The Competitiveness of Nations
in a Global Knowledge-Based Economy
H.H. Chartrand
April 2002
Milton Friedman
Essays in Positive Economics
Part I - The Methodology of Positive Economics
*
University of Chicago Press (1953), 1970, pp. 3-43
Introduction, 3;
I. The Relationship between Positive
and Normative Economics, 3;
In his admirable book on The Scope and Method of
Political Economy John Neville Keynes distinguishes among “a positive
science … a body of systematized knowledge concerning what is; a normative
or regulative science…[,] a body of systematized knowledge discussing criteria
of what ought to be…[,]an art… [,] a system of rules for the attainment of a
given end”; comments that “confusion between them is common and has been the
source of many mischievous errors”; and urges the importance of “recognizing a
distinct positive science of political economy.”
1
This paper is concerned primarily with certain methodological problems that arise in constructing the “distinct positive science” Keynes called for - in particular, the problem how to decide whether a suggested hypothesis or theory should be tentatively accepted as part of the “body of systematized knowledge concerning what is.” But the confusion Keynes laments is still so rife and so much of a hindrance to the recognition that economics can be, and in part is, a positive science that it seems well to preface the main body of the paper with a few remarks about the relation between positive and normative economics.
I. THE RELATION BETWEEN POSITIVE AND NORMATIVE
ECONOMICS
Confusion
between positive and normative economics is to some extent inevitable. The subject matter of economics is
regarded by almost everyone as vitally important to himself and within the range of his own experience and competence; it
is
* I have incorporated bodily in this article without
special reference most of my brief “Comment” in A Survey of Contemporary
Economics, Vol. II (B. F. Haley, ed.) (Chicago: Richard D. Irwin, Inc.,
1952), pp. 455-57.
I am indebted to Dorothy S. Brady, Arthur F. Burns, and
George J. Stigler for helpful comments and criticism.
1. (London: Macmillan & Co., 1891), pp. 34-35
and 46.
3
the source of continuous and extensive controversy and
the occasion for frequent legislation. Self-proclaimed “experts” speak with many
voices and can hardly all be regarded as disinterested; in any event, on
questions that matter so much, “expert” opinion could hardly be accepted solely
on faith even if the “experts” were nearly unanimous and clearly disinterested.
2 The conclusions of positive economics seem to be, and
are, immediately relevant to important normative problems, to questions of what
ought to be done and how any given goal can be attained. Laymen and experts alike are inevitably
tempted to shape positive conclusions to fit strongly held normative
preconceptions and to reject positive conclusions if their normative
implications - or what are said to be their normative implications - are
unpalatable.
Positive economics is in principle independent of any
particular ethical position or normative judgments. As Keynes says, it deals with “what is,”
not with “what ought to be.” Its
task is to provide a system of generalizations that can be used to make correct
predictions about the consequences of any change in circumstances. Its performance is to be judged by the
precision. scope, and conformity with experience of the predictions it yields.
In short, positive economics is, or
can be, an “objective” science, in precisely the same sense as any of the
physical sciences. Of course, the
fact that economics deals with the interrelations of human beings, and that the
investigator is himself part of the subject matter being investigated in a more
intimate sense than in the physical sciences, raises special difficulties in
achieving objectivity at the same time that it provides the social scientist
with a class of data not available to the physical sci-
2. Social science or economics is by no means peculiar
in this respect - witness the importance of personal beliefs and of “home”
remedies in medicine wherever obviously convincing evidence for “expert” opinion
is lacking. The current prestige
and acceptance of the views of physical scientists in their fields of
specialization - and, all too often, in other fields as well - derives, not from
faith alone, but from the evidence of their works, the success of their
predictions, and the dramatic achievements from applying their results. When economics seemed to provide such
evidence of its worth, in Great Britain in the first half of the nineteenth
century, the prestige and acceptance of “scientific economics” rivaled the
current prestige of the physical sciences.
