Page 74 - Global Political Economy_Understanding The International Economic Order

NEO CLASS ICAL C ONCEP T OF AN ECONO MY
it away. Economists do, however, utilize various techniques to side-
step difficulties raised for economic analysis by the unrealistic as-
sumptions of their discipline.
Economists’ treatment of uncertainty andtechnological change
provides a valuable illustration of unrealistic assumptions. Although
the profession recognizes technological advance as the most impor-
tant determinant of long-term economic growth and hence the most
important factor propelling economic change in the modern world,
it also acknowledges that technological innovation is uncertain and
unpredictable by its very nature. Nevertheless, Gene M. Grossman
andElhanan Helpman in their pioneering Innovation and Growth in
the Global Economy (1991) explicitly base their analysis of techno-
logical advance and its consequences on the unrealistic assumption of
certain and complete information about the nature andconsequences
22
of technological innovation. The very nature of technological devel-
opments, on the other hand, is that they and their effects are highly
unpredictable.
From my perspective, one of the most important intellectual limita-
tions of economics is its neglect of the role of the state in economic
affairs andespecially in international economic developments. The
discipline focuses on the behavior and interactions of autonomous
individuals and enterprises responding to impersonal market signals.
It is obvious, of course, that economists are well aware that national
policies andactivities can be relevant for economic outcomes. How-
ever, political considerations tendto be either ignoredor conveniently
23
forgotten. Economists formulate laws of economic behavior on the
assumption that markets count andstates do not.
Although many economists acknowledge the unrealistic assump-
tions underlying economic science and do their best to transcend
them, many andperhaps even most wouldagree with Milton Fried-
man’s methodological prescription that it is of no significance
whether or not the assumptions underlying economics are realistic. 24
What is important, according to Friedman, is whether those assump-
tions leadto fruitful propositions that can be tested empirically and
thereby shown to be valid or invalid. In other words, do the assump-

22
Gene M. Grossman andElhanan Helpman, Innovation and Growth in the Global
Economy (Cambridge: MIT Press,1991).
23
Benjamin J. Cohen, Organizing the World’s Money: The Political Economy of
International Monetary Relations (New York: Basic Books, 1977), 41.
24
Milton Friedman, “The Methodology of Positive Economics,” in his The Method-
ology of Positive Economics (Chicago: University of Chicago Press, 1953), 3–43.
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