American Economic Association

Professor Samuelson on Theory and Realism Author(s): Fritz Machlup Reviewed work(s): Source: The American Economic Review, Vol. 54, No. 5 (Sep., 1964), pp. 733-735 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/1818571 . Accessed: 27/06/2012 00:02
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Professor Samuelson on Theory and Realism

In a discussion of "Problems of Methodology" at an AEA meeting [4], Paul Samuelson embarks on a critique of theories which employ unrealistic assumptions. He concludes with this strong indictment of "unrealistic, abstract models": "If the abstract models contain empirical falsities, we must jettison the models, not gloss over their inadequacies" [4, p. 236]. Let us first indicate how Samuelson reaches this judgment. He defines a theory "as a set of axioms, postulates, or hypotheses that stipulate something about observable reality [4, p. 233]. Denoting the theory as B, the "consequences" derived from it as C, and the "assumptions"antecedent to it as A, he argues that A, B, and C must actually be identical in meaning, mutually implying one another. Thus, he holds, if the assumptions are empirically false, and the theory therefore unrealistic, the deduced consequences cannot possibly be empirically valid. In other words, an unrealistic theory cannot yield realistic consequences. Samuelson also considers the possibility that the assumptions are wider than the theory, and that the theory is wider than the consequence, so that there is a subset C- of C, while A is a subset of A +. In this case A + may imply B, without B implying A +; and C may imply C-, without C - implying C. If C- happens to be empirically valid, does this "validate" the wider theory B, or the even wider set of assumptions, A+? Samuelson explicitly rejects this. He regardsas "nonsense"the claim that the validity of C justifies holding an unrealistic theory B, let alone the completely unwarranted set of assumptionsA +. What Samuelson does here is to reject all theory. A theory, by definition, is much wider than any of the consequences deduced. If the consequences were to imply the "theory" just as the theory implies the consequences, that theory would be nothing but another form of the empirical evidence (named "consequence") and could never "explain" the observed, empirical facts. In addition, Samuelson errs in another way. We never deduce a consequence from a theory alone. We always combine the postulated relationships (which constitute the theory) with an assumption of some change or event and then we deduce the consequence of the conjunction of the theoretical relationships and the assumed occurrence. Thus, we do not infer C or C from B, but rather from the conjunction of B and some occurrence0. If Ccan be deduced from B cum 0; and if both 0 and C- are found to correspond to data of observaton which can be regarded as the empirical counterparts (referents, proxies) of the theoretical 0 and C-; then we rule that the theory B has sustained the test. This test does not prove that B is "true," but we have no reason to "jettison" B-unless we have a better theory B'. Let us now leave aside the argument by which Samuelson reached his decision against "unrealistic, abstract models" and theories; let us, instead, confront Samuelson's judgment with Samuelson's pattern of theorizing when

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he discusses, not methodology, but substantive propositions of economics. Let us choose the brilliant performancewith which he demonstratedan important proposition in the theory of international trade. In his ingenious papers on international factor-price equalization [2] [3], Samuelson shows "that free commodity trade will under certain specified conditions, inevitably lead to complete factor-price equalisation" [2, p. 181]. He admits that "it would be folly to come to any startling conclusions on the basis of so simplified a model and such abstract reasoning,"but he submitsvery rightly, in my opinion-that "strong simple cases often point the way to an element of truth present in a complex situation" [2, p. 181]. What are his assumptions, hypotheses, conditions? Here is the list: 1. There are but two countries, America and Europe. 2. They produce but two commodities, food and clothing. 3. Each commodity is produced with two factors of production, land and labour. The production functions of each commodity show "constant returns to scale".... 4. The law of diminishing marginal productivity holds.... 5. The commodities differ in their "labour and land intensities".... 6. Land and labour are assumed to be qualitatively identical inputs in the two countries and the technological production functions are assumed to be the same in the two countries. 7. All commodities move perfectly freely in international trade, without tariffs or transport costs, and with competition effectively equalizing the market price-ratio of food and clothing. No factors of production can move between the countries. 8. Something is being produced in both countries of both commodities with both factors of production.... From this he concludes: "Under these conditions, real factor prices must be exactly the same in both countries (and indeed the proportion of inputs used in food production in America must equal that in Europe, and similarly for clothing production)" [2, p. 182]. In his "intuitive proof" he goes so far as to state this: "I have established unequivocally the following facts: Within any country: (a) a high ratio of wages to rents will cause a definite decrease in the proportion of labour to land in both industries; (b) to each determinate state of factor proportion in the two industries there will correspond one, and only one, commodity price ratio and a unique configurationof wages and rent; and finally, (c) that the change in factor proportions incident to an increase in wages/rents must be followed by a one-directional increase in clothing prices relative to food prices" [clothing being the more labor-using commodity, food the more land-using commodity] [2, p. 187]. It may be fair to state that Samuelson had characterized the problem as "a purely logical one" [2, p. 182]. But he sometimes uses language of empirical operations, for example, when he speaks of "observing the behaviour of a representativefirm." It should be clear, however, that what he "observes"

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is merely the logical consequence of a set of assumptions; that the "behaviour" is purely fictitious; and that his representativefirm is only an ideal
type, a theoretical construct. Let me quote the sentence: ". . . if we observe

the behaviour of a representative firm in one country it will be exactly the same in all essentials as a representative firm taken from some other country -regardless of the difference in total factor amounts and relative industrial concentration-provided only that factor-price ratios are really the same in the two markets" [2, pp. 187-88, emphasis supplied]. At the end of his discussion Samuelson evaluates some important qualifications which he finds help to "reconcile results of abstract analysis with the obvious facts of life concerning the extreme diversity of productivity and factor prices in different regions of the world" [2, p. 196]. These "qualifications" to the theorem furnish Samuelson with the "causes" of the factor-price diversities. In other words, he does not hesitate, quite rightly in my view, to explain the observed facts of life-factor-price differentials-by the divergences of real conditions from the ideal ones which form the basis of the factor-priceequalization theorem. Would the Samuelson of the A-B-C argument against unrealistic, abstract models approve of the Samuelson of the intuitive proof of the factor-price equalization theorem? Frankly, I do not know. Perhaps both Samuelsons make a distinction between a theorem and a theory, meaning by the former a proposition deduced from counterfactual assumptions and postulates, and by the latter a proposition stipulating something about observable reality. But the Samuelson of the Foundations of Economic Analysis, who preceded both other Samuelsons, did pledge allegiance to a program emphasizing "the derivation of operationally meaningful theorems" [1, p. 3]. Since, according to Samuelson, a theorem deduced from counterfactual hypotheses cannot yield empirically true consequences, and does not contain operationally defined terms, it is not immediately clear just what an "operationally meaningful theorem" is supposed to be. If it is supposed to be a "strong simple case" pointing the way to "an element of truth present in a complex situation" [2, p. 181], then we have no quarrel. For, I submit, this is what the bulk of economic theory does. It is based on counterfactual assumptions, contains only theoretical constructs and no operational concepts, and yields results which, we hope, point to elements of truth present in complex situations. To call such theorems "operationally meaningful" is to confer on them a designation which is slightly deceptive; but in any case it gives them the recognition which Samuelson, as critic of the Friedman position, or "the F-twist," wants to deny. I conclude that Samuelson, one of the most brilliant theorists in presentday economics, produces his best work when he deduces from unrealistic assumptions general theoretical propositions which help us interpret some of the empirical observations of the complex situations with which economic life confronts us.
FRITZ MACHLUP* * The author is professorof economicsand international financeat PrincetonUniversity.