Two Minds: Intuition and Analysis in the History of Economic Thought

TWO MINDS Intuition and Analysis in the History of Economic Thought

TWO MINDS Intuition and Analysis in the History of Economic Thought

by Roger Frantz

Ql - Springer

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Printed in the United States of America. 9 8 7 6 5 4 3 2 1

SPIN 11367017

To my wife Nancy, whose love, patience, and analytical and intuitive abilities benefit me immensely.

Table of Contents Preface ....................................................................................................... ix 1. Introduction ............................................................................................1 2 . Adam Smith. New Intuitions for a New Age ......................................... 21 3. John Stuart Mill. An Anti-Intuitionist Social Reformer ......................... 39 4. Alfred Marshall. Metaphysician and Economist ....................................59

5. Intuition and Analysis in the Economics of the John Maynard Keynes ............................................................................................ 77

6. Frank Knight . Intuition. Risk and Uncertainty ....................................... 95 7. Swimming Against the Stream. Herbert Simon. Harvey Leibenstein. George Shackle. Friedrich von Hayek ................................................ 113

8. Intuition in Current Economic Literature ............................................ 135 9. References..........................................................................................

153

10. Index............................................................................ 173

Preface As everyone knows, intuition is warm and fuzzy, qualitative, not measurable. Economics, on the other hand, is quantitative, and if it is not a hard science, at least it is the "queen of the social sciences." It is, therefore, intuitively obvious, that intuition and economics are as if oil and water. The problem is, what is intuitively obvious is not always correct. And, there are two major reasons why intuition and economics are not like oil and water. First, economics concerns itself with decision making, and decisions are made in the brain. The human brain is the size of a grapefruit, weighing three pounds with approximately 180 billion neurons, each physically independent but interacting with the other neurons. What we call intuition is, like decision making, a natural information processing function of the brain. Second, despite the current emphasis on quantitative analysis and deductive logic there is a rich history of economists speaking about intuition. First, the human brain, specifically the neocortex, has a left and right hemisphere. The specialized analytical style of the left hemisphere and the specialized intuitive style of the right hemispheres complement each other. Roger Sperry did research on the hemispheres of the brain and was awarded a Nobel Prize for Medicine in 1981. Remove or disable one of the hemispheres and we are reduced to foolhardy creatures, or worse. Schumpeter and Keynes spoke about the specialized styles and complementarity of the hemispheres in their belief that intuition provides a vision which motivates and guides analytical thinking. Von Hayek said that humans are of two minds, masters of the intellectual universe, and "puzzlers" or "muddlers." Frank Knight distinguished "reasoned knowledge" or "formal processes of logic," from judgment, common sense or intuition. The latter consists, he said, of obscure mental operations about which there is not much that can be said. Perhaps Knight's distinction between reasoned knowledge and intuition, and his bewilderment about the nature of intuition is the main reason why economists do not speak much about a brain function so critical to understanding: we do not know how to measure it. If we could measure intuition and specify how it responds to some activity x -- dil dx, or Ail Ax -then we could have human capital in the form of intuition, followed by rates of return to intuition, studies in intuitive rationality, the Journal of Intuition and Economics Studies Quarterly, etc. Second, intuition went 'underground' as economics became more quantitative, especially after WWII. Perhaps because I was in graduate school in the 1970's and didn't know a great deal about the history of economics, it seemed intuitively obvious that there wasn't a connection between intuition and economics. Years later, 1 discovered, without looking, that Adam Smith gave a central role to intuition, however he preferred the word sympathy as in his Theory of Moral Sentiments. One thing led to another and I discovered, by looking, that Mill, Marshall, Keynes, Knight, and Herbert Simon also spoke

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about intuition, as did many others including Schumpeter, von Hayek, George Shackle, and Herbert Simon. About twenty years ago economists began talking more and more about "the intuition behind the model." Intuition has a long and rich history in economics, and has been making a comeback recently. In Insights of Genius. Imagery and Creativity in Science and Art, Arthur Miller (Miller, 1996), demonstrates that in the field of physics what is intuitively obvious today was non-sense 'yesterday' and out-of-date 'tomorrow.' The same is true in economics. Mercantilist doctrines were intuitive to many during the mercantilist era, but counterintuitive to Smith. Classical economics was intuitive to many but counterintuitive to Keynes. Mill maintained that what many considered to be intuition was nothing more than prejudices and an obstacle to social reform. Miller's book contains statements by various physicists about the role of intuition in their work as well as their own intuitions. None of the economists discussed in this book developed a theory of intuition, although von Hayek and Simon came closest. Smith, Knight, Marshall, Schumpeter, Shackle, and Simon discussed the positive role of intuition is various aspects of economics. It is necessary to 'tease' intuition fiom von Hayek's and Leibenstein's work, but it doesn't need much teasing. Only Mill had a mixed view. The most 'far out' intuitions are discussed by Simon, who is also, the most mathematical. It is, of course, intuitively obvious that 'far out' intuitions and a mathematical orientation are consistent with each other. Be that as it may the economists discussed in this book are known for their analytical skills and, as I discovered, had something to say about intuition. The genesis of this book dates back to the early 1970's and my own practice of meditation. As an academic endeavor the relationship between intuition and economics began with reading Smith's Theory of Moral Sentiments and seeing similarities between Smith's concept of sympathy and intuition. I published articles on Smith, Mill, and Simon beginning in 2000. Since then I have benefited from comments and opportunities by participants at the History of Economics Society meetings in 2001, and 2002; at the Society for the Advancement of Behavioral Economics (SABE) Poster Session at the ASSA meetings in 2001, and at the SABE meetings in 2004. I wish to acknowledge Morris Altman, editor of the Journal of SocioEconomics (JSE); Richard Hattwick, founder and past editor of JSE; Mie Augier, co-editor for a special issue on Herbert Simon in the Journal of Economic Psychology, and the anonymous referees of these Journals. I also wish to thank my SDSU colleagues, especially Ray Boddy, Eric Brunner, Shoshana Grossbard-Shechtman, Jennifer Imazeki, and Art Kartman for helpful comments, valuable insights, and support. Marilea Fried, Economics Editor at Kluwer provided much needed patience and support. All errors in style, fact, and grammar are mine alone.

Chapter 1 Introduction To Intuition 1.1 Introduction Homo economicus is a rational individual calculating costs and benefits at the margin. John Neville Keynes, in his book, The Scope and Method of Economics (Keynes, 1955), asserts that the basic principles of economics, including the principle of rational behavior is a priori. Thus, what is known precedes and is also independent of observations. The "facts of human nature," according to J.N. Keynes, are not directly observed, but are the result of "an introspective survey" (ibid, p. 173). Economic laws, including the law of rational behavior, are thus derived from facts about human nature which are intuitive or obvious. As we shall see, the apple (John Maynard Keynes) never falls far from the tree (John Neville Keynes). Max Weber argued that because we are human beings we understand the motives behind human behavior through our own introspections. For Weber, "This verstehen, or intuitive understanding of human motivation, is what distinguishes the human sciences from the physical sciences" (Lewin, 1996, 1298). Adam Smith, explicitly in Theory of Moral Sentiments (Smith, 1969), and implicitly in An Inquiry into The Nature and Causes of the Wealth of Nations (Smith, 1937) would have said it differently. However, the message is similar. For Smith the message is that intuition, he preferred the word "sympathy," is integral in both moral judgments and the invisible hand of the market. Despite some trends to the contrary, the majority opinion on this subject within the economics profession today is that economics as a science has little need for verstehen or intuition, or concepts such as consciousness, or understanding. These concepts are regarded as a "meaningless pursuit" because science should limit itself to "observable empirical regularities" (ibid, 1305) and hence to describing these regularities. The economists discussed in this book assume, explicitly or implicitly, that we live in a world replete with uncertainty, and that human behavior can be unpredictable, even capricious. This makes describing empirical regularities very difficult. With the possible exception of John Stuart Mill, the economists discussed in this book considered intuition a resource for dealing with uncertainty rather than a 'meaningless pursuit.' The economists discussed in this book also assumed, explicitly or implicitly, that humans have two minds, although it is intuitively obvious that they do not mean this literally. The two minds - two ways of knowing, thinking, or processing information - are the analytical and the intuitive mind, and they are complementary with each other.

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There are several variations of the idea of two minds. Steve Sloman, in his article "Two Systems of Reasoning" (Sloman, 2002), says that we follow our "noses" but feel compelled to justify our behaviors with reasons. Sloman distinguishes the Associative System of reasoning from the Rule-Based system. Forms of associative reasoning include intuition, imagination, and associative memory. Forms of rulebased reasoning are deliberation, formal analysis, and strategic memory. Sloman presents evidence from several studies showing that intuition and analysis often lead to similar judgments. In addition, he points out that analytically based judgments become more intuitive (common sense, or intuitively obvious) over time. Others have classified the dual processing system as experiential and rational (Epstein, 1994), intuition and analysis (Hammond, 1996), narrative and logioscientific (Bruner, 1986), and mystic and savant (Bergland, 1985). Michael Polanyi refers to this duality as the intuitive and the formal (Polanyi, 1974, 13l).Robin Hogarth in his book, Educating Intuition generalizes this point, saying that "humans have a variety of different information-processing systems that vary from the innate to the fully conscious, that most of these systems operate continuously.. ." (Hogarth, 2001, 179). There are a few basic issues that must be discussed at the beginning of this book: What is intuition? Are intuitions always correct? Is intuition an inherently metaphysical concept?

1.2 What Is Intuition? The Oxford English Dictionary lists several definition and uses of the word intuition including the five listed here. First, "The action of looking upon or into; contemplation; inspection; a sight or view" (Oxford, vol 8, p 29). Second, "The action of mentally looking at; contemplation; consideration; perception, recognition; mental view" (ibid, pp. 29-30). Third, "The spiritual perception or immediate knowledge, ascribed to angelic and spiritual beings, with whom vision and knowledge are identical" (ibid, p. 30). Fourth, "The immediate apprehension of an object by the mind without the intervention of any reasoning process" (ibid, p. 30). Fifth, an "Immediate apprehension by the intellect alone" (ibid, p. 30. An example of this fifth definition is from a 1659 publication, "This is that Tree of Knowledge.. .which instructs not.. .by sad and costly experience, but by fair and safe intuitions" (ibid, p. 30). Meanings and examples are also listed for the word intuitive. First, "Intuitive (Intellectual Sight) when we perceive the Agreement or Disagreement of one Idea with another immediately and by themselves, without the Mediation of any other idea." Second, "Not acquired by learning; innate." Third, ". ..immediate apprehension; opposed to discursive." Fourth, "The swift power of intuitive discernment.. ." Fifth, "The truths of Arithmetic, intuitive or not, certainly cannot be acquired independently of experience."

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Sixth, "I conceive that most of the highest truths are.. .intuitive; that is, they need neither explanation nor proof, but if not known before are assented to as soon as stated." Thus, intuition is concerned with knowledge gained swiftly and immediately, and seemingly obvious, not involving the process of analysis, but giving the intuitor, whether human or angelic, a sense of having a inside view of a thing or a relationship between or among things (ibid, p. 3 1).

1.3 Intuition is a 'Measure of Our Ignorance' Productivity, measured as output growth not accounted for by inputs growth, is often referred to as a measure of our ignorance. Intuition is not a conscious analytical -- logical, sequential, step-by-step, and reasoned -process of thinking. Intuition is, therefore, what it is not, and as such is a measure of our ignorance. Robin Hogarth, in Educating Intuition, lists the characteristics of intuition as speed of knowing, immediate cognition, the absence of rational or deliberate thought, knowing without knowing how you know, knowing without the use of a conscious step-by-step process (Hogarth, 200 1). Mario Bunge, in Intuition and Science, says that intuition is "the collection of odds and ends where we place all the intellectual mechanisms which we do not know how to analyze or even name with precision, or which we are not interested in analyzing or naming" (Bunge, p. 68). Bunge lists several characteristics of "the scientist's intuition," including quick identification, clear understanding of the meaning of something or the interrelationship of several things, the ability for easy and correct interpretation of equations or formulas, imaging or representing abstract entities or objects transcending the senses, designing appropriate metaphors, creative imagination leading to new ideas or discoveries, quick inference, synthesizing separate ideas into a new coherent system, insight or sound judgment, and common sense (Bunge, pp. 67-1 11). Peter Medawar, in Induction and Intuition in Scientzjk Thought (Medawar, 1969), says that intuition takes four forms. First, deductive intuition, meaning "perceiving logical implications instantly; seeing a t once what follows fiom holding certain views." Second, inductive intuition, meaning "thinking up or hitting on a hypothesis fiom which whatever we may wish to explain will follow logically." Third, "the instant apprehension of analogy." And fourth, "thinking up or thinking out an experiment which provides a really searching test of a hypothesis... experimental flair or insight" (ibid., p. 56-7). However, he says that scientists are reluctant to use the term intuition because "Scientists are usually too prod or too shy to speak about creativity and 'creative imagination'; they feel it to be incompatible with their conception of themselves as 'men of facts' and rigorous inductive judgments" (ibid., p. 55).

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Let me add three other, complementary, forms of our intuitions. First, intuition is the vision or inspiration behind a stated axiom. John Locke was one of many 17th. Century writers who spoke about intuition as an axiom. According to Locke, an intuition occurs when the mind perceives a relationship (or lack of one) between two ideas immediately, directly, and with a sense of certainty such that proof is not required. For example, he held it to be an intuition that 2 + 2 = 4, or that a triangle has three sides. Reasoning, on the other hand, is the mind perceiving a relationship (or lack of) between two ideas indirectly, that is, using intermediate ideas in order to do so. Reasoning is thus "indirect intuition." Locke also considered intuition to be rapid reasoning (Locke, 1894, vol. 2, p. 179), and complementary with conscious reasoning. Second, intuition as a pre-analytic vision. An intuition is a vision which precedes, motivates, and guides analytical thinking. According to Joseph Schumpeter (Schumpeter, 1954) intuition" is a "pre-analytic cognitive act that supplies the raw material for the analytical effort" (ibid., p.41). The vision motivating analytical thinking is "the frst perception or impression of the phenomena to be investigated" (ibid., p. 570). How do we acquire our vision of a set of phenomena? Schumpeter says we acquire it "intuitively.. .. This should be obvious. If it is not, this is owing to the fact that in practice we mostly do not start from a vision of our own but from the work of our predecessors or from ideas that float in the public mind" (ibid., p. 562). Third, intuition as expert decision making. Herbert Simon (Simon, 1978, 1989) is a chief proponent of this definition of intuition. Logical processes means conscious thinking which can be expressed in words or other symbols such as mathematics. In logical processes, goals and alternatives are specified, as are the costs andlor benefits of the alternatives. Non-logical processes are subconscious, and hence are not part of the conscious reasoning process. Nonlogical processes "are only made known by a judgement, decision, or action" (Simon, 1989, p. 24). Hence, the individual can give neither an account of the process of decision making nor how they judge it to be correct. Despite this, the individual often reports great confidence in their, intuitive decision. In Administrative Behavior, Hebert Simon (Simon, 1978), expressed a discomfort with these ideas because he did not understand precisely what unconscious processes resulted in intuition. It was when computers began to 'play' chess that Simon starting putting together pieces of the role of the unconscious and intuition and began writing about it. In addition, intuition is also associated with a wide range of everyday phenomena, from decisions by stock brokers, sensing danger, "picking up" good or bad vibes about strangers you have just met, parents knowing the emotional state of their children, and everyday "woman's intuition." In addition, intuition may be part of our "cultural capital," or our cultural heritage. This consists of the ways we see and interpret the world, people, and events. This was one of Mill's interpretation of intuition, and a reason Mill

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assumed that most of what we call intuition is culturally defined conventions and beliefs whose source we can not identifl. 1.3.1 The Value of Harnessing a Strong Intellect to a Strong Intuition The discussions by Medawar, Hogarth, and Bunge point to a "mystical" element to intuition. Bunge's quote that intuition is "the collection of odds and ends where we place all the intellectual mechanisms which we do not know how to analyze or even name with precision, or which we are not interested in analyzing or naming" (Bunge, p. 68) makes this clear. Jacques Hadamard in, The Psychology of Invention in the Mathematical Field, adds to this discussion of a mystical element by discusses intuition in a chapter titled, "Paradoxical Cases of Intuition." The paradoxes are cases of scientists who made breakthroughs in knowledge in ways that defy logic. For example, Pierre de Fermat (1601-1661) showed that xm + y"' = z"' "is impossible in integral numbers (x, y, z different fiom 0; m greater than 2; but the margin does not leave me room enough to inscribe the proof' (Hadamard, p. 116). What was the proof! Partial proofs have been found. However, they "required the help of some algebraic theories of which no knowledge existed in the time of Fermat, and no conception appears in his writings (Hadamard, p. 117). Hadamard concludes that Fermat's theorem is "mysterious." Bernard Riemann's (1826 - 1866) work on the distribution of prime numbers is another of the great mysteries in mathematics. Riemann, who had "extraordinary intuitive power" (Hadamard, p. 117), did not leave proofs of all his work because "I did not succeed in simplifying enough to publish it" (Hadamard, p. 118). The facts needed to prove some of his theorems require "facts which were completely unknown in his time; and ... it is hardly conceivable how he can have found it without using some ... general principles, no mention of which is made in his paper" (Hadamard, p. 118). One of Evariste Galois's (1 8 11 - 1831) theorems about integrals "could not have been understood by scientists living at the time of Galois... It must be admitted, therefore: (1) that Galois must have conceived these principles in some way; (2) that they must have been unconscious in his mind, since he makes no allusion to them, though they by "themselves represent a significant discovery" (Hadamard, pp. 119 - 120). Arthur Miller, in his book Insights of Genius. Imagery and Creativity in Science and Art, discusses the complementarity of intuition and analysis among scientists, including Albert Einstein. Einstein emphasizing this complementarity when he states that, "There is no logical path leading to these laws [of nature], but only intuition, supported by sympathetic understanding of experience" (Miller, 1996, p. 369). Intuition is, therefore, a feel for nature. This comes in handy because "... scientific thought is a development of prescientific thought" (ibid, p. 340). And, "All great achievements of science start fiom intuitive knowledge, namely in axioms, from which deductions are then made.. . Intuition is the

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necessary condition for the discovery of such axioms" (ibid, p. 204). In other words, intuition is a catalyst for logical analysis. Einstein also defined intuition as the ability to distinguish fundamental from non-fundamental problems in your field of interest. After Einstein failed at economics he considered mathematics as a career. However, he choose physics because he had an intuitive flash that "my intuition was not strong enough in the fields of mathematics in order to differentiate clearly the fundamentally important, that which is really basic, from the rest of the more or less dispensable erudition" (ibid, p. 369). In other words, Einstein intuited that his intuition wasn't strong enough to distinguish the mathematical forest from the mathematical trees. Einstein also associated intuition with visual imagery. When a particular image appears in the mind's eye often enough it begins to connect apparently unrelated ideas leading to models and theories. In Einstein's case he visualized riding a beam of light and wondering whether he could see himself in a mirror he was holding. A result of this extraordinary inner process is his theory of relativity. Henri Poincare said that "To make geometry, or to make any science, something else than pure logic is necessary. To designate this something else we have no word other than intuition" (ibid, p. 353). In 1881 Poincare discovered automorphic functions. In his description of his own mental process which he used to make this discovery Poincare described cycles of thought from conscious thought to unconscious thought or rest, to sudden illumination, and then verification via more conscious thought. About the existence of unconscious thought he simply said that "What strikes us immediately are these appearances of sudden illumination, obvious indications of a long period of previous unconscious work" (ibid, p. 354). The unconscious mind, or intuition, contributes by selecting and combining facts assembled during conscious work. How does this happen? "The rules that guide choices are extremely subtle and delicate, and it is practically impossible to state them in precise language; they must be felt rather than formulated" (ibid, p. 354). Clearly, in his view intuition is a catalyst for a vision and subsequent analysis via logic. In "Mathematical Definitions of Education" (1904) he stated "It is by logic we prove, it is by intuition we invent" (ibid, p. 35 1). In 1908 he stated that "Logic, therefore, remains barren unless fertilized by intuition" (ibid, p. 351). Jonas Salk saw intuition and analysis, he used the word reason, as being complementary with each other. In Anatomy of Reality, Jonas Salk says "Our subjective responses (intuitional) are more sensitive and more rapid than our objective responses (reasoned). This is in the nature of the way the mind works. We frst sense and then we reason why. Intuition is an innate quality, but it can be developed and cultivated... Intuition may be seen as a continuation or extension of 'natural' processes, like instinct, for example. Reason may be seen as that which man adds to explain his intuitive sense... Intuition must be allowed free rein and be allowed to play. .. The intuitive

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mind establishes the parameters, the premises on the basis of which reason is formulated to correspond to intuitively perceived patterns. The intuitive and reasoning realms operate separately and together ... I suspect that if appropriately cultivated, the two would work best together if the intuition were liberated from bondage and constraints, and put in charge of a respectful thinker" (Salk, 1983, pp. 79 - 80). As a young man he would imagine himself in the place of someone or something else. As a scientist he did the same: "I would picture myself as a virus, or as a cancer cell... I would also imagine myself as the immune system, and I would try to reconstruct what I would do as an immune system engaged in combating a virus or a cell. When I had played through a series of such scenarios on a particular problem and had acquired new insights, I would design laboratory experiments accordingly.. . Based upon the results of the experiment, I would then know what question to ask next.. . When I observed phenomena in the laboratory that I did not understand, I would also ask questions as if interrogating myself: 'Why would I do that if I were a virus or a cancer cell, or the immune system?' Before long, this internal dialogue became second nature to me; I found that my mind worked this way all the time" (Salk, p. 7, fn B). James Watson's, The Double Helix is an excellent account of how scientists work and make new discoveries. The book is Watson's account of how he and Francis Crick, two young scientists who were "long shots" to discover the structure of DNA, came upon one of the great scientific discoveries. The account is one of two scientists working in an environment filled with everyday human emotions and concerns, thinking analytically and open to their intuitions. The account includes their ideas which resulted in dead ends, their frustrations, their drinking, hiding their work from others as well as possible, and their unprofessional treatment of Rosalind Franklin. In the Preface to the book, Watson says, "As I hope this book will show, science seldom proceeds in a straightforward logical manner imagined by outsiders. Instead, its steps forward (and sometimes backward) are often very human events in which personalities and cultural traditions play major roles" (Watson, 1968, p. 3). Watson describes how common sense - that which is intuitively obvious - rather than "complicated mathematical reasoning" was what set Linus Pauling's work apart from others. Pauling is a two time winner of the Nobel Prize (1954 in chemistry; 1962 Nobel Peace Prize) and at the time - the early 1950's -- a much respected scientist. Watson and Crick employed the same "technique - look for the simply common sense solution. Watson says that "Worrying about complications before ruling out the possibility that the answer was simple would have been damned foolishness. Pauling never got anywhere by seeking out messes" (ibid, p. 34). Watson also speaks about how their "best guesses" and their "chemical intuition" led them to reject certain ideas and accept others. At the same time they also looked for data which

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would be inconsistent with their hunches, guesses and intuitions. In summary we can say that the value of harnessing a strong intellect to a strong intuition is, as the above examples show, insight, creativity, scientific breakthroughs. 1.3.2 As If Metaphors Arthur Miller shows that that analogies and metaphors make use of nonlogical reasoning often based on visual imagery. The German word for intuition is Anschauung, which can be translated as visualization. Using metaphors and analogies is a way to conceptualize or describe something which seems more abstract and is less well understood in terms of something which seems less abstract and is better understood. Thus, according to philosopher Max Black, "Every metaphor is the tip of a submerged model" (ibid, p. 223). The intuition is submerged, the metaphor expresses it. Analogies and metaphors often take the as if form. For example, in the 1860's the physicist James Clerk Maxwell said that the electromagnetic field acts as if it were "a collection of wheels, pulleys and fluids" (ibid, p. 221). In 1905 Einstein said wrote that "Under certain circumstances light behaves as if it were comprised of particles" (ibid, p. 246). In 1913, the physicist Niels Bohr said that the atom behaves as if it were a "minuscule solar system" (ibid, Miller, p. 225). In 1897 the electron was said to behave as if it is a charged billiard ball. In each case, the (as if) metaphor creates a mapping between a well understood subject (wheels, pulleys, fluids, or; solar system) with a badly understood subject (electromagnetic field, or the atom). Milton Friedman used the as if form of a metaphor to state that an expert billiard player makes shots as if they "knew the complicated mathematical formulas that would give the optimum directions of travel.. .could make lightening calculations from the formulas," and could do what the formulas require (Friedman, 1953, p. 2 1). Friedman was arguing why a theory's assumptions do not matter.

1.3.3 Science Progresses Funeral by Funeral Max Planck authored the statement appearing as the heading of this section, and Paul Samuelson sees it applying to economics (Samuelson, 1998, p. 1378). Science progresses funeral by funeral, by one idea being replaced by another. The problem with common sense is that it changes over time. While it may seem counter-intuitive that common sense changes, it actually is intuitively obvious to the casual observer that it does change! What seems extraordinary, even ridiculous at one point in time, becomes over time, common sense. but only to be replaced eventually by a new common sense. Once upon a time it was common sense that the earth was at the center of the universe. Once upon a time it was common sense that nature could not contain a vacuum. Once upon a time it was common sense that heavier objects fall faster than lighter objects. Galileo's thought experiments in his

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"mind's eye," that is his intuition, led to the new common sense (at least among physicists) that all objects fall through a vacuum at the same speed. Once upon a time Newtonian physics was common sense (at least among physicists). It was replaced by the common sense of Einstein's special theory of relativity. Einstein believed that science is a way of transcending our senses by allowing our intuition to transcend our senses. 1.3.4 Intuition as a Personality Type Carl Jung, a pioneer in psychoanalysis along with Freud, listed four major mental functions as part of identifying different personality types (Jung, 1971). Among the four mental functions two are perceptive functions and two are judgmental functions. The perceptive functions indicate whether a person primarily gathers information by using the five senses, or through intuition. Using intuition means perceiving implications and possibilities of sensory data, the general direction of events, and the 'big picture' without simultaneously perceiving the details. It also means listening to an inner voice, as John Stuart Mill did at the onset of his famous mental crises, and recognizing patterns, written about eloquently by Herbert Simon The judgment hnctions indicate whether we make decisions based on thinking (logic) or feeling (emotions). The four "primary" personality types are thus sensation, intuition, thinking, and feeling. Each of the four primary types are then classified as either introverted (preferring the inner subjective world) or extroverted (preferring the outer objective world), thus yielding eight personality types. The introverted - intuitive may be either a mystic, a dreamer, an artist, or a "crank," often having trouble communicating their insights. An extroverted - intuitive is more likely to be an innovator, inventor, or entrepreneur, but a poor manager.

1.3.5 The Brain The human brain weighs three pounds and is the size of a grapefruit. It contains approximately 180 billion cells or neurons, each of which is physically independent of every other cell but which interact with other cells, making the number of neuron interconnections in excess of the estimated number of atoms in the known universe! Research on the brain dates back to at least 450 B.C. when Hippocrates, the founder of modem medicine, declared that the brain, and not the heart, was the source of pleasure and pain, and judgment. Almost 2500 years before Roger Sperry, Hippocrates stated that the brain seemed to function in two distinct ways. In 1960, Roger Sperry showed that each of the two hemispheres of the neocortex specialize in their functions, with the left hemisphere processing information in a logical, reasoned, stepby-step, sequential manner, and the right hemisphere processing information in a (complementary) nonverbal and intuitive way.

Two Minds The left hemisphere engages in step-by-step thinking. The right hemisphere makes an overall view of the environment, including others' intentions. The right hemisphere is also where our overall world view or vision is generated, and for changes in this overall world view to account for anomalies. The left hemisphere is more of a follower, and indifferent to discrepancies. The left hemisphere assembles facts while the right integrates the individual facts into an overall world view. When we communicate, the left hemisphere processes the text, while the right hemisphere puts it within a context to create understanding. The right hemisphere holds various meanings of words while the left hemisphere chooses the best. It is the right hemisphere which also understands sarcasm, nonverbal communication, intentions, other peoples7state of mind, humor, proverbs, and metaphors. If you tell an individual with damage to their right hemisphere that they need to ground themselves, they are likely to place their feet on the ground. If you tell them to clear their mind before choosing they may put their head under a tap of water. Ask them the meaning of the proverb, people who live in glass houses shouldn't throw stones, and they give you a literal meaning - if you throw something at a piece of glass it may shatter. Because individuals with damage to their right hemisphere lack the ability to place things into context, they simply don't "get it." Far from being useful only to artists, the right hemisphere is essential in thinking and choosing rationally. Having made a decision and asked to explain it, individual's with damage to their right hemisphere will rely exclusively on their left hemisphere. The left hemisphere will have an explanation. But when the right hemisphere is damaged, the explanation told by the left hemisphere, regardless of how elaborate it may be, usually doesn't make much sense. The left hemisphere lacks the big picture and so, "the left hemisphere alone generally makes a mess of reality, not seeing the whole picture" (Ornstein, 127). In other words, left to its own devices, no one would want to live with only a left hemisphere. And, from the point of view of the brain's division of labor perspective, arguing against intuition is arguing against the brain's normal functioning. Economics is not and never has been (exclusively) a left-brained activity. Without the right - intuitive - hemisphere, economists would make absolutely no sense. 1.3.6 The Unconscious The development of cognitive science in the 1970's has also brought with it the discovery that perhaps 95% or more of our thoughts (mental activity) are unconscious and inaccessible to our conscious mind. What followed was the idea that intuition is the result of unconscious and rapid pattern recognition, or identifying the key features of the environment (Norretranders,

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1998). While intuition is the result of pattern recognition, drawing conscious inferences of these patterns is the result of analytical skills. Hence, creativity can be thought of as the product of a combination of conscious and unconscious mental activity. Jacques Hadamard in his book The Psychology of Invention in the Mathematical Field (Hadamard, 1945) presents a theory of creativity containing four stages: preparation, incubation, illumination, and further conscious analysis. Preparation is a (long) period of study. Incubation is a period of time in which you stop consciously thinking about the problem and allow it to reside solely in the subconscious. Illumination is a sudden flash of insight, an intuition. The final stage, further conscious analysis, is the time to translate the intuition into a coherent statement. Hadamard shows that this process of work - relax - insight also applies to Henri Poincare, Carl Gauss, and Hermann von Helmholtz. This four-stage process begins and ends with conscious thoughts with unconscious mental activity in between. It is this middle stage of unconscious mental activity which many economists ignore andlor associate with non-rationality. The fact that intuition is the product of unconscious mental activity has led many economists to associate intuition with non-rationality. Keynes was not among this group.

1.4 Are Intuitions Always Correct? "There is a simple intuitive logic to the notion that the members of the Organization of Petroleum Exporting Countries - particularly the oil-richest of them all, Saudi Arabia - want to push oil prices ever higher. They have lots of oil. We buy lots of oil. The higher the price, the more money they take from us. Simple, intuitive and wrong" (David Wessel, Wall Street Journal, May 27,2004) Based on Wessel's quote, the notion that OPEC wants lower prices for oil is counterintuitive. That is, it doesn't make sense. However it is intuitive that FED Chair Alan Greenspan's intuition about future interest rates should be taken more seriously than the intuitions about interest rates made by his favorite waiter at his favorite New York delicatessen. So should the intuitions of Linus Pauling on organic chemistry be taken much more seriously than my intuitions on organic chemistry! In other words, ceteris paribus, intuitions of an expert can be considered more reliable than those of a novice. At the same time, Daniel Kahneman and the late Amos Tversky have shown quite conclusively that the every-day intuitions of 'average' people is subject to error. A serious problem arises when we consider intuitions as not possibly subject to error. The assumed infallibility of intuition is assumed by many intuitionists, those adhering to the philosophy that humans have an intuitive faculty which allows us to sense or intuit the truth just as the sense of sight

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allows us to perceive objects and colors. A troubling aspect of intuitionism is that it can lead to authoritarianism. John Stuart Mill spent a good part of his intellectual energy arguing this very point. Mill argued that what some believed was intuition was inferences or bad memory. There is also a practice for some to say that if your intuition is incorrect then it wasn't your intuition. If it's incorrect then it was your fear, or your desire "speaking" to you, or you were tired at the time, or anything but the conclusion that your intuition is wrong. Of course, this turns the concept of intuition into one which is not falsifiable. It turns intuition into a concept similar to the concept that individuals are always maximizing, whereby if your data shows that they are not then you are not correctly defining and including all the arguments in their utility function. My answer to the question, is intuition always correct, is a resounding, No. I wholeheartedly reject intuitionism as defined here, even as I wholeheartedly believe that intuition - whatever it may be - is a valuable resource. 1.4.1 Heuristics and Biases

Intuition is a foundation for heuristics, that is, for short cuts or "perceptual routines" (Earl, 1990, 723), because it bypasses all conscious thinking processes and hence all (conscious) perceptual routines. In their preface to Hueristics and Biases, Gilovich, Griffin, and Kahneman state, "The core idea of the heuristics and biases program is that judgment under uncertainty is often based on a number of simplifying heuristics rather than more formal and extensive algorithmic processing. These heuristics typically yield accurate judgments but can give rise to systematic error" (Gilovich, Griffin, and Kahneman, 2002, xv). In other words, intuition is accurate, often complementing analysis, but is subject to systematic error. At the same time, the focus of the Kahneman and Tversky research agenda in heuristics (intuition) and biases in judgment. The result is that intuition at best can only as good as logic, but never better than logic. At the same time, Kaheneman and Tversky refer to intuition as a "natural assessment" (Kahenman and Tversky, 2002), and one with some advantages over reason. First, because intuitions are the product of work in the subconscious, the conscious mind is left free for other work. Second, because the process leading to an intuition occurs in the subconscious, it seems faster than reason. Third, given uncertainty, intuition is the (second) best method for subjectively evaluating the probability of events. Between intuition and reason, humans make the most use of -Evaluating intuitive based judgments implies a standard of comparison. Our standard often used is how well intuitive judgments compare to those made by analytical methods such as the rules of probability. For example, surveys show that people often ignore andlor violate both the extension rule -if A >B, then P(A) 2 P(B) - and the conjunction rule -- P(A&B) 5 (B),

m.

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preferring to use intuition rather than either rule. Comparing actual intuitions to rules of probability creates a bias against intuitive judgments. In fact, since & of probability are statements of logic, they are, well, logical. Since nothing can be more logical than logic, intuitions can never be superior to the rules of probability. In any contest between intuition and logic, intuition's best outcome is a tie. The fact is that in everyday and most other affairs we do not use either the extension or the conjunction rule. We use heuristics - intuition -- which we have observed over time to work reasonably well. In Kahneman and Tversky's prospect theory, intuitive judgments are shown to take many forms including creating similarities or making associations between two or more events or people, by perceptions of causality, and thinking about salient characteristics or archtype of events or people. In each case, people are attempting to turn a difficult question into an easier one. During a hiring seminar a tenured faculty member is really trying to answer a difficult question - whether a candidate will remain intellectually active and is good enough to receive tenure. A simpler question is asked - how good is their presentation. In attempting to answer the difficult question whether a particular person is an elementary school teacher or a CIA agent, people answer the easier question whether the known characteristics of that person are more similar to an elementary school teacher or a CIA agent. Intuitive judgments are made by our use of imagery; intuition is the result of mental model building. The mental model used and the form of the intuition is dependent upon the question being answered. For example, in answering the question what percentage men with a heart attack are over 60, we ask ourselves to picture the typical (exemplar, archetype) heart attack victim from memory of stories we have seen andfor read. This is known as the availability heuristic. If we are asked to choose an occupation for someone we do not know based only on a sketch of their personality, we look for similarities between the personality sketch and the representative personality of a person in a particular occupation. Hence, the term representative heuristic. If we are asked to make an assessment of something we know nothing about - the number of countries in the U.N., we draw upon whatever data we are given. This is known as anchoring. Paul Slovic has described another important heuristic - the affect heuristic (Slovic, Finucane, Peters, MacGregor, 2002). The affect heuristic refers to decisions being determined by affective considerations, i.e., our feelings of good and bad, like or dislike. Damasio (1994) provides a complementary explanation for the effect of affect from a neurobiological perspective. Intuitions are a natural assessment or judgment mechanism of the human brain. Especially when no other means of judgment is available, intuition is at least or at best, a second best. No one expects models to be accurate and full of detail. In fact, the "model as map" analogy states that the power of a map

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or a model is that it does not have too much detail. In turning difficult questions into simpler ones, and in building a generalized mental map of the environment, people would seem to be rational in using their intuition! Unfortunately, the mental image of the world and the "real" world are not always consistent with each other. And just as models don't always accurately predict, neither does intuition. At the same time, when people attempt to think logically they often fail. It seems intuitive, therefore, that the true comparison should be between intuitive judgments and actual judgments when people are trying to be logical. At the very least, intuition may be a second best way of making decisions. At the same time, the series of experiments by psychologists Amos Tversky and Daniel Kahnemann have been acknowledged by economists as demonstrating that human decision making deviates significantly from the predictions of economic theory. For example, in Rethinking Intuition, Tamara Horowitz (1998), a philosopher, argues that the results of the Tversky and Kahnemann experiments demonstrates that people's intuitions produce decisions which are at odds with economic theory. Errors in judgment due to the use of intuitionheuristics are not limited to say, undergraduates. Individuals of all levels of education and skill make such errors. Under and over-optimism in the predictions (diagnosis) of doctors, weather forecasters, lawyers, sports commentators and professional gamblers, economists and stock brokers (Koehler, Brenner, and Griffin, 2002). Werner DeBondt and Richard Thaler (DeBondt and Thaler, 2002) studied the one and two year earnings per share forecasts among a group of professional forcasters in the IBES International database. The results of their (statistical) analysis is that forecasters overreact, and that earnings per share forecasts are unrealistically optimistic. The same overreaction has been reported in the literature for exchange rate, and macroeconomic forecasts. DeBondt and Thaler conclude that the analysts surveyed are "decidedly human. The same pattern of overreaction found in the predictions of naive undergraduates is replicated in the predictions of stock market professionals. Forecasted changes are simply too extreme to be considered rational.. .When practitioners describe market crashes as panics, produced by investor overreaction, perhaps they are right" (ibid, p. 685). Bottom line: intuitions are not always correct.

1.5 Is Intuition an Inherently Metaphysical Concept? Intuition is not an inherently metaphysical or spiritual concept. It has been and still is discussed as part of the 'spiritual' aspect of life, but it is at the same time part of a scientific agenda. Let me briefly discuss the work of a great scientific mind's attempt to bridge the worlds of science and metaphysics. Rupert Sheldrake has a Ph.D. in biochemistry from Cambridge, and was a Research Fellow of the Royal Society. His 1981 book, A New Science of Life: The Hypothesis of Formative Causation has been described by the journal Nature as "the best candidate for burning there has been for

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many years" (Schwartz and Russek, 1999, p. 123). In his book, The Presence of the Past: Morphic Resonance and the Habits of Nature, Sheldrake (Sheldrake, 1989) hypothesizes that memory is inherent in nature and hence the past is available to us directly rather than indirectly through memories stored in the brain. Sheldrake's explanation is that all members of a species inherit a "collective memory" from all previous members of their own system, regardless of where or when they lived. All members of the same system are connected with each other and can "communicate" with and through each other, "tune in'' to each other as if time and space were not obstacles to communication. The reason is that we are connected to each other through our common "data base", the "collective unconscious", or what Sheldrake calls a "morphogenic field." Morphogenic comes from the Greek words morphe, meaning form, and genesis, meaning coming into being. Each system has its own morphogenic field which "surrounds" the system it organizes and assists the organisms in unfolding into their various forms. Sheldrake believes that this may be a scientific explanation of the ancient Hindu concept of the "akashic records. The akashic records is the memory of every moment of the past, held by nature and available to all minds. Enlightened people and gurus are said to "tap into" the akashic records with their intuitive mind. I'm not saying that the akashic records exist or do not exist. I'm not saying that it is possible to tap into these records or not. The point is, in this book I am not going to speculate about either this or any other metaphysical - spiritual aspects of intuition.

