Friedman's "Instrumentalism" and
Constructive Empiricism in Economics 1
by
Maurice Lagueux Université de Montréal
Very few texts in the methodological literature have been discussed as much as Milton Friedman's famous 1953 essay (Friedman, 1953). Friedman's anti-realism (later characterized as a form of "instrumentalism" by Wong and Boland2) was enthusiastically adopted by a
large number of economists, but became, nevertheless, the subject of an unending debate among methodologists. It is not surprising that bold and fresh ideas presented in an attractive fashion by a respected economist raised considerable interest among his colleagues dissatisfied with realism. What is more surprising, however, is the number of interventions --many of them from highly respected economists and philosophers -- which have been devoted to analyzing a short text usually described as brilliant but misleading, confused and written by an author who was ignorant of the important developments in methodology. The question raised by such a situation has nothing to do with an assessment of the merits of Friedman’s paper. Even among its most negative critics, there has been little doubt that this paper was full of ideas, some of them original and even ahead of their time.3 The question is
to know why this paper, whatever its qualities and its limits, became the source of such an almost emotional debate that has divided methodologists of economics for the last forty years.
1 This article was made possible thanks to grants from SSHRCC and from FCAR. The author is also grateful to L. Bovens, B. Caldwell, D. Desjardins, Y. Gauthier, D. Hausman, G. Lafleur, E. Litwack, J.-P. Marquis, W. Milnes, P. Mongin, C. Morris, R. Nadeau, P. Salmon, B. Toombs, F. Tournier, B. Van Fraassen and an anonymous evaluator of Theory and Decision whose suggestions after the reading of an earlier version were very useful. Naturally, none of them are responsible for any of the final version’s shortcomings.
2 Cf. Wong, 1973; Wong was, on this ground, probably indebted to Boland, who however wrote his own paper (Boland, 1979) at a later date.
3 For recent attempts to underscore these innovating aspects of Friedman’s essay, see Hirsch & de Marchi, 1990 and Nadeau, 1992.
In order to understand what was going on in this long debate, one must realize that what was at stake was not a technical point among others, but the very possibility of considering that economics, just like the natural sciences, is a positive science. After a standard discussion of the nature of a positive science, Friedman develops an argumentation against those who objected to the positive character of economics. His argumentation was exposed in a few provocative general considerations about the “realism of assumptions” followed by three colorful examples devised to show that its unrealistic assumptions do not make economics less “positive” than any other science. While these examples were probably largely responsible for the essay’s enduring influence over economists, it is the general considerations that were at the center of the debate. They quickly became the target of most commentators, but other ones managed to translate these considerations into a more palatable philosophical language, especially by presenting Friedman’s essay as a clever “instrumentalist” response to the damaging effect that an oversimplified realism can have on the practice of economics as on the practice of any science.
Without any pretension to establish what Friedman had really in mind, but with the hope of reducing the confusion around the debate as such, I will try to establish the three following points: (1) Friedman's general considerations are in no way substantiated by his three famous examples; on the contrary, these examples could be used to establish radically opposite conclusions. (2) Whatever the merits and the shortcomings of instrumentalism when applied to the physical sciences, Friedman's brand of "instrumentalism" applied to economics is of a quite different nature and it raises much more serious problems. (3) These ambiguities concerning realism and instrumentalism applied to physics or to economics can be brought to light in a more convincing way by introducing into the debate an approach like Van Fraassen's "constructive empiricism" that points more directly to the various issues at stake. The point of bringing out this comparison with Van Fraassen's approach will be to reformulate in a more satisfactory way Friedman’s essential considerations about empiricism and anti-realism.
Three Famous but Deceptive Examples
My first point will be that the most influential conclusion of Friedman's famous essay on methodology was largely based on the persuasive power of three celebrated examples which, when thoroughly scrutinized, appear inconclusive and, when properly readapted, tend to substantiate a diametrically opposed conclusion. But what was this "most influential
conclusion"? More precisely, given that Friedman's essay is remarkable for the richness of ideas if not for the consistency between all of them, which one of its theses was at the center of the debate which interests us? Essentially, this influential but controversial thesis stipulated that a negative answer had to be given to the question which served as a sub-title for the third part of the essay: "Can a hypothesis be tested by the realism of its assumptions?". It should be clear, however, that this question does not have to be understood too literally, for it is obvious that the realism of assumptions is not sufficient by itself to test a hypothesis. Clearly, such a question has to be read negatively in the following way: "can a hypothesis be falsified by the unrealistic character of its assumptions?", or better (to avoid interference with any eventual objection to the possibility of falsification which would be unrelated to the question of the realism of assumptions): "does it make sense to be concerned by the unrealistic character of the assumptions of a hypothesis which seems to have fairly well tested implications?". This interpretation of the question to which Friedman suggests a negative answer seems to be clearly justified by the following passage which precedes by a few lines the third part of the essay:
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.4
Friedman’s strategy to defend the “positive” character of a science based on unrealistic assumptions clearly rests on a sharp distinction between assumptions and implications and on the strong contention that empirical tests concern the implications but not the assumptions. According to Friedman, "testing a hypothesis" is "testing its implications" and any attempt to test directly the so-called assumptions of the hypothesis is based on a "misunderstanding" which is responsible for "much mischief" and for a 4 Friedman, 1953, p.14, emphasis were in Friedman's text.
"misdirection of […] intellectual effort". Hence, it does not make sense for him to be worried by the unrealistic character of the assumptions of a hypothesis which seems to have fairly well tested implications. Consequently, he claims that it would be wise not to spend too much "intellectual effort" in attempts to find hypotheses based on more realistic assumptions.
