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REFLECTIONWITHOUTRULES,D.WadeHands,2001,http://www.amazon.com/Reflectionwithout

RulesMethodologyContemporary/dp/0521797969

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2.1.4AustrianEconomicMethodology

AlthoughRobbinswasinfluencedbycertainAustrianideas,hismethodologydoesnotoffera

verysmoothtransitionintotheAustrianliteraturediscussedinthissection.Unfortunately,amore

effectivesegueisnotreallyavailable.Theproblemistheratherenigmaticrelationshipthatexists

betweentheMillianandAustrianmethodologicaltraditions.Ontheonehand,Austrianmethodologyis

frequentlypresentedasaspecialcaseofMillianapriorism,and,yet,ontheotherhand,theAustrian

traditionisbothantiempiricist(and,thus,deeplyatoddswithMillsfundamentalphilosophical

commitments)andearnestlymarginalistinitseconomics(and,thus,equallyatoddswithMills

commitmenttoclassicaleconomics).Aswewillseeinlaterchapters,thetendencytoviewthesetwo

methodologicalapproachesasfundamentallysimilarundoubtedlyowesmoretotheinfluenceofmid

twentiethcenturypositivismthantoanydeepphilosophicalcommonground,but,nonetheless,itstill

providesthe

main

rationale

for

adding

the

Austrian

position

to

this

section

on

Millian

methodology.

Austrianmethodologyisfarmoredifficulttosummarizethanthemethodologicalwritingsof

Mill,Robbins,ortheotherauthorsinthissection.Liketheworkoftheseauthors,theAustrianviewis

subjecttoavarietyofdifferentinterpretations,buttheAustriansituationiscompoundedbythefact

thattherearesomanydifferenteconomists,withsomanydifferentpointsofview,thatcanallbe(and

wouldprobablywanttobe)classifiedasAustrian.Thesheerbulkoftheliteratureandtherangeof

diversitywithintheprogramcombinetomakeiteffectivelyimpossibletoexamineall,oreventhe

majority,oftheworkintheAustrianmethodologicaltradition.Myapproachwillbetobrieflyconsider

thefounderoftheAustrianschool,CarlMenger,andthenturntothemethodologicalwritingsofthe

twomostimportantfiguresintwentiethcenturyAustrianeconomics:LudwigvonMisesandFriedrich

vonHayek.

Although

the

resulting

discussion

is

not

athorough

examination

of

Austrian

methodology,

it

shouldprovideausefulintroductionaswellasaneffectiveguideforthosewishingtodelvedeeperinto

thesubject.

CarlMenger(18401921)wasboththearchitectoftheAustrianschoolandoneofthe

economistssharingresponsibilityfortheearlydevelopmentofneoclassicaleconomics.Mengers

PrinciplesofEconomics(1976),LeonWalrassElementsofPureEconomics(1954),andWilliamStanley

JevonssTheoryofPoliticalEconomy(1879)allappearedintheearly1870sandaregenerallyconsidered

tobethethreemostimportantbooksinwhatultimatelycametobecalledtheneoclassical(or

marginalist)revolution.TheworksofMenger,Walras,andJevonsdohavemuchincommon,butthere

arealsosignificantdifferences(Jaff1976),andMengerseconomicsinparticulardifferedsubstantially

fromthatofJevonsandWalras.OnedifferencewasthatbothJevonsandWalrasreliedheavilyon

differentialcalculus(andthoughtitwasessentialfortheargument),whileMengeravoidedtheuseof

advancedmathematicsentirely,butthedifferencesrunmuchdeeperthansimplytheuseofcalculus.

Mengeradvocatedasubjectivistneoclassicism(GreenfieldandSalerno1983)thatemphasizedthe

subjectivegoaldirectedactionsofindividualeconomicagentsaviewthatcontinuestocharacterize

theAustrianapproachtoeconomictheory,butonethatultimatelycametobeovershadowedbythe

(nowdominant)Walrasianresearchprogram.


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AlthoughMengerhasbeenthesubjectofamassiveinterpretativeliterature,thecustomary

readingisthatwhileMengerhadmanyintellectualinfluences(seevariouspapersinCaldwell1990),his

underlyingphilosophicalpositionisbestdescribedasaversionofAristotelianessentialistrealism.13Itis

importanttoemphasizeMengersAristotelianism,sinceitrepresentsaradicallydifferentpointof

departurethantheempiricismofJohnStuartMill.AlthoughMillandMengerbothendupadvocatinga

deductiveaprioriapproachtoeconomics,andalthoughtheirgeneralapproachtotheorizing(as

opposedtotheiractualeconomictheories)maybeindistinguishabletothecasualobserver,theyarein

factstartingfromentirelydifferentphilosophicalpositions(Cartwright1994b).Thistensionthe

tensionbetweenanempiricistinspireddeductivism(theMilliantradition)andtheopenlyantiempiricist

deductivismofcertainAustrianshasmanifesteditselfinmanydifferentwaysduringthelasthundred

yearsofmethodologicaldebate.14

AlthoughtheMethodenstreitwithintheGermanhistoricalschoolprobablypushedMengerinto

aratherexaggeratedversionofhisview,itisalsoclearthathispositionwithinthedebatereflectedhis

overallmethodologicalconvictions.TheactualdebatebetweenMengerandGustavSchmollerwas

remarkablyshortlived.Itbeganin1883withSchmollersharshreviewofMengersUntersuchungen

(translatedasProblemsofEconomicsandSociology1963),andendedin1884withMengersequally

stridentreply,

areply

that

took

the

form

of

apamphlet

written

as

letters

to

afriend.

Although

the

formalexchangebetweenthetwoindividualsendedwithMengersreply,theMethodenstreitdragged

onthroughoutMengerslifeandultimatelyhadaprofoundimpactonboththeteachingofeconomicsin

GermanyandtheAustrianattitudeabouttheimportanceofmethodology.

Itisnecessarytorealisefullythepassionwhichthiscontroversyaroused,andwhatthebreak

withtherulingschoolinGermanymeanttoMengerandhisfollowers,ifwearetounderstand

whytheproblemoftheadequatemethodsremainedthedominatingconcernofmostof

Mengerslaterlife.Schmoller,indeed,wentsofarastodeclarepubliclythatmembersofthe

abstractschoolwereunfittofillateachingpositioninaGermanuniversity,andhisinfluence

wasquitesufficienttomakethisequivalenttoacompleteexclusionofalladherentstoMengers

doctrinesfromacademicpositionsinGermany.(Hayek1934,p.407)

ThestandardinterpretationoftheMethodenstreitreducestheentiredebatetoadisagreement

aboutwhetherdeductionorinductionrepresentsthe(only)propermethodforobtainingeconomic

knowledge.Mengerisviewedasaradicaldeductivistwhowantedtodeduceallofeconomictheory

fromafewbasicpropositionsabouteconomicbehavior,whiletheGermanhistoricalschoolisviewedas

anequallyradical,inductivistsectthatwantedtoabandontheoryaltogetherinfavoroftheendless

accumulationofempiricalandhistoricaldata.ThisportraitofMengersuggeststhathewasnotatall

interestedineitherempiricalevidenceorthestructureofsocialinstitutions,whilethisinterpretationof

Schmollermakeshimintoaninterminablefactfinder:aninductivistwhonevergetsaroundtoactually

makinganyinductiveinferences.Thisstandardcaricaturereallydoesaninjusticetobothsidesofthe

debate.AlthoughsortingouttheliteratureontheMethodenstreitisclearlybeyondthecurrentproject,

itshould

at

least

be

noted

in

passing

that

neither

side

actually

advocated

aview

that

was

anywhere

near

assimplisticasthatsuggestedbythestandardinterpretation.Evenrecognizingthattheheatofthefray

oftenpushesauthorsintosimplisticpositions,theargumentsofbothsidesweresubstantiallymore

complex(andmuchmorephilosophicallyinteresting)thanmerelyquarrelingoverwhetherpure

deductionorpureinductionconstitutesthepropermethodofeconomicscience.15

ThemethodologicalpositionofoneofMengersmostinfluentialfollowers,thethirdgeneration

AustrianeconomistLudwigvonMises(18811973),doesthoughcomefairlyclosetothecaricature


3/18

versionofMengerspositionintheMethodenstreit.16WhileMisessviewrepresentsaradicaldeparture

fromthemethodologicalmainstreamineconomicsamainstreamthatdespiteitsdiversitytendsto

begenerallyempiricistandmethodologicallymonist(socialandnaturalscienceshouldpracticethe

samescientificmethod)hisviewisoftenpresentedastheparadigmcaseofAustrianmethodology

(see,forexample,Hutchison1981).PerhapscommentatorsequateAustrianmethodologywithMisess

interpretationbecauseextremepositionsmakeeasiertargets,orperhapsitissimplybecauseofthe

vehemencewithwhichMisesadvocatedthesame(ratherradical)methodologicalpositionthroughout

hiscareer.