1.6 Some Scientific Studies on Intuition Two broadly defined intuition related issues studied by scientists are the somatic markers hypothesis of Antonio Damasio, and 'women's intuition.' 1.6.1 Somatic Markers

In his book Descartes'Error. Emotion, Reason, and the Human Brain, neurobiologist Antonio Damasio shows that intuition, emotions and feelings play a positive role in rational decision making. A very important reason is that, "The strategies of human reason probably did not develop, in either evolution or any single individual, without the guiding force of the mechanisms of biological regulation, of which emotion and feeling are notable expressions" (Damasio, 1994, p. xii). Not all human decisions involve choosing and reasoning in the sense used by economists - conscious evaluation of the costs and benefits of various options. First, there are automatic bodily processes by which the body moves to a state of equilibrium. For example, a drop in blood sugar triggers physical changes in your body leading to a state of hunger. We are neither conscious of, nor have any control of these physical changes. Second, we engage in

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survival strategies which are also automatic or instinctive. For example, when we see an oncoming car we automatically move away from it. We know that an oncoming car (stimulus) is dangerous and that the appropriate response or choice is to move. While we are conscious of what is going on, the movement away from the car is automatic. Third, there are many choices we make in our life - career, family, friendships, recreation, saving, voting - which require that we reason and choose in the usual sense of the terms. These choices involve short and long run costs and benefits, all of which are shrouded by complexity and uncertainty. Descartes referred to the first two as being part of our "animal spirit," while the third is characteristic of our "human spirit" (ibid., 165-68). The third category of decisions are traditionally believed to be optimized through logic - "rationality" - and in the absence of emotions. The difficulty with rational decision making is that calculating costs and benefits to maximize subjective expected utility will take too much time and is subject to too much error due to the facts that the human attention span is too short, and the capacity of our working memory is too small. There is another difficulty of sorts with emotionless rational decision making. The difficulty is that the lack of emotion in decision making is the way in which people with damage of their prefrontal lobe make decisions. I for one, always use emotion in making decision! According to Damasio, the human mind at the beginning of a decision making process is not a "blank slate." The mind contains numerous images gleaned from experience. Depending upon the circumstances surrounding the decision, a subset of the available images will be automatically activated. Even before reasoning takes place, when the mind considers an option with a bad outcome the individual experiences an intuition, an unpleasant gut feeling in the body. If the option contains a positive outcome the gut feeling is pleasant. Because the feeling is in the body, Damasio uses the term somatic (soma being the Greek word for body). The gut feeling in the body "marks" an image, hence the term somatic marker. Damasio says that somatic markers are an example of "feelings generated from ... emotions. Those emotions and feelings have been connected, by learning, to predicted future outcomes of certain scenarios" (ibid., 174). Feelings and emotions are not identical. An emotion is a physical phenomenon with bodily correlates. For example, fear affects the heart rate, and facial andlor other muscles. Emotions are often automatic and prompted by the subconscious. Emotions, and affect, give rise to feeling. You can be angry and feel angry. You can also be angry (with all the physical correlates) without feeling angry. However, your facial expression may contort with anger and a person next to you may see anger on your face. The somatic marker creates a feeling in the body which "forces attention on the ... outcome and to which a given action may lead, and functions as an automated alarm signal which says: Beware of danger ahead if you choose the option which leads to this outcome... The automated signal protects you

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against future losses, without much ado, and then allows you to choose)orn among fewer alternatives" (ibid., 173). Somatic markers, having screened alternatives, allows any subsequent cost-benefit calculations to be more accurate, and allows the decision making process to be more efficient. There are two important implications. First, somatic markers make use of both attention and working memory, but it is our values which drives the process. After all, pleasant and unpleasant gut feelings imply values or preferences. Second, there is an optimal level of emotion because emotions can be either beneficial or costly in the process of decision making. Third, emotion and logic, or intuition and analysis are complements rather than substitutes. While Pascal said, "the heart has reasons that reason does not know at all," Damasio says, "The organism has some reasons that reason must utilize" (ibid., 200). We are not always conscious of somatic markers. Somatic markers also act subconsciously, affecting those parts of the brain which control our appetites. Thus, for, no apparent reason we would feel drawn to or away from some particular behavior. He says that "This covert mechanism would be the source of what we call intuition, the mysterious mechanism by which we arrive at the solution of a problem without reasoning toward it" (ibid., 188). Damasio reports the results of gambling experiments illustrating his somatic market hypothesis. The experiment involves players turning over cards from four decks of cards. Some cards in decks A & B paid the player $100, but others required payments in excess of $1,000. In decks C & D, some cards paid $50, while other cards required payments of less than $100 on average. Players without frontal lobe brain damage began by sampling cards from all four decks. Seeing high rewards from decks A & B they showed a preference for these decks. As the game continued and they were forced to pay large sums from cards in decks A & B, they switched to decks C & D. Players with frontal lobe brain damage began by sampling cards from all four decks, then showed a preference for high reward decks A & B. However, having lost large sums of money they return to their preference for decks A & B, went bankrupt and forced to borrow more (play) money. Despite being attentive, risk averse, intelligent and possessing a preference to win, frontal lobe damaged individuals act "irrationally." Damasio7s explanation is that those with frontal lobe damage lack somatic markers, thereby lacking an association between a stimulus and an appropriate somatic response. They act, therefore, as if they have an inappropriate preference for the present at the expense of the future. They have in Damasio's terms, a "myopia for the future" (ibid., 218). It is as if they do not retain what they learned through education or experience; they do not have a theory of their own mind. A similar article on the same topic appeared in the journal, Science in which the author, Gretchen Vogel, states that "Intuition may deserve more respect than it gets these days. Although it's often dismissed along with

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emotion as obscuring clear, rational thought, a new study suggests that it plays a critical role in humans' ability to make smart decisions" (Vogel, 1997, ibid., 1269). Four neuroscientists from the University of Iowa College of Medicine studied patients with damage to their ventromedial prefrontal cortex. People with damage to this part of the brain score high on IQ tests and memory tests as often as non-brain damaged persons. However, they tend to be more indecisive and make poor choices in real life situations. Brain damaged patients and a control group were given four decks of cards, two "good" decks and two "bad" decks. Each person was given $2,000, and each card listed an amount of money they won or lost. The bad decks offered lower payoffs while the penalty cards contained lower penalties. In the long run, choosing from the bad deck led to net losses, while the good deck led to net gains. The brain damaged patients showed no emotion (measured by no changes in physiology which accompanies nervousness) after their net losses continued to increase and did not tend to switch towards the good deck. Members of the control group showed signs of nervousness after a series of losses and switched towards the good decks. They also began switching to the good decks even before they could articulate to the researchers that the good decks were a better long term strategy. In other words, members of the control group had a hunch about which deck to choose from even before their conscious mind could formulate a reason. An explanation for the result is that the ventromedial prefrontal cortex is a part of the brain which stores memories of past rewards and punishments and creates an unconscious response to current rewards and punishments which we call a hunch, or an intuition. The brain damaged patients lack this intuitive ability and hence make poor decisions. 1.6.2 Women's Intuition

Women are said to possess more intuitive abilities than men. Some believe it is because women have traditionally had the caregiver role which requires sensitivity to those around them. Another explanation is that women have more connecting fibers between the two hemispheres of the neocortex. In the studies on women's intuition reviewed here, intuition is also referred to as "empathic accuracy," "spontaneous communication," and "knowledge-byacquaintance" (Ickles, 1997). These are believed by some to be biological in nature. Ross Buck and Benson Ginsburg describe it in these terms: "We know directly certain inner meanings in others - certain motivationalemotional states - because others are constructed to express directly such states and we are constructed so that when we attend, we 'pick up' that expression and know its meaning directly. This knowledge is based upon phylogenetic adaptation and is conferred through inheritance.. .Therefore, the individuals involved in spontaneous communication literally constitute a biological unit.. .One's knowledge of the motivational-emotional states of

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others via spontaneous communication is as direct and biologically based as one's knowledge of the feel of one's shoe on one's foot" (Buck and Ginsburg, 1997, p. 28). The evidence, reported in Tiffany Graham and William Ickles, for the existence of women's intuition is mixed. The evidence is sorted according to three criteria. First, "vicarious emotional responding," or "emotional matching." Second, "nonverbal decoding ability," and third, "empathic accuracy." For purposes of simplicity all three will be referred to as empathy or intuition. The first criteria, vicarious emotional responding, is the ability for one person to experience the same emotions as a 'target' person in an emotionally provoking situation. In many studies females score as more empathic than males. The problem is, females evaluate themselves as more empathetic and disposed to emotional matching than males. In other words males and females' own evaluation are consistent with gender stereotypes on this issue. In the studies on emotional matching, males and females reported their reactions verbally to the experimenter raising the possibility that both females and males were expressing themselves consistent with stereotypes. However, when they reported their reactions 'privately' via writing their responses, gender differences disappeared (Graham and Ickles, 1997).

1.7 The Plan for the Remainder of the Book I discovered, without looking, that smith gave a central role to intuition. However, he preferred the word sympathy. I then discovered, by looking, that Mill, Marshall, Keynes, Knight, and Herbert Simon also spoke about intuition. Chapters two through six focus exclusively on Adam Smith, John Stuart Mill, Alfred Marshall, John Maynard Keynes, and Frank Knight, respectively. Chapter seven focuses on Herbert Simon, but also includes Friedrich von Hayek, George Shackle, and Harvey Leibenstein. Finally, in Chapter 8, I illustrate a renewed acceptance of the concept of intuition by reviewing a portion of the very large number of articles in economic journals which using the words intuition and intuitive.

Chapter 2 Adam Smith. New Intuitions For A New Age 2.1 Introduction Adam Smith's writings spanned a wide range of topics from the evolution of ideas in physics, The History of Astronomy, causes and effects of effective communication, Rhetoric and Belle Lettres, virtue and morality, Theory of Moral Philosophy, and, of course, economics, Wealth of Nations. Although Smith never used the word intuition, the concept of intuition is included in all four of the above, and is one of the things which connects his two major works, Theory of Moral Philosophy (TMP), and Wealth of Nations (WN). Some researchers consider the emphasis on virtue and morality in TMP inconsistent with the focus on private markets in WN. This inconsistency has been called the "Adam Smith problem." I do not see any "Adam Smith problem." What I do see is a coherent theme of how the human mind affects the evolution of ideas in science, interpersonal communication and relations, and the economy. I also see a person whose own intuitions became intuitions of the (modern) age he came to represent, replacing some of the intuitions of the mercantilist age. Today, some economists attempting to expand the scope of economics take some of their cues from Smith. In The Moral Dimension, Amatai Etzioni presents a "deontological multiple utility" model of socio-economics (Etzioni, 1988), and states, "...the deontological multiple-utility model ...is closer to the other Adam Smith, the author of The Theory of Moral Sentiments, not to replace the first (sic) Adam Smith, the author of the Wealth of Nations, but to add the concept of morality to that of the pleasure utility, and the concept of community to that of competition" (ibid., p. 22). Deirdre McCloskey in her book, The Vices of Economists - The Virtues of the Bourgeoisie, states that "integrating prudence with the virtues spoken about in his Theory of Moral Sentiments, can save economics from being both soulless -- the economics of only prudence -- and politicized sentimentality -- economics absent prudence" (McCloskey, 1996, p. 128-29). In this chapter I first discuss Smith's replacing the intuitions of the mercantilist age with new ones consistent with the modern age, as well as his relationship with Francis Hutcheson. This is followed by his use of the concept intuition in his various writings and why I do not find an "Adam Smith problem."

2.2 New Intuitions According to Max Lerner, Smith was in a good position to replace intuitions of a declining age with those of an advancing age for both personal and historical reasons. The personal reason was that Smith "was all antennae,

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reaching out for and absorbing everything within reach" (Smith, 1937, p. vi). He had "a mind that was a powerful analytic machine...and a powerful synthetic machine" (ibid, p. vi). He had "subtle insights" and was a "gentle sage" (ibid, 1937, p. vi). Edmund Burke called him a "man of uncommon observation" (Rae, 1965, p.146). It is said that he was "habitually inattentive...to what was passing around him" (Stewart, 1966, p.37), while at the same very aware and insightful of what was going on around him. The economist and contemporary of Smith, Dugald Stewart, remarked that "...he possessed a power, not perhaps uncommon among absent men, of recollecting, in consequence of subsequent efforts of reflection, many occurrences which, at the time when they happened, did not seem to have sensibly attracted his notice" (ibid., p.77).Historically, Smith "stood with these gifts at the dawn of a new science" and a new age, at the end of the feudal age in Europe. And what he wrote became "the expression of forces which were working, at the very time he wrote it, to fashion that strange and terrible new species-homo oeconomicus, or the economic man of the modern world" (Smith, 1937, p. v). Would it be too much to state that the Wealth of Nations is Smith's intuition on the modern world? In the Wealth of Nations Smith ridiculed a core intuition of mercantilism - that wealth consists of money (gold and silver). He says, "to attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utencils" (ibid, p. 408). Or, in another place Smith states, "the division of labour is the great cause of the increase of public opulence, which is always proportional to the industry of the people, and not to the quantity of gold and silver as is foolishly imagined" (ibid, p. xxx). The 'common sense' notion during the mercantilist era that wealth consists of gold and silver, similar to all pieces of common sense, seems intuitively obvious to even the casual observer and makes it difficult to think in any other way about the subject. Smith expresses this in saying, "I thought it necessary, though at the hazard of being tedious, to examine at full length this popular notion that wealth consists in money, or in gold and silver. Money in common language, as I have already observed, frequently signifies wealth; and this ambiguity of expression has rendered this possible notion so familiar to us, that even they, who are convinced of its absurdity, are very apt to forget their own principles, and in the course of their reasonings to take it for granted as a certain and undeniable truth" (ibid, p. 4 18). Smith replaced this core intuition of mercantilism with what would become a new intuition about free trade and wealth. "We trust with perfect security that the freedom of trade, without any attention of government, will always supply us with the wine which we have occasion for; and we may trust

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with equal security that it will always supply us with all the gold and silver which we can afford to purchase or to employ, either in circulating our commodities, or in other uses" (ibid, 404). He also expressed intuitions about the economic and social effects of self-interest within the "natural order": the "invisible hand" of the market. One of Smith's famous statements about the invisible hand is: "He generally, indeed neither intends to promote the public interest, nor knows how much he is promoting it ...he intends only his own security.. .he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention" (ibid, 423). Some have suggested that, more than an intuition, this is "a cardinal principal of the faith of the age," an argument "to fight the ecclesiastical institutions and the political obscurantism of their day" (ibid, p. ix). Smith says that "It is unnecessary to give an example" of how machinery supports labor (ibid, 9), presumably because it is intuitive. Rules of conduct also contain an intuitive element. Smith says, "In every age and country of the world men must have attended to the characters, and designs, and actions of one another, and many reputable rules and maxims for the conduct of human life, must have been laid down and approved of by common consent.. .The beauty of a systematical arrangement of different observations connected by a few common principles, was first seen...towards a system of natural philosophy. Something of the same kind was afterwards attempted in morals. The science which pretends to investigate and explain those connecting principles, is what is properly called moral philosophy" (ibid, p. 724). In other words, the rules of conduct evolve over time through observations of what behaviors are proper or improper. Over time, the rules of conduct appear to be simply intuitively obvious. Another example is the division of labor which is "not originally the effect of any human wisdom," but due to "a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another" (ibid, p. 13). Such broad all inclusive statements about human nature are intuitions, and in the context of Smith's writings are part of his vision of a world of private initiative free of government regulation and ecclesiastical authority. Smith often uses the word "natural" to suggest that a relationship between economic variables is intuitively obvious. For example, high wages are a "natural symptom" of rising levels of aggregate wealth (ibid, p. 73). Read this last sentence as, 'of course, it is intuitive that as wealth increases, wages increase.' It is natural intuitive - that the demand for labor increases as aggregate wealth increases (ibid, p. 69). A second example is that the "natural price" is the price towards which prices "are continually gravitating" (ibid, p. 58). Therefore, it is intuitive that prices gravitate towards the natural prices. Third, "Every species of animals naturally multiplies in proportion to the means of their

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subsistence" (ibid, p. 79). It seems, therefore, that it is intuitve to Smith that birth rates are proportional to income levels. This is no longer intuitive, in fact, the opposite is intuitive. A final example is, "The great phenomena of nature.. .are objects which, as they necessarily excite the wonder, so they naturally call forth the curiosity, of mankind to enquire into their causes" (ibid, p. 723). This is a particularly interesting quote because the topic of wonder, curiosity, and the advancement of science was central to some of Smith's earliest writings, a fact to which we shall return. He also uses the word "evidently" in a way which, evidently, denotes intuitive. For example, "Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value.. ." (ibid, p. 36). Smith not only personally replaced intuitions of the mercantilist era with what became intuitions of the 'modern' era, he also discussed the replacement of the intuitions of the Cartesian system with the intuitions of Sir Issac Newton. In one of Smith's early writings, "The History of Astronomy," Smith compares these two systems and states, "The Cartesian system, which had prevailed so generally before it, had accustomed mankind to conceive motion as never beginning" (Smith, 1980, p. 104). The Cartesian system "accustomed mankind," or in other words it was intuitively obvious. Mankind, however, replaced the Cartesian system with that of Newton. Speaking of Newton Smith says, "His system, however, now prevails over all opposition, and has advanced to the acquisition of the most universal empire that was ever established in philosophy. ...And even we, while we have been endeavouring to represent all philosophical systems as mere inventions of the imagination, to connect together the otherwise disjointed and discordant phaenomena of nature, have insensibly been drawn in, to make use of language expressing the connection principles of this one, as if they were the real chains which Nature makes use of bind together her several operations. Can we wonder then, that it should have gained the general and complete approbation of mankind, and that it should now be considered, not as an attempt to connect in the imagination the phaenomena of the Heavens, but as the greatest discovery that ever was made by man, the discovery of an immense chain of the most important and sublime truths, all closely connected together, by one capital fact, of the reality of which we have daily experience" (ibid, pp. 104-105). Newton's system is now considered "an immense chain of the most important and sublime truths" - under certain, but not all conditions.

2.3 Francis Hutcheson Several of the economists discussed in this book were influenced by noneconomists. Mill was influenced by Jeremy Bentham, Marshall was influenced by the philosopher Henry Mansel, J. M. Keynes by the philosopher G.E. Moore, Knight by philosopher/psychologist William James, and Simon

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by Business Professor Chester Barnard. Smith was influenced by the moral philosopher Francis Hutcheson, but then again, Smith was a moral philosopher as well. Francis Hutcheson ( 1694-1746), Adam Smith's teacher at Glasgow, was one of the leaders of the Scottish Enlightenment, and a proponent of the idea of a moral sense, an idea which is central to Smith's moral philosophy and his economics. Hutcheson authored, among other things, An Inquiry into the Original of our Ideas of Beauty and Virtue (1727), and A System of Moral Philosophy (1755). According to Hutcheson the moral sense -- an "internal sense," the "passive side of the mind," a "natural power of perception, or determination of the mind to receive necessarily certain ideas, from the presence of objects" (Scott, 1966, p. 187) -- recognizes moral goodness in ourselves and others, thereby allowing us to make moral judgments. This moral sense has been implanted in all persons, regardless of age or education, and is our "Superior Sense" (ibid, p. 190). In addition, the moral sense "leaps," it is 'immediate,' independent of Will, and independent of any other knowledge of the objects of perception. It should also be intuitively obvious to the casual observer that the internal senses function intuitively. In contrast with our (internal) senses, reason "plods" (Kivy, p. 36). William Scott, in his book Francis Hutcheson (Scott, 1966), refers to Hutcheson as an intuitionist, due to the fact that he "never tires of entreating or even commanding his reader to consult ' his heart' and observe what happens 'in his breast"' (ibid, p. 271). Hutcheson 's moral philosophy includes, as did Smith's, the ideas of an impartial spectator, sympathy, and self-interest. Sympathy allows us to "apprehend the state of others, our hearts naturally have a fellow-feeling with them" (Hutcheson, l968p. 19). Some passions and actions create in ourselves a "warm feeling of approbation, a sense of their excellence, and in consequence of it, great good-will and zeal for their happiness" (Hutcheson, 1968p. 24). On the other hand, there are other passions and actions which create a sense of remorse and dislike for others. Hutcheson, like so many of that time, had 'Newton envy': "This universal Benevolence toward all Men, we may compare it that Principle of Gravitation.. ." (Myers, 1983, p. 69). Despite the concepts used by Smith which are similar to those used by Hutcheson - impartial spectator, and sympathy - Smith was not in my opinion an intuitionist. In fact, I cannot find that he ever used the word intuition. He believed in what we would call intuition, and he realized its power to produce mutually beneficial interactions. At the same time it does not seem that he ever used the word intuition. During Smith's day many rejected intuition as the product of superstition and being anti-rational. Smith, however, did not reject intuition, he simply called it by other names. For Hutcheson, the moral sense is neither motivated by self-interest, nor a product of reasoning. The moral sense comes from the soul, as does reason.

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However, "tis pretty plain that reason is only a subservient power to our ultimate determinations either of perception or will" (Hutcheson, 1968p. 58). Understanding and reason (reflecting, comparing, judging, etc.) helps us judge about the means to achieve some end. But, reasoning cannot help with "ultimate ends" (ibid, p.38). At the same time, the ordinary work in the world requires self-interest, leading Hutcheson to say that "Self-love is really as necessary to the Good of the Whole, as Benevolence" (Myers, p. 69). The moral sense is an aspect of the sense of beauty. The sense of beauty yields "pleasures of the imagination," through our "spectator" (Hutcheson, 1968, p. 18) because of a sense of harmony or regularity. According to Hutcheson, the sense of beauty yields utility which is immediate and without "previous consideration" (Kivy, p. 29). In addition to the moral sense and sense of beauty, we also possess a "Public Sense" and a "Sense of Honor." Our Public Sense allows us to be happy for others' happiness, and "uneasy" at their misery. Through our Sense of Honor we feel happy when others acknowledge the good we have performed (ibid, p. 32). In Smith's view, Hutcheson did not place enough emphasis on self-interest.

2.3.1 Hutcheson's Economics Hutcheson, similar to Smith interpreted our (presumed) moral faculty as being a tool for an invisible hand. Hutcheson says that "we are under natural bonds of beneficence and humanity toward all..." (Hutcheson, 196813. 281). And, similar to Smith, the invisible hand works in our interest when we, paradoxically, act towards the interests of others. "...tis obvious that we cannot expect the friendly aids of our fellows, without, on our part, we be ready to good offices, and refrain all the selfish passions which may arise upon any interfering interests so that they shall not be injurious to others" (ibid, p. 290). Our moral sense perceives benevolence (good actions) in others and feels pleasure, and love for those persons even though we expect nothing from them. One thing which is pleasing to us is regularity; regularity assumes design, and hence has its source in benevolence. Hutcheson's moral sense thus has a teleological element. In his System of Moral Philosophy, Hutcheson favored liberty and explained how we benefit economically from "the friendly aids of our fellows" (Scott p. 235). "Tis plain, that a man in absolute solitude, though he were of mature strength, and fully instructed in all parts of life, could scarcely procure to himself the bare necessities of life ... much less could he procure any grateful conveniences" (ibid, pp. 235-36). If that seems to be extolling the virtues of the division of labor, the next passage makes it very clear. "Nay 'tis well known that the produce of the labours of any given number, twenty for instance, in providing the necessaries or conveniences of life, shall be much

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greater by assigning to one a certain sort of work of one kind, in which he will soon acquire skill and dexterity.. ." (ibid, p.236). Hutcheson, inspired by the writings of Cicero, coined the phrase, "the greatest happiness of the greatest number." When Bentham learned of the greatest happiness principle it "caused him the sensations of Archimedes" (ibid, p. 273). Archimedes (c. 287-212 B.C.) was attempting to determine the volume of an object based on how much water it displaced. While bathing he suddenly realized the solution to the problem. As excited as he was, he jumped out of the pool proceeding to walk home, naked, shouting eureka, eureka. Since that time the term eureka has been associated with a sudden intuition. Hutcheson also borrows Cicero's use of the concept of intuition man's internal senses and unreflective mental processes (ibid, pp. 271-2). According to Hutcheson, we are moved towards two things: our own maximum happiness,and the maximum happiness for all persons. And, it is by reason and reflection that we can see that God intended for each of us to pursue both the maximum general universal happiness, and our own so long as it is consistent with the general universal happiness. How do we pursue these? By following the guidance of our moral sense. Hutcheson's statements in System of Moral Philosophy (SMP) on value in use and exchange also predates Smith's own account. In general, the order of the economic topics in Hutcheson's SMP are similar to that in Smith's Wealth of Nations (WN). In the list which follows the first of two citations on any topic is the location in Hutcheson's SMP, while the second is for Smith WN. The eleven topics are, the division of labor (Bk 2, ch 4; Bk 1, chs 1-2), value (Bk 2, ch 12; Bk 1, ch 4), use & exchange value (Bk 2, ch 12; Bk 1, ch 4), money as medium of exchange (Bk 2, ch 12; Bk 1, chs 4-5), money as standard of value (Bk 2, ch 12; Bk 1, chs 4-5), prices (Bk 2, ch 12; Bk 1, ch 7), wages (Bk 2, ch 12; Bk 1, ch 8), rate of interest (Bk 2, ch 13; Bk 1, chs 9lo), rent (Bk 2, ch 13; Bk 1, ch 1I), trade (Bk 3, ch 9; Bk 4), taxation (Bk 3, ch 9; Bk 5). On the other hand, Hutcheson was a supporter of the system Smith criticized - mercantilism.

2.4 Smith's Early Career. The Mind, Interpersonal Communication and Brain Hemispheres Essays on Philosophical Subjects (Wightman and Bryce, 1980) is a collection of largely ignored essays by Adam Smith. One of the essays is particularly relevant for the study of intuition, "The History of Astronomy," (HA). In HA Smith says that, "It is evident that the mind takes pleasure in observing the resemblances that are discoverable betwixt different objects. It is by means of such observations that it endeavors to arrange and methodise all its ideas, and to reduce them into proper classes and assortments" (Smith, 1980, p. 38). In other words, it is intuitive (evident) that the mind likes to

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observe patterns or associations among things. And, the more knowledge we have of a subject the more distinctions or patterns we can imagine among objects. Patterns are experienced when, for example, one object always follows another, or when two objects are similar to each other but different from a third. When a pattern has been established it is expected to continue; when the fxst object, X, appears then the second object, Y, is anticipated. The imagination moves from one object in the chain to the other(s). For the imagination, "There is no break, no stop, no gap, no interval. The ideas excited by so coherent a chain of things seem, as it were, to float through the mind of their own accord, without obliging it to exert itself, or to make any effort in order to pass from one of them to another" (ibid., 41). A pattern experienced over time becomes a "habit of the imagination...The ideas excited by so coherent a chain of things seem, as it were, to float through the mind of their own accord, without obliging it to exert itself, or to make any effort in order to pass from one of them to another" (ibid., p. 41). We will see this theme of ideas floating through the air in Marshall's analysis of external economies. Patterns experienced again and again become intuitions. Smith says that what seems confusing to a novice is anything but confusion for an expert ("artizan"). The expert 'goes with the flow7 of their imagination and effortlessly sees the inner workings of things. Asked about the inner workings, "even the ignorant become so familiar with them, as not to think that their effects require any explication" (ibid, p. 44). However, when something cannot be classified or placed in a known pattern, the "spirits" (ibid., p. 39, fn.) within us move and the mind hesitates, feels surprise, and then wonder. The mind then seeks something to "fill up the gap, which, like a bridge, may so far at least unite those seemingly distant objects, as to render the passage of the thought betwixt them smooth, and natural, and easy" (ibid., p. 42). What is wonder? Wonder is our response to "extraordinary and uncommon objects, at all the rarer phaenomena of nature.. . and at everything, in short, with which we have before been either little or not at all acquainted" (ibid., 33). In a sense, wonder is caused by the intuitively obvious not occurring. In turn, wonder motivates new theories. Ultimately, what eventually becomes intuitively obvious begins as wonder. According to Smith the search for "common sense" brings advancements in science, and utility or the avoidance of pain. In other words, the mind prefers understanding to confusion, patterns to chaos; the mind prefers the intuitively obvious (derived from logic). Smith says that Individuals are thus not utility maximizers as much as they are "scientists in a very general sense" (Earl, 1983, p. 119). Another of Smith's early writings is Rhetoric and Belle Lettres. His interest in rhetoric and belle lettres - literature - stemmed from his interest in the power of the mind and the force which words have on the mind, and on

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the effect which the power of the mind can have on social harmony. According to Smith, language has more force and beauty if it conveys to the recipient the author's state of mind or "quality of spirit" (Smith, 1983, p. 18), feelings, passions, intentions, and sentiments. When this occurs, language contains propriety, and the recipient can "enter into all the concerns of others as if they were directly involved (ibid, p. 95). Thus, the author and the recipient are more apt to understand each other's state of mind. It was hoped that this, in turn, would increase the likelihood of social harmony. Currently we also think about this phenomena in terms of issues surrounding commitments, reputation, and signaling (Frank, 1988). Smith was himself described as having the capacity of "imaginative transposition" - the ability to "see the motives and the surroundings of another person as they appear to that other person himself' (Myers, 1983, p. 121). This phenomenon have been well researched by psychologists and known as "empathic accuracy," also referred to as "spontaneous communication," and "knowledge-by-acquaintance" (Ickles, 1997). In addition, they are believed to be related with both intuition and altruism, and to be biological in nature. Buck and Ginsburg describe it in these terms: "We know directly certain inner meanings in others - certain motivational-emotional states - because others are constructed to express directly such states and we are constructed so that when we attend, we 'pick up7 that expression and know its meaning directly.. .Therefore, the individuals involved in spontaneous communication literally constitute a biological unit ...One's knowledge of the motivationalemotional states of others via spontaneous communication is as direct and biologically based as one's knowledge of the feel of one's shoe on one's foot" (Buck, and Ginsburg, 1997, p. 28). If the author's spirit is not conveyed then a "chasm or gap" in communication creates uncertainty and causes a loss of meaning for the recipient. Smith says, "We should never leave any chasm or Gap in the thread of the narration. The very notion of a gap makes us uneasy for what should have happened in that time" (Smith, 1980, p. 100). What gives us pleasure is a "sequence of relations leading to illumination" (ibid., p.13). What causes a chasm or gap for the recipient? One cause is reading a literal translation of a text written in another language. Another cause is being caught in "a dungeon of metaphorical obscurity" consisting of either allegories or metaphors (ibid, p. 8). A metaphor will add to force if and only if it creates sympathy between two (or more) persons; otherwise it adds ambiguity and confusion. An absence of ambiguity is required for force or sympathy. Especially since the 1960s, cognitive scientists have investigated some of the same issues which concerned Smith, and have concluded that it is the right - intuitve hemisphere which specializes in non-literal translations, and sympathy generating metaphors. They have also concluded that it is the right hemisphere which allows us to "enter" into another's state of mind and

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feeling. This phenomena has been called "social intelligence" and "mind reading" (Ornstein, p.122), "personal intelligence" (Gardner,l982), "emotional intelligence" (Goleman, 1995), and "empathic accuracy" (Ickles, 1997). By placing things in context and providing the big picture, the right hemisphere gives us the ability to summarize the essence of written material, and make good inductions. The right hemisphere links together the large strokes of life, sees how they fit together, sees the "higher organization" (Ornstein, p.162, Norretranders, 1998). It also allows us to "complete the gaps" in language and thus good predictions about the words we expect to see. (There's a good chance that you did not notice that the word "make" was left out of the previous sentence.) We know now, 200 years after Smith wrote, that the ability to communicate with propriety and create sympathy with another is the province of the right hemisphere.

2.5 Smith's Middle Career. Moral Sentiments John Maurice Clark gave this advise for studying the history of economic thought: "To understand any forceful writer and to make the necessary allowances, find out what it was against which he was reacting" (Clark, 1966, p. 57). Smith was one among a group of writers who were reacting against the rapidly changing, confusing and potentially corrupting nature of the growing commercial "society of strangers." Smith wanted to understand how social bonds are created and maintained, and how one can live a virtuous life under those circumstances. He saw a solution in an individual suppressing the ego and entering into the feelings of another. In Smith's Scotland, effective communication and social bonding were believed to rest on three things: (1) simple human feelings during face-to-face interactions in small groups, (2) a Stoic detachment from the things of the world, and (3) reason. The term "reason" meant a "warm feeling" guiding one to virtuous behavior. It was believed that the private sector, especially with a close circle of friends, was where a warm feeling, sentiment and a "harmony of minds" (Dwyer, 1987, p. 100) could most likely exist. The public sphere was a place of egotism, and religious dogma. Religious dogma was anathema to Smith, and he reacted against the practice of causistry and the use of revelation for settling disputes. My intuition is that is a reason why Smith avoided the term intuition. In contrast to the grammatical oriented causists' approach to morality, Smith was part of a movement to discover a simple and clear guide to questions of morality and judgment; They found it in an individual's own instantaneous and p r e reasoned, intuitivelike feelings. Smith did not believe that precise rules are possible for matters of human emotions, feelings and sentiments. Therefore, thought Smith, trying to provide a complete system of morals, books of

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casuistry created "frivolous accuracy" and, therefore, are "as useless as they are commonly tiresome," replete "in abtuse and metaphysical distinctions" (Smith, 1969, p. 534). They are useless because they attempt "to direct, by precise rules, what it belongs to feeling and sentiment only to judge of' (ibid., p.533). As opposed to the contrivances and deliberations of the casuists, immediate feelings require neither a working knowledge of Latin nor membership in the clergy. His vision put him squarely in contrast with, and helped to totally undermine casuistry (Jonsen and Toulmin, 1988; Cameron, 1982; Kivy, 1976; Rae, 1965. The word which Smith used for erecting a harmony of minds and social bonds was sympathy. In The Heart of Altruism, Kristin Monroe (Monroe, 1996), states that, "Early discussions of what contemporary scholars refer to as empathy and altruism utilize the term sympathy, Adam Smith being but one notable example" (Monroe, p. 243, fn. 47). Furthermore, she reports that the word empathy comes from the German Einfuhlung, meaning ''the process of intuiting one's way into an object or event to see it from the inside" (ibid., p. 243, h.47). Collard (1978), and Ickes (1997) have also discussed altruism, and its relationship with empathy, sympathy, and intuition. Smith would have heard about sympathy during his visits to France. French culture at the time elevated the heart over the head, and spontaneity over calculation. The key word used was sensibilitb, meaning "the intuitive capacity for intense feeling" (Schama, p.149). In The Moral Sense, James Q. Wilson states that he is continuing the work of several 18th century writers (including Adam Smith) when he writes about the source and importance of a moral sense. Wilson uses the word sympathy as a synonym for moral sense, defining the latter as an "intuitive or directly felt belief about how one ought to act when one is free to act voluntarily (that is, not under duress)" (Wilson, 1993, p. xii). Research on the "inter- subjective meaning context" confirms Smith's belief that friends are more likely to be able to experience a harmony of minds than are strangers (Colvin, Vogt, and Ickes, 1997). Smith begins TMS with this statement: "How selfish soever a man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it" (Smith, 1969, p. 1). What principles are responsible for this? In TMS Smith speaks of two central principles: sympathy and the impartial spectator. Sympathy for Smith played the same role in human society and moral affairs as gravity played in the physical universe - it held things together. Smith wanted to provide a comprehensive view of the moral universe, much like the much-admired Newton did for the physical universe. Sympathy is what he believed could keep people in their own "orbit" and in harmony with others (Campbell, 1975, pp.69-70). What clear communication could advance from the "outside," sympathy could advance from the "inside."

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According to Jacob Viner, sympathy consists of "subrational feelings," almost instinctive to humans and central in human psychology and choice. These subrational feelings begin where "animal instincts shared by man end, and where human reason begins" (Viner, 1972, p.79). These subrational feelings allow us to interpret others' behavior by imagining what we would feel in their situation if we were they. Smith says that when we put ourselves in their situation we are "lodging, if I may be allowed to say, our living souls in their inanimated bodies..." (Macfie, 1967, p.50). In modern parlance, sympathy is approximately equal to empathy or "empathic accuracy" (Ickles, 1997) - identifying with the feelings of another through the fimctioining of the brains' right hemispheres. Sympathy is different from analytical thinking because sympathy is experienced "instantaneously and antecedent to any previous knowledge" (Macfie, p. 50). These first impressions are immediate feelings and not the result of conscious reasoning. Smith says that, "it is altogether absurd and unintelligible to suppose that the first perceptions of right and wrong can be derived from reason..." (Smith, 1969, p.506). For the same reason sympathy cannot be said to be deduced from self-love or selfinterest. Smith disagrees with those who "are fond of deducing all our sentiments from certain refinements of self-love..." (ibid., p.54). Pleasure, he says, comes from sympathy, from a correspondence of our sentiments with those of another. Likewise, pain comes when there is not such a correspondence. In other words, sympathy is an intuitive experience; sympathy is experienced intuitively. Smith says that we approve of others' behavior because we are in sympathy with another. For example, we admire the wealthy because we sympathize with them, not because we expect any private benefit -- utility -from their good will. The utility of it "is plainly an afterthought" (ibid., p. 65). Believing the wealthy to be happy is a self deception which may motivate us to work hard. Sympathy occurs through an objective part of us that Smith calls the impartial spectator (IS). Smith called the IS our conscience, the inhabitant in the breast, the man within, the great judge and arbiter of our conduct, the "eye of the third person," a certain modification of reason, a moral sense, an instrument of God, and "he who...calls to us, with a voice...," immediately (ibid., p.235). The IS is an intuitivslike voice. For Smith, it is most likely the voice of God (Campbell, 1975, p. 81). Through the IS we thus learn proper behavior -- how to avoid criticism and gain the approval of others. The IS thus represents an autonomous moral authority or conscience within each person (Campbell, 1975, p. 74). When you use the IS to examine your own or others' actions, you "divide yourself' into two persons, the examiner and the examined, the judge, and the one being judged. Through the IS we can gain needed insight and clarity because, left to the devices of "the selfish and original passions of human nature" (Smith, 1969, p.233), we will always over exaggerate our pain and

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rejoice excessively about our joy. Doing so is the "fatal weakness of mankind, is the source of half the disorders of human life" (ibid., p. 263). The IS, our intuitive voice, expresses a modified or clarified self-interest deemed so important by Smith. To this we shall return shortly. The IS is thus said to admire those with "acute and delicate discernment," those with the ability to distinguish "minute, and scarce perceptible differences," those with "comprehensive accuracy" (Smith, 1969, p. 64). And, it is these qualities of discernment and comprehensive accuracy -- current synonyms for intuition -which largely account for the "intellectual virtues" (ibid., p. 65). However, the IS is more than a source of the intellectual virtues. The "perfection of human nature" rests upon using the intuitive-like IS in social interactions. Smith says, "that to feel much for others, and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety" (ibid, 1969, p. 72). How does Smith know that the IS exists? Because it is "sufficiently evident of itself' (ibid., p.48), that is, it is intuitively obvious to the casual observer. For Smith, sympathy and the impartial spectator were two parts of one phenomenon. In TMS Smith refers to these two facets as the "...sympathetic feelings of the impartial and well informed spectator" (ibid., p.466). The sympathetic feelings are both immediate and subjective, and hence not the product of reason. The impartial and well-informed spectator is, on the contrary, founded on experience, and may thus be said to be the product of reason. Therefore, the "...sympathetic feelings of the impartial and well informed spectator" consists of immediate feelings founded on (social) experience. A.L. Macfie, in The Individual in Society. Papers on Adam Smith calls this "practical judgments based on experience" (Macfie, 1967, p. 68).

2.6 Smith's Later Career. The Economic's of Morality Even if it is clear that the pre-WN Smith spoke about something resembling intuition, the question still arises as to whether economists should care about this. Economists might care more if intuition could be shown relevant to his economic treatise, WN. Some argue that intuition is not relevant. The argument is that the emphasis of ethics, and all the talk about God in TMS was replaced by WN -- a treatise on the economic consequences of self-interest and property rights. The seeming inconsistencies between the two books have led to the "Adam Smith problem." It is my contention, a contention shared by others (V. Brown, 1994; Macfie, 1967; Young, 1997; Fitzgibbons, 1995; Winch, 1978) that there is not an "Adam Smith problem." It follows, therefore, that intuition may be relevant to WN and hence to economists.

Two Minds 2.6.1 The "Adam Smith Problem" There are five reasons for the debunking the "Adam Smith problem." The frst reason for not believing in the "Adam Smith problem" is that Smith himself seems to say so. On the last page of TMS, Smith, speaking about rules of morality and laws (or justice, one of the three cardinal virtues in TMS), says, "I shall, in another discourse, endeavor to give an account of the general principles of law and government,. ..police, revenue, and arms, and whatever else is the object of law" (Smith, 1969, p. 537). In an advertisement for the sixth edition of TMS, Smith states that WN is the partial fulfillment of the promise made on the last page of TMS (Brown, 1994, p. 24, fn. 4). A second reason is that Smith was lecturing and writing about topics in the early 1750's, before the publication of TMS, which would become the basis for WN. The course in Moral Philosophy which Smith taught at the University of Glasgow in the 1750s had three parts. First, natural theology, or man's ability to discover the truths of God and theology through "the light of nature" and the power of the human mind, without revelation. Second, ethics -- what became the TMS -- and, third, justice. His lectures on justice focused on expediency, or how to increase the wealth and power of the nation. These lectures became the basis for the WN. A third reason is that TMS and WN are written from two different, but complementary points of view. TMS is about the psychological aspects of human life which support liberty. It is written so that the inner world and the voice, thoughts, feelings, and, if you will, intuitions of the moral agent are known. And, TMS emphasizes the higher virtue of benevolence. On the other hand, WN is about the economic aspects of human life consistent with liberty. As such it is about the moral agent's (outer) rulebound world of commerce, and the lower order virtues of prudence and justice. In WN the voice of the moral agent is absent, as is his or her thoughts, feelings, and, of course, her intuitions. Vivienne Brown, in Adam Smith's Discource. Canonicity, Commerce and Conscience states that "the economic analysis of the system of natural liberty in WN is an amoral discourse" (Brown, 1994, p. 26). A fourth reason is that Smith's use of his famous "invisible hand" metaphor appears in both TMS and WN. The invisible hand metaphor stems from the 18". century belief that the universe, and society is akin to a machine, with the parts creating a well function system. In TMS it is God who controls our passions and moral judgments so that we are led as if by an invisible hand which holds society together. In one of his statements about an invisible hand Smith says, "... by acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind, and.. .cooperate with the Deity.. ." (Smith, 1969, p. 275). In WN, self-interest and economic incentives replace our passions and moral judgments, and God,

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and the invisible hand becomes the impersonal market which allows individual freedom to simultaneously serve society. A fifth reason given in this paper for not believing in the "Adam Smith problem" is that in Smith's view, making judgments through the "sympathetic feelings of the impartial spectator" is in our self-interest. In TMS Smith says that by our nature we wish to receive the sympathy of others - to be considered worthy of praise or honor. By our very nature our desire for sympathy is a stronger motivation of human action than is accumulating wealth. The chief value of wealth, he says, is that it makes us the object of attention and others' sympathy. And, in striving for sympathy we create enough wealth to feed even the poor. Receiving sympathy -- being praiseworthy -- stems from others believing you, and hence from you being persuasive. Smith says that people love to be believed, and hence they love to be persuasive. In TMS Smith says that "The desire of being believed, the desire of persuading,... seems to be one of the strongest of all our natural desires. It is perhaps the instinct upon which is founded the faculty of speech, the characteristic faculty of human nature" (ibid, pp.529-30). Why do individuals trade instead of taking things by force? For Smith the desire to be considered worthy of admiration and approval -- sympathy -- makes force unacceptable; sympathy requires mutually beneficial (exchange) trade. And trade, as WN makes clear, is enhanced through the division of labor. It thus seems that both trade (via the division of labor) and sympathy stems from the faculty of speech. Therefore, sympathy (ethics) and trade (economics) have a commonfoundation -- speech. In WN, Smith argues that property rights and competition in private markets for both food and labor would create more wealth for the poor than would a food guarantee during harsh times. But two of the main linkages between the rights of private property and feeding the poor are (1) our propensity to truck, barter, and exchange, and; (2) the division of labor. Smith begins the WN extolling the virtues of human interactions through (simple) labor and the organization of work. For a person who placed so much emphasis on social bonds, beginning a treatise on economics in this fashion is not altogether surprising. And it also serves to indicate that Smith's interest in social bonding carried over to the WN. What Smith says about labor and the organization of work is that, "The greatest improvement in the productive powers of labour...seem to have been the effects of the division of labour" (Smith, 1937, p. 3). Understood properly, Smith is saying that the desire for sympathy (and hence to persuade) leads to the division of labor and trade. This increases our productivity while making us more dependent upon numerous others for our standard of living. The division of labor is thus a good instrument for the simultaneous creation of social bonding (human interaction) and wealth (enhanced productivity).

