Epistomology of Economics - Sagal - DF

Epistemology of Economics
Author(s): Paul T. Sagal

Source: Zeitschrift für allgemeine Wissenschaftstheorie / Journal for General Philosophy
of Science, Vol. 8, No. 1 (1977), pp. 144-162
Published by: Springer
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Epistemology of Economics
PAUL T. SAGAL
Summary
Methodological disputes in economics have been with us since Mill and Senior fought
over the nature of economic science in the first half of the 19th Century. Progress has
been extremely slow, and there is good reason for this as the present essay hopes to show.
Three important methodological positions are examined critically: the "ultra-empiri
cism" of T.W. Hutchison, the "moderate empiricism" of Milton Friedman, and the
"extreme a priorism" of Lionel Robbins and Ludwig Von Mises. The argument be
tween Guttierrez and Block in Theory and Decision over praxiology is discussed in con
nection with the last mentioned position. The paper concludes that "extreme a priorism,"
though very much out of fashion is not without its resources. The work of the contem
porary German philosopher, Paul Lorenzen, is enlisted to bolster this position.
Methodological disputes in economics have been with us since Mill

and Senior fought over the nature of economic science in the first half
of the 19th Century. Progress has been extremely slow, and there is good
reason for this, as the present essay hopes to indicate. Much methodological
controversy centers upon the fundamental terms and principles of econom
ics. When we are at this fundamental level, when we are dealing with the
foundations of a discipline, we may be said to be doing epistemology. The
last mentioned term has usually been applied to the foundations of knowl
edge. But even here it is usual to distinguish between the theory of empirical
knowledge and the theory of non-empirical knowledge. Now even this
distinction is not without its problems, but let us bracket this question for
the moment. When philosophers have dealt with the theory, the foundations,
of empirical knowledge they usually have had physics in mind. This was
certainly excusable, especially since physics had had its Newton (and
Einstein too) whereas the other sciences can with some accuracy be said to
be still seeking their Newton. A theory of knowledge after all must have
knowledge for its subject matter. Except for physics (and closely related
disciplines) the other empirical sciences, primarily the social sciences,
appear to be high risk cases. On the non-empirical side, geometry has
always dominated epistemology, and for good reason. Geometry seems to
have the following extremely attractive epistemological properties : (1) Its
fundamental terms and principles are few, clear and distinct (economy plus
epistemological transparency.) (2) Its non-fundamental principles are
(apparently) deducible as theorems from the basic principles - the axioms
(decuctive-axiomatic style, deductive completeness) (3) Geometry gives
Zeitschrift f?r allgemeine Wissenschaftstheorie VIII/1 (1977)
? Franz Steiner Verlag GmbH, D-6200 Wiesbaden
Epistemology of Economics 145
information about the real world. It is about space, that extended substance
which surrounds us. In short, geometry gave a highly intelligible uniquely
true characterization of a significant portion of reality. It is no wonder that
especially the 17th Century rationalist philosophers were so enamoured
with geometry. For Spinoza, even ethics was to be put in more geom?trico.
By the time arithmetic and generalized arithmetic (arithmetic with letters
? algebra) were put in axiomatic form, something had happened to the
geometrical ideal of knowledge. For one thing, Euclid's geometry contain
ed logical gaps. For another tiling, Euclid's geometry had competition. The
necessity to choose between Euclid and his competitors had serious conse
quences. The certainty of Euclidean geometry seemed to be grounded in
the epistemological transparency of its basic terms and principles. It just
had to be true. Now the whole notion of substantive truth ? truth about
reality ? as grounded in the evidence of basic principles seemed to go by
the boards. How can we be sure that some other geometry isn't ,truec of
reality? The natural move to make here, and the move actually made, is not
difficult to foresee. A distinction is made between internal truth and external
truth. The former is a matter of logical consistency and valid deduction,
the latter a matter of empirical test, of application. What made Euclidian
geometry so attractive epistemologically was its apparent capacity to ob
viate such a distinction. The reader with roots in the philosophical tradition
will of course interpret the history of geometry as involving the birth and
death of the synthetic a priori (I remind the reader that I do not necessarily
subscribe to this more or less official story of geometry).
The epistemology of empirical knowledge too can be viewed as imitating
the axiomatic style of geometry. In fact, 18th Century empiricists differed
from 17th Century rationalists principally in what they chose for basic terms
and principles. The geometrical (axiomatic) ideal remained. In empirical
knowledge what you want to derive is Newton's laws, the laws of physics.
What makes these laws true is experience, and from these laws you can
explain and predict unknown experience. You don't want to take Newton's
laws as axioms, because then you would have to claim just as in the case
of geometry that the truth somehow was grounded in epistemological
transparency. For the empiricists this would make physics too close to geom
etry (to mathematics). Matters of fact are to be sharply distinguished from
relations of ideas. But how can empirical laws be deduced from observation
(experience) ? They can't. They can at best be induced. Then what happens
to the grounding of empirical laws in observation? We can look at the
matter in two different ways : (1) We supplement deductive logic with an
empirical or inductive logic. We then logically derive Newton's laws let us
say from additional axioms. (2) We supplement our observation statement
axioms with axioms of epistemological nature, some version of a uni
formity of nature principle. Then from this expanded set of axioms we
derive the laws of physics etc. Needless to say all this has the air of make
believe about it. Still it wasn't until the demise of logical positivism in the
late 1930s that this inductivist view of empirical knowledge was dealt a
10
146 Paul T. Sagal
death blow. (Of course, it is by no means dead for everyone. It still has a
faint heartbeat).
This official story leaves us in a rather uncomfortable position. Ration
alism and empiricism, the keystones of traditional epistemology, seem
vanquished. Something must rise from the ashes to rescue epistemology.
In the Mill/Senior debate, Mill was the empiricist and Senior was the ra
tionalist. The history of epistemology appears to have refuted both. (Neither
can stand without modification.) Inquiry into the foundations of economics
has several heavy crosses to bear : (i) the relation of economics to the empirical
sciences, e.g. physics on the one hand, and the non-empirical sciences e.g.
geometry, on the other hand, is not easy to set forth (ii) the epistemology
of both the empirical and the non-empirical sciences in general is (and
indeed has always been) too controversial to depend on. (iii) Economics
seems to flirt with normative and moral 'sciences' and this further compli
cates its epistemology. Is it any wonder that in economics "questions of
methodology are among the most difficult to reach agreement on or even
to find a basis of discussion for."1
The old empiricism can be labelled (following Sir Karl Popper) inductivist.
It saw the empirical sciences as based upon observation sentences. First
principles were to be somehow derivable from these sentences. But it is a
simple logical point that principles of a universal sort (scientific laws),
are not derivable from a finite set of observations. And since the set of all
verified observation sentences has to be a finite set, that these principles were
not so derivable. The move usually made by the old empiricism was to
supplement the rules of deductive logic with inductive rules, these together
being sufficient for deriving empirical laws. Alas, nothing like the relative
unanimity in deductive logic ever appeared in the inductive case. A related
attempt to salvage the old empiricism was to rest satisfied with high prob
ability of first principles. The inductive logic could serve as a probability
logic and we could provide a foundation for the probable truth of the
principles in question. However, as Hume was the first to point out, the
shift to probability will not do, for the justification of probability rules was
every bit as difficult as the justification of the inductive rules in the stronger
sense, i.e. the sense in which the truth of principles and not merely their
high probability, was derivable. The old empiricism has to give up both
inductive proof and degrees of confirmation. But empirical knowledge seemed
then to be without justification, without foundations altogether. We appear
caught in the throes of Humian scepticism. The empiricism attempted to
draw a sharp line between empirical science on the one hand and logical
or mathematical science on the other. (It also tried to sharply separate both
from non-science and metaphysics.) Now empirical knowledge seemed to
have vanished. The inductivist old empiricism was too ambitious a theory.
Empirical knowledge could not be salvaged inductively. Proof and confirma
1 Scientific Papers of T. C. Koopmans, Springer 1970, p. 148: New Epistemology