Mises(1949,1978)calledhisapproachtoeconomicmethodologypraxeology.The

philosophicaloriginsofpraxeologyareKantian:justasKantansweredthequestionofhowourconcepts

andexperiencesmatchuptotheobjectivefeaturesoftheexternalworldbyturningthequestionupside

downmakingtheobjectiveworldmatchuptoourconceptsandexperientialframeworkMises,

too,reliedontheessentialfeaturesofthehumansubjectiveconstitutiontogroundhisconceptof

knowledge.17ForKant,therewerecertainbasicprinciplesandjudgmentsthatformedthebasisofour

knowledgethingssuchastherulesoflogic,theideathateveryeventhasacause,andthefactthat

objectsexistthataresofundamentaltoourunderstandingthatwithoutthemnomeaningful

experiencewould

be

possible

at

all;

because

knowledge

of

such

principles

is

necessary

(a

precondition)

forunderstandingatall,theycannotcomefromoutside,fromempiricalobservation,butmustbe

syntheticaprioritrue.ForMises,economicknowledgealsohasa(unique)necessarypreconditiona

syntheticaprioritruepropositionnecessaryforthepossibilityofmeaningfulexperienceitisthat

humanbeingsact(engageinintentionalorpurposivebehavior).

Theaprioriknowledgeofpraxeologyisentirelydifferentcategoricallydifferentfrom

mathematics....Thestartingpointofallpraxeologicalthinkingisnotarbitrarilychosenaxioms,

butaselfevidentproposition,fully,clearlyandnecessarilypresentineveryhumanmind....The

characteristicfeatureofmanispreciselythatheconsciouslyacts.ManisHomoagens,theacting

animal....Toactmeans:tostriveafterends,thatis,tochooseagoalandtoresorttomeansin

ordertoattainthatgoalsought.(Mises1978,pp.45)

Knowledgeofthefactthathumansactpurposefullyisnotonlyapreconditionforallknowledge

ofhumanbehavior,itisknowledgethatwepossess,inpart,becauseofourselfknowledgeregarding

ourownactions.

Whatweknowaboutourownactionsandaboutthoseofotherpeopleisconditionedbyour

familiaritywiththecategoryofactionthatweowetoaprocessofselfexaminationand

introspectionaswellasofunderstandingofotherpeoplesconduct.Toquestionthisinsightisno

lessimpossiblethantoquestionthefactthatwearealive.(Mises1978,p.71)18

Thispostulatethatagentsactandtherebyengageinpurposeful,intentional,goaldirected

behavior

is

the

starting

point

for

the

entire

Misesian

research

program

in

economics.

All

legitimate

economictheoryfollowsasadeductionfromthiscoreaprioripresupposition.

Praxeologyisapriori.Allitstheoremsareproductsofdeductivereasoningthatstartsfromthe

categoryofaction....Everytheoremofpraxeologyisdeducedbylogicalreasoningfromthe

categoryofaction.Itpartakesoftheapodicticcertaintyprovidedbylogicalreasoningthatstarts

fromanaprioricategory.(Mises1978,p.44)


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TheMisesianapproachhasatleastthreeimportantmethodologicalimplications:

methodologicalindividualism,methodologicaldualism,andapriorism(Boettke1998).Itisusefulto

examineeachoftheseinturn.

Methodologicalindividualismisacommonpositioninthephilosophyofeconomics;itwas

advocatedbyMill,Robbins,andmostoftheothersdiscussedabove(andbelowaswell).Althoughthe

philosophicalliteratureisrepletewithnumerousspecificversionsofmethodologicalindividualism(see

Kincaid1996,forexample),theMisesianvariantisbasedonthesimplepresuppositionthatonly

individualsact:Thecollectivehasnoexistenceandrealitybutintheactionsofindividuals(Kincaid

1996,p.81).Thismeans(aswithRobbins)thatallofeconomicsismicroeconomics,andalthough

macroeconomicregularitiesmightsometimesbeofinteresttoeconomistsandpolicymakers,

macroeconomicconstructssuchastheconsumptionfunctionaretotallydevoidofanyrealexplanatory

power.AsWalterBlockexplainsinareplytoapaperonAustrianmethodologybythephilosopher

RobertNozick(1977):

FortheclaimoftheAustriansisthatalthoughmicroeconomicsiscorrectinitsownterms,ableto

tracephenomenabacktothecausalagents(individualdecisions),macroeconomicsincludesonly

artificialconstructs

which,

apart

from

the

individual

choices

upon

which

they

are

very

indirectly

based,havenocausalexplanatorypowerontheirown.Thereare,tobesure,statistical

correlationsbetweenvariousofthemacroeconomicaggregates.Butcutofffromthepurposesof

humanactors,theonlycausalagentineconomics,theyarepowerlesstoformpartofacausal

geneticchain.(Block1980,p.407)

Althoughindividualismisacommonviewamongthosewritingoneconomicmethodology,

Misesssecondaffirmationmethodologicaldualismisquiteuncommon.Methodologicaldualismis

thepositionthatthehumanandsocialsciencesarefundamentallydifferentincharacterthanthe

naturalsciences:thatthereisnotasinglescientificmethod,butrathertwodifferentmethods,one

suitableforstudyinghumansinsocietyandanotherforstudyingnonhumannature.Ofcourse,dualism

(twodifferentmethods)isasubsetofmethodologicalpluralism:theviewthattherearemanydifferent

waysof

obtaining

knowledge

depending

on

the

subject

at

hand.

Mill,

who

was

firmly

monistic

with

respecttoepistemology(allknowledgewasgroundedinempiricalevidence),wasmethodologically

pluralisticdifferentscienceshavedifferentspecificmethodsforobtainingknowledgeintheir

particulardomainbutsuchpluralismisrelativelyrareamongthosewritingoneconomicmethodology

(andlaterauthorsintheMilliantraditionplayeddownthisaspectofMillsview).Misessdualism

followsimmediatelyfromhisdefinitionofhumanaction.Humansactteleologicallytheyengagein

purposefulgoaldirectedbehaviorrocksandtreesdonot.Perhapsatonepointinourhistory,when

lightningboltswereviewedasaresultofpurposefulbehaviorbyangrygods,humansexplainednatural

phenomenainteleologicalterms,butmodernsciencehasreplacedsuchconceptswiththelawsof

nature.Whereasmodernsciencemayhaveaccomplishedalotwiththematerialisticpointofview,

Misesarguesthatitisnotpossibletoreducethegoaldirectedactionofhumanstophysiologyorbrain

chemistry,and

our

knowledge

of

human

beings

must

therefore

remain

grounded

in

praxeology,

not

naturalscience(Mises1978,pp.2834).19Therearetwodifferentwaystodoscience;economicsisnot,

cannotbe,andshouldnottrytobe,physics.20

FinallythereistheissueofMisessversionofapriorismandinparticularitsrelationtothe

empiricaltestingofeconomictheories.ForMises,economicsisnotsubjecttoempiricaltests;the

fundamentalpresuppositionsofpraxeologyareaprioritrue,and,therefore,assumingthedeductionis

donecorrectly,theconclusionsofdeductiveargumentsbasedonthosepremisesaretrueaswell.There


5/18

reallyisntanyroom(orreason)forempiricaltestingofsubstantiveeconomictheory.Infactthe

entirenotionoftestinginvolvesabasicinconsistency(ormisunderstanding)ofthecategoryofhuman

action.AsBruceCaldwellexplains.

Thefundamentalpostulateofhumanactionisthatallactionisrational.Praxeologistsassertthat

thispostulateisknowtobetruewithapodicticcertainty;thatis,itisaprioritrue.Misesargues

thatsince

attacks

on

the

postulate

require

purposeful

human

action,

attempts

to

refute

it

necessarilyinvolveinconsistency.(Caldwell1984b,p.364)

Ofcourse,likemanyofthoseintheMilliantradition,Miseswouldcertainlyagreethatempirical

evidencecanbeusefulindecidingabouttheapplicabilityorrelevanceofacertainresultforaparticular

problemorinaspecificcontext,butthesearequestionsabouthistorynotabouteconomictheory.

AgainWalterBlock:

Clearly,fortheAustrians,economictheoryiscompletelydevoidofanyempiricalrole,whileitis

necessary,althoughnotsufficient,foranunderstandingofeconomichistory.Experienceisalso

vitallyimportantindeterminingtheapplicabilityofapodicticallycertaineconomictheory....

notehowdifferenthereistheemploymentofthetermempiricalfromitsordinaryusein

economics.TheAustriansuseittodenotetheapplicabilityofaprioristiceconomiclawto

reality...;onthepartofestablishmenteconomists,empiricalworkisdoneinordertotestthe

truthofeconomichypotheses.(Block1980,pp.41920)21

Needlesstosay,thiscontemplatedlackofconcernoverempiricaltestingoffundamental

economictheorywillbecomeasignificantboneofcontentioninthelatermethodologicalliterature.All

ofthenonAustrianauthorsdiscussedintherestofthischapterwillusetheissueofempiricaltestingas

theirmainpointofattackaswellasaconduitforthepresentationoftheirownmethodologicalviews.

