The As-If View of Economic Motivational Hypotheses Author(s): Steven Rappaport Source: Review of Social Economy, Vol.

50, No. 1 (SPRING 1992), pp. 82-101 Published by: Taylor & Francis, Ltd. Stable URL: http://www.jstor.org/stable/29769596 . Accessed: 22/07/2013 20:03
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The

As-If

View

of Economic Hypotheses*

Motivational

By Steven Rappaport** De Anza College I. Introduction economic motivational hypothesis ascribes a goal to economic some of microeconomic models agents specified type. Neoclassical include The of the motivational model rational regularly hypotheses. consumer assumes that consumers seek to maximize their utility; the model of the purchasing behavior of a firm in a competitive factor market includes the hypotheses that a firm desires to hire a quantity of a factor which maximizes firm profits; and so on. My aim here is to an of motivational in neoclassical develop interpretation hypotheses An micro theory which I will call the "as-if view." The as-if view 1953). But I will develop presented before (Friedman, somewhat differently than has been done hitherto. In addition, will be made to rebut some criticisms of the as-if view which remain unanswered. II. What The as-if view invites the As-if us View Says has been the view an effort to

appear

economic motivational to true. do Let me be be purport hypotheses non-literally, though they more precise. On the as-if view, intentional terms such as "seek to maximize to maximize in utility" and "desire profits" occurring are economic motivational term E A is hypotheses non-referential. non-referential in a class of sentences K if each sentence in K can be construed so that its truth is consistent with there not existing anything

to construe

*0034-6764/92/0301-82/$1.50/0.

**I wish

to thank an anonymous

referee for helpful

comments

on this paper.

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THE AS-IF VIEW OF ECONOMIC

MOTIVATIONAL

HYPOTHESES

denoted by E.1 For example, the term "the average reader of Forbes" is non-referential in all sentences containing the termwe wish to affirm. A true sentence like
(1) The average reader of Forbes has a net worth of $1,374,138.

is equivalent
of readers

to

(2) The sum of thenetworth of all readersofForbes divided by thenumber

of the magazine is $1,374,138.

indicates that the truthof (1) is consistent with anything denoted by "the average reader of of live, flesh and blood readers of Forbes is tomake (1) true. says that intentional terms such as "seek to maximize profits" occurring in economic motivational hypotheses are are But economic non-referential. how motivational like hypotheses "firms seek to maximize profits" to be paraphrased so that intentional terms such as "seek to maximize profits" are non-referential? The

To paraphrase (1) as (2) there not really existing The existence Forbes." really all that is needed the as-if view Again,

of (1) and (2) above affords what Bertrand Russell would equivalence have called a "definition in use" of "the average reader of Forbes" It to offer a definition in use of intentional terms in is not possible economic motivational hypotheses. But an alternative is available. Consider the following sentence affirmed of a hummingbird.
(3) The hummingbird believes that the feeder still has sugar solution in it.

One way to construe (3) so that its truth is consistent with the intentional term "believes that the feeder still has sugar solution in it" not denoting anything, is to view (3) as equivalent to
(4) It is as if the hummingbird in it. believes that the feeder still has sugar solution

!I borrow the idea of non-referentiality from Dennett (1979, pp. 13-14). As statements of the form "All F are G" are standardly construed in first order logic, such statements do not imply the existence of Fs, and so do not imply the existence of Fs denoted by to say for this reason "G." But we do not want in "All F are G" that "G" is non-referential. "All F are G" which "G" let us say that "G" is non-referential in "All F are G" if Accordingly, can be construed so that it does not imply that there exists anything to with the assumption that Fs exist. applies when "All F are G" is conjoined

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REVIEW OF SOCIAL ECONOMY

solution in it" denotes nothing. Now, since (4) is compatible with the intentional term occurring in it being non-denoting, and (3) is being to (4), then (3) too is compatible with "believes viewed as equivalent that the feeder still has sugar solution in it" being non-denoting. The hummingbird example suggests that we can render intentional terms in economic motivational hypotheses non-referential by constru? ing such hypotheses as equivalent to as-if statements. For example, we can regard the neoclassical hypotheses about firmmotivation
(5) Firm managers seek tomaximize profits,

a clever act to deceive the psychiatrists who will testify at his upcoming trial.We may say "Jack is behaving as ifhe is insane." This remark can be true even though Jack is not insane at all. Thus, (4) above can be true even though the intentional term "believes that the feeder still has sugar

behavior ? The hummingbird's say, poking its beak into the feeder that the feeder But is (4) may justify (4). compatible with "believes still has sugar solution in it" not denoting hummingbirds or anything else. Let us call "as-if statements" statements of the form "_ as if_or of the form "It is as if_." Generally can be true even though what follows the statements as-if speaking, term "as if is false. Suppose Jack, an accused murderer, is putting on

as equivalent

to
behave as if they seek tomaximize profits.

