a model of disequilibrium (the old school) or unstable equilibrium, which is about the same thing as “stable disequilibrium” in a static position, when the quantitative or mathematical analysis is used. A warning is given that the term “stable disequilibrium” is not yet used in the economic literature. Laureate Leontief, no doubt, was a modern thinker, and from my personal conversations with him, he really thought that with his input-output analysis a new general equilibrium theory based on quantitative, statistical data will tip the balance in favor of modern methodology for some time in the future, if not forever. In my dialogue with him after he visited my old home country – Romania – I tried to convince him, as I attempted earlier Laureates John R. Hicks and Jan Tinbergen, that on the road of modern thinking based on the application of modern, formal, symbolic logic, the solution to any problem in the final analysis is ambiguous, indeterminate, in the spirit of Go¨del’s proof. In one sentence, any problem will not and cannot be solved properly and fully. But humanity cannot and will not accept such an ambiguous road with “either . . . or” and “as if” solutions, forever. Sooner or later, the present or future generations of economists will find the truth, the whole truth to solve the Great Argument of the twentieth century and prove that the classical and modern school of thought are not contradictory but rather complementary.

One great French economist by the name of Henri Guitton former President Wassily Leontief of the French Academie des Sciences, in his last book: Le Sens de la Duree (Guitton 1985, pp. 196-9), announced our third peaceful revolution (“la troisie`me revolution”) to solve the great argument. The contribution of Laureate Leontief is unique in the sense that he, too, in his own way, searched a solution to this argument. Here is his voice: 553 The world economy, like the economy of a single country, can be visualized as a system of interdependent processes. Each process be it the manufacture of steel, the education or the running of a family household, generates certain outputs and absorbs a specific combination of inputs. Direct interdependence between two processes arises whenever the output of one becomes an input of the other: coal, the output of the coal mining industry, is an input of the electric power generating sector . . . A network of such links constitutes a system of elements which depend upon each other directly, indirectly or both (Le Prix Nobel, 1973, p. 237).

Up to this point, the description or presentation by Laureate Leontief appears to be correct, logical, in particular if we apply modern, formal logic. If it were so, then nothing more could be added to Leontief’s perspective. The interdependence appears to be reasonable (formally) at the national and international level. There is however an, “if” in this conclusion. If the national economies associated with the world economy were really constructed on the basis of a unitary system of general, stable equilibrium in the Walrasian sense improved and completed, then there would be no problems and the description of Leontief would be perfectly consistent in every respect. However, we know precisely, and the application of the new, more comprehensive and improved neoclassical integrated logic, confirms the truth, that in 1973 the real structure of national economies and therefore also of world economy was not consistent but rather contaminated with disequilibria of all sorts. In order to have a general stable equilibrium with full consistency we must provide the proof of a common denominator. A complete common denominator is composed of at least 25 basic conditions for a system of general stable equilibrium (see Introduction, pp. 369-78). The minimum condition is that of 100 percent numeraire-currency for the monetary, banking and financial sectors of the economic system, pure competition and a stable institutional framework. There is no evidence – at least up to this point – that Laureate Leontief was concerned about the necessity of a real, common denominator, speaking in terms of methodology. Without such a reliable common denominator, we are exposed to large disparities, between money, and real wages, rent, interest, profit, taxes, foreign exchange and all other forms of income, wealth and liabilities. That he was not concerned with this fundamental problem, we can see from what he wrote in continuation:

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The state of a particular economic system can be conveniently described in the form of a twoway input-output table showing the flows of goods and services among its different sectors, and to and from processes or entities (“value added” and “final demand”) viewed as falling outside the conventional borders of an input-output system. As the scope of the inquiry expands, new rows and columns are added to the table and some of the external inflows and outflows become internalized. Increasing the number of rows and columns that describe an economic system also permits a more detailed description of economic activities commonly described in highly aggregative terms (op cit., p. 237).

There is indeed no sign that Leontief was aware of the fact that the data to be included in the “two-way input-output table” were infected with disequilibrium bacteria and microbes which would undermine the credibility of the whole project. We shall see that in his tables (Tables II and III) for the world economy of 1970, he used the US dollar of 1970. But, unfortunately, on August 15, 1971 the same dollar under the Nixon Administration ceased to be freely convertible in gold and became inconvertible paper-money anti-numeraire or disequilibrium type of currency.

Final demand

Table II. World economy in 1970 – developed countries (billions of 1970 dollars)

Extraction industry Other production Pollution Employment Other valueadded

Extraction industry

Other production

Abatement industry

Domestic

Trade

0 21 5 18

76 1,809 62 1,372

0 21 2 63 20

2 2,414 60 287

2 15 19 0 0

Total output 63 4,284 64

21 996 22 0 0 Note: All quantities are measured in billions of dollars “in current prices”; pollutants are “priced” in terms of average “per unit” abatement costs

Final demand Extraction industry

Table III. World economy in 1970 – less developed countries (billions of 1970 dollars)

Extraction industry Other production Pollution Employment Other value-added

Other production

Abatement industry

Domestic

Trade

Total output

0 8 0 2 15 25 7 197 0 388 2 19 573 2 8 0 11 0 21 9 149 0 99 0 8 220 0 0 0 Note: All quantities are measured in billions of dollars “in current prices”; pollutants are “priced” in terms of average “per unit” abatement costs

By 1973, when Leontief wrote his Nobel Memorial Lecture, a significant Wassily Leontief disparity between nominal (money) and real values in his project became reality. This, of course, changed the picture and the conclusions of the official input-output analysis. But surely, Laureate Leontief was not aware of these possible complications. He was a very active personality and had direct access to the organization of the United Nations, especially the Economic and Social 555 Council. Here is his report: Major efforts are presently (1973) underway to construct a data base for a systematic input-output study not of a single national economy but of the world economy viewed as a system composed of many interrelated parts. This global study, as described in the official document, is aimed at helping Member States of the United Nations make their 1975 review of world progress in accelerating development and attacking mass poverty and unemployment. First, by studying the results that prospective environmental issues and policies would probably have for world development in the absence of changes in national and international development policies, and secondly, by studying the effects of possible alternative policies to promote development while at the same time preserving and improving the environment. By thus indicating alternative future paths which the world economy might follow, the study would help the world community to make decisions regarding future development and environmental policies in as rational a manner as possible (op. cit., pp. 237-8).

Behind this project, certainly the personality of Leontief was very active. In fact, he moved from Harvard University to New York State University in order to be close to the United Nations Headquarters. Evidently, he had great hopes in this “global study”, which if fulfilled, could have been the crown of his scientific life. It is possible that Leontief was a member of the committee or was consulted when this official document was drafted. He gives further information about the selection of 28 groups of countries with about 45 productive sectors for each group. Environmental conditions were identified to about 30 principal pollutants. After 1975 the project was dropped or died, because once the convertibility of the US dollar was suspended the international financial instability became the rule of the world. A new general equilibrium theory, based on Leontief’s input-output method did not materialize. 2. A table of an input-output view of the world economy Laureate Leontief continued his lecture with an explanation of his input-output type of analysis in regard to the world economy. Let us hear first his view: This formulation should provide a framework for assembling and organizing the mass of factual data to describe the world economy. Such a system is essential for a concrete understanding of the structure of the world economy as well as for a systematic mapping of the alternative paths which it could move in the future (Le Prix Nobel, 1973, p. 238).

If the input-output method were indeed a better substitute for the Walrasian law of general stable equilibrium (even in its less complete formulation) then

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there would be nothing more to be said in pure analysis except to orient all our attention to the practical issue of identification and simple, but precise, classification of the “mass of factual data” between inputs and outputs. Unfortunately, the “mass of factual data” collected from capitalist, socialist and fascist regimes were by far not consistent with the rule of interdependence. The “mass of factual data“ was contaminated with disequilibrium aspects and effects so that in Leontief]s model there is no way to get determinate solutions and, consequently, no possibility “for a systematic mapping of the alternative paths which it (the world economy) could move in the future”. The division of the world economy made up of developed and less developed countries, proposed by Laureate Leontief does not seem to be difficult even though there is a problem of an objective standard to decide the line between them both. The division of the economy in each region among three productive sectors as follows seems to be reasonable.: (1) an extraction industry producing raw materials; (2) all other production, supplying conventional goods and services; and (3) a pollution abatement industry, In addition to these three sectors, there is also a consumption sector specified for each region. The “function of the abatement industry is to eliminate pollutants generated by the productive sectors, consumers, and the abatement industry itself”. Tables II and III show the world economy in 1970 for developed countries and less developed countries respectively. We reproduced the two tables as a sample, not so much for orientation but just simple information about their quantitative aspect. But even if these figures quantitatively were correct their real value is diminished because they are infected with disequilibrium traits which already created a large disparity between nominal (money) and real denomination. And this is a problem of the unstable framework of the mixed capitalist, socialist or fascist regime. Laureate Leontief is not aware of this basic difficulty, but he is aware of the difficulties with the physical measurement within the system. Like all great original thinkers, he does not hide these imperfections but he is alerting the reader to their existence. Let us lend an ear to his thoughts: The numbers in these two Tables are strictly speaking, fictitious. But their general order of magnitude reflects crude, preliminary estimates of intersectoral flows within and between the Developed and Less Developed regions during the past decades [. . .] A similar physical measurement of the other components of value added, even if it were possible in principle, is impossible given the present state of knowledge. In pure, or should I say speculative economic theory, we can overcome this kind of difficulty by introducing some convenient albeit unrealistic assumptions (Le Prix Nobel, 1973, p. 240).

3. Additional explanatory information about the two tables Wassily Leontief It is easy to understand that the information given in Tables II and III is interdependent. It refers to the flows which circulate in real life between the two tables. In reference to the flows, Leontief mentioned “three distinct sets of constraints”, as follows: First, within each production or consumption process there exists a technological relationship between the level of output and the required quantities of various inputs . . . The second set of constraints that has to be satisfied by every viable system requires that the total (physical) amounts of outputs and inputs of each type of good must be in balance, i.e. total supply must equal total demand (op cit., p. 240). The last of the three sets of relationships describes the interdependence of the prices of all goods and services and the values added paid out, per unit of output, by each industry (op. cit., p. 243).