TheNobellaureateFriedrichHayek(18991992)wasafourth generationAustrianworkingin

theMengeriantradition,andalthoughhismethodologicalviewscertainlyoverlapwiththoseofMises

(hisfriend

and

teacher),

there

are

also

substantial

differences.

Hayek

is

clearly

amethodological

individualist,buthesubstantiallysoftensboththedualismandtheapriorismofMises.22Thissoftening

occursinanumberofdifferentways.

OneofHayeksmostimportantmovesistodistinguishscientismfromscienceanddirecthis

attackagainsttheformer,notthelatter.

AccordingtoHayek,scientisminvolvesamechanicalanduncriticalapplicationofhabitsof

thoughttofieldsdifferentfromthoseinwhichtheyhavebeenformed(Hayek1979,p.24)andthis

uncriticalapplicationistheproblem,notscience(oreventhephilosophyofscience):Itneedscarcely

beemphasizedthatnothingweshallhavetosayisaimedagainstthemethodsofScienceintheirproper

sphere

or

is

intended

to

throw

the

slightest

doubt

on

their

value

(Hayek

1979,

p.

23).

Hayek

seems

to

bemuchmoresensitivetothefactthatheisliving,writing,andattemptingtopersuadereaders,inthe

ageofscience;althoughMisesisneverexplicitaboutit,onegetsthefeelingthathecouldjustaswelldo

withoutscienceentirely(oratleastwithoutthewholescientificformoflife).Inmanyways,Misesisa

nineteenthcenturyhumanist,idealist inspired,philosopher.Hayek,althoughsharingmanyofMisess

viewsonpoliticsandeconomics,seemsmuchmore(earnestlyorrhetorically)resignedtoempirical

scienceasthehegemonicformofintellectuallife;meaninghasclearlyleftthestage;thetaskisto


6/18

salvageasmanyofitsbestfeaturesaspossible,andthattaskmaybebestaccomplishedbyconciliation

withthepowersthatbe.

ForHayek,theaimofasocialsciencesuchaseconomicsistoexplaintheunintendedor

undesignedresultsoftheactionsofmanymen(Hayek1979,p.41).Suchsocialsciencemuststartwith

humanaction,thesubjectivegoaldirectedactionofindividualagents,butitismuchmore.Social

sciencemuststudythecoordinationofthoseindividualactionsintosocialphenomenaandstructures

thatwerenotthegoalofanyindividualagent:Tograsphowtheindependentactionofmanymencan

producecoherentwholes,persistentstructuresofrelationshipswhichserveimportanthumanpurposes

withouthavingbeendesignedforthatend(Hayek1979,p.141).Hayekcallsthisapproachthe

compositivemethod,andattributesitoriginallytoMenger(Hayek1979,pp.65_6).23Anexampleof

thecompositivemethodmightbeMengersdiscussionofmoneyinChapter8ofhisPrinciples(1976);

establishingmoney,ameansofexchange,isnotthepurposeofanyindividualsaction,andyetmoney

emergesasanunintendedconsequenceofthatindividuallyself interestedbehavior.Thosewho

embracescientismnotonlydonotpracticethecompositivemethod,ithasbecomeaconstantsource

ofirritationofthescientisticallyminded(Hayek1979,p.146).Thescientisticallymindedview

institutionsasconsciousconsequences(notunintendedconsequences)ofhumandesign;asitis

generallynot,

at

least

postmonarchy,

the

design

of

asingle

individual,

it

must

be

the

result

of

a

consciousgroupmind.Theresultisacollectivistprejudiceinherentinthescientisticapproach(Hayek

1979,p.65);thismethodologicalcollectivism(Hayek1979,p.93)iscloselyrelatedtovarioustypesof

politicalandeconomiccollectivism,whichinturnleadstoeconomicplanning,socialengineering,and

Stalinsengineersofthesoul(Hayek1979,p.166).

Inhislatermethodologicalwork,particularly(1967a)and(1967b),Hayekemphasizesthatwhile

economicsiscapableofmakingcertaintypesofempiricalpredictions,thecomplexnatureofeconomic

phenomenapreventseconomistsfrommakinganythingmorethangeneric,orwhatHayekcalls

patternpredictions.Thesepatternpredictionsareassociatedwithaparticulartypeofscientific

explanation:explanationsoftheprinciple.Thecomplexityofeconomicphenomena,forexample,

preventseconomists

from

predicting

what

any

particular

consumer

will

buy,

but

it

is

possible

to

predict

thegeneralpatternofanindividualsconsumptionandhowitislikelytochangeinresponsetotaxesor

subsidies.Whataneconomistisexplaininginsuchtheoreticalexercisesisthegeneralprincipleatwork

behindthescenesoftheobservedpatternofeconomicbehavior.InHayeksownwords:

Thoughwemayneverknowasmuchaboutcertaincomplexphenomenaaswecanknowabout

simplephenomena,wemaypartlypiercetheboundarybydeliberatelycultivatingatechnique

whichaimsatmorelimitedobjectivestheexplanationnotofindividualeventsbutmerelyof

theappearanceofcertainpatternsororders.Whetherwecallthesemereexplanationsofthe

principleormerepatternpredictionsorhigherleveltheoriesdoesnotmatter.Onceweexplicitly

recognizethattheunderstandingofthegeneralmechanismwhichproducespatternsofacertain

kindisnotmerelyatoolforspecificpredictionsbutimportantinitsownright,andthatitmay

provideimportant

guides

to

action

(or

sometimes

indications

of

the

desirability

of

no

action),

we

mayindeedfindthatthislimitedknowledgeismostvaluable.(Hayek1967b,p.40)

Again,thisiscertainlyanAustrianargument,butisnotasradicallyaprioristastheMisesian

versionoftheAustrianmethod.Unfortunately,Hayekandhismethodologicalfollowersoftendoget

caughtinwhatseemstobearatherdebilitatingcrossfire.CriticsoutsidetheAustrianschooloften

ignoresuchmoderateviewsandcharacterizeAustrianmethodologysolelyintermsofMisessmost

radicalstatements;bycontrast,manyofthosesympathetictoAustrianeconomicsseemtoviewHayeks


7/18

methodologicalmoderationasapotentiallydangerousslipperyslope(withWalrasianorKeynesian

economicswaitingatthebottom).TheresultisthatHayeksAustrianmethodology,anAustrianview

thatismoremoderateandinmanyrespectsphilosophicallyrathercontemporary,getsmuchless

attentionthanMisesspraxeology.

2.2VariationsonPositivistThemes

Positivistphilosophyofsciencewillnotbediscussedindetailuntilthenextchapter,butthis

sectioncontinuesthethemeofexaminingthegreatesthitsofeconomicmethodologybydiscussing

themethodologicalwritingsofthreeinfluentialeconomistsTerenceHutchison,MiltonFriedman,and

PaulSamuelsonwhowereall,inonewayoranother,influencedbypositivistideas.Theseeconomists

clearlyrepresentthebigthreeoftwentiethcenturymethodologicalwriting(atleastpriortothe

explosionofliteratureduringthelastfewdecades),andforthoseofuswhoaremiddleagedAmerican

educatedprofessionaleconomists,they(particularlyFriedmanandSamuelson)representthesumtotal

ofwhatwelearnedabouteconomicmethodologyingraduateschool.Thissectionwillexaminethe

methodologicalwritingsofthesethreeeconomistsasrelativelyfreestandingargumentsaboutthe

properwaytoconductthescienceofeconomicsthemethodologicalruleswithoutanyserious

considerationof

the

underlying

positivist

philosophy.

While

this

may

appear

to

be

an

unusual

approach

discussingtheapplicationofpositivistideasbeforediscussingpositivismitactuallyworksquite

wellinthecaseoftheseauthors.Althoughallthreewerebroadlyinfluencedbypositivistideas,noneof

themactuallyemployedthepositivistphilosophicallanguageorliteratureinaverypreciseorsystematic

way.Hutchisonsworkisbyfarthemostphilosophicallyastute,andyetevenhefuseslogicalpositivism

andelementsofKarlPoppersphilosophyinawaythatmakeshisposition(particularlytheearlywork

discussedinthissection)moreofafreestandingeconomicmethodologythanaparticularapplication

ofeitherlogicalpositivismorKarlPoppersphilosophy.Friedmansmethodologicalwritingsarebasically

aphilosophical,writtenbyapracticingeconomistforpracticingeconomists,withminimaldonnish

ornamentation;and,althoughSamuelsondoesendorseoperationalism,aparticularversionofthe

positivisttradition,heconstructshisownspecificversionoftheoperationalistapproach.So,yes,the

discussionof

positivism

can

safely

be

deferred

until

the

next

chapter.

