I am going to talk tonight about some very broad issues, but issues that I believe have a direct bearing on the prospects of much of the world over the coming decade. My comments will be divided into three parts. I want to talk, first, about the changing trends that have dominated developments in the world over the past several centuries, and that I think foreshadow the developments that we shall see in the coming decades. I want then to examine a bit more carefully the nature of the forces that produced those trends; finally, I want to conclude by looking at what developments are likely in coming decades in response to those forces.

In 1899, a famous British constitutional lawyer, A.V. Dicey, gave a series of lectures at Harvard University, which were later collected and published in a book under the title: Lectures on the Relation between Law and Public Opinion in the Nineteenth Century. That book contains a profound analysis of the forces that determine the government policies and of the role of public opinion in shaping those policies. Dicey's main thesis was that legislation affecting public policy follows public opinion but only after a long lag. If public opinion moves, then some ten or twenty years later, that movement in public opinion is reflected in policy. This idea was expressed later in a famous paragraph by John Maynard Keynes when he talked of “madmen in authority … distilling their frenzy from some academic scribbler of a few years back”.

I have somewhat mixed feelings about the splendid conference that Uskali Mäki organized on my ancient methodology article. On the one hand, it is a source of great satisfaction that an article I wrote more than fifty years ago should still be regarded as worth extensive scholarly discussion. On the other hand, that very fact is a severe condemnation of the essay. Surely, if the essay had been really lucid, scholars should not today still be having different opinions about what it says.

I have myself added to the confusion by early on adopting a policy of not replying to critiques of the article. I decided that I had a choice: I could spend my time discussing how economics should be done – a worthy cause; or I could spend my time doing economics – in my opinion, if not a more worthy, a more attractive cause. That act of self–denial has quite unintentionally been a plus for the discussion of methodology. It has left the field open for all comers, and they have all come and produced a broad stream of commentary. The articles at this conference are a good example.

I have read them all and I am impressed with their high quality and intellectual seriousness. I would not have thought that my modest essay would have relevance to so many issues. I feel like a proud father who has a large brood of bright children – all of them right, all of them wrong, and all entitled to his or her own views. Yet I am also impressed that there is a common thread that runs through them.

In his admirable book on The Scope and Method of Political Economy John Neville Keynes distinguishes among “a positive science…[,] a body of systematized knowledge concerning what is, a normative or regulative science …[,] a body of systematized knowledge discussing criteria of what ought ot be …; an art … [,] a system of rules for the attainment of a given end”; comments that “confusion between them is common and has been the source of many mischievous errors”; and urges the importance of “recognizing a distinct positive science of political economy.”

This paper is concerned primarily with certain methodological problems that arise in constructing the “distinct positive science” Keynes called for —in particular, the problem how to decide whether a suggested hypothesis or theory should be tentatively accepted as part of the “body of systematized knowledge concerning what is.” But the confusion Keynes laments is still so rife and so much of a hindrance to the recognition that economics can be, and in part is, a positive science that it seems well to preface the main body of the paper with a few remarks about the relation between positive and normative economics.

THE RELATION BETWEEN POSITIVE AND NORMATIVE ECONOMICS

Confusion between positive and normative economics is to some extent inevitable. The subject matter of economics is regarded by almost everyone as vitally important to himself and within the range of his own experience and competence; it is the source of continous and extensive controversy and the occasion for frequent legislation.

In his admirable book on The Scope and Method of Political Economy John Neville Keynes distinguishes among “a positive science … [,] a body of systematized knowledge concerning what is; a normative or regulative science … [,] a body of systematized knowledge discussing criteria of what ought to be …; an art … [,] a system of rules for the attainment of a given end”; comments that “confusion between them is common and has been the source of many mischievous errors”; and urges the importance of “recognizing a distinct positive science of political economy.”

This [essay] is concerned primarily with certain methodological problems that arise in constructing the “distinct positive science” Keynes called for – in particular, the problem how to decide whether a suggested hypothesis or theory should be tentatively accepted as part of the “body of systematized knowledge concerning what is.”

The factors accounting for changes in the stock of money during the four years from 1929 to 1933 are strikingly different from those in the other periods we have examined. Generally, the pattern for high-powered money has impressed itself most strongly on the total stock of money, the behavior of the two deposit ratios serving mainly to alter the tilt of the money stock relative to the tilt of high-powered money. That relation holds in Chart 1 only for the period up to October 1930, the onset of the first banking crisis. Thereafter, the two deposit ratios take command. High-powered money moves in a direction opposite to that of the total stock of money, and not even most of its short-term movements leave an impress on the stock of money.

From August 1929 to March 1933 as a whole, the change in highpowered money alone would have produced a rise of 17½ per cent in the stock of money. The change in the deposit-currency ratio alone would have produced a decline of 37 per cent; the change in the deposit-reserve ratio, a decline of 20 per cent; interaction between the two ratios, a rise of 10 per cent; these three converted the 17½ per cent rise that highpowered money would have produced into a 35 per cent decline in the stock of money. For a more detailed examination of these changes, we consider separately each of the periods distinguished in the preceding section and marked off on our charts.