rappaport the as-if view of economic motivational hypothesis

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The As-If View of Economic Motivational HypothesesAuthor(s): Steven RappaportSource: Review of Social Economy, Vol. 50, No. 1 (SPRING 1992), pp. 82-101Published by: Taylor & Francis, Ltd.Stable URL: http://www.jstor.org/stable/29769596 .

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The As-If View of EconomicMotivational Hypotheses*

By Steven Rappaport**De Anza CollegeI. Introduction

An economic motivational hypothesis ascribes a goal to economicagents of some specified type. Neoclassical microeconomic modelsregularly include motivational hypotheses. The model of the rationalconsumer assumes that consumers seek tomaximize their utility; themodel of the purchasing behavior of a firm in a competitive factormarket includes the hypotheses that a firm desires to hire a quantity ofa factor which maximizes firm profits; and so on. My aim here is todevelop an interpretation of motivational hypotheses in neoclassicalmicro theorywhich Iwill call the "as-if view." The as-if view has beenpresented before (Friedman, 1953). But I will develop the viewsomewhat differently than has been done hitherto. In addition, an effortwill be made to rebut some criticisms of the as-if view which appear toremain unanswered.

II. What the As-if View SaysThe as-if view invites us to construe economic motivational

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

*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" isnon-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 to(2)The sumof thenetworthof all readers fForbes dividedby thenumberof readers of themagazine is $1,374,138.

To paraphrase (1) as (2) indicates that the truthof (1) is consistent withthere not really existing anything denoted by "the average reader ofForbes." The existence of live, flesh and blood readers of Forbes isreally all that is needed tomake (1) true.

Again, the as-if view says that intentional terms such as "seek tomaximize profits" occurring in economic motivational hypotheses arenon-referential. But how are economic motivational hypotheses like"firms seek tomaximize profits" to be paraphrased so that intentionalterms such as "seek to maximize profits" are non-referential? Theequivalence of (1) and (2) above affords what Bertrand Russell wouldhave called a "definition in use" of "the average reader of Forbes" Itis not possible to offer a definition in use of intentional terms ineconomic 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 theintentional 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 believes that the feeder still has sugar solutionin it.

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

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REVIEW OF SOCIAL ECONOMY

The hummingbird's behavior ? say, poking itsbeak into the feeder? may justify (4). But (4) is compatible with "believes that the feederstill has sugar solution in it" not denoting hummingbirds or anythingelse. Let us call "as-if statements" statements of the form "_as if_or f the form "It is as if_." Generallyspeaking, as-if statements can be true even though what follows theterm "as if is false. Suppose Jack, an accused murderer, is putting ona clever act todeceive thepsychiatrists who will testify at his upcomingtrial.We may say "Jack is behaving as if he is insane." This remark canbe true even though Jack is not insane at all. Thus, (4) above can be trueeven though the intentional term "believes that the feeder still has sugarsolution in it" denotes nothing. Now, since (4) is compatible with theintentional term occurring in it being non-denoting, and (3) is beingviewed as equivalent to (4), then (3) too is compatible with "believesthat the feeder still has sugar solution in it" being non-denoting.The hummingbird example suggests thatwe can render intentionalterms in economic motivational hypotheses non-referential by constru?ing such hypotheses as equivalent to as-if statements. For example, wecan regard the neoclassical hypotheses about firmmotivation

(5) Firm managers seek tomaximize profits,as equivalent to

(6) Firm managers behave as if they seek tomaximize profits.This amounts to construing (5) so that its truth is consistent with "seektomaximize profits" not really denoting anything at all. For, (6) isconsistent with "seek tomaximize profits" being non-denoting. Thus,by viewing themotivational hypothesis (5) as equivalent to (6), theintentional term "seek to maximize profits" in (5) becomes nonreferential. Note that viewing (5) in this fashion is a non-literalconstrual of (5), though (5) is still true or false. For, to take (5) literallywould be to regard "seek tomaximize profits" in (5) as referential, i.e.,regard (5) as implying that "seek tomaximize profits" does denote orcorrectly apply to firmmanagers.2

Alternatively, we can say that "seek tomaximize profits" is referential in (5) if (5)should be construed so that, when conjoined with the assumption that firmmanagersexist, (5) implies the existence of things towhich "seek tomaximize profits" correctlyapplies.