2.2.1HutchisonontheSignificanceoftheBasicPostulates

TerenceHutchisonwasonlytwentysixyearsoldwhenTheSignificanceandBasicPostulatesof

EconomicTheory(1938)appearedinprint.24Whilethebookwasmanythingsincludingtheeconomic

professionsfirstsystematicintroductiontothephilosophicalideasofKarlPopperandLogicalPositivism

itwasmostpoignantlyanattackontheaprioristpraxeologyofLudwigvonMises.AsHutchisonputit

yearslaterintheprefacetothe1960edition,hiscritiquewasoriginallyaimedatthedogmaticand

extremeapriorismofProfessorMises,whichwasmuchmoreinfluentialinthethirties(1960,p.xxi).

Overtheyears,Hutchisonsexemplarformethodologicalmalpracticeshiftedabittoward(oratleastto

include)MarxandMarxianeconomics,butin1938thetargetwasclearlyMises.

Hutchisonwasaggressivelycommittedtothepositionthateconomicsshouldbe(and

praxeologywasnot)aScienceintheimageofthenaturalsciences.Economicsshouldbeabovethe

politicalandideologicalfray:ascienceclearlydifferentiatedfrommetaphysicalspeculationandwhose

propositionsweresystematicallydisciplinedbyobjectiveempiricalfacts.

Ifthereisanyobjectinpursuinganactivityonecallsscientific,andifthewordscienceisnot

simplytobeacomprehensivecloakforquackery,prejudice,andpropaganda,thentheremustbe


8/18

adefiniteobjectivecriterionfordistinguishingpropositionswhichmaybematerialforscience

fromthosethatarenot,andtheremustbesomeeffectivebarrierforexcludingexpressionsof

ethicalorpoliticalpassion,poeticemotionormetaphysicalspeculationfrombeingmixedinwith

socalledscience.(Hutchison1960,p.10)

GonefromHutchisonsviewofscientificinquiryisthemoralscienceofMillandthe

normativescience

of

Keynes;

gone

is

the

plurality

of

disparate

scientific

endeavors

each

with

its

own

disciplinespecificcharacteristics.ForHutchison,onlyoneuniqueandnarrowlydefinedtypeof

intellectualactivityshouldbeallowedtositatthecaptainstableofscience,andaneffectivebarrierfor

excludingallothersshouldbestrictlyenforced.Hedrewademarcationallineinthesand;ononeside

wasarelativelyhomogeneoussetofactivitiesthathadearnedtherighttobedesignatedScienceand

ontheothersidewasbasicallyeverythingelse:metaphysics,religion,ideology,ethics,poetics,

praxeology,andalltheotherintellectualactivitiesthat,howeverinterestingandpassioninspiringthey

mightbe,remainepistemicallytrifling.

Hutchisonscriterionfordemarcatingthescientificandempiricallymeaningfulfromthenon

scientificandmeaninglessresidesintheempiricaltestability(potentialfalsifiability)ofthepropositionin

question.

Wesuggestthattheeconomicscientististransgressingthefrontiersofhissubjectwheneverhe

resortsto,oradvancesaspossessingsomeempiricalcontent,propositionswhich,whatever

emotionalassociationstheymayarouse,canneverconceivablybebroughttoanyintersubjective

empiricaltest,andofwhichonecanneverconceivablysaythattheyareconfirmedorfalsified,or

whichcannotbededucedfrompropositionsofwhichthatcanconceivablybesaid.(Hutchison

1960,p.10)

Ifthepropositionissubjecttointersubjectiveempiricaltestifitissubjecttopotential

refutationbytheempiricalevidencethenitisscientific;ifnot,thenitisnot.AsHutchisonputitin

hisreplytoFrankKnight(1940):Scientificpropositionsinquestionmustbetestable....Thedifference

betweenthe

propositions

about

snakes

of

the

scientific

zoologist

and

those

of

the

sufferer

from

deliriumtremensisjustthat(Hutchison1941,p.738).

Asthediscussioninthenextchapterwillmakeclear,Hutchisonsdemarcationcriterionseems

toamalgamateatleastthreedifferentwaysthatphilosophershavetriedtodifferentiatethescientificor

cognitivelymeaningfulfromthatwhichisnonscienceorcognitivelymeaningless:thelogicalpositivist

criterionofcognitivemeaningfulness,thelogicalempiricistcriterionofempiricaltestability,andthe

falsificationistdemarcationcriterionofKarlPopper.Inlaterwork,Hutchisonbecamemoreattunedto

thesubtledistinctionsbetweenthesethreecriteriaandsidedwithPopperianfalsificationismbut

in1938hewasnotconcernedwithsuchphilosophicalnuances(nor,frankly,weretherelevant

philosophersyetclearaboutthedistinctionsthemselves).InSignificance,Hutchisonwasmakinga

simple,

if

rather

doctrinaire,

point;

economics

should

be

a

Science

and

science

involves

propositions

that

canbeempiricallytested.Theorizingbasedexclusivelyonpropositionsthatarenotsubjecttoempirical

test,suchasthesyntheticaprioritruepropositionsofMisesianpraxeology,issimplynotscienceand

hasnoplaceinscientificeconomics.AsHutchisonrestatedtheargumentfiftyyearsafterthepublication

ofSignificance(addingtheMarxiststotheaprioristroll),25theargumentissimultaneously

epistemologicalandpolitical.

Apriorismrejectsfundamentallythefalsifiabilityprinciple(FP)andallempiricaltesting....Long

supportedineconomicsbyMisesians...apriorismhasnowfoundsupportamongMarxians...


9/18

MisesiansandMarxianspresumablyclaimauthority,andrejectalltestingandfalsifiability,for

quitedifferent,perhapsflatlycontradictory,fundamentalaxioms....Thepoliticalimplications

arealarminglyhostiletofreedomofeconomists,orofanygrouporauthority,claiming

infallibility,orapodicticcertainty,forselectedaxioms,andconclusionsdeducedfromthem

thatareclaimedtopossesssignificanteconomiccontent,butforwhichtesting,andfalsifiability

arecomprehensivelyrejected.TheFP,ontheotherhand,isatrulylibertarianprinciplebecause,

indemanding

testing

and

falsifiability,

it

is

based

on

human

fallibility

and

denies

the

infallibility

claimedbytheapriorists,Misesian,andMarxian.(Hutchison1988,p.176,note3)

Althoughempiricaltestabilitywasnecessaryforscientificeconomics,Hutchisonrealizedthat

economicsciencewouldalsocontainnon empiricalpropositions;infact,heinsistedthatpuretheory

wasentirelydeductiveandnotempiricalatall.AccordingtoHutchison,puretheorysimplyinvolvedthe

(deductive)drawingoutoftheimplicationsofvariousanalyticalpresuppositions.Quotingthepositivist

philosopherMoritzSchlick,Hutchisoncalledsuchexercisesagamewithsymbols(Hutchison1960,p.

33).Itisagamethatisquiteusefulbecauseitallowsustoferretoutthevariousimplicationsofour

analyticaldefinitions,butsincetheyareneitherconfirmablenorcontradictablebyanempirical

syntheticproposition,propositionsofpuretheorycannottellusanythingnewinthesenseoftellingus

newfactsabouttheworld(Hutchison1960,p.34).Hutchisonclaimedaclaimharshlycriticizedin

thelater

literature

that

such

propositions

were

necessarily

tautological

(i.e.,

true

by

the

definitions

oftheterms).26Whetherornottautologicalistheproperterm,itisclearthatHutchisonsawarole

forpuretheory,butitisalsoclearthatheviewedpuretheoryasmerelyausefulaccoutermenttothe

mainprojectofempiricaleconomicscience.

AlthoughHutchisonadmittedtheusefulnessof(nonempirical)puretheory,hedidnotconsider

themainlawsofeconomicstobeofsuchanalyticalcharacter.Thelawsofeconomicsweretestable

empiricalpropositions.Theprimarylawofeconomicmotivationtheassumptionofrationaleconomic

manwasnotsimplyanaprioriproposition;itwasatestableempiricalpropositionabouthuman

behavior.

Itis

...an

empirical

generalisation

capable

of

being

tested

empirically

and

of

being

falsified,

possessingthereforesomeempiricalcontent,howeverinsignificantthismaybe.Itisnotsimply

anempiricallyemptydefinition,whichiswhatissometimesofferedasaFundamentalprinciple

ofeconomicconduct.(Hutchison1960,p.114,emphasisinoriginal)

Hutchisonnotonlyconsideredgeneralprinciplesliketherationalityassumptiontobetestable,

healsoconsideredmorespecificrestrictionssuchasthelawofdiminishingmarginalutility(Gossens

law)tobetestableaswell.AccordingtoHutchison,theproblemisnotwithsuchlawsbutwiththe

waythateconomistshavetraditionallythoughtaboutthem.