4
entist. But
neither the one nor the other is, in my view, a fundamental distinction between
the two groups of sciences. 3
Normative economics and the art of economics, on the
other hand, cannot be independent of positive economics. Any policy conclusion necessarily rests
on a prediction about the consequences of doing one thing rather than another, a
prediction that must be based - implicitly or explicitly - on positive
economics. There is not, of course,
a one-to-one relation between policy conclusions and the conclusions of positive
economics; if there were, there would be no separate normative science. Two individuals may agree on the
consequences of a particular piece of legislation. One may regard them as desirable on
balance and so favor the legislation; the other, as undesirable and so oppose
the legislation.
I venture the judgment, however, that currently in the
Western world, and especially in the United States, differences about economic
policy among disinterested citizens derive predominant from different
predictions about the economic consequences of taking action - differences that
in principle can be eliminated by the progress of positive economics - rather
than from fundamental differences in basic values, differences about which men
can ultimately only fight. An
obvious and not unimportant example is minimum-wage legislation. Underneath the welter of arguments
offered for and against such legislation there is an underlying consensus on the
objective of achieving a “living wage” for all, to use the ambiguous phrase so
common in such discussions. The
difference of opinion is largely grounded on an implicit or explicit difference
in predictions about the efficacy of this particular means in furthering the
agreed-on end. Proponents believe
(predict) that legal minimum wages diminish poverty by raising the wages of
those receiving less than the minimum wage as well as of some receiving more
than the
3. The interaction between the observer and the process
observed that is so prominent a feature of the social sciences, besides its more
obvious parallel in the physical sciences, has a more subtle counterpart in the
indeterminacy principle arising out of the interaction between the process of
measurement and the phenomena being measured. And both have a counterpart in pure logic
in Gödel’s theorem, asserting the impossibility of a comprehensive
self-contained logic. It is an open
question whether all three can be regarded as different formulations of an even
more general principle.
5
minimum wage without any counterbalancing increase in
the number of people entirely unemployed or employed less advantageously than
they otherwise would be. Opponents
believe (predict) that legal minimum wages increase poverty by increasing the
number of people who are unemployed or employed less advantageously and that
this more than offsets any favorable effect on the wages of those who remain
employed. Agreement about the
economic consequences of the legislation might not produce complete agreement
about its desirability, for differences might still remain about its political
or social consequences but, given agreement on objectives, it would certainly go
a long way toward producing consensus.
Closely related differences in positive analysis underlie divergent views
about the appropriate role and place of trade-unions and the desirability of
direct price and wage controls and of tariffs. Different predictions about the
importance of so-called “economies of scale” account very largely for divergent
views about the desirability or necessity of detailed government regulation of
industry and even of socialism rather than private enterprise. And this list could be extended
indefinitely. 4 Of course, my judgment that the major differences about
economic policy in the Western world are of this kind is itself a “positive”
statement to be accepted or rejected on the basis of empirical
evidence.
If this judgment is valid, it means that a consensus on
“corrrect” economic policy depends much less on the progress of normative
economics proper than on the progress of a positive economics yielding
conclusions that are, and deserve to be, widely accepted. It means also that a major reason for
dis-
4. One rather more complex example is stabilization
policy. Superficially, divergent
views on this question seem to reflect differences in objectives; but I believe
that this impression is misleading and that at bottom the different views
reflect primarily different judgments about the source of fluctuations in
economic activity and the effect of alternative countercyclical action. For one major positive consideration that
accounts for much of the divergence see “The Effects of a Full-Employment Policy
on Economic Stability: A Formal Analysis,” infra, pp. 117-32. For a summary of the present state of
professional views on this question see “The Problem of Economic Instability,” a
report of a subcommittee of the Committee on Public Issues of the American
Economic Association, American Economic Review, XL (September,
1950), 501-38.
6
inguishing positive economics sharply from normative
economics is precisely the contribution that can thereby be made to agreement
about policy.