The statement that the “total (physical) amounts of outputs and and inputs of each type of good must be in balance”, i.e. “total supply must equal total demand” does not actually represent a situation of stable equilibrium conditions. No! Two times No! It is a simple, formal technical relationship (static nature) which has nothing to do with a real position of general stable equilibrium. There are still more difficulties with this vast and complex project of a world economy. Here is again Leontief speaking: The combination of both systems (developed and less developed countries) viewed as a whole contains 29 unknowns but only 17 equations. Thus, to arrive at a unique solution, we have to fix the values of 12 variables on the basis of some other information, i.e. their values have to be determined exogenously. In view of the uneven quality of data that will constitute the empirical basis of the present inquiry, it would be a tactical mistake to pour all the factual information we possess into the rigid mold of a single, all embracing, inflexible explanatory scheme. The decision of which variables should be treated as dependent and which should be fixed exogenously is essentially a tactical one. The theoretical formulation is a weapon; in deciding how to use it we must take into the account the nature of the particular empirical terrain (Le Prix Nobel, 1973, pp. 243-4).

All these difficulties lead to one and the same conclusion, that the application of the input-output analysis is not sufficient to construct a general equilibrium theory in economics. However, if or when the Walrasian law of general stable equilibrium in its more complete formulation, was systematically and rigorously applied, then Leontief’s method of input-output could be used with confidence in many problems of micro- or macro-analysis. In the finale of his Memorial Lecture he presented also three cases of a projected world economy in 2000, which we decided not to include because this would not change the conclusion achieved up to this point. We prefer to give, in his memory, what he had to say about the three cases. Here is his own voice: I refrain from drawing any factual conclusion from the economic projections presented above. The computer received fictitious inputs and necessarily issued fictitious outputs. All theories tend to shape the facts they try to explain; any theory may thus turn into a

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procrustean bed. Our proposed theoretical formulation is designed to protect the investigator from this danger: it does not permit him to draw any special or general conclusions before he or someone else completes the always difficult and seldom glamorous task of ascertaining the necessary facts (Le Prix Nobel, 1973, p. 249).

Laureate Wassily Leontief, a pure empirical, quantitative, statistical economist, an institutionalist in his own way, thought that the ultimate solution to any economic problem lies in empirical data. He was a modern economist in the sense that he envisioned the economic problems in terms of a model of disequilibrium or unstable equilibrium where the solution of any problem is indeterminate. Leontief did not hold in high esteem the pure theory in the Walrasian or Kantian style which he considered a “pure speculative economic theory”. He became famous with the formulation and application of input-output method, which he thought could provide the basis for a new general theory in economic science. References Guitton, H. (1985), Le Sens de la Dure´e, Calmann Levy, Paris. Leontief, W. (1941), The Structure of the American Economy, 1919-1929, Oxford University Press, New York, NY. Rugina, A. (1998), Prolegomena 1: To Any Future Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), International Journal of Social Economics, Vol. 25 No. 5. Rugina, A. (2000), Prolegomena 2: To Any Future Study in “Integrated Logic” and a More Comprehensive Methodology for the Unification of All Sciences, Natural and Social (monograph), International Journal of Social Economics, Vol. 27 No. 5/6. Rugina, A. (2001), Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary, Financial and Social Stabilization Plans (monograph), International Journal of Social Economics, Vol. 28 No. 1/2

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8. Nobel Laureate: Friedrich A. Hayek (1899-1992)

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Nobel Memorial Lecture, December 11, 1974 Introduction by Professor Erik Lundberg of the Royal Academy of Sciences In a long introductory statement, Professor Lundberg made interesting observations about the nature of the economic science and its relationship with other social and political sisters. Here is the voice of Professor Lundberg: Hitherto the prize in Economic Science dedicated to the memory of Alfred Nobel has been awarded to researchers who have made pioneering contributions in what may be called “pure” economics. It has been awarded for work on economic theory at a high, abstract level with the theory of general equilibrium as the starting point, for work on analytical techniques on the basis of theoretical models with the aim of achieving quantitative precision of various relations and, finally, for work on historical-statistical analysis of economic development during long and short periods. However, there are prominent researchers in the field of the social sciences whose range of interests covers other and wider areas than those embraced by the term “pure economics”. Among these prominent researchers are this year’s prize winners, Professors Myrdal and Hayek (Le Prix Nobel, 1974, p. 242).

The characterization by Professor Lundberg is correct with the further observation that the spirit of the time when the work on “pure economics” by Leon Walras, Alfred Marshall and Vilfredo Pareto reached a peak by the end of the nineteenth century, remained, more or less, a sort of unfinished business. It was the classical spirit in searching the economic and social problems in terms of a model of stable equilibrium conditions. It is true that Hayek was among the most prominent economists during the twentieth century, who tried to restore the classical spirit but his attempt did not find an adequate audience. It is true that the theory of general equilibrium remained a subject of investigation during the twentieth century but in a different spirit, specifically, using a model of existing, disequilibrium conditions dominated by relativity and unstable equilibrium generated by the new economics of Keynes. This is the interpretation that we should attach to the second paragraph of Professor Lundberg; and the change in the spirit of the time made the transition between the classical and modern school of economics. It is true, in continuation, that both started their careers during the 1920s and 1930s in the same field of business-cycle and monetary theory. This author had the opportunity to know both personally, Myrdal earlier; he was an open and vigorous critic in science as well as in politics. Hayek, on the contrary

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But nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.

The whole personality of the two great scientists appears very well characterized for our purpose of doing justice to their unique contribution. Here is the voice of Professor Lundberg: Myrdal has, above all by directing his attention mainly to social problems (in the widest sense), especially as regards the negro question in the USA and the poverty of the underdeveloped countries, attempted to integrate economic analysis with a high measure of attention to social, demographic and institutional conditions. Hayek has extended his field of interest so as to take in the legal framework of the economic system and psychological-philosophical questions concerning the way in which individuals, organizations and different social systems work. Both scholars have shown a dominating interest in problems of economic policy, including possible changes in the organizational, institutional and legal structure of society. Here Myrdal has usually advocated reforms of a radical and unconventional kind, whereas Hayek has looked for ways of enhancing the viability of a liberal, individualistically oriented social system. These politically-coloured differences, however, are altogether subordinated to a common attitude towards social science research: the conviction that the major socio-economic questions of our time cannot be fully understood without an interdisciplinary broadening of the range of problems studied as well as of the methodology applied (Le Prix Nobel, 1974, pp. 242-3).

What can we say in addition to the very clear characterization given by Professor Lundberg, in no way to diminish but rather to enhance the description of the whole personality of the two scientists? In view of the fact that this author had the opportunity to know both and with full admiration of their contribution, it must be said that Hayek shared a certain degree of a positive bias for the mixed modern capitalist regime in the sense of ignoring or closing his eyes to perceiving the full image and extent of social injustices in modern economy and society, as if this injustice was inevitable. Laureate Myrdal, on the other hand, shared a certain degree of negative bias against the mixed, modern capitalist regime in the sense of exaggerating politically the existing social injustice. The explanation for this discrepancy in the personality of both scientists, and of course, only as a scientific hypothesis, lies in the fact that both were, in their own way, critics of modern society and science. However, in point of methodology, none of them turned around from analysis to show, with the same diligence, practically how exactly modern, mixed society and economy could be directed peacefully and democratically to the realization of and

maintenance over a longer period of time (normal dynamics) of a free, just and stable economy and society based on conditions of general stable equilibrium, 25 in number (see Introduction, pp. 369-78). Hayek devoted his attention to the subject of socialist central planning and examined the “fundamental difficulties” of socialist economies with regard to the problem of economic calculation. During a heated debate with Abba Lerner and Oscar Lange, Hayek intentionally or unintentionally ignored or missed adding to the argument the statement that the same problem (difficulties with economic calculation) was plaguing the capitalist regime, too, perhaps even more visibly. This actually happened because the whole debate was concentrated only on the concept of free market economy versus centrally-planned socialist economy. Not sufficient attention was given to the condition that a genuine free market economy, among other things, requires that all prices and incomes be expressed only in terms of numeraire-currency fully covered in gold, silver or any other suitable commodity. Professor Lundberg was right when he wrote: His [Hayek’s] conclusion is that it is only through a far-reaching decentralization in a market system with competition and free price formation that it is possible to achieve an efficient use of all this knowledge and information. Hayek shows how prices as such are the carriers of essential information on cost and demand conditions, how the price system is a mechanism for communication of knowledge and information, and how this system can mean an efficient use of highly decentralized resources of knowledge (Le Prix Nobel, 1974, p. 244).

This characterization was correct but by far not sufficient. If or when the prices were not expressed in terms of real numeraire-currency plus other conditions required by the law of general stable equilibrium, then the carriers are not transmitting true and reliable information. Biography: the life of Friedrich A. von Hayek Hayek was born in Vienna on May 8, 1899. He was the son of August von Hayek, Professor of Botany at the University of Vienna. His mother carried the rare name of Felicitas born Juraschek. He attended the Gymnasium in Vienna and graduated from the University in 1921 when he acquired a PhD in Law and in 1923 in Political Economy. He was in the Austro-Hungarian Army on the Italian Front 1917-1918. At the Peace Conference in Paris he served as a Legal Consultant of the Austrian Government. Hayek did postgraduate work in 1923-1924 at New York University. From 1927-1931 he was the Director of the Austrian Institute for Trade Cycle Research and also Lecturer in Economics and Statistics at the University of Vienna. From 1931-1950 he was Tooke Professor of Economics and Statistics at the University of London (London School of Economics and Political Science).