Such a position looks relatively sound, for it is very difficult to see how a test could be devised in such a way that anything but one of the implications of an hypothesis is tested. The important question to raise, however, is "what counts as an implication or as an assumption?". The answer to this question is crucial because if one can arbitrarily confer the status of an untestable "assumption" to an easily falsified "implication", then what looks like a sound principle might become a dangerous incitation to be unconcerned by falsifications that would be otherwise disturbing. But by refering to "the class of phenomena the hypothesis is designed to explain”, Friedman explicitly circumscribes those phenomena that could be considered as implications. Thus, a theory designed to explain prices and the quantity of goods produced assumes profit maximization and implies that prices and quantity are such and such. There is no doubt that an attempt to directly test profit maximization would be a “misdirection of intellectual effort”, but if the assumption of profit maximization
implies that, on the average, entrepreneurs would behave in an observable way that is
compatible with maximization, on what ground could one object to a test of this implication?5 Friedman’s answer would be either that the behavior of entrepreneurs has to be
considered as an assumption and not as an implication, or that the theory is not designed to explain a phenomena like this behaviour. But this line of defense would have to be based on something. Friedman however did not provide any theoretical argument in support of such a crucial position. If this position has been nonetheless so readily accepted among economists, it is clearly because Friedman’s three memorable examples strongly suggested that matters are going on in a more or less similar way in the most respectable sciences. It is time now to turn to these three famous examples whose suggestive power was largely responsible for the surprising influence exerted by Friedman's thesis.
(1) The first example put forward by Friedman in support of his thesis involves the physical law of falling bodies. This law, even though it assumes that the atmosphere is a vacuum, is satisfactorily applied in many cases (e.g. the falling of a stone through the air). Clearly, this hypothesis does not correspond to the actual situation. Thus, a comparison with 5 In somewhat different terms, Koopmans briefly made a similar objection to Friedman's position when urging him "to exploit all the evidence we can secure, direct and indirect" Koopmans, 1957, p. 140; see also p. 138.
perfect competition in economics is attractive. If, in a context where competition is imperfect, an economist obtains interesting predictions with the help of a theory which assumes perfect competition, this economist is in a situation roughly similar to that of the physicist who uses the law of falling bodies to predict the movement of a falling stone. Thus, Friedman’s example was designed to show that a theory (or “a hypothesis” to use his own wording) may be applied more or less successfully, depending (to a variable degree) on how well the conditions are fulfilled. To make this point more precise, Herbert Simon refered to a "principle of continuity of approximation" asserting that "approximately correct" derivations can be obtained when "the conditions of the real world approximate sufficiently well the assumptions of an ideal type" (Simon, 1965, p. 230). Thus we may safely conclude that a slightly unrealistic assumption is not necessarily fatal to a theory's predictions. Seen in this fashion, Friedman’s example shows convincingly that an unrealistic description of the conditions of the real world is not, as such, a sufficient reason to reject the theory and its fundamental assumptions. But who would seriously contest such a conclusion? The important point is that, from the analysis of this example, it cannot be concluded that it is a "misdirection of intellectual effort" to test how far from perfect competition the real markets are. Indeed, this comparison with the law of falling bodies suggests just the opposite. If in physics testing the air pressure allowed for the development of useful knowledge about effects of friction on falling bodies, it might be very useful to get more information about the way imperfect competition might modify the predictions of economists about prices and quantities.6
Be that as it may, there is surely no reason here to conclude that some lack of realism in a fundamental assumption itself could not be a sufficient reason to reject the theory. Friedman's first example is not really instructive on this point because the vacuum7 is just an
antecedent condition and not a fundamental assumption of the theory, as many authors have already pointed out (Archibald, 1959, pp. 64-65; Nagel, 1963, p. 212; Melitz, 1965, p. 42; Rosenberg, 1976, pp. 161-162). Hence, when the issue at stake is the realism of a fundamental assumption like profit maximization in economic theory, this example cannot be conclusive. Obviously, the fact that bodies fall in a terrestrial atmosphere instead of in a vacuum, and that nonetheless they fall in conformity with the law of falling bodies is not a reason to reject this law. But this conclusion surely does not exclude the possibility of 6 On this point see Rosenberg 1988a, pp. 77-79.
7 It is true that this is also the case with perfect competition. So Friedman’s example could be used to show that a theory assuming perfect competition can be applied successfully in cases sufficiently closed to perfect competition, but this point is not contested, at least by the main participants in this debate.
rejecting the law in a case where many bodies apparently would not fall in conformity with it, just as many economic agents apparently do not behave in conformity with the principle of rationality.
Since the question at stake in the debate raised by Friedman's essay is the validity of microeconomic price theory and since, typically, the assumption that the debaters had in mind was not perfect competition, but profit maximizing which is the "fundamental postulate" of this economic theory, Friedman's example has to be readapted to this context. A corresponding example involving falling bodies would have to refer not to a simple condition like a vacuum, but to a fundamental principle like the law of gravitation. Undoubtedly, physicists try to test the law of gravitation by its predictable consequences without being concerned by any allegation about its lack of realism. So, at first glance, Friedman's thesis still seems to be vindicated; but, as we have seen, the important question to raise at this stage is the following: "what consequences of a theory count as predictions?". Suppose physicists observe that some bodies do not fall to the ground when released a short distance from the Earth. They would surely be concerned with such a phenomenon, for the law of gravitation entails that bodies in normal conditions have to fall to the ground. Consequently, they would try to find unusual circumstances (air pressure, magnetic fields, centrifugal force, etc.) which would explain this apparent exception to the law of gravitation. They would certainly not be content to conclude that there is no need to worry about it, since the theory satisfactorily predicts phenomena like the tides and the motion of the planets that constitute "the class of phenomena the hypothesis is designed to explain”. Thus, physicists test their theories by their predictions only, but they do not exclude from the class of phenomena to be explained and predicted the most immediate ones like the free-fall of bodies. For them, it would be anti-scientific, arbitrary and meaningless to put away these immediate consequences of the theory and be concerned only with a pre-determined group of so-called predictable and testable implications. If some consequences concerning the tides, the planets, etc. are considered as members of a different class, it is simply because they are more unexpected and more interesting from a theoretical standpoint, and not because they would be the only ones relevant to the validity of the theory at stake. It is true that philosophers of science refer sometimes to the “domain of a theory”, but it is not to exclude arbitrarily some of its implications from being tested, it is to restrict its application to the (possibly very rare) situations that are compatible with it.8
8 The meaning of restrictions associated with "domain assumptions" is made very clear by Musgrave 1981, pp. 380-382. What Musgrave calls "domain of a theory" corresponds exactly to what Popper described as the "range of application of a theory" which, according to him, defines "the limits of its applicability". For Popper, insofar as its
In microeconomic price and production theory, profit maximization is the fundamental postulate. Admittedly, this theory has to be tested by its consequences rather than by the sheer realism of this assumption; but, among these consequences, it seems reasonable to include the fact that, on the average, and whatever their intentions could be, entrepreneurs would de facto make decisions that reflect in some way their alleged commitment to profit maximization. If an inquiry reveals that it is not the case, then on what grounds could economists decide to ignore it?9 How could they avoid this fact? Simply by
alleging that their theory can predict (more or less precisely) the level of prices and quantities produced? Since physicists do not consider only the tides and the motion of the planets but also the motion of mere falling bodies, why economists should allow them to consider only prices and quantities and not the average behavior of entrepreneurs as testable
and significant consequences of their theory? One may object that such a sharp distinction
could eventually be based on the classical positivist distinction between observable and theoretical terms, but, even ignoring the fact that Friedman does not clearly refer to this distinction, it would be difficult to argue that testing the behavior of entrepreneurs would systematically involve more theoretical terms than testing the level of prices.10 Thus, no
matter how this example is construed, it clearly shows that, in similar situations, physicists opt for a position which suggests that it is far from being a "misdirection of intellectual effort" to test any aspect of a theory (or to explain with precision any observed discrepancies with it) whenever it is possible.
