Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

ENDOGENOUS CHANGE3 The difficulty in specifying a particular function should immediatelyplace it outside the interest of economic theory. If some functioncannot be properly specified, how would one go about it or whyshould one introduce it in the analysis at all? The sensible thing to doin such a case is to put it off until somebody comes up with anacceptable specification. However, when the function in question is forinstance the production of new knowledge, there is no acceptablespecification to speak of as it is logically impossible to predict thecontent of new knowledge. The question in this case is whether theproduction of new knowledge is to be left out of economic discourse.The answer given in this chapter is that it is not.4 See Hahn 1973.5 See Hahn 1984:56.6 According to Hahn, agents are learning if, for example, havingobserved rain at time t+1 the probability they attach to rain at time t+2is different from the probability they attached to that event at time tconditional on rain at time t+1.7 Loasby makes an interesting comment on this:Such meta-theories and meta-policies cannot be preciselyspecified, because it is logically impossible for the content of newknowledge to be predicted in advance or, what comes to thesame thing, to be specified as the output, determinate orprobabilistic, of a well-defined process. This may be why, in1973, Hahn placed the generation or revision of theories andpolicies beyond the scope of economic analysis. He now (1991)believes that we cannot deal adequately with some importantproblems without extending that scope, and recognizes thatsuch extensions imply substantial revisions of the theories andpolicies which economists use.(Loasby 1991:48)8 Loasby starts his book with this comment:I would like to direct readers’ attention to a basic similaritybetween the problems faced by economists and by the economicagents whom they attempt to study. Both sets of people aretrying to make sense of the world in which they find themselves,and to behave intelligently in it…. So the behaviour ofeconomists may help us to understand the behaviour ofeconomic agents, and vice versa.(Loasby 1991:2)9 As an example of bounded rationality Hahn mentions the possibilitythat agents peer only a short distance into the future, or that a wholeclass of messages is ignored despite their relevance. However he doesnot pursue this point any further (see Hahn 1984:56).10 This assumption can be viewed as an aspect of the axiom of thepurposeful individual typical of Austrian thinking.11 Dutt (1990) represents the most comprehensive treatment of thisapproach.123