II . POSITIVE
ECONOMICS
The
ultimate goal of a positive science is the development of theory” or
“hypothesis” that yields valid and meaningful (i.e., not truistic)
predictions about phenomena not yet observed. Such a theory is, in general, a complex
intermixture of two elements. In part, it is a “language” designed to
promote “systematic and organized methods of reasoning.” 5 In part, it is a body of
substantive hypotheses designed to abstract essential features of complex
reality.
Viewed as a
language, theory has no substantive content; it of tautologies. Its function is to serve as a filing
system organizing empirical material and facilitating our understanding of it;
and the criteria by which it is to be judged are appropriate to a filing system.
Are the categories clearly and precisely defined? Are they exhaustive? Do we know where to file each individual
item, or is there considerable ambiguity? Is the system of headings and subheadings
so designed that we can quickly find an item we want, or must we hunt from place
to place? Are the items we shall
want to consider jointly filed? Does the filing system avoid elaborate
cross-references?
The answers to these questions depend partly on logical,
partly on factual, considerations. The canons of formal logic alone can show
whether a particular language is complete and consistent, that is, whether
propositions in the language are “right” or “wrong”. Factual evidence alone can show whether
the categories of the “analytical filing system” have a meaningful empirical
counterpart, that is, whether they are useful in analyzing particular class of
concrete problems. 6 The simple example of “supply” and “demand” illustrates
both this point and the pre-
5. Final quoted phrase from Alfred Marshall, “The
Present Position of Economics” (1885), reprinted in Memorials of Alfred
Marshall, ed. A. C. Pigou (London: Macmillan & Co., 1925), p. 164. See
also “The Marshallian Demand Curve,” infra, pp. 56-57,
90-91.
6. See “Lange on Price Flexibility and
Employment: A Methodological Criticism,” infra, pp.
282-89.
7
ceding list of analogical questions. Viewed as elements of the language of
economic theory, these are the two major categories into which factors affecting
the relative prices of products or factors of production are classified. The usefulness of the dichotomy depends
on the “empirical generalization that an enumeration of the forces affecting
demand in any problem and of the forces affecting supply will yield two lists
that contain few items in common.” 7 Now this generalization is valid for markets like the
final market for a consumer good. In such a market there is a clear and
sharp distinction between the economic units that can be regarded as demanding
the product and those that can be regarded as supplying it. There is seldom much doubt whether a
particular factor should be classified as affecting supply, on the one hand, or
demand, on the other; and there is seldom much necessity for considering
cross-effects (cross-references) between the two categories. In these cases the simple and even
obvious step of filing the relevant factors under the headings of “supply” and
“demand” effects a great simplification of the problem and is an effective
safeguard against fallacies that otherwise tend to occur. But the generalization is not always
valid. For example, it is not valid
for the day-to-day fluctuations of prices in a primarily speculative market.
Is a rumor of an increased
excess-profits tax, for example, to be regarded as a factor operating primarily
on today’s supply of corporate equities in the stock market or on today’s demand
for them? In similar fashion,
almost every factor can with about as much justification be classified under the
heading “supply” as under the heading “demand.” These concepts can still be used and may
not be entirely pointless; they are still “right” but clearly less useful than
in the first example because they have no meaningful empirical
counterpart.
Viewed as a body of substantive hypotheses, theory is to
be judged by its predictive power for the class of phenomena which it is
intended to “explain.” Only factual
evidence can show whether it is “right” or “wrong” or, better, tentatively
“accepted” as valid or “rejected.” As I shall argue at greater length below,
the only relevant test of the validity of a hypothesis
is
7. “The Marshallian Demand Curve,” infra, p.
57.