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Smith attributed the origin of the division of labor to a propensity in human nature to "truck, barter, and exchange one thing for another" (ibid., p. 13). Jacob Viner calls this propensity a "subrational" propensity (Viner, 1972, ch.2). Again, if the desire to persuade is basic to our nature, then so is the desire to truck, barter and exchange; the inferior alternative is the desire to "attack, stomp, and steal." Smith says that, "But man has almost constant occasion for the help of his breathren, and it is in vain for him to expect it from his benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them ... It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but to their advantages" (Smith, 1937, p. 14). Benevolence alone is not sufficient; sympathy alone is not sufficient; the impartial spectator alone is not sufficient. But the sympathetic feelings of the impartial spectator are important in persuasion, and also for establishing a mutual respect for another's private property and self-interest. In the process of respecting others' property and interests we "humble the arrogance of self love, and bring it down to something which other men can go along with" (Smith, 1969, p. 162). The result is the invisible hand, in this case not God, but the impersonal market. The sympathetic feelings of the impartial and wellinformed spectator -- intuition -- and self-interest can be complementary, and it is my judgment that this is what Smith believed. 2.6.2 Markets are for Efficiency and Friendship.

Market exchange is more than pure self-interest, it's also about friendship and social bonds. In WN Smith speaks of "Commerce, which ought naturally to be, among nations as among individuals, a bond of union and friendship.. ." (Smith, 1937, p. 460). Smith says that when interactions are directed by the intuitive-like IS, gratitude and friendship become the basis of transactions and "society flourishes and is happy" (ibid., p.166). When interactions are determined by utility, transactions become the result of "mercenary exchange" and society subsists, but will not flourish. And, where people are always ready to hurt and injure each other, society reflect malevolence and can not subsist. Therefore, economic society -- the society driven only by selfishness and utility -- produces the minimum conditions for the existence of society. Society, therefore, utilizes the desire for the sympathetic feelings of the impartial and well informed spectator, and the love of persuasion in generating the creation of wealth and a "happy commerce" between people (Smith, 1969, p.95).

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In The Moral Sense, James Q. Wilson (Wilson, 1993) states that sympathy is an intuitive experience, and that sympathy is what makes the pursuit of self-interest "calm rather than unruly" (Wilson, p. 14). However, he says, this is one of Smith's teachings which "many of his followers seem to have forgotten" (Wilson, p. 14). David Collard, in his book, Altruism and Economics, states that sympathy is "necessary to move society out of the Hobbesian jungle into an institutional framework for exchange..." (Colander, 1978, p. 64). In other words, sympathy massages self-interest so that it produces the invisible hand rather than chaos. Thus does A.L. Macfie state that "The Wealth of Nations is simply a special case -- the economic case -of the philosophy implicit in the Moral Sentiments" (Macfie, 1967, p. 75). The Wealth of Nations is thus in part the economic intuitions implicit in Smith's intuitions about moral philosophy.

Chapter 3 John Stuart Mill. An Anti-Intuitionist Social Reformer " With respect, then, to the discredit into which old institutions and old doctrines have fkllen, I may premise, that this discredit is, in my opinion, perfectly deserved." (J.S. Mill, 7'heSpirit of the Age, p. 8)

3.1 Introduction The central issue surrounding John Stuart Mill and intuition is his reaction to the doctrine known as intuitionism. Intuitionism is more than a belief, acknowledgment, or appreciation for human intuition. Intuitionism is a doctrine claiming that human beings have a unique faculty for intuition through which we can instantaneously know right from wrong, good from evil. At the extreme, intuitionists claim that intuitions are infallible. Mill's contention is that intuitionism was used to justify the status quo and was the 'trojan horse' for prejudice and authoritarianism. Modern intuitionism is a reaction to Thomas Hobbes' belief that human beings are materialistic, egoistic, and driven by self-interest, and that morality is relative to what an individual or a society finds good or pleasurable, and bad or painful (Hudson, 1980). The intuitionists maintained that human beings are motivated by self-interest, benevolence, and duty; that morality is absolute and universal like the axioms of geometry, and known through intuition. Early intutitionists included the Cambridge Platonists Ralph Cudsworth (1617-88), Samuel Clarke (1 675-1729), and Adam Smith's teacher Francis Hutcheson (1694-1746). The intuitionists which Mill responded to were those of the late 18* century to the middle of the 19% Thomas Reid (17 10-96), William Whewell (1794-1866), and William Hamilton (1788-1856). Intuitionism was one of the two leading philosophies during John Stuart Mill's lifetime. The other was empiricism -- Mill's preference. Mill was a leading anti-intuitionist during his lifetime, and his anti-intuitionism was a backdrop for some of his economic and other related writings. 3.1.1 Mil and Intuition

The fact that Mill's own life was turned 'upside down' (at least) twice by his own intuitions often goes unnoticed. The first occurred in the autumn of 1826, at the onset of Mill's famous mental crises. Mill was educated by his father to be the perfect rational human being, and to deeply discount emotions. Mill does not mention his mother even once in his Autobiography. Did Mill have a mother? Of course, and her name is Harriet. Yet, he says, "I

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was born in London, on the 2othof May, 1806, and was the eldest son of James Mill, the author of The History of British India" (Mill, 1964, p. 26). In his Autobiography he mentions never having a childhood, toys, or friends his own age, and that he was so accustomed to hearing his father tell him what to do that his conscience spoke to him in his father's voice (Mill, 1963, vol. 1, p. 613). The question Mill asked himself on that fateful day in 1826, as well as the answer he received from inside himself are often quoted. What is overlooked is that his answer is what we would refer to as an intuition. Mill asks himself, "'Suppose that all your objects in life were realized; that all the changes in institutions and opinions which you are looking forward to, could be completely effected at this very instant: would this be a great joy and happiness to you?' And an irrepressible self-consciousness distinctly answered, 'No!"' (Mill, 1964, p. 107). The voice was instantaneous, distinct or clear, irrepressible or non-analytical, in short an intuition. Two years later in 1828, Mill had what we might consider another intuition, some might prefer the word insight, one which brought him out of his depression. "I was reading, accidentally, Marmontel's Memoires, and came to the passage which relates his father's death, the distressed position of the family, and the sudden inspiration by which he, then a mere boy, felt and made them feel that he would be everything to them - would supply the place of all that they had lost. A vivid conception of the scene and its feelings came over me, and I was moved to tears. From this moment my burden grew lighter" (ibid, p. 111). The boy in the story had a sudden inspiration, and Mill himself had a clear image of the boy's sudden inspiration. We could say, in effect, that the boy's intuition inspired Mill's intuition. I'm neither a psychologist nor a psychiatrist, which is perhaps why my interpretation of this seems intuitively obvious. Reading Memoires, Mill pictures his dead father and he taking care of his family, and lo, he emerges out of his depression. Enough said, except Mill probably would have referred to his response as being the result of an inference, not an intuition. After his bout with depression Mill began to read poetry and listen to music, and recognize the value of emotions and intuition. He said of Thomas Carlyle, "...he was a man of intuition, which I was not; and that as such, not only saw many things long before me, which I could only when they were pointed out to me, hobble after and prove, but that it was highly probable that he could see many things which were not visible to me even after they were pointed out" (ibid, pp. 132-33). In 1833, Mill, with his depression behind him wrote an essay titled "Thoughts on Poetry and Its Varieties." In the essay Mill claims that distinguishing the 'testimony' of consciousness" from rapid inferences, and "distinguishing whether that of which the mind is conscious be an eternal truth, or but a dream," are among the greatest accomplishments of the "most matured and 'perfect' intellect" (Mill, 1963, vol 1, p. 355). So it is possible to distinguish (real) intuitions from inferences, even though, by

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definition, it is a difficult task for most persons. Mill then says that poets and other writers "confines himself altogether to intuitive truths" (ibid., p. 355). But just when you think he may be going 'soft' he continues by saying that writers express intuitive truths with words chosen on the basis of "acquired notions," analysis, and life experiences (ibid., p. 355). Therefore, intuitions exist but are expressed through words chosen by inference. However, when Mill speaks about his beloved Harriet Taylor he seems to be more definite that intuitions are real. According to Mill, Taylor was "a woman of deep and strong feeling, of penetrating and intuitive intelligence, and of an eminently meditative and poetic nature" (ibid., p. 139). While Mill says that she and he came to similar conclusions on different issues, she "reached her opinions by the moral intuition of a character of strong feeling" while Mill used analysis (ibid., p. 141). Thus, Mill was clearly not opposed to the concept of intuition, per-se. He was, however, of two minds on the subject. On the one hand he considered Thomas Carlyle to be "a man of intuition," and he gushed on about the intuitive, and intellectual qualities of his beloved Harriet Taylor. On the other hand, he believed that what most people consider to be intuition is in reality inferences born of sensations. In A System of Logic, he says that "truths are known to us in two ways: some are known directly, and of themselves; some through the medium of other truths. The former are the subject of intuition or consciousness; the latter, of inference" (Mill, 1970, p. 3). What we know intuitively is gained without any previous knowledge, and are beyond question. The importance of truths known intuitively is that they are the "original premises from which all others are inferred" (ibid., p. 3). Our ability to establish any truths through reasoning requires that our premises are true, and this is possible because of the truths known intuitively. Examples might include estimating distances by eyesight, or perceptions of colors. However, Mill insists that most of what we believe to be an intuition is, in reality, an inference drawn from experience. Estimating distance by eyesight, for example, had been considered by many to be an intuition, but according to Mill has been proved to be an inference. What the eye sees is a combination of a sensation and inferences made from those sensations (Mill, 1963, vol 11, p. 250). Others have said that this inference is itself, an intuition. Unraveling this is not the subject of this book. Whatever is the ultimate truth about the mechanics of sight, Mill concedes that perceptions of color are intuitions.

3.2 Intuitionism During Mill's Lifetime Various intuitionists could agree on several things. First, the physical world "masks" an underlying spiritual or ideal reality (August, 1975,28). This spiritual reality and the truths it holds is accessible to the individual through intuition. Man is not a tabula rosa at birth. To the contrary, intuitionism posits

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that Man has knowledge which is independent of observation and sense experience, independent of deduction and induction. Second, physical things are composed of qualities, which are known intuitively, and which reveal that things nature, purpose, and meaning. William Hamilton, a leading intuitionist of the time believed that we perceive directly through intuition the "essence" of things, or their "essential attributes" (Mill, 1963, vol. 9, p.16). Third, one of the things we perceive directly is morality, right and wrong. Intuitionism's view of morality is that it is a priori or self-evident (ibid, p. 170). That is, right and wrong is beyond doubt and need not be proved. In addition, right and wrong is a quality of something and independent of its consequences or (dis)utility. And, intuition is infallible, innate and a distinct faculty of knowing, one separate from the intellect (Hudson, 1980, p. 3). Intuition is thus the source and justification of moral principles and judgments. William Hamilton believed that "what is given in consciousness" - what we know intuitively -- is "a decision without appeal" (Mill, 1963, vol. 9, p. 126). Fourth, we must do what our intuition reveals to be right. William Whewell, another leading intuitionist of the time stated that morale behavior means "that we must do what is right at whatever cost. That an action is right, is a reason for doing it.. .It is painful.. .It is a loss.. ..It is unkind: but it is right: therefore we must do it. These are self-evident propositions. That a thing is right, is a supreme reason for doing it.. ." (Donner, 1991, p. 33). Whewell preferred a priori morality or what he called the "internal principle" (Mill, 1963, vol. 10, p.171) to utilitarian morality, what he deemed to be the use of external objects as the basis for morale judgments. He wanted morality grounded on "conscience", a "moral faculty", and the "superiority of reason to desire" (ibid, pp. 171-72). Only intuition "can see what is right; alone can understand that there is such a character as rightness" (Donner, 1991,33). The moral dimension of intuition is to guide us in the "supreme" rule of human action - to do the right and avoid what's wrong. Fifth, the source of our intuitions is God. According to Whewell, moral intuition is the faculty which perceives the eternal and non-changing ideas of right as they exist in the mind of God and it is also the source of rules for the other parts of human nature. What consciousness reveals to us is not a means to an end, i.e., happiness, but an end in itself. Intuitionists see a world where truths exist waiting to be discovered -- by intuition. Coming from God, the intuitionists believed that our intuitions and proclamations about morality come from the "general voice of mankind." Intuition and morality, therefore, have aspects of a public good. Our moral faculty gives the same answer to all persons, are self-evident and universal, known by all, in all societies, and in all times (Bryson, 1968, pp. 13-14). More than this, they also assumed that everything worth knowing can be known and verified by all persons, and that all "truths" beyond the grasp of the majority are unimportant and probably not

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true. True intuitions are thus the intuitions, not of a single individual, but a truth which is part of "universal human nature" (Mill, 1963, vol. 10, p. 187). Intuition will lead our actions to be in conformity with the "eternal and immutable rule of right", or the "law of nature", or the "fitness of things" (ibid, p. 178). More than that, intuition is the basis of both belief and knowledge - the knowledge of individual things, of morality, of the underlying "superior unity" (ibid, p. 36) within which all things exist, and knowledge of God.

3.2.1 Mill on Intuitionism To put it mildly, there was a "natural hostility" (Nicholson, 1998, p. 464) between social reformers (Mill) and intuitionists. According to Mill, intuitionism is "a philosophy which discourages the explanation of feelings and moral facts.. .. and prefers to treat them as ultimate elements of human nature. It is also a philosophy which is addicted to holding up favorite doctrines as intuitive truths, and deems intuition as the voice of God, speaking with an authority higher than that of our reason" (Robinson, 1982, pp. 46465). Mill had many specific objections to intuitionism. First, he objected to intuitionism's tendency to regard "all the marked distinctions of human character as innate, and in the main indelible..." (Nicholson, 1998, p. 465). Mill's belief was that the greater part of differences among the races or between genders is produced by differences in circumstances. And these differences in character can be changed by social institutions and politics. Intuitionism's belief in the innateness of human character is according to Mill "one of the chief hindrances to the rational treatment of great social questions, an upholder of conservative doctrines, and one of the greatest stumbling blocks to human improvement" (ibid, p. 465). On the other hand, intuitionism's deification of both habit and opinion, interpreted the existing order as being the natural order, maintained that what is, is what must be, and hence equated change with criminality (Donner, 1991, p. 35). The intuitionists' intuitions "revealed" that women are "naturally" less intelligent than men, that Blacks are "naturally" childish, and that the Irish are "naturally" lazy (August, 1975, p. 106). Why fight for social equality if women and Blacks aren't able to function as equals with White males? Why help the poor if they "naturally" reproduce at an unsustainable rate? Mill was persistent and adamant that an appeal to intuition is actually a disguise for one's own prejudices and uncritical feelings (Donner, 1991, p. 34). A second objection is that intuitionism lacks progressiveness. In the early 19th century, the Anglican Church, and Universities such as Oxford and Cambridge were bastions of intuitionism and opponents of utilitarianism. The Church's opposition was so strong that they considered the concept of utility as a threat to their teachings and labeled it as a "deadly heresy" (Mill, 1963,

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vol. 10, p. 170). Mill's view of English universities was that they were headed by persons who, while presumably being the "guides and governors" of mankind, were actually tied to required but outworn opinions based on faith and authority rather than facts of the physical world. Such men, he says, are neither philosophers nor teachers of philosophers, and neither education, a strengthening of the mind, nor truth will ever be the outcome of their work. Their philosophies (including intuitionism) are but props of the "doctrines to which they are pledged" (ibid, p. 168). Mill maintained that their doctrines were behind the times and hence their doctrines (including intuitionism) tended to arrest rather than promote progress. Mill the reformer simply denied that what is means what must be. Mill points out that the history of science has seen case after case of supposed truths later proved false or impossible. Mill the empiricist denied that an individual can be directly -- intuitively -aware of external objects, because he believes that only sense experience is a valid source of knowledge. We can know nothing more than what the senses allow, and nature has not given us any other vehicle for knowing. Therefore, there isn't any knowledge which is distinct from sensation. Thus he also denies that an irresistible belief must be innate or intuitive. And, in general, he denies that any self-evident principles exist. For Mill what is taken to be intuitive and self-evident is actually custom and prejudice, rationales for the protection of the status quo. A third objection is intuitionism's apparent lack of a rational foundation and objectivity. According to Mill, intuitionism is neither objective, measurable, independent of majority opinion, nor can interpersonal comparisons of intuitions be counted upon. Intuitionist opinions are based on feelings yet they confuse them with fact. Even when the facts are pointed out they continue to hold to their feeling-beliefs. Their argument for their "consistency" is that their feelings stem from "some deeper ground which the arguments do not reach" (Mill, 1997, p. 1). Intuition is not an objective decision-making procedure because if two people disagree about their intuitions then an impasse exists. Since intuition is the ultimate judge, a disagreement stemming from intuition has no place to turn. The only recourse is to rely on feelings to justifl other feelings! To make matters worse, intuitionists believe that the feelings which constitute intuitions are not their own individual feelings about right and wrong, but are part of human nature. Whose feelings speak for human nature is arbitrarily determined. Open resolution of moral conflicts among intuitionists was thus not common. But all of this also helps explain why intuitionism was so popular - people refuse to believe that their strong feelings of right and wrong could be considered wrong by others. Obviously feelings exist. The point is, says Mill, do you take the feelings as "given", as the product of "design" as do the intuitionists, or do you ask whether the actions tied to those feelings cause happiness, as do the

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utilitarians? For Mill this question was central to many of his socio-politicaleconomic philosophy and policy proposals. A fourth objection is that it is part of religious fanaticism. "Deluded visionaries" (ibid., p. 514) believe themselves to be conversing with God andlor inspired by Heaven. In fact, they are simply reaching conclusions "drawn from appearances to his senses, or feelings in his internal consciousness" (ibid., p. 514). At the end of the General Theory, Keynes, the intuitionist (of sorts) makes a similar statement, "Practical men, who believe themselves to be quite exempt fiom any intellectual influences, are usually the slaves of some defunct economist" (Keynes, 1937, p. 383). Many of the intuitionists' arguments appeared to Mill to be composed of nothing but vicious circles. One example is Whewell's statement "that we must do what is right, at whatever cost of pain and loss" (Mill, 1963, vol. 10, p. 172). What is right is the "supreme, unconquerable reason" for doing something (ibid, p. 187). Mill agrees that we should do what is right, but says that the real question is deciding "What is right"? In effect, Whewell is saying that we must do what is right, because it is right, and, that what is right is what we must do. Mill the scientist sought logic and consistency in arguments. The intuitionists' use of many moral rules, each known by intuition, but with unresolvable inconsistencies and conflicts among the various intuitions was intolerable for Mill. Mill thus holds that the intuitionism and the (so-called) intuitive faculty fail the empirical and objectivity tests.

3.2.2 Mill on the Experience the Intuitionist's Call Intuition "The ways of nature are perfect," "Things always move towards their own place," and "Nature abhors a vacuum." According to Mill, these were some of the beliefs considered as truths known through intuition from prior to the lifetime of Francis Bacon until Mill's own time. According to the intuitionists, intuition can tell us about things which are not in our own mind. These intuitively known truths were considered "revelations of nature in the depths of human consciousness, and recognizable by the light of reason alone. Mill's response is that these beliefs are merely bad generalizations of the vulgarest outward experience; rough interpretations of the appearances most familiar to sense, and which therefore had grown into the strongest associations in thought; never tested by the conditions of legitimate induction" (ibid, p. 41 7). Why were they never tested? In part, because they were believed to emerge from a source 'higher' than induction. What is the phenomenon higher than induction which intuitionists call intuition? Mill believed that they are actually examples of forgetfulness; custom, tradition, and habit; laziness, and; inference. According to Mill, experience, culture and tradition may be an unconscious source of our

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knowledge, and that "intuition" is forgetting what we've learned and experienced, as well as a misinterpretation of perceptions of an unknown origin. Mill states that "Mankind are always predisposed to believe that any subjective feeling, not otherwise accounted for, is a revelation of some objective reality" (Mill, 1987, p. 58). Mill also asserts that naming a belief as stemming fiom intuition is a cover for being intellectually lazy. The intuitionists' intuition is actually nothing more than assertions about puzzling, paradoxical, and difficult problems; the intuitionists prefer to assert that the answer is intuitive than work through the problem for proof. In effect, it is intuition which tells us which knowledge is intuitive. In other words, intuition is proof of itself. Mill will have none of it. For him, 'intuition' is a measure of our ignorance. "Belief is not proof, and does not dispense with the necessity of proof' (Robinson, 1982, p. 63). Mill adds that, "Some of the causes may lie beyond observation; many are apt to escape it, unless we are on the look-out for them; and it is only the habit of long and accurate observation which can give us so correct a preconception what causes we are likely to find, as shall induce us to look for them in the right quarter. But such is the nature of the human understanding, that the very fact of attending with intensity to one part of a thing, has a tendency to withdraw the attention fiom the other parts. We are consequently in great danger of adverting to a portion only of the causes which are actually at work" (Mill, 1968, pp. 153-54). Mill's third response is that intuition may be an "instantaneous and irresistible suggestion and inference, which has become by custom and habit undistinguishable from direct intuition" (Mill, 1963, vol. 10, p. 188). Why the confusion between intuitions and inferences? First, inferences may be made so rapidly as to stay below the 'radar' of memory or the conscious mind. The rapidity is due to a law of the human the mind acting on habit due to the law of Association. Second, the quality of inferences are known to improve with experience, thus giving them the appearance of an intuition. Mill maintains that sensations, not matter, as the building blocks of our reality. Thus, Mill's famous phrase about matter: "Matter, then, may be defined as the Permanent Possibility of Sensation" (Mill, 1963, vol. 9, p. 183). Mill's approaches the reality of matter based on the "Psychological Method." His intellectual opponents, the Intuitionists, relied on the Introspective Method." The Psychological Method begins with two "psychological truths." First, after we experience a sensation the mind forms expectations about sensations which would be present if certain conditions were present. Second, there exist the laws of "Association of Ideas." According to these laws, similar phenomena and phenomena experienced in close proximity of each other are associated with each other, and thought of together. The more two phenomena are experienced together the more certain and rapid the Association becomes. Eventually, the rapidity seems to be an intuition.

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Mill says that "The Psychological Theory maintains that there are associations naturally and even necessarily generated by the order of our sensations and of our reminiscences of sensation, which, supposing no intuition of an external world to have existed in consciousness, would inevitably generate the belief, and would cause it to be regarded as intuition" (ibid., p. 178). The particulars which might generate a belief that the sensation is an intuition is the simplicity, rapidity, and the role of the unconscious through which we become conscious of the sensation. And, the fact is that from before Mill's time to ours, these characteristics are considered trademarks of intuition. However says Mill, "These features can only prove the impression to be intuitive, on the hypothesis that there are no other means of accounting for them otherwise. If they not only might, but naturally would, exist, even on the supposition that it is not intuitive, we must accept the conclusion to which we are led by the Psychological Method, and which the Introspective Method furnishes absolutely nothing to contradict" (ibid., p. 183). By contrast with Mill, William Whewell, a leading intuitionist of the time claimed that the laws of motion are intuitive because we are compelled to believe these laws and no others. In other words, it is inconceivable that the laws of motion could be anything other than what they are. Mill illustrates his disagreement with Whewell with the First Law of gravity, "An object in motion tends to stay in motion, and an object at rest tends to stay at rest, unless the object is acted upon by an outside force." Mill points out that the fxst law "stood opposed to apparent experience of the most familiar kind" (Mill, 1970, p. 160). Yet, after the laws of motion were "suddenly" established, scientists started to believe that they "were under a 'demonstrable necessity, compelling them to be such as they are and no other"' (ibid., p. 160). Intuitionists such as Whewell then began to speculate the laws of motion are intuitively obvious even if they are never experienced. 3.2.3 Moral Judgments. Plato Vs Mill The issue of moral iudnments was central to Mill. Are moral judgments intuitions or inferences? Asked in another way, what is the origin of moral judgments? The Intuitionists said the origin is consciousness or intuition. Moral judgments are thus derived from a moral sense, just as sight is derived from the sense of sight. Moral judgments - the difference between right and wrong - are considered to be "an ultimate and inexplicable fact" (Mill, 1963, vol 10, p. 51), derived from "a peculiar law of our own name," and from a "peculiar and inscrutable property in the acts themselves" (ibid., p.51). Mill objected to moral judgments being described by words such as inexplicable (mysterious) and inscrutable (unfathomable). He believed instead that moral

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judgments of right and wrong are an acquired belief based on the effect of the actions on human happiness. So common is the confusion between intuition, and experience or inference that, according to Mill, it applies even to Plato, the "champion of the intuitive or apriori character of moral truth, against what is regarded, by most of the Platonic critics, as the low and degrading doctrine of Utility" (Mill, 1963, vol. 11, p. 388). According to Mill, Plato's error was to consider things of the real world to be based in an alternative universe of pure Forms or Ideas. Knowledge for Plato became knowledge of these Forms or Ideas, while the knowledge of individual (worldly) objects was achieved only through knowledge of these transcendental forms. To make matters worse, Plato, or other philosophers assumed to possess knowledge of the Forms or Ideas through cognition of the transcendental realm, were "akin to the gods, who, being the possessors of supreme wisdom, must live in the perpetual contemplation of these glorious and superterrene existences" (ibid., p. 406). Making matters even worse still, is the related, almost inevitable issue of past life memories. In Plato's Meno, Socrates wonders why we have knowledge of things about which we have no earthly knowledge? Why is the truth we are seeking "instantaneously" accepted as the truth when we find it? Socrates' answer is that we knew it in a past life and our seeking the truth in this life simply reminds us of what we once knew. According to Mill, modern thinkers simply substituted the word intuition for past life memories. Mill prefers a third explanation, that truth is found only after a long and gradual process, and inductions are often so rapid that they seem to be coming from thin air, or past lives. In short, Mill explains the intuitionists' intuition as an "acquired product" through the principle of association: "When two phenomena have been very often experienced in conjunction...it is impossible to think the one thing disjoined from the other'; as a result, 'the facts... answering to those ideas come at last to seem inseparable in existence', and 'the belief we have in their coexistence, though really a product of experience, seems intuitive' " (Hamilton, 1998, p. 148). In fact, not only are moral feelings the result of association, but so are a wide variety of other human emotions such as ambition, envy, and jealousy (Ryan, 1974, p. 100). 3.2.4 Henry Mansel

Henry Manse1 was a disciple of Hamilton's at Oxford, held the position of Chair of Moral and Metaphysical Philosophy at Oxford, and is the author of Limits of Religious Thought (Mansel, 1860a), and Prolegomena Logica (Mansel, 186Ob). Both Manse1 and Hamilton held strong religious beliefs including the belief that the world and God are ultimately a mystery to the human mind. Mansel, unlike Hamilton, did not believe that humans have a

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separate and unique faculty for knowing God, nor did he believe that human reason was sufficient to understand the nature of God. Acknowledging the limits of human reason for knowing God was part of Mansel's definition of reverence towards God. At the same time, Manse1 was a harsh critic of Hamilton's The Philosophy of the Conditioned. Mill spent a consideration amount of time and mental energy critiquing this book. Perhaps it is not a surprise that Mill had a more positive opinion of Manse1 than Hamilton, in part because he "has a decided taste for clear statements and definite issues; and this is no small advantage when the object is, not victory, but to understand the subject" (Mill, 1963, vol. 9, p. 262). For example, Manse1 says about the laws of association, "that whatever truths we are compelled to admit as everywhere and at all times necessary, must have their origin, not without, in the laws of the sensible world, but within, in the constitution of the mind itself. Sundry attempts have, indeed, been made to derive them from sensible experience and constant association of ideas; but this explanation is refuted by a criterion decisive of the fate of all hypotheses: it does not account for the phenomena" (ibid, p. 262). One of the elements of the mind's constitution is (the ability for) intuition. Mansel7s quote above also points to his rejection of the Law of Association. Mill appreciates the fact that Manse1 is interested in scientific proof, and that his statement is consistent with someone advocating the Psychological Method. However, appearances can be deceiving, and in Mansel's case Mill was clear that although Mansel's views weren't as erroneous as Hamilton, he was still a believer in the 'relativity of all knowledge,' he rejected the Law of Association, and he was an intuitionist in his own right. On the topic of God, Mansel says that an Absolute and Infinite Being -God -- is "inconceivable" to the human mind. Hence we can know neither the character, attributes, or characteristics of God, nor can we judge his teachings. God (the Infinite) cannot be described by any human word or phrase because they would limit God's own existence. So God must be "actually everything and potentially nothing" (ibid., p. 96). In addition we cannot know what Wisdom, Justice, Benevolence, and Mercy mean to God. But it is safe to assume that Wisdom to God is not human wisdom taken to the power of infinity. Wisdom, or Justice to God is of a fundamentally different kind or quality from these attributes among humans. At the same time, it is reasonable to believe in God. Mill rejects Mansel's assertion that it is reasonable to believe in God. Religion, says Mill - an empiricist and social reformer - have been used as "reasons why we may assert any absurdities and any moral monstrosities concerning God, and miscall them Goodness and Wisdom...My opinion of this doctrine, in whatever way presented, is, that it is simply the most morally pernicious doctrine now current.. ." (Mill, 1963, vol. 9, p. 90). Using the same word to stand for two different things - Wisdom, and human wisdom -- is not

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acceptable to Mill who says, "I take my stand on the acknowledged principle of logic and of morality, that when we mean different things we have no right to call them by the same name, and to apply to them the same predicates, moral and intellectual" (ibid., p. 102). The implication is that Mill refuses to sanction the presumed rules of God because God cannot be logically defined and His rules are merely expressed as "the highest human morality which we are capable of conceiving" (ibid., p. 103). Likewise, Mill refuses to worship a God who is unknowable and inconceivable, but described in humans terms and possessing human characteristics raised to the highest conceivable power. It is likewise on logical grounds that Mill says that he is ready to be banished to hell by God for not worshiping such a God. In his essay, "On Genius," Mill rejects the intuitionist belief in vicarious knowledge, the belief that one person's knowledge (intuition) can be accepted by all persons because all are connected to God. Mill says, "...that when a truth has become known to any one, all who follow have nothing to do but passively to receive it; as if one man, by reading or listening, could transport another man's knowledge ready manufactured into his own skull" (Mill, 1963, vol. 1, p. 331). As will be discussed in the next chapter of this book, Alfred Marshall thought highly of Mansel, and Marshall's concept of "external economies" is based on knowledge passively received.

3.3 Mill's Anti-Intuitionism, Socio Political Economics Intuitionists were too prone to equate what is for what must be. Mill sees this intuitionist tendency in political economics. He says that "It is a case of the error too common in political economy, of not distinguishing between necessities arising from the nature of things, and those created by social arrangements: an error which appears to me to be at all times producing two opposite mischiefs; on the one hand, causing political economists to class the merely temporary truths of their subject among its permanent and universal laws, and; on the other hand, leading many persons to mistake the permanent laws of Production... for temporary accidents arising from the existing conditions of society.. ." (Mill, 1973, p. 436). Speaking about mercantilism in ways reminiscent of Smith, Mill states: "It often happens that the universal belief of one age of mankind.. . becomes to a subsequent age so palpable an absurdity, that the only difficulty then is to imagine how such a thing can ever have appeared credible. It has so happened with the doctrine that money is synonymous with wealth. The conceit seems too preposterous to be thought of as a serious opinion" (ibid, p. 3).

John Stuart Mill 3.3.1 Economics as an Inexact Science

Mill's anti-intuitionist economic philosophy was partly the result of his training received by his father, James Mill. The elder Mill trained the younger Mill in the "geometric" (Newtonian) method of economic or social science -that self-interest is the one organizing principle from which all economic or social science may be explained. Mill eventually came to the conclusion that his father's method was too narrow, and that economics was more complex than the geometric method could admit. What was missing for the younger Mill were the elements which converted geometric economics into a socioeconomics. On the one hand, Mill knew that nature contains many uniformities. On the other hand, he also knew that the problem for the economist in trying to understand these uniformities is that effects have multiple & simultaneous causes, and the data we use is fallible. This increases the occurrence of false claims about cause and effect, and makes economics an "inexact science" (Redman, 1997, p. 330). The "truths" of economics are thus only "rough" truths (ibid, p. 344); they reveal tendencies, allowing for an "approximate generalization" (ibid, p. 336). Economics has the "certainty, but not the precision" of physical science. And, the best method for obtaining the (rough) truths of economics are a combination of deductive logic based upon a knowledge of human nature, and observation. In Essays on Some Unsettled Questions of Political Economy (Mill, 1968), Mill's anti-intuitionism is revealed when he says, "If the knowledge what are the particular causes operating in any given instance were revealed to us by infallible authority, then, if our abstract science were perfect, we should become prophets. But the causes are not so revealed: they are to be collected by observation" (ibid, p. 153). The social scientist can't rely on exact measurement, they need good judgment and skill. Social scientists can't pretend to be mathematicians because social scientists must deal with incomplete and fallible data, and the complexity of human beings. Mill desired the "emancipation" of the laws of economics such as supply and demand because these laws are treated "as if they were laws of inanimate matter, not amenable to the will of human beings from whose feelings, interests, and principles of action they proceed (Redman, 1997, p. 345). Mill thus considered math a good starting point for economic theory. And, he considered the laws of economics to be relative to time and place. Mill thus placed the fields of history and sociology, and the combination of theory and observation as pivotal in social science (ibid, p. 337). Mill didn't treat history as thoroughly as did Karl Marx, nor did he replace individual choice with group behavior as thoroughly as Marx. Mill believed in the usefulness of economic theory and tried to defend it against "overenthusiastic sociologists" (Ryan, 1974, p. 162). Yet, he also tried to defend

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and incorporate history and sociology into his economics. He did this, in his anti-intuitionist way by distinguishing the theory of production from the theory of distribution. 3.3.2 Production Theory There are "truths" in this world. However, they are not the moral truths of the intuitionists or the "truth" of the current status quo. Rather the truths "partake of the character ofphysical truths" governing production (Mill, 1973, p. 199; italics added). Diminishing returns to labor in agriculture is one such "fundamental truth" (ibid, p. 469). There is nothing "optional or arbitrary" about the laws of production. The "constitution" and "inherent properties" of things are important in determining the maximum output which can be gained from them. Output is also limited by a person's energy and skill, the quality of the machinery being used, and the organization of production. But regardless of ones opinions or feelings, the laws of production are f ~ e d .

3.3.3 Distribution Theory While the production of things may "partake of the character of physical truths", while the laws of production would be the same regardless of whether the economy were market oriented or socialist, the distribution of income depends upon social arrangements. The distribution of wealth is solely a matter of human custom, feeling, and opinions, and change from time to time and place to place. The rules of distributing wealth can be whatever society decides, it is "a matter of human institution solely" (ibid, p. 200). However, the results of those rules, "...must be discovered, like any other physical or mental truths, by observation and reasoning" (ibid, p. 201). In other words, while Mill allows for some indeterminacy in the distribution of income, he is also defending economics against "over-enthusiastic sociologists" by also having one foot in a more standard economic way of thinking, i.e., that the distribution of income also follows the deterministic rules of cause and effect. Which laws and customs determine the distribution? It is by the "opinions and feelings of the ruling portion of the community" (ibid, p. 200) that the distribution is decided. How did the custom of distributing income through the institution of private property emerge? It emerged because private property helped to "repress violence and terminate quarrels" (ibid, p. 201). What is the source of these opinions? The Newtonian in Mill states that it is the "consequences of the fundamental laws of human nature" (ibid, p. 200), while his non-Newtonian side states that it is also the effects of a very complex interaction of intellectual and moral development, existing social institutions, and knowledge and experience.

John Stuart Mill 3.3.4 Value Theory Speaking about the nature of value, Mill sounds his anti-intuitionist philosophy when he states: "Political economy has nothing to do with the comparative estimation of different uses in the judgment of a philosopher or of a moralist. The use of a thing, in political economy, means its capacity to satisfy a desire or serve a purpose...The word value.. . always means, in political economy, value in exchange..." (ibid, p. 437). Mill rejected the intuitionists' claim that intuition as capable of intuiting value, i.e., judging about right and wrong, judging about the "nature" of a thing, and hence judging its uselillness, worth, or value. For Mill a thing has value in exchange if it is conducive to some purpose - satisfies a desire, yields utility -- and, if there is some difficulty attaining it (ibid, p. 442). In 99% of the cases the difficulty of attaining something totally controls value, while utility is "inoperative" (Mill, 1964, p. 443). Utility determines value only in the case of pure monopoly. The utility of the thing "in the estimation of the purchaser" (Mill, 1973, p. 442) is the upper limit to the thing's exchange value. In other words, exchange value will be greater than or equal to use value. Therefore, value is not determined by infallible intuition of a "priest" but by the estimation of the buyer, regardless of how priest-like they are. Striking his anti-intuitionist more explicitly, Mill says that, "...value is a relative term: that the value of a commodity is not a name for an inherent and substantive quality of the thing itself, but means the quantity of other things which can be obtained in exchange for it. The value of one thing must always be understood relatively to some other thing, or to things in general.. .the high value of some things is synonymous with the low value of others" (ibid, p. 459; italics added). 3.3.5 Capitalism vs. Socialism The alternative to the institution of private property (capitalism) is communism (or socialism). Mill points out that a supposed major defect of communism is also true of most organizations in a capitalist society: that most workers' income is not tied to effort and hence there is a tendency for slacking off. However, Mill is not certain that this is a major defect of either communism or capitalism. The anti-intuitionist social-reformer Mill says, "That even this inferiority would necessarily exist, is by no means so certain as is assumed by those who are little used to carry their minds beyond the state of things with which they are familiar. Mankind are capable of a far greater amount of public spirit than the present age is accustomed to suppose possible" (ibid, p. 206).

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Does Mill prefer capitalism or communism? He doesn't have the data to make an informed judgment! Capitalism "is supposed to mean the guarantee to individuals of the fruits of their own labour and abstinence" (ibid, p. 209). On the other hand, capitalism as he knew it meant the institution under which income is inversely related to a person's hours worked. Therefore his conclusion is that "The principle of private property has never yet had a fair trial in any country; and less so, perhaps, in this country than in some others ...The laws of property have not yet conformed to the principles on which the justification of private property rests" (ibid, p. 208). Mill would not rule out the possibility that socialism may one day replace capitalism, or that popular opinion may one day support socialism.

3.4 The "Nature" of Women Sounding this anti-intuitionist stance on the first page of his book, The Subjection of Women, Mill says that: "So long as an opinion is strongly rooted in the feelings, it gains rather than loses in stability by having a preponderating weight of argument against it.. .when it rests solely on feeling, the worse it fares in argumentative contest, the more persuaded its adherents are that their feeling must have some deeper ground, which the arguments do not reach ..." (Mill, 1997, p. 1). Mill says that his own age, the 19'~.century, believed in the infallibility of the "unreasoning elements" and used the word instinct, and the sayings "intention of Nature7' and the "ordinance of God" for whatever "we find in ourselves and for which we cannot trace any rational foundation" (ibid, p. 3). Mill called this the most extreme case of false worship. What is Nature's intention for women? Mill provides examples of how his society found it intuitively obvious that women should be subordinate and submissive to men. The subordination of women to men rests with the belief that the "character" or "nature" of women ordains it. "All the moralities tell them that it is the duty of women, and all the current sentimentalities that it is their nature, to live for others; to make complete abnegation of themselves, and to have no life but in their affections" (ibid, pp. 14-15). But such presumptions are not infallible. According to Mill there aren't any presumptions which are infallible. This is, in fact, one of Mill's main arguments for freedom of expression in his book, On Liberty. In The Subjection of Women, Mill says that the presumption that women should be subordinate to a male rests only on theory. This is so because there never was a time, says Mill, when society tried different degrees of subordination of males over females and vice-versa in order to gather data on the best organization of society. The subordination of males over females rests from the fact ". ..that from the very earliest twilight of human society, every women (owing to the value attached to her by men, combined with her inferiority in

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muscular strength) was found in a state of bondage by some man" (ibid, pp. 45)The "nature of women" is not their nature; it is the result of "forced repression" and "unnatural stimulation" (ibid, pp. 21), so that their "nature cannot but have been greatly distorted and disguised..." (ibid, p. 56). Therefore, the circumstances in which they live rather than their "natural capacity" is what we use when concluding about the "nature" of women. The greatest obstacle to human progress - and a prime example of "unspeakable ignorance" - is the opinion that whatever tendency anyone shows is assumed to be their "natural tendency" (ibid, p. 2 1). What then are the real, underlying strengths of women? To mention the one which is central to this paper: women are more intuitive than men! Mill was an anti-intuitionist, but he also believed in the value of intuition, especially after he met Harriet Taylor (Rose, 1984). In other words, Mill believed that intuition was useful but neither infallible nor magical. His view was very sensible, one which would be reformulated about 100 years later by Herbert Simon (Simon, 1982). What does it mean that women are more intuitive than men? To Mill it meant that women are superior at having a more "rapid insight into character" (Mill, 1997, p. 55), and "a rapid and correct insight into present fact" (ibid, p. 56). Women have a "quickness of observation" and "quickness of apprehension" (ibid, pp. 57-59). Their intuitive sagacity makes them superior in formulating general truths from a given amount of data and observation." Of course, women being subservient to men and kept away from a science education don't get credit for their intuition! "It no doubt often happens that a person, who has not widely and accurately studied the thoughts of others on a subject, has by natural sagacity, a happy intuition, which he can suggest, but cannot prove, which yet when matured may be an important addition to knowledge... They occur by hundreds to every women of intellect" (ibid, p. 70). A "matured" intuition is an intuition tested by a scientific procedure. Women, being kept away from science can never prove their intuitions. Hence women's intuitions "are mostly lost, for want of a husband or friend" who can test the intuition. But even when the women can test it and prove it accurate, the credit "generally appear as his ideas, not their real author's" (ibid, p. 70). Presumptions about gender (and racial) differences he says is the greatest impediment to social progress. "Whatever any portion of the human species now are, or seem to be, such, it is supposed, they have a natural tendency to be" (ibid, p. 21). And this is true not only for a belief in the "natural" submission of women to men. "Did not the slavsowners of the Southern United States ... call heaven and earth to witness that the dominion of the white man over the black man is natural, that the black race is by nature incapable of freedom, and marked out for slavery?" (ibid, pp. 11-12).

