Fritz Machlup: Review of Economic Research and the Development of Economic Science and Public Policy (1948)

Fritz Machlup’s review assesses twelve papers presented at the National Bureau of Economic Research’s twenty-fifth anniversary meeting, published in 1946. He finds substantive economic discussion beneath the commemorative occasion, but distributes his attention deliberately unevenly: brief notices of most contributions precede sustained examinations of Harold G. Moulton, John Jewkes, and Jan Tinbergen. The review’s governing concern is the quality of the reasoning connecting economic theory, empirical inquiry, and policy advice. Institutional experience and methodological sophistication matter, but neither exempts an economist’s claims from scrutiny.

The shorter notices establish the collection’s range. Wesley C. Mitchell anticipates closer integration of empirical and speculative inquiry; E. A. Goldenweiser warns government advisers against allowing political expediency to compromise professional judgment. Charles Rist discusses younger French economists’ attraction to planning and Keynesian monetary expansion, while Alexander Loveday advocates an international economic intelligence service and Per Jacobson considers international research on gold and prices. Robert B. Warren traces monetary legislation and administration alongside the interaction of academic thought and political action. Joseph S. Davis calls for independent scrutiny of government research. Machlup’s praise of Lewis W. Douglas centers on his quotation of Keynes about the pre-1914 liberal world economy. These notices identify a shared field of inquiry without attributing a unified doctrine to the contributors.

Moulton’s explanation of economists’ disagreements gives Machlup his first substantial occasion for criticism. Moulton attributes disagreement to revolutionary institutional change, the difficulty of keeping abreast of developments across specialized fields, and economists’ doctrinal attachment to inherited theories. Machlup accepts Moulton’s contribution to replacing commercial-paper theories of bank liquidity with the shiftability of bank assets, including long-term government securities. He contests the other examples, however, arguing that they demonstrate Moulton’s attachment to his own disputed revisions as much as orthodox resistance to change.

The issue is not whether theories require revision, but whether a particular revision warrants acceptance. Moulton’s arguments about international debt payments and inflexible foreign-trade balances had not persuaded his critics. His dismissal of interest rates as a determinant of lending similarly invites a question about the conditions under which that claim holds:

Is this not merely a half-truth, relating only to rate reductions during depression and to the moderate and timid rate increases which monetary authorities are likely to allow?

Machlup thus turns a purportedly general proposition into a conditional one. He also rejects Moulton’s implication that his account of saving and capital formation commands professional acceptance. Declaring a theory obsolete cannot substitute for answering criticism; nor should economists’ contemporary positions be identified with classical formulations they no longer maintain.

Jewkes supplies the positive counterpart. Machlup judges his reconsideration of the British White Paper on Employment Policy the collection’s best contribution:

In an exemplary fashion Jewkes welds discussions of economic theory, considerations of practical policy, and recommendations for empirical research projects into one consistent whole.

Its merit lies in productive questioning rather than confident prescription. Jewkes asks what unemployment target permits a safe distance from inflation and challenges exaggerated expectations about the precision of economic control. Distinguishing structural from cyclical change, coping with export fluctuations, and maintaining wage and price stability all become problems requiring investigation. Administrative and political constraints are integral to the analysis, not qualifications appended afterward. For Machlup, Jewkes’s experience in government strengthens his economics because it helps identify the conditions on which policy success depends.

Tinbergen’s balance-of-payments paper receives the most detailed technical criticism. Tinbergen suggests that exchange depreciation might worsen excess demand for foreign exchange, that equilibrium is nevertheless more probably stable, and that exchange rates may be unreliable regulators where demand and supply curves have nearly equal slopes. He proceeds to recommend quotas or reduced international debt payments. Machlup challenges the reasoning supporting this movement from uncertain analysis to intervention.

The first objection concerns the unit in which import values are measured. Tinbergen argues that depreciation could reduce import volume while increasing import value when demand elasticity is below one. Machlup distinguishes domestic-currency expenditure from foreign-exchange expenditure. The former could rise, but does not establish the conclusion about the foreign-exchange market; the latter, he argues, cannot rise through the stated mechanism. He separately acknowledges that inelastic foreign demand for exports could reduce their foreign-exchange proceeds, while treating the circumstances permitting that result as uncommon.

The second objection concerns monetary-policy assumptions. Tinbergen’s export multiplier allows increased exports to raise income and imports, but apparently does not allow the preceding adverse balance to reduce income. Machlup insists on consistent treatment of these effects:

If we are consistent in our assumptions, we must assume either a policy of offsetting—in which case an adverse balance does not reduce incomes and an export increase does not increase incomes; or a policy of letting the balance of payments affect domestic circulation and incomes—in which case the export increase which results from depreciation could not increase national income but could merely mitigate the income reduction which would continue until the equilibrium of the balance of payments is restored.

Although an asymmetrical official response is conceivable, Machlup refuses to make such a policy the basis of a general theory of exchange-market instability. His criticism targets this demonstration, while acknowledging Tinbergen’s usual ingenuity. The final brief dismissal of R. H. Coats’s encyclopedic paper reinforces the review’s standard: learning must yield an identifiable contribution. Throughout, Machlup values research that clarifies mechanisms, exposes assumptions, and specifies practical uncertainties over either declarations of theoretical obsolescence or prematurely confident policy recommendations.