8
comparison of its predictions with experience. The hypothesis is rejected if its
predictions are contradicted (“frequently” or more often than predictions from
an alternative hypothesis); it is accepted if its predictions are not
contradicted; great confidence is attached to it if it has survived many
opportunities for contradiction. Factual evidence can never “prove” a
hypothesis; it can only fail to disprove it, which is what we generally mean
when we say, somewhat inexactly, that the hypothesis has been “confirmed” by
experience.
To avoid confusion, it should perhaps be noted
explicitly that the “predictions” by which the validity of a hypothesis
is tested need not be about phenomena that have not yet occurred, that is, need
not be forecasts of future events; they may be about phenomena that have
occurred but observations on which have not yet been made or are not known to
the person making the prediction. For example, a hypothesis may imply that
such and must have happened in 1906, given some other known circumstances. If a search of the records reveals that
such and such did happen, the prediction is confirmed; if it reveals that such
and such did not happen, the prediction is contradicted.
The validity of a hypothesis in this sense is not by
itself a sufficient criterion for choosing among alternative hypotheses. Observed facts are necessarily finite in
number; possible hypotheses, infinite. If there is one hypothesis that is
consistant with available evidence, there are always an infinite number that
are. 8 For
example, suppose a specific excise tax on a particular commodity produces a rise
in price equal to the amount of the tax. This is consistent with competitive
conditions, a stable demand curve, and a horizontal and stable supply curve.
But it is also consistent with
competitive conditions and a positively or negatively sloping supply curve with
the required compensating shift in the demand curve or the supply curve; with
monopolistic conditions, constant marginal costs, and stable demand curve, of
the particular shape required to produce this result; and so on indefinitely.
Additional evidence with which
the
8. The qualification is
necessary because the “evidence” may be internally contradictory, so there may
be no hypothesis consistent with it. See also “Lange on Price Flexibility and
Employment,” infra, pp. 2 82-83.
9
hypothesis is to be consistent may rule out some of
these possibilities; it can never reduce them to a single possibility alone
capable of being consistent with the finite evidence. The choice among alternative hypotheses
equally consistent with the available evidence must to some extent be arbitrary,
though there is general agreement that relevant considerations are suggested by
the criteria “simplicity” and “fruitfulness,” themselves notions that defy
completely objective specification. A theory is “simpler” the less the
initial knowledge needed to make a prediction within a given field of phenomena;
it is more “fruitful” the more precise the resulting prediction, the wider the
area within which the theory yields predictions, and the more additional lines
for further research it suggests. Logical completeness and consistency are
relevant but play a subsidiary role; their function is to assure that the
hypothesis says what it is intended to say and does so alike for all users -
they play the same role here as checks for arithmetical accuracy do in
statistical computations.
Unfortunately, we can seldom test particular predictions
in the social sciences by experiments explicitly designed to eliminate what are
judged to be the most important disturbing influences. Generally, we must rely on evidence cast
up by the “experiments” that happen to occur. The inability to conduct so-called
“controlled experiments” does not, in my view, reflect a basic difference
between the social and physical sciences both because it is not peculiar to the
social sciences - witness astronomy - and because the distinction between a
controlled experiment and uncontrolled experience is at best one of degree.
No experiment can be completely
controlled, and every experience is partly controlled, in the sense that some
disturbing influences are relatively constant in the course of
it.
Evidence cast up by experience is abundant and
frequently as conclusive as that from contrived experiments; thus the inability
to conduct experiments is not a fundamental obstacle to testing hypotheses by
the success of their predictions. But such evidence is far more difficult
to interpret. It is frequently
complex and always indirect and incomplete. Its collection is often arduous, and its
interpretation generally requires subtle
10
analysis and involved chains of reasoning, which seldom
carry real conviction. The denial
to economics of the dramatic and evidence of the “crucial” experiment does
hinder the adequate testing of hypotheses; but this is much less significant
than the difficulty it places in the way of achieving a reasonably prompt and
wide consensus on the conclusions justified by the available evidence. It renders the weeding-out of
unsuccessful hypotheses slow and difficult. They are seldom downed for good and are
always cropping up again.