for Economics : Berlin, New York.
tion could not stand up to philosophical critique. What could be done?

We come to the Popperian salvage job. Popper's primary interst was in
demarcating science from non-science, especially in drawing a line around
empirical science ? something the old empiricism could not manage.2
For Popper, what sets empirical knowledge apart is the testability of its
statements, not its provability or confirmability (probability). Empirical
statements are tentative. They are subject to falsification ? though not
confirmation. Empirical knowledge develops through the rigorous testing
of bold ? content rich ? conjectures. Falsification of such conjectures is a
consummation devoutly to be wished, for it is by means of such falsification
that we learn. This is what learning from experience is about. As Popper
points out, the method of conjecture and refutation is really trial and error
learning, raised to a methodological principle. We can call Popperian
empiricism the new empiricism. Its influence was wide even where Popper
ian ideas were far from fully assimilated. The empirical motto became
testability. It was this that the scientist was after. It was this that made his
work scientific. This was the solution to the demarcation problem. The
line was drawn around empirical science.
It is this new empiricism which forms the backdrop to T. W. Hutchison's
classic work on the methodology of economics.3 For Hutchison, economics
was an empirical science; therefore its basic postulates had to be testable.
It was thus incumbent upon the economist to spell out relevant empirical
tests for his postulates, assumptions, axioms, basic principles, etc. As
Hutchison admits in the new introduction to the republication of his work,
he was importantly concerned with combatting the idea of a school of
economics which treated postulates as not subject to such testing, a school
which proudly proclaimed the nonempirical status of its principles. It
was the Austrian methodology of Von-Mises and Lionel Robbins (at the
time) which was the methodological enemy. We will confront Austrian
methodology directly in a subsequent section. What is important to see
here is that the new empiricism gave Hutchison and his followers a stage
to stand upon. All science was either a priori or a posteriori. A priori truths
were simply true by virtue of language ? analytic. They were tautologies.
All informative (synthetic) truths were truths which rested upon empirical
testing. (Actually all one had at best were conjectures, hypotheses, which
had thus far withstood rigorous testing). Outside of these areas, we had
non-science, metaphysics taken broadly or metaphysics taken narrowly
along with other epistemological outlaws. What we had, and what Hutchi
son worked with, was basically the Humian-Positivist view of knowledge
in restated modern dress.
2 For the development of Popper's philosophy, see Conjectures and Refutations and
Objective Knowledge. Popper's truly fundamental work remains The Logic of Scientific
Discovery. See also I. Lakatos' penetrating discussion of Popper's thought in Lakatos
Musgrove volume, Criticism and the Growth of Knowledge?)
3 T. W. Hutchison, The Significance of Basic Postulates in Economic Theory.
10*
148 Paul T. Sagal
But this new empiricism had its problems, some of which were fore
shadowed in the history of western philosphy. The line drawn appeared too
confining. Not all empirical statements, not all parts of empirical science,
seemed equally empirical. The basic postulates of science did not confront
falsification with the same forthrightness as statements like All ravens are
black, and If a two pound weight is placed on this string it will collapse. In New
tonian science we had the laws of motion which seemed barely empirical.
Could one falsify the law of inertia? Still Hutchison would insist that the
problem with such examples was that thinkers had been epistemologically
shifty in treating them. They had played (and still play, for that matter),
the now it's empirical, now it's not, game. The scientist has to make up his
mind. They are one or the other. He cannot eat his cake and have it too.
Kantianism is one important historic line of thought which attempted
to resist the above argument. It is not that scientists are being shifty, but
rather that methodologists have blinded themselves to a significant and
idiosyncratic part of empirical science ? the a priori part of empirical science.
For empiricism, old and new, there just 'ain't' such an animal. We will
come back to Kantianism since it is the epistemological stage on which
Hutchison's methodological enemies stand.
Another critical reaction to empiricism is the Duhem/Quine line. The
operative word here is holism. We will, as has been our custom, paint in
broad strokes. On this view, theories to conjectures do not confront test
and possible refutation in isolation. When a theory is tested, not only it
but an infinite number of background assumptions ? any assumptions
which were necessary to deduce the consequent which turned out false are
also tested. It is not written in heaven what adjustment among all these
assumptions should be made. There is no commandment to give up the
theory. We could also keep the theory and give up something else. Further
more, where we push this line to its limits, there is nothing in the whole
science which we could not in principle give up. So either all science, the
system, a priori and a posteriori, is testable or nothing is. We cannot go
into the empiricist counterattack here - but the point we want to make is that
both from the Kantian and the holistic epistemological perspective, the
methodological strictures of the new empiricism have to be dropped. Hut
chison's work in economics is of course dependent upon the defensibility
of the new empiricism.
A modest reaction to Hutchison's empiricism is reflected in Milton
Friedman's very influential essay, On the Methodology of Positive Economics.*
Friedman is looking for elbow room. He is worried about the demand that
basic postulates themselves be subject to empirical test.
Friedman's influential essay is usefully viewed as a reaction against what
has been termed (by F. Machlup) Hutchison's ultra-empiricism. But a
caveat is in order. Friedman's essay is a difficult one. Certain key terms
4 M. Friedman, Essays in Positive Economies, pp. 3-9.
are not sufficiently explained and there is some question even about the
consistency of the line of argument. Furthermore laying out the line of
argument has its own difficulties since as indicated key terms prove trouble
some. Friedman is afraid that empiricist strictures a la Hutchison would
outlaw much useful economic theorizing. More pointedly, Friedman holds
that assumptions like perfect competition, and profit maximization need
neither be true nor testable to be useful for prediction. Usefulness is a
matter of predictive reliability. This is Friedman's pragmatism, indeed
his instrumentalism. Look at assumptions as tools; do they give us the
results we are after? We are to judge theoretical assumptions by their fruits
and not by their roots (in reality). This view has all the troubles of any
brand of extreme pragmatism. It has difficulty in drawing the line between
scientific liberty (in theorizing) and scientific license. Assumptions needn't
be true, they needn't even be empirically testable. They just have to yield
appropriate predictions. How are we to choose among alternative useful
theories? Here the hard-line pragmatism is softened. We can look for
parallels with the successful theories. We can compare them on some
measure of simplicity. (It is of course not easy to spell this out.) Basically
Friedman relies upon some notion of fit or coherence with other parallel
theorizing. But of course there is something circular about this. Each
competitor theory is to be judged by its coherence with successful parallel
theories. But how did we choose the superior parallel theories from among
its competitors? Some criterion independent of coherence is apparently
required. Yet how are to admit one, without bringing the realism, the truth,
the empirical meaningfulness of assumptions back into the picture?
Lionel Robbins and Hutchison spoke of basic postulates. And it is
clear that they had such things in mind as profit maximization. Friedman
on the other hand speaks of assumptions ? and clearly includes profit
maximization in this category. Are assumptions simply postulates, first
principles ? axioms? They had better be. For the logic of assumptions
otherwise is something terribly murky. Friedman speaks of hypotheses
having both observational implications and assumptions. In testing a
hypothesis the truth or falsity of the implications matter, if the assumptions
do not. A way of clarifying this kind of talk would be the following. An
assumption is a statement to which the hypothesis is a logical consequence.
(It is a logical consequence if the assumption were one of the statements
used in deriving it.) An implication is simply a logical consequence of the
hypothesis ? same characterization of logical consequence as above. Fried
man's position would then amount to this. Epistemological requirements:
truth realism, testability, etc. are passed up to a hypothesis from its impli
cations and not down to a hypothesis from its assumptions. Assumptions
are judged by the fruitfulness of the hypotheses which are logically-conse
quent to them.
This alone would solve some crucial problems in Friedman-interpretation
But the key separation of assumption from hypothesis is not easily made in
all cases. When Friedman speaks of assumption testing or evaluation ?
150 Paul T. Sagal
when he speaks of the logical consequences of assumptions ? he distin