(2) But let's move on to Friedman's second example which involves "the density of leaves around a tree" and which has the advantage of referring unequivocally to a fundamental assumption. The argument supposes that such a density can be predicted with accuracy with the help of the unrealistic "hypothesis that the leaves are positioned as if each leaf deliberately sought to maximize the amount of sunlight it receives, given the position of its neighbors" (Friedman, 1953, p. 19). Clearly, such an example illustrates the fact that good predictions may be derived from false assumptions; but this point is logically trivial and had been well illustrated for quite a while by the example of the relatively good predictions applications alone are concerned, "a theory may continue to be used even after its
refutation, within the limits of its applicability" (Popper 1963, p.113, Popper's emphasis).
9 It was the results of such inquiries that Lester opposed to marginal analysis in the seminal article which was, for Friedman, a paradigmatic example of misplaced concern about the unrealism of assumptions; cf.: Lester, 1946, pp. 63-82; Friedman, 1953, p. 15.
10 For a more systematic discussion of such a "positivist" version of Friedman's argument, see Mongin, 1988.
derived from Ptolemaic astronomy. In any case, Friedman’s example does not prove that a defender of such a hypothesis should not be concerned by evidence which suggests that leaves cannot "deliberately seek to maximize". Otherwise, Copernicans would have been wrong to have been concerned by evidence which suggested that the Earth was not at the center of the Universe when Ptolemaic theory made it possible to derive good predictions with the help of a geocentric postulate.
Be that as it may, Friedman uses his example in a different way and claims that there is no need to postulate that leaves "deliberately" seek to maximize anything because we have in fact a "more attractive" alternative theory. This superior theory explains by a "natural selection" mechanism that the surviving leaves have to be precisely those which grow, by pure chance, in the areas which are most exposed to sunlight. Similarly, in economics, a "more attractive" way to explain the results predicted by economic theory would be to suppose that the surviving entrepreneurs have to be those who, by pure chance, happen to choose a course of action which tends to maximize profits.
But why should such a theory be considered superior to another which implies "deliberate maximization"? Friedman's answer is the following:
This alternative hypothesis is more attractive than the constructed hypothesis not because its "assumptions" are more "realistic" but rather because it is part of a more general theory that applies to a wider variety of phenomena, of which the position of leaves around a tree is a special case, has more implications capable of being contradicted, and has failed to be contradicted under a wider variety of circumstances. (Friedman, 1953, p. 20)
One may think that the crucial point for Friedman is that the theory of natural selection explains more phenomena (the evolution of species being surely the most important example of them) than the theory of deliberate maximization and is therefore preferable. But, since the theory of maximization also explains many social phenomena (cf.: decision theory in economic, military, engineering and even political contexts), it is not clear, at this level of generality, which theory has the larger extension. In any case, it would unambiguously make sense to consider a theory superior if (over and above the phenomena explained by both theories), it explains some other phenomena directly concerning what is to be explained that is, in the above example, the position of the leaves around a tree. But, in this example, both theories predict exactly the same facts concerning this position itself, with the exception of those (explained only by the theory of natural selection) concerning the actual behavior of
the leaves (the fact that they manifest no signs of being conscious and the fact that they have no brain or no reasonably developed nervous system). Consequently, if this example is taken seriously, the superior scope of the theory of natural selection would be based precisely on
its capacity to account easily for the way the leaves behave.
Since the publication of Friedman’s paper, many technical objections have been raised against the application of the selection argument to economic matters.11 Let us, however,
forget these objections to consider only what is implied by Friedman’s example taken as a methodological example. According to it, it would make sense to regard a theory of natural selection as superior to a theory of deliberate maximization because it would be compatible
not only with prices and quantities equalizing marginal costs and marginal revenue, but also
with the actual behavior of most entrepreneurs. Indeed, according to such a theory of natural selection, these entrepreneurs succeed in surviving because they have been, by pure chance, actual maximizers even if they are unable or unwilling to make their decisions by applying maximizing estimations. They do not consciously maximize, they are rather guided by "animal spirits"; some of them refrain from taking drastic decisions required by maximization, but, roughly, only those who have turned out to be maximizers anyway are the actual survivors. But, for this very reason, we must conclude that the behavioral
implications 12 of our assumptions matter, and consequently, that it makes sense for someone
who has to choose between two theories or between two ways of interpreting a theory, to be concerned by what Friedman calls the lack of "realism of the assumptions" of the theory. Admittedly, as maximization occurs even with the theory of natural selection, the only question at stake in this choice is the way this maximization is explained or interpreted. Nevertheless, the important point is that if this example illustrates anything at all, it illustrates that testing the behavioral implications of a theory can hardly be considered as a "misdirection of intellectual effort". Indeed, it may be the only way to vindicate a more satisfactory theory (like a "natural selection" theory that is supposed to explain why surviving entrepreneurs are de facto maximizers even if they do not really care to maximize) and thus to make a definite advancement in science.