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Such presumptions about gender differences had its affects in the economic status of women. Lower wages for women which do not reflect their lower efficiency are generally caused by custom, which in some cases takes of form of occupational discrimination. Where wages are regulated by custom they are not determined by competition (S&D), and for women this means that their wage is less than their market value. Custom against paying women an equal wage for equal work is "grounded either in a prejudice, or in the present constitution of society, which, making almost every woman, socially speaking, an appendage of some man, enables men to take systematically the lion's share of whatever belongs to both" (Mill, 1973, p. 400). In some cases this custom of paying lower wages for women is caused by occupational discrimination, so that ". .. the occupations which law and usage make accessible to them are comparatively so few, that the field of their employment is still more overcrowded" (ibid, p. 401). What to do about the lack of opportunities facing women? Educational and political institutions have a central role. The educational system must stop teaching that women are naturally subordinate and naturally gifted only at being a mother and wife. The legal system must support women's desire for equality. Mill supported women's suffrage, educational and occupational openings for women, and legislation such as the Married Woman's Property Bill, and the Divorce Act of 1857. Once equal rights and equal opportunity were supported by social institutions, Mill placed faith in the ability of the market to create more equality. His reasoning is this. First, there is no need to forbid a woman to do what "by naturey' (Mill, 1997, p. 26) she cannot do. Second, what a woman cannot do as well as a man, labor market competition, if it truly exists, will prevent them from doing. Third, labor market competition, if it truly exists, will offer incentives for women to enter those occupations where they are more productive than a male. Mill, the quintessential 19" century liberal, seems in this case to be a forerunner of Gary Becker's theory of discrimination. Mill says that reducing educational and occupational discrimination will create a benefit for women but also an external benefit by "doubling the mass of mental faculties available for the higher service of humanity" (Mill, 1973, p. 83). This is all the more important because there is an excess demand for "mental superiority" (ibid, p. 83).

3.5 Quantity vs Quality Mill was more "modern" than the intuitionists. The intuitionists believed that physical things (including humans) are composed of aualities, and these qualities reveal that thing's nature, purpose, and meaning. This necessarily

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limits what that thing is capable of doing. This underestimates the expected benefits of any social reform program and raises the unit costs. The more "modern" / scientific view is that physical things are not composed of qualities, but are able to be quantified. For example, the 'nature' of women is replaced by women's relative wages. Jacques Barzun, in From Dawn to Decadence, discusses how this change from quality to quantity was a catalyst for the rise of the modern scientific world view (Barzun, 2000, pp. 194-196). Having eradicated the quality aspect of things, the modern view eliminates one of the limits placed on possibilities. This necessarily increases the perceived benefits of social reform proposals and reduces the costs. For a passionate social reformer, Mill's anti-intuitionism was consistent with his reform proposals and his views on political economics.

Chapter 4 Alfred Marshall. Metaphysician and Economist 4.1 Introduction Alfred Marshall's contributions to economic theory include the concepts of time and ceteris paribus, elasticity, partial equilibrium analysis, external and internal economies, prime and supplementary costs, and the representative firm. He was also instrumental in developing the fxst program in Economics in the early twentieth century. It is my contention that he also integrated his economics into his ideas about religion, character, duty, and intuition, and was influenced by one of the foremost defenders of the Christian faith of his time, Henry Mansel.

4.2 Henry Manse1 Henry Mansel, a Professor of Moral and Metaphysical Philosophy at Oxford, provided an intellectual justification for Christian orthodoxy during the latter part of the nineteenth century. According to Mansel, humans have a deep desire for knowledge. SatisfLing this desire can be achieved either by knowing all there is to know or by knowing the limits to human knowledge. Manse1 discounted the knowing-all-there-is-to-know option. Especially in the area of knowledge of God, the limited capacity of our mind or consciousness cannot adequately conceive the nature of (unlimited) God. At the same time, the structure of the human mind compels us to believe in the existence of God even though we cannot adequately reason about God (Davis, 1991, p. 67). The interaction of the supply of mental capacity for religious Truth, and the demand of the mind to believe in God produces confusion and contradiction. All we are left with is faith in the absolute nature of things and God. Manse1 explicitly takes up the argument of a leading intuitionist of the time, William Hamilton - Mill's intellectual opponent - that inferences about the existence of God come exclusively from the mind, and can not be made from observing the phenomena of matter. Manse1 places a great deal of importance on consciousness, stating that it is the only criterion of truth in questions of either logic or religion. According to Manse1 the facts of consciousness comprise our entire conscious life. All knowledge about the world is based on the facts of consciousness. The mind does not simply take in information from the environment. Information about the external environment enters a human being through the senses and then passes, via human consciousness, to the intellect. However, the process of passing the information from the senses to the intellect changes the 'information' to a form that the mind can comprehend. Therefore, what we know is the way things appear to us via an interaction of the thing itself and

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human consciousness, not the way they are in themselves (Mansel, 1859, pp. 128-29). This aspect of Mansel's work can be seen in Marshall's early (1 870) article, "Ye Machine." According to Mansel, every fact of consciousness must be something conceivable and, everything conceivable is a "possible intuition" (Freeman, 1969, p. 17). Our intuitive faculty is the basis for a fact of consciousness, and hence the basis for our thoughts, including what we can imagine. Denying our ability to know absolute truth with certainty, Manse1 says "Intuition is never pure but is always presented together with interpretation" (ibid, p. 26), and our interpretations are based on our experiences. On the other hand, it is possible to intuit the rightness or wrongness of actions without considering their consequences or utility (ibid, p. 55). 4.2.1 Time

An important characteristic of human consciousness is that it is subject to "the law of Time" (Mansel, 1859, p. 98). That is, everything we are conscious of is understood as having both a past and a future. Everything we are conscious of is 'moving' through time. However, understanding the absolute frst link in a chain of events, or the ultimate cause of events is impossible for the human mind because to understand the first cause is to imagine a time before time. This is impossible because everything we are conscious of including our thoughts - is bounded by time. Everything we understand is understood in terms of "our own relation to time" (ibid, p. 103). The problem is that humans cannot find the the first moment of what we call reality. Thus according to Mansel, (the perception of) time is of paramount importance to human life, it is one of the primary conditions of human experience (Mansel, 1859, p. 184). Furthermore, time is not absolute; our perception of time is related to our consciousness, and hence the experience of time is an intuitive experience. Being an intuitive experience means that it is an a priori law of the human mind, determined by the mind what the experience should be, before the experience occurs (ibid, pp. 185-86). 4.2.2 Short and Long Run

Manse1 did not believe that religious faith and science were incompatible with each other. In an essay, "On Miracles," Manse1 says, "In one respect, indeed, the advance of physical science tends to strengthen rather than to weaken our conviction of the supernatural character of the Christian miracles" (Mansel, xxxx, p. 21). Scientific progress, "within a longer or shorter period" (ibid, p. 22; emphasis added), explains what was hitherto unexplainable, it converts unknown causes into known causes. However, over the short or long

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run, as the new known causes fail to explain miracles, the belief in the hand of God in miracles grows stronger. 4.2.3 Equilibrium, Ceteris Paribus Miracles are.also not a violation of the laws of nature. Laws of nature are the powers and properties of nature whereby identical causes create identical effects. Given all the laws of nature, a miracle is an introduction of a new hitherto unknown power for a very specific purpose and then immediately withdrawn. Manse1 did not use the term ceteris paribus, but his explanation of a miracle involves holding all known laws of nature constant and introducing a new law. As opposed to Mansel7sview, the scientific or skeptical view was that, ceteris paribus, the introduction of a new power would disturb the equilibrium of the universe. Mansel's response to the 'change in equilibrium' view is that such an assertion has never been proven. He also discounted this view because since the entire known universe is a manifestation of the unknown, an equilibrium of the universe must also be an unknown. 4.2.4 Elasticity Just as miracles represent non-physical causes of observed events, so to is the free Will of man the "power indispensable to all moral obligations and to all religious beliefs" (ibid, p. 28) and capable of producing results which physical causes cannot. In addition, the world contains "an elasticity, so to speak, in the constitution of nature, which permits the influence of human power on the phenomena of the world to be exercised or suspended at will, without affecting the stability of the whole" (ibid, p. 28). To understand this requires distinguishing mind from matter, and recognizing that the former can influence the latter. Thus, neither miracles nor the effects of human power violate the laws of nature. Rather, they are the product of a (free) agent who transcends the laws and thus cannot, by definition, neither obey nor violate the laws. Ultimately miracles represent a class of phenomena which we do not understand, brought into the world by God for a definite purpose, at a definite time and place, "without disturbing the economy of the universe" (ibid, p. 3 1; emphasis added). 4.2.5 Duty Another important intuition is the "sense of moral obligation" (Freeman, 1969, p. 52) or duty. It is an intuition because it is part of the structure of our mind implanted there by God. The sense of moral obligation is a source of religious feelings and gives us a sense of God's goodness. The study of morals is thus a study of character or personality. And while mathematics can

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stand alone as a theory of mathematics, the chief value of moral science is in its applications to the real world. 4.2.6 Joy of Religion

At the end of Lecture 2 in his famous Bampton Lectures, Manse1 says, "Philosophy, as well as Scripture, rightly employed, will teach a lesson of humility to its disciple; exhibiting as it does, the spectacle of a creature of finite intuitions, surrounded by partial indications of the Unlimited; of finite conceptions, in the midst of partial manifestations of the Incomprehensible. Questioned in this spirit, the voice of Philosophy will be but an echo of the inspired language of the Psalmist: 'Thou hast beset me behind and before, and laid thine hand upon me. Such knowledge is too wonderful for me: it is high; I cannot attain unto it"' (Mansel, 1859, p. 90). How can we know God? Our first sense of God does not come through the intellect (reasoning). Humans learn to pray before they learn to reason; we have an "instinct for worship" (ibid, p. 115). Therefore, the origin of religious practice is something other than reason. The problem with relying on reason for our religious practices it that reason creates "barren abstractions" and "inexplicable contradictions" (ibid, p. 117). On the other hand, a religion based on feeling "abandons itself to the wild follies of fanaticism, or the diseased ecstasies of mysticism" (ibid, p. 117). Manse1 was not against reasodrationality. However, he did believe that reason has its limits which only psychology (the study of the human mind) can establish. Psychology, in addition, can show the way to truths beyond which reason can attain (Freeman, 1969, p. 14). Therefore, both spirit (intuition) and understanding (reason or reflection) are necessary for religious practice. 4.2.7 Applied Theology

While reason and hence empiricism has limits when it comes to questions of religion, a science must be based on something with a concrete existence and within the realm of experience. One reason Manse1 objected to "rational theology" - a study of the human soul - because the finite human mind cannot conceive either a moment before time (ibid, p. 23) or the infinite (God). Marshall placed emphasis on experience as the basis for "practical instinct" or intuition which enhanced decision making. Marshall insisted on using money as a prime motivator of economic behavior because money, as opposed to love or pride, is measurable. Marshall divided the study of market prices into the short and long run time periods. (A firm may always have capital but distinguishing a long and short run allows you to conceive the limits faced by the firm.)

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Marshall followed Manse1 in his belief that human experience was central to human life, and central to the human experience was the experience of time. It is also central to economic life, and this is one way in which Marshall applied Mansel7s philosophy to economics. Marshall held strong feelings of moral obligation towards the poor, and wanted to apply economics to the study of mankind in its day-to-day existence.

4.3 Alfred Marshall 4.3.1 Economic Method

Marshall says that Mansel's defense of Christian orthodoxy "showed me how much there was to be defended" (Keynes, 1966, p. 8). It is possible to read Marshall's appreciation of Mansel's work when Marshall says, "I have come to the conclusion that the Unknown probably has concerns in which this world plays a part almost as insignificant as that played by a single small insect in the history of this minute world ...Every year my reverence for the Unknown becomes deeper; my consciousness of the narrow limitations of all the knowledge in this world becomes more oppressive; and my desire to add to that quantity something that will count, though it is a microscopic fraction of that microscopic whole, become stronger" (Marshall, 1966, p. 368). How do you push back the unknown and gain understanding of this world? Marshall's answer was, in part, "dividing" time into time periods, the judicious use of the ceteris paribus assumption, and focusing on costs and benefits at the margin. Focusing on the margin also illustrates economic freedom. Marshall says that economic freedom is nowhere illustrated as when a business owner "endowed with genius" experiments with different input combinations and technologies in order to increase efficiency. This involves substituting inputs until the net product for all inputs is proportional to the price paid for each input. He does this generally by "trained instinct rather than formal calculation.. ." (Marshall, 1920, p. 406; emphasis added). In other words, economic freedom is best exemplified by using intuition in business. This freedom is illustrated by the substitution of inputs with a higher MP/$ for inputs with a lower ratio, until, in equilibrium, MP/$ are equal for all inputs. Marshall also considered the joy brought about from religion as the "highest joys of which men are capable" (ibid, p. 16). But Marshall was also focused on the hersand-now. Hence, his statement that when it comes to economics, "We must begin with that which is within us, not with that which is above us; with the philosophy of Man, not with that of God" (Mansel, 1859, p. 89). Marshall's path to economics started with metaphysics and the controversy between the empiricist John Stuart Mill and the intuitionist William Hamilton. A.C. Pigou notes that Marshall's conviction that mankind

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has a limited ability to know metaphysical truths, is what turned Marshall's career path to psychology, then ethics, and ultimately economics (Pigou, 1966, p. 82). While he came to economics through metaphysics, psychology, and ethics, he kept all of these in economics, seeing the solution to economics as the "handmaiden" of ethics, and the solution of economic problems in the utilization of man's "higher" faculties (Keynes, 1966, p. 9). Marshall's ethical system included a belief that once you determine what is good it is your & to try to create it in the world. Hence his belief that faith, hope, and charity are some of the most valuable of human possessions. Keynes attributes Marshall with "the most essential of the economist's needed gifts - he was conspicuously historian and mathematician, a dealer in the particular and the general, the temporal and the eternal, at the same time" (ibid, p. 12; emphasis added). Marshall defined economics as how people live and think in their ordinary business of life. 4.3.2 Das Alfred Marshall Conflict

Just as there is an "Adam Smith problem," so is there an "Alfred Marshall conflict." The Smith problem involves the apparent inconsistencies between Smith Wealth of Nations, and his Theory of Moral Sentiments, written 16 years before in 1759. I've tried to make my own position clear as to why I believe there isn't any Adam Smith problem. The Alfred Marshall conflict is named for the fact that Alfred Marshall, a name synonymous with neoclassical theory, holds some views quite divergent from those synonymous with neoclassical theory in his time and ours. Marshall, it seems, was quite the behavioral and socio-economist. The first conflict is that according to Marshall we do not always act on the basis of deliberation and calculation; we "do not weigh beforehand the results of every action.. ." (Marshall, 1920, p. 20). We act on the basis of altruism, habits, customs, and intuition. Marshall used the terms practical instinct and trained instinct as synonyms for intuition. Trying as he did to find complementarity between economics and evolutionary theory, Marshall adds that habits, customs, and what we call intuition are "most nearly sure to have arisen from a close and careful watching the advantages and disadvantages of different courses of conduct" (ibid, p. 21). In other words, intuition is based on experience and serves an evolutionary purpose. Intuitions are rational even if they are stored in the subconscious. Especially in business, inappropriate habits and customs "quickly die away" (ibid, p. 21). In addition to considering such non-quantifiable aspects of life such as spirit, intuition, habit and custom, but, economics must also consider various motivators of human behavior. Including various motives behind behavior is one of Marshall's applications of the "Principle of Continuity." This principle applied to behavior asserts that the motives or modes of human behavior are

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a continuous variable from complete altruism to complete selfishness. Because human behavior cannot be reduced to a single rule, Marshall refuses to exclude any human motivation a priori (ibid, p. vi). As one example he lists four major egotistic motivations: (1) economic advantage and need; (2) punishment and reward; (3) honor and recognition, and; (4) the desire for work, and the pleasure of activity. In addition, the altruistic motive is the "impelling force of the inward command to moral action, the pressure of the feeling of duty, and the fear of one's own inward blame, that is, of the gnawings of conscience. In its pure form this motive appears as the 'Categorical Imperative,' which one follows because one feels in one's soul the command to act in this or that manner, and feels the command to be right.. . The following of the command is no doubt regularly bound up with feelings of pleasure, and the not following it with feelings of pain" (ibid, p. 784). In other words, at bottom, morality is utilitarian. Despite the number of motivations affecting human behavior, over the long run the most stable motive affecting economic behavior is money. In other words, economics is concerned with how mind and spirit are manifested in human behavior as measured by a measurable motive, money (ibid, pp. 1417). A second conflict is Marshall's conviction that, not only are there various motives of human behavior, but economists themselves need various modes of thinking. Economists need "the three great intellectual faculties perception, imagination and reason: and most of all he needs imagination, to put him on the track of those causes of visible events which are remote or lie below the surface, and of those effects of visible causes which are remote or lie below the surface" (ibid, p. 43). For Marshall the truth is that economists need to combine knowledge and analysis, and "disciplined imagination" (ibid, p. 44,48). The limits of human knowledge also require that they proceed with "caution and reserve" (ibid, p. 46). And they need the use of the "faculty of sympathy" which allows them to put themselves in the situation of another, especially the situation of those in other economic/social classes (ibid, p. 45). The founders of modern economics, he says, were men possessed of a "gentle and sympathetic temper, touched with the enthusiasm of humanity" (ibid, p. 47). For example, Adam Smith, possessing more "philosophical insight" (ibid, p. 246) than many others of his day, did not accept the philosophy of 'what is, is right.' The faculties needed by economists arises from the fact that in matters of economics what is not seen is often more important than what is seen. Just as the number of combinations of moves in a game of chess is enormous, so too are the unique situations we find in nature. As a result economists must use a varied number of research methodologies (ibid, pp. 29-30); always attempt to simplify things by focusing on how incentives, most notably opportunities for income, affect behavior, and; be "greedy" for facts (ibid, p. 38). To get below

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the surface, to find the "causes of causes" (ibid, p. 779) analytical thinking is not enough. Complementary with analytical thinking - a "cool head" are common sense, practical or natural instinct - intuition - life experiences, a "mother-wit, of a sound sense of proportion" (ibid, p. 778), and a "warm heart." Economics without common sense produces little, while analysis extends the usefulness of common sense. However, "in every practical problem it is common sense that is the ultimate arbiter" (ibid, Notesx, p. 157). Common sense guides the research, chooses the data to be used, combine data from different fields of knowledge including their importance in the fmal product. In fact, "Economic science is but the working of common sense aided by appliances of organized analysis and general reasoning" (ibid, p. 38). Common sense solves problems by first breaking it up into its parts, considering each part with the use of the ceteris paribus assumption, and then combining all the parts into a whole. Economic theory can enhance our knowledge of economic life by assisting common sense but neither replacing it nor determining the order with which common sense looks at a problem. It also aids common sense by reasoning about human motives which are measurable. In this world, and he doesn't eliminate the possibility of other worlds where this may not be true, money is the best measure of human motives. The effect of money on behavior is best left to scientific thinking. Having analyzed the money part of the economic problem, scientific thinking then leaves common sense to be the final arbiter (Marshall, 1966, p. 164). A third conflict is Marshall's belief that economics is different from natural science in fundamental ways. One difference is the inability for anyone to create a complete science of man. Any scientific statement of human behavior must be "inexact and faulty" (Marshall, 1920, p. 32). A complete science of atoms, maybe, but not a complete science of man. A second difference is treating humans as if we are machines. Humans have free will, consciousness and its creations -- imagination and intuition. Exactness in economics is difficult, and facts alone are never enough. In fact, facts never speak for themselves. What is needed is experience, common sense and trained instinct (intuition) combined with scientific thinking. A fourth conflict is Marshall's opposition to "armchair economics." Economics is neither an "intellectual toy" nor a way of solving "imaginary problems not conforming to the conditions of real life" (Pigou, 1966, p. 84). Economic theory is not sufficient to solve practical economic problems. One has to apply theory to one's interpretation of economic life, and interpretation comes from both consciousness and common sense. While facts are important, "Facts by themselves are silent. Observation discovers nothing directly of the actions of cases, but only of sequences in time" (Marshall, 1966, p. 166), There is an almost infinite number of causes of events, and no set of causes ever occurs twice producing the same event twice. As a result,

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economic life changes quickly and constantly, and all conditions which affect behavior mutually determine each other. This makes economics difficult and lacking in "finality" (Keynes, 1966, p. 35). It is also why common sense is so important, why a successful economist must have a "profound knowledge" of economic life (ibid, p. 33), and why the past isn't a good guide to the future. One must apply intuition and imagine the future in order to get a "direct feel" (Pigou, 1966, p. 85) of the real world. And after all is said and done, "Economic laws and reasonings in fact are merely a part of the material which Conscience and Common-sense have to turn to account in solving practical problems, and in laying down rules which may be a guide to life" (Marshall, 1920, p. vi). 4.3.3 The Importance of Human Character Economics, says Marshall, is a study of the behavioral or external manifestations of internal states as measured by money. And, while economics does not attempt to understand the internal - mental and spiritual characteristics of humans, neither does economics ignore either the mental and spiritual characteristics of humans. This is because the mental and spiritual manifest as desire, and it is important to know whether particular desires create a "strong and righteous character" or a less desirable one (ibid, p. 17). Character's moral dimension, is associated with a concern for altruism, and is relatively low discount rate for time. Associated with the latter, character, also positively correlated with the ability to anticipate and plan for the future. Because the future is uncertain, different individuals have different subjective expectations about the future. Those with character are those with patience, self-control, foresight, and a time perception which allows them to forecast and prepare for the future. In other words, time is a subjective, intuitive concept, and those with character are skilled with time, being willing and able to see further into the future (Raffaelli, 1994, p. 83). For Marshall, this has an effect on savings, and organizations. Character is formed at work, by the nature of the work and the relations at work. Character is as much a function of how income is earned as how much is earned. Marshall doesn't exclude non-economic forces affecting character. He says, "For man's character has been moulded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world's history have been the religious and the economic" (ibid, p. 1). And while it is true that religion, family, and friends can be a source of character even among the poor, it is also true that in general material poverty causes moral poverty (ibid, pp. 1-2). However, Marshall did not believe that income and character are always linearly related. For some moderate income earned by steady but moderate work offers the best

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opportunities for character growth. For others, the strenuous pursuit of the goal should be alternated with periods of deep rest. Character has a moral aspect, the ability to sympathize with the sufferings of others and to act for the benefit of others. The ability to sympathize has evolutionary implications for Marshall who states that the races with the strongest populations are those exhibiting the most powerful sympathy (ibid, p. 243). What is the source of sympathy? Marshall says that during the "ruder stages of human life (ibid, p. 243) sympathy may be due to heredity and unreasoned impulses. Eventually, sympathy becomes a choice as it is fostered by the "far-seeing" teachings of religious and other leaders (ibid, p. 243). Deliberate, sympathetic, moral choices are ultimately created by associations and experience. Marshall refers to a highly developed state of associations as our "sixth sense" (Marshall, 1994, p. 139), our "subtle instincts" (Marshall, 1920, p. 253) or a "store of knowledge and a faculty of intuition" (ibid, p. 252; emphasis added). Our sixth sense is an always latent ability within man for perceiving the "electrical states" of other people and things. What is particularly helpfd in the creation of intuition are regular periods of relaxation, and focused study about a relatively narrowly defined set of issues. 4.3.4 Ye Machine

In an article written around 1870, "Ye Machine," (Marshall, 1994) Marshall uses the image of a machine to discuss human cognition, intuition, and moral character. The concept of consciousness was necessary in order for Marshall to mount an intellectual front against extreme empiricism, physical determinism, and the mind as a submissive container. The role of consciousness is as the necessary condition for our human experiences, and our sense of order. At the same time, consciousness could not explain the workings of the human mind. Marshall's solution is to place consciousness inside the evolution of a machine. The machine takes in data or impressions, what Marshall calls sensations, from the outer environment which produce "ideas of sensations" in the brain, which produces "ideas of action" in the brain, which produces actions. There are three 'players' in this sequence: the outer environment, the brain, and the body which is stationed between the environment and the brain. The brain does not directly perceive the outer world or reality. The brain knows those parts of the outer world which are first filtered through the body. Sensations or actions repeated, and all the associations and connections created from the repetitions, become the basis of memory, expectations, and instinct. Thus, thunder and lighting become associated with each other, as do sights or sounds associated with other sights or sounds. Meditation is the process by which an idea leads to a "long train of ideas to others very different from them" (ibid, 118). Actions or ideas which

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cause their own continuation are "pleasurable" ideas or actions; ideas and actions which have the opposite affect are ''painfil." The machine's brain has two parts, the cerebrum and the cerebellum. The cerebrum is the largest part of the brain and accounts for about 213 to 314 of the brain's weight. It includes the cerebral cortex, and is divided into two hemispheres, the right and left hemispheres. The cerebrum is the seat of conscious mental processes, gives us a sense of past, present, and future time - and thus allows us to react to the past and plan for the future. The cerebellum controls bodily functions. The brain is connected to the outside world through the body. As the brain evolves so do the connections among the various parts. These parts create, as it were, well-developed pathways that improve decision making ability with less need for mental exertion by the cerebrum. One of the effects of these pathways is the transformation of sympathy from what seems to be unreasoning impulses or instinct, to reasoned choices. The ability for reasoned choices includes the ability for a liberal education. Thus, the machine would learn language by associating sounds with objects. With practice it could 'speak' the correct sound associated with an object. With more practice it would differentiate similar objects and associate each different but similar object with the appropriate sound. Differentiated sounds could also be intemated to form more complex sounds which have allow for the communication of ideas. In this way there is the growth of language which helps other machines. The machine learns math by making good guesses, and the pleasure derived from good guesses creates associations in its brain facilitating learning and arithmetic reasoning. Of course the machine's reasoning would be subject to error, as there is no way of "preventing any of the numberless other associations which would spring up from usurping, owing to some accidental advantage, the place of that which is really wanted" (ibid, p. 125). This springing up has similarities with false intuitions, or errors in reasoning brought to the attention of the economics profession so forcefully by Kahneman, Tversky, and others (Kahneman, Slovic, and Tversky, 1982; Kahneman, and Tversky, 1979). The learning of music would be facilitated if music gives the machine pleasure, thus creating the machine to continue producing pleasurable harmonious - music. In all aspects of liberal education, the machine avoids unwarranted specialization, the source of bad habits and the dampening of the human mind and character. The machine can also receive a moral education. The basis of the machine's moral structure is sympathy. If the machine perceives that another machine needs coal, then it thinks about itself needing coal. This leads to actions to relieve the other machine of its coal needs. Sympathy, experience, and association create moral habits. The evolution of the machine may be said to end with the ability for intuition. Marshall says, "Finally, it might completely develop associations corresponding to that

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sense which

has always probably been latent in man, and is now coming prominently forward - I mean that of the so called electrical states of other persons and things. In this way it might not only instantly perceive the whole internal state of another Machine, but it might, by forced vibrations, control its actions. Sympathy might also by this means be much developed" (Marshall, 1994, p. 130; emphasis added). You would ever guess that Alfred Marshall, one of the founders of neoclassical theory, spoke about intuitive, 'mind' reading, telekinetic machines! The simultaneous differentiation and integration of sounds is one example of the simultaneous differentiation and integration characterizing the development of all organisms in the world, be they biological, industrial, or any other. 4.3.5 Scale vs. Atmosphere

The division of labor's enhancement of efficiency illustrates a "fundamental unity of action between the laws of nature in the physical and in the moral world. This central unity is set forth in the general rule.. .that the development of the organism, whether social or physical, involves an increasing subdivision of functions between its separate parts on the one hand, and on the other a more intimate connection between them" (Marshall, 1920, p. 241). Each part becomes less self-sufficient and more dependent on the other parts. In the market, the subdivision results in the division of labor which creates specialized skill and knowledge, and increases the demand for specialized machinery. The increased connection leads to greater use of both credit and modern means of communication (sea, road, rail, telegraph). As it applies to the brain, Marshall says that despite the fact that the physical basis of mental work was not well known in his day, what was known is that specialization and integration within the brain results from practice and experience. With practice and mental effort "new connections between different parts of the brain" are created (ibid, p. 252). The effect of the division of labor on increased efficiency is commonly known as practice makes perfect. With practice, what at first seems difficult becomes habit, an automatic "reflex" (ibid, p. 250), not requiring the use of the cerebrum, the brain's "chief central authority" of thinking (ibid, p. 251). Any activity practiced regularly creates new connections between parts of the brain, allowing for faster and more effortless solutions. Information is stored in the brain and pieces of information are connected to one another through pathways. Through experience the flow of information becomes automatic. For example, a novice at any physical activity learns a skill only because the brain's cerebrum works 'full-time' controlling every movement of the body. As a result the brain has little 'room' left over for other things such as thinking about other things. With practice, however, the job of performing a

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skill is left to the local nerve centers and the activity is performed as if automatically without thinking. A skilled artist, for example, has created hand-eye connections which leave the cerebrum free for other things, for example, holding a conversation (ibid, p. 251, fh 1). Therefore, practice increases both specialization and integration. Marshall gives the examples of skating and painting, and the work of businessmen, scientists, doctors, and lawyers which require conscious attention at fwst but become semi-automatic with practice (ibid, p. 251). These well-developed pathways manifest as a "store of knowledge," "subtle instincts" or "intuition" (ibid, pp. 252-53; underline added). Intuition, he says, "can be obtained in no other way than by the continual application of the best efforts of a powerful thinker for many years together to one more or less narrow class of questions" (ibid, p. 252). To repeat one very important effect of the division of labor: it enhances intuition. Business managers must have two broadly defined skills. First, the manager must have a thorough knowledge of the particular trade in question. This includes forecasting supply and demand, recognizing new market opportunities, and have good judgment but be a risk taker. Second, the manager must be a "natural leader" (ibid, p. 297), choosing the right people for job, and earning the trust of those employed. In other words, a business manager has to be of two minds - both a peoplsperson and an expert at the non-people details of business. A large scale organization has the advantage of "economy of skill, economy of machinery and economy of materials" (ibid, p. 278). Marshall refers to these well-known advantages as internal economies. But he also offers an alternative set of advantages he calls external economies. In his Industry and Trade, Marshall says that external economies represent "opportunities of a strong man with moderate means, who concentrates his energies on a speciality" (Marshall, 1923, p. 244). External economies are achieved from, what appears as part of the title of chapter 10, Book 4, in his Principles, "the concentration of specialized industries in particular locations" (Marshall, 1920, p. 267). Just as regular practice allows the brain to make more connections among its various parts, so does the interaction of many (relatively) small frms in a localized area allow for more connections among its parts. The main reasons that lead to the localization of industries are physical conditions such as climate and soil, and nearby mines and quarries, and; the existence of a court and its large retinue of wealthy patrons. There thus develops a group of skilled (and unskilled) workers in a relatively small area. Their interaction over time creates great advantages, one of which is the "mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously" (ibid, 271). Ideas pass fiom one person to another, enhancing other people's ideas which enhance the growth of knowledge. So, many (relatively) small firms create an atmosphere with

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many of the advantages of a smaller number of relatively large firms. The effect of the division of labor stem from both internal and external economies. Smaller organizations can benefit from division of labor and "economies of atmosphere," and from what we now call x-efficiency. In other words, xefficiency is a form of external economies. Marshall says that "The master's eye is everywhere; there is no shirking by his foremen or workmen, no divided responsibility, no sending half-understood messages backwards and forwards from one department to another" (ibid, p. 284). The general body of empirical literature on x-efficiency supports Marshall's position. Specifically, the literature which shows the relative strength of x-efficiency vs economies of scale or economies of scope supports Marshall's position (Frantz, 1997). 4.3.5 Time

Marshall wasn't analyzing the effects of either the short run or the long run on economic phenomena because he knew that the division of time exists only in his imagination. "For the element of time which is the center of the chief difficulty of almost every economic problem, is itself absolutely continuous: Nature knows no absolute partition of time into long periods and short" (Marshall, 1920, p. vii). At the same time, he used his imagination to create a "direct feel" (Pigou, 1966, p. 85) of the real world. For this he needed an artificially boundary of time: the short and long run periods. Thus the quote immediately above continues, ". .. but the two shade into one another by imperceptible gradations, and what is a short period for one problem is a long period for another" (Marshall, 1920, p. vii). The short and long periods do not absolutely exist, but can be a convenient way of getting a direct feel of life. So be it. Marshall's famous statement about economics is that "Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing" (ibid, p. 1). Marshall knew that the ordinary business of life is complex because life is complex. He accepted Cournot's analysis that in economic problems it is not enough to analyze the effect of A on B, B on C, and so on, because A, B, and C are simultaneously determining each other. But of course life doesn't consist of only A, B, and C, but A through Z, A' through Z', and so on. Life has a very complex cross-sectional element. It also has a very complex time series element because "the main body of movement depends on the deep silent strong stream of the tendencies of normal distribution and exchange; which 'are not seen,' but which control the course of those episodes which 'are seen"' (ibid, p. 828). While it is not possible to observe neither all of the cross sectional elements, A - Z, A' - Z', nor the unseen basis for the seen movements over time, it is possible to observe changes in benefits and costs.

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Marshall looked into the n-dimensional matrix we call life and saw something recognizable and translatable into the "ordinary business of life" via supply and demand curves. We can conclude that he was either a creative genius or a mystic. The ordinary business of life is not as simple as predicting the changes in the motion of a rock swinging from a string. For one thing, people are not rocks. Another, related, reason is that both the demand schedule and the supply schedules change over time. This means that for the study of supply and demand, and equilibrium, the time dimension is of great importance. The time period we use to analyze a market may vary depending upon the particular circumstances of the particular market. However, it is assumed that the circumstances of the market - fashion or taste, input substitutions, technology - do not change during this period of time (ibid, p. 342). In the normal case demand curves slope downward to the right and supply curves slope upward to the right, equilibrium being where the demand price and supply price are equal with each other. The conditions affecting supply and demand change constantly, each time changing the equilibrium. Marshall uses his famous metaphor of a pair of scissors to explain the determination of price. The two blades of the scissors corresponding to the force of utility (demand) and cost (supply) in determining price. Constant change leads to the "great importance" (ibid, p. 347) of time in the determination of supply and demand. The normal or "natural" value of a commodity in the long run is "the average value which economic forces would bring about if the general conditions of life were stationary for a run of time long enough to enable them all to work out their full effect" (ibid, p. 347). However, the future is not perfectly foreseeable, and the general conditions of life are not stationary. This makes it difficult to apply economic theory to life's practical problems. To presage a sticky problem, time, being an intuition, is part of man's inner world. The simplest case of market equilibrium is when a person produces what he wants and the stock is already available. A boy picking blackberries for himself to eat will pick them until the MU of blackberries equals the marginal disutility of picking them (or the MU of playing rather than picking). A case representing a modern market is a corn market where all the corn for sale already exists. With buyers willing to buy more at lower prices and selling willing to sell more at higher prices, an equilibrium exists where Qd = Qs. In anything more than a day market, the quantities supplied and demanded, and prices accepted and offered depend upon estimates of an uncertain future. It is in the face of an uncertain future that Marshall says market quantities and prices depend upon the thoughts which people have of the future. In particular it depends upon how "far-sighted" (ibid, p. 338) -intuitive -- are both buyers and sellers. This is not the all of it. Marshall says that he is particularly interested in market adjustments "ranging over still

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longer periods than those for which the most far-sighted dealers in futures generally make their reckoning" (ibid, p. 338). Marshall is going to extend his intuition further than the most intuitive buyers and sellers generally extend their intuition when making market decisions. In other words, Marshall is attempting 'to go where no man has gone before.' How he gets there is by combining intuition and analysis. He imagines or intuits the general outline of what he admits is an unknowable world, and then analyzes in a step-by-step fashion the path that individuals, fxms, and society take in that world. Marshall states the obvious, that our abilities for prophesy are less than perfect, that the unexpected will occur, and the forces of adjustment will not work themselves out completely through time. However unrealistic the assumptions, Marshall analyzes the unknowable. The outlines of the unknowable world is that it contains free and competitive markets in which there is only one price per marker at any one point in time, and a reasonable high degree of knowledge on the part of buyers and sellers. How do you analyze the unknowable? By 'breaking up' time, imposing the ceteris paribus assumption, and assuming the existence of the stationary state. Time, and its concomitant dilemma of having to analyze the unknowable world "make it necessary for man with his limited powers to go step by step, breaking up a complex question, studying one bit at a time, and at last combining his partial solutions into a more or less complete solution of the whole riddle" (ibid, p. 366). Going step by step means placing aside "those disturbing causes, whose wanderings happen to be inconvenient, for the time in a pound called Ceteris Paribus" (ibid, p. 366). The stationary state means that economic activity is "motionless" or stationary -- average age, per-capita income, output, internal and external economies, and the average size of the representative firm are constant. In addition, every effect has only one cause, and price is determined by cost. Last but not least, the short and long run natural value are identical with each other, and time has no essential effect on economic activity. Of course, Marshall understands neither can time be broken up, nor is the stationary state a reality, nor is ceteris ever paribus. Breaking time up into discrete units and assuming ceteris paribus is the only viable option he sees for analyzing "the difficult problem of the interaction of countless economic causes" (ibid, p. 369). Assuming the stationary state is only his starting point. The method from going from the stationary state to "the actual conditions of life" (ibid, p. 369) is called the statical method. "By that method we fix our minds on some central point: we suppose it for the time to be reduced to a stationary state; and we then study in relation to it the forces that affect the things by which it is surrounded, and any tendency there may be to equilibrium of these forces. A number of these partial studies may lead the way towards a solution of problems too difficult to be grasped at one effort" (ibid, p. 369). In other words, by the statical method the economist holds an

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image in the mind and then analyzes sources and the extent of changes in that imaginary world. Marshall, who stated that economists need intuition or imagination, and the ability for analytical thought, combined both in the statical method. Especially for "very long" periods, using the statical method is "dangerous; care and forethought and self restraint are needed at every step" (ibid, p. 379, fi f). The issue of time includes the issue of the stationary state, which Marshall considers a fiction but useful for economic analysis. In the stationary state the influences of time on costs and value are minimal as the conditions of supply and demand, distribution and exchange are "motionless" (ibid, p. 367). There is no sense of time in the stationary state, and no distinction between short and long run. Yet, the stationary state "is full of movement; for it is a mode of life" (ibid, p. 367). In the stationary state fum size remains constant. Marshall gets around this by speaking of the "representative" firm which remains approximately the same size. In the stationary state value is governed by costs of production, and every effect would have one cause. Speaking of the conditions existing in the stationary state Marshall says, "But nothing of this is true in the world in which we live. Here every economic force is constantly changing its action, under the influence of other forces which are acting around it" (ibid, p. 368). Because the world in which we live so subject to constant change created by "countless economic causes" (ibid, p. 369). Thus, "A man is likely to be a better economist if he trusts to his common sense, and practical instincts, than if he professes to study the theory of value and is resolved to find it easy" (ibid, p. 368).

Chapter 5 Intuition and Analysis in the Economics of the John Maynard Keynes 5.1 Introduction John Maynard Keynes, a student of Alfred Marshall, makes a statement in his General Theory of Employment, Interest and Money (GT) which reflects Marshall's statical method: ". ..after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst ourselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error." (Keynes, 1936, p. 297). Similar to Marshall, Keynes minimized the use of mathematics, and in GT he says, "The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems. .. It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis.. .that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep 'at the back of our heads' the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials 'at the back' of several pages of algebra.. .To large a proportion of recent 'mathematical' economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretensions and unhelpful symbols" (ibid, pp. 297-98). Keynes, similar to Marshall, placed importance on observation and experience motivating theory, and on good theory and mathematics verifying and satisfying intuition. His phrase 'at the back of our heads' refers to unconscious mental activity, or intuition.