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According to what has been said so far, the as-if view holds thatintentional terms occurring inneoclassical motivational hypotheses arenon-referential. Or, in light of what the hummingbird examplesuggests, we may say that the as-if view claims that neoclassicalmotivational hypotheses are tobe seen as equivalent to as-if statements.But the as-if view requires some further clarification. Itwill be helpfulto focus on the neoclassical hypothesis about business firmmotivation,i.e., (5) above. What will be said about (5) is readily applicable, withsuitable modification, to other neoclassical motivational hypotheses.Again, the as-if view says that (5) is equivalent to (6) above. Now (6)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 have the knowledge needed tomaximize the profits of theirfirm.(5) and (7) jointly mply

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

For themoment we are regarding (5), as well as (7), literally, i.e., weare taking intentional or psychological terms to be referential. Soregarded, the conjunction of (5) and (7) implies the occurrence of thebehavior characterized by (8). Now let us replace (5) and (7) with theas-if statement

(9) Firm managers behave as if they seek tomaximize firm profits and havethe knowledge needed to achieve this goal.(9) is (6) above plus (7) interpretedo that the intentional erm"knowledge" is no/i-referential in (7). Now (9) also implies the

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prediction (8).3 The occurrence of the behavior described by (8) is achief implication of (6) for the behavior of firm managers, animplication (6) shares with (5) when the latter is literally interpreted.As indicated in theprevious paragraph, the as-if view of neoclassicalmotivational hypotheses takes such hypotheses to imply that economicagents like firms and consumers engage in behavior which infactmaximizes (or minimizes) something perhaps subject to constraints.But on the as-if view, what is the state or activity of economic agentsleading to the optimizing behavior? It is obvious that the same behaviorcan be the result of different states or processes. To borrow an obviousexample from Paul Churchland, suppose a small calculating devicedisplays the number equal to 2n when a number n is entered into thedevice. One way thedevice could be led to display 2n is by multiplyingn by 2. But another way the same display would result is that the devicemultipliesn by6 and then ividesby 3 (Churchland, 984,p. 93). Theas-if view construes the neoclassical hypothesis about firm motivationso that it implies that firmmanagers set output at the level which in factmaximizes firm profits. But what state or activity ofmanagers causesthem to engage in this behavior? The as-if view is silent on thisquestion; itoffers no answer to it,but instead leaves itopen for furtherresearch within economics.The as-if view is consistent with a variety of different causes of theoptimizing behavior, which is implied by the view's construal ofeconomic motivational hypotheses. To stick with the example of firmmotivation, the as-if view's interpretation of the neoclassical hypothe?sis about firm motivation is compatible with each of the following.

(Cause A) Firm managers actually have as their goal maximizing profits. Inaddition, managers know what their profit function is and know enoughdifferential calculus to set the first derivative of the profit function equal tozero and solve for the profit maximizing output level. They also check to seethat the second derivative of the profit function is negative at the output level

3Toget (5) and (7) to imply ogically (8), the ssumptionis needed that irmmanagersare instrumentally rational. That is to say, managers can be counted on to select meansthey believe are appropriate to realizing their aims. But the assumption of instrumentalrationality is also at work in deriving (8) from (9). (9) means thatmanagers' behavior? towit, setting firm output at the level which in fact maximizes profits ? is the sameas the behavior exhibited by managers who really do have profit maximization as theirgoal and know how to achieve this goal. But to predict the behavior of such managers,the assumption of instrumental rationality is required.

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in question. Selecting the appropriate means to their goal, managers then setfirm output at the level which maximizes profits.(Cause B) Firm managers consult astrologers about the level at which to setfirm output. It so happens that the astrologers tellmanagers to set output atthe level which coincidentally always maximizes profits.(Cause C) Firm managers practice full-cost pricing. That is, they compute theaverage cost of producing a normal level of output, and add a profit mark-up? for example, 10% of the selling price ? to the average cost to arrive at aprice. But it turns out that themark-up firms adopt varies inversely with theprice elasticity of demand for their products. Thus, producing a normaloutput level and charging the full-cost or mark-up price, firms in factmaximize profits.4

(Cause A) and (Cause B) are no doubt improbable. But thepoint is thatthe as-if view's construal of the neoclassical firm motivationalhypothesis only implies that the behavior of the firm consists in settingoutput at the level which in fact maximizes profits. Any of the abovethree causes, if operating, would result in this behavior. So, the as-ifview implies nothing about the specific causal mechanism leading tofirmmanagers setting output at the profitmaximizing level.

A final point is worth making in clarification of the as-if view.Instrumentalism in the philosophy of science is often associated withthe position that there does not exist anything denoted by so-calledtheoretical terms such as "electron," "molecule," etc. (Morgenbesser,1969, p. 201). On the as-if view, the concept of desire (or goal) andother intentional concepts used in economic motivational hypotheses,are somewhat analogous to theoretical concepts on the instrumentalistview. The concepts of desire, knowledge, etc., as used in neoclassicalmotivational hypotheses, are non-denoting according to the as-if view.This follows from the fact that the as-if view advocates interpretingsuch concepts non-referentially. But the instrumentalist view holds thatso-called theoretical concepts are non-denoting simpliciter. The as-ifview is not committed to saying intentional terms are non-denotingsimpliciter. It is only committed to such terms being non-denoting as4Nicholson indicates thatmark-up pricing can lead to a business firm setting output atthe level which in fact maximizes profits. He shows that for profit maximization and

mark-up pricing to coincide, themark-up must vary inversely with price elasticity ofdemand (Nicholson, 1978, pp. 273-275). It is perhaps worth noting that the proofassumes that at the output level the firm selects, average total cost and marginal cost areequal.