IfoneconceivesofGossensLawasanempiricalgeneralisationonecan,whenonewantsto,go

tothefactsofeconomicbehaviourtotestit.Ontheotherhand,simplytorelyondogmatic

assertioneven

when

supported

by

phrases

like

inner

feelings

of

necessity

and

a

priori

facts,

istocommitscientificsuicide.(Hutchison1960,p.135)

ThebottomlineforHutchison(atleastinSignificance)seemedtobethattherewasnotreally

anythingmuchwrongwiththepracticeofeconomicsalongthelinesofCairnesshypotheticalmethod

orKeynesspositiveeconomics;theproblemwasmostlyinhoweconomiststhought(anddefended)the

propositionsofeconomictheory.Hutchison,ofcourse,thoughtthatsomeeconomics(Mises,Marx,etc.)

wasclearlybadscience,butforthemostpartthemainstreameconomictraditionfromMillthrough


10/18

MarshallseemedtobedefensibleonthebasisofHutchisonsscientificdemarcationcriterion.This

attitudechangedinHutchisonslaterwork(see1992b,inparticular).Here,MarxandMisesremain

villains,butnowtheformalistabstractionistmathematicaltheoriststhatdominatedAngloAmerican

economicsinthelatterhalfofthetwentiethcenturyalsobecomethesubjectofrebuke.Economicsisno

longeraboutpolicyortherealworldbutagametobeplayedfortherespectof(only)other

professionaleconomists.AccordingtoHutchison,theresultisanabstractionistmathematicalblight

(Hutchison1992b,p.102)thathasdivorcedeconomicsfrombothsocialengagementandtherulesof

properscientificmethod.Inrecentwork,Hutchisonhasevenblamedcertaineconomicmethodologists

formanyofthesetroublingdevelopments.Evidentlythosewritingoneconomicmethodologyduringthe

1960sand1970swereinfluencedbytheultrapermissiveattitudeoftheflowerchildren(Hutchison

1992b,p.48)andwerethusunable(orunwilling)tokeeptheeconomicsprofessionsfeettothe

scientificfire.But,ofcourse,considerationofsuchaccusationswouldcarryuswayaheadinourstory.

Fornow,letusdropoutofsuchrecentdebatesandreturntothesecondofthethreemaincharacters

inmid twentiethcenturyeconomicmethodology:MiltonFriedman.

2.2.2FriedmanontheMethodologyofPositiveEconomics

MiltonFriedmans

essay

on

The

Methodology

of

Positive

Economics

(1953)

is

clearly

the

best

knownworkintwentiethcenturyeconomicmethodology.Itwasamarketingmasterpiece(Caldwell

1982,p.173)thatiscitedinalmosteveryeconomicstextbookanditremains,almostahalfcenturyafter

itspublication,theonlyessayonmethodologythatalargenumber,perhapsmajority,ofeconomists

haveeverread(Hausman1992,p.162).

UnlikeHutchison,Friedmanwasnotwritingsomuchinresponsetoadebateaboutthe

philosophicalfoundationsofeconomicsbutratherinresponsetocertaincontemporarydebates

regardingthetheoreticalandempiricalpracticesoftheeconomicsprofession.Therewere,ofcourse,

manysuchdebatesrecallthiswasaperiodofgreatchangeineconomics,markedbytheriseof

Keynesianmacroeconomics,Walrasiangeneralequilibriumtheory,mathematicaleconomics,and

econometrics,as

well

as

by

the

decline

of

various

indigenous

American

strains

of

economic

theorizing

butIwilllimitmycommentstothreecontroversiesthatseemedtobearmostdirectlyonFriedmans

methodologicalviews.

First,andtheissuethatgetsthemostpressinthemethodologicalliterature,wasthedebate

overtheappropriatenessofmarginalanalysisinthestudyoflabormarketsandthetheoryofthefirm.

RichardLester(1946)andothers(HallandHitch1939)hadmadethecase(inpartbasedonsurveydata

frombusinessmanagers)thatfirmsdonotactuallymaximizeexpectedreturnsasassumedinthe

standardmarginalist

54ReflectionwithoutRules

framework.27Second,andrelatedtothemarginalistcontroversy,wastheimperfect

competitionrevolutioninitiatedbyChamberlin(1933)andRobinson(1933)whichofferedamajor

challengetotheassumptionofperfectlycompetitivemarketsthathaddominatedeconomicanalysis

sincethetimeofAdamSmith.Third,andmostrelevantinlightoflaterdevelopmentsineconomic

theory,wasthesocalledmeasurementwithouttheorydebatebetweenrepresentativesoftheCowles

Commission(Koopmans1947and1949)andtheChicagoschoolofeconomics(Vining1949aand

1949b).28Thisdebatewasostensiblyabouttheproperroleoftheoryandempiricalobservationin

theanalysisofbusinesscycles(BurnsandMitchell1946),butactuallyreflectedamuchdeeperschism


11/18

betweenthemembersoftheChicagoeconomicsdepartment(includingFriedman)andthemembersof

theCowlesCommissionwhowerephysically(butnotintellectually,methodologically,orpolitically)

housedattheUniversityofChicagofrom1939to1955.29ThestableequilibriumthatFriedmansoughtto

negotiateamong,andinresponseto,these(andother)disruptiveforceswasatypeofMarshallian,

partialequilibrium,smallnumberofequations,microandmonetaryeconomicsthatwouldsteera

theoreticalmiddlegroundbetweentheabstractWalrasiantheorizingofCowlesononehand,andthe

morebroadlysocialtheorizingofcertainInstitutionalistsontheother.Thisequilibriumalsoneededto

sustaintheuseoftheavailableempiricalevidenceandstatisticaltechniqueswithoutbeingforcedinto

theProcrusteanbedofCowlesianstructuralequationeconometrics;allowfortheuseofcertain

Keynesianbasedtheoreticalconstructs(liketheISLMmodel)withoutbuyingintoKeynesian

interventionistpolicyorpoliticalphilosophy;andpreserveboththetwohundredyearoldframeworkof

economicanalysisbasedoncompetitivemarkets,andtheneoclassicalassumptionofrational

maximizingagents.Keepingalloftheseballsintheairatthesametimewasnotaneasyjob.

FriedmansmainargumentinTheMethodologyofPositiveEconomicswasthatforthe

purposesofpositive(asopposedtonormative)economics,thetruthoftheassumptionsofatheorydo

notmatterall.Theonlythingthatmattersindecidingamongvariouseconomictheoriesiswhichoneis

mostsuccessful

in

making

empirical

predictions.

The

theory

that

makes

the

most

accurate

predictions

in

therelevantdomainisthebesttheory,andifitemploysunrealisticassumptionsthisshouldnotinany

waydetractfromitssuccessasapositivescientifictheory.

Viewedasabodyofsubstantivehypotheses,theoryistobejudgedbyitspredictivepowerfor

theclassofphenomenawhichitisintendedtoexplain.Onlyfactualevidencecanshow

whetheritisrightorwrongor,better,tentativelyacceptedasvalid,orrejected....the

onlyrelevanttestofthevalidityofahypothesisiscomparisonofitspredictionswithexperience.

(Friedman1953,pp.89,emphasisinoriginal)

Whileonlypredictionsmatter,Friedmandoesarguethatsomepredictionsaremoreimportant

thanothers.Predictinganovelfactevidencenotyetobservedisthekeydeterminantofa

successfuleconomic

theory.

In

Friedmans

own

words,

the

ultimate

goal

of

apositive

science

is

the

developmentofatheoryorhypothesisthatyieldsvalidandmeaningful...predictionsabout

phenomenanotyetobserved(Friedman1953,p.7).Now,sinceeconomicsoftenpredictsthingsthat

happenedinthepast,whetherthatpastisnineteenthcenturyeconomichistoryorthismorningsstock

market,Friedmanalsomakesitclearthatnoveldoesnotnecessarilymeaninthefuture,butrather

unknowntotheeconomistproposingthetheoryinquestion:theymaybeaboutphenomenathat

haveoccurredbutobservationsonwhichhavenotyetbeenmadeorarenotknowntotheperson

makingtheprediction(Friedman1953,p.9).ItisusefultonotethatFriedmanhasconsistently

maintainedtheimportanceofnovelfactsthroughouthiscareerfromhiscritiqueofLangein1946

(theabilitytodeducefactsthathavenotyetbeenobserved,p.631)totheFriedmanandSchwartz

responsetoHendryandEricssonin1991(anyhypothesismustbetestedwithdataornonquatitative

evidenceother

than

that

used

in

deriving

the

regression

or

available

when

the

regression

was

derived,

p.49)itiscertainlynotanargumentthatjustappearedinthe1953methodologicalessay.30

Ofcourse,ifpredictionisallthatmatters,novelorotherwise,thentherealismofthe

assumptionsareentirelyirrelevanttotheimportanceofaneconomictheory.31Tousetwoof

Friedmansownexamples,objectsfallasiftheywerefallinginavacuumandtheleavesonatree

arrangethemselvesasiftheyweretryingtomaximizethesunlighttheyreceive;theseassumptions

thepresenceofavacuumandleavesactingrationallyarehighlyunrealistic,andyetscientifictheories


12/18

basedonsuchunrealisticassumptionsyieldhighlyreliable(andoftennovel)empiricalpredictions.