A more significant example of this kind of passage to a superior theory can be found in the development of modern cytogenetics. This theory superseded the Mendelian version of 11 See especially, Winter, 1964, pp. 239-242.
12 I call "behavioral" those implications (of an economic theory) which concern the behavior of entrepreneurs (on the average), but which Friedman does not seem to regard as implications at all.
heredity theory even though the latter gave fairly good predictions of the statistical phenotype of empirical populations. Mendelian theory, however, assumed the existence of genes which were unobservable and unlocalizable. Since it is reasonable to expect that such postulated entities manifest themselves somewhere in the organism, many biologists felt concerned by this assumption's lack of realism. It is true that ex post we know that Mendelian theory was vindicated by the discovery of chromosomes (where genes have been finally localized) and that, consequently, its postulated entities were not unrealistic; but ex
ante, they looked just as unrealistic as the rational behavior of entrepreneurs. Thus, had they
been convinced by Friedman's injunction against "misdirection of intellectual effort", modern biologists would have consistently chosen to push aside the putatively unrealistic character of a theory which permitted predictions far more spectacular than those obtained by contemporary economists. But, they were concerned by the lack of realism of these assumptions and thus the discovery of chromosomes was made possible.
Naturally, Friedman would argue that, in economics, we are still waiting for a "superior" theory, and that until we have one, it makes sense to rely on the performance of the standard theory. With respect to this particular question, he is probably right, but the important point, in the present context, is that the lack of realism of the "assumptions" really
matters. It matters because it refers to a class of implications (alternative manifestations of
leaves' intelligence, actual decisions of the average entrepreneur, localization of genes in the organism, etc.) which might in fact be the class of implications of a fundamental assumption that a superior theory would predict. This point is fully illustrated by the case of modern cytogenetics and also, although in a more confused way, by the case of those "natural selection" theories which Friedman considers to be superior.
(3) Let's turn to Friedman's last example, the one in which he discusses the behavior of an expert billiard player. «It seems not at all unreasonable», according to Friedman, «that excellent predictions would be yielded by the hypothesis that the billiard player made his shots as if he knew the complicated mathematical formulas that would give the optimum directions of travel, could estimate accurately by eye the angles, etc., describing the location of the balls, could make lightning calculations from the formulas, and could then make the balls travel in the direction indicated by the formulas» (Friedman, 1953, p. 21). In contrast with the example of the falling body, this example refers to a fundamental assumption of a "theory" (the "lightning calculations" theory of billiard playing); and, in contrast with the example of the leaves, it is not a pure fiction concocted in order to be compared with a superior theory. Indeed, it seems reasonable to hold the view that billiard players, just like
entrepreneurs, let their decisions be guided by at least some intuitive mathematical principles.
Nonetheless, there are two obvious differences between the two situations. (1) While the typical entrepreneur might refrain from profit maximizing because he might give more importance to some other goal (good relations with employees or customers, for example), an expert billiard player would never make a decision which is not strictly guided by a maximization objective. Indeed, by contrast with the entrepreneur, it is difficult to see what other objective could interfere with the latter when he is playing an important game13. (2) By
insisting on the fact that the billiard player is an "expert", Friedman chooses not to consider the amateur billiard player whose shots might be more difficult to predict by way of a theory of the intuitive application of "mathematical formulas". However, as the economy is the result of the actions of all entrepreneurs, not just those who are the most successful, in this context, an exclusive attention to the expert billiard players is not very appropriate.
It is true that the example is only supposed to show that the inability of expert players to use complicated mathematics does not have to be a source of trouble for a theoretician who asserts that, if the expert's shot is to reach its goal as expected, he has to hit the ball precisely at the point he would have chosen had he been consciously applying some specific mathematical laws. In itself, however, while quite true, such an assertion is totally without consequence, just like the assertion made by a physicist that a canon ball follows precisely the path it would have followed, had it consciously determined its own path by strictly applying the physical laws about canon balls! Clearly, the point lies elsewhere. Unlike canon balls, billiard players and entrepreneurs have goals and they may or may not succeed in maximizing them. To claim that they maximize in the sense that they are actually hitting the ball in the best way so as to reach a pocket, we have to rely on a hypothesis, akin to "natural selection", implying that unsuccessful players (those who do not maximize) are driven away from the pool tables. Similarly, in order to claim that entrepreneurs maximize in this sense, once again we have to introduce something like a "natural selection" hypothesis and to admit that it implies that unsuccessful entrepreneurs (those who, consciously or not, fail to take the proper actions to maximize) are driven out of the market place.
13 While important in itself, the implied difference between attempts to maximize and maximizing results need not to be considered in the discussion of Friedman's example that, clearly, refers only to results.
If we keep in mind that the issue at stake is whether or not it makes sense to be concerned by apparent discrepancies between assumptions and the observed behavior of entrepreneurs, then there is no need to decide if entrepreneurs actually maximize or not. It is sufficient to observe that the example of the billiard player shows that such concern makes sense anyway, as we can readily see by successively considering the two possible cases concerning actual maximization by entrepreneurs.
If we suppose that entrepreneurs are (deliberately or by virtue of "natural selection") maximizing just like expert players, we can, thanks to the marginalist theory, expect some success in predicting prices. But why, then, could we not predict the behavior of the players as well as their results? And how could we not be concerned about our theory if, on the average, this behavior contradicts what is expected from it? If we apply to economics the expert billiard player example, we have to admit that surviving entrepreneurs behave in such a way that prices are predictable precisely because their behavior is equally predictable.