guishes between direct consequences and indirect consequences. It is the latter
that are important. These are the empirical hypotheses and their logical
consequences. The direct consequences would only be important if the
realism (truth etc.) of the assumptions was a legitimate issue.
Let us now raise some related issues in connection with Friedman's
'half-way house' empiricism (perhaps indirect empiricism would be better).
As we saw Friedman opposes criticisms of perfect competition, perfect
monoploy, profit maximization which are based on lack of realism, de
scriptive inaccuracy, "false image of reality" and other such epistemological
criteria. We should only pay attention to the predictions derivable from the
assumption (the theory). T. C. Koopmans points out the following: "In
the first place, in order that we shall have a refutable theory at all, the postu
lates then need to be supplemented by a clear description of the class of
implications by which the theory stands or falls. Otherwise every contra
diction between an implication and an observation could be met by re
classifying the implication as a "direct" one."5
We still have the problem in Friedman's account of how the direct con
sequences of a theory which are untestable and in whose 'truth' we should
not be concerned connects up with the indirect consequences which provide
the empirical test items of the theory. It is here, I believe, that Friedman
introduces "rules for using model (theory)." These seem to be what many
contemporary philosophers of science call bridge laws or rules of inter
pretation. If the theory can be likened to a black box, the rules of inerpreta
tion provide an entrance and exit for empirical material. They link theory to
experience, and thereby provide for the empirical test of a theory. Otherwise,
we simply have the black box ? the deductive consequences of the basic
postulates. These bridge laws (rules of interpretation) come in all kinds of
packages. They do not usually provide definitional equivalents for
theoretical terms. They provide as a rule what is called a partial (rather than
a full) interpretation. If this were not thes case, theories could only be di
rectly testable insofar as their component statements would be equivalent
to such directly testable statements.
What we might ask at this point is just how black Friedman's black box
needs to be? As we saw, Friedman sometimes speaks like an extreme
instrumentalist. We don't care how the box works just so long as it produces
what we want (good predictions). Yet his examples of theories, and some of
his pronouncements, reflect a very definite concern with the insides of the
box. He even goes so far as to suggest an argument for the theoretical
assumption of profit maximization based on the survival value of such a
practice in business competition. This sounds as if Friedman not only
cares about the contents of the box, but wants to show that the contents
are optimal ? that his theory is true, realistic, all the things he said we
5 "The Construction of Economic Knowledge" in Brodbeck M. (ed.), Readings In

