The introduction to A History of Money and Banking in the United States (by Joseph T Solerno) places the book squarely into a methodological dispute over how one goes about interpreting and explaining economic historical events. In delineating two approaches Joseph T Solerno poses questions such as
- What motivated the mass granting of right-away for railroad expansion?
- How did the expansion of railroads affect the net growth of the GDP?
- What motivates the steel industry to lobby for tariffs and quotas?
- What is the effect of steel tariffs and quotas on domestic steel prices?
- What political maneuverings, intellectual disagreements, economic interests were at the root of the formation of the Federal Reserve?
- How has the stock of money in the United States historically affected various economic variables like real prices, and growth?
Each pairing of questions reflect contrasting approaches to understanding economic history. The first question in each pairing is concerned with the motivations and interests of people and institutions involved in the outcomes. The second question in each pairing is solely focused on quantitative information and results derived from statistical analysis.
Solerno is setting the context for Rothbard's method of "specific understanding" which is used to interpret the history of money and banking in the United States. This method is a product of the theory of
praxeology, or the study of the aspects of human action that can be grasped a priori. This is an approach that holds, for example, that a specific historical price is a unique event that requires analysis in the same manner due an explanation of the origins of the Spanish-American war. Rothbard employs an
extreme a priorism that starts from certain universal truths about human action that hold across all contexts. These are abstract, general truths, such as: humans employ means to reach their ends, humans are constantly trying to exchange current circumstances for more favorable circumstances based on their value preferences, etc. In short they are truths derived by
Ludwig von Mises' theory of human action. A simplistic account of Rothbard's approach is that he explains historical events by inquiring into what motivated the participants. Using this approach, how would one explain the rise in German commodity prices during hyperinflation of the German mark in the 1920s? One of the causal factors involved the heavy speculation against the German mark in foreign exchange markets. As Solerno writes, this aspect would be given little weight by an Austrian-oriented economic historian,
because he approaches this event armed with the supply-and-demand theory of money and the purchasing-power-parity theory of exchange rate. These "presuppositions" derived from praxeology lead him to avoid any attribution of causal significance to the actions of foreign exchange speculators in accounting for the precipitous decline of the domestic purchasing power of the mark. Instead they direct his attention to the motives of the German Reichsbank in expanding the money supply.
In short, then, the theory guides the deductive inquiry and weighting of factors in the explanation. Solerno lays out another approach for contrast and criticism:
cliometrics. It is an approach with a focus on quantitative information and statistical methods. Causal relationships are demonstrated using the counterfactual method. For example, why didn't the panic of 1902 lead to widespread bank failures or even temporary closings? Solerno offers Milton Friedman's approach in the
Monetary History of the United States, 1867-1960 as an example. Freidman looks at the fact that banks promptly limited withdrawals on deposits and hypothesizes that this limit on withdrawals is a causal factor. He then "tests" the hypothesis by seeing that it holds in other historical situations. During the financial crisis that started in 1929 banks didn't curtail withdrawals until 1933 and in that time there were widespread bank failures. Would swift limits on withdrawals have changed this outcome? The counterfactual method tests a hypothesis analytically by looking for historical events that involve it, conjecturing that things might have happened differently, and examining the consequences.
Social sciences suffer from the problem that controlled experiments are difficult if not impossible to carry out, and the two approaches delineated by Solerno are in disagreement over the amount of explanatory power they credit one another. Solerno's central objections to cliometrics is that human motivation is given so little consideration that the explanations omit essential human goals, interests, and deceptions* that are more fundamental to historical explanation. Essentially, the light of explanation is prone to focus on the wrong aspects of an event. Solerno also claims the counterfactual method is circular because the theory it develops is constantly open to revision by new evidence and it's explanatory power is diminished.
Despite Solerno's enthusiasm, the method of specific understanding is not without its own drawbacks. Solerno notes that there is an impression that Rothbard's explanations are grounded in little more than idiosyncratic conspiracy theories. He labels this impression as mistaken. However, the heavy use a priori reasoning does have a larger margin of error. In considering a person's motivation, weights have to be assigned to various factors. How much of a person's motive is ideological? How much of a person's motivation is economic? In
Super Crunchers, Ian Ayres describes how a simple computer algorithm employing statistical methods was better able to predict decisions of Supreme Court justices than a panel of court experts. Ayres attributes the algorithm's better performance to the fact that it is hard for humans to be objective when assigning weights to causal factors. For example everyone knows that a justice's decision, in part, depends what state the case originates. But the experts are prone to give that factor the weight it deserves rather than the weight it has shown. [
Econ talk interview here.]
Another problem with placing a heavy emphasis on deductive reasoning from a particular theory is that theories don't always capture exceptions well. In March of 2007 Peter Norvig gave
a talk at MIT with a theme captured by a quote from the 1891 book The Adventures of Sherlock Holmes, "It is a capital mistake to theorize before one has data." Norvig described the application Google makes of the vast amount of data it collects from the internet. In particular, Google has built software that performs automatic translation of text from English to other languages using statistical methods. In constructing the translation model Norvig's team brought in a linguist to build in information about noun phrases and verb phrases. The problem was that while linguists have theories about what are noun phrases and verb phrases, there are exceptions. The statistical models were better at dealing with the exceptions and dealt with the general cases at an acceptable level. Overall Norvig's team achieved better translations using just a statistical model.
These examples argue that theory and the deductive reasoning of experts isn't without problem. Praxeological theory certainly can have explanatory power and inform lines of inquiry for economic events. Its drive for unifying consistency is important. However there is a large margin of uncertainty over the weighting of factors and the accounting for exceptions to theory. Perhaps there is a balance to be found between the two approaches.
* since professed intentions are not always consistent with actual intentions
This is somewhat of a tangent, but what would you say the sense was for the original audiences when considering what Achilles should do in response to Agamemnon's embassy? Was Achilles viewed at all favorably for his actions? Or was he seen as petty?