(6) Firm managers

This amounts to construing (5) so that its truth is consistent with "seek to maximize profits" not really denoting anything at all. For, (6) is consistent with "seek tomaximize profits" being non-denoting. Thus, to (6), the the motivational (5) as equivalent hypothesis by viewing non to maximize in becomes intentional term "seek (5) profits" that viewing referential. Note (5) in this fashion is a non-literal construal of (5), though (5) is still true or false. For, to take (5) literally would be to regard "seek tomaximize profits" in (5) as referential, i.e., as to that "seek maximize (5) profits" does denote or implying regard correctly apply to firm managers.2

we can say that "seek to maximize Alternatively, so that, when conjoined with should be construed exist, applies. (5) implies the existence of things to which

in (5) if (5) is referential profits" that firm managers the assumption "seek tomaximize profits" correctly

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THE AS-IF VIEW OF ECONOMIC

MOTIVATIONAL

HYPOTHESES

to what has been said so far, the as-if view holds that According intentional terms occurring in neoclassical motivational hypotheses are in light of what the hummingbird non-referential. Or, example suggests, we may say that the as-if view claims that neoclassical motivational hypotheses are to be seen as equivalent to as-if statements. But the as-if view requires some further clarification. Itwill be helpful to focus on the neoclassical hypothesis about business firmmotivation, i.e., (5) above. What will be said about (5) is readily applicable, with to other neoclassical motivational suitable modification, hypotheses. the as-if view says that (5) is equivalent to (6) above. Now (6) Again,

has definite implications about the behavior of business firmmanagers. Indeed, (6) has the same implications for non-verbal behavior as does (5) when (5) is construed literally. To bring this out, let us conjoin (5) with
(7) Managers firm. have the knowledge needed to maximize the profits of their

(5) and (7) jointly imply

(8) Firm managers maximizes marginal maximization set the firm's output at that level which revenue the output level at which marginal profits, i.e., cost (and at this same output level the second order condition will of the profit function is also met). in fact equals for the

For are

themoment we are regarding (5), as well as (7), literally, i.e., we terms to be referential. So taking intentional or psychological regarded, the conjunction of (5) and (7) implies the occurrence of the behavior characterized by (8). Now let us replace (5) and (7) with the as-if statement
as if they seek tomaximize behave (9) Firm managers to achieve needed this goal. the knowledge firm profits and have

so that the intentionalterm (9) is (6) above plus (7) interpreted

"knowledge" is no/i-referential in (7). Now (9) also implies the

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REVIEW OF SOCIAL ECONOMY

prediction (8).3 The occurrence of the behavior described by (8) is a an of (6) for the behavior of firm managers, chief implication shares with when the latter is (5) literally interpreted. implication (6) As indicated in the previous paragraph, the as-if view of neoclassical motivational hypotheses takes such hypotheses to imply that economic and consumers engage in behavior which in fact firms like agents to maximizes constraints. (or minimizes) something perhaps subject But on the as-if view, what is the state or activity of economic agents leading to the optimizing behavior? It is obvious that the same behavior can be the result of different states or processes. To borrow an obvious suppose a small calculating device example from Paul Churchland, a number n is entered into the to the when number 2n displays equal device. One way the device could be led to display 2n is by multiplying n by 2. But another way the same display would result is that the device

research within economics. The as-if view is consistent with a variety of different causes of the construal of is implied by the view's optimizing behavior, which with stick the To economic motivational hypotheses. example of firm the as-if view's interpretation of the neoclassical motivation, hypothe? is compatible with each of the following. sis about firmmotivation
(Cause A) Firm managers managers calculus addition, know actually have as their goal maximizing profits. In what their profit function is and know enough to set the first derivative to of the profit function equal

as-if view construes the neoclassical hypothesis about firmmotivation so that it implies that firmmanagers set output at the level which in fact causes firm profits. But what state or activity of managers maximizes in this behavior? The as-if view is silent on this them to engage question; it offers no answer to it, but instead leaves it open for further

divides by 3 (Churchland,1984,p. 93). The multiplies n by 6 and then

differential

zero and solve that the second

for the profit maximizing output level. They also check to see at the output level derivative of the profit function is negative

can be counted on to select means are instrumentally rational. That is to say, managers are to But the assumption their of instrumental aims. believe realizing they appropriate means at also in that behavior is work from (8) (9). (9) deriving managers' rationality ? ? to wit, setting firm output at the level which in fact maximizes is the same profits as the behavior goal the assumption and know exhibited how

3Toget (5) and (7) to implylogically (8), theassumption is needed thatfirm managers

as their who really do have profit maximization by managers to achieve of such managers, this goal. But to predict the behavior of instrumental rationality is required.

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THE AS-IF VIEW OF ECONOMIC

MOTIVATIONAL

HYPOTHESES

in question. firm output

(Cause that the astrologers to set output at firm output. It so happens tell managers the level which coincidentally maximizes always profits. the (Cause C) Firm managers practice full-cost pricing. That is, they compute a normal level of output, and add a profit mark-up average cost of producing ? ? to the average cost to arrive at a for example, 10% of the selling price out turns it that the firms But varies mark-up adopt inversely with the price. of demand elasticity level and charging output maximize profits.4 price for their products. Thus, the full-cost or mark-up a normal producing price, firms in fact

to their goal, managers the appropriate means then set Selecting at the level which maximizes profits. to set consult astrologers about the level at which B) Firm managers

1969, p. 201). On the as-if view, the concept of desire (or goal) and other intentional concepts used in economic motivational hypotheses, are somewhat analogous to theoretical concepts on the instrumentalist view. The concepts of desire, knowledge, etc., as used in neoclassical motivational hypotheses, are non-denoting according to the as-if view.