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used in neoclassical motivational hypotheses.III. Blaug's Criticism

Mark Blaug is sharply critical ofMilton Friedman's version of theas-if view. Blaug says:There remains what I have labeled the Alchian thesis, that is, the notion thatall motivational assumptions inmicroeconomics may be construed as as-ifstatements. By leaning heavily on the Alchian thesis Friedman is in factrepudiating themethodological individualism that is commonly held to beembedded in the neoclassical approach to economic questions: instead ofderiving testable predictions in-the-large from the rational action ofindividual agents in-the-small, the predictions ofmicroeconomics are insteadderived from a new kind of causal mechanism, namely, a dynamic selectionprocess that rewards those businessmen who for whatever reason act as ifthey were rational maximizers, while penalizing those who act in some otherway by bankruptcy Blaug, 1980,p. 117).

In the first sentence of this passage Blaug represents theAlchian thesisas holding that economic motivational hypotheses are to be seen asequivalent to as-if statements. This is what I have called "the as-ifview." Blaug's criticism of the view is expressed in the followingpassage:

In a nutshell, the problem with theAlchian thesis is the same as the problemof reading meaning into "the survival of the fittest" in Darwinian theory: tosurvive, it is only necessary to be better adapted to the environment thanone's rivals, and we can no more establish from natural selection thatsurviving species are perfect than we can establish from economic survivalthat surviving firms are profit maximizers (Blaug, 1980, p. 119).

Blaug's point hereseems to be this:

(10) The fact that a firm survives in an industry while one or more rivals goout of business does not indicate that the firm produces an output level that infact maximizes profits (whatever the goals of the firm's managers).No doubt (10) is correct. As Blaug points out, a firmmay survive in anindustry because it has some cost advantage rivals lack rather thanbecause it, unlike its rivals, is a profit maximizer. For example, thelong run average cost curve for firms in an industry may exhibiteconomies of scale throughout. A firm that enters the industry earlierand has grown to a larger size than some rival firm,will have loweraverage costs of production, and thus be able to charge lower prices for

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itsoutput than the late arrival. The late arrival may then be forced outof business. But this process does not require that the surviving firmproduces an output level thatmaximizes profits.However, regarding (10) as a criticism of the as-if view is anignoratio elenchi. The as-if view is that neoclassical motivationalhypotheses can be construed as as-if statements. Looking at (10) above,it is hard to see how (10) could be any sort of reason to reject the as-ifview. Why does Blaug think (10 is a reason for rejecting the as-if view?I believe it is because Blaug conflates two distinct views, calling both"the Alchian thesis." As indicated above, Blaug sometimes uses thisterm to refer to the as-if view. But he also uses "the Alchian thesis" torefer to the following doctrine:

(11) Competition represents a Darwinian process that produces the sameresults which would ensue if firms sought tomaximize profits (and had theknowledge required to do so), and consumers sought to maximize theirutility.

That Blaug labels (11) "the Alchian thesis" is clear from the followingpassage:First of all, he [Friedman] argues, as we have seen, that competitionrepresents a Darwinian process that produces exactly the same results thatwould ensue if all consumers maximized their utility and all business firmsmaximized their profits, as a result of which the neoclassical model predictscorrectly even though its assumptions may be counterfactual. (The classicstatement of this argument is by Armen Alchian, and we will therefore labelittheAlchian thesis.) Blaug, 1980,p. 116).

That Blaug uses "the Alchian thesis" to referboth to the as-if view andto (11) strongly suggests he does not regard them as distinct theses.Blaug's (10) does look like a reason for rejecting (11). So, given thatBlaug does not regard the as-if view and (11) as distinct, it is easy to seehow he could think (10) is a reason for rejecting the as-if view. In short,Blaug's reason for thinking the as-if view mistaken is not a good one.At best the reason Blaug presents counts against (11), a different thesisthan the as-if view.Two objections might be urged against what I have said. For one, itmight be objected that the as-if view and (11) are not distinct as I haveclaimed, and, as a result Blaug's (10) is as much a reason for rejectingthe as-if view as for rejecting (11). In response to this, I think the as-ifview and (11) do have something in common. (11) is consistent with