AccordingtoFriedman,therelevantquestiontoaskabouttheassumptionsofatheoryisnotwhether

theyaredescriptivelyrealistic,fortheyneverare,butwhethertheyaresufficientlygood

approximationsforthepurposeinhand(1953,p.15),andingeneral,themoresignificantthetheory,

themoreunrealistictheassumptions(1953,p.14).Suchargumentsabouttheirrelevanceofunreal

assumptionsledPaulSamuelsontocharacterizeFriedmansmethodologicalpositionastheFtwist(a

labelthathasstuckintheliterature):Atheoryisvindicableif(someof)itsconsequencesare

empiricallyvalidtoausefuldegreeofapproximation;the(empirical)unrealismofthetheoryitself,or

ofits`assumptions,isquiteirrelevanttoitsvalidityandworth(Samuelson1963,p.232).

Friedmanspositionontheimportanceofpredictionandtheirrelevanceofunrealistic

assumptionsbothhaveimportantimplicationsforthetheoreticaldebatesinwhichhe,andthe

economicsprofessionmoregenerally,wasembroiledatthetimeandforthenextfewdecades.Thesole

criteriaofpredictiveaccuracyboredirectlyonhisdebateswithCowlesandotherKeynesians,sincetheir

manyequationbigeconometricmacromodelsdidntseemtoperformpredictivelyanybetterthanthe

small,oftensingleequation,modelsofFriedmanandothermonetarists.Theirrelevanceofunreal

assumptionshadanobviousimpactonthemarginalistcontroversyanddebatesaboutthe

appropriatenessof

the

assumption

of

perfect

competition.

If

models

assuming

profit

maximization

and

perfectcompetitionweremorepredictivelysuccessfulthantheavailablealternatives(whichFriedman

certainlyassumed),thenthepurportedunrealismoftheirassumptionswasentirelyirrelevanttotheir

scientificusefulness;and,perhapsevenmoreimportant,onecouldjustdroptheentireirrelevant

debateaboutwhethersuchassumptionswereunrealisticornotandgetonwithactuallydoing

economics(i.e.,makingeconomicpredictions).Friedmanmadetheseimplicationsquiteclearinhis

originalessay.

Theabstractmethodologicalissueswehavebeendiscussinghaveadirectbearingonthe

perennialcriticismoforthodoxeconomictheoryasunrealisticaswellastheattemptsthat

havebeenmadetoreformulatetheorytomeetthischarge....Aswehaveseen,criticismofthis

typeislargelybesidethepointunlesssupplementedbyevidencethatahypothesisdifferingin

oneoranotheroftheserespectsfromthetheorybeingcriticizedyieldsbetterpredictionsforaswidearangeofphenomena.(Friedman1953,pp.30l)

Thismessageessentiallydontcriticizeuntilyouhaveatheorythatpredictsbetterseems

tohavebeengreetedwithasenseofliberationbytheeconomicsprofession.Economistscouldnowget

onwiththejobofexploringandapplyingtheirmodelswithoutbotheringwithobjectionstotherealism

oftheirassumptions(Hausman1992,p.164,note18).

Friedmansessayhasgeneratedamassivecriticalandinterpretativeliterature.32Thefirstround

ofthesedebateswasdubbedtheassumptionscontroversyandcontributionstoithaveproceeded

relativelyunimpededsinceitsbeginningsinthemid1950suntilthecurrenttime.Therealsohavebeen

othersubdebates

that

have

emerged

along

the

way

(some

of

these

will

be

discussed

in

Chapters

6and

7)andFriedmanspositionhasconsistentlyservedasafoilfor,orasthebackdropto,authorspresenting

othermethodologicalviews.Althoughithasdieddowninrecentyears,therewereafewdecadeswhere

almosteverythingwrittenabouteconomicmethodologyseemedtostartwithFriedmansessay.Given

theextentofthedebate,Iwillnotattempttosummarizetheliteratureontheassumptionscontroversy;

instead,IwilljustpicktwoauthorsMusgrave(1981)andHausman(1992)thathavemade

particularlyinfluentialremarksregardingFriedmansessay.33


13/18

AlanMusgraves(1981)rathersimple,butveryimportantpoint,isthatnotallassumptionsplay

thesameroleineconomic(orforthatmatteranyscientific)theory.Friedmanjusttalksabout

assumptionswithoutspecifyingexactlywhattypeofassumptionsheistalkingabout.Musgravesimply

arguesthatforcertaintypesofassumptions,Friedmanisrighttheydontmatterbutforother

typesofassumptions,theydo.Hedividestheassumptionsineconomicsintothreemaintypes:

negligibility,domain,andheuristic.Musgravediscusseseachofthesetypes,butalsonotesthathis

threefoldclassificationdoesnotexhaustallofthevarioustypesofassumptionsthatappearin

Friedmanspaper.

Negligibilityassumptionssimplyspecifythatsomefactorxisnegligible;inotherwordsthingsact

asifxwerethecase.Thewaytothinkaboutnegligibilityassumptionsisnotthatsuchfactorsareabsent,

butratherthattheyareirrelevantforthephenomenatobeexplained(Musgrave1981,p.380).

Musgravegivestheexampleofanogovernmentsectorassumptioninamacromodel,butperhapsa

betterexamplewouldbetheassumptionofperfectcompetitionintheanalysisofshortrun(qualitative)

comparativestatics.Anincreaseindemandwillincreasethepriceofthegoodwhetherthefirmis

competitiveoramonopoly;theassumptionthatthemarketiscompetitiveisirrelevantforthis

particularphenomena.MusgravearguesthatFriedmanisbasicallycorrectaboutnegligibility

assumptions

some

of

the

things

that

Friedman

says

about

them

are

not

exactly

right

but

Friedman

iscorrectthattherealismofsuchassumptionsisirrelevanttothevalidityorusefulnessofaneconomic

theory.

Musgravessecondtypeofassumptionisadomainassumption;itspecifiesthatatheoryworks

(perhapsonlyworks)insomeparticulardomain.Topursuethemacroexample;adomainassumption

thatthereisnogovernmentsectorwouldsaythatthetheoryworks(perhapsonlyworks)inan

economywithoutagovernmentsector.Musgraveargues,contraFriedman,thatsuchassumptionsdo

matter.Inparticular,ifoneconvertsafalsifiednegligibilityassumptionintoadomainassumption,one

decreasesthetestabilityofthetheory.

Finally,heuristic

assumptions

are

assumptions

that

are

initially

assumed

to

be

negligible,

but

eventually,atalaterstage,willbeweakenedtoseeiftheyhaveanyimpact.Continuingwiththe

exampleofnogovernmentalsector;asaheuristicassumption,itwouldsayletsassumeforthe

momentthatthereisnogovernmentsector,butlaterwewillrelaxtheassumptionandseeifithasan

impactontheresults.Heuristicassumptions,accordingtoMusgrave,areextremelyimportantina

scientifictheorysuchaseconomicswherethelogicomathematicalmachineryissocomplicatedthata

methodofsuccessiveapproximationhastobeused(Musgrave1981,p.383,emphasisinoriginal).

Becauseofthetentativenatureofsuchassumptions,theyareinvolvedmoreintheprocessoftheory

refinementthaninempiricalprediction.

MusgraveconcludeshisanalysisofFriedmansessaywiththefollowingsummaryofhisposition.

Ihaveclaimedthatthesocalledassumptionsofeconomictheories(andofotherscientific

theories)playatleastthreedifferentroleswithinthosetheories,andareassertionsof(atleast)

threedifferenttypes.IhavearguedthatFriedmanoverlookedthesedistinctions,andwasled

therebytothemistakenthesisthatthemoresignificantthetheory,themoreunrealisticthe

assumptions(Musgrave1981,p.385)34

DanielHausmanhasbeenaprolificcontributortotherecentmethodologicalliterature(hiswork

willbeexaminedinmoredetailinChapter7)andhasmadecriticalremarksaboutFriedmans


14/18

methodologyinanumberofdifferentcontexts.ThecriticismthatIwilldiscussinthissectionisthe

criticismheraisesinChapter9ofTheInexactandSeparateScienceofEconomics(1992).Here,Hausman

makestheargumentthatFriedmansclaimsabouttherealismofassumptionsdonotstandupevenif

oneacceptsempiricalpredictionasthesolecriterionforscientificsuccess:Hausmanscriticismshould

(forreasonsthatwillbeobviousinamoment)becalledtheusedcarargument.Hebeginsby

summarizingFriedmansargumentinthefollowingway:

1. Agoodhypothesisprovidesvalidandmeaningfulpredictionsconcerningtheclassof

phenomenaitisintendedtoexplain(premise).