(Cause A) and (Cause B) are no doubt improbable. But the point is that construal of the neoclassical the as-if view's firm motivational the the firm that of behavior consists in setting hypothesis only implies at the level in which fact maximizes output profits. Any of the above three causes, if operating, would result in this behavior. So, the as-if view implies nothing about the specific causal mechanism leading to at the firmmanagers level. setting output profit maximizing A final point is worth making in clarification of the as-if view. Instrumentalism in the philosophy of science is often associated with the position that there does not exist anything denoted by so-called etc. (Morgenbesser, theoretical terms such as "electron," "molecule,"

This follows from the fact that the as-if view advocates interpreting such concepts non-referentially. But the instrumentalist view holds that so-called theoretical concepts are non-denoting simpliciter. The as-if view is not committed to saying intentional terms are non-denoting simpliciter. It is only committed to such terms being non-denoting as
4Nicholson indicates that mark-up in fact maximizes to coincide, pricing can firm setting output at that for profit maximization and with inversely price elasticity of It is perhaps worth noting that the proof lead average total cost and marginal cost are to a business

the level which mark-up demand assumes equal. pricing

profits. He shows the mark-up must vary

1978, pp. 273-275). (Nicholson, that at the output level the firm selects,

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REVIEW OF SOCIAL ECONOMY

used

in neoclassical

motivational III. Blaug's

hypotheses. Criticism Friedman's version of the

Mark Blaug is sharply critical of Milton as-if view. Blaug says:

There remains what I have labeled on the Alchian the Alchian all motivational statements. repudiating embedded deriving individual derived in microeconomics individualism approach

thesis, may

assumptions

that is, the notion that as as-if be construed is in fact held action to be of of instead

By leaning heavily the methodological in the neoclassical testable predictions

thesis Friedman

that is commonly to economic questions: from the rational of microeconomics

agents in-the-small, from a new kind of causal mechanism,

in-the-large the predictions

are instead selection act as if

who that rewards those businessmen process while penalizing they were rational maximizers,

namely, a dynamic reason for whatever those who

act in some other

way by bankruptcy(Blaug, 1980,p. 117). In the first sentence of this passage Blaug represents theAlchian thesis as as holding that economic motivational are seen to be hypotheses to as-if statements. This is what I have called "the as-if equivalent criticism of the view is expressed in the following view." Blaug's passage:
In a nutshell, the problem with the Alchian thesis is the same as the problem of reading meaning into "the survival of the fittest" in Darwinian theory: to to be better adapted to the environment it is only necessary than survive, can no more that one's establish from natural selection rivals, and we are surviving species perfect than we can establish that surviving firms are profit maximizers (Blaug, from economic 1980, p. 119). survival

Blaug's

point here seems

to be this:
one or more rivals go that in

in an industry while (10) The fact that a firm survives out of business does not indicate that the firm produces fact maximizes profits (whatever the goals

an output

level

of the firm's managers).

No doubt (10) is correct. As Blaug points out, a firmmay survive in an it has some cost advantage rivals lack rather than industry because unlike its rivals, is a profit maximizer. because For example, the it, run curve an cost in for firms exhibit average long industry may economies of scale throughout. A firm that enters the industry earlier and has grown to a larger size than some rival firm, will have lower average costs of production, and thus be able to charge lower prices for

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THE AS-IF VIEW OF ECONOMIC

MOTIVATIONAL

HYPOTHESES

its output than the late arrival. The late arrival may then be forced out of business. But this process does not require that the surviving firm profits. produces an output level thatmaximizes However, regarding (10) as a criticism of the as-if view is an elenchi. The as-if view is that neoclassical hypotheses can be construed as as-if statements. Looking it is hard to see how (10) could be any sort of reason to view. Why does Blaug think (10 is a reason for rejecting ignoratio

motivational at (10) above, reject the as-if the as-if view? I believe it is because Blaug conflates two distinct views, calling both "the Alchian sometimes uses this thesis." As indicated above, Blaug term to refer to the as-if view. But he also uses "the Alchian thesis" to refer to the following doctrine:
a Darwinian that produces the same (11) Competition process represents ensue results which would if firms sought to maximize profits (and had the to maximize to do so), and consumers their knowledge required sought utility.