5.2 Intuitionism Once More Joseph Schumpeter says that scientific activity is not so much driven by rational activity, inference and logic, observation and experimentation, as it is by vision and a process resembling "artistic creation" (Schumpeter, 1954,

Two Minds pp. 113-14). Thus, intuition in the form of a "vision" often precedes, motivates, and guides analytical thinking. According to Joseph Schumpeter intuition" is a "pre-analytic cognitive act that supplies the raw material for the analytical effort" (ibid, p. 41). How do we acquire our vision of a set of phenomena? Schumpeter says we acquire our vision "intuitively.. .. This should be obvious. If it is not, this is owing to the fact that in practice we mostly do not start from a vision of our own but from the work of our predecessors or from ideas that float in the public mind" (ibid, p. 562). In other words, similar to Mill, but not as aggressively as Mill, Schumpeter says that intuition may be confused with information we can't quite put our hands on. And, similar to Marshall who referred to information floating in the air, Schumpeter refers to information as "floating" in the public mind. Schumpeter says that Friedrich List "had one of the elements of greatness" - a "grand vision of a national situation" (ibid, p. 504). William Stanley Jevons had a vision, but did not adequately developed it analytically (ibid, p. 826). Carl Menger had a "spacious vision that went deep below the surface" but similar to Jevons, and Eugene Bohm-Bawerk did not sufficiently develop it analytically (ibid, p. 848). Schumpeter maintained that good science is accomplished by integrating intuition and analysis. His own work included an attempt to integrate two types or canons of economics, the neoclassical canon and what Erik Reinert refers to as "The Other Canon" (Reinert, 2003). The neoclassical canon emphasizes analytical thinking and the left hemisphere of the brain (neocortex), while The Other Canon emphasizes verstahen or intuition. According to Reinert, Schumpeter failed in his attempt to integrate the latter into the former (ibid, p. 269). Keynes, says Schumpeter, is an "excellent example" of an overarching vision being the basis for analytical work, and then the two interact "in an unending relation of give and take" (Schumpeter, 1954, p. 1171). Keynes vision included England as an aging and arteriosclerotic capitalist economy with fewer opportunities for investment and too much saving. Schumpeter says that Keynes' vision was well expressed in the early part of the Economic Consequences of the Peace, and the Tract on Monetaiy Reform. The Treatise on Money failed to adequately express his vision. GT was written to integrate vision and analysis, and the book "seems to have satisfied him completely, so much so that he felt himself to have led economics out of 150 years of error into the land of definitive truth - a claim that ...was as readily accepted by some as it discredited his work in the eyes of others" (ibid., p. 1172). It is worth noting two issues surrounding intuition in Schumpeter's statement. First, people tend to be confident about the truth of their intuitions, and second, what is intuitively obvious to some is intuitively or otherwise not intuitively obvious to others. Although Schumpeter spoke about the positive values of intuition, and its complementarity with analysis, he is not an intuitionist. That is, he does not state that intuition as a unique form of

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intelligence, a unique source of knowledge and self-evident truths or moral principles independent of sense experience. Henry Sidgwick (1838-1900), an economist, philosopher, was a leading intuitionist during the mid to late 1 9 ~ ~century . attempted to reconcile utilitarianism and intuitionism. He founded the Society for Psychical Research in 1882 with which Keynes was involved before 1914 (Moggridge, 1992, p. 59). Besides for Sidgwick, other leading intuitionists of this period were G.E. Moore (1 873 - 1958), Bertrand Russell (1 872 - 1970), and Ludwig Wittgenstein (1889 - 1951). Together they developed a philosophy called New Realism. Their belief is that facts and truths of individual things is possible and dependent upon judgment or "acts of simple insight" implying that individuals possess a faculty for intuition, intuition being "pure unmediated vision" (Davis, 1994, pp. 98-99). Russell believed that intuition was essential to knowledge and that "Philosophy is mainly a question of insight and perception" and although "there are difficulties in explaining how we acquire knowledge that transcends experience, but ... the view that we have no such knowledge is untenable" (O'Donnell, 1989, p. 98). Against the charge that all knowledge comes only from experience, Russell says that experience may serve only to direct our attention so that we see the truth of our intuition. According to Moore intuition is not an b'intellectual state of mind" but a "direct connection with reality" (Davis, 1994, p. 14). Reality is thus self-evident. G.E. Moore, in Principia Ethica (Moore, 1903), asked three major questions: what is the definition of good, what is good in itself, and what conduct produces good results. His (intuitionist) answer to the first question, what is the definition of good, is that good is incapable of definition but known only through intuition. According to Moore "... good is good, and that is the end of the matter" (Bateman, 1991, p. 57). Good is not necessarily what we desire, what is natural, God, or what is inevitable: good is good and nothing more. Moore's answer to the second question, what is good in itself, involved a rejection of classical or hedonistic utilitarianism, the notion that pleasure is the ultimate good. Moore believed that what is good in itself is known intuitively, and consists of states of mind of pleasure, beauty, and human interaction. Upon reading Moore Keynes said "Something gave in my brain and I saw everything quite clearly in a flash..." (O'Donnell, R.M. (1989, p. 113). Under the influence of Moore, Keynes and his Apostles of Truth colleagues gave themselves "license to judge all things anew.. .in a.. . quest for new values" (Hillard, 1998, p 4). In "My Early Beliefs" written in 1938, Keynes says that goodness was a simple "matter of direct inspection, of direct unanalysable intuition about which it was useless and impossible to argue. ..Broadly speaking we all knew for certain what were good states of mind and that they consisted in communion with objects of love, beauty and truth" (Keynes, 1972, vol 10, pp. 437-38). This was Keynes' religion, and

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"some sort of relation of neo-platonism it surely was" (ibid, p. 438). But it was also "entirely rational and scientific in character. Like any other branch of science, it was nothing more than the application of logic and rational analysis to the material presented as senssdata" (ibid, p. 438). Keynes was later to recant his reliance on Moore. Looking back on the earlier part of his life in his 1938 paper "My Early Beliefs," Keynes says that Moore's neo-Platonism "absorption in the good in itself, with a scholasticism which outdid St. Thomas" (ibid, p. 442) gave a sense of superiority and contempt for others, "But it was hardly a state of mind which a grown-up person in his senses could sustain literally" (ibid, p. 442). The emphasis on rationality, interpreting the rationality of religion and human feeling, and the rejection of Christianity and social mores "led to a thinness, a superficiality, not only of judgment, but also of feeling. It seems to me that Moore.. .left out altogether some whole categories of valuable emption. The attribution of rationality to human nature, instead of enriching it, now seems to me to have impoverished it. It ignored certain powerful and valuable springs of feeling. Some of the spontaneous, irrational outbursts of human nature can have a sort of value from which our schematism was cut off" (ibid, pp. 448-49). Of course, spontaneous and irrational outbursts of human nature are the "animal spirits" Keynes gave such a central role of investment spending in his GT. Over time, Keynes broke away from Moore, from Benthanism, and ultimately from classical economic theory. In "My Early Beliefs," Keynes also spoke about his "escape" from the teachings of Jeremy Bentham. He refers to himself and his inner circle of friends as being "the first of our generation, perhaps alone among our generation, to escape fiom the Benthamite tradition" (ibid, p. 445), a tradition he regarded, in 1938, as "the worm which has been gnawing at the insides of modern civilization and is responsible for its present moral decay" (ibid, p. 445). As he was escaping from Benthamism he considered himself and his friends the last Utopians, people who believed that humans are rational and decent people capable of being influenced by truth and objective standards, and who could use their "reliable intuitions of the good" (ibid, p. 447) to advance moral progress free of organized religion. His escape from classical theory appeared most fully in the GT. 5.2.1 Keynes' Intuitionism Keynes used many words and phrases for intuition including reflection; reflective, direct, and intuitive judgment; contemplation; a priori determination; direct inspection; direct recognition; direct knowledge, and; self-evident knowledge (ibid). In his 1908 dissertation, PrincipIes of Probability, Keynes used terms equating intuition and vision including "the gaze of intuition," "the peering eyes of philosophy," "the eyes of common

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sense," "the mind's eye" (O'Donnell, 1989, pp. 90-91; fn A), "intuitive power" (ibid, p. 70), "logical intuition" (ibid, p.18), and "direct judgment" (ibid, p. 52). At the same time he described those about whom he did not have a high opinion as having "ears but no eyes" (ibid, p. 91). In A Treatise on Probability he uses the term "a particular twist of the mind" (Moggridge, 1992, p. 148). In a letter to O.T. Falk written in 1936 Keynes remarked that intuition allows the individual to see the destination of their thoughts even before they see the path to the destination. And understanding this intuitive ability is "the most obscure problem of all in the psychology of original work" (Mini, 1994, p. 164). Similar to Bunge, Keynes says that the process resulting in intuitions is unknown and not analyzable, and that "it is difficult to give an account" of intuition (Davis, 1994, p. 21). Keynes believed more than simply that intuition is beneficial in intellectual and non-intellectual endeavors. He believed that intuition is a unique "non-sensory, cognitive faculty" (ibid, p. 20) giving direct knowledge of things and knowledge about how things are related with each other. The general beneficial effects of intuition listed by Keynes include having a vision which serves as the basis for analysis; sound judgment and problem solving; deriving expectations about the future; quick inference making; imagination; a meeting of the minds, attaining "a correct apprehension of the true course of events" (Keynes, 1972, vol 7, p. 382), and; perceiving the true nature of things such as goodness and beauty. In "The Economic Possibilities For Our Grandchildren," written in 1928 and published in 1930, Keynes says that intuition helps one understand "what is going on under the surface," and an ability for "a true interpretation of the trend of things" (Keynes, 1972, vol. 9, p. 322). Three more specific and interrelated reasons can be cited as to why Keynes believed that intuition is important. First, we need intuition because knowledge and experience is limited. In a Treatise on Probability (TP) Keynes says, contrary to the classical approach to probability in which the only alternative to complete knowledge is ignorance, "In Metaphysics, in Science, and in Conduct, most of the arguments, upon which we habitually base our rational beliefs, are admitted to be inconclusive in a greater or less degree. Thus for a philosophical treatment of these branches of knowledge, the study of probability is required" (Keynes, 1952, p.3). Belief may be either rational or irrational, and either one may be consistent with truth. "If a man believes in something for a reason which is preposterous or for no reason at all, and what he believes turns out to be true for some reason not known to him, he cannot be said to believe it rationally, although he believes it and it is in fact true. On the other hand, a man may rationally believe a proposition to beprobable, when it is in fact false" (ibid, p. 10).

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Knowledge may be complete, limited or probabilistic, or completely absent (ignorance). Keynes explains an implication of imperfect knowledge with these words, "And where our experience is incomplete, we cannot hope to derive from it judgments of probability without the aid either of intuition or of some further a priori principle. Experience, as opposed to intuition, cannot possibly afford us a criterion by which to judge whether on given evidence the probabilities of two propositions are or are not equal" (ibid, p. 86). Even though our knowledge (and experience) is incomplete, there are objective truths about the relationship between evidence and conclusions. Conversely, a proposition is not true because it is intuitive. Intuition or self-evidence is a reason for believing a proposition to be true. A second and related reason for needing intuition is that our knowledge of the future is limited. Robert Skidelsky claims that "Keynes's fundamental insight was that we do not know - cannot calculate - what the future will bring" (Skidelsky, 1997, p. 225). Keynes was conservative about not sacrificing current benefits for future ones because "Our power of Prediction is so sleight, our knowledge of remote consequences so uncertain..." (Moggridge, 1992, p. 125). Third, intuition is important because logical analvsis has its limits. The limit of analysis is reached when it is no longer possible to break down one thing in terms of its parts. When this occurs what is left is the essence, the real character, the true or inner nature of that thing. And the essence of a thing is known intuitively. For example, following G.E. Moore, Keynes held that the concept "good" can't be broken down into anything more basic or simpler and is, therefore, undefinable. On the essence of good he stated, "Good is good and that is the end of the matter" (ibid, p. 112). In My Early Beliefs (MEB), written in 1938, Keynes said that good states of mind are experiences of love, beauty and truth (Keynes, 1972, vol 10). Friendship, truth and beauty are good, the pursuit of money is less good. Because humans are subject to limited knowledge and experience, Keynes believed that economics is a moral science, primarily concerned with "introspection and with values ... with motives, expectations, psychological uncertainties" (Davis, 1991, p. 94). Hence economists' own introspection practices will assist them in modeling human behavior and understanding motives for behavior. Keynes's own economic method, unlike most economists, was "motivated by serious reflection on philosophical questions.. ." (ibid, p. 89). In his 1905 paper, "The Theory of Beauty," Keynes says that the first task of a philosopher is to "train his perceptions" to overcome conventional wisdom, and preconceptions in order to see "the objects of experience as they precisely are." In My Early Beliefs Keynes referred to himself and his friends as "immoralists" because they sought to escape from conventional wisdom and habits (Keynes, 1972, vol 10, p. 446). In his 1906 article, "Egoism", he remarked that intuition is the result of an individual exercising their "mental muscles and by keeping his nose to the

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stone..." (O'Donnell, 1989, p. 92). In his 1909 paper, "Science and Art," Keynes expands on these papers by enunciating a three part process, similar to Hadamard's, of scientific discovery. The first task of a scientist is to "perceive very clearly the precise nature of the different details." He then "holds the details together clearly before his mind," probably for a long time. He then "with a kind of sudden insight see through the obscurity of the argument or of the apparently unrelated data, and the details will quickly fall into a scheme or arrangement, between each part of which there is a real connection" (ibid, p. 101). In other words, intuitions "arrive in a flash" (ibid, p. 92), after years of study! In A Treatise on Probability, almost completely written by 1907, but not published until 1921, Keynes spoke about how although real objective probability relation exists, our personal knowledge of them varies according to our mental capacity or ability for logical insight. In other words, there exists a Platonic-like universe in which "truth" exists even if it unknown to those of us subject to illusions. One breaks through the illusion to common sense with a combination of intuition, and facts and experience. What does intuition (induction and analogy) - creative thinking - consist of! Keynes says "No clear or satisfactory account of them is to be found anywhere," and induction is "Within and yet beyond the scope of formal logic" (Keynes, 1952, p. 217). In a lecture given on November 6, 1933, Keynes stated that creative thinking begins as a "grey, fuzzy, woolly monster" in your head, and that "The precise use of language comes at a late stage in the development of one's thoughts. You can think accurately and effectively long before you can, so to speak, photograph your thoughts" (Skidelsky, 1997, pp. 308-09). Milton Friedman disagreed with Keynes on many points, but the following quote from Friedman seems to be one point on which they would agree: "The construction of hypotheses is a creative act of inspiration, intuition, invention; its essence is the vision of something new in familiar material" (Friedman, 1952, p. 43). Herbert Simon, the 1978 Nobel Prize winner held a similar view. Simon was trying to understand the relative frequency of words found in a book or the relative size of cities. The answer is that the nth most frequent word found in a book appears l/n times as frequently as the most frequent word, or why the nth largest city is l/n times as large as the largest city. Simon began to realize this by means of a non-verbal visualization. Simon said, "At some point I began to visualize a cascade, with successive pools of water each maintained at a constant level by flow in from the pool above and flow out to the next pool below.. . the equilibrium condition requires that the probability of creating a word that has already occurred k times must be proportional to k" (Simon, 1996, p. 374). Referring to Einstein use of images as well at to its use as described in Jacques Hadamard's "delightful book" (ibid, p. 379, The

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Psychology of Invention in the Mathematical Field (Hadamard, 1945), Simon says, "What is good enough for Hadamard and Einstein is good enough for me. I too have difficulty in finding any presence in words when I am thinking about difficult matters, especially mathematical ones.. .I cannot really detect the words in my thoughts.. .until they come out the ends of my fingers. But perhaps I am not thinking, but just recording previously composed ideas that reside somewhere in my subconscious mind" (Simon, 1996, p. 375). Keynes believed that intuition is complementary with, not a substitute for, reason. Intuitions may have an unknown source but this does not make them irrational. Keynes says that what is known intuitively is "...entirely rational and scientific in character. Like any other branch of science, it was nothing more than the application of logic and rational analysis to the material presented as sense-data" (Shionoya, 1991, p. 10). Having both a welldeveloped intellect and intuition, Keynes might be expected to make such a statement. Keynes was himself described as having a scientific imagination equal to that of Sigmund Freud. What Keynes said about Freud was that he was "endowed, to the degree of genius, with the scientific imagination which can body forth an abundance of innovating ideas, shattering possibilities, working hypotheses, which have sufficient foundation in intuition and common experience to deserve the most patient unprejudiced examination, and which contain, in all probability, both theories which will have to be discarded or altered out of recognition and also theories of great and permanent significance" (Keynes, 1972, vol. 28, p. 392). Keynes admired economists and others who had a strong intuition and combined it with analysis based on experience. In his essay on the life of Alfied Marshall, first published in 1924, Keynes refers to Marshall as the "founder of modern diagrammatic economics" (Keynes, 1972, vol, 10, p. 185). Diagrams are "an elegant apparatus ... which we all use as an inspirer of, and a check on, our intuitions" (ibid, pp. 185-86). Keynes believed that "economic interpretation in its highest form" requires a combination of logic, intuition, and a considerable amount of facts (ibid, p. 186, fh 2). In this combination, intuition often preceeds logic; logic being a way of presenting ideas in an understandable way. That is, original thought relies on intuition, and then logic is used to present the ideas generated by intuition in a precise logical way (O'Donnell, 1989, pp. 209-210). In his essay on Frank Ramsey, fwst published in 1930, Keynes refers to economics as "our most agreeable branch of the moral sciences, in which theory and fact, intuitive imagination and practical judgment, are blended in a manner comfortable to the human intellect7'(Keynes, 1972, vol 10, p. 335; underline added). Keynes gave a nod of approval to a "brave army of heretics" (O'Donnell, 1989, p. 210), economists such as Malthus (and Marx) who struggle with their own intuitions, who choose to "see the truth obscurely and imperfectly rather than

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to maintain error, reached ... by easy logic but on hypotheses inappropriate to the facts (ibid, p. 2 10). In his essay on Malthus, first written in 1922, Keynes says that he "approached the central problems of economic theory by the best of all routes" (Keynes, 1972, vol 10, p. 107). First, he began as a philosopher and moral scientist applying the a priori method of political philosophy. Second, he absorbed himself in the facts of economic life past and present. Third, he returned to the a priori method as an economist in an attempt to understand the facts of economic life by combining intuition and analysis. In short, Malthus studied economics via moral philosophy, then history, and finally as an economist by combining intuition and analysis. Keynes hesitated to discard a priori arguments because they are contrary to data unless the data is overwhelming. Keynes supported only those a priori arguments which are realistic or capable of becoming realistic. Keynes opposed Ricardo's a priori theorizing because they were too removed from the world of facts. Even though Ricardo was the "father" of both the quantity theory of money, and the purchasing power parity of exchange, Keynes' comment is that "When one has finally painfully escaped from the intellectual domination of these pseudo-arithmetical doctrines, one is able, perhaps for the first time for a hundred years, to comprehend the real significance of the vaguer intuitions of Malthus" (ibid, p. 88). Malthus himself "hated to stray too far from what he could test by reference to the facts and his own intuitions (ibid, p. 95). Keynes believed that a good theory is a combination of facts or experience, and intuition or a priori reasoning (O'Donnell, 1989, p. 218). In his essay on Newton, Keynes refers to him as the "last of the magicians" (Keynes, 1972, vol 10, pp. 363-64) whose mind was blessed with the "unusual powers of continuous concentrated introspection ... His peculiar gift was the power of holding continuously in his mind a purely mental problem until he had seen straight through it ... until it surrendered to him its secret ... Then being a supreme mathematical technician he could dress it up, how you will, for purposes of exposition, but it was his intuition, which was preeminently extraordinary" (ibid, pp. 364 -65). Newton claims to have discovered the secrets of planetary motion years before he attempted a verification of his intuition. For Keynes, creative discovery is ultimately the result of intuitions because it is the mind which "sees" something new. Experience is necessary but not sufficient; experience provides the "raw materials" used for analysis and is a check on common sense (O'Donnell, 1989, p. 88). And, intuition must be consistent with experience. Ultimately economics "is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions" (ibid, p. 161). Economics is not an exact science and hence economists have to consider other, vaguer, forms of reasoning such as intuition. For example, Keynes discounted "the supposed

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empirical fact" that real wages and output are inversely related, in favor of his a priori argument or intuition about the relationship between these two variables (ibid, p. 217).

5.3 Keynes' New Common Sense in the General Theory A good theory or policy primarily conforms to common sense and experience, and appeals to intuition, with logical consistency being secondary (ibid, p. 232). In a letter sent to Hicks in 1935, Keynes discussed his intention to show that the common sense of classical economics was outdated. He told Hicks, "I deliberately refrain in my forthcoming book from pursuing anything very far, my object being to press home as forcefully as possible certain fundamental opinions - and no more" (Mini, 1994, p. 165). In preparing drafts of GT, Keynes often spoke about intuition. For example, in 1933 Keynes wrote a draft chapter on savings for GT in which he states that one of his own theories will be acceptable if it satisfies the readers' intuition. If a person eats less bread and more butter, then incomes remain constant, the price of bread falls by as much as the price of butter rises. On the other hand, if a person buys less bread and more machines, then income will fall. Why the paradox? Why do consumer goods have one result and investment goods another? Keynes says that "I believe that I showed in my Treatise of Money that this must be so; but I cannot claim to have shown clearly to the reader's intuition how and why it must be so" (Keynes, 1972, vol29, p. 105; underline added). In a letter he sent to R. F. Kahn on user cost in 1935, Keynes says "In rewriting my note on user cost I gave some further thought to the point of yours which we discussed. It still does not appeal to my intuition. So perhaps I have not quite got your meaning even now" (Keynes, 1972, vol13, p. 634). In 1935 Keynes wrote a letter to R.B. Bryce commenting on Bryce's paper, "An Introduction to a Monetary Theory of Employment." Keynes wrote that he was not surprised, but found it both "tiresome and boring" (Keynes, 1972, vol 29, p. 150) that Bryce's readers found it difficult and that one of the main difficulties was with his definitions. Keynes tells Bryce that he had to do the same thing and "this was in a sense a great pity and might divert the readers' minds from the real issues. It is, I think, a further illustration of the appalling state of scholasticism into which the minds of so many economists have got which allow them to take leave of their intuitions altogether. Yet in writing economics one is not writing either a mathematical proof or a legal document. One is trying to arouse and appeal to the reader's intuitions; and , if he has worked himself into a state when he has none, one is helpless!" (ibid, pp. 150151).

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After the publication of GT Keynes continued to emphasize the combination of intuition, experience, and logical analysis. In a letter to R. F. Harrod on August 29, 1938 Keynes says that "In general, you must prove your point from stated assumptions, and not merely assert it as an intuition from unstated ones - especially when the assumptions are (avowedly) unrealistic and therefore not easily supplied by the reader" (Keynes, 1972, vol 14, p. 335). In another letter to Harrod on September 19, 1938 Keynes added that it is not enough to state a major point as an "obvious fact." In order to appeal to a reader's intuition rather than leave it as a "complete loss," an exposition requires an explanation consistent with the world of experience (ibid, pp. 339-40). On September 22 of the same year Harrod sent Keynes a letter about savings. Harrod says that "The marginal propensity to save must be so immensely much greater than the average propensity.. .In the condition of stable equilibrium, the marginal propensity to save must be greater still. I think this may be grasped intuitively, but a formal proof is appended at the end" (ibid, p. 343). In a letter about economic growth to Roy Harrod on September 26, 1938 Keynes says that "As a result of your last letter, I have, at last, seen in a flash what it is all about. My intuition told me that your conclusion could not be true in general, but only subject to specific conditions" (ibid, p. 345; underlines added). At the end of the same letter Keynes says, "Well, you see that I find your analysis very interesting, clarifying and thought-provoking...On the other hand, once you have made the distinction and the necessary assumption, you can get the intuition of your readers working on the right lines and they will see what it is all about" (ibid, p. 350). In the Preface to GT Keynes says, "For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises" (Keynes, 1936, p. v). What is the source of a lack of clearness and generality? The source is in the intellectual blinders which are created when one accepts the orthodoxy as common sense, in this case, classical economics Keynes says that "The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author's assault upon them is to be successful, - a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds" (ibid, p. viii). Keynes recognized that it is not only himself and classical economists who needed to escape from the bonds of illusions. On the next to last page of GT Keynes makes one of his famous remarks that, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are

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usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back" (ibid, p. 383). Keynes believed that his own break with illusion - GT -- was a general theory needed because economic conditions did not always satis6 the assumptions of classical economics. Keynes referred to the conditions which satisfied the assumptions of classical economics as both a "co-operative economy" and a "neutral economy." The classical assumptions break down in an "entrepreneur economy." In a co-operative economy the factors receive a preset percentage of output in either money or kind "with a view to spending the whole of it forthwith on purchasing such part of current output as they choose7' (Keynes, 1972, vol29, p. 77). In a neutral economy the factors of production are hired by entrepreneurs for money and "there is a mechanism of some kind" insuring that the money income is sufficient to buy the share of output which would be given to the factors in a co-operative economy. However, "it is in an entrepreneur economy that we actually live to-day" (ibid, p. 78). Keynes sets out to explain an entrepreneur economy "So as to bring home the essential features to the reader's intuition" (ibid, p. 87). For Keynes, classical economics was a special case dependent upon certain circumstances existing in society. Unfortunately, "the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disasterous if we attempt to apply it to the facts of experience" (Keynes, 1936, p. 3). Keynes offered a general theory, new intuitions, a new theory consistent with experience and intuition or common sense. A strong intuition combined with experience of the real world was his recommended path from the old common sense to the new. The old common sense of employment was based on two assumptions. First, with respect to the demand for labor, W = MP. Second, with respect to the supply of labor the wage is equal to the marginal disutility of labor. Together they describe a theory of employment in which only two possible forms of unemployment are possible: frictional, and voluntary. The old common sense doesn't allow for involuntary unemployment. The old common sense assumes that workers bargain for real wages, and that bargaining for money wages only would not significantly change the theory. "They do not seem to have realized that" (ibid, p. 8) a supply of labor curve based on money wages will shift with every change in prices. Thus the old common sense is not a general theory. The new common sense appears when Keynes says that "Now ordinary experience tells us, beyond doubt, that a situation where labor stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case" (ibid, p. 9). Ultimately, Keynes questions the old common sense because, in the Marshallian tradition, the theory is inconsistent with the "facts from experience" (ibid, p. 9).

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Common sense in classical economics was beyond doubt, or intuitively obvious to classical economists. For example, it was intuitively obvious that workers' money-wage bargains determine real wages (not merely influence real wages). Keynes says, "Now the assumption that the general level of real wages depends on the money-wage bargains between the employers and the workers is not obviously true. Indeed it is strange that so little attempt should have been made to prove or refute it" (ibid, p. 12). Given the obviousness that real wages are determined by money wage, it is actually not surprising that so little effort has been allocated to proving or disproving it. According to Keynes, money wage bargains affect the distribution of (relative) real wages, but reductions in money wages do not increase employment; reductions in real wages increase total employment. Ironically, workers resist reductions in money wages but not real wages. "Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school" (ibid, p. 14). Common sense can be so powerful on the minds of experts that only non-experts - workers - can think clearly enough to instinctively, unconsciously, or intuitively, act "correctly" (relative to the new common sense). At the same time, "The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight - as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required today in economics" (ibid, p. 16). Specifically, economics needed a theory of involuntary unemployment. The old common sense took it for granted that supply creates its own demand, that savings will be invested in the production of capital goods. Keynes points out that this means that "money makes no real difference except frictionally" (ibid, p. 19). The old common sense, just as any other common sense places certain blinders on the mind. Thus Keynes says that "Contemporary thought is still deeply stepped in the notion that if people do not spend their money in one way they will spend it in another" (ibid, p. 20). Keynes, having freed himself from the then current common sense points out the "optical illusion" (ibid, p. 21) in this. The error in judgment, the (false) intuition, is the assumption that "there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter and not linked in any simple way with the motives which determine the former" (ibid, p. 21). The old common sense - supply creates its own demand - meant that the aggregate demand function [D=f (N)] is equal to the aggregate supply function [Z=0 (N)] for all levels of employment and output. In Keynes' new common sense, the value of D when D=Z is called "effective demand"; effective demand is equal to consumption O plus investment (I) spending.

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The economic problem is that when D is equal to Z effective demand may be at a level too low to achieve full employment. The reason includes the response to higher income caused by higher employment. Keynes says that "The psychology of the consumer is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income" (ibid, p. 27). In order to attain full employment the gap between income and consumption must be filled with investment spending. Investment depends on the marginal efficiency of capital (MEC) and the various interest rates. The MEC is the discount rate which equates the present value of all future annuities and the supply price of capital. The MEC depends on expected future yields, not current yields which is "The most important confusion concerning the meaning and significance of the marginal efficiency of capital" (ibid, p. 141). Because the MEC is about expected yields rather than current yields means that it is not part of a static state, but "is of fundamental importance because it is mainly through this factor ...that the expectation of the future influences the present" (ibid, p. 145). Therefore, the old common sense is incorrect in this instance as well. "The fact that the assumptions of the static state often underlie present-day economic theory, imports into it a large element of unreality. But the introduction of.. .the marginal efficiency of capital.. .will have the effect, I think, of bringing it back to reality" (ibid, p. 146). So, what is 'reality' with respect to investment? Expectations are critical, and there is both an individual and institutional element in the determination of expectations. First, the individual element. Expectations concerning yields depends on both existing facts which are "more or less for certain," and future events which we can forecast with nothing more than varying degrees of confidence. Our knowledge of the world is slight and for the most part extremely precarious. Serious estimates of economic conditions five or ten years into the future "amounts to little and sometimes to nothing," and in any case almost no one believes the estimate and hence it has little affect on moving the market (ibid, p. 150). Therefore in forming expectations it is "reasonable.. .to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue" (ibid, p. 148). Therefore, more or less known facts about the current environment enter "disproportionately" into long run expectations. The institutional element is changes in corporate ownership. In "former" times, before the advent of organized investment markets and when the owners were also the managers, investment depended on individuals with a "sanguine temperament and constructive impulses" (ibid, p. 150), that is, confident intuitive persons. The results of investment decisions were difficult to evaluate, that is, it was not known how the rate of return compared with the interest rate. "Cold calculation" was rare and investment took place because human nature contained the temptation of taking chances and derived

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satisfaction of creating things such as factories, and farms. When ownership is separated from control and with the existence of organized investment markets individual investment decisions take place with other people's money, investments are evaluated daily through stock prices. Expectations are, therefore, grounded in stock prices rather than "genuine expectations of the professional entrepreneur" (ibid, p. 151). 'Reality' about investments is that forecasts about the future are based "on what is, in truth, a convention. The essence of this convention ... lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely" (ibid, p. 152). For one thing, "all sorts of considerations enter into the market evaluation which are in no way relevant to the prospective yield" (ibid, p. 152). One of these "considerations" is the state of confidence, also known as "animal spirits." So, what are "animal spirits"? In his "Notes on Modern Philosophy" Keynes equates animal spirits with "unconscious mental action" (Carabelli, 1988, p. 298, fn. # 3). Animal spirits are thus a source or form of intuition. In the GT animal spirits are a central determinant of investment and an often used non-analytical mental process. He says that "... a large proportion of our positive activities depend upon instantaneous optimism rather than on mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive ... can only be taken as a result of animal spirits - of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities" (Keynes, 1936, p. 161). Animal spirits are not irrational, but express reasons of which we are not aware. Animal sprits are so important to business that "if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die" (ibid, p. 162). As important as calculations are for the success of business, "individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits ..." (ibid, p. 162). Animal spirits may be difficult to quantify, they may be difficult to model, they may leave Keynes' theory of investment subject to too much exogeneity (for some people's taste), but according to Keynes they complement analysis which is severely limited by uncertainty. The existence of animal spirits does not imply that "irrational psychology" is the controlling factor in business and economics. What Keynes does say is that human decisions affecting the future cannot depend upon mathematical expectations "since the basis for making such calculations does not exist" (ibid, p. 163). Our rational self chooses among

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alternatives as well as it can, but when push-comes-to-shove we fall back on "whim or sentiment or chance" (ibid, p. 163; italics added). Keynes did not consider animal spirits to be a synonym for irrationality. Robert Lucas' theory of rational expectations was designed to give a more precise role to animal spirits (Hodgson, 1985, p. 53). Keynes was suspect about precise mathematical models especially when they resulted in a loss of intuitive understanding. In his chapter in GT, "The Theory of Prices," Keynes says that "symbolic pseudo-mathematical models" assume strict independence among the independent variables, whereas in everyday affairs we can "keep 'at the back of our heads' "the complex interrelationships which no amount of algebra can achieve (Keynes, 1936, p. 297). The "back of our heads" is the subconscious, the home of intuition. Keynes believed that individuals are rational but seriously constrained by uncertainty. Although investment decisions are precarious because of uncertainty, individuals are forced to act and, therefore, they ask themselves how can they "behave in a manner which saves our faces as rational, economic men?" (Keynes, 1972, vol 14, p. 114). Individuals fall back to three assumptions. First, the present is a better guide to the future than is the past. Second, current opinion about the future is expressed through prices. Third, knowing that our judgment is "worthless," we rely on the judgment of others by conforming to the majority, on average. Therefore, the "psychology" of society leads to conforming to a "conventional judgment." Why use a convention? Why not intuit the real objective probability relation? Because the ability for logical insight, intuition, varies. However, an individual is also looking to make money in the market by anticipating how the majority under mass psychology will evaluate an investment three months or a year before they make that (collective) evaluation. Hence Keynes used another "as if' metaphor in discussing investment. Investment is as if a Game of Snap, or Old Maid, or Musical Chairs. The point of Old Maid is to pass the Old Maid card to someone else before the game stops. The point of Musical Chairs is to sit down on an empty chair when the music stops. The problem is that the number of available chairs is one less than the number of players, so when the music stops whoever didn't move quickly enough loses. The possibility of losing money means that people may prefer to hold their assets in money rather than other asset forms. Unlike Classical economics which assumed that all savings automatically became investment, making saving a good thing, in Keynes' model savings doesn't automatically become investment. One reason why saving doesn't automatically become investment is that people have a desire for liquidity, wealth in the form of money rather than capital assets. From Keynes' early career onward money making was not good per-se. Friendship, truth and beauty are good, the pursuit of money is not as good. Rejecting the pursuit of money as a good

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implied that savings per-se is not good in-and-of-itself. This belief would serve as one of Keynes' major objections to Classical economics, that is, his rejection of equating savings with investment. We thus have the paradox of savings whereby too much savings reduces income and hence savings. 5.3.1 Das Keynes Problem?

The Das Adam Smith Problem was the apparent inconsistency between Smith's Theory of Moral Sentiments, and Wealth of Nations. There is also a Das Keynes Problem: the apparent inconsistency between Keynes philosophy about intuition during his early years and later years. Carabelli (1988), and O'Donnell(1989) emphasize the continuity of Keynes' thinking, while Davis (1994) emphasizes the discontinuity. Without reviewing their arguments I will briefly argue that comparing the younger and older Keynes is similar to comparing red and green apples. In "My Early Beliefs" (MEB) Keynes and his intimate group of friends were interested in states of mind which consisted in "timeless, passionate states of contemplation and communion, largely unattached to 'before' and 'after"' (Keynes, 1972, vol 29, p. 436), and related to neither behavior, performance nor consequences. They considered 'being good' as not only different from 'doing good,' but considered the latter as possibly interfering with the former. The ideal of the younger Keynes's life was "passionate contemplation and communion" independent of all else (ibid p. 445). He also admits that the fundamental intuitions in Moore's Principia Ethica provided a "justification of experience wholly independent of outside events" was a source of comfort (ibid, p. 444). Christians were his 'enemy' in part because they represented "tradition, convention and hocus-pocus" (ibid, p. 446; underline added). Reading Moore's chapter "The Ideal" years later Keynes remarks that "It is remarkable how wholly oblivious he managed to be of the qualities of the life of action and also of the pattern of life as a whole" (ibid, pp. 442-43). The young Keynes believed that intuition is a unique "non-sensory, cognitive faculty" (Bunge, 1962, p. 20) giving direct knowledge of things and knowledge about how things are related with each other. Keynes believed that one could intuit a priori relationships. However, even in TP Keynes stated that individuals have different capacities for intuition so that what is selfevident or apriori for one person may only be probable to another (Bicchieri, 1988, p. 93; Keynes, 1952, pp 17-18). The process of gaining intuitions was unknown to Keynes; he said that "it is difficult to give an account" of intuition (Bunge, 1962, p. 21). Intuition was not subject to neither proof nor disproof, and the process un-analyzable.

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Before we judge whether the younger Keynes philosophy about intuition differed significantly from the older Keynes, consider that in his 1905 paper Miscellanea Ethica Keynes said that human organs contain "approximate uniformity" and hence we can make interpersonal comparisons and anticipate what others will think and feel under certain circumstances. Keynes' approximate uniformity connects him to Smith and his use of the term sympathy. Clearly Keynes Platonic flirtings changed by the time he wrote the GT ,in which states of mind for the average investor was more a social convention than a Platonic grasp of true reality. However, the social convention is an implication of Keynes "approximate uniformity" written about in 1905. Therefore, the social conventions expressed in GT has its roots in the younger Keynes. While the younger Keynes was sitting in his dorm room conjecturing about the nature of goodness and beauty, the older Keynes was discussing how the average investor made decisions in a world with a separation of ownership from control, and with an organized capital market. So comparing the younger and older Keynes is similar to comparing red apples with green apples. Any changes in Keynes' philosophy aside, it seems clear that the younger Keynes was more of an intuitionist, while the older Keynes used his own intuition to upset approximately 150 years of economic thinking.

Chapter 6 Frank Knight. Intuition, Risk and Uncertainty 6.1 Introduction Frederich Kershner, President of Milligan College and Professor of Frank Knight, said of Knight, "From the standpoint of quickness of perception, or of that rare capacity, which enables a person to 'see through things' almost at a glance, he is the best student I have had" (Howey, 1983, p. 165). That rare capacity is what we call intuition.

6.2 Knight's Methodology Frank Knight wrote at a time when economics gave more credence to qualitative and philosophical dimensions than it does today. Knight, says James Buchanan, was the "economist as philosopher, not the economist as scientist" (Buchanan, 1968, p. 426). At the same time, he was a founder of the Chicago School of Economics, and hence it should probably come as no surprise that he considered the problems of life as economic problems. In "The Limitations of Scientific Method in Economics," Knight says that "From a rational or scientific point of view, all practically real problems are problems in economics. The problem of life is to utilize resources 'economically,' to make them go as far as possible in the production of desired results. The general theory of economics is therefore simply the rationale of life" (Knight, 1999, p. 1). As such he considered economics to be based on the abstract assumption of rationality and focused on the determination of prices. In Risk, Uncertainty, and Profit he said, "It is not the province of economics to determine the value of life in 'hedonic units' or any other units, but to work out, on the basis of the general principles of conduct and the fundamental facts of the social situation, the laws which determine the prices of commodities and the direction of the social economic process" (Knight, 1965, p. 71). Thus, Knight's writings show that he 'preached' aspects of both the neoclassical canon and a canon that more fully includes philosophical and psychological elements. There are several examples of this duality in Knight's approach. First, Knight defines economics as a science of human behavior and founded in the psychology of human behavior. Yet, similar to Harvey Leibenstein, Knight maintained that rationality is one possible form of human judgment. Another form of human judgment is "metaphysical-linguistic fuzziness" which "enshrouds the human mind" (Buchanan, 1968, p. 427). Second, a scientific study of human behavior depends on human behavior being grounded in stable and conscious motives. Yet, he also recognized that human behavior is governed by impulse and is fickle. In an essay titled,

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"Economics," Knight says that "Applied economics must try to take account of the role in business life of error and motives (good or bad), such as prejudice, curiosity, and the various forms of play interest, which do not conform to the pattern of economic rationality. Competition itself, in the psychological meaning, is a non-economic interest" (Knight, 1956, p. 26). Thus, while other economists accepted scientific psychology or behaviorism as a model for scientific human behavior (Giocoli, 2002), Knight found behaviorism to have limited use in understanding human behavior and hence economics. Third, Knight contributed to economic theory and emphasized equal returns at the margin, and opportunity costs. Yet, similar to Marshall and Keynes, and (other) American Institutionalists, Knight was skeptical that economic theory could be applied widely. The applicability of economic theory would be enhanced if it incorporated other social sciences such as history, psychology, and statistics. These other social sciences are complementary and, "All are needed to supply data and interpretation, to put content and definiteness into the valid but highly abstract 'laws' of economic choice and of market phenomena. Without such supplementation economic laws have little value for prediction, since the essential factor of wants is not open to sense observation and any course of events that occurs can be fitted into the theoretical pattern" (Knight, 1956, p. 26). Fourth, he rejects the presumed first principle of science - knowledge is based on empiricism or observation. But he also rejects our ability to directly know any realities beyond our ability for observation. Fifth, his most famous book, Risk, Uncertainty, and ProJit includes a discussion about consciousness and intuition. Yet, he also states in the book that he is interested with "the ultimate nature of reality" or any other philosophical position. In other words, intuition as a tool for decision making is important, but the link between the two does not require any belief or study of any ultimate nature of reality. Knight thus separates intuition from metaphysics and 'spirituality.' Sixth, Knight gives a positive nod to the French philosopher Henri Bergson, whose writings on intuition made it fashionable to question the validity of logical processes. Yet, while Knight was not sure that the world is understandable to any great extent, to the extent that it is understandable it is through logical processes. In other words, logic, economic theory, and human rationality have limits. In his duality, Knight was "swimming" against the tide of the rising neoclassical canon. T.W. Hutchison's 1938 book, The Signijicance and Basic Postulates of Economic Theory, presented what is considered a significant statement of economics as a science (canon). One of Hutchison's claims is that all scientists have "definite, agreed, and relatively conclusive criteria for the testing of propositions, solutions, and theories" (Hutchison , 1938, p. 7), these being empiricism and logic. This onsmethod-fits-all is not only what

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distinguishes science from philosophy, it is also why the growth of scientific knowledge exceeds the growth of philosophical knowledge. Knight will have none of this. He responds that this idea "illustrates the superficiality and dogmatic oversimplification" of the author's position (Knight, 1956, p. 152). He adds that Hutchison speaks as if, "conveying instructions pronounced in the awe-inspired tone chiefly familiar in public prayer. This emotional pronouncement of value judgments condemning emotion and value judgments seems ... a symptom of a defective sense of humor" (ibid, p. 151). And Hutchison's discussion that science and philosophy are like day and night Knight says is a "contrast between glorified science and a caricature of philosophy" which limits both (ibid, p. 152).