If we suppose, on the contrary, that a large portion of entrepreneurs either do not want to maximize profits or, like amateur billiard players, do not succeed in maximizing them, then there would be no reason to expect better results when we predict prices than when we try to predict the erratic billiard shooting of amateurs when assuming that they optimally apply mathematical formulas! If nonetheless the lack of realism of such a maximizing assumption turns out to be not too damaging for predictions, it is thanks to an implicit
supplementary assumption which is either statistical or which has to do with natural
selection. On the one hand, an implicit statistical assumption may indeed suggest that, given a large number of decision makers, mistaken decisions compensate for each other in such a way that prices (or the pool balls' final positions) can be fairly well predicted. But, given such an assumption, why should it be more difficult to predict the average behavior of entrepreneurs (or of players)? And if this average behavior is predictable, it would surely be normal to be concerned by significant discrepancies between the actual and the predicted behavior of average entrepreneurs (or of average players). On the other hand, an implicit "natural selection" assumption suggests that since the unsuccessful decision-makers are pushed out of the market (or out of the pool halls), the survivors will be (unconscious) maximizers. In the case of billiard players, again, it is legitimate to expect some success in predicting the final positions of the balls, but, with the help of the "natural selection" hypothesis, it should be perfectly possible to predict, with equal success, the actual behavior of the billiard players and not only the result of their shots. Thus, if predictors observed that some "surviving" billiard players had not been behaving in the expected way but had been
knocking the balls in an erratic fashion, they would have serious grounds to be concerned by such an unexpected observation. Similarly in economics, it would be legitimate to expect some success in predicting prices, but why would it be so absurd to test another implication of such an assumption as well, which is that the entrepreneurs who keep going in competition do behave, on the average, in a maximizing way?
Thus, if we refer to a “lack of realism" to characterize a discrepancy between the set of assumptions required to predict prices and their implications for average entrepreneurial behavior, then each of Friedman's examples, when properly analyzed, suggests that we
should be seriously concerned by such a “lack of realism”.
Instrumentalism in Economics vs Instrumentalism in Physics
In spite of their shortcomings, Friedman's thesis about the "realism of assumptions" and the persuasiveness of his three famous examples survived a forty year-long debate. There is little doubt that this fact was largely due to the general conviction that a commitment to realism would limit freedom in theoretical construction to such an extent that economic theory would be reduced to uninspiring descriptive analysis. Therefore, it is not surprising that, while they admitted some forgivable clumsiness in Friedman's early essay, many participants in the debate who were more familiar than Friedman with the philosophy of science tended to conclude that a rewording of his thesis along an "instrumentalist" line could vindicate it.14 In spite of many objections raised against instrumentalism as a
philosophy of physics, there are indeed impressive arguments to defend such a philosophy as an alternative to "realism".
However, before discussing such an interpretation of Friedman’s thesis, let's attempt to see, without referring to the actual debate itself, what an exact transposition of instrumentalism could be in economics if it were argued along the lines followed by instrumentalist philosophers in discussions about physics. What is instrumentalism about, according to philosophers of physics? Clearly, it suggests that a scientific theory is an instrument for prediction. But if instrumentalism amounted to that claim only, then all methodologists including realists would probably consider themselves as instrumentalists. 14 For examples (not necessarily equivalent) taken in recent literature, see: Boland, 1979; Coddington, 1979; Mingat, Salmon, and Wolfelsperger, 1985; and, to some extent, Caldwell, 1982.
Only those for whom a scientific theory is nothing but an instrument for prediction may be properly called "instrumentalists".15 With this in view, to appreciate how instrumentalism and
realism differ, consider the respective attitude of methodologists of each family when faced with unobservable entities such as those that abound in physics (electrons or neutrinos for example). Even though he would readily admit that electrons are extremely helpful in predicting a large number of phenomena, a realist would conclude that, for this very reason (and possibly others), they must exist in the real world. By contrast, an instrumentalist would hold that it is a sheer waste of time to indulge in ontological speculations about such entities as long as it is possible to derive successfully tested predictions merely by assuming that they exist.
As economics, like physics, deals with observable phenomena (consumer, worker or entrepreneurial behavior, prices, profit rates, etc.) which are explained by a constructed theory, it is natural to ask whether unobservable entities play a similar role in this theory. But does economics refer to such unobservable entities? It is difficult to answer this question in a general and abstract way, but some skepticism seems legitimate when one tries to consider the candidates which seem to be most suitable for such status. One might think of a purely allegorical device like Adam Smith's "invisible hand" that is clearly unobservable (and inaccessible to direct experience), but it is in no way an entity comparable to electrons. One may prefer to consider a demand function but, here again, it is clear that a demand function, that is a relation between potential prices and potential demand, is not an entity in the same way that electrons are entities. It is more akin, for example, to a relation defining, for any moment in time, the gravitational force between two planets. Just as planets are the entities underlying the gravitational force, the entity behind demand (and other similar) functions is the demander. A better candidate would be probably the stable utility function that Stigler and Becker postulate to explain phenomena like addiction.16 And a more promising strategy
would be to claim that in economics one has not, like in physics, to look for unobservable entities but for unobservable properties. Thus, there would be room for a dispute between, on the one hand, realists who would be convinced that demand or utility functions are real properties existing in some fashion in the brains of consumers and, on the other hand, instrumentalists who would maintain that it is a waste of time to indulge in such speculations about the existence of these properties as long as they yield accurate predictions of prices or of output level. This is how the potential debate in economics would have been, had it 15 For the classical discussion of instrumentalism in the philosophy of science, see Popper,
1963.
paralleled the debate in physics. On the one hand, realists would have been ready to defend
the reality of properties associated with any function refered to by economists; on the other hand, instrumentalists would have been convinced that such commitments are beyond the scope of a science characterized only by its predictive capacity.
