Introduction

From the public finance perspective, instruments available to a government in tackling its myriad tasks may be classified under three broad categories. These are fiscal or budgetary policies; policies concerning state or public enterprises; and policies affecting the social, political and economic environment. The last category includes government rules and regulations; governmental attitudes concerning industrial relations, foreign enterprises, public bureaucracy and the relationship between the individual and the state; and broad manpower policies.

The main objective of this paper is to provide an overview of Singapore's fiscal system and practices. While the focus is on the fiscal system and practices, to the extent that there are important interconnections between it and the other two broad categories noted above, they are incorporated in the analysis. The discussion includes an examination of the probable impact of Singapore's fiscal system and practices on resource allocation, equity, incentives to work, to save, and to invest, and macro-economic stability. The paucity of relevant and reliable empirical studies, and limitations of the existing economic theory have necessitated a reliance on a qualitative rather than a quantitative analysis.

Although this paper does not seek to provide a comprehensive analysis of the role of the fiscal system and practices in Singapore's rapid economic growth, it is hoped that a firm basis for such an analysis will have been provided.

The Budgetary System

Accounts of the Singapore Government are organized around various funds. Premchand identifies eight such funds, thus classifying Singapore as belonging to an Intermediate Fund System, that is, countries with 5 to 20 such funds (1983, pp. 393-95). Of the eight funds, only the Consolidated Fund, Development Fund, Sinking Funds, and Skills Development Fund (SDF) are of major importance. Funds which are of minor importance include Contingencies Fund and various Revolving Funds for meeting personal advances and housing and vehicle loans.

The Consolidated Fund consists of Consolidated Loan Account and Consolidated Revenue Account. All proceeds from loans are accounted for in the former, while all monies other than loan monies are accounted for by the latter.

Over the past decade or more, trade between China and ASEAN countries has grown considerably. But there do exist some difficulties and problems. In the last few years, China's trade with some ASEAN countries has come to a standstill or even declined. This is indeed a very worrisome situation. How can the expansion of trade between China and ASEAN countries be promoted? Can counter-trade, a subject of much discussion, play a positive role in expanding China's bilateral trade with ASEAN countries? These are the questions dealt with in the present paper.

I. Developments and Problems in China-ASEAN Trade

1. Developments over the Past Decade

In the early years of the People's Republic of China (PRC), political considera- tions prevented the country and most ASEAN countries from entering into any trade relationship with one another. In the sixties, of all ASEAN members, only Singapore and Indonesia had direct trade relations with China, while the rest were trading indirectly through either Hong Kong or Singapore. Since 1967, direct trade between Indonesia and China had been suspended.

In the seventies, Malaysia, the Philippines, and Thailand resumed trade exchanges with China even prior to the restoration of diplomatic relations. Singapore had no diplomatic ties with China, but none the less maintained good trade relations. In 1978, the two governments signed a trade agreement and subsequently set up commercial offices in each other's capital. Indonesia reached an understanding on non-governmental trade with China in November 1985.

Over the past decade, China's trade with ASEAN countries has increased very rapidly. According to statistics from China's General Administration of Customs, the volume of trade between Ghina and the six ASEAN countries increased from US$524 million in 1975 to US$3,964 billion in 1985, a near seven-fold increase n ten years. Of this, China's exports to ASEAN countries increased from US$402 million to US$2,829 billion, and imports from ASEAN rose from US$162 million to US$1,135 billion.

In 1986, however, China-ASEAN trade was reduced to US$3,358 billion, a fall of 15.3 per cent over 1985. China's exports in particular dropped sharply from US$2,829 to US$1,878 billion, caused mainly by plummeting international oil prices.

This volume had its origin in a desire on the part of Joop Klant's colleagues at the University of Amsterdam to mark his retirement from the Chair of History and Philosophy of Economics. That desire translated into an attempt to focus scholarly effort on some of the themes that have informed his work over the past quarter-century.