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From 1950-1962 he was Professor of Social and Moral Science at the University of Chicago (Committee on Social Thought). At the University of Freiburg i. Br. he was Professor of Economics from 1962-1968. Hayek returned to Europe in 1962 and was invited to take the chair held earlier by Professor Walter Eucken. He was a honorary member at various universities where he was a visiting Professor: Stanford, Arkansas, Virginia, California at Los Angeles, Cape Town and Salzburg; Fellow of the British Academy in 1944, Dr Honoris Causa University of Tokyo, University of Salzburg in 1974. He published many books, among them: . Geldtheorie und Konjunkturtheorie (Hayek, 1929). . Prices and Production (Hayek, 1931). . Monetary Theory and the Trade Cycle (Hayek, 1933). . The Road to Serfdom (Hayek, 1944). . Individualism and Economic Order (Hayek, 1949). . The Counter-revolution of Science (Hayek, 1952). . The Constitution of Liberty (Hayek, 1960). . Studies in Philosophy, Politics, and Economics (Hayek, 1967). . Law, Legislation and Liberty, Vol. I Rules and Order (Hayek, 1973). Also edited by F.A. Hayek were: . Collectivist Economic Planning (Hayek, 1935). . Capitalism and the Historians (Hayek, 1954). Nobel Memorial Lecture, December 11, 1974, by Friedrich August Hayek. The pretence of knowledge 1. The problem: an assumed contradiction between the methodology used in physical and social sciences The issue is not new but its radical formulation by Laureate Hayek with respect to the science of economics and modern economy deserves to be scrutinized objectively, professionally. Here is Hayek’s voice: The particular occasion of this lecture, combined with the chief practical problem which economists have to face today, have made the choice of its topic almost inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at this moment (1974) called upon to say how to extricate the free world from the serious threat of accelerating inflation, which it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

What can we say about the beginning of the lecture, something needed for a more complete meaning? For Laureate Hayek, at that moment, the economic

science as well as the modern economy were in a crisis. He appears as a severe critic of both but for some reason he did not identify the real culprit, specifically, the new Keynesian economics and the macro-monetary and fiscal policies. We dare to say that he was right, both in principle as well as a matter of policy but not for the reason he gave in this lecture. Hayek was a classical thinker in every respect but he did not identify his model of thinking as being close to that of Walras, Marshall or Pareto. He never accepted the Walrasian concept of numeraire-currency as an indispensable (natural parameter) condition for general stable equilibrium. He trusted, almost unconditionally, the principle of free competition. Toward the end of his life he was in favour of abandoning any official monetary system and leave the monetary function to the monetization of credit by private banks. In principle, he was right that a free society cannot exist with out a free economy. The modern, mixed capitalist regime was, for him, the model of a free market economy that we can construct and live on with the social benefits that are offered in this way. The policies recommended by the majority of economists and which were a failure were nothing else but the application of Keynesian macromonetary and fiscal policies. Hayek ignored or refused to identify them with an explanation which is not convincing at all, as we shall see below. First, let us identify the principal reason why the application of macromonetary and fiscal policies have ended with a fiasco or, using the language of Hayek, “have made a mess of things”. It is the impossibility theorem in practice (see Introduction, pp. 353-4). With all due respect and gratitude for advice and support received by this author, on different occasions from Laureate Hayek, we cannot accept his explanation for the obvious failure of the macro-monetary and fiscal policies, especially after the Second World War. Here is his voice. It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of brilliantly successful physical sciences – an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude – an attitude which, as I defined it some thirty years ago, is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed. I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error (Le Prix Nobel, 1974, p. 249).

This position of Hayek is rather weak, untenable in terms of methodology and its application. When Walras (1954) explicitly pointed out that his Elements of Pure Economics was a sort of replica to Newton’s (1686) Principia Mathematica,

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he was not an imitator but an original thinker who discovered that Newton’s methodology was applicable in economics too, under certain conditions. When Lord Keynes used the concept of “equilibrium with unemployment” and the ex post type of equality between investment and saving together with the inverted order of reasoning or backward thinking, as opposed to the ex ante, classical cause and effect analysis, he did not imitate any other scientist. He just used a new type of modern, formal logic introduced by his friend Wittgenstein’s (1922) Tractatus Logico-Philosophicus. This was the basis of a new macro-economics. A large majority of the 1930s generation as well as that of the 1940s and even 1950s accepted and followed the new economics of Keynes. In addition, most if not all Nobel Laureates in economics after 1969 were also affiliated with the same heritage left by Keynes. This, by any standard, does not mean that all Laureates were imitators of Keynes. Each one has brought up a new contribution, which, of course, has enriched the Keynesian heritage. This author himself can testify that his new research program of a simultaneous equilibrium versus disequilibrium approach was born as a result of discovering a conflict and its solution between the classical and modern, Keynesian school of economic and social thinking. This was the great argument of the twentieth century, and we hope that our Prolegomena 1 (Rugina, 1998), Prolegomena 2 (Rugina, 2000) and Prolegomena 3 (Rugina, 2001), sooner or later will put to rest the conflict in question. There was no “scientistic error” – in the sense given by Hayek – but rather a true revolution in economic thinking where the classical logic and methodology were replaced by modern versions. If economics is, or wants to be, a science, then its methodology must have a common denominator with all other sciences. The “scientistic error” does not provide nor lead to a common denominator. Consequently, it is not and cannot be acceptable; in fact it is untenable. Hayek’s position has two important points: one is positive which requires that a free society and a free market economy are connected organically in the sense that one cannot exist without the other. The other point is negative in stressing that “the theory which has been guiding monetary and financial policy during the last thirty years (1974) . . . I regard it as fundamentally false, and to act upon it, as we now experience, as very harmful” (Le Prix Nobel, 1974, pp. 249-50). 2. The relationship between economics, social sciences and the physical sciences There is a view shared by many economists that the method and the approach used in the physical sciences are not and cannot be applied in economics and other social sciences with much success. The major point usually is concentrated on the lack of conditions to experiment in the way and with the same precision as in physical sciences. But that is not the whole story, because

we could experiment also in social sciences, including economics, on a small area and the standard-precision needs not to be very high, close to the limit of 100 percent, as in the physical sciences. Let us see what Hayek has to say: Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process . . . will hardly ever, be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes (Le Prix Nobel, 1974, p. 250).

What can we say about these observations? Complex phenomena exist not only in national economies or human societies, but also in the physical universe. The only significant difference lies in the fact that in Nature the natural parameter or the “constant” is given by the initial act of creation, whereas in economics the natural parameter of the numeraire-currency is not given, but we know from the work of Walras that it is absolutely necessary if we want economic and financial stability. Since after the Great Depression, gradually we eliminated the natural parameter of the numeraire, of course, Hayek’s “complex phenomena”, in human societies and economies are more difficult, in the sense that they contain more disequilibrium than the physical phenomena. That is true for the first and the second paragraph. The common ground for the methodological unification of all sciences does not lie in the use of the quantitative method or approach, but rather in the dual nature of both the physical universe and human societies which are mixed, composed of stable (equilibrium) and unstable (disequilibrium or unstable equilibrium) elements and forces. The first, stable equilibrium units are directly observable and measurable but the second are not. In the third paragraph, Hayek was right to warn about the danger that “theories may be formulated” only with reference to “measurable magnitudes” in the sense to subordinate theory to conform to certain empirical realities. This may happen usually in countries with political dictatorship of any sort. The quantitative method which Hayek considered “brilliantly successful in physical sciences” but, in his opinion, any attempt to apply the same procedure in social sciences “may lead to outright error”, does not represent the last word. Indeed, the fundamental question on what is the final theory to explain the real structure of matter, using the quantitative approach, by far has not been solved during the twentieth century. An authority on the subject informs us that from the “three species of elementary particles, which were known in the 1920s, we

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now have sixty one” (see Dyson, 1988, p. 7). If so, then the physical sciences are faced with a similar problem of methodology as in economics. For about the same time, in economic life we experimented with the application of the quantitative method, respectively, the macro monetary and fiscal policies, but in vain because, among other things, the problems of inflation or unemployment are still not solved properly and fully. The dual nature of the physical universe and human societies requires the development of two basic sections in methodology. Section I is concerned with the study of stable-equilibrium aspects of empirical realities (both actual and also potential) in Nature as well as in human societies. Section II deals with the more complex study of disequilibrium and unstable equilibrium aspects of empirical realities (actual and potential) both in Nature and human societies. The two sections have to run parallel and in this way we shall pass into a third peaceful revolution in science (Rugina, 2000). There is no trace of evidence that Hayek was concerned with the problem of methodological unification of all sciences. There is also not sufficient evidence about the distinction between: . problems of adjustment within a system of general stable equilibrium which are easy to solve, or they are automatically solved through a normal functioning of the system; and . problems of structural reforms of the institutional and legal framework of the system in the case of a major or total disequilibrium. 3. The road of Hayek versus the road of Keynes Laureate Hayek and Lord Keynes, two different personalities, started from the same observation that there was something good in the modern mixed capitalist regime but there were also some problems which were to be resolved. Hayek was a classical thinker by training and temperament, and he was irritated by the fact that many contemporary economists, including Keynes, were using a different approach and mode of reasoning, which was against the classical school. He knew that there were some problems of instability due to the business cycle phenomenon but the Hayek road was toward optimism in the sense that the difficulties were simple problems of adjustment within the system. For instance, if the system was cleaned of monopoly institutions and practices and eliminated government interventions, then the economic life would be normal. And that is all we can expect from the advise of the economic profession, according to Hayek. On the other hand, he felt strongly that something was wrong in the advice given by the experts to the political men in power. In a way he was anticipating our impossibility theorem in practice. That explains the spirit of what he said in his lecture: The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper

scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level . . . I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, is very harmful (Le Prix Nobel, 1974, p. 249).

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There is no doubt that Hayek refers here to Keynes and his theory of macroeconomics, respectively to monetary and fiscal policies, viewed as a failure in practice and “fundamentally false”. Lord Keynes, contrary to Hayek, viewed the problems of the capitalist regime as in need of serious structural reforms which, by the given historical conditions of the 1930s, he wanted to be completed by gradually adjusted democratic procedures. The Keynesian road was directed to active government intervention repudiating the Hayek road of “laissez-faire” capitalism. Keynes accepted the quantitative method but not extended to the limit of passing over into a centrally-planned and controlled economy. Here is the picture of modern capitalism as viewed by Keynes in 1936:

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In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect to output and employment, it is not violently unstable. Indeed, it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse (Keynes, 1936, p. 249).