Although debates of this type may occur among economists, it is doubtful that such an issue could have been at the center of a forty year-long discussion often considered as the most important in economic methodology. The status of an entity may indeed be a question with major implications for subatomic physics, for the questions raised in this field depend directly on the ontological status of entities like electrons. In contrast, it is difficult to see how the status of the above economic properties is so important for economics since it is much more difficult to figure out the significance of the difference between the instrumentalist and the realist positions when the question at stake is the ontological status of the properties of functions. Indeed, it is is difficult to see what type of existence a realist would require over and above what would be readily admitted by an instrumentalist who considers that, in any case, these functions prevails.
Since the debate between realists and instrumentalists, construed as it is when involving physics, has so little substance when involving economics, one suspects that the nature of the crucial debate in which Friedman was involved was very different. In the above discussion, we assumed that both sides admitted that the unobservable entities or properties involved play an essential role in the development of science. The realist and the instrumentalist physicists shared a common view concerning the observable consequences and the predictive power of the hypothesis based on electrons. Similarly, a realist and an instrumentalist would find it worthwhile to engage in a subtle debate about the ontological status of a demand or a utility function (or of their properties) only if they are in basic agreement when it comes to the usefulness of such functions. Between them, the issue at stake (apparently more important for physics than for economics) is the existence of the entity (or the property) involved. However, in the case of the actual debate concerning "realism" and "instrumentalism"17 in economics, the situation is totally different. Consider for
17 Since it became so usual to use the term “instrumentalism” to refer to Friedman’s thesis, even if I maintain that this thesis differs substantially from what philosophers of science usually call instrumentalism, I will write “instrumentalism” with quotation marks to refer to what I describes sometimes more explicitly as Friedman’s brand of “instrumentalism” or as Friedmanian “instrumentalism”. It is probably to avoid such a potentially equivocal designation that Mongin chose to characterize Friedman's thesis as a "methodological irrealism" (1986) or as an "irrealism of assumptions thesis" (1988) rather than as an
example the controversies over the marginalist theory of the firm in the 40's, especially Lester's (1946) famous critique of profit maximization. While Lester is often called a "realist", this is certainly not because he defends a realistic interpretation of any entity (or property) used by microeconomists in their analysis. On the contrary, if he is at all a "realist", this is because he rejects the relevance of the use of such theoretical concepts. As Mongin (1986, section IV and V; see also Mongin, 1992) has convincingly shown, an important part of the argument made by Lester (as well as other heterodox writers of the time) bore on predictions about prices and quantities, much like those that, for Friedman, had to be put to the test. Thus, it is self-evident that, far from concerning the existence of theoretical entities, this "realist" challenge of neoclassical economics concerned the
relevance of maintaining an apparatus which, according to Lester -- whose conclusions
naturally need not be accepted for the present argument to be valid -- was blatantly unable to give a realistic picture of the prices as well as of the output of an economy. In the debate generated by Lester's and Friedman's articles, there was no one, not even among those who were labelled "realists", committed to defending the existence of alleged unobservable properties. By contrast, in the debate about physics, realists are those who are ready to defend the existence of unobservable electrons.
In order to understand the real issue of the debate that has been going on since Lester's paper and Friedman's essay, one has to recognize that some assumptions attributing properties to agents (e.g. "being a profit maximizer") are inconsistent with some observations (e. g. the result of an inquiry about the behavior of a sample of entrepreneurs). Friedman was so far from denying this inconsistency, that, in what is probably the most provocative passage of his text, he readily admitted the "wildly inaccurate" character of certain crucial assumptions, even though he claimed that they were perfectly suited for a scientific theory:
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). (Friedman, 1953, p. 14)
Given such an acknowledgement, there is in economics another question which is much more important for scientific analysis than the metaphysical question about the existence of entities (or of their properties). It concerns the relevance of accepting a theory which, whatever its value as an instrument for the prediction of phenomena like prices and output, is
based on assumptions contradicted by other phenomena such as the observable behaviour of entrepreneurs. In this context, the so-called "realists" are those who, because they are concerned by the discrepancy between a fundamental property postulated by the theory and some actual behavioral observations, are committed to improving this situation by turning to more realistic postulates. In the other camp, the so-called "instrumentalists" are those who, like Friedman, argue that being concerned by such a situation is unjustified, as long as the theory predicts prices and other non-behavioral variables accurately enough. Hence, they would argue that to test the behavioral implications of an assumption (what they mistakenly call "directly testing the assumption itself") would be a "misdirection of intellectual effort".
Thus, although the question of the ontological status of unobservable entities is of capital importance when the instrumentalist thesis is applied to physics, the same question is
not raised at all when Friedman's thesis, often known by the same name, is applied to
economics. To my knowledge, with the possible exception of Alexander Rosenberg, who maintained, in more general terms, that there is a similar ambiguity for all "positivist" interpretations of economics,18 no attention was given to this crucial difference (between
these two types of instrumentalism) during the long discussion concerning “instrumentalism” in economics. Putting aside the discussion related to Rosenberg's more general claim, I suggest that we alleviate this ambiguity in the use of the word "instrumentalism" by insisting on a crucial distinction. When we refer to instrumentalism, we should distinguish the
question of existence which is capital for the debate concerning physics (the question of
knowing if some entities really exist ) from the question of relevance which is capital for the debate concerning economics (the question of knowing whether, given that some theoretical assumptions are inconsistent with observable data, it is nonetheless relevant to proceed "as if" they prevail, or, put in another way, the question of knowing whether it makes sense to be concerned by the assumptions' lack of realism). Clearly, this question of relevance has very little to do with the debate between realists and instrumentalists in physics.
Thus, when discussing the theory of electrons, it is clear that the question of relevance is uninteresting; no one would deny the relevance of arguing as if electrons existed, given the fact that instrumentalists propose precisely to proceed this way and that realists, since they maintain that electrons actually exist, are still further from denying the relevance of the argument. In contrast with this situation, it makes sense to ask whether it is relevant for an 18 Rosenberg, 1976, pp. 148-152; but see a critical discussion of this general statement in Mongin, 1988, pp.308-310 and, by Rosenberg, a short comment on this point in Rosenberg, 1988b, p.380.
economist to argue as if a market actually were correctly described by a “pure competition” model or as if entrepreneurs were strictly profit maximizers. In this context, the "realists" are those who consider that such a way of arguing is hardly acceptable, and Friedmanian "instrumentalists" are those who find it totally legitimate. In this sense, the point of Friedman's three famous examples was supposed to be that, notwithstanding what was characterized as an assumption's lack of realism (systematic discrepancy between this assumption and behavioral observations), it is still relevant, according to him, to argue as if no discrepancy was observed.