Those themes are clearly evident in his own chapter, “The Natural Order,” and are also spelled out in his contribution to the Discussion. They have to do with the nature of economics and with certain implications for being an honest practitioner in that discipline. First of all, economics is not value-free. That means that the choices we make about theories and policies in economics inevitably reflect our preferred notions of how the world is constituted. Furthermore, because we do not have natural constants in the world of economics and because our theory in economics is often so general (for instance, “agents optimize”) that only specific versions can be tested, this leaves the basic theories themselves immune to test results. In our efforts at self-criticism, therefore, we have to go beyond mere testing for falsifying instances. This does not mean that striving after falsifiable theory is unimportant. It does mean that we must acknowledge and identify, as far as possible, the role of “vision” (perceived natural order) and art–the art of the good practitioner–in our economic “science.”

Introduction, acknowledgments, and dedication

This is a revised version of a paper delivered at the conference, The Popperian Legacy in Economics, held in Amsterdam in December 1985 to honor the retirement of J.J. Klant.

I apologize in advance for writing what is bound to be perceived as a very egocentric chapter. In it I trace the development of some of my ideas on methodology, and I attempt to construct a case for pluralism. In constructing my case, I try to answer some of the objections I have heard most often concerning pluralism. Most of these objections were raised by a number of people who commented on earlier drafts of this chapter. I am indebted to Neil de Marchi, Wade Hands, Uskali Maki, Bob Coats, Roy Weintraub, Dan Hausman, Mark Blaug, Larry Boland, and members of Neil de Marchi's workshop in the history of economic thought at Duke University for their thoughtful comments and criticisms. Finally, I would like to dedicate this chapter to J.J. Klant. I suspect that he will feel some ambivalence about this, since many of the ideas expressed here will not meet with his full approval. However, it should be clear that I share his desire to understand better the “rules of the game” in economics.

Science and art

Do economic theories propound laws that describe how events occur, or do they contain rules showing how we must behave? It is an old question. In the nineteenth century, when economics was still called “political economy,” the practitioners compromised by that name asked themselves: Are we occupied with a science teaching us how we do it or with an art teaching us how we must do it? In the introductory chapter of the book devoted to the principles of political economy, they often represented themselves as research scientists, curious about the way the world is made up. But anyone who read on could also discover how they designed a blueprint for changing the world.

Adam Smith had left no doubt about the latter. He too had come under the spell of the idea proclaimed by John Locke: The laws of nature do not really differ from the moral laws by which man should behave and society must be ordered. They both relate to the natural order desired by God. Smith, impressed by Descartes and Newton, regarded society expressly as one large mechanism, the operation of which can be explained by reasoning and observing with the aid of a small number of principles, but in line with ideas of Shaftesbury and his teacher Hutcheson, he also devoted attention to the world's beauty.

Economists and philosophers agree that general equilibrium analysis is important, but they disagree with each other, and among themselves, on its role in the growth of economic knowledge (see, for example, Hahn, 1973; Coddington, 1975; Blaug, 1980; Hausman, 1981; Kotter, 1983; Klant, 1984; Hands, 1985; Rosenberg, 1986).

In a number of recent studies (Weintraub, 1979, 1985a, 1985b) I have presented the view that is associated with a scientific research program in the sense of Lakatos, and that the Arrow–Debreu–McKenzie model (which many economists and philosophers take to be general equilibrium theory) is an instantiation of the hard core of what I have called “the neo-Walrasian research program.” I have argued that the development of existence proofs is an example of the “hardening” of the hard core of that program. I have also suggested that the hard core of the program guides work in the protective belts of the program, and that work in the belts is appropriately appraised by asking questions about both theoretical progress and empirical progress; within the neo-Walrasian program, the positive heuristic connects formal theory to empirical work. If the neo-Walrasian program is roughly coextensive with neoclassical economics, general equilibrium analysis shapes a research agenda for applied economic analysis.

This claim has drawn some attention, not all of it sympathetic (Rosenberg, 1986). In particular, Rosenberg has argued that although this set of ideas reconstructs the core of the program, the real issues concern the role of the theories in the protective belts.

Professor Klant, in his masterful overview of economic methodology, The Rules of the Game, relies heavily on Karl Popper's writings on the philosophy of science. For, like Popper, Professor Klant is concerned about whether theories are genuinely testable and whether they are truly supported by empirical evidence. I respect these concerns and share them, yet I have serious objections to Popper's philosophy of science. Indeed, I shall argue in this chapter that nontrivial questions about the testability of economics cannot be asked within the confines of Popper's falsificationism. A reasoned concern with falsifiability demands the repudiation of Popper's philosophy of science. Moreover, there is no way to amend his views without eviscerating them and making Popper's central theses little more than truisms accepted no less by anti-Popperians than by Popperians.