Lord Keynes (1930), even when he wrote A Treatise on Money, shared the concept of stable equilibrium inherited from his honoured teacher Alfred Marshall. But when he saw the ravaging effects of the Great Depression, especially during the second period (1931-1933), he changed his mind and shifted to the concept of unstable equilibrium, avoiding the prefix of “unstable” and calling it more simply “equilibrium with unemployment”, producing confusion to some extent, even though in his favor by attracting more followers. Keynes, all along this scientific road, knew what he was doing. In A Treatise on Money (Keynes, 1930), he changed the classical concept of real, natural, equilibrium, asset type of money and converted it into a nominal, artificial, disequilibrium liability-type of money. He called it “money of account”, “representative” or “managed currency”. It could be called more properly, “antinumeraire”, in reference to the Walrasian law of general equilibrium. What is open for debate, one might say confusing (speaking scientifically), is the fact that Keynes considers his definition as the “primary concept of a theory of money”. No prominent economist of that time or thereafter objected. Here is how Keynes opened Ch. 1 of his A Treatise on Money: Money of account, namely that in which debts and prices and general purchasing power are expressed,is the primary concept of a theory of money (Keynes, 1930, p. 3).

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On the other hand, to repeat, Keynes knew what he was doing. When he, in 1930, changed the concept of money radically from an asset (gold or silver numeraire) which cannot be manipulated or managed at will by the government (with or without a central bank) into a liability type of money (paper money and monetized bank credit), anti-numeraire or disequilibrium monetary standard, he was preparing the future road of macro-monetary and fiscal policies.“Money of account”, therefore, in fact represented an artificial monetary standard which by definition once accepted in circulation would automatically contaminate all prices and incomes with disequilibrium or general instability. In the end the whole financial and economic system would come under Go¨del’s proof, and the solution to any problem would be indeterminate. Initially, we thought that Laureate Hayek would raise this problem of financial and not less economic instability in view of his argument with Abba Lerner and Oscar Lange in the 1930s about “economic calculation”, but he did not. There was a second occasion when Hayek, in working on his lecture, could have encountered our “impossibility theorem in practice” (see Introduction, pp. 353-4), as a crown of his repeated criticism in sounding the alarm that something basic was wrong in the economic science and implicitly in modern society and economy. But Hayek again missed the occasion. We shall return to this point. Lord Keynes had a new message by 1936, specifically offering an immediate solution of how to escape from the Great Depression. For the short run the solution appeared to be all right, but in the long run unfortunately the solution proved to be a sort of unfinished business. That is why by 2002 we are in danger of falling into a much more complicated “global crisis”, compared with that of the 1930s. The Keynesian road, initially was good but in the long run it became socially harmful, with no precise direction in zig-zag; not solving properly and fully the problem of “involuntary unemployment”, but in addition creating a host of new complicated issues of a cumulative and perpetual nature. Here we can enumerate a few most important issues: (1) Perpetual deficits in the public budget. (2) An ever rising national and international debt. (3) Permanent difficulties with the balance of trade and international payments. (4) More social injustice through the redistribution of national income by inevitable false manipulation (the impossibility theorem in practice) of the official rate of interest and implicitly also the private rates. (5) A tendency of reducing the official rate of interest as a stimulus to business, at the same time weakening and partially destroying the natural source of capital formation, respectively, the real, equilibrium savings of the middle class.

(6) An easy access to the invisible, cheap but most powerful mechanism of monetization of abstract, fictitious form of bank credit can be used to finance most destructive projects where modern technology appears as an instrument to destroy the natural resources, industry, life facilities and in this way damages a large population for several generations. (7) The same artificial, cheap monetized bankcredit is also responsible for spending billions and billions of US paper dollars to construct “international space stations” which one day may become the basis of military action for solving political, ideological, racial or even religious conflicts on our planet. In all these cases the real culprit appears to be the artificial, abstract, nominal, anti-numeraire, cheap, disequilibrium form of money that Lord Keynes called “money of account” and recommended as the primary concept of a theory of money. If we continue to use this type of money on a large scale at the global level – as we do nowadays – it does not take much philosophical reasoning to see that modern civilization, as we knew it before the atomic bomb was discovered, and with it the whole humanity, is in great danger of selfdestruction through modern technology, which brought so many socially beneficial inventions before “money of account” took the upper hand in finance. It was so, as long as technology was financed also by free voluntary savings of the people. If Lord Keynes would come back just for a day to see how many dangers are included in his favorite concept of “money of account”, we have no doubt that he would have some “second thoughts” about this matter. If Laureate Hayek would be allowed also to return for a day and see the world as it is, in great danger, he also may have “second thoughts” that the old or new “laissez-faire capitalism” that he advanced during a large part of his life could not save us from a complex spiritual confusion that dominates our time. Vested interests in business and finance, in politics, and not less in the world of ideas, characterize the double crisis of our generation. Modern civilization, nolens volens is on trial and for good or bad a great transformation is on its way and we are not prepared at all; we are at the mercy of vested interests and blind historical forces (see Rugina, 1998). 4. The Keynesian profile of future capitalism We just saw a short description of two different roads associated with the existing, actual social and economic order in the world. One was conservative in nature in the sense that it departs from the assumption that the present social and economic system as a whole, with direct reference to Western capitalism, is good and healthy, but there are some problems. Those problems are only for adjustment within the existing institutional and legal framework. This was the principal thesis of Laureate Hayek. There is no question about

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“future capitalism”, because all is a continuation of the old “laissez-faire” capitalism with hands-off policies by the government, as much as possible. The second was the Keynesian road, which may be called social-democratic or democratic-socialist, which departs from the premise that the existing social and economic system is in need of structural changes in the institutional and legal framework. These changes, however, should be accomplished through democratic procedure, by the consent of the people. We just went through a critical examination of the Keynesian road which is complicated not only in terms of execution (the impossibility theorem in practice), but also in view of far reaching hazardous consequences for the future. Since Lord Keynes was a great original thinker throughout his life, and the majority in the profession and intellectuals consider him as the greatest economist of the twentieth century, we have to provide the maximum of assurance that the examination is fair and restricted to pure scientific analysis. And the best procedure, we think, is to attach his own presentation. Here is the voice of Keynes: The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine the optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will cooperate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community (Keynes, 1936, p. 378).

Almost to the letter, all these provisions indicated above have been applied during the twentieht century, but in the end none of the seven critical issues mentioned before has been solved properly and fully. Laureate Hayek was right in his feeling that something was wrong in the “guiding monetary and financial policy” since the 1930s, but his explanation is untenable. An adequate solution is still waiting for a free, open and comprehensive debate in the literature. 5. Laureate Hayek and a continuous battle with the impossibility theorem in analysis Even though he never mentioned specifically, Laureate Hayek like any great economist, aspired to formulate one single general theory based on empirical realities characterized by what he called “essential complexity”, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large number of variables. “Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons” (Le Prix Nobel, 1974, p. 251).

On the same page Hayek gave additional information about his concept of equilibrium as follows:

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We know, in other words, the general conditions in which what we call, somewhat misleadingly, an equilibrium will establish itself: but we never know what the particular prices or wages are which would exist if the market were to bring about such an equilibrium. We can merely say what the conditions are in which we can expect the market to establish prices and wages at which demand will equal supply. But we can never produce statistical information which would show how much the prevailing prices and wages deviate from those which would secure a continuous sale of the current supply of labour (op. cit., ibid.).

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Laureate Hayek, at least at this point, does not make a distinction between general stable equilibrium inherited from Walras in its more complete formulation, and the concept of unstable equilibrium with unemployment. He is also not aware about the long distance between a system of general stable equilibrium and another system of mixed, unstable equilibrium, as conceived by Keynes or Leontief. Only with our orientation table does the long distance between model M1 (Walras) and model M4 (Keynes) appear in its full significance. Let us examine more carefully the above text. We repeat what was mentioned earlier that both social and the physical universe are in their essence of dual nature, composed of stable (equilibrium) and unstable (disequilibrium) elements and forces. The only difference, speaking methodologically, between the physical universe and human societies is that in Nature the natural parameter (the Newtonian constant) is given (implanted by the Act of Creation), whereas in human societies the natural parameter of the numeraire-currency (the Walrasian constant) is not given but we have to introduce it with the other conditions for general stable equilibrium, if we want stability with full employment and prosperity. In Nature we have complexity in “an orderly manner”, whereas in human societies since the 1930s we abandoned the Walrasian constant and no surprise that in 1974 or 2002, we have complexity in a “disorderly manner”. In pure theory, in the Walrasian sense, we do not need to ask for “quantitative evidence” or a “fairly large number of acting persons” in order to have certain results of real, pure competition. When all basic conditions for general stable equilibrium are fulfilled (25 in number, see Introduction, pp. 369-78) in practice, the equilibrium prices and the particular prices, wages and all other sources of income are all in a state of inherent stability, determined by the law of marginal utility, cost and productivity. Here is what Walras wrote: Thus any value in exchange (prices), once established, partakes of the character of a natural phenomenon, natural in its origins, natural in its manifestations and natural in essence (Walras, 1954, p. 69).

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Within the Walrasian system, it is enough if we can conceive, or think about, a concept as a possible, potential reality. This suffices for a natural, real-truth concept to enter the process of rational, analytical, theoretical reasoning. When Hayek is saying that we “never know the particular prices or wages”, or “we can never produce statistical information”, then he is not talking about the Walrasian model M1 but rather implicitly about the Keynesian model M4 of unstable equilibrium. Unfortunately, Laureate Hayek did not identify the model where his conclusion was right, and probably he did not feel that there was need for such identification. After all, his reasoning was done under the assumption of the old and new “laissez-faire capitalism” which is the same as model M4. When Hayek mentioned the “misleading interpretation” of equilibrium, he certainly refers not to stable but rather to unstable equilibrium which he criticized. In addition, the evidence in Hayek suggests that his own concept of equilibrium is institutional and very wide in nature, including the entire entity of a modern society and economy. But such an all comprehensive theory is impossible by definition. It is the essence of the impossibility theorem in analysis (see Introduction, pp. 349-53). In order to see the truth-content between a system of stable equilibrium versus a system of unstable equilibrium and also the long distance between the two systems, there is need to consult the orientation table for economics (see Introduction, pp. 341, 345). Hayek insisted all the way on his original position that there is a conflict in methodology between social sciences, including economics and the physical sciences. He thought that the scientist in the physical field is capable of providing and using precise empirical information, whereas a research man in social sciences cannot. Here again is Hayek’s voice: The reason for this state of affairs is the fact, to which I have already briefly referred, that the social sciences, like much of biology but unlike most fields in the physical sciences, have to deal with structures of essential complexity, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables. Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons (Le Prix Nobel, 1974, p. 251).