2. Theonlytestofwhetheranhypothesisisagoodhypothesisiswhetheritprovidesvalid

andmeaningfulpredictionsconcerningtheclassofphenomenaitisintendedtoexplain

(invalidlyfrom1).

3. Anyotherfactsaboutanhypothesis,includingwhetheritsassumptionsarerealistic,are

irrelevanttoitsscientificassessment(triviallyfrom2).(Hausman1992,p.166)

Themainproblemwiththeargumentisthatisitnotavalidargumentatall:Statement2is

nottrueanditdoesnotfollowfromstatement1.Hausmanusesthefollowinganalogousargumentto

makehispoint:

1 Agoodusedcardrivesreliably(oversimplifiedpremise).

2 Theonlytestofwhetherausedcarisagoodusedcariswhetheritdrivesreliably

(invalidlyfrom1).

3. Anythingonediscoversbyopeningthehoodandcheckingtheseparatecomponentsof

ausedcarisirrelevanttoitsassessment(triviallyfrom2).(Hausman1992,p.166)

Theproblemisofcoursethatwithausedcaroraneconomicmodeltherelevantissueishow

wellitwillperforminthefutureandinothercircumstances.Theoryshouldbeaguideevenifwe

focuson

empirical

prediction

to

new

circumstances

and

new

situations,

and

for

those

forward

lookingapplicationsexaminingtheparts(theassumptions)matter.Infact,thoughHausmandoesnot

makethispoint,Friedmansemphasisonnovelfactsgivesawayhiscommitmenttosuccessfulfuture

performance,butFriedmanneverclosesthecircle.Friedmanseemstobemakingtheimplicit

assumptionthatsuccessinonenovelsituationimprovestheprobabilityofsuccessinadditionaland/or

futurenovelsituationsthatwemighthaveaninterestin,butthereisnoobviousreasonforthistobe

thecase.SuchissuesactuallycarrythediscussionbeyondFriedmansessayandintodebatesabout

realismandinstrumentalisminthephilosophyofscience:adiscussionthatmustwaituntilthenext

chapter.AtthispointIjustwanttonotethatHausmanscriticismofFriedmanseemstobecorrect

evenifoneisonlyinterestedinprediction,theassumptionsstillmatter.

2.2.3SamuelsonandOperationalisminEconomics

PaulSamuelsonhadaprofoundimpactontheshapeandstructureofpostwareconomics.Not

onlywasheaneconomistwitharrestingtechnicalabilities,hewasalsothesecondindividual(andfirst

American)toreceivetheNobelPrizeineconomicscience,and,hewasalso,morethananyother

individual,responsibleforthestructureandcontentofeconomicseducationinpostwarAmerica.During

the1950sand1960s,theteachingofcollegeleveleconomicsintheUnitedStatesstabilizedaroundtwo

keytexts:SamuelsonsEconomics(1948a)attheundergraduateintroductorylevelandSamuelsons

FoundationsofEconomicAnalysis(1947)atthegraduatelevel.Althoughthesetwobookswere


15/18

ultimatelyreplacedintheirrespectivemarketsbymoreuser friendlyspinoffsfromotherauthors,they

nonethelesseffectivelydefined(andtoalesserextentcontinuetodefine)theteachingofmodern

scientificeconomicsinbothformandcontent.IntermsofpedagogicalformEconomicsgaveusthe

frameworkforthetwopart,microandmacro,introductorysequencefamiliartomany(even

noneconomist)readersfromtheirownundergraduateeducation,whereasFoundationssenttheclear

signalthatstudentsshouldnoteventhinkaboutgraduateworkineconomicsuntiltheyhavejumped

throughtheappropriatemathematicalhoops(demonstratingcompetencyinatleastmultivariate

calculus,realanalysis,andlinearalgebra).Withrespecttotheoreticalcontent,bothtextsaffirmedthe

neoclassicalsynthesisofWalrasianmicroeconomicsandKeynesianmacroeconomics;atthe

introductorylevel,themicrowasabitmoreMarshallianwithitsfocusonsinglemarketsandfirms,but

eventherethetonewasfirmlyWalrasian.

Samuelsonclearlydemonstratedtechnicalbrillianceineconomictheoryandhecertainlyhadan

importantimpactontheteachingofcollegeleveleconomics,buteventhesetwofactorstogetherare

notsufficienttoaccountforhiswideranginginfluenceoneconomicsandtheimageoftheeconomics

profession.AnothercontributingfactorwasundoubtedlySamuelsonsreputationasMr.Science

(PearceandHoover1995,p.184);itwasactuallySamuelson,andnotFriedman,whobybothwordand

deedwas

responsible

for

the

twentieth

century

self

image

of

the

neoclassical

economist

as

scientist

(Mirowski1989c,p.182).Samuelsonofferedtheeconomicsprofession,andthoseingovernmentand

businessassociatedwiththeprofession,animageofscientificeconomicsthatwasabovethepolitical

fray,neitherextremerightnorextremeleft(neitherMisesnorMarx),butanobjectivedisinterested

instrumentofscientificanalysisthatcouldbeusedtoreconcileandharmonizethevariousconflicting

interestsinpostwareconomiclife.AsPearceandHooverputitinarecentstudyofSamuelsons

introductorytext:

HisEconomicsisaboveallaharmonistbook.Thecoremodelcontinuesinitssanctifiedroleas

thePrinceofPeaceamongcompetingeconomicdoctrines.Thefoundationsofthepeaceablekingdom

are,aboveall,inscientificeconomics....Science,forSamuelson,isnotjustamatterofnaiverealism;it

alsorelies

on

aneutral

and

generally

applicable

analytical

framework.

(Pearce

and

Hoover

1995,

p.

198,

emphasisinoriginal)

WhilethesemotivationsseemsimilartothemotivationsofHutchisonandJ.N.Keynes

discussedabove,inSamuelsonscase(andinthepost Hiroshimaera)theymanifestthemselvesina

fundamentallydifferentsetofmethodologicalrecommendations.

Samuelsonsstatedeconomicmethodologyisoperationalistanddescriptivist,andalthoughboth

ofthesephilosophicalpositionswillbeexaminedinmoredetailinthenextchapter,Samuelsonwas

fairlyclearwhathemeantbybothterms.Consideroperationalismfirst.

Althoughoperationalistideasgobackatleasttothenineteenthcentury,operationalismwas

firmlyestablishedasareputablephilosophicalpositionbythepublicationofPercyBridgmansTheLogic

ofModernPhysicsin1927.35Bridgmanwasapracticingphysicist(NobelLaureatein1946)whowrote

widelyonoperationalistphilosophicalideasandtheirimplicationsforcontemporaryphysicaltheory.

ThefirstreferencetoBridgmansoperationalismineconomicsseemstohavebeeninHenrySchultzs

TheoryandMeasurementofDemand(1938),but,sinceoperationalistideaswerewidelydiscussed

duringthe1930sand1940s(inpsychologyaswellasphilosophyandphysics),itisnotclearwhether

SamuelsonpickeduptheseideasfromSchultzduringhisundergraduateyearsatChicago,orfrom

elsewhereontheintellectuallandscape.36


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Thecoreoperationalistideaisthataquestionhasmeaningonlyifthereexistasetofoperations

thatwillprovideadefinitiveanswertoit.Correspondingly,aconceptortermisoperationally

meaningfulifitcanbecharacterizedbyaparticularsetofoperations,andthemeaningofaconceptor

termisdefinedbythatsetofoperations.Bridgmanhimselfusedtheconceptoflengthasanexample.

Whatdowemeanbythelengthofanobject?Weevidentlyknowwhatwemeanbylengthifwe

cantellwhatthelengthofanyandeveryobjectis,andforthephysicistnothingmoreisrequired.Tofindthelengthofanobject,wehavetoperformcertainphysicaloperations.Theconceptof

lengthisthereforefixedwhentheoperationsbywhichlengthismeasuredarefixed:thatis,the

conceptoflengthinvolvesasmuchasandnothingmorethanthesetofoperationsbywhich

lengthisdeterminedIngeneral,wemeanbyanyconceptnothingmorethanasetofoperations;

theconceptissynonymouswiththecorrespondingsetofoperations.(Bridgman1927,p.5,

emphasisinoriginal)

SamuelsonsFoundationswasbasedonhis1941doctoraldissertation,whichcarriedthesubtitle

TheOperationalSignificanceofEconomicTheory,andfromtheveryfirstpageofthebookhemakesit

clearthatheisexclusivelyconcernedwith(andalsothathethinksthatnotenoughpreviouseconomists

havebeenconcernedwith)thederivationofoperationallymeaningfultheorems(Samuelson1947,p.