That Blaug passage:

First of

labels (11) "the Alchian

thesis" is clear from the following

as we he [Friedman] that competition have seen, argues, same a the that Darwinian results that process represents produces exactly ensue if all consumers maximized their utility and all business firms would all, maximized their profits, as a result of which the neoclassical model predicts may be counterfactual. (The classic correctly even though its assumptions statement of this argument and we will therefore label is by Armen Alchian,

it the Alchian thesis.) (Blaug, 1980,p. 116).

than the as-if view. Two objections might be urged against what I have said. For one, it might be objected that the as-if view and (11) are not distinct as I have claimed, and, as a result Blaug's (10) is as much a reason for rejecting the as-if view as for rejecting (11). In response to this, I think the as-if view and (11) do have something in common. (11) is consistent with

That Blaug uses "the Alchian thesis" to refer both to the as-if view and to (11) strongly suggests he does not regard them as distinct theses. (10) does look like a reason for rejecting (11). So, given that Blaug's Blaug does not regard the as-if view and (11) as distinct, it is easy to see how he could think (10) is a reason for rejecting the as-if view. In short, reason for thinking the as-if view mistaken is not a good one. Blaug's At best the reason Blaug presents counts against (11), a different thesis

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REVIEW OF SOCIAL ECONOMY

(12) Firm managers

do not actually

have maximizing

profits as a goal.

profits" not denoting anything at all. Perhaps it is the fact that the as-if view and (11) are alike in being consistent with (12) that could lead someone to conflate them. Though similar in the respect cited, the as-if the as-if view does not view and (11) are not equivalent. Specifically,

process whose results are (11) says rivalry among firms is a Darwinian the ones thatwould ensue if firms sought tomaximize profits (and had the knowledge needed to achieve this goal). Thus, (11) does not say or as their goal, anymore imply that firms do have the profit maximization than my saying the streets are wet if it is raining implies that it is raining. But the as-if view is also compatible with (12). For the as-if firm motivational view says that the neoclassical hypothesis is to be so term the "seek tomaximize that its is with truth consistent interpreted

in the competitive struggle. itmight be admitted that the as-if view and (11) are not Secondly, might be objected that economists like Friedman who equivalent. But it accept the as-if view try to substantiate it by appealing to (11). And, since Blaug's (10) is a reason to reject (11), (10) undermines the as-if view as well. Thus, despite some confusion on Blaug's part between (11) and the as-if view, his criticism does tell against the as-if view. In as a reply to this, Friedman for one does appeal to something like (11) not the reason for adopting, neoclassical the as-if view per se, but about business firm motivation interpreted as an as-if hypothesis statement (Friedman, 1953, p. 22).5 By undermining (11), Blaug's (10) could at best undermine the neoclassical hypothesis about firm motivation construed in theway the as-if view prescribes. But it should not be granted that (10) even does this much. Friedman himself does "Firm not regard (11) as the most important reason for accepting as to if seek maximize behave managers they profits." Instead, he
5A referee natural Blaug's that the close association suggested selection by (11) hypothesis expressed conflation of the two views. in Friedman of the as-if view and the for

is indicative of the fact that it produces a surviving and prospering level of output (whatever the actual goal of firm profit maximizing managers). But the as-if view is not at all committed to this claim. The as-if view simply does not imply anything about what is indicated by the circumstance that a firm survives and prospers while rivals go under

logically imply (11). (11) is committed to the claim that a firm

is at least part of the explanation

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THE AS-IF VIEW OF ECONOMIC

MOTIVATIONAL

HYPOTHESES

reason for accepting the most this motivational cogent the number of is successful very large hypothesis empirically of the in solving specific problems, such as applications hypothesis whether decontrolling natural gas prices will result in higher or lower gas prices (Friedman, 1953, pp. 22-23). Whether or not Friedman is in fact right here, it should be clear that (11) is not the only consideration that could conceivably support "firm managers behave as if they seek to maximize profits." Thus, that (11) is implausible and so does not warrant the neoclassical seen as an hypothesis about firmmotivation thinks

so construed as-if statement does not imply this hypothesis is discredited or undermined.6 To discredit the hypothesis, itwould have to be shown that considerations, other than (11) which might be to in the support thought question, in fact do not justify it. hypothesis And the objection cited at the outset of this paragraph shows nothing of the sort. I have tried to bring out that Blaug's criticism of the as-if view is unsuccessful. Before turning to another critic of the view, I want to correct a misunderstanding of it expressed in the passage from Blaug in the first in quoted paragraph of this section. In that passage Blaug effect affirms that the as-if view is inconsistent with themethodological individualism usually regarded as embedded in neoclassical microeco? nomics. Blaug himself does not regard this inconsistency as reason to reject the as-if view, inasmuch as Blaug does not accept methodologi? cal individualism as a substantive thesis. Be that as itmay, Blaug is wrong to suggest that the as-if view is incompatible with methodologi? cal individualism. Blaug takes methodological individualism to say that ".. . social theories must be grounded in the attitudes and behavior of . . ." individuals 1980, p. 266). We may (Blaug, regard this as or statements that about social wholes must be collectives affirming deducible from statements about individual human beings. Neoclassi? cal microeconomics does at least appear to conform to thismethodolog? ical individualist requirement. To illustrate with a simple example, consider
6As

the following
above, But

asserted

sentence of neoclassical
its truth makes

theory:

I said An

improbable. plausible.