Realism, Instrumentalism and Constructive Empiricism
Such was, for Friedman, the point of the three examples. But we have seen in the first part of this paper that these examples are far from substantiating it. And as we have just seen that Friedman's thesis cannot be assimilated to the one defended by instrumentalists arguing about physics, we must conclude that it cannot find better support from the more plausible case against realism in physics. Thus, when dealing with economics, we are apparently forced to retreat to a “realistic” position hardly inspiring to economists, because it seems to condemn those bold theoretical principles from which successful sciences are so often constructed. In such an epistemological context, to reject Friedman's "instrumentalism" because it neglects some observable phenomena in the name of predictive efficiency, seems equivalent to accepting realism, even if it may, in economics, paralyze science by excluding free theoretical constructions. Indeed, what Friedman had in mind when he refered to an "assumption" was theoretical constructs like the couple "perfect competition - perfect monopoly" and the fundamental assumption which implies that businessmen's decisions are profit maximizing (Friedman, 1953, p. 15). These "assumptions" were among the most frequent targets of the enemies of orthodox economic theory. Perfect competition and profit maximizing are hardly palatable notions for those who are looking for a realistic account of the economy. Before Friedman's intervention, the traditional way to neutralize objections against the use of these assumptions was based on a more or less apriorist view of economic theory, according to which the validity of this theory, being logically founded, was not dependent upon what was observed in the real world. However, with the growing prestige of "positive" science, this line of defense became rather unconvincing and the empirical objections that "institutionalist" minded economists raised against these unrealistic postulates became more and more threatening for orthodox economics. Given the popular
acknowledgment that the "tribunal of experience" might invalidate the entire formal economic analysis by discrediting perfect competition and profit maximizing, it is not surprising that Friedman's arguments against realism were acclaimed by economists who neither wanted to abandon formalized theory nor sacrifice the prestige of empirically based scientific achievements.
However, there is no reason to hold that one dissatisfied with Friedman’s view has to choose between uncompromising versions of apriorism or of realism. This trilemma19 may
seem natural in the methodology of economics, due to the fact that discussions in this field are focused on the question of the "realism of assumptions". When dealing with such a question, one is tempted to maintain, either that each assumption has to be tested through an examination of the behavior of economic agents, or that assumptions do not have to be tested at all, either because their truth is known a priori, or because their eventual falsity does not matter. In the first case (the above type of "realism"), one would reject as mistaken all theoretical constructions which were not directly related to the actual behavior of economic agents. In the second case (apriorism), one would reject empiricist tenets of modern science, and in the third case (Friedman's brand of "instrumentalism"), one would reject as "misdirected" any concern about the behavioral observations which seem to contradict these assumptions.
In order to avoid such a dead-end conclusion, it may be useful to introduce at this point a methodological approach which might help to avoid the damaging conclusions of these extreme positions. Among the recent theories in the philosophy of science, Van Fraassen's "constructive empiricism" (Van Fraassen, 1980, ch. 1-4) is clearly characterized by a kind of epistemological equilibrium. My intention is not to extoll the virtues of Van Fraassen's type of empiricism, which has been the target of serious criticism20, nor is it to
discuss its relation with other trends in the philosophy of science. Rather I mean to refer to it as a minimal position that insists on just what is required to avoid being trapped in any kind of instrumentalism while rejecting what sounds unacceptable in apriorism and in any kind of realism. Indeed, this methodology of physical science is worded in a way that helps considerably to emphasize sensible answers to the issues at stake in the debate among
19 This trilemma bears a superficial resemblance with Fries's trilemma as discussed by Popper (Popper, 1968, ch. V). While it might be instructive to relate these two triple-exit situations even if, at first glance, they look significantly different, such a comparison is not required by the present argument and will not be attempted here.
methodologists of economics21. Thus, it will only be used to disentangle a debate that, by
being too centered on the question of the “realism of assumptions” was more or less locked into these extreme positions.
By requiring that a science should "save" all phenomena -- i.e. «correctly describe[s] what is observable» (Van Fraassen, 1980, p.4.) -- and hence account for all of them, at least in principle, constructive empiricism would force economists to be preoccupied with the fact that empirical phenomena like consumer and entrepreneurial behavior are inconsistent with the literally construed theoretical postulates of the theory. A constructive empiricist, then, is just as reluctant as a realist to leave these important phenomena unaccounted for by the theory. As, clearly, they are not "saved" by the theory when their incompatibility with the assumptions of the theory is not considered as damaging to it, a constructive empiricist would reject Friedman's brand of "instrumentalism". Constructive empiricism maintains, however, that theoretical entities required by scientific explanations and predictions are
constructed, and suggests that we do not have to be disturbed by their possible
non-existence. Such a position is clearly anti-realist; in any case, it is strongly antithetical to Lester's "realist" theses. Thus, when the question at stake is the one typical of the debate about economics -- the one I have called a "question of relevance" (of accepting a theory which predicts some phenomena but is contradicted by some other) -- it is possible to reject apriorism (as constructive empiricism does as explicitly as any other type of empiricism) and to reject Lester's brand of "realism", without indulging in Friedman’s brand of “instrumentalism”. One only has to admit (with constructive empiricism) that the free construction of theoretical entities and the free adoption of assumptions is conditional on the ability of a theory thus constructed to "save" all phenomena. Thus, while strongly objecting to Lester’s type of realist considerations, a constructive empiricist would be concerned by what Friedman calls the lack of "realism" of the assumptions of a theory.