What can we say about the above text? The real state of affairs or the heart of the matter in economic science lies not at all in a presupposed conflict between social and physical sciences and even less in an imitation of the methodology used in the physical sciences. The full truth is that the methodology used in both fields of science is incomplete, is based on the same modern, formal, symbolic mathematical logic where the propositions have a form of expression only (empty symbols) but are lacking in “real-truth content”. Consequently, the results are in the class of “ambiguities”, paradoxes of the type “either-or” and “as . . . if”. The principal father of modern, symbolic, mathematical logic – Bertrand Russell ” recognized this in his magnum opus Principia Mathematica

(Whitehead and Russell, 1910, p. 39) where he wrote that “the essential characteristic of a function is ambiquity” (author’s emphasis). And “ambiguity” is the characteristic of the profile of model M4 on our orientation table, which represents any system in a position of unstable equilibrium in all sciences, including economics with the usual model of “equilibrium with unemployment”. Pure competition is an invisible but real force which acts in human societies together with the natural parameter of numeraire like the force of gravitation and the Newtonian constant in the solar system, for the purpose of holding the system together. In economics this mechanical process of stable equilibrium is not supported nor influenced by “a large number of acting persons” – as Hayek thought – but rather as a natural, rational behavior of free people in a social and economic system governed by the Walrasian law of general stable equilibrium in its more complete formulation. This statement has no intention to imitate Newton and Walras, but rather to express simply and clearly a full methodological truth in applying the new integrated logic to the given subject. When Lord Keynes condemned the classical school as “misleading and disastrous if we attempt to apply it to the facts of experience” (a previous quotation from Keynes, 1936, Ch. 1, p. 3) so did Laureate Hayek in his Memorial Lecture when, with reference to Keynesian macro monetary and fiscal policies, he declared them (omitting the prefix “Keynesian” but easily recognized from the text) “as fundamentally false, and to act upon it, as we now experience, as very harmful”. The reader should not be surprised about these negative conclusions. Hayek was a classic, speaking philosophically, and Keynes was a modern thinker in opposition to the classical doctrine. Using the orientation table, both initially began with observation of empirical realities, that is, modern mixed capitalist regime represented by model M4. The interpretation of Hayek was that this system was good and healthy in principle but still there were some problems to be resolved. Other classics before him thought in the same manner. In view of Hayek the solution was to develop a better economic theory, in a way a general theory but institutionalist and including a large number of empirical data, with the direction toward the north, using the same orientation table. Lord Keynes started also with the observation of modern capitalism, but came to the conclusion that the system with all good aspects needed serious structural reforms in order to solve the problem of involuntary unemployment that in the 1930s was considered an immediate social and economic danger. The orientation of Keynes was toward the south (using the same orientation table) and therefore anti-classic. Lord Keynes was the winner because the spirit of the time was in his favor. The Keynesian doctrine by 2002 is still fighting with the impossibility theorem in practice.

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Laureate Hayek was the loser because with his institutionalist general theory he did not find adequate reception in the profession and the public opinion, in view of the Keynesian revolution which got the upper hand. However, the spirit of globalization resurrected in some respect the Hayek doctrine of “free trade without conditions”. 6. Laureate Hayek and mathematical economics Hayek wanted further to dissipate any misinterpretation that he was against the application of mathematical method in economics. In reality, he accepted the use of mathematical economics, but only on a limited basis. The same attitude was shared earlier by another great classic, Alfred Marshall. Here is the voice of Hayek: I regard it in fact as the great advantage of the mathematical technique that it allows us to describe, by means of algebraic equations, the general character of a pattern even where we are ignorant of the numerical values which will determine its particular manifestation. We could scarcely have achieved that comprehensive picture of the mutual interdependencies of the different events in a market without this algebraic technique. It has led to the illusion, however, that we can use this technique for the determination and prediction of the numerical values of those magnitudes; and this has led to a vain search for quantitative or numerical constants (Le Prix Nobel, 1974, pp. 252-3).

How can we interpret this text? In the first paragraph he gave “to Caesar what belongs to Caesar”, and in this particular case the Caesar should be replaced by Leon Walras with his law of general stable equilibrium, even unfinished as it was. The Walrasian system, however, was never tested in practice with its adequate institutional and legal framework, factor “R” on our orientation table. For clarification, in the Walrasian system, both in theory and practice, we have only one “constant”, that is, the numeraire-currency as the natural parameter of the system. Once in action, this system provides all the necessary numerical values to check that the final results are exactly as those indicated by the theory in question. Laureate Hayek was a conservative-liberal of the old school of “laissez-faire capitalism” and he was defending the status quo. From the modern, mixed, capitalist regime one could never extract the “numerical values” to complete the equations and confirm the validity of the law of general stable equilibrium in practice. On this point, Hayek was right as a critical observer. But he did not provide a positive solution to this problem whose roots were located in modern, symbolic, formal logic and in the structure of modern capitalism. Hayek’s sharpest criticism against mathematical economists was expressed in the following paragraph: There may be few instances in which the superstition that only measurable magnitudes can be important has done positive harm in the economic field: but the present inflation and employment problems are a very serious one. Its effect has been that what is probably the true cause of extensive unemployment has been disregarded by the scientistically minded majority of economists, because its operation

could not be confirmed by directly observable relations between measurable magnitudes, and that an almost exclusive concentration on quantitatively measurable surface phenomena has produced a policy which has made matters worse (Le Prix Nobel, 1974, p. 253).

In the first paragraph, the words “superstition” and “only” are not quite justified and will not be accepted by a mathematical economist. What Hayek called superstition is a habit of thinking in the profession that measurable magnitudes contain some truth, independent of personal views. The positive harm of the existing inflation and unemployment is not due to the fact that some magnitudes are measurable and others are not. The real harm comes from a different direction, respectively from a lack of distinction between: . problems of adjustment within the system which is assumed to be good and healthy; and . structural problems in the institutional and legal framework of the system. Hayek thinks that the problems under modern capitalism are of the first order, meaning, simple adjustments, and he was irritated by macro-monetary and fiscal policies. In reality, the problems are of the second order of the institutional and legal framework. The measurable magnitudes used by mathematical economists are contaminated with disequilibrium elements and invisible but real forces, which are omitted from the equations used. This is the true cause of “extensive unemployment” and perennial inflations. Hayek correctly felt by intuition that something is wrong in the system but he offers no positive solution to cure the superstition. The mathematical economists are justified in using the quantitative method in economic history and statistics. They can play a limited role also in the equation of unified knowledge, which is to come. To be sure mathematical economics can be applied with full success but only in a system of general stable equilibrium, in the Walrasian sense in a complete formulation and realized in practice with the necessary structural reforms (Rugina, 2001). The principal reason for this statement lies in the fact that the Walrasian model M1 is the only conceivable system which is 100 percent consistent at the limit and where the ex ante or ex post analyses with reversibility are valid. Applied in practice, nominal (money) and real wages are equal and all other sources of income or costs expressed in money are also equal in real terms. There is no other system where the natural parameter of numeraire-currency is 100 percent strong at the limit. In dynamics possible fluctuations are a single event, simple and limited in time. With the same methodological assurance, one can say that mathematical economics cannot be applied with full success in model M4 on the orientation

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table, which represents a system of unstable equilibrium or what Lord Keynes called “equilibrium with unemployment”. This mixed system of model M4 is only 50 percent consistent and 50 percent inconsistent at the limit where the solution to any problem is indeterminate, a paradox of “either . . . or” functions, under Go¨del’s theorem. Keynes called this system also “secular stagnation”. In dynamics, the possible fluctuations are cumulative up and down irregularly in the sense of Wicksell, forming the business cycle phenomenon. In one sentence, the whole system is fighting a losing battle with the impossibility theorem in practice, as we know very well from the experience during the twentieth century. 7. The transition from a system of unstable equilibrium to a new system of general stable equilibrium through the equation of unified knowledge The formula for transition from a system of unstable equilibrium to a system of general stable equilibrium, which would solve all problems raised by Hayek, we called the equation of unified knowledge. It is a very simple methodological device that constitutes a most powerful logical instrument in solving practical problems not only in economics and other social sciences, but also in natural sciences like medicine, biology and engineering as far as they have technology applicable to human life and activities. The equation of unified knowledge stands for: S ¼ f ðA; PÞ where: S ¼ solution to a practical problem; A ¼ actual, existing realities which are in a state of disequilibrium, because otherwise, we do not have practical problems; and P ¼ potential, future realities under the best possible conditions, which cannot be anything else but conditions of general stable equilibrium, because only in that case is the problem adequately and completely solved. The equation of unified knowledge S ¼ f ðA; PÞ can be used, in the first place, to solve scientifically (applied science) not only practical problems of everyday life, but also it is a credible, objective instrument to explain other problems from the history of economic thought. Let us examine quickly for a moment the activity of a scientist in medicine facing a patient who is sick. He will examine the sick patient asking questions and order some tests in the laboratory. This is nothing but the identification of the factor “A” in our equation. When all the tests are in, the same medical doctor has to establish a correct diagnosis of the suffering person, who is, so to say, in a medical disequilibrium. How could he determine a correct diagnosis if he would not carry in the back of his mind a clear image (knowledge) of the ideal conditions of stable equilibrium in a completely healthy individual, knowledge acquired from his medical studies and previous practice. This is nothing but factor “P”, from our equation. When these two factors are completed, our medical doctor is able to determine the diagnosis and to prescribe the necessary medicine and/or other recommendations, that is, establishing factor “S” that will bring our patient

