Economic Probabilities

Writen by Gabriel Rise

The way to freedom in economic theory is in our choice of a standard of truth. Implicitly, in pure theory, the criterion of truth is logical consistency with definitely formulated axioms, postulates, and conventions. Explicitly, as pure economists, we claim to have our eyes upon empirical reality alone as our guide, where, as we have seen, the criterion of truth is probable frequency of occurrence. We become aware of this conflict of standards only when we ask the question whether our rational truth squares with our empirical truth. When we definitely put this question with regard to the statical theory of general equilibrium we regretfully confess we seem to have been pursuing a mirage. There is no way of answering our question because, by the interposition of hypotheses at variance with reality, the logical construction cannot be made to square with empirical reality.

The theory of general equilibrium, which rests upon the hypothesis of "la libre concurrence absolue" in a static state, cannot be made to describe the moving general equilibrium in a perpetually changing economy where absolutely free competition, in the technical sense of that term, does not and cannot exist. We cannot change empirical reality, but we can change the axioms, postulates, and conventions that lie at the basis of our rational construction. Since, by implication, the criterion of truth in our rational construction is logical consistency with definitely formulated axioms, postulates and conventions, we do not sacrifice pure truth if we change our premises: we simply choose the form of pure truth which agrees with our empirical truth, and we wish to perfect the agreement in order that we may use our rational instruments to foreknow prospective empirical realities. The problem, therefore, seems to be this: how shall the axioms, postulates, and conventions of pure economics be changed in order that the rational and the real may be brought into agreement?

The synthetic economist changes the convention, the postulate, and the axiom: His conventional equilibrium is the general equilibrium which economic forces actually at work in our perpetually changing economy tend to bring about; he postulates that this equilibrium tends to occur along the lines of general trend of the varying economic factors; he abandons the axiom of "la libre concurrence absolue". Starting with the new convention, postulate, and axiom, he inquires what the conditions are that determine the moving equilibrium. The investigation leads to a separation of the rational and the empirical conditions. The empirical elements are the laws of demand, the laws of supply, and the coefficients of production. All of these, under the new premises, are empirically determinable. The rational elements are the new axiom, postulate, and convention, and their logical consequences when applied deductively to the laws of demand, the laws of supply, and the coefficients of production. If the premises are wisely chosen and the empirical elements are properly evaluated, the logical consistency of the rational construction should ensure a final agreement with the probable frequency of the empirical occurrences.

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