Much of the appeal of Popper's philosophy of science depends upon ambiguities and equivocations concerning the notion of falsifiability. I shall argue that the notion of falsification as a purely logical relation between theories and basic statements or observation reports, which Popper has stressed again and again throughout his long career, is irrelevant to any important questions concerning science. On the other hand, Popper's relevant views concerning falsificationism as a methodology or a policy are unfounded and unacceptable.

Logical falsifiability

Popper argues that what distinguishes scientific theories, such as Newton's or Einstein's, from unscientific theories, such as Freud's or those endorsed by astrologers, is that scientific theories are falsifiable.

What I am doing is also persuasion. If someone says, “There is not a difference” and I say, “There is a difference” I am persuading. I am saying, “I don't want you to look at it like that.”

The theme

The determination to speak of economics as discourse signifies interest in the problems of communication in economics. The preferred image is that of economists involved in conversations. Rather than reducing these conversations to a series of statements–the prevalent tendency in talk about economics–we want to observe the multiformity of economic discourse and explore the various arguments, analogies, metaphors, stories, argumentative strategies, and other rhetorical devices that economists use in their conversations. These explorations are intended to illuminate the tensions and conflicts that keep economic discourse alive. They may also uncover different modes within economic discourse and disagreements as problems of communication.

This interest in the communicative aspects of economics implies a paradigmatic shift in the discourse about economics. Issues such as the logical properties of economic theories, criteria for their appraisal, and the scienticity of economics, which have been until now the dominating concern of economic methodologists, lose much of their relevance once we alter our discussion as I am advocating. The leading questions change and so do major concepts.

In this chapter, I am addressing myself primarily to those who got me interested in talking about economics–J.J. Klant, T.W. Hutchison, and Mark Blaug.

Sir John Hicks's career in economics spans more than fifty years, in the course of which he has published fourteen books, including six collections of almost one hundred essays. In some of these, particularly Value and Capital (1939) and A Revision of Demand Theory (1956), there are hints of Hicks's general attitude to the nature of economics, but it is only recently that he has become more explicit about his views on the methodology of economics. A 1976 essay on ““Revolutions” in Economics” voiced doubts about the applicability of Lakatos's philosophy of science to economics; the opening and closing chapters of Causality in Economics (1979) threw up similar doubts about the wider question of empirical testing in economics; and, finally, an essay written in 1983 with the pointed title of “A Discipline Not a Science” decisively parted company with all varieties of empiricism, Popperianism, falsifiability, or call it what you will, in economics.

Economics as a discipline not a science

After observing that economic theories can offer no more than “weak explanations” for economic events because they are always subject to a ceteris paribus clause–a feature that he appears to believe is unique to economics–Hicks concludes:

Hausman paper

Summary remarks

My thesis is that Popper's philosophy of science is a mess, and that Popper is a very poor authority for economists interested in the philosophy of science to look to.

I am not concerned with all of Popper's philosophy of science. My focus is on falsifiability, the idea that what distinguishes science from nonscience is that scientific claims are falsiflable and that there are certain rules of procedure which one can derive from the notion of falsifiability, which characterizes how a scientist should go about his business.

Popper employs two contradictory notions of falsifiability. Logical falsifiability is logical inconsistency with some set of basic statements. This gives rise to the asymmetry between verification and falsification and to Popper's insistence that we can never have reason to believe that theories are correct. All we can find out is that they are incorrect. In other passages, however, Popper maintains that we can only decide whether we are dealing with an empirical science by examining the methods the supposed scientists employ.

A serious difficulty with logical falsifiability is that any test requires background knowledge as well as basic statements. If we could rely on nothing but relations between theories and basic statements, no science would be possible.

Popper knows this and allows that we must combine our theories with auxiliary hypotheses, and from these larger “test systems” derive predictions which involve basic statements.