from the stage “A” (disequilibrium), as quickly as possible and without creating other problems in the immediate future toward the final station “P ” (stable equilibrium) where our patient is again a healthy individual. If we take another example of mechanical engineering where a simple or a most complicated machine is in disorder or does not function properly, a specialist called to help, methodologically speaking, will follow absolutely the same procedure. Why should it be different for an economist who is called to examine a single business firm (micro-analysis) or a national economy (macroanalysis) if economics is a science, and we think it is? Upon more reflection, a keen observer will notice that with reference to a national economy, the factor “A” requires knowledge of the Keynesian and Marxian economics, but restricted only to the identification of the mixed nature of the actual, empirical realities. On the other hand, factor “P ” implies rational, pure analytical knowledge provided by the Walrasian law of general equilibrium. Why do we need this? The Walrasian law serves in this case as a stable indicator of the right direction on the road for the realization of the great free, just and stable economy and society, the dream of humanity, of the human family all over the world. The dominant thinking of today is concentrated, almost exclusively on empirical realities which evidently are in a state of disequilibrium. That means that modern and contemporary scientists do their basic reasoning in terms of factor “A”and ignore factor “P ” of our equation. In this way the moderns commit a methodological error in reverse to that committed by the classics who reasoned the problems only in terms of ideal conditions of stable equilibrium, that is only factor “P ” neglecting the empirical realities or factor “A”. On this road and for this basic methodological error the classics failed. We leave to the reader to reflect what may happen to the moderns in the future in view of the situation in 2002. Let us examine the position of our two great original thinkers: Laureate Hayek versus Lord Keynes. Both started their research about the same time as their work matured by considering factor “A”, respectively, mixed-modern capitalism. Each interpreted the existing empirical conditions in his own way. Hayek, with his background and temperament took, the path of reasoning ex ante toward the end of the equation. He retained the classical heritage with the cause-and-effect analysis and the forward vision of the economic and social process. It was the correct road, yet he never reached the final station where Walras was waiting, not for an imitator, but for a productive continuation of his system of general stable equilibrium. Laureate Hayek wanted a general theory on empirical basis, but soon he discovered that this was not possible. Indeed, according to our orientation table (Introduction, pp. 341, 345), he was fighting a losing battle with the impossibility theorem in analysis (Introduction., pp. 349-53). When he saw that what he wanted was not possible at that time, he turned to his initial position

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with the conviction that the “real difficulty in science . . . which sometimes is indeed insoluble, consists in the ascertainment of the particular facts” (Le Prix Nobel, 1974, p. 256). A more explicit statement on his position was expressed in the following text:

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It has, of course, to be readily admitted that the kind of theory which I regard as the true explanation of unemployment is a theory of somewhat limited content because it allows us to make only very general predictions of the kind of events which we must expect in a given situation. But the effects on policy of the more ambitious constructions have not been very fortunate and I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false (Le Prix Nobel, 1974, p. 253).

What was not in order during the struggle of Hayek to construct a general empirical theory in economics? First, as great as he was, he missed the observation by the master logician Wittgenstein who said: “The facts all contribute only to setting the problem, not to its solution” (Wittgenstein, 1922, p. 149). He missed in continuation the following two observations by Leon Walras: It is already perfectly clear that economics, like astronomy and mechanics, is both an empirical and a rational science. And no one can reproach our science with having taken an unduly long time in becoming rational as well as empirical (Walras, 1954, p. 47). From these real-type concepts the pure science of economics should then abstract and define ideal-type concepts in terms of which it carries on its reasoning. The return to reality should not take place until the science is completed and then only with a view to practical application (Walras, 1954, p. 71).

In our equation of unified knowledge, factor “A” is empirical whereas factor “P ” is rational. In Hayek’s kind of theory the factor “P ” was missing and that is why he could not get a clear cut “true explanation of unemployment”. Lord Keynes, in turn, departed from the same point of observation “A” but with his dynamic personality and inclination to change, he left classical theory inherited from his teacher Alfred Marshall and headed in the opposite, anticlassical direction compared with Hayek. Using an inverted order of empirical reasoning with effect-counter-effect type of policies and macro ex post analysis, he constructed a new, attractive model based on the assumption of “equilibrium with unemployment”, the full meaning of which very few people understood. By adding other attractive devices like “leakage of demand”, “government deficit spending”, the “multiplier process” and “macro-monetary and fiscal policies”, at a time when a better solution was not available, Lord Keynes definitely was the winner in the short run. He was the scientist who gave new ideas which were accepted by the political men in power at that time. In this way, Western society was saved from a possible Marxist revolution with all

other consequences. In the long run, however, as we know now very well from experience during the twentieth century, Keynes left behind modern society and economy fighting continuously with the impossibility theorem in practice. The economic, financial and social problems in 2002 are much more complicated and more numerous than during the 1930s. Yet, we think that as long as we have freedom of expressing different points of view, we are not lost. Free human imagination is our inexhaustible individual and social asset. We are convinced that the equation of unified knowledge together with the new research program of a simultaneous equilibrium versus disequilibrium approach and the rest of the other tools can help to solve not only the conflict between Hayek and Keynes, but also the great methodological argument of the twentieth century. It was a battle on method not only in economics but actually in all sciences. The essence of the dispute was a presupposed contradiction on method between classical and modern schools. According to our results, the modern school of reasoning is not contradictory but rather complementary to the classical school (see Rugina, 2000, Ch. 2). The end of Laureate Hayek’s lecture contains good advice to the younger generation in all sciences but in particular to those in economics and other social sciences, as follows: If a man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible . . . (p. 257). The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him from becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals (Le Prix Nobel, 1974, p. 258). References Dyson, F. (1988), Infinite in All Directions, Pelican, Gretna, LA. Hayek, F.A. (1929), Geldtheorie und Konjunkturtheorie, Ho¨lder-Pinchler-Tempsky, Wien and Leipzig. Hayek, F.A. (1931), Prices and Production, George Routledge & Sons, London. Hayek, F.A. (1933), Monetary Theory and the Trade Cycle, Jonathan Cape, London. Hayek, F.A. (Ed.) (1935), Collectivist Economic Planning, Routledge and Kegan Paul, London. Hayek, F.A. (1944), The Road to Serfdom, University of Chicago Press, Chicago, IL. Hayek, F.A. (1949), Individualism and Economic Order, Routledge and Kegan Paul, London. Hayek, F.A. (1952), The Counter-revolution of Science, Glencoe: The Free Press, New York, NY. Hayek, F.A. (Ed.) (1954), Capitalism and the Historians, University of Chicago Press, Chicago, IL. Hayek, F.A. (1960), The Constitution of Liberty, University of Chicago Press, Chicago, IL.

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Hayek, F.A. (1967), Studies in Philosophy, Politics, and Economics, Routledge and Kegan Paul, London. Hayek, F.A. (1973), Law, Legislation and Liberty, Vol. I. Rules and Order, Routledge and Kegan Paul, London. Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan and Co., London. Keynes, J.M. (1930), “A treatise on money”, Vol. 1. The Pure Theory of Money, the Collected Works of John Maynard Keynes, Macmillan St Martin’s Press, Royal Economic Society, London. Newton, I. (1962), Philosophiae Naturalis Principia Mathematica, Vol. 1 (originally published in 1686), trans. by Cajori, F., University of California Press, Berkeley, CA. Rugina (1998), Prolegomena 1: To Any Study in Economics, Finance and Other Social Sciences: The Road to a Third Revolution in Economic, Financial, Social, Ethical, Logical and Political Thinking (monograph), International Journal of Social Economics, Vol. 25 No. 5. Rugina (2000), Prolegomena 2: To Any Future Study in “Integrated Logic, and a More Comprehensive Methodology for the Unification of all Sciences, Natural and Social (monograph), International Journal of Social Economics, Vol. 27 No. 5/6 Rugina (2001), Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary, Financial and Social Stabilization Plans (monograph), International Journal of Social Economics, Vol. 28 No. 1/2 Walras, L. (1954), Elements of Pure Economics or the Theory of Social Wealth (originally published in 1874), trans. by Jaffe, W., Richard D. Irwin, Homewood, IL. Whitehead, A.N. and Russell, B. (1910), Principia Mathematica, Cambridge University Press, Cambridge. Wittgenstein, L. (1922), Tractatus Logico-Philosophicus (originally published in 1921), trans. by Pears, D.F. and McGuiness, B.F., Routledge and Kegan Paul, London.

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9. Nobel Laureate: Gunnar Myrdal (1898-1987) Nobel Memorial Lecture, March 17, 1975 Introduction by Professor Erik Lundberg of the Royal Academy of Sciences together with Laureate Friedrich A. Hayek Biography. Laureate Gunnar Myrdal was born on December 6, 1898 in Gustafs Parish, Sweden. He graduated from the Law School of Stockholm University in 1923 and received his juris doctor degree in 1927. From 1925-1929 he visited for study purposes Germany and England. In 1929-1930 he was a Rockefeller Fellow in the USA. In 1933 he was appointed as Professor of Political Economy and Public Finance as a successor of Gustav Cassel. He was involved also in Swedish politics and was elected to the Senate in 1934 as a member of the Social Democratic Party. The Carnegie Corporation of New York in 1938 commissioned him to make a study of the American negro problem. This study was published in 1944 with the title: An American Dilemma. The Negro Problem and Modern Democracy (Myrdal, 1944). After returning home in 1942, he was re-elected to the Senate and served as a member of the Board of the Bank of Sweden and Chairman of the Post-War Planning Commission. He was Executive Secretary of the United Nations Economic Comission for Europe. After that he conducted a study of economic trends and policies in South Asian countries for the Twentieth Century Fund. Again he published the books: Asian Drama. An Inquiry into the Poverty of Nations (Myrdal, 1968) and The Challenge of World Poverty. A World AntiPoverty Program in Outline (Mydal, 1970). In 1961 he returned to Sweden where he became Professor of International Economics at Stockholm University, where he established the Institute for International Economic Studies. He was the Chairman of the Board of the Stockholm International Peace Institute. He became also Chairman of the Board of the Latin American Institute. He received more than 30 honorary degrees beginning with Harvard University in 1938. He was a member of the British Academy, American Academy of Arts and Sciences, the Royal Swedish Academy of Sciences, Fellow of the Econometric Society and Honorary Member of the American Economic Association.