There is, of course, considerable variation in these
respects. Occasionally, experience
casts up evidence that is about as direct, dramatic, and convincing as any that
could be provided by controlled experiments. Perhaps the most obviously important
example is the evidence from inflations on the hypothesis that a substantial
increase in the quantity of money within a relatively short period is
accompanied by a substantial increase in prices. Here the evidence is dramatic, and the chain of reasoning
required to interpret it is relatively short. Yet, despite numerous instances of
substantial rises in prices, their essentially one-to-one correspondence with
substantial rises in the stock of money, and the wide variation in other
circumstances that might appear to be relevant, each new experience of inflation
brings forth vigorous contentions, and not only by the lay public, that the rise
in the stock of money is either an incidental effect of a rise in prices
produced by other factors or a purely fortuitous and unnecessary concomitant of
the price rise.
One effect of the difficulty of testing substantive
economic hypotheses has been to foster a retreat into purely formal or
tautological analysis. 9 As already noted, tautologies have an extremely
important place in economics and other sciences as a specialized language or
“analytical filing system.” Beyond
this, formal logic and mathematics, which are both tautologies, are essential
aids in checking the correctness of reasoning, discovering the implications of
hypotheses, and determining whether supposedly different hypotheses may not
really be equivalent or wherein the differences lie.
But economic theory must be more than a structure of
tautol-
9. See “Lange on Price Flexibility and Employment,”
infra, passim.
11
ogies if it is to be able to predict and not merely
describe the consequences of action; if it is to be something different from
disguised mathematics. 10 And the usefulness of the tautologies
themselves ultimately depends, as noted above, on the acceptability of the
substantive hypotheses that suggest the particular categories into which they
organize the refractory empirical phenomena.
A more serious effect of the difficulty of testing
economic hypotheses by their predictions is to foster misunderstanding of the
role of empirical evidence in theoretical work. Empirical evidence is vital at two
different, though closely related, stages: in constructing hypotheses and in
testing their validity. Full and
comprehensive evidence on the phenomena to be generalized or “explained” by a
hypothesis, besides its obvious value in suggesting new hypotheses, is needed to
assure that a hypothesis explains what it sets out to explain - that its
implications for such phenomena are not contradicted in advance by experience
that has already been observed. 11
Given that the hypothesis is
10. See also Milton Friedman and L. J. Savage, “The
Expected-Utility Hypothesis and the Measurability of Utility,” Journal of
Political Economy, LX (December, 1952), 463-74, esp. pp.
465-67.
11. In recent years some economists, particularly a
group connected with the Cowles Commission for Research in Economics at the
University of Chicago, have placed great emphasis on a division of this step of
selecting a hypothesis consistent with known evidence into two substeps: first,
the selection of a class of admissible hypotheses from all possible hypotheses
(the choice of a “model” in their terminology); second, the selection of one
hypothesis from this class (the choice of a “structure”). This subdivision may be heuristically
valuable in some kinds of work, particularly in promoting a systematic use of
available statistical evidence and theory. From a methodological point of view,
however, it is an entirely arbitrary subdivision of the process of deciding on a
particular hypothesis that is on a par with many other subdivisions that may be
convenient for one purpose or another or that may suit the psychological needs
of particular investigators.
One consequence of this particular subdivision has been
to give rise to the so-called “identification” problem. As noted above, if one hypothesis is
consistent with available evidence, an infinite number are. But, while this is true for the class of
hypotheses as a whole, it may not be true of the subclass obtained in the first
of the above two steps - the “model.” It may be that the evidence to be used to
select the final hypothesis from the subclass can be consistent with at most one
hypothesis in it, in which case the “model” is said to be “identified”;
otherwise it is said to be “unidentified.” As is clear from this way of describing
the concept of “identification,” it is essentially a special case of the more
general
[problem of selecting among the alternative hypotheses
equally consistent with the evidence - a problem that must be decided by some
such arbitrary principle Occam’s razor.