The usual student about to embark on a dissertation in economics is advised to find a tractable problem, produce a model, and test its implications in ways that shed light on the problem. It is accepted that data of the right sort are hard to find and yield only to trained pummeling (or caressing). Many compromises and judgments insert themselves between the theoretical and the empirical model ultimately adopted. Tests therefore are rarely satisfying and never conclusive, and the student learns to make do with conclusions as reticent as “The results do not warrant rejection of the hypothesis.”

All of this is pretty much common wisdom. Testing is what we aspire to, and we think we know what it means to test. A mere thirty years ago, however, things were not so clear. Then, both the techniques and the methodology of testing were quite new. In 1955 there were just three texts in econometric methods available in English–Tinbergen (1951), Tintner (1952), and Klein (1953)–and Friedman's essay espousing the testing of theory by checking its predictions was just two years old. Calculating technology, too, was very primitive for the majority. As an undergraduate I cranked out calculations on hand-operated Facit machines, and anything beyond a simple linear regression was unthinkable.

From the side of economic theory, too, there was a serious snag, although it is doubtful whether it was more than vaguely sensed by many.

The preceding title and subtitle, as formulated by the authors of the draft program, seem to correspond reasonably well with what I have discovered that I want to say. But a little further clarification may not, perhaps, be superfluous.

Any significant case for adopting, or “striving after,” a methodological principle must rest ultimately on some ethical, moral, or political argument (as Popper emphasized in the debate with Habermas and elsewhere). Insofar as methodological principles are critical principles, then, the criticism they contain, or imply, must rest on some kinds of normative standards or presuppositions. Moreover, I would like to emphasize, at the start, how closely the real questions of economics, much more than is the case with any other subject, scientific or otherwise, are constantly and intimately involved with controversial political, indeed party-political, issues, an involvement that gives rise to persistent and perennial problems in applying economic knowledge to policy.

Anyhow, it is with such ultimate ethical or political meta-arguments for the (or a) falsification and falsifiability principle that this chapter is concerned.

I want to start from, and take as far as it will go, Professor Johannes Klant's analogy or comparison between the methodological principles of economics and the “rules of the game.” Personally, however, I would not want to emphasize at all appreciably the two definite articles.

This chapter discusses the literature on ad hoc theory adjustment both within economics and within the Popperian philosophical tradition. It will be shown that there are two fundamentally different concepts of ad hocness within the Popperian tradition, one associated with Popper himself and one with Lakatos, and that these two different concepts are mirrored in the way the term is used by economic methodologists and economic theorists, respectively. In Section I, Popper's use of the term “ad hoc” and its fundamental importance to the Popperian program will be discussed. In Section II, Lakatos's three different notions of ad hocness will be reduced to two (one the same as Popper's and one uniquely Lakatosian), and the importance of each of these to the methodology of scientific research programs will be examined. These first two sections, although simply surveys, are necessary because this particular aspect of both the Popperian and Lakatosian philosophy of science has been badly neglected in the recent literature on economic methodology. Section III discusses the use of “ad hoc” by both economic methodologists and economic theorists, and compares these uses with those in the philosophical literature. In the conclusion (Section IV) the methodological implications of the discussion in the first three sections will be examined. It will be argued that proper emphasis on the different notions of ad hocness, and the different groups who tend to emphasize each use, have significant implications for economic methodology, particularly Lakatosian economic methodology.

Outsiders make the same complaint about philosophers as they do about economists, saying, These writers thin down the question so. And so they both do. The economist thins the question of the good society right down to matters of price and marginal cost. The philosopher thins the good argument right down to matters of modus tollens and infinite regress. Precision comes from the conversational thinness, as does employment and other goods. But even after such achievements, we should not be surprised if outsiders want to get back to the main and fatter point.

The trouble with using Karl Popper's thinking for a history or methodology of economic thought is not mainly some flaw in its technique, though Daniel Hausman has made the pervasiveness of the flaws clear. The main problem, even in this the richest of philosophies, is its thinness. Rich as Sir Karl's thinking is, supplemented by Lakatos, elaborated and applied with wonderful ingenuity by their followers, it looks thin beside the actual conversation of science. A conversation begun in the primeval forest, as Michael Oakeshott once said, extended and made more articulate in the course of centuries, is probably not going to fit easily into a few lines of philosophy. Or rather, since the issue is empirical, it might–it might be that a philosophy could describe well what goes on in the conversation of science–but it hasn't.