It takes a theory to beat a theory

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from Yoshinori Shiozawa (originally a comment)

At around the same time that Fred Lee and Lars Syll visited the University of California and talked long on Sraffa with Axel Leijonhufvud, a paper by Avi J Cohen appeared in Eastern Economic Journal: “The Laws of Returns under Competitive Conditions”: Progress in Microeconomics since Sraffa (1926)? (Vol. 9, No. 3, 1983, pp. 213-220).

It was a short paper that counts only eight pages, but a decisive criticism of economics of perfect competition that was understandable for new economics students. After two sections of persuasive arguments, Cohen concluded that

Thus, on both short and long run levels, there is no adequate resolution of contradictions between the partial equilibrium theory of perfect competition and the empirical evidence of non-increasing costs. Instead of a constructive resolution, perfect competition continues to be justified by the unsatisfactory verbal and logical contortions, denials of empirical evidence and proofs by assertion that originated more than fifty years ago.

However, this was not a real conclusion, but a premise of his true inquiry:
How are we to account for this extraordinary state of affairs? 

After a few words on John Hicks’s position, Cohen noted this state of affairs could be understood as a normal state of scientific research:

Recent work in the philosophy of science sheds additional light on the situation. Hicks, while recognizing the dangers of the assumption of perfect competition, cannot conceive of any alternative for theoretical analysis. This restricted vision suggests Kuhn’s (1970) concept of normal science — problem-solving activity within the context of an accepted theoretical framework or paradigm. As the passage by Hicks implies, it is only the acceptance of the equilibrium paradigm (including perfect competition) that allows the posing and solution of theoretical problems.

Normal science is a period of steady refinement of the basic theoretical framework. During this period, contrary evidence does not lead to the rejection of the basic theory, but instead leads to the development of more detailed, secondary hypotheses that account for discrepancies between facts and the basic theory. Lakatos (1978), in developing Kuhn’s ideas about secondary hypotheses, formulated the concept of a “protective belt” of auxiliary
assumptions that protects the basic theoretical framework from empirical refutation.

The conclusive observation Cohen made is this:

Probably the most significant reason why the theory of perfect competition has persisted despite its problems is that no acceptable alternative theory has come along to take its place. According to Blaug (1978, p. 703), “Economists abhor a theoretical vacuum as much as nature abhors a physical one, and in economics, as in the other sciences, theories are overthrown by better theories, not simply by contradictory facts.”

This observation was made after a little less than 60 years after Sraffa’s paper, but it was also predictive because there was no big difference after the paper, for about 40 years.

What Cohen observed is not new. In fact, he only reconfirms the old dictum, i.e. it takes a theory to beat a theory. To beat mainstream economics, repeating criticism is not enough. We should build and present a theory that can surpass it.