(10) Blaug's some sort of natural

is true, and selection be

produces level of profits referee.

example perhaps the same results which (and had

would would

the knowledge

hypothesis this: competition ensue iffirms sought a positive (not maximum) required to do so). The point here is due to a

other

or (11) implausible than (11) may still be that represents a process

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REVIEW OF SOCIAL ECONOMY

(13) The market

demand

curve

for a good

has

a negative

slope.

(13) is about the social collective market demand neoclassical micro theory, (13) is derived from
(14) The market demand curve for a good curves of the buyers of the good is the horizontal

curve for a good.

sum of the demand

In

and
(15) The demand curve of each buyer of a good has a negative slope.

(15) is a statement about individual humans rather than a social collective or whole.7 The as-if view is quite consistent with the general methodological individualist position just described. Once again, the as-if view says that ascriptions of goals to economic agents are to be construed as as-if statements. But this hardly means that economic motivational are not about individual economic agents. Consider again hypotheses
(5) Firm managers seek tomaximize profits.

On

the as-if view

(6) Firm managers

(5) is to be seen as equivalent

behave as if they seek to maximize

to
profits.

microeconomics statements. Any

(6) is just as much about individual economic agents, to wit, firm as is (5). In neoclassical micro managers, theory statements about social collectives are regularly derived from statements about individ? ual economic include motivational agents, and these sometimes like But the as-if view's (5). hypotheses interpretation of motivational an not does to any derivation obstacle in present hypotheses But from individual could relying on, say, (5) just as well to without be I the as-if valid. thinks suspect Blaug employ (6) ceasing view conflicts with methodological of his individualism because
7 Of course, should

of social derivation

collective

statements

each person buys more of a good (15) simply says that, ceteris paribus, the price fall and buys less should the price rise. And in neoclassical micro in or derived is itself grounded from the assumption that a consumer theory (15) her utility. Also, methodological maximizes allows individualism that the derivation of statements about social demand collectives curve from statements about individual

The derivationof (13) from (15) employs (14), which is a definition definitions. of the
term "the market for a good."

people

may

use

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THE AS-IF VIEW OF ECONOMIC

MOTIVATIONAL

HYPOTHESES

conflation of two distinct doctrines under the label "the Alchian thesis." As indicated above, Blaug conflates (11) above with the as-if view, calling both "the Alchian thesis." Deriving predictions about the effects on business firms of higher wage rates, higher taxes, etc., from (11) does not look compatible with methodological individualism.8 Thus, since Blaug runs together (11) and the as-if view, it is not hard to see come to think the latter is incompatible how he could with methodological individualism. IV. Winter's Criticism

is critical of a position which resembles the as-if Sidney Winter focuses on Friedman's view. Like Blaug, Winter position. Winter rehashes some of the usual criticisms of the neoclassical hypothesis about business firmmotivation. He then says:
succinct statement of the Friedman (as it relates to profit position seem to be that the theory of the firm ismisnamed; would it is maximization) not a theory of the firm at all in the sense of being useful for prediction of events within any particular firm. The theory of the firm is a theory of the block of the firm; more it is a building (market) behavior importantly, in the theory of firms, i.e., the theory of how firms in the aggregate will react tomarket situations. Thus, in particular, the theory of the firm does not that decision will give when makers about their predict answers queried nor does it objectives, predict how they will go about reaching their decisions external The most

(Winter, 1962,p. 231). Let us call the position Winter ascribes to Friedman in this passage "the external view of the theory of the firm." The as-if view and the external view may not be entirely the same. But the two views are similar in that they share an important implication. As the last sentence of the quoted

passage indicates, the external view implies that the neoclassical theory of the firm generates no predictions about what firmmanagers will say in response to questions about their goals, or what processes they go about output level, price, etc. And the through in making decisions as-if view has this same implication. For on the as-if view, neoclassical micro theory does not literally ascribe any goals or other intentional states to firmmanagers. Winter is critical of the external view, and his
8Blaug seems and to think that (11) statements about individual humans is about this a dynamic whole 117). causal would process not be acting on firm from derivable

managers, statements

social

about

(1980,

p.

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REVIEW OF SOCIAL ECONOMY

criticism focuses on the implication it shares with the as-if view. Should Winter's criticism of this implication be successful, the as-if view would have to be rejected, given that one of its central implications is incorrect. Thus, inwhat follows I will regard Winter's critical remarks as applicable to the as-if view. In doing so, I am not suggesting Winter's intention is to criticize the as-if view, or that the as-if view and the external view say exactly the same thing. I am only suggesting that, criticism of the external view, his critical given the focus ofWinter's remarks would also tell against the as-if view if they are persuasive at
all.