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(12) Firm managers do not actually have maximizing profits as a goal.(11) says rivalry among firms is a Darwinian process whose results arethe ones thatwould ensue iffirms sought tomaximize profits (and hadtheknowledge needed to achieve this goal). Thus, (11) does not say orimply thatfirms do have theprofitmaximization as theirgoal, anymorethan my saying the streets are wet if it is raining implies that it israining. But the as-if view is also compatible with (12). For the as-ifview says that the neoclassical firmmotivational hypothesis is to beinterpreted so that its truth is consistent with the term"seek tomaximizeprofits" not denoting anything at all. Perhaps it is the fact that the as-ifview and (11) are alike in being consistent with (12) that could leadsomeone to conflate them. Though similar in the respect cited, the as-ifview and (11) are not equivalent. Specifically, the as-if view does notlogically imply (11). (11) is committed to the claim thata firmsurviving and prospering is indicative of the fact that it produces aprofit maximizing level of output (whatever the actual goal of firmmanagers). But the as-if view is not at all committed to this claim. Theas-if view simply does not imply anything about what is indicated bythe circumstance that a firm survives and prospers while rivals go underin the competitive struggle.Secondly, itmight be admitted that the as-if view and (11) are notequivalent. But itmight be objected that economists like Friedman whoaccept 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-ifview 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. Inreply to this,Friedman for one does appeal to something like (11) as areason for adopting, not the as-if view per se, but the neoclassicalhypothesis about business firm motivation interpreted as an as-ifstatement (Friedman, 1953, p. 22).5 By undermining (11), Blaug's(10) could at best undermine the neoclassical hypothesis about firmmotivation construed in theway the as-if view prescribes. But it shouldnot be granted that (10) even does thismuch. Friedman himself doesnot regard (11) as the most important reason for accepting "Firmmanagers behave as if they seek tomaximize profits." Instead, he5A referee suggested that the close association in Friedman of the as-if view and thenatural selection hypothesis expressed by (11) is at least part of the explanation forBlaug's conflation of the two views.

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thinks the most cogent reason for accepting this motivationalhypothesis is the very large number of empirically successfulapplications of the hypothesis in solving specific problems, such aswhether decontrolling natural gas prices will result in higher or lowergas prices (Friedman, 1953, pp. 22-23). Whether or not Friedman is infact right here, it should be clear that (11) is not the only considerationthat could conceivably support "firmmanagers behave as if they seektomaximize profits." Thus, that (11) is implausible and so does notwarrant the neoclassical hypothesis about firmmotivation seen as anas-if statement does not imply this hypothesis so construed isdiscredited or undermined.6 To discredit the hypothesis, itwould haveto be shown that considerations, other than (11) which might bethought to support the hypothesis in question, in fact do not justify it.And the objection cited at the outset of this paragraph shows nothing ofthe sort.

I have tried to bring out that Blaug's criticism of the as-if view isunsuccessful. Before turning to another critic of the view, I want tocorrect a misunderstanding of it expressed in the passage from Blaugquoted in the first paragraph of this section. In that passage Blaug ineffect affirms that the as-if view is inconsistent with themethodologicalindividualism usually regarded as embedded in neoclassical microeco?nomics. Blaug himself does not regard this inconsistency as reason toreject the as-if view, inasmuch as Blaug does not accept methodologi?cal individualism as a substantive thesis. Be that as itmay, Blaug iswrong to suggest that the as-if view is incompatible with methodologi?cal individualism. Blaug takesmethodological individualism to say that".. . social theories must be grounded in the attitudes and behavior ofindividuals . . ." (Blaug, 1980, p. 266). We may regard this asaffirming

that statements about social wholes or collectives must bededucible 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 the following asserted sentence of neoclassical theory:6As I said above, Blaug's (10) is true, and its truth makes (11) implausible orimprobable. But some sort of natural selection hypothesis other than (11) may still beplausible. An example perhaps would be this: competition represents a process thatproduces the same results which would ensue iffirms sought a positive (not maximum)level of profits (and had the knowledge required to do so). The point here is due to areferee.

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(13) The market demand curve for a good has a negative slope.(13) is about the social collective market demand curve for a good. Inneoclassical micro theory, (13) is derived from

(14) The market demand curve for a good is the horizontal sum of the demandcurves of the buyers of the goodand

(15) The demand curve of each buyer of a good has a negative slope.(15) is a statement about individual humans rather than a socialcollective or whole.7The as-if view is quite consistent with the general methodologicalindividualist position just described. Once again, the as-if view saysthat ascriptions of goals to economic agents are to be construed as as-ifstatements. But this hardly means that economic motivationalhypotheses are not about individual economic agents. Consider again

(5) Firm managers seek tomaximize profits.On the as-if view (5) is to be seen as equivalent to