6.3 Radical Empiricism and Pragmatism Knight's mentor, Herbert J. Davenport, was a leading figure in the "American Psychological School (APS)," also known as the "American Austrians." The APS sought to integrate the theories of Jevons, Wicksteed, and the Austrians, with those of Veblen. Like Davenport, Knight rejected the notion that there is a single principle or motive underlying human behavior. And, like Davenport he accepted the Austrian theory of alternative or opportunity cost. Finally, like Davenport, he placed the entrepreneur in a strategic position in business. From John Stuart Mill Knight accepted that economics needs both deduction and induction, "if indeed the two methods are theoretically separable" (Knight, 1965, p. 6). From Pareto he accepted the "scientific method...of successive approximations" (ibid, p. 8). By this method theories -- approximations of reality -- are adjusted as the facts require. The value of this method for science is that "It is wrong to believe that the exact properties of concrete facts can be discovered by studying our a priori ideas about these facts without modifying such concepts by comparing aposteriori the results with the facts. In other words, the origin of a theory is our subjective mental interpretation of reality. Being an interpretation it is also only an "imperfect image" or approximation. The method of successive approximations is thus the method of adjusting the subjective to proven fact. According to Pareto there are three types of intuitions, and two types of propositions. Proposition type X are those which are potentially verifiable; type Y propositions are not. Type I intuition is when an individual's intuition leads to stating proposition X, and that proposition X is verified (experimentally or experientially). Type 2 is when the intuition leads to proposition X which is not verified; type 2 intuition is a false intuition. Type 3 intuition leads to stating proposition type Y, a proposition which can neither be verified nor contradicted. Pareto's makes his tripartite distinction in order to point out that intuition is fallible. Speaking of the three types of intuitions Pareto says, "Some people deliberately confound the third and the first by

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conveniently forgetting the second. They say, 'by intuition man achieves a knowledge of the truth, whether it be experimental or not', and in this way they have attained the desired goal, which is to confuse propositions X with propositions Y" (ibid, p. 23). One way to distinguish proposition types X from Y is the expertise of the intuitor. Intuitions of experts in the field under investigations are considered (more) "worth while because it is based on experience" (ibid, p. 24). And the opposite is also true that "Intuitions regarding facts of experience can be contradicted by the facts themselves; hence the intuitions must adapt themselves to the facts. Non-experimental intuitions are contradicted only by other intuitions of the same type; for there to be adaptation, it is enough that certain men all have the same opinion" (ibid, p. 24). Thus, by the scientific method of successive approximations, Pareto is stating that intuitions are valuable but fallible. Intuition are valuable because, in Pareto's words, "Logic is useful for proof but almost never for making discoveries" (Pareto, 1971, p. 22). Intuitions start with mental impressions, and these internal impressions lead the individual to believe in their authenticity, and in the authenticity of any propositions derived from those impressions. At the same time that the individual believes in the propositions, they do so "without being able to say either how or why, and if he attempts to do so he deceives himself" (ibid, p. 22). 6.3.1 William James' Blooming and Buzzing An overlooked influence on Knight is that of the American psychologist and philosopher William James. A curious connection between James and Knight can be seen by comparing particular statements by both men, and one in particular. In James' book, Some Problems of Philosophy (James, 1948), first published in 1911, James talks about the world as a "big, blooming buzzing confusion" (ibid, p. 50). In "The Limitations of Scientific Method in Economics," written in 1924, Knight says that human "experience in its raw state" is a "big, buzzing, booming confusion" (Knight, 1999, p. 7). Upon further examination there were other similarities in areas of interest and philosophies between Knight, and James. Although James' work covers many topics in philosophy and psychology, two which stand out are radical empiricism and pragmatism, the research for both occurring mostly in the first ten years of the twentieth century. James' work influenced the "Chicago School of Philosophy," whose recognized leader was John Dewey. Knight, of course, was one of the founders of the Chicago School of Economics. In the preface to Studies in Logical Theory, Dewey, writing on behalf of various members of The Chicago School of Philosophy states, "For both inspiration and the forging of the tools with

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which the writers have worked there is a pre-eminent obligation on the part of all of us to William James" (Dewey, 1903, p. xi). "Radical Empiricism" (RE) was James's attempt to walk a line between Empiricism, and Rationalism. James says, "Ordinary empiricism ...has always shown a tendency to do away with the connections of things and to insist most on their disjunctions" (James, 1987, p. 1160). In other words, ordinary empiricism rejects conjunctive relations and emphasizes disjunctive relations. On the other hand, rationalism attempts to unite all the disparate parts with the aid of a non-observable transcendental entity such as the Absolute, or the One. The transcendental reality would be postulated to be the underlying reality or substance of all things. James rejected Empiricism and Rationalism, and attempted a reformulation of both in the form of RE. In "A World of Pure Experience" James distinguishes radical empiricism from the other two and defines RE in these words: "Rationalism tends to emphasize universals and to make wholes prior to parts in the order of logic as well as in that of being. Empiricism, on the other hand, lays an explanatory stress upon the part, the element of, the individual, and treats the whole as a collection and the universal as an abstraction. My description of thing, accordingly, starts with the parts and makes the whole a being of the second order.. .To be radical, an empiricism must neither admit into its constructions any element that is not directly experienced, nor exclude from them any element that is directly experienced.. .Radical empiricism...does Jitlljustice to conjunctive relations, without, however, treating them as rationalism always tends to treat them, as being true in some supernal way, as if the unity of things and their variety belonged to different orders of truth and vitality altogether " (ibid, pp. 22-23). At the same time as RE relies on experience, it defines experience broadly to include experiences on the "fringe" of consciousness, those which may be characterized as "a faint brain-process" which influence thoughts however, "dimly perceived" (Principles of Psychology, vol 1, p.258). RE includes "gut feelings" or intuitions as part of experience. In "The Tigers of India7' (James, 1987, pp. 853-856) James distinguishes immediate or intuitive knowing from conceptual, symbolic, or representative knowing. James, as is true of Knight, includes intuitions among experiences without making intuition spiritual or metaphysical. He does the same with the concept of consciousness. James says that consciousness is not an entity separate from the material world. The word consciousness, however, stands for a function, and that function is knowing (James, 1987). Intuition is not simply a way of knowing different from analytical thinking. Intuition is fundamental to the human experience. In his book, Some Problems of Philosophy (James, 1948), first published in 1911, James talks about the world as a "big, blooming buzzing confusion" (ibid, p. 50). The big, blooming buzzing confusion is the continuous and "immediate flow of

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conscious life" experienced by the senses (ibid, p. 48, fn 1). James refers to this flow as "percepts," listing intuition as a synonym. The confusion caused by this immediate flow of sensations hampers our understanding of the world. The response is that our human attention "carves out objects, which conception then names and identifies forever" (ibid, p. 50). Therefore, we create conceptual order by replacing buzzing with the output of the intellect (ibid, p. 194). Hence, "The intellectual life of man consists almost wholly in his substitution of a conceptual order for the perceptual order in which his experience originally comes" (ibid, p. 5 1). The continuity of perceptions are replaced with discrete concepts, and chaos is made orderly. Concepts are discrete because each concept has a unique meaning, and are the product of our intellect. Concepts are applied to the "mathematical world of pure forms," to logic, ethics, and action or the "world of material tasks to be done" (ibid, p. 52). As opposed to the discrete meaning of concepts, the "perceptual flux as such, on the contrary, means nothing, and is but what it immediately is" (James, 1987, p. 1008). Are intuitions and the output of the intellect substitutes or complementary with each other? James says that they are - both. They are substitutes in that conception replaces perception. But they are complements because "concepts flow out of percepts and into them again, they are so interlaced" (James, 1948, p. 47). Furthermore, "percepts and concepts interpenetrate and melt together, impregnate and fertilize each other. Neither, taken alone, knows reality in its completeness. We need them both, as we need both our legs to walk with" (ibid, p. 53). What is the practical meaning of the buzzing, and flowing of precepts and concepts? According to James, pragmatism or the pragmatic method tries to answer metaphysical questions by the "practical consequences" of each idea (James, 1978, p. 28). If the "concrete" consequences of two ideas are the same then the two ideas mean the same thing. Pragmatism has no use for the "inveterate beliefs dear to professional philosophers" (ibid, p. 31), d and abstractions, verbal solutions, poor a prori reasoning, f ~ e principles, closed systems. It prefers concreteness, facts, and action. It has the potential of aligning science and metaphysics with each other, and making theory more responsive. It recognizes that laws of nature are simply approximations of nature. And it holds that ideas are true, be it in science or metaphysics, "just in so far as they help us get into satisfactory relation with other parts of our experience" (ibid, p. 34). Finally, the way to "truth" is by both logic and experience. Explaining, and maximizing the value of concepts such as beauty, truth, utility is by combining concepts and percepts, or the intellect and intuition (James, 1948, pp. 55-58). Pragmatism thus offers the "instrumental" or utility view of truth, taught successfully at Chicago (James, 1978, p. 34).

Frank Knight 6.3.2 Knight's Radical Empiricism, and Pragmatism. Knight believed in the scientific method without 'bowing down' in front of the 'alter' of science. In Risk, Uncertainty and ProJit (RUP), Knight described himself as a radical empiricist and acknowledged his pragmatic philosophy. Because RUP is about risk, profit, and uncertainty. it is not surprising that Knight says, "If we are to understand the workings of the economic system we must examine the meaning and significance of uncertainty; and to this end some inquiry into the nature and function of knowledge itself is necessary" (Knight, 1965, p. 199). He recognizes that the topics of risk and uncertainty have been included in relation to the topics of insurance, speculation, and entrepreneurship. On the other hand, the English tradition of economics had been too static and long run oriented to adequately include the topic of uncertainty. Knowledge, according to Knight, begins with consciousness, or awareness. Consciousness is "forward-looking," it anticipates the future, it sees things coming before they materialize. The ability to see ahead of materialization is the nervous systems role in evolution and survival. To survive in a world of uncertainty requires that we infer the future from images of the future. Our consciousness is filled with inferences, not facts or data taken directly from the external world. Thus, "We perceive the world before we react to it, and we react not to what we perceive, but always to what we infer" (ibid, p. 201). Tor Norretranders, in The User Illusion. Cutting Consciousness Down to Size (Norretranders, 1998) offers a good scientific explanation of this phenomena. Yet, true to his radical empiricism -- "neither admit into its constructions any element that is not directly experienced, nor exclude from them any element that is directly experienced" -- Knight says that while the relationship between consciousness, knowledge, and behavior is relevant for the study of economics, the ultimate nature of reality is not part of his agenda. Knight says, "In this superficial sketch of the theory of knowledge it has not seemed important to give extended reference to philosophical literature. It will be evident that the doctrine expounded is a functional or pragmatic view, with some reservations.. .it is the function of consciousness and knowledge in relation to conduct that we are interested in, for present purposes, and the text must not be taken as expressing any view whatever as to the ultimate nature of reality or any other philosophical position. The writer is ...a radical empiricist in logic, which is to say, as far as theoretical reasoning is concerned, an agnostic on all questions beyond the fairly immediate facts of experience" (Knight, 1965, pp. 200-20 1, fn). Because Knight recognized that the scientific method rejects certain experiences he rejected the belief that the scientific method can be widely applied to economics. The difficulty with the scientific method is that human

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perception and memory -- the only scientific sources of knowledge and truth limits itself to (perceiving and remembering) disjunctive relations. According to Knight, a disjunctiveonly view of the world is not sufficient. The insufficiency includes the fact that it excludes intuition. Knight rejects the exclusion of intuition; in RUP Knight argues that intuition plays an important role in human behavior under the conditions of risk and uncertainty. In "The Limitations of Scientific Method in Economics," Knight says that "A scientific world view has no possible place for the intuitive, or any other foresight of new truth, in advance of perception. Its fundamental assumption is that truth is always the same and is known through perception and memory. But that truth is always the same is equivalent to saying that the world is always the same" (Knight, 1999, p. 6). But if the world is always the same then there is no issue of uncertainty. It should be intuitively obvious to the casual observer that Knight would not agree with this. In like manner Knight rejects both the exclusive use of both mathematics and pure theory, and the non-inclusion of mathematics and pure theory is favor of descriptive economics. Knight offers a "middle way," insisting that Pareto's mathematical method is "only one small division of the great domain of economic science" (Knight, 1965, p. 6). At the same time it is a very important part of economics and one which should be further developed. Deductive logic is important must should be combined with inductions, and checked against observations. "Even more important in the present connection is the role of common sense or intuition in the study of human phenomena. Observation and intuition are, indeed, hardly distinguishable operations in much of the field of human behavior.. . Many of the fundamental laws of economics are therefore properly 'intuitive' to begin with, though of course always subject to correction by induction in the ordinary sense of observation and statistical treatment of data" (ibid, pp. 7-8, fn).

6.3.3 Knight's Buzzing and Booming In "The Limitations of Scientific Method in Economics," written in 1924, Knight says that human "experience in its raw state" is a "big, buzzing, booming confusion" (Knight, 1999, p. 7). It is the buzzing and booming confusing which creates uncertainty, leads to the use of consciousness to make sense of the buzzing and booming, and limits the effectiveness of science in understanding human behavior and ultimately economics. The booming and buzzing of the world also creates infinite novelty, so that no two things or situations, or people are exactly the same. Not only are individuals physically different from each other, we are also different in terms of our feelings, emotions, and motivations. The buzzing and booming creates such a wide variety of experiences and circumstances that it becomes impossible to know or predict the behavior of

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things. The buzzing and booming is accompanied by uncertainty, overwhelms human memory capacity, making thinking and inference making essential. In fact, Knight says that it "would be hard to over-emphasize the importance of the fact that the practical usefulness of scientific principles" (Knight, 1999, p. 18) depends upon inferring facts about the unseen from what we observe. Through inference making, objects known to have certain characteristics are inferred to have others, even though observation of those characteristics is absent. "Most of our ordinary recognition of objects is really on this basis, we perceive relatively little, and infer most of what we think we perceive. Reasoning power is the capacity to single out essential characteristics, marks from which relatively much can be inferred, and associate with them the qualities really connected" (Knight, p. 9). Reasoning, including scientific research, thus involves pattern recognition derived from limited observations. As such it is similar to Herbert Simon's description of the use of intuition of chess grandmasters. Unlike objects of the natural world, we have consciousness, free will, and do not remain the same through time. We have memory and we adjust to experience. Unlike atoms, no two people are exactly the same, no two people react exactly the same to the same experience, and no two people experience the same "objective" environment exactly the same. Knight thus rejected scientific psychology - behaviorism for two reasons. First, because it adopted the procedures for studying nature in order to study humans. Second, it ignores consciousness by placing it as part of metaphysics, and accepts only observed physical facts of behavior. Behaviorists held that these beliefs are consistent with the evolution of civilization away from the animism of "primitive" man towards the advance of a scientific view of the world, and a substitution of spiritual forces with observation and "facts." Knight also had concerns with how the scientific model reacts to the novel and uncertainty inherent in the world. He says that in order to overcome the infinite novelty of the world, and be able to obtain reliable knowledge and the ability to predict the future, humans create a "dogma." In this dogma, the world is "unchanging"; the world is composed of categories or kinds of things which, under the same circumstances, behave the same way. In effect, the dogma ignores precepts in favor of concepts. In this dogma anything which is not true for all people at all times is considered subjective and hence unreal. And, any source of knowledge which does not yield constant results, including intuition, is also discounted (Knight, 1999, p. 116). In short, we have an "elementary, purely intellectual craving for a world which is fured, and hence can be known, once and for all" (ibid, p. 123).

Two Minds 6.2.4 Intuition and Scientific Analysis Knight states that intuition can be as effective as scientific analysis, though the process is not scientific. He uses an example of weather forecasting by a scientifically trained meteorologist, and a " f m e r or old salt." The meteorologist determines and measures relationships among variables, and calculates probabilities. The farmer does neither of these, but uses a process which is "largely unconscious, whether truly intuitive or unconsciously rational" (ibid, p. 12).Knight's dichotomy between truly intuitive and unconsciously rational is an interesting one in that scientists tend to assume that intuition is a rational process which takes place in the unconscious. He goes on to say that "The scientific dogmatist will insist that there can be no real intuition, but we are not so sure, especially in the field of human interpretation and communication" (ibid, p. 12). Interpretation is important when judging human nature and predicting human behavior. Hence, according to Knight, interpretation is more art intuition -- than science. The way to improve the 'technique' of judging and predicting "is not to attempt to analyze things into their elements, reduce them to measure, and determine functional relations, but to educate and train our intuitive powers" (ibid, p. 19). And, when it comes to social problems "it seems very doubtful whether.. .the application of logical methods and canons will as good results as the informal, intuitive process of judgment which, when refined and developed becomes art" (ibid, p. 26). Intuition clearly plays a significant role in Knight's view of reasoning. Pattern recognition and intuition are not the only sources of reasoning or knowledge about the world. Reasoning also comes from communication. In fact, according to Knight "an over-whelmingly preponderant portion comes through other persons by a process of communication" (ibid, p. 10). Knowledge must be dependable to be usable, and to be dependable means it must be the same for all minds, and communicated between and among minds. How we communicate our feelings or engage in non-verbal communication is a mystery, but undoubtedly exists. And, our entire intellectual life depends on communication among individuals. Knowledge of the external world is thus intimately connected to, and in fact is "unthinkable" without the knowledge of others' minds and hence selfknowledge: knowledge is thus gained intuitively (Knight, 1956, p. 162). Knowledge of the external world and, says knight, most knowledge, requires a consensus of what is true, and this depends upon value judgments about the reliability of others. Sounding similar to Smith, Knight says that knowledge of the external world assumes that we can have "intercommunication of mental content" (ibid, p. 156). Knowledge about human conduct is similarly Smithian in that it is mainly gained through inter-personal communication and social interaction, or what Knight calls "sympathetic introspection" (ibid, p. 162) or

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intuition. Similarly, the basic postulates of economics such as rational behavior and whether any action is economical are also known intuitively.

6.4 Risk, Uncertainty, Profit, and Intuition In "Faith and the Right to Believe," an Appendix to his 1911 book, Some Problems of Philosophy (James, 1948), James says that the terms probability and possibility refer to predicting cases about which we are at least partially ignorant. Complete ignorance creates a "bare" probability or possibility, while incomplete ignorance creates a "grounded" probability or possibility (ibid, p. 226). Where there are many conditions affecting probability such that confusion is high, we categorize things into similar kinds, and determine the probability of some event according to its relative frequency among those kinds of things. Probability is then expressed as a fraction. If one death in 10,000 is from suicide, then one person's death by suicide is 1110,000. If one house in 5,000 burns down, then the probability of any single house burning down is 115,000. Whereas an insurance company relies on stable frequencies in setting premiums, an individual can't hedge on only one of his 5,000 homes burning if he only has one. We may have more than one house, but we only have one life. According to James, we can't take that one life seriously one day and as a farce the next. To do so is to help defeat your own life values. In Risk Uncertainty, and Profit, Knight uses an example of burning buildings to distinguish a priori and empirical methods of determining probabilities. The apriori method is used in games of chance. The probability of a die landing with a one face up is 116, regardless of how many times you throw the die. Regardless of what number comes up on the previous 10, or 100 throws, it is an "intuitive certainty" (Knight, 1965, p. 217) that the chance of getting a 1 is 116. An a priori probability is similar to a proposition of mathematics; they are ultimately inferences based on experience. On the other hand, the probability of a particular building burning on any particular day is not intuitive. Buildings are different from each other in many regards, so that the probability of this occurring is determined by a statistical investigation. The result of the investigation is an "empirical generalization" (ibid, p. 217). The difference between an a priori and statistical probability is the ability to classify instances into (relatively) homogenous groups. Since all die are the same, all throws of the die are identical. On the other hand, all buildings are not equal. At the same time, probability judgments of either kind based on past data can be assumed to hold in the future only because of an a priori judgment. Finally, a priori probabilities are never encountered in business while statistical probabilities are common. Whether the probability is of the a priori or statistical varieties, in both cases the distribution of outcomes is known, and hence there is measurable randomness Knight gives the name risk to refer to these cases. He uses the

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name uncertainty to refer to all cases in which the distribution of outcomes cannot be known, and hence there is unknowable randomness or ignorance. Under conditions of risk, instances can be grouped, whereas under conditions of (pure) uncertainty, each situation is unique and a judgment must be made. Knight claims that what was largely ignored in the literature of economic problems is the distinction between risk, and uncertainty. 6.4.1 Uncertainty and Perfect Competition

In a study of human behavior or society factors aren't isolated naturally in nature and neither can they in a laboratory. Hence, an exacting science must be abstract. Perfect competition or an "imaginary society" (ibid, p. 76) is one such "heroic abstraction." First, this imaginary society contains rational people. Rational people have "practical omniscience" (ibid, p. 198), and hence there is a lack of ignorance. Rational people know what they want, the motives which they respond to are conscious, stable, and consistent. Their responses are deliberate, nothing is "capricious or experimental" (ibid, p. 77), and they know the consequences of their actions. Second, there is perfect mobility and no costs of adjustment. Third, there is costless intercommunication among people. Fourth, people make decisions independent of all others. Fifth, all activity is free and voluntary; there is no preying of people upon each other. These are the necessary conditions of perfect competition. It is thus "self-evident" that under these perfectly competitive conditions there is not any chance for "profits" (ibid, p. 86). A world in which there is "general fore-knowledge of progressive changes" (ibid, p. 36), or knowledge of the "law of change7' (ibid, p. 37), is a world without either profits or losses. In "real" life, perfect inter-communication and hence perfect knowledge does not exist. In real life there is uncertainty, inertia, indifference, habit, and hence inflexible prices. And with these comes the possibility of profits. Knight reviews literature associating profits with many factors including a reward for the risk of loss of capital, bargaining power stemming mainly from "superior knowledge and foresight" (ibid, p. 28) about the direction of change an ever changing environment and, "frictions" created by uncertainty hindering the competitive process, and with dynamic changes lowering costs. However, it is not change as such which creates profits, but ignorance of change, unpredictable change, or error which gives rise to profits. According to Knight, uncertainty is not the only problem in preventing the real economy fiom behaving like a perfectly competitive one in long run equilibrium. Other problems include inertia, habit, and differences in products. While the effects of change can be predicted using the "laws" (ibid, p. 151) of supply and demand, it is prediction of change itself which is the real issue. Equilibrium itself becomes uncertain because "the interrelations of

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the various factors.. .are so complicated, and the functions themselves are so inaccurately known and are affected by so many unknown variables, that definite predictions extending any considerable distance into the future seem to be quite out of the question" (ibid, p. 152). In other words, novelty is a characteristic of the natural and the economic world. Focusing on some factors leads at best to "partial truths" (ibid, p. 153). And consider that there are many non-economic factors each of which may have a very small affect on things but which in total do affect the economy. Consider also imperfect knowledge, and imperfect mobility. Viewing equilibrium as an approximation of reality at any given time is thus a "serious error" (ibid, p. 155). Of course, eliminate all of this and markets would quickly achieve their equilibrium! While the "actual course" and the time required for equilibrium to be attained are "probably matters of pure and unfruitful speculation" (ibid, p. 168), equilibrium theory still has logic and value (ibid, p. 168).

6.4.2 Risk, Uncertainty, Profit, and Intuition Knight included a role for intuition in his RUP. In a chapter titled "The Meaning of Risk and Uncertainty" Knight says that "The mental operations by which ordinary and practical decisions are made are very obscure, and it is a matter for surprise that neither logicians nor psychologists have shown much interest in them. Perhaps.. .it is because there is really very little to say about the subject" (ibid, p. 21 1). The obscurity of the process, the lack of "technique," stems from the fact that much of it takes place in the subconscious and requiring memory. "There seems to be very little meaning in what has gone on in our minds, and certainly little kinship with the formal processes of logic which the scientist uses in an investigation. We contrast the two processes by recognizing that the former is not reasoned knowledge, but 'judgment', 'common sense,' or 'intuition"' (ibid, p. 21 1). Part 3 of Risk, Uncertainty, and Profit examines the assumption of "practical omniscience" (ibid, p. 197). Knight says that this requires a "brief excursion into the field of the theory of knowledge" (ibid, p. 197). The effect, he says, will be to "illuminate that large group of economic phenomena which are connected with the imperfection of knowledge" (ibid, p. 197). He should have added that it will also illuminate different thinking styles. We infer the effects of our (in)action on the future. However, there are difficulties with this inferential process. First, we perceive only pieces of the present, and we perceive those pieces not as they are but only as we experience them. Second, our inferences of the future are imperfect. Third, our knowledge of the consequences of our actions is imperfect. Fourth, our actions to change the future are not identical to the actions we want to take. These errors occur because we are not machines: "generally speaking" machines do not make mistakes (ibid, p 202). The process of human inference is, in short, a "non-

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mechanical'' process, and a "fundamental mystery" (ibid, p. 202). To be conscious is largely to infer, and the process lacks "automatic mechanical accuracyy'and is therefore subject to error (ibid, p. 203). The role of inference also implies that reasoning is based on analogy rather than reality. And, the fact remains that the world is composed of so many different things that individual things "cannot be given a definite meaningy' (ibid, p. 209). In a rebuff of behaviorism, Knight says that we are forced to draw inferences about intelligent behavior not from overt physical evidence but from "the fact of consciousness in 'objects' outside ourselves" (ibid, p. 208). It is the power of consciousness to be aware of the "configuration of the lines about the mouth, the gleam of 'twinkle' of an eye or a shrill or 'soft7 vocal sound" (ibid, p. 208). How do we make such inferences? Following Adam Smith, he says that it is through a "mysterious capacity of interpretation7' for " 'sympathetic introspection' into what is going on in the 'mind' of the 'object' contemplated" (ibid, p. 208). To know the world we must first know ourself (ibid, p. 208). Knight's theory of knowledge is not a theory of "exact knowledge" (ibid, p. 209) offered by behaviorism/science/logic. The fact remains that most of our behavior is not supported by knowledge of the things we are dealing with. He says that "It probably occasions surprise to most persons the first time they consider seriously what a small portion of our conduct makes any pretense to a foundation in accurate and exhaustive knowledge of the things we are dealing with" (ibid, p. 210). "The ordinary decisions of life are made on the basis of 'estimates' of a crude and superftcial character" (ibid, p. 210). And, "The mental operations by which ordinary and practical decisions are made are very obscure" (1 1, p. 21 1). The reason that logicians and psychologists have paid so little attention to them is perhaps because "there is really very little to say about the subject" (ibid, p. 21 1). The obscurity of the process stems from the fact that much of it takes place in the subconscious and requiring memory. However, the subconscious element does not imply irrationality. Knight offers an explanation which many scientists and others can relate to. We desire to know something, and "the desired idea comes to mind, often when we are thinking about something else" (ibid, p. 211). About what happens in the subconscious, he says that "there is very little that we can tell about the operation, very little 'technique"' (1 1, p. 2 11). Our expectations are thus formed by a kind of "mental ramblingyy (ibid, p. 21 l), and all of a sudden, or as Knight says, "the first thing we know we find that we have made by our minds.. ." (ibid, p. 2 11). How we make up our mind, what goes on in our mind is virtually unrelated to logical processes. This mental rambling is called judgment, common sense, and intuition. Knight obviously considers intuition to be based on memory, association, and experience, a type of "unconscious induction (ibid, p. 229), and made more valuable when combined with analysis. In these ways he is similar to other economists, notably J.S. Mill (Frantz, 2001a), and Herbert Simon

Frank Knight (Frantz, 2001b). So did James. In Some Problems of Philosophy he says that, concepts (the product of the intellect) are derived from percepts (intuition, feelings) and combine with them again, making them complements (James, 1948, p. 47). So ideas flow from intuition and then back into intuition. The flow back part I interpret to mean that what we consider to be intuitive is based at least in part on experience; hence what is intuitive becomes common sense. Intuitions are subject to error, but at the same time the ability to make correct judgments is the prime determinant of an individual's value and success of business. (Intuition transform seemingly unique instances into one of a group of instances?) "The ultimate logic, or psychology, of these deliberations is obscure, a part of the scientifically unfathomable mystery of life and mind. We must simply fall back upon a 'capacity' in the intelligent animal to form more or less correct judgments about things, an intuitive sense of values. We are so built that what seems to us reasonable is likely to be confirmed by experience, or we could not live in the world at all" (Knight, 1965, p. 227). How do we react to uncertainty? We prefer uncertainty, at least a certain amount of it. Even though uncertainty reduces our behavior from being perfectly rational, it is also one thing which makes life interesting. Uncertainty reduces the ability to achieve certain ends, which actually makes us strive after achieving them. So while we try to reduce uncertainty we would not want to eliminate it completely. We also react to uncertainty with certain biases. First, we have an "inveterate belief" in our ability to be lucky; we can overcome uncertainty with luck. Second, our superstitious side leads us to see "signs" which can neutralize uncertainty (ibid, p. 236). Third, we have an S-shaped value function -- one steeper in loses than in gains - which reduces our ability for logic. Knight says that we "refuse to incur a small chance of losing a larger amount for a virtual certainty of winning a smaller, even though the actuarial value of the chance is in their favor" (ibid, p. 236). For example, a person would refuse to take a bet of losing $100 with a 10% chance, or winning $20 with an 80% chance. This is now known as a Kahneman-Tversky Value Function. It is created when decision makers consider gains and loses separately, and make decisions by adding the value of gains and the value of loses together (Tversky and Kahneman, 1981). We react to uncertainty by attempting to find regularities or patterns among cases. Knight says that "...it is hard to imagine an intelligent individual considering any single case as absolutely isolated" (Knight, 1965, p. 234). Second, the use of insurance, or what Knight calls consolidation. An aspect of consolidation is to increase the size of the organization, giving greater ability to offset some bad decisions with good ones. Third, undertaking activity considered relatively low in uncertainty. Shorter production processes and manufacturing (vis-a-vis agriculture) involve less

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uncertainty. Fourth, (attempting to) control the future through greater knowledge. Greater knowledge, in turn, "increases the value of the intuitive 'judgments' on the basis of which his decisions are finally made after all..." (ibid, p. 261). Fifth, increasing one's ability for prediction, a factor he relates to technology. These last two are particularly interesting because they show Knight valuing both intuition and analytical thinking. Sixth, specialization among the people managing uncertainty. This is necessary because individuals differ in their "capacity by perception and inference to form correct judgments as to the future course of events in the environment.. .Of special importance is the variation in the power of reading human nature, of forecasting the conduct of other men, as contrasted with scientific judgments in regard to natural phenomena" (ibid, pp. 241-42). Thus, a need for entrepreneurs, and the existence of their income called profits. A world of perfect certainty is a world of routine, a world without a need for men to be responsible for anything but performing their own routine chores, a world in which organizations are in equilibrium (there being no incentive to change), a world in which doing dominates the need to decide what to do. With uncertainty, all of this changes. Especially important here is that a specialized function arises of men being responsible for other men, for y&t is to be done, and for trying to control the future. In other words, uncertainty gives rise to enterprise and to business men or entrepreneurs, and to a residual income share called profits.

6.5 Economics Chicago Style We live in a booming buzzing confusing world of infinite novelty which creates ignorance, limits rational behavior, causes us to guess, and to make decisions through inference and intuition. The decisions we make include predictions about future human behavior. If we were mechanistic this would be relatively simple. But, according to Knight we are not mechanistic and hence our behavior is more difficult to predict. In fact, according to Knight, our behavior is rarely consistent with standard rational choice models. We not only act impulsively, we are also subject to superstitions, and to confuse coincidence or "signs" with laws of nature. We also consider that our hunches and "something tells me" which have no basis in fact to be based in fact and to be a valid reason for action. We have feelings and emotions, and react to the same stimuli in various ways. We are motivated by love and hate, and capriciousness, and subject to persuasion. Not only is it unlikely that human behavior is (always) rational, but there is a "fundamental 'irrationality' of a perfectly 'rational' attitude to life. One of our most significant 'wants' is freedom from the bother of calculating things or making close estimates" (ibid, p. 62, fn 1). Knight says that "we can hardly suppose" that people deliberate much among alternatives (ibid, pp. 66-7).

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But then he advances an idea more associated with the Chicago tradition of Becker and Stigler: "It is evident that the rational thing to do is to be irrational, where deliberation and estimation cost more than they are worth." In other words, irrationality can be both rational and irrational (ibid, p. 67, fn 1). A second problem arising from treating human behavior in a scientific way is that we are "zoon politikon," that is, we help our friends and obstruct the plans of others (ibid, p. 182). "The relative importance of other-regarding motives and desires, directed not to material things, but to forms of social relationships, is sure to be underestimated by any one treating economic phenomena in a 'scientific' way" (ibid, p. 182). A third problem is that human behavior is not oriented toward anything that is "really wanted" (ibid, p. 53). We want to "know thyself' more than know how to get what we want. What we do is more or less randomly choose a goal for ourselves and then treat it like a game which we want to win. Every clay decisions are unscientific, lodged in the subconscious, obscure, and neither easily described nor studied. Because the process of making everyday decisions is mysterious, the rationality assumption and the exclusion of psychology is, therefore, justified as perhaps a second best solution. And, although neoclassical theory does not have all the answers, in the long. run and on average, neoclassical theory is good enough. Knight, one of the founders of the Chicago School, says that, "if for no other reason than the impossibility of intelligently dealing with conduct on any other hypothesis, we seem justified in limiting our discussion to rational grounds of action" (ibid, p. 236. Therefore, we can assume that people act rationally, that if, equating costs and benefits at the margin. Even if a single individual is (rational to the point of) irrationality, Knight makes it clear that the law of large numbers (ibid, p. 184, fn l), and for the "scientific purpose of simplification" (ibid, p. 5 3 , we can assume rationality for the population as a whole in the long run. Thus, "The market behaves as ifmen were wont to calculate with the utmost precision in making their choices. We live largely, of necessity, by rule and blindly; but the results approximate rationality fairly well on an average" (ibid, p. 67, fn 1). Intuition is part of the process.

Chapter 7 Swimming Against the Stream. Herbert Simon, Harvey Leibenstein, George Shackle, Friedrich von Hayek 7.1 Introduction This chapter focuses on four economists. It was initially designed to focus on Simon and Leibenstein. As the book progressed I discovered that Shackle and Hayek were relevant to the main thesis of the book. One of the things which bind these four economists is that each were swimming against the neo-classical stream. And, of course, they each have "two minds."

7.2 Herbert Simon. "Administration man recognizes that the world he perceives is a drastically simplified model of the buzzing, blooming confusion that constitutes the real world" (Herbert Simon, 1966, p. xxv). Simon received a Ph.D. in Political Science from the University of Chicago, the same University where Frank Knight taught and William James had a large influence. This may explain Simon's use of a phrase which uses the words buzzing and blooming, the reverse order used by the psychologistphilosopher James. After Chicago, Simon was instrumental in the development of Artificial Intelligence, developed the Graduate School of Industrial Administration at Carnegie Tech, and was a Professor of Computer Science and Psychology at Carnegie Mellon. In 1978 he won the Nobel Prize in Economics, "for his pioneering research into the decision-making process within economic organizations." Some economists were outraged by his winning the Nobel Prize. Yet his research (agenda) was prescient, because among other things it was 'first generation' behavioral economics (Camera and Lowenstein, 2004). Simon's work was motivated by the belief that neither the human mind, human thinking and decision making, nor human creativity need be mysterious. His life work was devoted to proving this point. His motto was "Wonderful, but not incomprehensible" (Simon, 1969, p. 4). Where he carried out his motto was at the intersection of economics, psychology, cognitive science, and organization theory. A major part of this intersection was creating computer programs which allow machines to "think" and make choices. It was after he helped create "thinking" machines that Simon came to understand human intuition as subconscious pattern recognition. In doing so he showed that intuition need not be associated with magic and mysticism. He

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also showed that "intuition is not a process that operates independently of analysis; rather the two processes are essential complementary components of effective decision-making systems" (Simon and Gilmartin, 1973, p. 33). 7.2.1 Intuition. The "Problem" Illustrated

Simon's philosophy of intuition may be said to begin with the publication of Chester Barnard's The Functions of the Executive (Barnard, 1942), specifically an Appendix titled "Mind in Everyday Affairs" in which Barnard discusses intuition. Herbert Simon, in his lecture given in Stockholm upon receiving the Nobel Prize in Economics, referred to Barnard as an "intellectually curious business executive who distilled from his experience as president of New Jersey Bell Telephone Company...a profound book on decision making ..." (Simon, 1965, p. 25). Yet, when it came to Barnard's philosophy of intuition, Simon says that Barnard, "presents an interesting, but perhaps too optimistic view of the 'intuitive' elements in administrative decisions.. ." (ibid, p. 60). What makes Barnard's presentation too optimistic for Simon? Barnard's philosophy about intuition was stated matter-of-factly. First, intuition may seem abstract because it arises from the subconscious, but it's not abstract. Intuition & a non-logical process, defined by Barnard as a process which takes place in the subconscious or is so rapid as to seem subconscious, and hence also seems to be instantaneous and devoid of reasoning. Examples of intuition cited by Barnard include studying a complex balance sheet for only a few minutes or seconds before being able to derive a coherent picture of the company. Second, intuition is as much an expression of intelligence as is logic. Third, intuition is useful and so people should use it. Fourth, many people use intuition at work but are in the 'intuitive closet.' The reason is that many people feel the need to rationalize their beliefs and have them appear plausible, and hence do not want to admit using something that is unexplainable. At the same time, many people insist on using logic but are not skilled at applying logic in actual decisions. Fifth, intuition is most appropriate when working with short time horizons and data which is either of poor quality andlor very limited. This covers according to Barnard the majority of situations used in every day affairs in both business and government. In most situations, therefore, 'women's intuition' is the only mental process available. Understanding organizations also calls for intuition. He says, "Our logical methods and our endless analysis of things has often blinded us to an appreciation of structure and organization.. . You cannot get organization by adding up the parts ...To understand the society you live in, you must feel organization -- which is exactly what you do with your nonlogical minds. .." (Barnard, 1942, p. 3 17).

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Simon's approach was very different. As a scientist he needed to understand the phenomena we call intuition. In the early part of his career there wasn't a scientific - rational, logical -- theory of intuition, and so Simon considered intuition to be a mystery. In time and with advances in cognitive science and A1 as a framework, Simon concluded that intuition is subconscious pattern recognition. Simon did not consider intuition to be irrational, he considered it to be non-rational, meaning it is not a conscious analytical method of decision making (Simon, 1987). Simon had his own intuitive experiences. His preliminary exam in statistics for the University of Chicago in 1940) required that he produce a derivation of the chi-square statistic: he provided two derivations. He says, "While taking my shower on the morning of that exam, it came to me with blinding and unaccountable certainty that there would be a question on chi-square, and I boned up on it before setting out for the exam room. On no other occasion have I had such loving attention from my guardian angel" (Simon, 1996, p. 84). As a second example, Simon had been contemplating programming computers to simulate chess playing since the early 1950's. In 1955 during a walk on the campus of Columbia University he says, "Suddenly, I had a clear conviction that we could program a machine to solve such problems (p. 203). Third, speaking about government employees specializing in security he said, "Intuitively, they know that intellectuals seek to be loyal to abstractions like 'truth,' 'virtue,' or 'freedom,' rather than to a national state or its flag" (Simon, 1989%p. 133).

7.2.2 Rationality For Simon, problem solving was a "search through a vast maze of possibilities, a maze that describes the environment" (Simon, 1982h, p. 66). Rationality is bounded BR or limited by the vast maze of possibilities which is our environment. The maze makes the procedures we use in decision making, one of which is subconscious pattern recognition, more important than traditionally given in economics. And it means that the decisions we make are more satisficing than maximizing. Thus, Simon challenged the economic orthodoxy on the definition of rationality by proposing the concepts of bounded and procedural rationality, and satisficing. The orthodox definition is represented by Economic Person (EP) who is a substantively rational maximizer of subjective expected utility. Substantive rationality occurs when behavior is appropriate to attain a given goal, under given conditions (constraints). In other words, substantive rationality is about outcomes. EP is substantively-rational because she is assumed to have at least a sufficient amount of information about all relevant aspects of their environment, the ability to compute benefits and costs of available alternative courses of action, information about the probability of each outcome of each

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chosen behavior, and a willingness and ability to understand and consider simultaneously all current and future available alternatives. Assuming that individuals are substantially rational, and that they have a definite goal, economics can be "done" with calculus. And, it can be done without psychology. But, Simon says, "...there is a complete lack of evidence that, in actual human choice situations of any complexity, these computations can be, or are in fact, performed" (Simon, 1982a, p. 244). Simon's ideas on bounded-rationality (BR) were initially contained in the first (1947) and subsequent editions of Administrative Behavior (Simon, 1965), and in more formal models published in 1955 in the Quarterly Journal of Economics (Simon, 1982a), and in 1956 in the Psychological Review (Simon, 19820. In 1956 Simon wrote a short story as an attempt at a "transmigration of the soul" of his model of bounded rationality. The story, "The Apple: A Story of the Maze" (Simon, 1989a), is about a young man named Hugo who lived alone in a large castle. Hugo's problem was that he had to find food, which, mysteriously, was being left on the tables in some of the rooms. Some of the food left was of a variety he had never seen, so he had to discover his tastes and preferences for food. He also needed to save time at finding the right room so he began looking for clues to tell him which room had which variety of food. For example the rooms containing his favorite foods had various paintings on the wall. His preference for certain paintings had developed un-consciousl~as an association with certain preferred foods. With experience, finding his preferred foods became easier. Hugo's search for food did not continue until he found his favorite food. Hugo was often hungry and he didn't know when he would find food again, so his searches ended when he found food which was satisfactory. His experience showed him that finding the right food depended upon the number of turns or choice points in the maze, the number of available paths at each choice point, the number of moves or steps between choice points, the number of moves and choice points the individual can see ahead, and the ability of the individual to find clues (patterns) in order to avoid walking around in circles. The hungrier he was, the greater the number of food types and groups fell under the category of satisfactory. Hugo was a satisficer whose rationality was bounded by the shape of his world and the circumstances of his life. Associations or patterns were stored in memory and retrieved automatically from memory when it served to satisfy his goal. Hugo engaged in subconscious pattern recognition, that is, he engaged his intuition. Substantive rationality and global maximization in a maze is possible, but only when the maze is very small.