The

criticism of Winter's passage:

the auxiliary

that I wish

to consider

is expressed

in the

following
Thus

traditional

theory; but one that rules out tests considered testability for the theory as amended, ex ante to be The of this introduction of auxiliary hypotheses appropriate. not a to in is the cumulative increase 1962, p. (Winter, type path knowledge

which restricts the predictive range of the hypothesis an ex to to the market is amendment post theory phenomena a new range of it is not an amendment that suggests furthermore,

232). This passage, together with the one previously quoted, indicates that Winter takes the view he is criticizing to add to neoclassical micro the following hypothesis:
(16) The managers. neoclassical the internal workings theory of the firm does not say or imply anything about of firms, such as the decision of processes making

say in response to questions about their goals) which it did before (16) is added. In short, (16) violates the prohibition on ad hoc hypotheses popular with logical empiricist philosophers of science. As a matter of fact, the as-if view does not advocate adding any new micro theory. Rather it espouses interpret? hypotheses to neoclassical ing motivational hypotheses of neoclassical theory as as-if statements. But the distinction perhaps matters little, as interpreting neoclassical to (16). motivational in this way carries a commitment hypotheses so to it is it reformulate Winter's criticism that does not Moreover, easy

And Winter claims (16) is an inadmissible auxiliary hypothesis because it does not enable neoclassical theory to generate any new predictions, means and the addition of (16) that neoclassical theory no longer some ones about what firm managers will generates predictions (e.g.,

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distort the as-if view: The as-if view is unacceptable because itdoes not enable neoclassical theory to generate any new predictions, and in order to save the theory from adverse evidence, it cancels some predictions neoclassical theory would otherwise generate. The premise of Winter's criticism as applied to the as-if view is correct. substantially Interpreting neoclassical motivational hypotheses as as-if statements certainly does not enable neoclassical to micro to unable the absence of it is in such generate any predictions generate no longer flow from an interpretation. Also, some predictions this neoclassical micro theory once the as-if view is adopted. However, rather than a defect. The predictions of latter fact is an advantage are cancelled the as-if neoclassical by imposing theory which are not motivational of true, and so hypotheses probably interpretation so not that it does these neoclassical generate theory construing

neoclassical allows theory to better square with the predictions we not do data. adopt the as-if interpretation of empirical Suppose neoclassical motivational theory, hypotheses. In this case, neoclassical with suitable generates predictions auxiliary assumptions, together about the verbal behavior of economic agents. And these predictions in many cases will probably turn out to be false. For instance, consider hypothesis about firmmotivation: again the usual neoclassical
(5) Firm managers seek tomaximize profits.

Conjoin (5) with thepair of auxiliaryhypotheses:

(17) Firm managers know the goals of their firms

and
(18) Firm managers answer truthfully questions about the goals of their firms.

profits" as Interpreting (5) literally, i.e., regarding "seek to maximize with (17) and (18) referential in (5), neoclassical theory together implies
(19) Firm managers will say they seek tomaximize profits of the firm.

But various considerations, including answers firm managers have in the past given to questionnaires, provide reason for thinking (19) is false 1978, (Nicholson, pp. 269-70). probably Now let us construe the motivational hypotheses of neoclassical as as-if statements. In this case, we regard (5) above as micro

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equivalent

to
behave as if they seek tomaximize profits.9

(6) Firm managers

But regarding(5) in this way, theconjunctionof (5), (17) and (18) no longer implies theprediction (19). Regarding (5) as equivalent to (6),
(5) does as
(20)

enable us to derive from neoclassical

theory a prediction
revenue

such

Firms

will

produce

an output

level

at which

marginal

equals

marginal

cost.

do not literally ascribe any goals that motivational assumptions could imply to economic whatever agents, and so such assumptions nothing about what economic agents say about their goals. Thus, the (19) does not at all count against falsity of prediction probable neoclassical micro when itsmotivational hypotheses are seen as as-if statements. The as-if view allows neoclassical theory to be more consistent with the empirical data. It has been argued that the as-if view improves the epistemological situation of neoclassical micro. But itmay be felt that I have not really criticism as directed at the as-if view. I have answered Winter's admitted the premise ofWinter's criticism, viz., the as-if view reduces the predictive content of neoclassical theory. And I have gone on to a claim this is virtue, since the predictions neoclassical theory no longer not are probably the as-if view precisely false. But is generates to an to adding neoclassical ad hoc hypotheses theory? And analogous a a to is not adding such theory prohibited by sound hypothesis methodology?
in (6) should be taken to refer to II above that the term "behave" ? barrels of lead-free such as setting firm output at a certain level 250,000 term does not cover such per day, 400,000 pounds of milk per year, etc. The gasoline as would be involved about firm goals and other in answering verbal behavior questions 9Recall from Section states of managers.