(6) Firm managers behave as if they seek tomaximize profits.But (6) is just as much about individual economic agents, towit, firmmanagers, as is (5). In neoclassical micro theory statements aboutsocial collectives are regularly derived from statements about individ?ual economic agents, and these sometimes include motivationalhypotheses like (5). But the as-if view's interpretation of motivationalhypotheses does not present an obstacle to any derivation inmicroeconomics of social collective statements from individualstatements. Any derivation relying on, say, (5) could just as wellemploy (6) without ceasing to be valid. I suspect Blaug thinks the as-ifview conflicts with methodological individualism because of his7Of course, (15) simply says that, ceteris paribus, each person buys more of a goodshould the price fall and buys less should the price rise. And in neoclassical microtheory (15) is itself grounded in or derived from the assumption that a consumermaximizes her utility. Also, methodological individualism allows that the derivation ofstatements about social collectives from statements about individual people may usedefinitions. he derivation f (13) from 15) employs (14),which isa definition f theterm "the market demand curve for a good."

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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 effectson 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 seehow he could come to think the latter is incompatible withmethodological individualism.IV. Winter's Criticism

Sidney Winter is critical of a position which resembles the as-ifview. Like Blaug, Winter focuses on Friedman's position. Winterrehashes some of the usual criticisms of the neoclassical hypothesisabout business firmmotivation. He then says:The most succinct statement of the Friedman position (as it relates to profitmaximization) would seem to be that the theory of the firm ismisnamed; it isnot a theory of the firm at all in the sense of being useful for prediction ofevents within any particular firm. The theory of the firm is a theory of theexternal (market) behavior of the firm; more importantly, it is a buildingblock in the theory of firms, i.e., the theory of how firms in the aggregate willreact tomarket situations. Thus, in particular, the theory of the firm does notpredict answers that decision makers will give when queried about theirobjectives, nor does itpredict how they will go about reaching their decisions(Winter, 1962,p. 231).

Let us call theposition Winter ascribes toFriedman in this passage "theexternal view of the theory of the firm." The as-if view and the externalview may not be entirely the same. But the two views are similar in thatthey share an important implication. As the last sentence of the quotedpassage indicates, the external view implies that the neoclassical theoryof the firm generates no predictions about what firmmanagers will sayin response to questions about their goals, or what processes they gothrough inmaking decisions about output level, price, etc. And theas-if view has this same implication. For on the as-if view, neoclassicalmicro theory does not literally ascribe any goals or other intentionalstates to firmmanagers. Winter is critical of the external view, and his8Blaug seems to think that (11) is about a dynamic causal process acting on firm

managers, and statements about this social whole would not be derivable fromstatements about individual humans (1980, p. 117).

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criticism focuses on the implication it shares with the as-if view. ShouldWinter's criticism of this implication be successful, the as-if viewwould have to be rejected, given that one of its central implications isincorrect. Thus, inwhat follows Iwill regardWinter's critical remarksas applicable to the as-if view. In doing so, I am not suggestingWinter's intention is to criticize the as-if view, or that the as-if view andthe external view say exactly the same thing. I am only suggesting that,given the focus ofWinter's criticism of the external view, his criticalremarks would also tell against the as-if view if they are persuasive atall.The criticism of Winter's that I wish to consider is expressed in thefollowing passage:

Thus the auxiliary hypothesis which restricts the predictive range of thetraditional theory to market phenomena is an ex post amendment to thetheory; furthermore, it is not an amendment that suggests a new range oftestability for the theory as amended, but one that rules out tests consideredex ante to be appropriate. The introduction of auxiliary hypotheses of thistype is not the path to a cumulative increase in knowledge (Winter, 1962, p.232).

This passage, together with the one previously quoted, indicates thatWinter takes the view he is criticizing to add to neoclassical micro thefollowing hypothesis:

(16) The neoclassical theory of the firm does not say or imply anything aboutthe internal workings of firms, such as the decision making processes ofmanagers.

And Winter claims (16) is an inadmissible auxiliary hypothesis becauseit does not enable neoclassical theory to generate any new predictions,and the addition of (16) means that neoclassical theory no longergenerates some predictions (e.g., ones about what firmmanagers willsay in response to questions about their goals) which itdid before (16)is added. In short, (16) violates the prohibition on ad hoc hypothesespopular with logical empiricist philosophers of science.As amatter of fact, the as-if view does not advocate adding any newhypotheses to neoclassical micro theory. Rather it espouses interpret?ingmotivational hypotheses of neoclassical theory as as-if statements.But the distinction perhaps matters little, as interpreting neoclassicalmotivational hypotheses in this way carries a commitment to (16).