3,emphasisinoriginal).ForSamuelson,atheoremisoperationalifitcanbeempiricallytested;ameaningfultheoremissimplyahypothesisaboutempirical

13See,forexample,Cartwright(1994b),Hutchison(1973),Kauder(1957),Klant(1984,pp.6671)Clive

Lawson(1996),Maki(1990a,1990b,1992c,1997),Mirowski(1988,pp.225;1989a,pp.2602),Oakley(1997),and

Smith(1990).

14LionelRobbinsseemstobeagoodexampleofthistension;itisneverentirelyclear(particularlyinthe

2ndeditionofhisEssay)whichsideofthisphilosophicalfenceheison,andthisfoundationalbipolarityseemsto

open

the

door

to

a

number

of

different

criticisms.

15ThereissurprisinglylittleEnglishlanguageliteratureontheMethodenstreit,giventhatitlurkedinthe

backgroundofmostlatenineteenth andearlytwentiethcenturymethodologicalwriting.Aswesawinthe

previousdiscussionofKeynesandRobbins,acommonapproachwastouseitasakindofominousthreat;Listen

tomy,moremoderate,methodology,sowedonotfallintoextreme(andunproductive)viewslikethose.Certain

laterAustriansevenseemedtotakesuchastance(seeBohmBawerk1890,forexample).Someofthemore

contemporaryliteratureontheMethodenstreitincludesBarkai(1996),Bostaph(1978),Fri8by(1976),Hutchison

(1973),andMki(1997).

16MengerisconsideredtobeafirstgenerationAustrian;hisyoungercolleagues,suchasWieserand

BhmBawerk,constitutedthesecondgeneration,makingMisesamemberofthethirdgeneration.

17SeeBarrotta(1996)andParsons(1997b)forarecentexchangeconcerningtheconnectionbetween

MisesandKant.

18Theclaimthatourunderstandingoftheactionsofotherscomesfromsharingacommoninterpretive

frameworkopensthedoortoVerstehenorhermeneuticapproachestothesocialsciences:approachesoften

consideredtobethepolaroppositeofaneconomicapproachtohumanbehavior.


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Theeconomistquaactingindividualunderstandsintentbyvirtueofpersonallyengagingin

purposefulaction.AconsequenceofthisVerstehen,orinterpretiveunderstanding,isthatone

imputesmeaningtotheactionorobjectonthebasisofanalogywithonesownpatternof

purposefulaction.(GreenfieldandSalerno1983,p.49)

Thishasledtoafairlyextensiveliteratureontherelationshipbetweeneconomics,particularlyAustrian

economics,and

the

triad

of

Verstehen,

hermeneutics,

and

interpretation.

See

Bacharach

(1989),

Gordon

(1991,

Ch.

14),GreenfieldandSalerno(1983),Hayek(1973),Klant(1984,pp.7682),Lavoie(1990,1991b),andLewin(1996)

forawiderangeofdifferentviewsonthesubject.SeeWinch(1990)foraclassicstatementoftheinterpretiveview

ofsocialscienceandRosenberg(1995a)forarecentsurveyofthesubject.

19Misesanticipates,andcritiques,theeliminativematerialistclaimsdiscussedbelow(attheendof

Chapter4).

20AccordingtoMises,attemptstotrytodoeconomicslikephysicsleadtoundesirablepolitical

consequences.ThedesiretomakethesocialsciencesuniversalatendencythatMisesrightlyidentifieswith

logicalpositivism(seeChapter3)stems,heargues,fromadictatorialcomplextoseethemselvesintherole

ofthedictatortheduce,theFhrer,theproductiontsarinwhosehandsallotherspecimensofmankindare

merepawns

(Mises

1978,

pp.

40

1).

21ItisusefultonotethatMisessattitudeaboutempiricaltestingseemstobemucheasiertodefend

nowthatproblemsliketheoryladennessandunderdetermination(discussedindetailinChapter3)aregenerally

acceptedwithinthephilosophicalliterature(seeCaldwell1984bandBoettke1998).Ofcourse,thisdoesnot

vindicateMisessposition,butitdoeslegitimizemanyofhiscriticismsofempiricismandpositivisminwaysthat

wouldhavebeeninconceivableonlyafewdecadesago.

22Thereissomedebateaboutwhen(orif)HayekmadethetransformationfromMisess

methodologicalviews.BruceCaldwell(1988)hasarguedthattherewasatransformationthatbeganaroundthe

timeofHayeksEconomicsandKnowledge(1937),butthetransformationhadlesstodowithMisesthanwith

Hayeksgrowingdiscomfortwithequilibriumanalysisfordealingwithimportantquestionslikethecoordinationof

knowledge.

See

Caldwell

(1992a,

1992b,

1998a)

and

Hutchison

(1981,

Ch.

7,

1992a).

23Aswewillsee(inChapter7),thephilosopherKarlPopperalsocharacterizedsocialscienceasthestudy

oftheunintendedconsequencesofindividualrationalaction.Althoughitisclearthatsuchideasgobackatleastto

BernardMandeville,AdamFerguson,andAdamSmith,HayeksuggeststhatPoppergottheideaofunintended

consequencesdirectlyfromhim(Hayek1967c,p.100).SeeCaldwell(1991a,1992a,1992b,1998a)andHutchison

(1981,Ch.7,1992a)fordifferentviewsofthePopperHayekconnection.

24SeeCaldwell(1998b)andCoats(1983a)forageneraldiscussionofHutchisonsworkandCoats(1983b)

forabibliographyofhiswritings(priorto1983).

25HollisandNell(1975),inparticular.

26criticalreviewsofHutchison(1938)particularlyKlappholzandAgassi(1959),Knight(1940),and

Machlup(1955)constitutesomeofthemostimportantmethodologicalliteratureofthemiddleofthetwentieth

century.Althoughmanyoftheissuesraisedbythesecriticswereunappreciated(ormisunderstood)atthetime,

recentmethodologicaldebateshavegivenusanewrespectformanyoftheargumentsraisedinthesepapers.

27Machlup(1946)andStigler(1947)forotherresponsestothisliterature.


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28ThepapersassociatedwiththemeasurementwithouttheorydebatearereprintedinVolumeIIof

Caldwell(1993);alsoseeMirowski(1989b).DanielHammonds(1993)interviewwithFriedmanprovidessome

insightintothefactorsthatFriedmanhimself(atleastwithhindsight)feltweremostimportantinthe

developmentofhismethodology.

29SeeMirowskiandHands(1998)foradiscussionofFriedmansinvolvementinthedisagreements

betweenthe

Cowles

Commission

and

the

Chicago

economics

department

during

this

period.

30WewilldiscoverinChapters3and7thatnovelfactsarealsoimportantforothermethodological

approaches.

31Maki(1989,1992b,andelsewhere)has,Ithinkcorrectly,arguedthatrealisticnessisamuchbetter

termforwhatFriedmanisinterestedinthanrealism,butIwillfollowtraditionandcontinuetousetheterm

realism.SeeSection7.3.2belowformorediscussionofMakisargument.

32Thepreponderanceofthisliteraturehasbeencritical(Mayer1993and1995areexceptions).This

createsaratherquizzicalsituationwheremany,perhapsevenmost,practicingeconomistsendorseFriedmans

view(atleastinaproformaway),whilealmostallofthecommentarywrittenonthepaperisquitecritical.This

reflectsin

part

who

has

written

on

the

subject

of

economic

methodology

in

the

latter

half

of

the

twentieth

century,butthereareundoubtedlyotherfactorsaswell.Atthisjuncture,Ionlywanttopointouthowdifferent

thisisfromsay,Mill.

33OtherkeycontributionstotheassumptionscontroversyincludeBearandOrr(1967),Klappholzand

Agassi(1959),Koopmans(1957),Maki(1989,1992b,2000a),Melitz(1965),Nagel(1963),Rotwein(1959),

Samuelson(1963),andWong(1973).SeeHausman(1992,p.163,n.17)orRedman(1991,p.99,n.4)foramore

completelist.

34Maki(2000a)presentsanumberofcriticismsofMusgravesinterpretationoftheassumptions

controversy.

35Although

it

is

clear

that

Bridgman

disliked

the

term

operationalism

and

felt

that

in

some

ways

he

had

createdaFrankenstein(Green1992,p.310).

36Unlikemostoftheeconomistsdiscussedinthischapter,italsoislessclearwhatspecificintellectual

concernsmotivatedSamuelsonsmethodologicalcommitments. Ipersonallysuspectthatitwasaseriesofdeeply

disturbingruninswithFrankKnightduringSamuelsonsyearsatChicago,butthisispurelyspeculationonmypart.

austrian methodology

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