But no prediction can be derived about what firm managers will say about their goals or other psychological states, including whatever about price, output, etc. Viewing bases they have for their decisions neoclassical motivational hypotheses as as-if statements has the result that neoclassical micro theory does not imply predictions such as (19) above. Construing motivational hypotheses as as-if statements means

behavior

psychological

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of a theory? sense, a modification adding an auxiliary ? basic the is ad of theory, etc. hypothesis, reinterpreting assumptions to rescue the theory from adverse it is designed hoc simply when has observed, there is But, as Larry Laudan empirical evidence. In one indeed, nothing wrong in general with this sort of ad hoc modification; such modification improves the epistemic worth of a theory (1977, p. 115). And I have claimed that the as-if view is just such a beneficial ad hoc modification of neoclassical microeconomics. If ad hoc is to be a some to have will criterion be given for its use as a term pejorative term, of negative appraisal. Or in other words, some criterion will have to be

hocness"

The second bad ad hoc modifications. supplied for distinguishing he above that Winter would from passage propose that suggests quoted ? a bad ad hoc modification ? use term not the he does ad hoc though is one that does not ". . .suggest a new range of testability for the This looks like a criterion for bad "ad ..." theory as amended of science emphasized by logical empiricist philosophers a A of is modification ad hoc theory provided (Hempel, 1966, p. 29). it is designed to rescue the theory from adverse empirical evidence, there and, apart from the adverse evidence leading to themodification, is no empirical evidence favoring the amended theory additional to that favoring the theory before the amendment. It would be suggested that a theory is unacceptable should it be subject to an ad hoc modification in this sense.

ad hoc modifications supplied by logical empiricists. A standard example of ad hocness given by logical empiricists is the hypothesis that phlogiston has negative weight, which of course was proposed by adherents of the phlogiston theory to reconcile itwith the result that an increase in weight often occurs during experimental calcination. Now the as-if view was proposed by Milton Friedman to

The trouble with the logical empiricist criterion for ad hocness just described is that it has been effectively criticized. Counterexamples have been provided which indicate that a theory can be subject to an ad hoc modification according to the logical empiricist criterion and yet be and Urbach, 1989, pp. 111-12). But merely (Howson acceptable the criterion for ad Winter's criticism aside hocness implicit in brushing is not enough. I want to try to distinguish the as-if view's modification of neoclassical micro theory from at least some of the examples of bad

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is empirical testing of the theory. A theory's prior credibility determined by such factors as the consonance of the theory with already the hypothesis that accepted beliefs, simplicity, and so on. Adding to has the reduced the phlogiston negative weight theory phlogiston For the and substances with theory's prior credibility. physical objects which people are familiar certainly do not have negative weight. And that makes rather bizarre, diminishes the credibility of, any theory, such as the amended phlogiston theory, which affirms that some has substance physical negative weight. It is theprior credibility of the which is reduced, as the judgment of diminished credibility is theory the of results of any empirical test of the phlogiston theory independent the as-if view of neoclassical motivational itself. However, hypotheses does not reduce the theory's prior credibility. Neoclassical micro no ? la the has as-if view lower theory interpreted prior credibility than does neoclassical micro when itsmotivational hypotheses are literally

reconcile neoclassical micro theory with adverse empirical evidence.10 But there ends the similarity between the as-if view and the hypothesis that phlogiston has negative weight. Let us use the term "prior to the credibility of a theory independent of the to refer credibility" results of any empirical tests of that theory. A theory's prior credibility, whether high or low, is determined by factors other than the results of

And

construed. In short, the as-if view's modification of neoclassical theory is not the same as such standard examples of bad ad hocness as the hypothesis that phlogiston has negative weight. It has been suggested that theWinter style reason for thinking the as-if view unacceptable is not persuasive. It is true, as theWinter style reason alleges, that the as-if view reduces the predictive content of But it does not follow that the as-if view neoclassical microeconomics. or in any way defective. The as-if view makes is unacceptable neoclassical micro theorymore consistent with the empirical evidence. standard
10In the

it is not implausible or bizarre in the way at least some of the of bad ad hocness are. In sum, the as-if view examples
1940s the neoclassical that business firm managers maximize assumption under attack on the basis of answers given to questionnaires by managers firms. A well-known of this is Richard Lester's criticism of the example

profits came of real world

on the basis of results of a he sent to 58 assumption profit maximization questionnaire a version of the firms in the southern United States (Lester, 1946). Friedman developed as-if view so that the results of questionnaires be irrelevant to the like Lester's would appraisal of neoclassical motivational hypotheses (1953, pp. 15-16, pp. 21-22, p. 31).

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represents a beneficial modification V. The As-if View and

of neoclassical

theory.

Friedman's

Methodology

reject the other. I have discussed, and criticized, Friedman's methodology Elsewhere (Rappaport, 1986). It is worth briefly summarizing themain tenets of as a success It emphasizes Friedman's methodology. predictive criterion for the acceptability of a theory or hypothesis in economics. More precisely, a theory T is acceptable if T has been tested one or more times, and each test has been successful. The conception of operates with is a simple form of hypothetico testing Friedman deductivism. This affirms that testing a theory is nothing more than deducing one or more predictions from it, and determining whether or A

Friedman's methodology.11 Since themethodology is badly flawed, the as-if view and my defense of itmust also be defective. However, my defense of the as-if view is in no way a defense of Friedman's methodology. And in fact, the as-if view and Friedman's methodology are independent of one another. One could accept one of the two and