Moreover, it is easy to reformulate Winter's criticism so that itdoes not

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distort the as-if view: The as-if view is unacceptable because itdoes notenable neoclassical theory togenerate any new predictions, and in orderto save the theory from adverse evidence, it cancels some predictionsneoclassical theorywould otherwise generate.The premise of Winter's criticism as applied to the as-if view issubstantially correct. Interpreting neoclassical motivational hypothesesas as-if statements certainly does not enable neoclassical micro togenerate any predictions it is unable to generate in the absence of suchan interpretation. Also, some predictions no longer flow fromneoclassical micro theory once the as-if view is adopted. However, thislatter fact is an advantage rather than a defect. The predictions ofneoclassical theory which are cancelled by imposing the as-ifinterpretation ofmotivational hypotheses are probably not true, and soconstruing neoclassical theory so that it does not generate thesepredictions allows neoclassical theory to better square with theempirical data. Suppose we do not adopt the as-if interpretation ofneoclassical motivational hypotheses. In this case, neoclassical theory,together with suitable auxiliary assumptions, generates predictionsabout the verbal behavior of economic agents. And these predictions inmany cases will probably turn out to be false. For instance, consideragain the usual neoclassical hypothesis about firmmotivation:

(5) Firm managers seek tomaximize profits.Conjoin (5)with thepairof auxiliaryhypotheses:

(17) Firm managers know the goals of their firmsand

(18) Firm managers answer truthfully questions about the goals of their firms.Interpreting (5) literally, i.e., regarding "seek tomaximize profits" asreferential in (5), neoclassical theory together with (17) and (18)implies

(19) Firm managers will say they seek tomaximize profits of the firm.But various considerations, including answers firmmanagers have inthe past given to questionnaires, provide reason for thinking (19) isprobably false (Nicholson, 1978, pp. 269-70).Now let us construe the motivational hypotheses of neoclassicalmicro as as-if statements. In this case, we regard (5) above as

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equivalent to(6) Firm managers behave as if they seek tomaximize profits.9

But regarding5) in thisway, theconjunction f (5), (17) and (18) nolonger mplies theprediction 19). Regarding (5) as equivalent to (6),(5) does enable us to derive from neoclassical theory a prediction suchas(20) Firms will produce an output level at which marginal revenue equals

marginal cost.But no prediction can be derived about what firmmanagers will sayabout their goals or other psychological states, including whateverbases they have for their decisions about price, output, etc. Viewingneoclassical motivational hypotheses as as-if statements has the resultthatneoclassical micro theory does not imply predictions such as (19)above. Construing motivational hypotheses as as-if statements meansthat motivational assumptions do not literally ascribe any goalswhatever to economic agents, and so such assumptions could implynothing about what economic agents say about their goals. Thus, theprobable falsity of prediction (19) does not at all count againstneoclassical micro when itsmotivational hypotheses are seen as as-ifstatements. The as-if view allows neoclassical theory to be moreconsistent with the empirical data.It has been argued that the as-if view improves the epistemologicalsituation of neoclassical micro. But itmay be felt that I have not reallyanswered Winter's criticism as directed at the as-if view. I haveadmitted the premise ofWinter's criticism, viz., the as-if view reducesthe predictive content of neoclassical theory. And I have gone on toclaim this is a virtue, since thepredictions neoclassical theory no longergenerates are probably false. But is not the as-if view preciselyanalogous to adding an ad hoc hypotheses toneoclassical theory? Andis not adding such a hypothesis to a theory prohibited by soundmethodology?9Recall from Section II above that the term "behave" in (6) should be taken to refer tobehavior such as setting firm output at a certain level ? 250,000 barrels of lead-freegasoline per day, 400,000 pounds of milk per year, etc. The term does not cover suchverbal behavior as would be involved in answering questions about firm goals and otherpsychological states of managers.

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In one sense, a modification of a theory? adding an auxiliaryhypothesis, reinterpreting basic assumptions of the theory, etc. is adhoc simply when it is designed to rescue the theory from adverseempirical evidence. But, as Larry Laudan has observed, there isnothing wrong in general with this sort of ad hoc modification; indeed,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 adhoc modification of neoclassical microeconomics. If ad hoc is to be apejorative term, some criterion will have tobe given for itsuse as a termof negative appraisal. Or in other words, some criterion will have to besupplied for distinguishing bad ad hoc modifications. The secondpassage fromWinter quoted above suggests thathe would propose thata bad ad hoc modification ? though he does not use the termad hoc?is one that does not ". . .suggest a new range of testability for thetheory as amended ..." This looks like a criterion for bad "adhocness" emphasized by logical empiricist philosophers of science(Hempel, 1966, p. 29). A modification of a theory is ad hoc providedit is designed to rescue the theory from adverse empirical evidence,and, apart from the adverse evidence leading to themodification, thereis no empirical evidence favoring the amended theory additional to thatfavoring the theory before the amendment. Itwould be suggested thata theory is unacceptable should it be subject to an ad hoc modificationin this sense.