The Philosophy of the Social Sciences, New York/London 21968, p. 536.
shouldn't concern ourselves with. Though this observation about the sur
vival value of profit maximization should perhaps be taken as mere obiter
dictum, it remains the case that Friedman is concerned with more than the
indirect consequences of theories. For one thing, he wants theories to be
simple or as simple as possible. For another, the examples he adduces of
'false' theories which are useful are examples of theories with other attrac
tive traits. They provide analogies or pictures of operation which are rela
tively easy to grasp. They provide a certain kind of understanding. They
tell us that things happen as //"things were the way the theory says. (This is,
it seems to me, the attractiveness of the billiard player explanation in terms
of geometrical optics). There are criteria, certainly, in choosing among
such as if explanations, whether we speak of understanding, heuristic value
or what have you. Indeed quite independently of a theory's pragmatic
value its role in understanding may make it relatively resistant to competi
tors. So although Friedman goes out of his way to emphasize the instru
mental, black box nature of theories, he does recognize what we may term
the epistemological value of theories. Theories render facts intelligible.
They can be effective engines for prediction generation without accom
plishing this.
In the 1955 volume of the Southern Economic Journal'there was an important
and extremely lively discussion of methodological issues. The chief protag
onist was Fritz Machlup. Machlup in his Verification in Economics distin
guishes two extreme positions ? ultra-empiricism which he identified with
the views of Hutchison which we have already encountered, and extreme a
priorism which he identified most importantly with Ludwig Von Mises.
(We will soon examine Von Mises's position) Machlup's own views were
very close to Friedman's. He, however, did not share Friedman's ultra
pragmatic (instrumentalistic) tendencies. Machlup stressed the idealizing
function of basic assumptions. These assumptions were necessary for the
scientist if not for the job of generating testable consequences. For the
latter, a large class of theories would do. But only a subset (perhaps one) of
these theories could serve as an idealization, as an instrument of inter
pretation, if you will. "For the fundamental assumption may be understood
as an idealization with constructs so far removed from operational con
cepts that contradiction by testimony is ruled out; or even as a complete
fiction with only one claim: that reasoning as if it were realized is helpful
in the interpretation of observations. And... "The fundamental assumption
is a resolution to proceed in the interpretation of all data of observation as
if they were the result of the postulated type of behavior."6
Hutchison did not by the way take the ultra-empiricist charge lying
down. He responded forcefully ? to say the least ? to Machlup's paper
pointing to some non ultra-empiricist passages in his work. Machlup, in his
reply ? Rejoinder to a Reluctant Ultra-Empiricist, ? argued that Hutchison
in spite of some statements to the contrary, deserved the ultra-empiricist
6 Fritz Machlup, Verification in Economics, SEf, 55?56.
152 Paul T. Sagal
label. In this rejoinder, Machlup went somewhat further in developing his

methodological position, and it is to this elaboration, especially his illus
tration, that we now turn.
Machlup suggests that Hutchison does not really appreciate the logic
of his own (Hutchison's) methodological position. The difficulty centers
upon the notion of indirect testability of theoretical assumptions. It is
the indirect testability which distinguishes ultra-empiricists from empiricists.
For the ultra-empiricists everything must be directly testable. For Machlup
if a statement is equivalent to a set of statements which are directly testable
then it too is directly testable. Hutchison does not seem to accept this. He
speaks of indirect testing as involving the reducibility of theoretical assump
tions to direct testability. Of course, the key term is reduce. If reduction
amounts to translation without remainder, complete rather than partial
interpretation, then we have a view different from both Machlup's and
Friedman's. On this ultra-empiricist view, theoretical statements (theories)
are easily eHminable. They simply provide a shorthand notation. We may
say that ultra-empiricism has a stenographic conception of theories.
Interestingly enough, Machlup himself is perhaps mistaken in his con
ception of indirect testing. (Perhaps we have here a case of the pot calling
the handle black.) He claims that Hutchison's "formulation suggests a
requirement that the implications of any single proposition be tested
independently of those of other propositions with which it is conjoined to
constitute a "case". In fact however the conjunction of logically independent
propositions and derivation of their joint consequences is the essence of indirect
testing."7 This looks fine. Theoretical statements have no directly testable
consequences of their own. However in conjunction with other statements
? so called bridge or interpretive statements, statements which serve to
partially interpret theoretical terms in an observational language, they
yield statements which are directly testable. The theoretical statements
themselves are said to be indirectly testable. Notice that the bridge state
ments are not themselves directly testable since they involve the theoretical
language in an essential way, i. e. the theoretical terms in the bridge state
ments are not themselves eliminable. Now, Machlup, as will be evident
from the following, fails to recognize this. "If assumption A can neither be
subjected to any direct empirical test nor reduced 'by direct deduction to
an empirically testable proposition' its indirect verification can be accom
plished by combining it with an assumption B which is directly testable;
if a consequence C can be deduced from the conjunctive hypothesis A plus
B ? but not from either one alone ? and if C is empirically tested, A is
regarded as having passed the indirect test."8 B is apparently a bridge
statement and hence is not directly testable unless it itself were equivalent
to a set of directly testable statements. This would make these bridge
7 F. Machlup, Reply to a Reluctant Ultra-Empiricist, SEJ 1955, p. 484.

8 p. 484.
statements equivalents and thereby show themselves to be superfluous in