Swimming Against the Stream 7.2.3 Substantive vs Bounded and Procedural Rationality

In contrast to EP, "Bounded Rational Person" (BRP) lives in a world which offers a set of objectively available behavior alternatives, but a more limited set of "perceived" behavior alternatives. BRP lacks both the information and the computational capacities to be globally rational. RWP lives in a world with too much uncertainty -- unintended con-sequences, and computational limits. Given our computational limits the environment that we are aware of is only a fraction of the "real" environment within which decisions are made. The number of possible alternatives in so immense that they can't be examined. The best and only feasible solution is to find a satisfactory solution. In psychology it is aspiration levels which perform this function. And "problem solving and decision making that sets an aspiration level, searches until an alternative is found that is satisfactory by the aspiration level criterion, and selects that alternative" (Simon, 1982j, p. 415) is called satisficing. The concept of satisficing is common within psychology (Simon, 1982~).It is part of a model of behavior in which the motivation to act comes from "drives," and the termination of action occurs when the drive is satisfied. The definition of drivssatisfaction varies upon aspirations and experience. Satisficing in economics is assumed to be less important because standard economics assumes that individuals are objectively or globally substantively rational expected utility maximizers. Of course these assumptions amount to nothing more than assuming away the importance of satisficing. However, in the real world inhabited by BRP perception and cognition do not merely passively filter only a small part of the entire environment into our consciousness. Of the entire amount of new information generated by our entire environment, our senses filter out 99%+ before it reaches our consciousness. Given these facts, human behavior is in most cases restricted to satisficing behavior. Rationality is thus bounded by the complexity of the world we live in relative to our cognitive abilities. It seems intuitively obvious to the casual observer that BR is more descriptive of the way people with modest computational abilities make decisions, stay alive, and even thrive (Simon, 1983). Intuitive rationality (IR) is a subset of bounded rationality, but more about this later. Because rationality is bounded the process we use in making the best decisions we can becomes more important. Simon thus considers behavior to be rational when it is the outcome of an appropriate deliberation process. Behavior is procedurally rational when it is the outcome of an appropriate deliberation process. Behavior is procedurally irrational when it is the outcome of impulsive behavior (Simon, 1982d, p. 426).

Two Minds 7.2.4 Rationality and Chess

There are about 30 legal moves in a chess game. Each move and its response creates an average of about 1000 contingencies. In a 40 move chess game there are about 10'~' contingencies. Chess masters are believed to look at no more than 100 contingencies, only ten percent of the possibilities existing for one move and a response (Simon, 1982j). Beginning with an inordinately large number of possibilities, chess masters, and humans in general, humans search for outcomes whose utility values are at least satisfactory. Once found, the search stops. In other words, chess masters are satisficers, and their rationality is bounded by their limited cognitive capacity relative to their environment. Chess grandmasters take so little time to decide on a move that Simon says that it is not possible for their moves to be the product of "careful analysis" (Simon, 1996, p.133). A grandmaster takes five or ten seconds before making a strong move, which 80% to 90% of the time proves to be correct and one that is "objectively best in the position" (Simon, 1983, p. 25). Their skill barely diminishes when they play 50 opponents at once rather than one opponent. How do they do it? When grandmasters are asked how they play they respond with the words intuition and professional judgment. Simon says that intuition is a "label for a process, not an explanation of it" (Simon, 1982h, p. 105; emphasis added). The process is subconscious pattern recognition based on experiences stored in memory and retrieved when needed. While short term memory (STM) can store only a relatively small amount of information, long term memory (LTM) is, metaphorically speaking, a large encyclopedia with an elaborate index in which information is cross referenced. Cross referencing means that information is associative with one piece of information linked or associated with other associated thoughts. Cross referencing and chunking makes subconscious pattern recognition or intuition easier. Studies on recognition among chess masters have used eye movements to assess recognition abilities. Chess masters examining a previously unknown board position taken from an actual game immediately - within two seconds - shift their eyes to the most relevant part of the board. This means that they immediately grasp or "see" the most important relationships on the board. Simon concludes that it is sufficient to state that a chess master's performance is based on a knowledge of chess and an act of (subconscious) pattern recognition. In fact, Simon helped develop a computer program with the ability to mimic the eye movements of a chess master. His computer program and human chess masters make the same mistakes, and both recover in a similar way. For example, in one program a queen who was in trouble did exactly what a human would do to not only save their queen but to get their opponent in checkmate. Simon ads that the ultimate nature of human

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intellectual activity is best known through a chess playing machine. Human or machine experts at chess or in any field of activity experts are expert (in part) because of their ability for subconscious pattern recognition. 7.2.5 Artificial Intelligence Writing in 1966, Simon believed that the word mysterious was the adjective most often used to describe thinking, but that mysterious no longer applied. The reason was increases in knowledge about the process of thinking based on AI, that is, computer programs which mimic human problem solving (Simon, 1966b). Simon's view of thinking affected by AI is that thinking is a form of information-processing. Both human thinking, and informationprocessing programs perform three similar operations: they scan data for patterns, they store the patterns in memory, and they apply the patterns to make inferences or extrapolations. In fact, some programs reproduce and even outperform human experts at problem solving. Simon concluded that there is sufficient reason to believe that some kinds of human thinking closely parallel the operations of an information-processing computer program. A1 also led him to conclude that intuition is a subset of thinking. The fact that the mind is a serial information processor, it performs one (or only a very few) operations at a time, places severe limits on human attention, binds our rationality, and limits our capabilities for problem solving to a set of satisficing rather than maximizing solutions. Problem-solving thus involves two generalizations. First, a selective trialand-error search is made which by necessity can only consider a relatively few possible solutions. The solution is thus a satisficing solution and the search is based on rules-of-thumb or heuristics. Second, one of the basic heuristics is means-end analysis. Means-end analysis involves three steps. First, the current situation is compared to a goal, and differences between them are noted. Second, a memory search is performed to identifji an operator which can bring the current situation more in line with the goal. Third, the operator is applied in the hope of getting closer to the goal. Since computers solve problems as humans do using heuristics and means-end analysis, Simon concluded that computers display intelligence, defined as behavior which is appropriate to the goal and adaptive to the environment. Intelligence allows the limited processing capacity of the organism, be it man or machine, to use efficient search procedures to generate possible solutions, with the most likely solutions being generated early in the search process (Newell and Simon, 1990). In order to test whether machines display intelligence, Simon (and his colleagues) identified tasks requiring intelligence and then built computer programs which carried out these tasks. These tasks include playing chess, solving math and physics problems, diagnosing disease, making discoveries in science, and even formulating

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hypotheses and testing them empirically. In doing these things, Simon showed that computers "think," and that they possess (artificial or man made) intelligence. 7.2.6 Machine's That "Think"

Simon's machine think in that they recognize patterns and apply "if then" rules in making decisions. Margaret Boden (1990), in her book The Creative Mind. Myths and Mechanisms, uses the example of soybean diseases to show that a set of "if - then" rules incorporated into a computer program allows it to find patterns in a maze of data on soybean symptoms and then correctly diagnose soybean diseases. Programs such as the ID3 algorithm not only diagnose soybean diseases with an accuracy which would make any psychic jealous, but it does so with maximum efficiency. That is, it asks the right questions in the right order so as to make the right diagnoses in the minimum amount of time. ID3 has discovered patterns in data which humans have not, and it has discovered strategies in chess previously unknown by chess masters. Computer programs have been developed which input and output words, formula, images, and musical notations. These computer programs have been said to display creativity. The first A1 program, developed by Simon, is the Logic Theorist (LT). Written in 1956, LT discovers proofs for theorems contained in Alfred North Whitehead and Bertrand Russell's Principia Mathematica (Whitehead and Russell, 1962). In order to do this LT mimics expert human decision-makers by working "backward." Both LT and expert human decision-makers use information about the goal to eliminate many paths without having to try them. Human novices, on the other hand, solve problems in a more time consuming inefficient "forward" manner. Work on LT demonstrated to Simon that trial-and-error (a procedure of science) and insight (an apparent discontinuity, or mystery) are complementary with each other. LT also lead Simon to conclude that the human brain is analogous to a digital computer. The value of the brain- as-computer metaphor is that it takes the mystery out of concepts such as intuition and insight (Simon, Newell, and Shaw, 1989, p. 7). The General Problem Solver (GPS), an early program developed in 1957 engaged in means-end analysis, a basic heuristic in problem-solving. The EPAM program (Feigenbaum and Simon, 1989) simulates human recognition or learning, while the MAPP program (Simon, 1989b) which simulates the ability to recognize patterns in a manner similar to chess (grand) masters. The APS ("adaptive production system") program engages in learning-by-doing, and learning-by-example. The APS program learns-by-example to solve algebraic problems by inspecting each step in an algebraic problem placed in its memory. When faced with any algebraic problem it goes through the steps

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and arrives at a solution to a particular problem. APS programs learns-bydoing an algebraic problem, and then uses that example to learn how to solve other algebra problems. Simon and his colleagues also developed several programs which make discoveries in science including BACON, BLACK, GLAUBER, and STAHL. BACON analyzes data sets and derives quantitative relationships among data sets. BACON "discovered" many well known scientific laws including Galileo's law of uniform acceleration, Kepler's third law, Boyle's law, and Ohm's law (Langley et.al., 1987). And it does by considering the simplest explanation (pattern) first before moving on to more complex explanations. BLACK, named after Joseph Black, works on situations in which two substances are additive. If analyzing the data show that the two substances are not additive then BLACK finds one or more unobservable properties of the substances to explain non-additivity. GLAUBER, named after the chemist Johann Glauber, divides substances into groups according to their observable properties. Similar to Glauber, GLAUBER uses a sample of acids and alkalis to infer correctly that acid reacts with alkalis to form salt. STAHL, named after chemist Georg Stahl, is given a set of heuristics used by chemists and a list of experimental results on the nature of combustion in historical sequence. Similar to human chemists, STAHL's hypotheses about combustion are sometimes incorrect, but similar to human chemists STAHL reviews previous experimental results and corrects its mistakes. The result is that STAHL correctly reproduced the approximately 80 year development of the oxygen theory of combustion from the phlogiston theory. 7.2.7 Intuition. Simon's Early and Later Views

In the second edition of Administrative Behavior (Simon, 1965) Simon recognized the value of experience and habit in decision-making. Experience becomes human capital; habit becomes internalized as unconscious and automatic reflex actions. Decision-making using experience and habit relies on "clues." Whether clues are recognized consciously or known only to the subconscious, they enhance our understanding of particular situations, and improve decision-making. Experience and habit become part of effective procedures in decision making. Simon comments that "human rationality relies heavily upon the psychological and artificial associational and indexing devices that make the store of memory accessible when it is needed for the making of decisions" (Simon, 1965, p. 87). In the fourth edition of Administrative Behavior, 1997, and having A1 as his framework, Simon (1996) would refer to the associational and indexing devices of memory as intuition.

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Another value of experience and habit in performing purposive or rational behavior is that it "permits conservation of mental effort by withdrawing from the area of conscious thought those aspects of the situation that are repetitive" (Simon, 1965, p. 88). And it permits similar stimuli or situations to be met with similar responses or reactions, without the need for a conscious rethinking of the decision to bring about the proper action (p. 88). In the fourth edition, Simon (Simon, 1997) would also refer to this as intuition. In the earlier additions of Administration Behavior, Simon did not discuss intuition because he was uncertain about the nature of subconscious thinking processes. In the fourth edition he introduced material about intuition because, he says, "...we have acquired a solid understanding of what the judgmental and intuitive processes are" (Simon, 1997, p. 3 1). These processes are subconscious andlor rapid, and based on experience which by-passes a conscious "orderly sequential analysis" of a situation. Simon went so far as to say that intuition is actually analytical thinking "frozen into habit and into the capacity for rapid response through recognition of familiar kinds of situations" (Simon, 1997, p. 139). Intuition and analysis are complementary with each other and almost always present in all human decisions, including those of scientists. Thinking about the use of intuition among scientists in general and physicists in particular, Simon spoke about "physical intuition," that is, intuition used by physicists or scientists in general. In "New Age," and spiritual literature, physical intuition refers to physical sensations in your body. For example, when you meet someone for the first time, feeling an ache in your gut (gut feeling) is your intuition "telling" you that this person is to be avoided. The difference in the use of the term physical intuition between Simon and New Agelspiritual literature is both startling and revealing of differences in approach to the topic of intuition. The combination of intuition and analysis is present in chess grandmasters because chess "is usually believed to require a high level of intellect" (Simon, 1987, p. 28), and grandmasters use the word intuition when describing how they do what they do in chess. Chess grandmasters take only a very few seconds to decide on their next move and then a longer period of time verifying that their "educated hunch" is correct. One test for the use of unobservable physical intuition was done with the use of protocol analysis in which a novice and an expert were given a physics problem to solve, and each person verbalized what they were thinking. The results showed that the more experienced person solved the problem in less time, required fewer steps to solve the problem, spent less time per step, did not write down as many relevant facts or equations to solve, and expressed more confidence in themselves. In essence, the skilled person took a series of appropriate short cuts and avoided conscious calculation of how to solve the problem. This is possible because an expert's knowledge is similar to an encyclopedia with a large index in which entries are cross referenced. That is, not only does the

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expert have more knowledge than the novice, but the expert can more rapidly elicit relevant facts from memory. The expert exhibits "the usual appearance of intuition," while the novice uses more "conscious and explicit analysis" (Simon, 1996, p. 136). The conclusion Simon reaches is that experience allows people to make decisions intuitively, or judgments "without careful analysis and calculation" (ibid, p. 136). Simon says that intuition "...is no deeper than the explanation of your ability, in a matter of seconds, to recognize one of your friends whom you meet on the path tomorrow as you are going to class" (Simon, 1983, p. 26). Experience and knowledge is the key to intuition because paraphrasing Poincare, "inspiration comes only to the prepared mind" (ibid, p. 27). 7.2.9 Herbert Simon on Intuition Revisited

Simon's studies of MBA students and experienced business executives asked to analyze a situation show that the two groups come to similar conclusions. However, the experienced executives came to their conclusion in much less time, "with the usual appearance of intuition" (Simon, 1997, 136). The work of the MBA students, on the other hand, "was done slowly, with much conscious and explicit analysis" (ibid., 136). The conclusion Simon reaches is that experience allows people to make decisions intuitively, or judgments "without careful analysis and calculation" (ibid., 136). In a study of decision making among physicists, Simon and Simon studied the protocols of two persons solving a physics problem by recording them verbalizing what they were thinking while solving the problem. One of the persons was a "novice" at this type of problem solving, the other an "expert." The expert solved the problem in less time, did not follow the reason-only steps, required fewer steps to solve the problem, spent less time per step, did not write down as many relevant facts or equations to solve, and expressed more confidence in themselves. In essence, the skilled person took a series of appropriate short cuts. These short cuts imply that they used, what Simon calls physical intuition - intuition used by physicists. That is, they read the problem, created a mental representation, and created a set of equations based on that mental representation to solve the problem. While the expert's approach is more "physical" or "primitive" (Simon and Simon, 1989, 224), the novice's approach is more algebraic. The conclusion that physical intuition "accounts for the superior ability of physicists to solve physics problem should occasion no surprise. Physicists and teachers of physics have been saying that for years" (ibid., 230).

Two Minds 7.2.10 Intuitive Rationality

Intuition is useful, and it is a subset of bounded rationality. IR and BR are consistent with each other, and all "serious thinking" uses both. Both use search-like processes both lead to sudden recognition of underlying patterns, and the focus of one's attention plays a major role in the choices one makes. Intuition is said to be what is responsible for people finding solutions to problems "suddenly" and having the "aha" experience. Having A1 as a framework, Simon understood these to be genuine experiences, and to lead to judgments which "frequently are correct" (Simon, 1983, p. 25). Simon helped create computer programs which mimic expert human decision makers who use the word intuition as a label for how they make decisions. Creating machines that think led Simon to his "explanation" for that very human phenomena called intuition.

7.3. Harvey Leibenstein "Great economists, it could be argued, achieve (much of) their status.. .by creating penetrating images in the minds of their peers which govern how these others view the world" (Szostak, 1999, p. 11). During the 19407s, before going to Princeton and receiving a Ph.D., Leibenstein taught at Illinois Tech (IT) While at Princeton he had a conversation with Mark Perlman in which he told Perlman that IT had some brilliant faculty members who were on par with the faculty at Princeton. When Perlman asked who, Leibenstein said, "Some guys you never heard of, Franco Modigliani and Herb Simon." Leibenstein and Simon, along with Scitovsky, and George Katona were frst generation behavioral economists. Leibenstein and Simon's work have both similarities and differences. Both emphasize procedures by which decisions are made, the internal operation of the firm, motivation, peer pressure, non-fully rational behavior, habit, resistance to change except under duress, internal inefficiency, and multiplicity of goals. There are differences between the works of Simon and Leibenstein. First, satisficing is similar to maximizing in that both are goaloriented, directed behavior. On the other hand, X-inefficient behavior stems not from satisficing behavior, but from sloppiness, laziness, and the like. Second, organizational slack is treated as having the positive effect of helping to stabilize the organization during times of crises by providing it with a cushion. Leibenstein's general approach was to call organizational slack a form of inefficiency. Third, the Carnegie School takes more of an operations research and organizational behavior approach, while XE theory orients itself within an economic theory framework. In fact, Leibenstein insisted that he

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was a neoclassical economist, but one who did not believe that human behavior was always maximizing. Leibenstein's X-Efficiency theory began with his own intuition, aha experience. While he was at Berkeley in the early 1960's, one of Harvey's graduate assistants displayed an effort level which varied considerably from day to day. He knew about studies done using data collected in various countries showing that given amounts of labor and capital produced output levels which varied widely. Interacting with his graduate student one day it suddenly seemed intuitively obvious that for humans in general, effort and efficiency vary: it was a moment of discovery. To capture his intuition in terms of its implications for economic theory Leibenstein developed Xefficiency theory and illustrated it with three visual images, or intuitions: a torn net, a split personality, and an army on the battlefield. 7.3.1 The Army on the Battlefield In Keynes, Bloomsbury and the General Theory, Piero Mini says that Keynes had "a tendency to think in terms of the spiritual, the psychological, the non-material and the imponderable" (Mini, 1991, p. 158). Mini says that had Keynes been a general he would have stressed willpower and solidarity above the number of soldiers. This is also true about Leibenstein. In the first page of the Preface of Beyond Economic Man, Leibenstein quotes Tolstoy for a military analogy of the nature of x-efficiency. In War and Peace, Tolstoy writes that "Military science assumes the strength of an army to be identical with its numbers. Military science says that the more .troops the greater the strength. Les gros battaillons ont toujours raison (Large battalions are always victorious) . . . In military affairs the strength of an army is the product of its mass and some unknown x . . . That unknown quantity is the spirit of the army, . . . The spirit of an army is the factor which multiplied by the mass gives the resulting force. To define and express the significance of this unknown factor-the spirit of an army-is a problem for science. This problem is only solvable if we cease arbitrarily to substitute for the unknown x itself the conditions under which that force becomes apparent-such as the commands of the general, the equipment employed, and so on-mistaking these for the real significance of the factor, and if we recognize this unknown quantity in its entirety as being the greater or lesser desire to fight and to face danger" (Leibenstein, 1976, p vii). Leibenstein goes on to say that understanding the level of economic output requires more than knowing the "observable inputs" including technology. What Tolstoy calls "spirit" Leibenstein calls effort, both physical and mental. It should be intuitively obvious that one thinks intuitively, not logically about the spiritual, the nonmaterial, and the imponderable. At the same time, to express one's intuitions rationally requires combining intuition and analysis.

Two Minds

7.3.2 The Torn Net Frank Knight's explanation of the role of an entrepreneur included the ability to utilize intuition in the face of uncertainty. Leibenstein's explanation about why entrepreneurs are important made use of his own imagery or intuition. Harvey questioned the assumption that individuals are always fullyrational - maximizers - and thought it would be helpful if we could observe the degree of a person's rationality. In his book, General X-Eficiency Theory and Economic Development, Leibenstein asks how a psychological variable such as effort might affect economic development. One way that answers this question is by distinguishing labor time from labor effort. This distinction is between inputs purchased by a firm, and the effectiveness with which they are used by the firm, respectively. A traditional economic model (of development) emphasizes time while Leibenstein emphasizes effort. In addition, traditional economic models assume that effort is a given, while Leibenstein emphasizes that effort varies according to the pressures felt by an individual. In a traditional model of economic development, once you assume that prices are well known, production and cost functions are well defined, markets are well functioning, then there is little if any use for entrepreneurs. Leibenstein's view of the economy is that these assumptions often do not hold. In order to express this, he uses the image of a net. The economy described by a traditional economic model of development is a well construed net, all the strands in place, and all of them in proper condition. The strands of the net are the pathways which carry inputs to the firms and final goods and services to the households. The intersection of strands are the firms and industries which receive inputs, and the households which receive final goods and services. In a well-functioning market inhabited by cost-minimizing firms the net is complete without any tears. In many cases the net contains gaps from being worn or torn. Tears in the net come from some inputs not being available, some goods or services not being available to all buyers, some opportunities for mutual gain not being exploited because of inertia. The function of the entrepreneur is a gap-filler, mending or completing the net (Leibenstein, 1978). Leibenstein acknowledges a debt to David McClelland7s work in The Achieving Society. According to McClelland, economists' models of economic development are incomplete because they emphasize rational behavior, capital, technology, division of labor, and entrepreneurship at the expense of sociological and/or psychological explanations including "need for achievement." Understanding development, he says, would be helped if we possessed a "psychic X-ray" (McClelland, 1967, p. 39) allowing us to observe a person's need for achievement rather than relying on the a priori or selfevident assumptions about economic-man. We can reasonably interpret a

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psychic x-ray as intuitive abilities. One source of need for achievement is a person's core religious value, specifically "positive mysticism" (ibid, p. 367) or the "mystical strains" of Christianity. A mystical strain emphasizes a mystical relevance for life rather than renouncing the world in order to achieve this link. The rise of the business class in 19" century Japan is associated with Zen and its emphasis on positive mysticism, individuality, and rejecting of many traditional religious rituals. 7.3.3 The Split Personality

The concept that an individual can contribute to X (in)effrciency arises from an individual's split personality. Of course, a human personality is not literally split, but the image of a split personality conveys the intuition that individuals are torn -- not literally - in their preferences. On the one hand, we want to adhere to standards, to strive for the maximum, and to strive by being calculating and attentive to details. In other words, this aspect of the personality is our rational self, the part of us that uses "tight," focused, or rational decision-making procedures. Leibenstein refers to this aspect of our personality as the "superego function." The other tendency is for each of us to "kick back," to use "loose" decision-making procedures, to follow our "animal spirits." Leibenstein refers to as the "id function." It is the id function that leads us to be "unconstrained," that is, unwilling but not necessarily unable to be calculating, attentive, rational. XE theory assumes that, on the average, each individual is influenced by both functions in a way that leads to a compromise between the two. That is, each of us forges a compromise between the way we feel we must behave and the way we would like to behave were it not for a sense of obligation to duty or to a set of standards. In other words, each individual strikes a compromise that provides them with a sense of (psychological) "comfort." Individuals are thus selectively rational. X-E. Leibenstein assumes that, on average, each individual is pushed by their superego to maximize, and pulled by their id to kick back and watch the world flow by. That is, each of us forges a compromise between these two forces that provides them with a sense of (psychological) "comfort." The human personality is thus seen as having two end points. On the one end is an intense concern for constrained behavior - economic man -- while on the other end is a complete lack of constrained behavior. The former would be a fully rational person, with others exhibiting "selective rationality." Rationality is thus a continuous variable with an "economic person" exhibiting complete constrain concern. The economic person is thus a limiting case: a characteristic of the decision-making procedures used by some people at some times but not necessarily characteristic of all people at all times.

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Leibenstein says that his superego function is similar to Harry Levinson's "ego-idear' in his book, The Exceptional Executive (Levinson, 1968). The ego-ideal leads to creativity, itself expressed as a "sudden inspiration or illumination7' (ibid, p. 179) - the intuitive aha experience. The ego-ideal is part of the functioning of our conscience, is an "internal self-governing agent, and is our "internalized image of oneself at his future best" (ibid., 13). People's needs are divided into 3 categories: ministration, maturation, and mastery. Maturation needs includes the use of "female intuition." Mastery needs include affection or cooperation with others through "empathy" (intuition).

7.4 George Shackle Fore George Shackle reason and imagination are the "two faculties which make us human" (Shackle, 1972, xii). Reason or rational thinking is the same for all people, and hence is "sure, safe, even in a sense simple" (ibid., xii). Reason means the use of knowledge to evaluate the relative costs and benefits of various options about the future. The underlying assumption is that human behavior is self-interested, and that reason is applied to whatever circumstances a person find themselves. However, in reality we can not have sufficient knowledge about the future, and hence we can not either apply reason or be rational. In addition, we do not have sufficient knowledge to understand our current circumstances. On the other hand says Shackle, economists assume that we have the knowledge of both the future and our current circumstances which leaves no purpose to ask what should be the central question in economics - what is the source of our knowledge? What do we substitute for knowledge in the absence of knowledge? In the absence of knowledge, people use imagination, or intuition. Imagination is used when thinking about practical matters - not theorizing - "in which it is only useful to imagine what is deemed to be possible" (ibid., xii). Reason may be sure, safe and simple, with one set of rules for all people, but imagination has neither of these characteristics. "The future is imagined by each man for himself and this process of the imagination is a vital part of the process of decision" (ibid., 3). If the goal of rational choice is maximizing (expected) utility, then how do we evaluate our imagination? The "test of success in an expectational system is the maximum attainment of a good state of mind, a good state, that is, of imagination, of the conception of states to be attained which cast the warmest glow of anticipation on the present (ibid., xvii-xviii). The source of a lack of knowledge and an inability to be rational is the existence of time. The past no longer exists, and present can not be fully known, and the future is unknown. Thus there is a basic conflict between assuming rationality, and including time as a variable in economic analysis. The conflict is that time coexists with ignorance, a lack of knowledge, and the

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impossibility of rationality. The "insufficiency of knowledge is permanent and part of the nature of things, for consciousness consists precisely in the continuous gaining of knowledge.. .What does not exist cannot now be known" (ibid., p. 3). We have knowledge of the present moment, but make choices about future moments. The idea of a present moment implies a
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According to Shackle, the neoclassical assumption that humans pursue their self-interests by applying reason to their environment is itself an intuition. But since this is not possible, the only way to analyze the future is to "suppose conduct to transgress the bounds of demonstrable reason" (ibid., 91). That is, if we want to assume rational behavior then we must assume that behavior is being guided by something other than reason, something such as imagination or intuition. Shackle says that we must "examine the psychic processes, transcending and supplanting reason, which serves for guidance where data are lacking and demonstration at a loss: (ibid., 272). Including time and assuming rational behavior can only be done by assuming the existence of a "psychic process which is ultimately extra-logical" (ibid., 255). Reason has been so attractive to humans because it is within us. But rational choice means having a "psychic weighing machine" (ibid., 82) in order to have preferences and balance costs and benefits. Economics tried to avoid the psychic or intuitive realm by calling this machine, "tastes." But preferences, tastes, and choices are about the future, and hence beyond the field of rationality. The assumption of rationality is also paradoxical because it assumes that human conduct in part of the "determinant order and process of Nature, and at the same time, humans choose for themselves what is best for particular circumstances. That is, we are free to choose and our choices are predictable at the same time. We are free to choose, but only one choice will be choosen! This is similar to Leibenstein's complaint about NCT. Natural science includes time in its analysis, so why can't economics? Science which studies inanimate objects is different from economics which is or should be "concerned with the thoughts and deeds, not with the ultimate chemistry of man" (ibid., 4). Assuming that humans are inanimate objects allows the economist to more easily assume that humans have perfect knowledge, and to assume that human behavior is predictable. These assumptions have lead, according to Shackle, to the development of both partial and general equilibrium theory. In both theories, alternative options are compared, but the central question, what does the individual know about the options, is never asked. This is because of the assumption that the knowledge of the options exists in the mind. But in a world of uncertainty and novelty where there are "fundamentally undeducible things, waiting to be encountered for the first time" (ibid., 26) -- complete knowledge, reason, and mathematical models are severely limited. And what of economists trying to imitate natural science? "Economics has gravely and greatly misled itself by a tacit belief that rational self interest is as simple a basis of prediction as the laws of physical motion" (ibid., 37). There are fundamental differences between natural science such as physics and economics. First, the former does not depend on "conscious knowledge, memory, past experience, reason or imagination with their more than infinite

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possibilities of variation in character and combination" (ibid., 28). Second, natural laws such as gravity can be expressed in a single formula, whereas human behavior cannot. Third, natural science looks "inward at the Origin" -the search for the unity of life, ultimate reality, the "single Secret of Nature,"or "one big thing" -- while economics looks "outward at the Manifestation7'(ibid., 29). Fourth, rational self-interest will not explain the behavior of inanimate objects, so it's not part of the theory of, for example, atoms. (It can't even explain the behavior of humans.) Taking up the axiomatic method and assuming rational self-interest, economics neglected the equivalent of "case law" (ibid., 38). Hence economics became "an attempt to study in outline, by means of an imposed simplicity and precision, some aspects of a subject-matter which in the fullness of its unabstracted nature involves a vast richness of intricate and yet essential detail (ibid., 38). Fifth, natural science is based on what we see, economics is built on what we think, the imagination (ibid., 66), "thoughts about thoughts" (ibid., 71). Sixth, mathematics may demonstrate superiority of one choice over another, math and physics may show the unity of life, but a "simple, single principle" of determining human behavior is not possible. Human behavior is about human thoughts and the analogy between thoughts, atoms and mathematical symbols breaks down. "The prime duty of a theory is to tidy the mind, leaving it clear for practical activity" (ibid., 71). Theory imposes order on the disorderly. Smith couldn't say it better. Economists talk about desire, filling in our gaps of knowledge, and uncertainty by inventing ideas. Leibenstein saw the limitations and created X-E from an intuition. (Entre as gap filler; xe theory created surprise but no wonder to among others; critics attacked; HL wondered about neoclassical theory and created xe theory.)

7.5 Frederick von Hayek Hayek discusses our "two types of mind" (von Hayek, 1978) as two types of scientific thinking. One is "the perfect master of the subject" (ibid., 50), a person who has at his fingertips an apparently inexhaustible amount of facts and theories. The second consists of "puzzlers," or "muddlers" (ibid., 51). Puzzlers process "wordless thought," they "see" connections between and among things they cannot put into words, and they make discoveries after a period of reflection which comes as a "surprise," what we refer to as the aha experience (ibid., 53-54). Hayek describes himself as a puzzler. He describes Jacob Viner as a perfect master of the subject, but Frank Knight as "a puzzler if there ever was one" (ibid., 5 1). About Keynes he says, "He was, by gift and temperament, more an artist and politician than a scholar or student. Though endowed with supreme mental powers, his thinking was as much influenced by aesthetic and intuitive as by purely rational factors. Knowledge came

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easily to him and he possessed a remarkable memory. But the intuition which made him sure of the results before he had demonstrated them, and led him to justify the same policies in turn by very different theoretical arguments, made him rather impatient of the slow, painstaking intellectual work by which knowledge is normally advanced" (ibid., 287; emphasis added). In The Sensory Order Hayek (1976) distinguishes "two orders," the "subjective, sensory, sensible, perceptual, familiar, behavioural, or phenomenal" order, and the "objective, scientific, 'geographical', physical, or sometimes 'constructional"' order (Hayek, p. 4). He refers to these as the phenomenal or macrocosm, and the physical or microcosm orders, respectively. The sensory order is our perceptions of the world, and is different from the objective reality which is the world. The sensory order is, our sense of order. It is created by physical processes occurring in our nervous system, specifically, the continuous stream of electrical impulses of a seemingly endless number of neurons connected with each other in seemingly endless numbers of combinations or patterns. These physical processes or patterns are spontaneous, changing and evolving, and are occurring without us being conscious of them. Without our sense of order, the world would appear as an "indistinguishable homogeneity" (Horwitz, 2000, p. 32). The patterns of electrical impulses or excitation creates our sense of order about the world and hence is our model of the world. Our model of the world is forwardlooking allowing us to anticipate the future. More than being our model of the world, the patterns of excitation & our mind. Our mind is the spontaneously created and recreated sensory order. As such, there are serious limits to our ability to "know, predict, and control" (Horowitz, p. 24) our own mind. And, there are serious limits for us to know the world through reason, as usually defined. There are three important implications from the limits to reason. First, human reason contains both intuitive and logical or analytical elements. Second, there are severe limits to rational choice. Third, not all knowledge is the explicit or static form which is used to express scientific theories. Nonexplicit form of knowledge mean that we cannot articulate everything we know or all the rules which govern our behavior. Non-explicit knowledge is tacit, or intuitivebased knowledge (or patterns). Our mind is the coordinator of impulses which creates a sense of order. What we know from experience are past patterns (of impulses) and expectations of future patterns. Being unconsciously aware of patterns is thus significant in the theories of both Hayek and Herbert Simon. There are similarities between Hayek's view of the mind and his view of the market. First, what the mind is for the individual, prices -- the market system - is for the economic sphere of life - the coordinator and communicator of knowledge (Hayek, 1945). Second, just as the mind is a spontaneous creation which we cannot predict or control, so too is the market system an institution spontaneously created and beyond our control (without

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destroying it). Third, knowledge possessed by the mind and the market are conjectural. Fourth, the mind and the market are forward-looking. Fifth, knowledge is generated spontaneously in both the minds and the market. Sixth, just as the mind generates tacit or intuitively-based knowledge, so does the market rely on tacit knowledge. Seventh, he rejects the rationalist view of both knowledge, and choice. One could say that Hayek was an advocate of behavioral economics/economic psychology.

Chapter 8 Intuition in Current Economic Literature "All who labour in the vineyard of science.. .have cause to ponder the nature of acts of insight. Much of day-to-day research, to be sure, may be technical plodding incapable of producing, at least directly, anything deserving the appellation of 'insight'. Yet we all have experienced those moments of inspiration - often when we are far fkom our desks in both body and mind - when we felt that we had put together pieces of the puzzle that represents our understanding of reality in some novel way...The way in which these moments of inspiration arise indicates that they are not the result of conscious rational thought, but rather reflect the workings of our intuitive subconscious selves" (Rick Szostak. Econ-Art. London: Pluto Press, p. 16.)

8.1 Introduction The increasing reliance on formal modeling and mathematics in economics after World War 2 kept intuition in the background of the profession. Yet, recently it has become almost commonplace for an economist to state during a presentation that, "The intuition behind the model (andfor result) is ..." And, in, The Making of an Economist, Klamer and Colander (1990) interviewed graduate students from various departments throughout the U.S. Students consider both mathematics and intuition to be important, and they express an appreciation for the intuitive elements in the work of their professors. Through the past twenty years a large number of articles, over one thousand, have included the words intuition or intuitive. From that large number I have chosen 84, only a few which were published before 1990, to illustrate the various ways in which the words intuition and intuitive are used.

8.2 Intuition in Current Economic Literature The uses of the words intuition and intuitive have been divided into four broad categories: Intuition as a Research Tool, Intuition and Rationality, Intuitions and Assumptions, Intuition Complements Analysis, Other Uses, and Intuitions are Fallible. The categories of uses are arbitrary, and many of the cited articles can be included in other categories. In other words, it is intuitively obvious that the taxonomy and placement of articles in this section is not intuitively obvious.

8.2.1 Intuition as a Research Tool Intuition can provide insights which analysis cannot, and hence is considered essential to research. For example, Milton Friedman, in his 1952

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article with L.J. Savage, "The Utility Analysis of Choices Involving Risk," said that "The construction of hypotheses is a creative act of inspiration, intuition, invention; its essence is the vision of something new in familiar material" (Friedman and Savage, 1952, p. 43). Simon Kuznets says, "...in view of the great complexity of the problems faced by economic historians in organizing and interpreting the data on the course of economic change, allowance must be made for various approaches in formulating hypotheses from selective description and interpretation that appeal on the basis of intuitive plausibility to the more rigid structure in which quantifiable variables are sharply defined and specific assumptions concerning the functions are made to permit the combination of the variables in an equation" (Kuznets, 1957, p. 547). A similar remark is made by Daniel Smith. "Despite its seeming advantages of objectivity and precision, rigorous analysis of content is not clearly the most useful research procedure. The method is underutilized in history because of its mechanical emphasis on the manifest content...of documents and its neglect of the latent, thematic indicators. Fully implemented it tends to yield too much of the obvious along with considerable noise. The method if inefficient and time consuming, especially when compared to the intuitive insights possible.. ." (Smith, 1985, p. 2 17-18). David Landes makes a similar remark. Landes reproduced a long quote from June Goodfield's 1977 Phi Beta Kappa lecture to AAAS, commenting that "What Jane Goodfield says about the history of science is mutates mutandis, largely applicable to our own field" (Landes, 1978, p.10). Goodfield's quote, in part, is, "The kind of knowledge we seek is not just the knowledge of facts or the logic of method. The kind of knowledge we seek is more like the knowledge of a friend, his character, his ways of thought and action, an intuitive sense of the nuances of his creative personality. We must have an imaginative power of a high degree to enter into another's mind and world" (Landes, 1978, pp. 9-10). On the other hand, "It is ironic that the study of property rights in which Marx and Engels pioneered has been extended in modern times by neo-classical economists and economic historians. Marx's important intuition about the fundamental role of property rights in determining the structure of an economic system has received little or no additional analytical impetus from Marxist scholars" (North, 1978, p. 79). Paul Krugrnan (1998) weighs in on the difference between Marshall and many current economists' use of intuition in economic research. Marshall, he said, used a "verbal, intuitive exposition rather than formal modeling" (p. 1833). He believed that math should be used only to check ones intuitions, not as a method to develop intuitions. By contrast many economists, including Keynes, use math to check the consistency of their ideas and to serve as an "intuition pump," that means to generate new intuitions. According to Krugman intuitions are subject to error. For example, some people have an intuition that economic growth among newly industrialized countries will

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reduce income in the already industrialized world. Others have the intuition that the expansion of international trade will create large amounts of wealth for everyone. Krugman says that "Thanks to the models of Hicks (1950) and especially Johnson (1958) well-trained economists eventually learn why both intuitions are deeply wrong" (p. 1834). In general economists often hold views contrary to common sense and closer to the truth than "highly intelligent non-economists." Why is this possible? "Because economists "have used mathematical models to help focus and form their intuition" (p. 1834). In the case of trade theory, discontent with conventional theory was replaced by a better theory only because intuition was both the cause and the effect of mathematical models. Krugman, who admits to admiring the contributions of Marshall does not agree with Marshall on the use of intuition in economic research. Dale Jorgensen points out that Mollie Orshansky established the poverty threshold using consumption date but then switched to income data: "This intuitive leap made it possible to estimate the proportion of the population living in poverty by enumerating the individuals with household incomes below a poverty threshold based on consumption" (Jorgenson, 1998, p. 81). Jorgenson went on to say that "Estimates of poverty depend critically on the choice between income and consumption as a measure of household resources. Milton Friedman's (1957) permanent income hypothesis provides the intuition helpful for understanding the implications of this choice" (ibid, p. 82). Robert Clower had a rather interesting insight about the relationship between Friedman (and Schwartz7s)intuitions and theory. He says, "Whether or not Friedman and Schwartz regard personal intuitions as 'facts' is uncertain; but my hunch is that they do not. If they did, they would have to pay at least some attention to the intuitive plausibility (that is, 'realism') of their assumptions, and this would violate a fundamental tenet of the 'methodology of positive economics"' (Clower, 1964, pp. 374-75). Speaking of Fisher Black and Myron Scholes's being awarded the Nobel Prize, Robert Jarrow says, "Together they solved the partial differential equation, using a combination of economic intuition and the earlier pricing formulas" (Jarrow, 1999, p. 232). Jarrow comments on the derivation of the Black-MertonScholes formula. "This derivation does not highlight the mathematical details inherent in the use of stochastic calculus. Rather it concentrates on the economic intuition underlying the derivation." (ibid, p. 244). Joseph Schumpeter gave intuition the role of providing a pre-analytical vision. He also predicted the demise of the creative and intuitive entrepreneur and the rise of more automatic group decision making. "The entrepreneurial performance involves, on the one hand, the ability to perceive new opportunities that cannot be proved at the moment at which the action has to be taken, and, on the other hand, will power adequate to break down the resistence that the social environment offers to change. But the range of the

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provable expands, and action upon flashes and hunches is increasingly replaced by action that is based upon 'figuring out'. ..So far as this is so, the element of personal intuition and force would be less essential than it was: it could be expected to yield its place to the teamwork of specialists; in other words, improvement could be expected to become more and more automatic" (Schumpeter, 1947, p. 157). A colleague of Schumpeter's at Harvard, Edwin Gay, was a President of the AEA, and a Dean at Harvard's Graduate School of Business. One of Gay's students, Abbott Payson Usher also taught at Harvard during the 1930's and '407s, and had this to say about intuition: "The truths of logic and pure mathematics are certain if the propositions express accurately a determination to use symbols in a particular way.. .The empiricist contends that such truths do not describe some special character of reality beyond the limits of experience, that is, directly knowable by reason and intuition" (Usher, 1949, pp. 141- 142). Finish Welch described the research attributes of Kevin Murphy, 1997 winner of the J.B. Clark Medal in these terms: "He possesses a mixture of mathematical, statistical, and computer skills (that is, data processing-cleaning, organizing and analyzing) that is simply without parallel. The intuition is absolutely extraordinary. He is the model of an applied economist" (Welcg, 2000, p. 193). The praise continues for the MyrphyBecker team: "Kevin's relationship with Gary Becker is clearly special. Gary's originality and foresight, his appreciation of import, his interest in bigpicture problems, together with Kevin's intuition and technical expertise.. .wow!" (ibid, p. 203).

8.2.2 Intuition and Rationality Intuition is often compared and contrasted with analysis, and logic. But, what if our definition of rationality comes from our intuitions? Gilovich and Griffin, in Heuristics and Biases. The Psychology of Intuitive Judgment, edited by Gilovich, Griffin, and Kahneman, state, "...rationality does not exist apart fiom human intuition...- in fact, standards of rationality are the 'distillation of our best intuitions about rationality" (Gilovich, and Griffin, 2002, p. 13). David Hendry in "The Econometrics of Macroeconomic Forecasting" comments about a different type of distillation when he states that intuition "is just the legacy of previously unquestioned beliefs" (Henday, 1997). It is not intuitively obvious to this (not) casual observer that intuition is just such a legacy of unquestioned beliefs. Some intuitions are undoubtedly a legacy of unquestioned beliefs, but some are certainly a legacy of questioned beliefs which have become common sense, or statements of fact which have become too obvious to be questioned any further (Miller, 1996).