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The equality issue in world development, Nobel Memorial Lecture, March 17, 1975 by Gunnar Myrdal Laureate Myrdal selected a topic for his Lecture, entitled “The equality issue in world development”, conceived as a broader problem about the economic, financial, social, psychological and political “conditioning of our thinking, which at bottom is a moral issue”. The reader should understand from the beginning that Laureate Myrdal is a critic of both the economic science and the modern, capitalistic regime. The second paragraph speaks for itself: Our knowledge, as well as our ignorance, at any time and on every issue, tends to be opportunistically conditioned, and thus brought to deviate from full truth. In every epoch and every problem, this opportunistic tendency operates also in our scientific work, if not critically scrutinized. This view dawned upon me more than forty years ago, when I analyzed the political element in the development of economic theory. I have then over the years found this hypothesis confirmed by my studies in many different fields and, of course, during my ten years as Executive Secretary of the United Nations Economic Commission for Europe, responsible for operational work in relations with governments, as well as for research (Le Prix Nobel, 1974, p. 263).

1. More clarification about the concept of true, right and peaceful social and economic equality and equity for all What can we say about the text above? First, just because Laureate Myrdal announced that the subject was conceived as a “broader problem”, this requires more clarification about the very concept of “equality”, which is not provided in the text. In continuation, he added that the problem “at bottom is a moral issue” and therefore it is associated with the concept of social justice. Social justice in turn can be viewed as justice of equitable shares, i.e. equity and justice of equal shares, that is, equality. Further, the notion of “political element in the development of economic theory” and the “opportunistically conditioned” behavior in research will not be easily accepted by any economist who is struggling hard to discover new ideas but at the same time is inclined to be critical with his/her own work. That our thinking, in some respects, can be influenced by prevailing doctrine and mode of reasoning, is a reality in the profession. Laureate Myrdal has criticized severely what is known as the “establishment”, which sometimes impedes the development of new, better ideas and interpretations. We shall return to this subject later (Myrdal, 1972). Let us revise the concept of equality for more qualifications which are not given in the text. Myrdal seems to take the term of equality as if it were quite clear and free of any misinterpretations. In the US Declaration of Independence of July 4, 1776, the Representatives in the General Congress declared:

We hold that these truths to be self-evident, that all men are created equal; that they are endowed by their Creator with certain inalienable rights; that among these, are life, liberty, and the pursuit of happiness. That, to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed; that, whenever any form of government becomes destructive of these ends, it is the right of the people to alter or to abolish it, and institute a new government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness (David McKay Co., 1976, pp. 9-10).

In spirit, this Declaration (the quoted text) represents the ideal conditions of a society and economy under conditions of a system of general stable equilibrium in the Walrasian sense and a more complete formulation, identified as a model M1 on our orientation table (Introduction, pp. 341, 345).This is also the full image of a free, just and stable economy and society which can be taken as an axiom. The Marshallian model M2 can be brought in real life as close as humanly possible to model M1. In this imagery but also empirically possible economy and society, any child is born equal with those inalienable rights. In this ideal environment, we can talk about direct equality of rights at birth. As soon as the babies are born (male and female), as a matter of fact, they appear unequal in many respects and even more unequal when they grow up through education, at home and in the schools, professional training, experience and character. This is natural inequality, which we cannot change except by force through political power. The original axiom of equality still remains valid but limited in time at birth. Political power can suppress but not annihilate it. The French Revolution of 1789 was conducted under the flag of “Liberte´, E´galite´ et Fraternite´”. But equality (e´galite´) after the revolution was converted into the formula “E´galite devant la loi” (equality before the law) which is the same as the US formula on the frontispiece of the US Supreme Court: “Equal justice under the law”. Analytically speaking, it was Leon Walras, among the great economists, who early in life (he was only 26 years old) found a solution to the argument of “justice of equality” versus “justice of equity”. He called the first one “e´galite´ des conditions” and the second “inegalite´ des positions”. The first one refers to “equal conditions” in any competitive selection in a game or a free market in any society and economy without monopoly or unjustified privileges. The second one refers to “inequality of positions” which actually reflects the true concept of “justice of equity” or of “natural inequality” as defined above. About the same problem of a distinction between the two concepts of justice, Walras wrote in continuation: Let us reform society and leave it to the individual to reform himself accordingly . . . Let us learn to reconcile the unreasonable claims of both individualism and communism; this would dispense us from remedying the consequences of an excessive individualism by

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lopsided communism in matters of morals or political economy (Walras, L., L’Economie Politique et la Justice, Paris, 1860, quoted in Rugina, 2000).

Now we reached the point where “natural inequality” combined with “equality of conditions” on free markets lead to a composite concept of general stable equilibrium distribution of national income. If we go back in history to 1786, 1860, 1936 or 1974 the real, empirical, financial and economic conditions were different from the Walrasian model M1 or M2. Does this mean that the Walrasian general equilibrium theory does not have application today or when Laureate Myrdal held his lecture? On the contrary, it has full meaning because we can see in our case that on top of natural inequality, we have to add also a residual, extra, artificial inequality which is the cause of many social inequities like poverty and unemployment. It is the existence of a residual, extra, artificial or disequilibrium form of inequality that Laureate Myrdal was hunting for, but he was not interested in this kind of pure analytical investigation. He was an institutional economist who was disturbed by the lack of sufficient and efficient research on problems of poverty, economic stagnation and social injustice in any form. When he was young, he published a book in Swedish (1929) which was translated into English: The Political Element in the Development of Economic Theory (Myrdal, 1953). He was a severe critic of the capitalist regime in the West where the political power structure, or what he called “the political element”, was so deeply embedded in the system that economic theory could not attain or deliver the full truth in the economic science. Unfortunately, as an institutionalist economist he was interested more in the political power structure and how to change it according to his philosophical views and less in the improvement of pure theoretical research. He did not see that no practical problem in economics or any other science can be solved properly and fully unless that problem was solved first in pure analysis (theory), beyond any reasonable doubt. 2. Decolonization and following social and economic problems Laureate Myrdal observed back in the 1930s the world composed of “backward regions” or underdeveloped countries versus developed or advanced countries, an anomalous situation. Here is his description of that time: Leaving all other differences aside, what then was referred to by the static term the “backward regions” were held at rest, within the colonial power structure. Their continued economic stagnation in great poverty was taken for granted, without exerting much interest on the part of the public in the rich countries, nor among their economic scientists. Perhaps the most important effect of World War II was the rapid dissolution of that power structure – although not having been part of the war aims of any belligerant country and not expected anywhere. Beginning with the quasi-voluntary decolonization of the British dependencies on the Indian subcontinent and the rest of South Asia, it swept over the globe like a hurricane, reaching also regions where there had been virtually no indigenous

liberation movement foreboding and, in some measure, preparing the change (Le Prix Nobel, 1974, p. 263).

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A large number of new politically independent countries emerged on the map of the world but not prepared at all for the change. However, political independence was not enough in the new environment. A new educated e´lite from these countries, trained in Western universities, raised the issue of development but without having a well developed program of stabilization and orderly development based on conditions of general stable equilibrium. Laureate Myrdal describes the situation in dramatic terms:

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In turn, as a subsequent effect of that political change the general public in the Western countries were suddenly forced to become aware of the huge income gap as between the poor majority of mankind and the rich minority, as well as the further fact that this income gap is continually widening, as indeed it had been doing for more than a century. An isolating wall of inattention, and ignorance made possible by that opportunistic bent of mind, had been broken through (op. cit., p. 264).

The educated e´lite mentioned above with the help of Western experts began to do research for national planning of economic development. The application of national economic planning brought a new layer of bureaucracy and corruption, over and above the remnants of the old colonial regime. In continuation, the new independent countries through the advice of the same e´lite tried to imitate and apply the concept of the “welfare state” with government deficit spending. The credit and loans coming from outside were not used productively and in the end they were not able to pay at least the interest due to foreign creditors. No surprise that gradually the income gap between developed and developing countries in question had increased. Half a century later, the politically independent countries are still asking for technical assistance, capital aid and commercial concessions from developed countries. The United Nations through various specialized agencies and due to pressure by the representatives of underdeveloped countries attempted to help but the situation could not be significantly improved. After all these failures, the evidence speaks that something must be wrong with the methodology applied to solve the gap in development between relatively poor and relatively rich nations. Finally, Laureate Myrdal began to see some light at the end of the tunnel when he repeated an excerpt from a series of lectures given in Cairo in the middle of the 1950s and later published in a volume, Economic Theory and Underdeveloped Regions (Myrdal, 1957), where he said: What is needed is not primarily a redistribution of wealth and incomes. Indeed, aid can only be a very small part of a rational international equalization program . . . None of the schemes which have been propounded for capital aid for development of underdeveloped countries has ever amounted to taking away more than a tiny fraction of the early increase of national income per head in the richer countries, which implied that no real sacrifice has ever been envisaged . . . A wholesale income equalization by redistribution between nations is both impossible and, I am inclined to believe, an unimportant objective (Le Prix Nobel, 1974, p. 265).