that the original theoretical statement A would thereby be shown to be
directly testable.
Another important discussion of methodological questions took place
in December 1966 meetings (published in 1967) of the American Economic
Association. Though Milton Friedman did not participate, his essay on the
Methodology of Positive Economics dominated the proceedings. The
Keynote Address, as it were, was delivered by the philosopher Ernest
Nagel. It was aptly titled Assumptions in Economic Theory.
Nagel argues that Friedman's paper largely comprises bad arguments for
a good conclusion. We have indicated some criticisms offered against
Friedman's paper, but it will be useful to bring a number of them together
as Nagel does. First the ambiguity of the term assumption. Basically an
assumption can either be taken as an entire statement underived rather
than derived in a system, or it can be taken as the antecedent in a conditional
statement, the whole statement having the afore-mentioned underived
character. Nagel points out that given the latter interpretation there is in a
sense no problem for the entire conditional statement if the antecedent is
false or unrealistic, since according to the usual manner of construing
conditionals, this would make the whole statement true. Still, it seems to
me, this significance of this ambiguity can be overemphasized. What
Friedman is interested in is the testability of the assumption. No matter
how we construe assumptions the heart of our problem is still the rules of
interpretation, the correspondence postulates. The conditional statement
as assumption is tested in the following way: (In testing we seek falsification
by empirical fact. Testing is Popperian.) Conditionals are of the form p ->q.
Such statements are false if p is true and q is false. The convention is to
treat all other cases as true. So only p A ? q contradicts p - q. But how can
pA ? q be determined empirically? We need correspondence postulates,
p and ? q must themselves be shown to be testable. Now to falsify p -*-q,
p must pass the test and q fail. If p ->-q a bridge principle p or q must not
be directly testable. Let C be a correspondence postulate for p, let e be an
empirical statement. Then p.C. -*-e, and e fails to refute p, then p passes the
indirect test. The assumption is the same if the antecedent of the conditional
has passed the test. This is the first step in indirect tests of the conditional
as a whole. We now test q by deriving e' from q and its correspondence
postulate(s) C and if e' is not true, this would be, other things being equal,
a refutation of the original conditional assumption for we would have e
and ? e'. So the basic point of this digression is that the indirect testing of
conditionals requires the antecedents of these conditionals to be indirectly
tested and to pass these tests. Assumptions in the sense of antecedents of
conditions often state the conditions, e.g. pure competition, under which
the consequents and hence the rest of the theory is supposed to hold.
Indirect testing of the theory then requires the antecedent be met (at least
approximately). This has to be established (tested with the aid of corres
pondence postulates relating the theoretical state of pure competition with
154 Paul T. Sagal
some empirically identifiable economic features. If correspondence postu

lates are themselves directly testable we get a regress ad infinitum.
Thus far in our methodological investigation we have encountered two
species of empiricism ? ultra-empiricism, the view that basic postulates of
economics are subject to direct empirical tests, and deferred empiricism ?
the view that basic postulates are subject to empirical tests but only in con
junction with certain auxilliary principles which provide rules for inter
preting theoretical terms with empirical terms. These can be said to bridge
the gap between theory and observation. (As we indicated, such principles
do not permit us to eliminate the theoretical terms. If they did, deferred
empiricism would collapse into ultra-empiricism.)
We come now to the non-empiricist methodologies. Perhaps the most
powerful statement of such a position, certainly the most influential such
statement in the English speaking world, is Lionel Robbins' The Nature
and Significance of Economic Science. This work, first published in 1932,
provides the locus classicus for twentieth century methodological debate
in Economics. All stripes of empiricists can be seen as responding to
Robbins' position. Robbins admits that his own views were greatly in
fluenced by Ludwig Von Mises, and we would quite reasonably begin with
Von Mises, but Robbins' exposition is so lucid and compact that we would
do well to adopt the present order.
According to Robbins, economic analysis "consists of deductions from
a series of postulates, the chief of which are almost universal facts of ex
perience present whenever human activity has an economic aspect, the rest
being assumptions of a more limited nature based upon the general features
of particular situations or types of situations which the theory is used to
explain."9 The key phrase in the above passage is "universal facts of
experience." It is because the basic postulates express such facts that they
have the epistemological status they do. The postulates are obvious, self
evident, clear and distinct, etc. Robbins does not use these additional
characterizations. In fact he avoids dealing with strictly epistemological
issues. Though he would tie the basic postulates to experience, they are
clearly not in need of anything like empirical testing. To understand them
is to appreciate their truth. They are clearly not refutable, and hence are
unscientific in Popper's sense. To use some old philosophic coin, they are
synthetic a priori in the sense that their truth can be established without
empirical testing, without experiment, statistics, etc. and yet they are
supposed to deal with reality. Now, the whole subject of the synthetic a
priori is among the more harrowing ones in the history of philosophy,
and this is not the place to attack it head on. We will in subsequent sections,
though, have something more to say about it. For now, we may point out
that from the time of Plato and Aristotle on, many philosophers have
staked out a kind of statement which was neither tautology nor empirical
hypothesis, and that these statements were considered to be of paramount
9 L. Robbins, The Nature and Significance of Economic Science, pp. 99?100.
philosophical interest. One of Aristotle's justifications for the principle

of non-contradiction lies in showing that it is derivable from the most fun
damental and at the same time ubiquitous aspects of experience. It is involv
ed in the very notion of what an object is, from the concept of being if you
will. This is the most fundamental concept with which we deal. It is pre
supposed in all other concept-formation. (Everything is some object or
other.) And therefore truths about being, like the principle of non-contra
diction (stated in the form that an object cannot have two incompatible
properties at the same time and in the same respect), have the status of being
beyond empirical test yet about reality. Whether we employ the Ptolemaic,
if you will, epistemology of Aristotle and St. Thomas or the Copernican
epistemology of Kant, there is much overlap in the kind of statements
which were in question. No more than logic or ontology can avoid the
concept object, and truths governing it, and physics, the concept of time
and space9 and truths governing them, can economics avoid the concepts of
scarcity, means and ends and truths governing them. At least this is broadly
the epistemological orientation of Robbins' work. While the above in
dicates a certain parallel between logic, natural science, and economics
in foundational matters, the dominant or established deferred empiricist
view (a view which in its basis goes back to Hume - though there are
certainly ancient and medieval precursors) sees things quite differently.
It denies that even fundamental principles are beyond empirical test.
According to this egalitarian epistemology, no concept, and hence no
principle, can escape empirical judgment. They are all in the same boat -
the S. S. Neurath-Quine. Robbins does not argue that this deferred empiricist
exposition is wrong across the board. It is just not appropriate for
economics. Assumptions in physics often do require empirical testing.
But economics is not physics. "There is much less reason to doubt the
counterpart in reality of the assumption of individual preferences than
that of the assumption of the electron10. In economics we proceed de
ductively from the familiar, obvious, from the known to the unknown.
This is just the opposite to the way physics proceeds.11 Popper has empha
sized that science proceeds from the unknown to the known rather than the
other way around. (This is, by the way, the antithesis of the traditional
Aristotelian view of scientific explanation.) Robbins admits that in econo
mics we seem to obtain a surprising amount from mere definition. But he
adds that "it is not true that the definitions are arbitrary."12
10 Ibid., p. 105.
11 See F. Hayek's discussions of this point in his Science, Economics, and Politics, first
essay "Degrees of Explanation."
12 What we have in Robbins is what Karl Popper termed the method of essentialist
definition. Popper saw that this Aristotelian procedure was just the kind of procedure
that his own methodological views could not tolerate. The method of essentialist or
somewhat less extravagantly, simply real, definition is of course one of the main ways
of defending something like the synthetic a priori. Popper's most penetrating discussion
of essential definition is found in his discussion of Aristotle's conception of knowledge
156 Paul T. Sagal
At the heart of Robbins' position is the sharp distinction which Robbins