The introduction of two substeps in selecting a hypothesis makes this
problem arise at the two corresponding stages and gives it a special cast. While the class of all hypotheses is
always unidentified, the subclass in a “model” need not be, so the problem
arises of conditions that a “model” must satisfy to be identified. However useful the two substeps may be
in some contexts, their introduction raises the danger that different criteria
will unwittingly be used in making the same kind of choice among alternative
hypotheses at two different stages.
On the general methodological approach discussed in this footnote see Tryvge Haavelmo, “The Probability Approach in Econometrics,” Econometrica, Vol. XII (1944), Supplement; Jacob Marschak, “Economic Structure, Path, Policy, and Prediction,” American Economic Review, XXXVII, (May, 1947), 81-84, and “StatisticaI Inference in Economics: An Introduction,” in T. C. Koopmans (ed), Statistical Inference in Dynamic Economic Models (New York: John Wiley & Sons, 1950); T. C. Koopmans, “Statistical Estimation of Simultaneous Economic Relations,” Journal of the American Statistical Association, XL (December, 1945), 448-66; Gershon Cooper, “The Role of Economic Theory in Econometric Models,” Journal of Farm Economics, XXX (February, 1948), 101-16. On the identification problem see Koopmans, “Identification Problems in Econometric Model Construction,” Econometrica, XVII (April, 1949), 125-44; Leonid Hurwicz, “Generalization of the Concept of Identification,” in Koopmans (ed.), Statistical Inference in Dynamic Economic Models.]
HHC – [bracketed] content displayed on p.13 of
original.
12
consistent with the evidence at hand, its further
testing involves deducing from it new facts capable of being observed but not
previously known and checking these deduced facts against additional empirical
evidence. For this test to be
relevant, the deduced facts must be about the class of phenomena the hypothesis
is designed to explain; and they must be well enough defined so that observation
can show them to be wrong.
The two stages of constructing hypotheses and testing
their validity are related in two different respects. In the first place, the particular facts
that enter at each stage are partly an accident of the collection of data and
the knowledge of the particular investigator. The facts that serve as a test of the
implications of a hypothesis might equally well have been among the raw material
used to construct it, and conversely. In the second place, the process never
begins from scratch; the so-called “initial stage” itself always involves
comparison of the implications of earlier set of hypotheses with observation;
the contradiction these implications is the stimulus to the construction of
new
13
hypotheses or revision of old ones. So the two methodologically distinct
stages are always proceeding jointly.
Misunderstanding about this apparently straightforward
process centers on the phrase “the class of phenomena the hypothesis is designed
to explain.” The difficulty in the
social sciences of getting new evidence for this class of phenomena and of
judging its conformity with the implications of the hypothesis makes it tempting
to suppose that other, more readily available, evidence is equally relevant to
the validity of the hypothesis - to suppose that hypotheses have not only
“implications” but also “assumptions” and that the conformity of these
“assumptions” to “reality” is a test of the validity of the hypothesis
different from or additional to the test by implications. This widely held view is fundamentally
wrong and productive of much mischief. Far from providing an easier means for
sifting valid from invalid hypotheses, it only confuses the issue, promotes
misunderstanding about the significance of empirical evidence for economic
theory, produces a misdirection of much intellectual effort devoted to the
development of positive economics, and impedes the attainment of consensus on
tentative hypotheses in positive economics.
In so far as a theory can be said to have “assumptions”
at all, and in so far as their “realism” can be judged independently of the
validity of predictions, the relation between the significance of a theory and
the “realism” of its “assumptions” is almost the opposite of that suggested by
the view under criticism. Truly
important and significant hypotheses will be found to have “assumptions” that
are wildly inaccurate descriptive representations of reality, and, in general,
the more significant the theory, the more unrealistic the assumptions (in this
sense). 12 The
reason is simple. A hypothesis is
important if it “explains” much by little, that is, if it abstracts the common
and crucial elements from the mass of complex and detailed circumstances
surrounding the phenomena to be explained and permits valid predictions on the
basis of them alone. To be
important, therefore, a hypothesis must be descriptively false in its
assumptions; it
12. The converse of the proposition does not of course
hold: assumptions that are unrealistic (in this sense) do not guarantee a
significant theory.