This situation explains why "constructive empiricism" is often perceived as a simple kind of instrumentalism when it deals with typical problems in the philosophy of physics. Indeed, in discussions about physics, instrumentalists and constructive empiricists are both 21 I do not know any published material relating Van Fraassen's views to the debate about instrumentalism in economics. However, after having written this paper, I had the opportunity to attend the 9th International Congress of Logic, Methodology and Philosophy of Science (Uppsala, 1991) where T.A. Boylan presented a paper ("Kaldor's Methodology of Economics: A Constructive Empiricist Interpretation") that made use of Van Fraassen's ideas to clarify in a somewhat similar fashion a different debate in economics.
opposed to realists; for example, they both maintain that it is perfectly relevant to refer to electrons without being committed to accepting their existence. It is true that they disagree about the goals of science since constructive empiricism insists that science must explain and not be only a tool for prediction. But given the close relation between explanation and prediction in physical science, this difference may sound thin. However constructive empiricism’s commitment to explanation requires a particular insistence upon the idea that all phenomena must be saved. Thus, this anti-instrumentalist commitment to explanation comes more clearly to the surface when it goes against Friedmanian “instrumentalist” refusal -- such a refusal being more frequent when discussing economics than when discussing
physics -- to be concerned by contradictions between certain implications of postulates and
some observed phenomena.
In conclusion, I would like to illustrate this state of affairs in a somewhat dramatic way by devising a thesis (concerning a hypothetical situation in physics) which would be strictly equivalent to Friedman’s thesis about the situation encountered in economics. Suppose the only known way of predicting precisely the observed motion of the planets is by constructing a theoretical model according to which the planet "Earth" is totally composed of magnetized iron. The existence of such an iron-entity (by contrast to the actual Earth) would not constitute a matter of discussion because no one, and the realists less than anyone else, would be prepared to defend its reality. However, Friedmanian “instrumentalists” would maintain that it would be a sheer waste of time to question and discuss the existence of such an entity as long as the model is the only available instrument for prediction. Who would deny, however, that the truly important question would not be this somewhat metaphysical question of existence (the issue of which is not at stake because no one is prepared to defend this existence) but the methodological question of knowing if it is relevant to model the Earth by way of an imaginary iron-entity and if any concern raised by the lack of realism of such a model is "misdirected"? To this question, realists of all types would readily answer "no" and Friedmanian “instrumentalists” "yes". As for constructive empiricists, in spite of their anti-realism (which is manifest when a question like the one concerning the existence of electrons is at stake), they would say that resorting to such an entity is not acceptable because it implies that this theory is incapable of "saving" phenomena such as the chemical heterogeneity and the relatively weak electromagnetic field of the Earth. That is why their position would differ from that of the Friedmanian “instrumentalists” and why such a difference -- whatever the respective differences of these two positions with instrumentalism in methodology of physics, which are not discussed here -- becomes fully evident only when
the question raised is one of relevance (which is typical when dealing with economics), and not one of existence (which is typical when dealing with physics).
* * *
Of course, one may object that it is unfair to endow constructive empiricism with such an "epistemological equilibrium" and then to compare it to extreme forms of “realism” and “instrumentalism”. After all, moderate versions of both realism and instrumentalism that are typically defended by philosophers of physical sciences are much nearer to constructive empiricist views about the question debated in economics. Just as those who consider themselves realists are not necessarily opposed to theoretical construction, those who consider themselves instrumentalists in the philosophy of physical sciences are usually very concerned by discrepancies between theory and behavioral observations. And since Friedman's thesis itself is rich enough to allow a great number of inconsistent interpretations, some of them being very close indeed to constructive empiricism, one could even maintain that Friedmanian “instrumentalism” can be interpreted in such a way. I readily admit that, in the present paper, it is possible that I overemphasized the passages about the "misdirection of intellectual effort" and the alleged virtues of "wildly inaccurate" assumptions. But the point of this paper is not to propose, once again, a more correct interpretation of Friedman's thought, but rather to explain why a debate about such a fundamental issue was so confusing and inconclusive. This debate focused spontaneously on the most provocative aspect of Friedman's ideas, and this "provocative" aspect, allegedly vindicated by his three suggestive examples, has been presented more or less in the following way: "false assumptions, being potentially good for science, concern about their falsity is a misdirection of intellectual effort". Economics being a science whose respectability is constantly endangered, this extreme form of Friedman's thesis was seen as providing a complete safeguard against any objections raising doubts about the seriousness of a science whose assumptions have apparently been repeatedly falsified. And as the methodology of economics has constantly been developed with an eye to the methodology of physics, Friedman's argument was equivocally associated with the instrumentalist thesis developed in physics. Thus it benefited by being confused with an instrumentalism whose case against realism seemed to be better grounded.
A more generous reading of Friedman's ambivalent essay and of his followers' papers is undoubtedly possible, but the net effect of such a generous interpretation would have been to eliminate the very object of this forty-year debate without explaining it. And if, thanks to
such an interpretation, a consensus really could be reached concerning the idea that scientific theories must "save" all the phenomena, including those related to the behaviour of
entrepreneurs, it would be necessary -- given that the record of orthodox economic theory
on this ground is rather poor -- to admit that repeated and heroic attempts must be made to test these behavioral implications and, eventually, to replace the assumptions by more suitable ones, instead of being unconcerned by a lack of realism which looks almost appealing. Clearly, a fully satisfactory version of Friedman's thesis would not preserve the ''protective belt" effect provided by a cruder and more extreme version of it.
According to constructive empiricism, complete freedom in constructing theoretical entities and a commitment to "save" all the phenomena are both essential requirements of scientific research. It was the will to "save" all the phenomena which induced realists like Lester to challenge a boldly "constructive" economic theory. It was the will to protect this theory from such a challenge which induced Friedman and most of his followers to discourage the saving of the behavioral phenomena. If this methodological debate has lasted for so long -- with repeated attempts to construe each thesis in a manner which alleviates the opposition between them --, it is apparently because economists, while convinced of the necessity of being both theoretically "constructive" and empirically respectful of all phenomena, have still not found an adequate way to simultaneously fulfill these two requirements.
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