recognizes between the validity of a statement (thesis or theorem) and its
applicability. Validity "is a matter of its logical derivation from the general
assumptions which it makes. But its applicability to a given situation de
pends upon the extent to which its concepts actually reflect the forces operat
ing in that situation."13 Robbins illustrates this distinction in connection
with the quantity theory of money (a theory whose epistemological-logical
status is notoriously difficult to identity).14 The quantity theory tells us that
as the money supply increases (ceteris paribus) the value of money, e. g. the
value of each dollar, decreases. The validity of the above is not subject
to question. It is logically derivable from the theory's basic assumptions.
Still, in order to apply the theory to a particular situation we must be able,
for instance, to identify what things count as money. What we need is
something analogous to our correspondence (bridge) postulates or rules
of interpretation to get us from the theoretical term money to the empiric
ally ascertainable features of the situation ? to tell us what counts as money.
But here, in contrast to the deferred empiricist position, we do not use the
correspondence postulate in order to test the theory ? the fundamental
assumptions. Here we simply are interested in applying a valid theory.
It is therefore on Robbins' ground always a mistake to conclude that the
theory is false. It is only the correspondence, here it would be better to call
them application, postulates that can be mistaken. In Robbins' example,
application goes astray because bank credit was not included under the
concept of money.
It is clear then how empirical data play no role at all in determining the
validity of theories. The appeal to experience "cannot supercede formal
analysis. But it can suggest in different situations what formal analysis is
appropriate, and it can provide at that moment some content for the formal
categories."15
Philosophers have long disputed the epistemological status of first
principles (of science) ? especially the question of their testability. For a
long time what may be termed the Aristotelian paradigm reigned supreme.
The basic notions (terms) of a science are gleaned by abstraction. Experi
ence will soon (or immediately) provide occasion for you to form the con
cept of object or space (extension). It is part of every one's intellectual
development. Once grasped, once understood, it will be evident that certain
principles hold true of object, space, etc. These principles, like: The law of
identity, non-contradiction in connection with objects, and Euclid's axioms
in the second volume of Open Society and its Enemies. We have begged off confronting
these issues. One suggestion, though, at this point, may be of some value. It might be
that the appeal to real or essential definitions does have some place but only where one
is dealing with the fundamental (defining) terms or concepts of a theory. Beyond this,
they might, as Popper states, simply get in the way of empirical investigation.
13 Ibid. p. 116-117.
14 See J. Agassi, "Tautology and Testability in Economics," Phil. Soc. Sei. 1 (1971),
46-63. 15 p. 123.
in connection with space are definitive of the concepts. They are evident
because they are definitional, and they apply to reality because the concepts
which they define are formed in response to the demands of experience
(experience which is too uniform to be illusory, or out of touch with
reality).16 Now this Aristotelian view has had its ups and downs. For a
long time however, only empiricists of sceptical leanings really rejected it.
In the Medieval period the Ockhamist tradition, and Humean empiricism
in the 18th century were the major anti-Aristotelian forces. Kant's Coper
nican revolution, it should be noted, was hardly revolutionary when it
came to this scientific Aristotelianism. In fact the Kantian attempt to legi
timize the synthetic a priori was in substance if not in terminology quite
congenial with Aristotelianism. The important thing in both was to have
science certain yet informative. Empiricism -? logical positivism ? for a while
threatened to bring down Aristotelianism once and for all. It was nour
ished on, among other things, certain developments in geometry. Euclid
ean geometry had competition. If there were any number of geometries,
all definitive, of any number of spaces, definition and self-evidence could not
by itself provide a criterion of truth. Truth had to be a matter of empirical
testability. If this was the situation in geometry, it was a fortiori the situation
with the rest of science. Empiricism seemed victorious. But two caveats are
in order here : (i) It does not follow that the rest of science must follow the
lead of geometry, (ii) It is not clear i.e. the situation is complex and difficult,
that the discovery of non-Euclidean geometry marks the demise of Aristote
lianism even in geometry. In other words Euclidean geometry still might
possess some privileged status. At this point we are interested simply in
keeping questions open. For this is really all we need to first locate Robbins'
position squarely in the Aristotelian locale and point out that Aristotelianism
is still an option philosophically. (In other words there is still room for
reasoned controversy. Aristotelianism has, after all, outlived a number of
fashions.)
The empiricist (ultra or otherwise) sees first principles as subject to test.
The Aristotelian sees first principles as certain ? and consequently as merely
requiring appropriate application. In practice, there really need be little
difference. Extremely well-entrenched (obvious) principles, e.g. the prin
ciple of non-contradiction, are for all practical purposes untouchable.
Robbins and Von Mises to whom he is indebted view the relation between
human action and basic principles as analogous to the relation between object
and the basic principles of logic (not so much propositional logic but what
S. Lesniewski called Ontology, laws of object identity, etc.).
A parallel which the author finds particularly helpful, though admittedly
hardly unproblematic is that between economics and arithmetic. There are
not many arithmetics (though there are different number systems) in the
way there at least seem to be many geometries. The fundamental principles
16 As we mentioned, this is what Popper terms essentialism as a philosophy of science