14
takes account of, and accounts for, none of the many
other attendant circumstances, since its very success shows them to be
irrelevant for the phenomena to be explained.
To put this point less paradoxically, the relevant
question to ask about the “assumptions” of a theory is not whether they are
descriptively “realistic,” for they never are, but whether they are
sufficiently good approximations for the purpose in hand. And this question can be answered only by
seeing whether the theory works, which means whether it yields sufficiently
accurate predictions. The two
supposedly independent tests thus reduce to one test.
The theory of monopolistic and imperfect competition is
one example of the neglect in economic theory of these propositions. The development of this analysis was
explicitly motivated, and its wide acceptance and approval largely explained, by
the belief that the assumptions of “perfect competition” or “perfect monopoly”
said to underlie neoclassical economic theory are a false image of reality.
And this belief was itself based
almost entirely on the directly perceived descriptive inaccuracy of the
assumptions rather than on any recognized contradiction of predictions derived
from neoclassical economic theory. The lengthy discussion on marginal
analysis in the American Economic Review some years ago is an even
clearer, though much less important, example The articles on both sides of the
controversy largely neglect what seems to me clearly the main issue - the
conformity to experience of the implications of the marginal analysis - and
concentrate on the largely irrelevant question whether businessmen do or do not
in fact reach their decisions by consulting schedules, or curves, or
multivariable functions showing marginal cost and marginal revenue.
13 Perhaps these
13. See R. A. Lester, “Shortcomings of Marginal Analysis
for Wage-Employment Problems,” American Economic Review, XXXVI (March,
1946), 62-82; Fritz Machlup, “Marginal Analysis and Empirical Research,”
American Economic Review, XXXVI (September, 1946), 519-54; R. A.
Lester, “Marginalism, Minimum Wages, and Labor Markets,” American Economic
Review, XXXVII (March, 1947), 135-48; Fritz Machlup, “Rejoinder to an
Antimarginalist,” American Economic Review, XXXVII (March, 1947),
148-54; G. J. Stigler, “Professor Lester and the Marginallsts,” American
Economic Review, XXXVII (March, 1947), 154-57; H. M. Oliver, Jr., “Marginal
Theory and Business Behavior,” .American Economic Review, XXXVII (June,
1947), 375-83; R. A. Gordon,
[“Short-Period Price Determination in Theory and
Practice,” American Economic Review, XXXVIII (June, 1948),
265-88.
It should be noted that, along with much material purportedly bearing on the validity of the “assumptions” of marginal theory, Lester does refer to evidence on the conformity of experience with the implications of the theory, citing the reactions of employment in Germany to the Papen plan and in the United States to changes in minimum-wage legislation as examples of lack of conformity. However, Stigler’s brief comment is the only one of the other papers that refers to this evidence. It should also be noted that Machlup’s thorough and careful exposition of the logical structure and meaning of marginal analysis is called for by the misunderstandings on this score that mar Lester’s paper and almost conceal the evidence he presents that is relevant to the key issue he raises. But, in Machlup’s emphasis on the logical structure, he comes perilously close to presenting the theory as a pure tautology, though it is evident at a number of points that he is aware of this danger and anxious to avoid it. The papers by Oliver and Gordon are the most extreme in the exclusive concentration on the conformity of the behavior of businessmen with the “assumptions” of the theory.
HHC:
[bracketed] content displayed on p.16 of original.
15
two examples, and the many others they readily suggest,
will serve to justify a more extensive discussion of the methodological
principles involved than might otherwise seem appropriate.