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John Conlisk states that "heuristics are rational in the sense that they appeal to intuition and avoid deliberation cost, but boundedly rational in the sense that they often lead to biased choices" (Conlisk, 1996, p. 676). At the same time, intuition may be the best we have: "Because we normally do not have adequate formal models for computing the probabilities of ...events, intuitive judgment is often the only practical method for assessing uncertainty" (Tversky, and Kahneman, 2002, p. 19). Intuition can help study rationality in the context of game theory: "Game-theoretic models allow economists to study the implications of rationality, self-interest and equilibrium.. . I try to give clear definitions and intuitive examples of the basic kinds of games and the basic solution concepts" (Gibbons, 1997, p. 127). 8.2.3 Intutitions and Assumptions

Intuitions are expressed by the assumptions we make in our theories and models. For example, to explain, why returns to stocks are higher than that for bonds, several authors "assume a combination of decision isolation investors evaluate returns using a 1-year horizon - and aversion to losses.. .[other authors, sic] use a similar intuition in a standard asset-pricing model" (Camerer and Loewenstein, 2004, p. 35). Intuition is expressed through the principles which lead to our judgments, even when those judgments violate principles of rationality. Referring to hedonic framing such as segregating gains, integrating losses, integrating smaller losses with larger gains, and segregating smaller gains... from larger losses because of an asymmetric value function, Thaler says that "...most people share the intuition that leads to these principles. That is, if you ask subjects 'Who is happier, someone who wins two lotteries that pay $50 and $25 respectively, or someone who wins a single lottery paying $75?' Sixty-four percept say the two time winner is happier" (Thaler, 2004, p. 79). And, of course, we must mention, "the intuition behind the model is.. ." For example, "The life-cyclspermanent-income model has been the primary theoretical framework for research on saving. The basic intuition of the model is that households should smooth consumption over the life cycle" (Lusardi, p. 449). Krugman distinguishes "rough" from "smooth" intuitions in saying, "The rough intuition behind these curves runs as follows" (Krugman, 1998, p. 166). Second, the value of time directly depends on the congestion level (through commuting time a) so that, ceteris paribus, a reduction in congestion raises time values. The intuition is that lower congestion levels reduce the time needs associated with an extra hour of labour time" (DeBorger and Van Dender, 2003, p. 514). Third, "A demand function for years of schooling representing an expanded version of the Becker model is estimated using ordinary least squares. The data sample is made up of males born during the

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period 1945-1954. The crude consumption value estimates are found to be positive and significant. The results lend empirical support to the intuitive idea that schooling yields consumption value" (Gullason, 1989, p. 287). Fourth, "Individuals save and invest too little, not out of their own violation, but as a result of socially suboptimal behavior by monopolistic firms. Government investment is now warranted as a way of improving not only growth but social welfare. The intuition is that, given the standard production function, an increase in government output raises productivity in the private sector, making investment goods bought in the private sector cheaper and providing further incentives for government output" (Balvers, 1997, p. 620). Fifth, Sophistication is the ability to have foresight about future selfcontrol problems; naYve (naifs) individuals do not have this foresight. Thus, ". ..an intuition.. .that sophistication is 'good' because it helps overcome selfcontrol problems.. .Akerloff intuits that sophistication could overcome this problem, and ...demonstrates this intuition. However, this intuition may not hold when rewards are immediate" (O'Donoghue and Rabin, p. 232). Due to "present-biased preferences (PBP)," an individual, choosing between two moments in the future, will increase their relative preference for the earlier moment as that moment approaches. The "present-bias effect" illustrates the implications of PBP: procrastinate when costs are immediate, and do not delay action when rewards are immediate. Thus, "We refer to the most basic intuition concerning how present-biased preferences affect behavior as the present-bias effect" (O'Donoghue and Rabin, p. 233). And, "in our model, the behavior of naifs intuitively and directly reflects their bias for the present" (ibid., p. 243). Finally, "This paper models the basic intuition that although rich countries are rich because they have more public goods, this very fact makes them more dependent. Sudden destruction of these public goods can affect rich countries disproportionately more than poor ones" (Kanbuy, and Pottebaum, 2002, p.233). On the other hand, intuitions, being so subjective, can be difficult to adequately express. Sweden's blue-collar trade union LO engaged in a 1960's study of wage bargaining and it's effects on structural change. However, "LO reports on structural change are, however, based largely on intuitive reasoning and are outlined in a rather diffuse manner" (Ramaswamy, 1992, p. 1041). Intuitions are supposed to be relatively clear and simple to understand, which is one reason why at many seminars a blackboard full of greek letters and numbers is followed by the statement, 'the intuition behind this is. .." Thus, "the intuition is quite straightforward" (Fehr and Schmidt, p. 280). Second, "At the cost of some repetition, the commonsense intuition of the argument can be expressed very simply" (Sanyal, 1996, p. 473?). Third, "Thus simple intuition suggests that effort levels will be inversely related to effort costs" (Goeree and Holt, p. 1408). Fourth, "simple economic intuition that deviations from best responses are more likely in the less risky direction"

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(Anderson, Goeree, and Holt, 2002, p. 42). Fifth, "The intuition that constrained choices are less elastic as well as suboptimal is confirmed by LeChatelier's principle in economic models of optimizing behavior for environments with no uncertainty." (Snow, 2000, p.715). Sixth, James Heckman notes the difference between a formal analysis and intuition: "This argument is stated more formally in the Appendix. Here I present an intuitive discussion" (Heckman, 1998, p. 108). Seventh, intuitions are not proof: "Here is a simple example that illustrates the intuition. (It is not proof.)" (Blinder, 1997, p. 11). Eighth, intuitions are sometimes aided by graphs and a table of numbers: "To build some intuition about the results of regressions like these, consider some explicit findings presented in Figure 4 and in Table 1" (Gordon, 1997, p. 24). The fact that intuitions are simple and clear is not always enough. For example, "The intuition of Barro's (1974) theorem on Ricardian equivalence is simple and clear: the links between successive generations resulting from altruism entirely offset the postponing of taxes by a public debt. There has been a large debate both theoretical and empirical on the validity of Barro's theorem" (Michel, 2004, p.2). Or, "The theorists' intuitions were mathematically clear, but based on no data" (Camerer, 2003, p. 414). Or, "To understand the intuition behind the argument, suppose that.. ." (Hoxby, 1996, p. 61). 8.2.4 Intuitions Complement Analysis Paul Samuelson is definitive in making a distinction between intuition and analysis. In his second paper on trade and factor-price equalization, Samuelson says that the purpose of the paper is "(1) to restate the principal theorem, (2) to expand upon its intuitive demonstration, (3) to settle the matter definitively by a brief but rigorous mathematical demonstration..." (Samuelson, 1949, p. 181). Section 3 of the paper is titled, "Intuitive Proof." Section 3 does not contain any mathematics, but does contain a graph showing constant, increasing and decreasing marginal cost production possibility curves. Assuming that clothing is labor-intensive, and food landintensive Samuelson says, "Intuition tells us that.. .we should transfer a larger proportion of labour than of land to clothing production" (p. 185). Different factor intensities leads, intuitively, to some conclusions. Samuelson says, "Intuition tells us that by following an optimal pattern which recognizes the difference in factor intensities of the two goods, we can end up on a production possibility curve ...that is convex" (p. 186). Then came the rigorous mathematical analysis, vis-his, the intuitive visual demonstration. Good theories appeal to our intuition. For example, expected utility theory is a good theory about decision making under risk because "The theory has a degree of intuitive appeal. It seems almost trivially obvious that.. .decision

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making under risk will necessarily take account of both the consequences of choices and their associated probabilities" (Starmer, p. 107). Intuition is often cited in support of empirical results. For example, "the employee's wage is high when the conditions inside the f r m are uncertain relative to the employee's market alternative, whereas the wage should be small when the employee's market alternative is uncertain relative to the conditions inside the firm. These results are intuitive" (Lueven, and Oosterbeek, 2001, p. 342). Second, an experiment involving games played on a computer network, the authors did not allow each player to be able to identify other players. "Laboratory researchers in economics assiduously protect the confidentiality of subjects. We present an experiment that unmasks subjects in a systematic and controlled way. We show that, as intuition suggests, identifying subjects has significant effects" (Andreoni and Petrie, 2004, p. 1605). Third, Abromovitz finds it intuitive that the growth residual is large. "Technological progress was, of course, a part of the Residual, and the Residual's large value fitted in nicely with a common intuition that such progress was an important source of labor productivity growth" (Abramovitz, 1993, p. 2 18). Fourth, transportation can be used for commuting to work and other uses. "Higher commuting taxes plausibly reduce time values, but higher noncommuting transport prices will typically raise the value of time. The intuition for this latter finding is that the reduction in congestion that follows from the tax increase itself raises net wages per hour of work" (DeBorger and Van Dender, 2003, p: 510). And, "The intuition is borne out by the experimental data (Goeree and Holt, p. 1408). It is sometimes pointed out that a theory is not consistent with intuition, and hence open to question. It is sometimes said that one cannot serve two masters. It was thus suggested that the development of transaction costs theory has been "impeded because it has absorbed Williamson's tension between an intuitive commitment to realism...and his commitment to some core presumptions of mainstream economics" (Pessali, and Fernandez, 1999, p. 265). An intuition was used to explain why a theory needs to be modified. For example, if consumers perceive monopoly prices as unfair, then profit maximizing monopolists would set a price below that predicted by theory, and "this intuition is an implication of fairness equilibrium" (Rabin, p. 3 11). Or, "This prediction is violated in an,intuitive manner" (Goeree and Holt, p. 1407). More generally, "we feel that his model does not quite capture the right behavioral intuitions" (Benartzi and Thaler, p. 594). Or, the "traveler's dilemma is a particularly convincing example of a case where the unrelenting logic of game theory is at odds with intuitive notions about human behavior" (Capra, Goeree, Gomez, and Holt, 1999, p. 678). There are intuitive explanations for failures of theory to predict. For example, "the Nash prediction clearly fails, although it fails in a way that is consistent with simple (non-game theoretic) intuition" (ibid., p. 1418). Or, "A unified perspective is

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provided on many recent laboratory studies of games in which Nash equilibrium predictions are inconsistent with both intuition and experimental evidence." (Anderson, Goeree and Holt, 2002, p. 21). Gordon Winston asks, "Will the information spawned by the computer create as great a change in living conditions as the major inventions of the late nineteenth and early century? At an intuitive level, it seems unlikely." (Winston, 2000, p.60) A theory consistent with intuition increases confidence in the theory. Richard Freeman applies this to union-management relations when he says, "The preponderance of the evidence is that the extent of management opposition substantially determines the outcomes of organizing campaigns, as posited. As management devotes considerable resources to opposing unionization, and presumably acts rationally, this makes intuitive sense" (Freeman, 1988, p. 83). Good theories should appeal to our intuitions, our common sense, to what seems reasonable. An example is, "'behavioral game theory,' which generalizes standard theory to match observed regularity and psychological intuition" (Camerer, p. 387). A second example is, "The following general equilibrium analysis formalizes this intuition" (Laibson, p. 440). Third, "Because public schooling involves a transfer from the parents' generation to the children's generation, an intergenerational model is necessary to trace distributional effects. Such a model is presented to test the logic of 4 propositions which have been advanced through verbal intuition" (Conlisk, 1984, p. 3). Fourth, "Premised on the reasoning that China's Great Leap famine occurred in a complex institutional environment, this article attempts to assess the joint significance of a set of proposed causes of this famine within a multivariate analysis framework. Based on carefully constructed panel data on 21 Chinese provinces, our estimations confirm the intuition that excess deaths were indeed the result of a multitude of factors" (Kung, and Lin, 2003, p. 70?). Fifth, the theory that work effort depends on the gap between fair and actual wages "conforms to common sense, and also to sociological and psychological theory and observation" (Akerlof and Yellen, p. 479). Sixth, Victor Zarnowitz writing about business cycle theory says, "These regression results make intuitive sense and are generally robust" (p. 76). Seventh, Keuzenkamp and McAleer (1995) state that intuitive, and quasi and purelyformal motivations for an assumption may complement each other (p. 7). Intuition is also used to explain inconsistent empirical results. For example, in a series of games played only once, one payoff structure produced player behavior consistent with Nash equilibrium. A different payoff structure did not. "These contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others' decisions" (Goeree and Holt, p. 1402). Or, "The observed contradictions are typically somewhat intuitive, even though they are not explained by standard game theory" (ibid., p. 1403). Or, results may be

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counterintuitive. For example, in a review of literature on time preference and time discounting, the authors state that "This counterintuitive result can be explained in terms of a preference for.. ." (Frederick, Loewenstein, and O'Donoghue, p. 178). Or, "Our 'crowding out' result may seem counterintuitive, since it is almost axiomatic to some economists that material incentives should produce a better outcome" (Fehr and Gachter, p. 522). If it's almost axiomatic, then it's almost intuitively obvious. Therefore, to say that a result is counterintuitive means that the Fehr and Gachter comment is about two competing intuitions. And, it should be intuitively obvious that only one can be c o m t . It would be counterintuitive to think otherwise. If Schumpeter is correct that an intuition(s) about a topic preceeds the development of theories and models about the topic, then it is intuitive that evidence may not yet exist which verifies or falsifies an intuition. Matthew Rabin says that "Researchers have formulated models of bounded rationality (based on intuition, computer science, or artificial intelligence) meant to capture cognitive limits of economic actors, but which do not invoke research on the specific patterns of errors that human beings make" (Rabin, 1998, p. 12). Again, Rabin. "Such an account of how reference levels are determined seems intuitive, though there seems to be little evidence on this topic" (ibid, p. 15). Intuition can explain why a theory is not consistent with evidence. "This paper aims at reconciling theoretical models of endogenous growth with the empirical evidence on trade and growth. In particular, we show that the conventional wisdom according to which trade is growth-impairing for a country with comparative advantage in goods with limited opportunities for learning fails to hold when the imported good is a capital good. The intuition is that the country gains access to cheaper capital goods, which raises investment, output per worker and learning by doing" (Goh, and Olivier, 2002, p. 41 1). Intuition is used to distinguish between competing theories. For example, do people adhere to norms because they are norms or because they are attractive due to intrafirm incentives or other qualities? "An attempt is made to build some preempirical intuition by considering a single interesting case7'(Kreps, 1997, p. 359). Paul Krugman points out that intuitions about spatial economics were resisted because of conflicting beliefs: "Mainstream economic theory of the time turned a blind eye to most stories, no matter how simple or intuitive, for which increasing returns were crucial" (Krugman, 1998, p. 164). Mark Machina offers an example of intuitions serving different theories. Writing on the topic of choice under uncertainty he says, "Does this mean that the study of non-expected utility preferences requires us to abandon the vast body of theoretical results and intuition we have developed within the expected utility framework? Fortunately, the answer is no" (Machina, 1987, p. 83).

Intuition in Current Literature 8.2.5 Other uses

David Colander reminds us of the evolution of economic thinking through an exampleof economic textbooks in the 1940s. "The textbooks of the time were 'civilized' and discursive--a melding of insights, numerical examples, and classifications. They had sensible discussion of economic policy and serious looks at recent history as it would be seen by an economist. Formal analysis was minimized. This approach made economics the domain of intuitive economists. It was a domain that some people found too hard and some found too easy. Keynes (1924) summed up the difficulty in this approach in his well-known pronouncement that economics requires a mixture of common sense and analytic ability that is quite uncommon" (Colander, 2000, p. 125). Weintraub (1998) distinguishes three categories of mathematicians: logicians, formalists, and intuitionists. Logicians specialize in giving rigorous definitions and deriving deductions from them. Formalists specialize in creating a formal treatment of a problem and deriving an appropriate algorithm. Intuitionists stress geometrical intuition. So it is that supply and demand have intuitive interpretations. Gordon Winston says that, "The set of points of price and quantity for given years has an intuitive interpretation." (Winston, 2000, p. 61) The graph shows an increase in supply (due to technology change) and an increase in demand for computers resulting in an increase in Qe and Pe. Bruce Caldwell, states that the following statement made by Leland Yeager expresses Hayek's own opinion: "Often an entrepreneur makes business decisions partly on his intuition or feel for technology, the attitudes and tastes of consumers and workers, sources of financing, and conditions in markets for inputs and for consumer goods and services--all in the future as well as the present. Much of what he thereby observes--or senses--he could not express in explicit words or numbers. A socialist system would let much such entrepreneurial knowledge go to waste even if it emerged in the first place" (Caldwell, 1997, p. 1866). Other statements include, "Intuition suggests that the monetary authorities, or policymakers in general, drive the actual exchange rates as close as possible to the corresponding targets" (Apergis, 1992, p. 22). "The right way to generalize the equilibrium theories and to formalize the intuition is to.. .weaken some of the rationality assumptions" (Camerer, 2003, p. 463). "For anyone unconvinced of the importance of social goals empirically or intuitively..." (Rabin, p. 301). ". ..habitual responses are subconsciously guided" (Shefrin and Thaler, p. 399). "...people who are themselves experiencing a visceral factor will be more empathic toward, and more accurate predictors of, others who are experiencing the same visceral factor" (Loewenstein, p. 709). Discussing the costs of water and rail transportation,

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Robert Fogel remarks that "the costs involved seem to be limited only by the intuition of the disputants" (Fogel, 1962, p. 193). A statement reflecting the most acceptable definition of intuition, the expert's intuition, Geoffrey Hodgson says, "There is also the case of the intuitive optimizer, with tacit skills. Although the skills may not be codifiable, they are embedded in habits" (Hodgson, 1998, p. 186). And finally, "A number of scientists have addressed the important relationship between aesthetics and intuition. Communicating one's research contents and findings is an art that embraces aesthetic dimensions, however tortured and lonely the process of composition may be7' (Szenberg, 1998, p. 94). It is intuitive that we can all appreciate Szenberg's statement. James Hines gives an example of a nineteenth century intuition still considered valuable: "The intuition that Dupuit and Jenkin offer in deriving their welfare triangles is essentially unchanged today. However, a number of details on which they are silent became the focus of more than a century of subsequent research" (Hines, 1999, p. 170). Here are three examples about intuition and learning economics. The frst suggests that an abstract presentation can hinder the development of needed economic intuition: "Economics is often taught at a level of abstraction that can hinder some students from gaining basic intuition" (Laury and Holt, 2000, p. 205). The second advocates using exercises to help in the development of intuition: "Students typically have better intuition about these effects immediately following the exercise" (ibid, p. 21 1). The third points out the virtue of the IS-LM-AS model for developing intuition: "A principle virtue of the IS-LM-AS model is that many students and policymakers with little or no previous exposure to economics can, after some effort, master its mechanics, understand its intuition, and apply it to novel situations" (Romer, 2000, p. 152). 8.2.6 Intuitions are Fallible Kahneman and Tversky consider heuristics as "natural intuitions," valuable in decision making but subject to error. Matthew Rabin questions the intuition concerning altruistic behavior. He says, "If you were a simple altruist, therefore, learning that others were not conserving would cause you to intensify your conservation efforts. This prediction is inconsistent with intuition and empirical evidence: People are more inclined to conserve water if they think other people are conserving, not if they think others are splurging" (Rabin, 1998, p. 21). Jon Elster claims that empirical evidence among doctors shows the fallibility of intuition. "Medical diagnosis and prognoses can be done very efficiently by mechanical point systems that rely on a small number of variables. In fact, such methods almost invariably tend to perform better than intuition based on 'gut feeling'" (p. 63). Oswald (1997)

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asked why, if economic progress does not buy much happiness, do we strive to become wealthier? He answers that perhaps it is because what matters is relative income. "But think of the fate of someone who stands up at a football game to get a better view, only to lose it when everyone else stands up. Hence the intuition that wealth leads to happiness is incorrect. This intuition is based on how an individuals happiness is affected by an increase in their income, ceteris paribus. This intuition fails us when everyone's income is rising". David Card and Alan Krueger on school inputs and student performance say, "However, despite the strong intuitive appeal of the North CarolinaSouth Carolina comparison on a priori grounds, and the availability of over 130,000 wage observations for the 1960, 1970 and 1980 censuses, it is evident that the power of the data to yield precise estimates of cross-state earnings differentials by race and cohort is limited" (Card and Kruger, 1996, p. 46). Comparing expected utility and cassbased decision theories, Gilboa and Schmeidler state that they are two different languages more than competing theories, and "The two languages are equally powerful in terms of the range of phenomena they can describe. But for each phenomena, they will not necessarily be equally intuitive" (Gilboa and Schmeidler, p. 674). Intuitions can also be the result of conflicting aspects of experiences. For example, "Evidently, people have conflicting intuitions about current value.. .As they earn, borrow, spend, save, and invest money, people's intuitive accounting is often based on multiple representations rather than on a single representation of the transaction" (Shafu, Diamond, and Tversky, 2004, p. 499). Sometimes a little intuition can go a long way. Noting that an absence of immigration after 1870 would have that real wages in urban areas would have been 14% higher in 1890 and 34% higher by 1910, the authors stated, "If the Immigration Commission had any intuition about an impact of that size, it certainly would have had every cause to produce a 1911 Report that supported immigrant quotas" (Williamson, 1996, p. 290). But, how much intuition is enough intuition? "For there is a real issue of how much rein it is useful to allow to one's intuitions, and more important still, of the proper means by which prior 'hunches' may be enlisted in the quest for more precise answers about the past" (David, 1972, p. 710). The answer may be need based on short and long run time requirements. For example, a planner with unlimited amounts of time will be focused on the long run and will be better able to create an optimal plan. However, in fact, planners care about the present and therefore "act on hunches and intuitions rather than blindly following algorithms that are inconsistent with their beliefs" (Spagat, p. 87). The answer may also be based on comparative advantage. "Like a detective, a data analyst will experience many dead ends, retrace his steps, and explore many alternatives before settling on a single description of the evidence in front of him. The process of searching for this description can be as unpredictable as the data themselves. Instead of

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mimicking this behavior, we propose a computer system for performing an orderly search, replacing intuition and hunches (which people are good at) with extensive computation (which computers are good at)" (Lubinsky and Pregibon, 1988, p. 247). It's not intuitively obvious that replacing intuition with computation is always a good thing. For example, "...the computable general equilibrium (CGE) methodology ... is becoming increasingly prevalent and customary in economics. The dominant advantage of CGE methodology is that it allows precise numerical answers to be obtained to precisely formulated questions. The inevitable cost of this precision, however, is a certain amount of lingering doubt about the validity andlor generalizability of whatever results are obtained.. .. There is no definitive "cure" for this situation and, as a result, any evidence forthcoming from a CGE model must be considered partial and circumstantial evidencsto be weighed along with evidence from various other methodologies and approaches (including casual empiricism and subjective intuition" (Yunker, 1997, p. 405?). Experts in any field are often believed to be more intuitive when it comes to that field: "...many of those with medical training hold an intuitive, if not an explicit, feel for the meaning of anthropometric evidence" (Steckel, 1998, p. 812). Or, "Intuition and anecdotal evidence from anyone who has ever worked on a largescale capital budgeting project for a real firm would certainly support the notion that "animal spirits" tend to dominate the investment decisions of firms" (Theilman, 1993, p. 314). But when in doubt, gather evidence. So, "Since we have found this a difficult topic to research, and had little intuitive feel for 'what the results ought to look like' when we began our study, we welcome the opportunity to discuss these points and present some new evidence" (McGouldrick, and Tannen, 1982, p. 432). Or, "concepts such as the intuitive criterion were developed to reflect intuitions.. .We have no idea if these intuitions are right, so the stage is set for an informative experiment" (Camerer, 2003, p. 413). Intuitions can also be incorrect rather than inconsistent with other intuitions. A few examples are given below. "Intuition tells us that the scarcity of space on the earth's surface should be closely tied both to population growth and to economic growth.. .Intuition also suggests that land scarcity should in turn retard the growth of population and per capita incomes.. .Scholars have good reasons for reevaluating the accuracy of these intuitions decade after decade" (Lindert, 1974, p. 851). "I shall argue that intuition is about half right regarding the links between land scarcity and growth (Lindert, 1974, p. 853). "The following analysis thus predicts that an incorrect intuition about the effects of economic growth on farm land rents will someday become correct" (Lindert, 1974, p. 854). "If this happens, the traditional intuition that economic growth, as well as population growth,

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should make farm land and food increasingly scarce would prove not wrong but only premature by a generation and longer" (Lindert, 1974, p. 880). Referring to a link between health status and performance measures such as wages and productivity, the authors of one study state, "The fact that no significant effects for health indicators have been found in most of these studies, although there exists a strong a priori intuition in favor of positive effects, may stem from specification errors in the estimated models or merely from poor or incomplete data that do not allow accurate estimation of these effects" (Croppenstedt, and Muller, 2000, p. 480?). More concentrated industries are expected to be better at lobbying because there is less freeriding, and it is easier to maintain cooperation among firms. "In contrast with the second intuition, it is shown that there is no general presumption that maintaining cooperation becomes more difficult as the number of firms in the industry rises" (Pecorino, 1998, p. 652). According to Gordon Winston intuitions can lead to error when assuming that profit maximizing and nonprofit maximizing firms act similarly. "This paper suggests that economic intuition and analogies, built on an understanding of profit-making firms and the theory that supports it are likely to be a poor guide to higher education and to making predictions and public policy. One who thinks a college is like any other business will look in all the wrong places" (Winston, 1999, p. 33). Fisher and Turnovsky (1998) state that it is intuitive that one might expect that government investment will have a smaller impact on private capital formation in the presence of congestion. They add that this may or may not be the case (p. 408). This statement has two interesting aspects to it. First, the authors aren't sure if the intuition is correct. If we apply the usual sense that one is by definition certain that their intuitions are correct, then does this make their intuition, to coin a phrase, a 'quasi-intuition'? Second, the combination of the word intuitively and the phrase "one might expect," is odd in its own right. If it is intuitively then it should be expected, not might be expected. Chiu (1998) states that a more equal distribution of income leads to more human capital formation and higher economic performance. He assumes that there are relatively wealthy parents with children who have a relatively low innate capacity for productivity, and relatively poor parents with children who have a relatively high innate capacity for productivity If income becomes redistributed towards more equality then wealthy parents who are now not as wealthy reduce the amount of money spent on the kids' human capital formation. At the same time, less wealthy parents who are now wealthier spend more money on their more talented kids. Since a larger number of more talented kids are receiving human capital then the stock of human capital and economic performance Chiu states that this intuitive linkage between income inequality and aggregate human capital needs an additional qualification (p. 50). That means that the intuitive linkage is not really intuitive, but perhaps a quasi-intuition.

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8.3 As If vs Heuristics Milton Friedman and Herbert Simon offer different philosophies about intuition. In, Essays in Positive Economics, Friedman used the as ifform of a metaphor. Metaphors express non-logical - intuitive - reasoning and often utilize imagery. Friedman's use of the as if form is to state that an expert billiard player makes shots as if they "knew the complicated mathematical formulas that would give the optimum directions of travel ...could make lightening calculations from the formulas," and could do what the formulas require (Friedman 1953, 21). Although not using the word intuition, Friedman's choice of words suggests that the billiard player uses their intuition. Friedman's argument is not about playing pool, but why a theory's assumptions do not matter. Friedman's billiards metaphor about assumptions in economic models originated with an article by Milton Friedman and L.J. Savage (Friedman and Savage 1952) in their paper, "The Utility Analysis of Choices Involving Risk." In a section titled "The Descriptive 'Realism' of the Hypothesis" Friedman and Savage reject the notion that the realism of a hypothesis matters. Specifically, it is of no concern that humans are assumed to act in a way which may never have been observed, or that individuals do not consciously calculate utility before acting. Friedman and Savage assert that individuals behave as if they calculated and compared expected utility and as if they knew the odds" (Friedman and Savage 1952,86). The mathematical formula for even relatively easy billiard shots is complex. Does the billiards player apply the formula, consciously or unconsciously, before taking a shot? It seems "not at all unreasonable" (ibid, p. 87), they say, that an expert billiards player makes a high percentage of their shots as if they knew the formula, as if they apply the formula with "lightening calculations" to meet the current shot requirements. Friedman incorporated this metaphor in his book, Essays in Positive Economics, adding more general comments about assumptions in economic models. "It is only a short step" from the billiards example to "the economic hypothesis that under a wide range of circumstances individual fxms behave as ifthey were seeking rationally to maximize their expected returns.. .and had full knowledge of the data needed to succeed in this attempt; as iJ; that is, they knew the relevant cost and demand functions..." (Friedman 1953, p. 21). If they did not know the formulas or functions then the expert billiards player would not be an expert, and the fwm would go bankrupt. The billiards player when asked how he decides where to hit the ball may say that he "just figures it out" (ibid, p. 22). The billiard player just figures it out without consciously proceeding step-by-step, meaning, it's left to intuition. In An Empirically Based Microeconomics Simon says that, 'Tf we want a theory explaining how people play billiards, we do not want a theory of perfect billiard balls; we want a theory of what heuristics a human billiard

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player uses in order to plan and make a (often not quite accurate) shot. These heuristics do not involve solving the differential equations of the billiard board; they involve rules of thumb, and it is these practical guides to action we are trying to discover in order to explain the behavior" (Simon 1997, 173). So here we have it. Friedman, in the two works cited, supporting indirectly the argument that an expert's intuition is correct, by definition. Simon, who expanded economists7 knowledge of human decision making, expands the argument about billiard players to include both expert and novice players. How do billiard players in general decide on how to make e a shot? They use heuristics, which are subject to error. We are back where we started in Chapter 1: intuition can be valuable but it is subject to error. Intuition complements analysis, provides the assumptions for our models, can give us confidence about our models and empirical results, and is called upon to provide a simply and easily understandable explanation for all the mathematics. At the same time, what B intuition? The best we currently have, unfortunately, is that intuition is what it is not, it is not a conscious analytical step-by-step method of processing information.

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Index of Authors A Abromovitz, Moses, 142 Akerloff, George, 140 Altman, Morris, x Andreoni, James, 142 Apergis, Nicholas, 146 Archimedes, 27 Augier, Mie, 153 August, E, 42,44 B Balvers, Ronald, 140 Barnard, Chester, 25, 114 Barzun, Jacques, 57 Bastick, Tony, 153 Bateman, Bradley, 79 Becker, Gary, 111, 138 Benartzi, Shlomo, 143 Bentham, Jeremy, 25,27, 80 Bergland, Richard, 154 Bergson, Henri, 96 Black, Fisher, 137 Black, Joseph, 121 Black, Max, 8 Blinder, Alan, 154 Boddy, Ray, xi Boden, Margaret, 120 Bohm-Bawerk, Eugene, 78 Bohr, Niels, 8 Brown, Vivienne, 34-35 Bruner, J, 154 Brunner, Eric, xi Bryce, R.B, 87 Bryson, G, 43 Buchanan, James, 95 Buck, Ross, 19,29 Bunge, Mario, 3, 5, 8 1, 94 Burke, Edmund, 22 C Caldwell, Bruce, 146

Camerer, Colin, 113, 139, 142, 144, 146, 149 Cameron, Jame, 3 1 Campbell, T.D, 32-33 Capra, C, 143 Carabelli, Anna, 92, 94 Card, David, 148 Carlyle, Thomas, 40-4 1 Chiu, W, 151 Clark, John Maurice, 3 1 Clark, Samuel, 39 Clower, Robert, 137 Colander, David, 38, 135, 146 Collard, David, 32, 38 Colvin, C. Randall, 32 Conlisk, John, 139, 144 Crick, Francis, 7 Croppenstedt, Andre, 150 Cudsworth, Ralph, 39 D Damasio, Antonio, 14, 16-18 Davenport, Herbert, 97 Davis, John, 79, 81, 83,94 DeBondt, Werner, 14 DeBorger, Bruno, 140, 143 de Beauport, Elaine, 156 Dewey, John, 3 1,99 Donner, W, 42,44 E Earl, Peter, 12, 29 Einstein, Albert, 5-6, 8-9 Elster, Jon, 148 Engels, Friedrich, 136 Etzioni, Amatai, 2 1 F Falk, O.T, 81 Fehr, Ernst, 141, 145 Fisher, W, 137, 150 Fitzgibbons, Athol, 34

Two Minds Fogel, Robert, 147 Franklin, Rosalind, 7 Frantz, Roger, 72, 109 Frederick, Shane, 145 Freeman, Richard, 144 Freud, Sigmund, 84 Fried, Marilea, xi Friedman, Milton, 8, 136-37, 151-52 Fuller, R. Buckminster, 158

G Galileo, 121 Galois, Evariste, 5 Gardner, Howard, 30 Gauss, Carl, 11 Gay, Edwin, 138 Gibbons, Robert, 139 Gilovich, Thomas, 139 Giocoli, Nocola, 96 Glauber, Johann, 121 Goeree, J, 141, 143, 144 Goleman, Daniel, 30 Goodfield, June, 136 Graham, Tiffany, 19 Greenspan, Alan, 12 Griffin, Dale, 139 Grossbard-Shechtman, Shoshana, xi Gullason, Edward, 140 H Hadamard, Jacques, 5, ll,83-84 Hamilton, William, 39,42, 59, 64 Hayek, Friedrich von, ix, x, 20, 113, 132-33 Heckman, James, 141 Helmholtz, Hermann von, 11 Hendry, David, 139 Hicks, J.R, 86, 137 Hillard, John, 80 Hippocrates, 10 Hodgson, Geoffrey, 93, 147 Hogarth, Robin, 2-3,5 Holt, Charles, 141, 143-44, 147 Horowitz, Tamara, 133

Hoxby, Caroline, 142 Hutcheson, Francis, 21,25-27,39 Hutchison, T.W, 97 I Ickles, William, 19,29-30,33 Imazeki, Jennifer, xi J James, William, 25,32,95,98-100, 105, 109, 113 Janow, Robert , 137 Jevons, William Stanley, 97 Johnson, Hany, 137 Johnson, Mark, 162 Jorgensen, Dale, 137 Jung, Carl, 9 K Kahneman, Daniel, 12, 14, 70, 110, 139, 147 Kanbuy, Ravi, 141 Karhnan, Art, xi Katona, George, 125 Kershner, Frederich, 95 Keuzenkamp, H, 144 Keynes, John Maynard, ix- 10, 1,20, 45,63-64 67,77-95, 125,132 Keynes, John Neville, 1 Kivy, Peter, 25-26,3 1 Klamer, Arjo, 135 Knight, Frank, ix-x, 20,25,95-113, 126, 130, 132 Krueger, Alan, 148 Krugman, Paul, 136, 140, 145 Kung, James, 144 Kunets, Simon, 136 L Laibson, David, 144 Lakoff, George, 162 Landes, David, 136 Langley, P, 12 1 Laury, S, 147

Index of Authors Leibenstein, Harvey, 20,95, 113, 124-28, 131-32 Lerner, Max, 22 Levinson, Harry, 128 Lewin, Shira, 163 Lindert, Peter, 50 List, Friedrich, 78 Locke, John, 4 Lowenstein, George, 113 Lueven, E, 142 M Macfie, A.L, 32,34,38 Machina, Mark, 145 Malthus T.R, 85 Mansel, Henry, 25,49,59-64 Marshall, Alfred, x, 20,25,28,5960, 63-77,85,89,96, 136 Marx, Karl, 85, 136 Maxwell, James Clerk, 8 McClelland, David, 127 McGouldrick, Paul, 149 Medawar, Peter, 3, 5 Menger, Carl, 78 Michel, Philippe, 142 Mill, James, 40, 5 1 Mill, John Stuart, 1,9, 12,20,25, 39-58,64,78, 109 Miller, Arthur x, 5, 8 Mini, Piero, 81, 87, 125 Modigliani, Franco, 124 Moggridge, Donald, 79, 81, 82 Monroe, Kristin, 3 1 Moore, G.E, 25,79, 80, 82,94 Murphy, Kevin, 138 Myers, David, 26,29 N Nash, John, 143-44 Newell, Allen, 120-21 Newton, Sir Issac, 24-25,32 Nicholson, P, 43 Norretranders, Tor, 11,30, 101

0 Ornstein, Robert, 11, 17,30 Orshansky, Mollie, 137 Oswald, A, 148 P Pareto, Vilfredo, 97-98, 102 Pauling, Linus, 8, 12 Pecorino, Paul, 150 Perlman, Mark , 124 Pessali, H, 143 Pigou, A.C, 64,67,73 Pinker, Steven, 166 Planck, Max, 9 Plato, 48, 83,95 Poincare, Henri, 6, 11 Polanyi, Michael, 2 R Rabin, Matthew, 140, 143, 145-47 Rae, John, 22,3 1 Raffaelli, Tiziano, 68 Ramachandran, V.S, 166 Ramaswamy, Ramana, 141 Ramsey, Frank, 85 Redman, Deborah, 52 Reid, Thomas, 39 Reinert, Erik, 78 Riemann, Bernard, 5 Robinson, Daniel, 43,46 Romer, D, 147 Rose, P, 56 Russell, Bertrand, 79, 120 Ryan, A, 49,52 S Salk, Jonas, 7 Samuelson, Paul, 9, 142 Sanyal, Amal, 141 Schama, Simon, 32 Scholes, Myron, 137 Schumpeter, Joseph, ix-x, 4,77-78, 138,145 Schwartz, Gary, 15

Two Minds Scitovsky, Tibor, 125 Scott, William, 25 Shackle, George, x, 20, 113, 128-31 Shefrin, Hersh, 147 Sheldrake, Rupert, 15 Shionoya,Yuichi, 84 Sidgwick, Henry, 79 Simon, Herbert, x, 4,25, 56, 84, 103, 109, 113-25,33, 151 Skidelsky, Robert, 82, 84 Sloman, Steve, 2 Slovic, Paul, 14,70 Smith, Adam, ix, 1,20-39,64,66 Smith, Daniel, 136 Snow, Arthur, 141 Spagat, M, 149 Sperry, Roger, ix, 10 Stahl, Georg, 121 Starmer, Chris, 142 Steckel, Richard, 149 Stewart, Dugald, 22 Stigler, George, 111 Szostak, Rick, 124, 135 T Taylor, Harriet, 40-4 1,56 Thaler, Richard, 14, 140, 143, 147 Theilman, Ward, 149 Tversky, Amos, 12, 14, 70, 110, 139,147,148

u Usher, Abbott Payson, 138

v Van Dender, Kurt, 140,143 Veblen, Thornstein, 97 Viner, Jacob, 32,37, 132 Vogel, Gretchen, 18 W Watson, James , 7 Weber, Max, 1 Weintraub, E, 146 Wessel, David, 12 Whewell, William, 39,42, 47 Whitehead, Alfred North, 120 Wicksteed, Philip, 97 Williamson, Jeffrey, 143, 148 Wilson, James Q, 32,38 Winch, Donald, 34 Winston, Gordon, 143, 146, 150 Wittgenstein, Ludwig, 79 Y Yellen, Janet, 144 Young, Jeffrey, 34 Yunker, James , 149

z Zarnowitz, Victor, 144

Index of Subjects A American Psychological School, 97 B Bampton Lectures, 62 Behaviorism, 96, 103 Blank slate, 68 C Cambridge Platonists, 39 Cartesian System, 24 Chicago School of Philosophy, 98 D Das Adam Smith problem, 2 1,33-35 Das Keynes problem, 93 Das Alfred Marshall conflict, 64

E Economics as left-brained activity, 11 Educating Intuition,2-3 Empathic accuracy, 19,29-30,32 H Heuristics, 12-15, 119-21 Human brain, ix, 10, 14-18,69, 71

I Impartial spectator, 25,3 1-33,35-36 Induction and Intuition in Scientijk Thought, 3 Insights of Genius, 6 Intuition and construction of hypotheses, 83 and experience and logic, 84, 87 and external economies, 71-72,74 and discovery, 86 as a priori morality, 42,48 as a research tool, 135 as an acquired product, 48 as an axiom, 4 as aha, 125, 128, 132

Intuition as animal spirits, 80,9 1-92 as artistic creation, 78 as a basis of behavior, 64 as blank slate, 42 as chemical intuition, 7 as common sense, 2-3, 8-9,22, 28 as consciousness, 41,48 as educated hunch, 123 as essential knowledge, 79 as expert decision making, 4 as faint brain process, 99 as a feel for nature, 5 as flash of awareness, 87 as a vague form of reasoning, 86 as a gaze, 8 1 as a grey monster, 83 as a gut feeling, 16 as impartial spectator, 25, 3 1-33, 35-36 as an inference, 40-41,46,48 as intelligence, 29,41 as a measure of our ignorance, 3 as amental muscle, 83 as a mysterious capacity, 5, 108 as natural instinct, 66 as non-logical thinking, 114-15, 150 as non-sensory cognitive faculty, 81,94 as part of scientific discovery, 83 as pattern recognition, 28, 103 as physical intuition, 122-23 as practical instinct, 62, 64, 75 as practical omniscience, 106-07 as pre-analytic cognition, 4, 78 as scientific imagination, 84 as self-evident propositions, 42 -44, 106 as a sense of time, 129 as sixth sense, 68,70

Two Minds Intuition as knowledge, 68, 71 as subconscious thinking, 113-16, 118-19, 122 as subrational feelings, 3 1 as subtle instincts, 68, 71 as sympathetic introspection, 105, lo8 as tacit knowledge, 131, 133 as peering eyes of philosophy, 8 1 as trained instinct, 63-64,66 as unconscious induction, 109 as verstahen, 1,78 as vicarious knowledge, 50 as vicious circles, 45 as vision for analytical work, 6, 7779, 8 1, 84 as wordless thought, 132 definitions, 2-3 needed by economists, 65 Intuitions of Mercantilism, x, 21-22 Intuitionism, 12,25,39,41-45, 50-51, 57,77,79-80 Intuitive closet, 114 mind, 2,7, 16 Intuition and Science, 3

N Newton, Sir Issac, 24 P Pragmatism 98, 100 Psychology of Invention in the Mathematical Field, 5, 11 R Radical empiricism, 98-99, 101 Rationality bounded, 115 procedural, 115 satisficing, 115, 117, 119, 125 S Scientific thinking, 132 Society for Psychical Research, 79 Somatic marker, 16-18 Sympathy, 1,20,25,29-37 T "The Other Canon," 78 Trusting common sense, 75 W Wall Street Journal, 11 Woman's intuition, 4, 18,55

M Making of an Economist, 135 Morphogenic field, 14 Y Ye Machine, 60,68