? see Popper's Open Society and Its Enemies, vol. II).
158 Paul T. Sagal
of arithmetic are definitive of (are explicative of) the concept discrete quantity.
There is no question of (i.e. it would be artificial to speak of) testing the
principles of arithmetic. It is just a matter of properly applying them. Here
it is discrete quantity which is analogous to human action. We shall go into some
of these questions with greater depth in the following section. The Misian
approach to economics stands or falls with these fundamental philosophical
affirmations. Mises gives a Kantian turn to Aristotelian methodology and
we shall have to see whether this strengthens or weakens the position. We
move now to "extreme ultra-apriorism".
With all the debate on methodological questions, the extreme a priorist
position of Robbins has hardly received any contemporary attention. The
debate seems to have passed it by. This holds equally well of the methodolo
gical work of Von Mises, which forms much of the basis of Robbins' work.
The logical positivist revolution and its aftermath seem to have left Von
Mises' work by the wayside. What could be worse than an outdated, un
fashionable methodological perspective. But fashions change, revolutions
have their reactions, and perhaps the outdated, non positivist (Aristotelian
Kantian) methodological stance of Von Mises will once again have its day17.
In fact not so long ago in Theory and Decision there occurred a lively debate
over the viability of Mises' Praxiology ? his general theory of human action
of which Economics is a part. The central paper in this discussion was
Claudio Gutierrez's The Extraordinary Claim of Praxiology.18 The "extra
ordinary claim" is that the whole science of human action can be gleaned
from the single a priori category (concept) of human action. "Extraordinary
as this claim sounds, it has not received, as far as I know, a commensurate
rebuttal either from economists or philosophers." (p. 327) But Mises'
work in general has not received much attention, and "extraordinary" is
perhaps a presumptive term. Is it extraordinary that the concept of set, the
predicate of set-membership e is sufficient (with the aid of logic) to yield
all of classical mathematics? It was perhaps treated as extraordinary at one
time, but surely now if it is considered extraordinary it is not unfamiliar or
questionable. In fact, the history of thought reveals many cases where a
single notion, e.g. object for metaphysics or Lesniewski's logical system
for ontology, homogeneity for Euclidean geometry was treated as adequate
(at least thought to be adequate) for an entire science. In fact, the entire
"axiomatic" approach has as its ideal of getting as much as possible from as
little as possible. So I do not find the label "extraordinary" terribly helpful.
But then again, what's in a label? It's the argument that matters.
17 For a full systematic presentation of praxiology, see Ludwig von Mises, Human
Action, Yale, 1963. On specifically methodological issues, see the same author's Episte
mological Foundations of Economics, Van Nostrand. See also two important papers
of Murray Rothbard, "Mises 'Human Action* : A Comment," American Economic Review,
March 1956, "Praxeology: Reply to Mr. Schuller, American Economic Review, December
1951, and "The Defense of Extreme A Priorism," Southern Economic four nal.
18 Theory and Decision 1, (1971), pp. 327-336.
Gutierrez is worried about the applicability of the system based upon

the concept of human action. For Von Mises, of course, it is no more problem
than the applicability of Lesniewski's Ontology to talk about objects, or of
Arithmetic to talk about discrete quantities. (Notice, I deliberately leave
out the Euclidean Geometry example. I will return to it, with a vengeance,
however.) Gutierrez attempts to refute Praxiology through the problem of
applying an a priori theory to an empirical situation. Now, if such con
siderations were sufficient for refutation, areas of logic, mathematics, etc.
would fall by the wayside. Or, put more perspicuously, a certain general
methodological position, call it Aristotelian-Kantian, would be refuted too.
But this is certainly a tall order, and one from the beginning has some
right to consider sceptically this overkill of praxiology. "The difficulty I
see here has to do with the description of the empirical condition which must
form part of the theorem in order for it to be applicable. Even if the theorem
is a priori it has to mention the factual situation under which one is saying
that the theorem is relevant. But this mention has to be made in a language,
and the language one has to use must be empirical, in the sense of being
capable of expressing the condition of application of the theorem."19
We can, I think, put this in what is for us more familiar language. Gutierrez
is asking us to consider correspondence rule as part of the theory itself.
Now, historically such correspondence rules weren't even explicitly stated
much less included in the theory itself. But tradition itself is no argument,
and contemporary philosophers of science have made much of the import
ance of correspondence rules ? but not in logic and arithmetic. And even
in geometry where Reichenbach introduced the notion of coordinating
definition, this practice is not usually followed, for these theories are closer to
experience to begin with than the highly "theoretical" (highly postulative)
theories of contemporary physics, and some of the social sciences. What
goes on in the former sciences is a process of idealization and the
relation between theory and experience is usually obvious enough not to
require explicit correspondence rules.20 For Von Mises, certainly, appli
cation is rarely a serious problem at all. Furthermore, no one denies that
experience is necessary to obtain the concept, e.g. human action, object,
discrete object, from which the theory is in turn obtained. Some experience
and therefore some language predates praxiological language, but this does
not imply that some empirical (economic) knowledge is independent of
praxiology. We simply get theoretical versions of these sentences (they
offer a praxiological theorem just as from the concept of human action) and
get the praxiological version that is praxiology itself. That there is a lan
guage prior to praxiological language no more makes praxiology not a
priori than that there is experience prior to the formulation of the concept
human action makes it a posteriori. That Gutierrez is confused about all this
19 p. 328.
20 But see, for a discussion of the complexities involved in idealization, Stephan
K?rner's Experience and Theory.
160 Paul T. Sagal
is reflected in his talking about languages as a priori and a posteriori. Now