The trouble with the logical empiricist criterion for ad hocness justdescribed is that it has been effectively criticized. Counterexampleshave been provided which indicate that a theory can be subject to an adhoc modification according to the logical empiricist criterion and yet beacceptable (Howson and Urbach, 1989, pp. 111-12). But merelybrushing aside the criterion for ad hocness implicit inWinter's criticismis not enough. Iwant to try to distinguish the as-if view's modificationof neoclassical micro theory from at least some of the examples of badad hoc modifications supplied by logical empiricists.A standard example of ad hocness given by logical empiricists is thehypothesis that phlogiston has negative weight, which of course wasproposed by adherents of the phlogiston theory to reconcile itwith theexperimental result that an increase in weight often occurs duringcalcination. Now the as-if view was proposed byMilton Friedman to

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reconcile neoclassical micro theorywith adverse empirical evidence.10But there ends the similarity between the as-if view and the hypothesisthat phlogiston has negative weight. Let us use the term "priorcredibility" to refer to the credibility of a theory independent of theresults of any empirical tests of that theory.A theory's prior credibility,whether high or low, is determined by factors other than the results ofempirical testing of the theory. A theory's prior credibility isdetermined by such factors as the consonance of the theorywith alreadyaccepted beliefs, simplicity, and so on. Adding the hypothesis thatphlogiston has negative weight to the phlogiston theory reduced thetheory's prior credibility. For the physical objects and substances withwhich people are familiar certainly do not have negative weight. Andthatmakes rather bizarre, diminishes the credibility of, any theory,such as the amended phlogiston theory, which affirms that somephysical substance has negative weight. It is theprior credibility of thetheory which is reduced, as the judgment of diminished credibility isindependent of the results of any empirical testof thephlogiston theoryitself.However, the as-if view of neoclassical motivational hypothesesdoes not reduce the theory's prior credibility. Neoclassical microtheory interpreted ? la the as-if view has no lower prior credibility thandoes neoclassical micro when itsmotivational hypotheses are literallyconstrued. In short, the as-if view's modification of neoclassical theoryis not the same as such standard examples of bad ad hocness as thehypothesis thatphlogiston has negative weight.It has been suggested that theWinter style reason for thinking theas-if view unacceptable is not persuasive. It is true, as theWinter stylereason alleges, that the as-if view reduces the predictive content ofneoclassical microeconomics. But itdoes not follow that the as-if viewis unacceptable or in any way defective. The as-if view makesneoclassical micro theorymore consistent with the empirical evidence.And it is not implausible or bizarre in theway at least some of thestandard examples of bad ad hocness are. In sum, the as-if view10In the 1940s the neoclassical assumption that business firm managers maximize

profits came under attack on the basis of answers given to questionnaires by managersof real world firms. A well-known example of this is Richard Lester's criticism of theprofit maximization assumption on the basis of results of a questionnaire he sent to 58firms in the southern United States (Lester, 1946). Friedman developed a version of theas-if view so that the results of questionnaires like Lester's would be irrelevant to theappraisal of neoclassical motivational hypotheses (1953, pp. 15-16, pp. 21-22, p. 31).

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represents a beneficial modification of neoclassical theory.V. The As-if View and Friedman's Methodology

The last criticism of the as-if view Iwish to consider concerns therelation between it and the type of methodology of economicschampioned byMilton Friedman. Friedman's methodology has comein formuch criticism, and itmight be thought thatmy defense of theas-if view ? a view Friedman himself proposed in his 1953 paper oneconomic methodology ? is somehow at the same time a defense ofFriedman's methodology.11 Since themethodology is badly flawed, theas-if view and my defense of itmust also be defective. However, mydefense of the as-if view is in no way a defense of Friedman'smethodology. And in fact, the as-if view and Friedman's methodologyare independent of one another. One could accept one of the two andreject the other.Elsewhere I have discussed, and criticized, Friedman's methodology(Rappaport, 1986). It isworth briefly summarizing themain tenets ofFriedman's methodology. It emphasizes predictive success as acriterion for the acceptability of a theory or hypothesis in economics.More precisely, a theory T is acceptable ifT has been tested one ormore times, and each test has been successful. The conception oftesting Friedman operates with is a simple form of hypotheticodeductivism. This affirms that testing a theory is nothing more thandeducing one or more predictions from it,and determining whether ornot the predictions are true. Should they be true, the test is successful.A theory T is to be rejected if it has had many unsuccessful tests, or ahigher percentage of unsuccessful tests than some existing alternative.Finally, should a pair of competing economic theories have been testedand with equal success, then the one that is simpler and more fruitfulshould be adopted.An advocate of the as-if view is simply proposing an interpretation ofmotivational hypotheses in neoclassical microeconomics. The as-ifview does not imply an endorsement of anyone's criteria for theacceptability of an economic theory, neoclassical or otherwise. Let ussuppose that themotivational hypotheses of neoclassical micro theoryare viewed as as-if statements. Further imagine thatneoclassical theory

1Alexander Rosenberg seems to link Friedman's general methodology of economicswith the as-if view (1976, pp. 163-168).

