Fritz Machlup, “[Contribution to] Discussion: Relations Between Economic Theory and Economic Policy” (1960)

Fritz Machlup’s contribution to a jointly published discussion examines the conceptual boundaries behind claims about economic theory’s practical influence. Responding to papers by Stigler and Wilcox, he asks what their largely negative conclusions actually cover: Stigler’s account of the influence of events upon theory, and Wilcox’s account of theory’s influence upon policy. Machlup’s central move is to show that such judgments depend on which ideas and practitioners qualify as theoretical. He begins with a methodological proposition that governs the entire contribution:

Judgments concerning the relations between current events, economic theory, and economic policy must depend largely on what is meant by “economic theory.”

The contribution proceeds through six questions defining the term’s possible scope, then examines five exclusions individually before turning to political conflict and monetary experience. The questions distinguish academically certified economists from other thinkers; pure theorists from applied economists; ruling doctrine from dissent; currently accepted theory from superseded beliefs; comprehensive deductive systems from isolated empirical generalizations; and demonstrably plausible propositions from any influential belief about causes and effects. These distinctions are consequential because widening the category changes the evidence available for judging theory’s influence.

Machlup immediately accepts a limit on inclusiveness. If every policymaker’s beliefs about consequences count as theory, theory necessarily influences policy: choosing a measure already presupposes some expectation about its effects. Similarly, current events obviously influence what people say about economic relations. These propositions would be tautologies rather than substantive findings. Stigler and Wilcox therefore rightly reject the widest alternative in the sixth question. But that rejection does not settle whether their other restrictions are equally appropriate.

The first two exclusions concern who produces theory. Academic certification cannot be decisive, Machlup argues, given the foundational standing of the stockbroker and parliamentarian he invokes. Yet admitting such outsiders also opens the category to monetary reformers, legislators, union leaders, and business figures whose ideas have affected policy. His examples include Gesell’s influence on the dwindling money of Wörgl, Major Douglas’s influence in Alberta, and the theoretical views associated with American labor legislation. Applied economists pose a related difficulty. Government specialists have influenced monetary policy directly, and their recommendations necessarily rest on some reasoning about economic relationships. Excluding them makes theory appear less influential by reserving the title for scholars engaged in pure theory.

The next distinctions concern intellectual status and form. Restricting theory to ruling doctrine removes theoretical defenders of protectionism and other policies opposed by the profession’s mainstream. Restricting it to contemporary doctrine overlooks the delayed influence of earlier teaching, the mechanism Machlup recalls from Keynes’s account of policymakers’ inherited ideas. Finally, admitting only comprehensive, internally consistent systems excludes piecemeal generalizations connecting classes of events. This last restriction can reproduce the exclusion of outsiders and applied specialists without explicitly relying on their professional standing. Machlup nevertheless presents these distinctions as clarification, not a wholesale rejection of the papers:

The exclusions may be needed for meaningful answers to the question of the relationships between events, theory, and policy.

The point is that meaningful inquiry requires boundaries, but conclusions must remain proportionate to them. Weak influence by currently accepted, comprehensive academic theory does not establish weak influence by economic reasoning more broadly. Conversely, simply expanding the definition until every policy belief qualifies would empty the inquiry of explanatory content. Machlup keeps both dangers in view.

He then shifts from classification to the apparent failure of theory to shape policy. Where theoretical recommendations conflict with organized interests, he locates the disagreement chiefly in value judgments about transitional effects and the relative welfare of particular groups and unidentified consumers. A theorist asked only to assess immediate consequences for a specified group might reach the same findings as its advocates. The divergence arises when analysis extends to longer-run consequences and society as a whole. Politicians may sincerely care for identifiable constituents while attaching less weight to dispersed consumers, including people outside their electoral jurisdiction. Machlup thus recasts the accusation that theory is unrealistic:

The charges of "unrealism" which politicians level against economic theory stem less from its technical language or from its esoteric assumptions than, I submit, from its concern with total strangers, somewhere, sometime, and its disregard of "my good friends" here and now.

This passage distinguishes disagreement over whose welfare matters from disagreement over analytical competence. Resistance to theory need not result primarily from obscure models or deficient communication; it can reflect incompatible horizons of concern.

The closing monetary comparison supplies a concrete exception to both papers’ negative conclusions. Machlup contrasts the anti-inflationary emphasis of German and Austrian theorists with the anti-deflationary emphasis of British and American theorists:

I submit that the experiences with galloping inflations in Germany and Austria have influenced theorists in these countries to place major emphasis on the disastrous effects of inflation, whereas British and American theorists, evidently swayed by their recollections of the deflation of the thirties, stress chiefly the intolerable effects of deflation.

He further argues that these theoretical emphases shape national monetary priorities. Presented as a qualified comparison rather than a general proof, the example traces a sequence from historical experience through theory to policy. The contribution’s enduring relevance lies in its insistence that assessments of theory’s influence specify the doctrine, practitioners, temporal lag, and welfare perspective under examination.