one can perhaps make sense of this kind of talk, but it would be a long hard
pull. If it is languages we are talking about and if the a priority of terms is
made dependent upon whether it is obtained from experience through
abstraction, idealization, or what have you, then Praxiology. Logic, Mathe
matics, are not a priori at all.
But what about all this and the "extraordinary" claim of praxiology?
Gutierrez seems to have not one but two "extraordinary" claims in mind:
(i) All praxiology follows from the single concept of human action and (ii)
Praxiology is an a priori science, yet applicable to reality. It is (ii) that the
above seems to question, (i) and (ii) can be connected, I suppose, by
speaking of "the single ? a priori ? concept of human action instead simply
of the single concept of human action. As far as (ii) is concerned a priori
is just too problematic a concept for Gutierrez to make his point; his
discussion of a priori language in fact makes it appear that Praxiology is
not a priori at all. There is much detailed and interesting discussion in the
remainder of Gutierrez's paper which centers pretty much on (i), but it
seems to me that it does not have broad methodological significance. It
criticizes defacto praxiology (Mises and Rothbard) for not having a "water
proof" deductive structure. The only significant point, however, is whether
it can be made "water-proof" even if at present it is not
Walter Block in his "A Comment on the 'Extraordinary Claim of Praxi
ology' by Professor Gutierrez"21 does a fine job of responding to particular
points in Gutierrez's paper. Perhaps even more importantly in his Abstract,
he emphasizes that his exchange with Gutierrez "involves not so much
specific disagreements between Gutierrez and the author as it does the dif
ferent world views of two competing philosophers of social science. To put
it in its historical perspective, what we have here can be characterized as
evolving from debates concerning synthetic a priori statements first raised
by Immanuel Kant and David Hume, but applied to the conceptual foun
dations of modern economics." It is this significance for the philosophy
of the social sciences (indeed for the philosophy of science, itself) that makes
the debate over praxiology so attractive to the philosopher. Murray Roth
bard, a distinguished student of Von Mises (and economist-political
philosopher in his own right) quite a bit earlier characterized the debate
over methodology as involving a battle over the a priori in general, and over
an epistemological point of view which recognized certain, yet non-trivial
(important) truths. Rothbard calls himself an Aristotelian but admits that
Von Mises' neo-Kantianism is simply another path to the same empiste
mological destination. But so much for general characterization and histo
rico-philosophical context. The crucial question is not over some particular
version of the certain-informative theory. It is a matter of at least one version
being defensible.
21 Theory and Decision, Vol. 3, 1972.
In contemporary philosophy, there is one especially promising approach

along this line. This theory presents a comprehensive theory of science,
especially well-worked out in logic and mathematics, and to a lesser extent
in the natural sciences, and to lesser and varying degrees in Ethics and the
social sciences. The theory is the constructive philosophy of the German
philosopher, Paul Lorenzen. It seems to me one could work out a defense
of Von Mises and his extreme a priorism on the basis of Lorenzen's ap
proach. The approach itself can be directly argued for in those areas where
it has been worked out in detail. Even this kind of defense is beyond the
scope of this paper. The conclusion we are arguing for is of the following
form. Praxiology is defensible as a theory of economic science in that it
can be reconstructed within Constructive Philosophy.
The Lorenzen program can be viewed then as a re-statement of the old
Kantian program. Every science is at least in part a priori. Among the
sciences with both an a priori (rational) and an a posteriori (empirical) part,
we find what could be described as a two-tiered structure. At the top, there
are the fundamental principles expressed in the fundamental terms. These
are the first principles or axioms. The lower (the derivative) level consists
of empirical laws or hypotheses which though not deducible from the
axioms exclusively, are deducible with the help of certain auxilliary assump
tions ? assumptions which have to hold if the lower level principles are to
hold. Thus Newton's three laws of motion are first principles, the law of
universal gravitation an empirical law. (The latter is empirically testable in
conjunction with additional assumptions, or more accurately is testable
through the testability of the assumptions. We might distinguish still a
third tier, the level of empirical generalizations ? these being empirically
testable directly but not directly derivable from the first principles). Lower
tier principles are subject to empirical test. Upper tier principles are defended
a priori ? or in some sense required by the nature of the subject-matter or
inquiry. Kant called arguments for these principles, transcendental.
Let us look once again at physics. The theory of measurement is pre
supposed in all physics because it must be available before we can go about
testing hypotheses. The principles of the theory of measurement are a
priori to these hypotheses and hence cannot themselves be empirically
testable. Their justification must be of another kind.
How does this relate to praxiology, or the general theory of human
action? The subject matter of the social sciences ? the explanandum (ex
plananda) ? is to a great extent human action. We require a preliminary
understanding of what we will be theorizing about. The terms and prin
ciples definitive of human action must come first in the way the terms and
principles of the theory of measurement ? protophysics (for Lorenzen) ?
must come first. We need a proto-social science, a praxiology, as a pre
liminary to empirical social science.
22 p. 377, (1973), vol. 3.
11
162 Paul T. Sagal
What principally distinguishes Lorenzen's enterprise from Kant's is

the nature of the apparatus employed to justify first principles or axioms.
Lorenzen is philosophizing after the linguistic turn. It is the language of
science which must be legitimized. This is accomplished by constructing
this language from the ground up, and proceeding in a step by step non
circular fashion.23
Proto-social science or praxiology would comprise the methodical intro
duction of such terms as action, end, mean, cost, price, profit and loss. (Remem
ber the last mentioned terms needn't, of course, involve money.) In a sequel
to the present paper, I hope to carry out this kind of construction, to put
forth a constructive praxiology. The present paper prepares the ground
work.
23 See for instance Paul Lorenzen: Methodical Thinting, Ratio 1967.
Adresse des Autors:
Prof. Dr. Paul T. Sagal, Dept. of Philosophy, New Mexico State University, Las Cruces,
New Mexico 88003

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Epistemology of Economics

Author(s): Paul T. Sagal

Methodological disputes in economics have been with us since Mill

1 Scientific Papers of T. C. Koopmans, Springer 1970, p. 148: New Epistemology

tion could not stand up to philosophical critique. What could be done?

4 M. Friedman, Essays in Positive Economies, pp. 3-9.

when he speaks of the logical consequences of assumptions ? he distin

5 "The Construction of Economic Knowledge" in Brodbeck M. (ed.), Readings In

6 Fritz Machlup, Verification in Economics, SEf, 55?56.

label. In this rejoinder, Machlup went somewhat further in developing his

7 F. Machlup, Reply to a Reluctant Ultra-Empiricist, SEJ 1955, p. 484.

statements equivalents and thereby show themselves to be superfluous in

some empirically identifiable economic features. If correspondence postu

9 L. Robbins, The Nature and Significance of Economic Science, pp. 99?100.

philosophical interest. One of Aristotle's justifications for the principle

At the heart of Robbins' position is the sharp distinction which Robbins

16 As we mentioned, this is what Popper terms essentialism as a philosophy of science

Gutierrez is worried about the applicability of the system based upon

is reflected in his talking about languages as a priori and a posteriori. Now

21 Theory and Decision, Vol. 3, 1972.

In contemporary philosophy, there is one especially promising approach

22 p. 377, (1973), vol. 3.

What principally distinguishes Lorenzen's enterprise from Kant's is

23 See for instance Paul Lorenzen: Methodical Thinting, Ratio 1967.

Adresse des Autors:

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