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does meet Friedman's criteria for a theory being acceptable ? perhapsall the predictions of neoclassical theory have turned out to be correct.Still an advocate of the as-if view is not committed to sayingneoclassical theory is acceptable. The proponent of the as-if view couldadopt, say, a Bayesian view of the appraisal of economic theoriesinstead of Friedman's methodology. Since we have not been told thatneoclassical micro theory has been evaluated using Bayes' theorem, theBayesian advocate of the as-if view would refrain from sayingneoclassical 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 adistinction between (a) the interpretation ofmotivational hypotheses, inneoclassical micro-theory or elsewhere, and (b) the criteria for theacceptability of an entire economic theory. This distinction has theresult that the as-if view does not carry a commitment to any particulareconomic methodology, Friedman's or anyone else's. So, the defectsof Friedman's methodology do not spell trouble for the as-if view.Let me say something which will put into proper perspective whathas been said in this section. Some readers may regard the as-if view asan element of Friedman's methodology of economics. Such readerswould probably find puzzling my effort to separate the as-if view andFriedman's methodology. There isperhaps a broad sense of "methodol?ogy" in which the as-if view is uncontroversially an element ofFriedman's methodology. But in the above remarks, I have used"methodology" in a narrow sense to refer only to the criteria forappraising theories in a discipline or range of disciplines. So, inspeaking of Friedman's methodology of economics, I have been talkingexclusively about the criteria Friedman presents for appraisingeconomic theories. (A brief account of these criteria is given in thesecond paragraph of this section.) And I have tried to separate the as-ifview from Friedman's methodology in the narrow sense of the term.Once we see that the as-if view carries no commitment to Friedman's

methodology (narrow sense), we will not be tempted to reject the as-ifview because it somehow commits us to thatmethodology.VI. Conclusion

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

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results that would ensue if firms sought to maximize profits andconsumers sought tomaximize utility. The criticism I extracted fromSidney Winter's writing misconstrues the fact that the as-if viewreduces the predictive content of neoclassical micro theory. Contrary totheWinter style criticism, this fact represents an improvement in theepistemic status of the theory. Finally, I have tried to deflect thecriticism of the as-if view that its commitment to the flawed economicmethodology proposed byMilton Friedman makes the as-if view itselfunacceptable. The as-if view is not committed to Friedman'smethodology in the first place. This is evident once the distinction ismade between interpreting themotivational hypotheses of neoclassicalmicro theory, and proposing criteria for the acceptability of an entireeconomic theory. In light of the discussion here, it is fair to say that theas-if view represents a defensible interpretation of the motivationalhypotheses of neoclassical microeconomics.

REFERENCESBlaug, Mark. The Methodology of Economics: Or How Economists Explain. New York:Cambridge University Press, 1980.Churchland, Paul. Matter and Consciousness. Cambridge, Massachusetts: The MIT Press, 1984.Dennett, Daniel. Content and Consciousness. London: Routledge & Kegan Paul, 1979.Friedman, Milton. "The Methodology of Positive Economics," inEssays inPositive Economics.

Chicago: University of Chicago Press, 1953.Hempel, Carl. Philosophy of Natural Science. Englewood Cliffs, New Jersey: Prentice-Hall,1966.Howson, Colin and Peter Urbach. Scientific Reasoning: The Bayesian Approach. La Salle,Illinois: Open Court, 1989.Laudan, Larry. Progress and Its Problems. Berkeley: University of California Press, 1977.Lester, Richard. "Shortcomings of Marginal Analysis for Wage-Employment Problems,"American Economic Review 36 (1946), pp. 63-82.Morgenbesser, Sidney. "The Realist-Instrumentalist Controversy," inMorgenbesser, Suppes, andWhite (eds.), Essays inHonor ofErnst Nagel: Philosophy, Science and Method. New York:St.Martin's, 1969.Nicholson, Walter. Microeconomic Theoiy, Second Edition. Hinsdale, Illinois: The DrydenPress, 1978.Rappaport, Steven. "What isReally Wrong with Milton Friedman's Methodology ofEconomics,"Reason Papers, No. 11 (Spring 1986), pp. 33-61.Rosenberg, Alexander. Microeconomic Laws: A Philosophical Analysis. Pittsburgh: University ofPittsburgh Press, 1976.Winter, Sidney. "Economic 'Natural Selection' and theTheory of the Firm," Yale EconomicEssays 4 (1962), pp. 225-272.

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