The last criticism of the as-if view I wish to consider concerns the relation between it and the type of methodology of economics Milton Friedman. Friedman's has come championed by methodology in for much criticism, and itmight be thought thatmy defense of the a view Friedman himself proposed in his 1953 paper on as-if view ? economic methodology ? is somehow at the same time a defense of

motivational in neoclassical microeconomics. The as-if hypotheses view does not imply an endorsement of anyone's criteria for the or otherwise. Let us acceptability of an economic theory, neoclassical suppose that themotivational hypotheses of neoclassical micro are viewed as as-if statements. Further imagine that neoclassical
1 Alexander with seems Rosenberg the as-if view (1976, pp. to link Friedman's 163-168). general methodology

not the predictions are true. Should they be true, the test is successful. tests, or a theory T is to be rejected if it has had many unsuccessful some tests of than unsuccessful alternative. higher percentage existing Finally, should a pair of competing economic theories have been tested and with equal success, then the one that is simpler and more fruitful should be adopted. An advocate of the as-if view is simply proposing an interpretation of

theory theory

of economics

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micro theory has been evaluated using Bayes' theorem, the from view would of the as-if advocate refrain saying Bayesian neoclassical theory is acceptable, even though it is being interpreted ? la the as-if view. In short, a proponent of the as-if view can insist on a neoclassical (a) the interpretation of motivational hypotheses, in or elsewhere, and (b) the criteria for the micro-theory an entire of economic theory. This distinction has the acceptability result that the as-if view does not carry a commitment to any particular or anyone else's. So, the defects Friedman's economic methodology, do not spell trouble for the as-if view. of Friedman's methodology Let me say something which will put into proper perspective what has been said in this section. Some readers may regard the as-if view as distinction between neoclassical

? criteria for a theory being acceptable does meet Friedman's perhaps all the predictions of neoclassical theory have turned out to be correct. to saying is not committed of the as-if view Still an advocate as-if view The the could of is neoclassical proponent theory acceptable. a the theories of economic view of Bayesian appraisal adopt, say, Since we have not been told that instead of Friedman's methodology.

of economics, I have been talking speaking of Friedman's methodology criteria for appraising the Friedman about presents exclusively economic theories. (A brief account of these criteria is given in the second paragraph of this section.) And I have tried to separate the as-if in the narrow sense of the term. view from Friedman's methodology Once we see that the as-if view carries no commitment to Friedman's (narrow sense), we will not be tempted to reject the as-if methodology it somehow commits us to thatmethodology. view because VI. Conclusion

an element of Friedman's methodology of economics. Such readers would probably find puzzling my effort to separate the as-if view and There is perhaps a broad sense of "methodol? Friedman's methodology. an element of the as-if view is uncontroversially in which ogy" I have used But in the above Friedman's remarks, methodology. a narrow sense to to the criteria for refer in only "methodology" a or of in theories So, in range disciplines. discipline appraising

to explain the as-if view about the An effort has been made In addition, microeconomics. motivational of neoclassical hypotheses several criticisms of the as-if view have been shown to be unpersuasive. criticism fails through confusing the as-if view with the Mark Blaug's the same is a Darwinian claim that competition process producing

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status of the theory. Finally, I have tried to deflect the epistemic criticism of the as-if view that its commitment to the flawed economic methodology proposed by Milton Friedman makes the as-if view itself to Friedman's is not committed The as-if view unacceptable. once the first This is evident distinction is in the methodology place. made between interpreting themotivational hypotheses of neoclassical micro theory, and proposing criteria for the acceptability of an entire economic theory. In light of the discussion here, it is fair to say that the as-if view represents a defensible interpretation of the motivational hypotheses of neoclassical microeconomics.

ensue if firms sought to maximize results that would profits and consumers sought to maximize The I extracted from criticism utility. misconstrues the fact that the as-if view Winter's writing Sidney reduces the predictive content of neoclassical micro theory. Contrary to theWinter style criticism, this fact represents an improvement in the

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Press, 1978. of Economics," Rappaport, Steven. "What isReally Wrong with Milton Friedman's Methodology Reason Papers, No. 11 (Spring 1986), pp. 33-61. Laws: A Philosophical Analysis. Pittsburgh: University of Rosenberg, Alexander. Microeconomic Pittsburgh Press, 1976. 'Natural Selection' and the Theory of the Firm," Yale Economic Winter, Sidney. "Economic Essays 4 (1962), pp. 225-272.

American Economic Review 36 (1946), pp. 63-82. Suppes, and Morgenbesser, Sidney. "The Realist-Instrumentalist Controversy," in Morgenbesser, White (eds.), Essays inHonor of Ernst Nagel: Philosophy, Science and Method. New York: St. Martin's, 1969. Illinois: The Dryden Nicholson, Walter. Microeconomic Theoiy, Second Edition. Hinsdale,

Chicago: University of Chicago Press, 1953. Hempel, Carl. Philosophy of Natural Science. Englewood Cliffs, New Jersey: Prentice-Hall, 1966. The Bayesian Approach. La Salle, Howson, Colin and Peter Urbach. Scientific Reasoning: Illinois: Open Court, 1989. Laudan, Larry. Progress and Its Problems. Berkeley: University of California Press, 1977. for Wage-Employment of Marginal Problems," Lester, Richard. Analysis "Shortcomings

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