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Even if the rich nations would accept to give away a relatively larger portion of their yearly increase of national income per head, the gap in question would remain and, in all probability, will increase. The imitation of the experiment with the welfare state doctrine from the West, has already created a new problem in addition to the existing poverty, namely the population explosion. If that was not enough, a third problem emerged in underdeveloped countries, i.e. the depletion of unrenewable resources. Laureate Myrdal is not alone in favor of more equality in the distribution of national and international income. It is easy to say “more equality is needed”, but how can we determine “how much is the right proportion”? Where is the limit to stop? How can we apply the formula in practice, considering different professional groups? We can see how complicated it is to do justice to the problem of “equality”. We think that in the end a one-time reasonable social reform to compensate, as far as humanly possible, social injustices inherited by the present generation from the preceding generation, and the implementation of a program for stabilization and normal development according to the basic conditions of general stable equilibrium, remains the ultimate and best solution (Rugina, 2001, Ch. 1). Myrdal never mentioned the Walrasian system which has a stable institutional and legal framework and a distribution of national income according to the principle of justice of equitable shares for the active population. His final solution seems to be in convincing governments that there is “a virtual necessity of bringing down the consumption in the developed countries, if development should be possible in the underdeveloped ones” (op. cit., p. 266). Myrdal gave credit to the USA for the fact that “in the beginning and continually for a long time, what of aid was given came almost only from the United States” (op. cit., ibid.). But he did not like it when later US foreign aid was conditioned, more or less, also by political and military arrangements. In the 1960s during the Vietnam War, it is true that US foreign aid received more and more the political character of being oriented toward those countries which supported US foreign policy. Other Western countries tried to apply the rule that foreign aid be tied to exports from the donor countries. This practice implied higher import prices for underdeveloped countries and this in turn was of little help for the cause of development, just where it was badly needed. Myrdal was very critical of the profession when he wrote: The lack of zeal on the part of most professional economists to scrutinize the statistical figures on aid is to me embarrassing, like their often uncritical use of many other statistics from underdeveloped countries, their acceptance of a diplomatically twisted terminology and, more fundamentally, their use of systems of analytical concepts that are inadequate to the situation in underdeveloped countries (Le Prix Nobel, 1974, p. 268).

This criticism formally appears to be correct but it is hard to pass a judgment because there is not sufficient evidence to see whether Laureate Myrdal

referred here to systems of pure analytical concepts in the sense of Walrasian pure economics, which evidently are applicable to underdeveloped countries, or he referred to another kind of institutional economics that was inconsistent with his view. In any case the problem raised here is one of methodology, specifically if one sees that the basic problems of the underdeveloped countries are an issue of adjustment within the system, or a structural deficiency in the institutional and legal framework. From the text which follows it seems that Myrdal shared the second sort of methodology but in his own institutionalist approach. The position of Myrdal is “that the motivation given for a policy does matter, not only in a deeper moral sense, but also for its effectiveness”. He gave again as an example the USA “where aid to underdeveloped countries has been continuously argued as being in ‘our country’s best interest’ with these interests more and more specified as located in the military sphere, foreign aid has increasingly lost its popular appeal” (Le Prix Nobel, 1974, p. 268). His theory, in his own words, is associated with the concept of “human solidarity and compassion with the needy” (op. cit., p. 269). 3. The era of the 1970s and an impasse with the problem of equality The rest of the lecture is devoted to the further development of the problem of equality but the prospects are not bright, according to Laureate Myrdal’s evaluation. Here is his interpretation: In recent years there have been sudden, major changes in the world economy. They have radically affected the economic situation of all underdeveloped countries, though in different directions and degrees, and thereby the entire setting of the equality problem I am discussing in this lecture. For by far the larger part of the people in underdeveloped countries, these changes have been worsening their development prospects and in many countries are now threatening the survival of large numbers of their poor masses. The type of marginal foreign aid we have provided, is clearly not enough to meet their barest needs. The underdeveloped countries are therefore now proclaiming the necessity of not only increased aid but fundamental changes of international economic relations (Le Prix Nobel, 1974, p. 269).

There were several events which were supposed to help in solving the problem of the underdeveloped countries. The United Nations passed a resolution in the form of a “Declaration on the establishment of a new international economic order” in a special session of the United Nations General Assembly held in April 1974, supposedly to consider the “emergency situation”. A World Food Conference took place in November the same year with a declaration “establishing the right of every man, woman and child . . . to be free from hunger and malnutrition, and stressing the fundamental responsibility of the governments to work together for reaching that goal”. Nothing came out from this conference. There followed the “Organization of the Petroleum Exporting Countries” in form of a cartel which raised the earlier price of oil four to six

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times. The result was that some underdeveloped countries became rich, but partially at the expense of other countries which were importing oil. Under these conditions, Myrdal has this to say: There is, therefore, a vicious circle inherent in the present trends. As development is frustrated and living levels brought downwards among the masses because of the oil crisis and the food crisis, any population policy, which might be inaugurated, becomes less effective. And so the food crisis becomes goaded in the way of circular causation with cumulative effects . . . In this situation there are certainly moral and rational reasons for a new world order and, to begin with, for aid on a strikingly much higher level. In particular, people in rich countries should be challenged to bring down their lavish food consumption (Le Prix Nobel, 1974, p. 272).

There is a vicious circle here, not only “inherent in the present trends” but also in the method of approach used to solve the problem. If the foreign aid would be “on a strikingly much higher level” this in turn would lead soon to a population explosion which would complicate the problem even more. A reasonable and efficient solution has to come from inside and not be imported from the outside. The vicious circle can be avoided and the problem can be solved properly and fully – to repeat – with the rigorous application of the equation of unified knowledge S ¼ f(A, P) which implies: . a one-time social reform to correct, as far as humanly possible, social inequities inherited by the present generation from the previous generation; and . simultaneously proceed with structural reforms to introduce a new, best possible, social and economic order based on conditions of general stable equilibrium in its more complete formulation. Laureate Myrdal is not interested in the application of a general stable equilibrium. His main goal is a concept of “equality” and its application on a large scale which implies central economic planning and controls. On the other hand, he thinks that all this change can be realized and maintained by democratic means. We leave it to the reader to reflect more about this combination. A part of the central message by Laureate Myrdal is expressed in the following text: Real economic planning should be done in these rational terms. Such planning could help us to be more successful in solving the internal equality problems and would at the same time provide for a much larger aid to development in underdeveloped countries. In the first place, it could prevent the serious risk of human disasters for the majority of the poorest peoples in these countries. The blunt truth is that without rather radical changes in the consumption patterns in the rich countries, any pious talk about a new world economic order is humbug (Le Prix Nobel, 1974, p. 273, Myrdal’s emphasis).

There may be some doubts whether the radical changes proposed by Myrdal are in the right direction because outside of his concept of equality he does not say anything about the other great ideals of freedom, justice of equity, peace and economic, monetary, financial and political stability. A consistent correlation among all these basic ultimate values including equality as a part of social justice, is a must requirement for any true economic and social progress. All these conditions are part and parcel of a system of general stable equilibrium as envisioned by Leon Walras. Toward the end of his lecture he completed his message by saying: But a change of the trend towards a more egalitarian society cannot be effectuated by a redistribution of money incomes from the rich to the poor. What the poor masses need is not a little money, the distribution of which in countries with so much poverty and with colossal tax avoidance and tax evasion among the few rich would only spur inflation, that, in turn, regularly works to the disadvantage of the poor. What they do need is fundamental changes in the conditions under which they are living and working. The important thing is that these changes regularly imply both greater equality and increased productivity at the same time. The two purposes are inextricably joined, much more, in fact, than in developed countries. To these imperatively needed radical changes belong, first, land reform, but also a fundamental redirection of education and health work. And the “soft state” must be made efficient, and corruption, which is now almost everywhere increasing, must be exterminated on all levels (Le Prix Nobel, 1974, p. 278).

Everything seems to be alright as socially beneficial and most desired for a new, better social and economic order in all countries, developed and underdeveloped, but leaving out two expressions: “a more egalitarian society” and “greater equality” to be replaced by “a free, just and stable society and economy” and “greater social justice of equity in principle and of equality, whenever justified by special circumstances”. The most legitimate reason lies in the rule of “integrated logic” that the two expressions used by Myrdal are indeterminate; we do not know how much more a given society has to be “more egalitarian” in order to reach the optimum level of productivity and full employment. This is impossible to determine. However, the two previous quotations expressed the social, economic and political creed of Laureate Gunnar Myrdal, and there is nothing we can do except to respect it scientifically and leave it to the judgment of history and other generations of economists. Like any other great scientist, Myrdal told the truth, as he saw it and through his model of thinking. It is the moral responsibility of the reader or the researcher to think more about the nature of the model involved and how it was used to deduce the consequences. And that is what we did in this short essay. The change proposed above was only hypothetical, introduced for the purpose of making the argument clearer and more constructive. We have great respect for Laureate Myrdal who raised his voice publicly against “conformity” and “vested interests in the world of ideas” which

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dominate at a given time and often practically impede the development of new, better ideas and interpretations (Myrdal, 1972). We give the last word to him with his lecture’s ending:

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Even though my world view must be gloomy, I am hopeful about the development of our science. We can by immanent criticism in logical terms challenge our own thinking and cleanse it from opportunistic conformism. And we can widen our perspective. Everything can be studied. We are free to expand and perfect our knowledge about the world, only restricted by the number of scientists working and, of course, the degree of their diligence, brightness and their openness to fresh approaches. References David McKay Co. (1976), The Constitution of the United States with the Declaration of Independence and the Articles of Confederation, David McKay Co., New York, NY. Myrdal, G. (1944), An American Dilemma. The Negro Problem and Modern Democracy, Harper & Row, New York, NY. Myrdal, G. (1953), The Political Element in the Development of Economic Theory, (originally published in Swedish in 1929), Routledge and Kegan Paul, London. Myrdal, G. (1957), Economic Theory and Underdeveloped Regions, Harper & Row, New York, NY. Myrdal, G. (1968), Asian Drama. An Inquiry into the Poverty of Nations, Pantheon Books, New York, NY. Myrdal, G. (1970), The Challenge of World Poverty. A World Anti-poverty Program, Pantheon Books, New York, NY. Myrdal, G. (1972), “Against the stream”, Critical Essays on Economics, Vintage Books, New York, NY. Rugina, A. (2000), “The concept of social and economic justice: why are we not successful in analysis and practice?”, Rivista Internazionale di Scienze Economiche e Commerciali, XLVII No. 2. Rugina, A. (2001), Prolegomena 3: Fundamentals to Any Present and Future Economic, Monetary, Financial and Social Stabilization Plans, International Journal of Social Economics, Vol. 27 No. 5/6