Philosophy of Economics || Realism and Antirealism About Economics

REALISM AND ANTIREALISMABOUT ECONOMICS

Uskali Maki

1 INTRODUCTION

Economics is a controversial scientific discipline. One of the traditional issues thathas kept economists and their critics busy is about whether economic theoriesand models are about anything real at all. The critics have argued that economicmodels are based on assumptions that are so utterly unrealistic that those modelsbecome purely fictional and have nothing informative to say about the real world.Many also claim that an antirealist instrumentalism (allegedly outlined by MiltonFriedman in 1953) justifying such unrealistic models has become established as thesemi-official practitioners’ philosophy of conventional economics. Others arguethat what is the case in the economy and the way economics relates to it aresocially constructed such that there is no economics-independent way the worldworks or truths about it. On both of these pictures, realism would seem to havelittle to do with economics.

These pictures are too simplistic. There is more realism in and about economicsthan first would appear. To see this requires not just looking more closely, butalso adjusting one’s conception of scientific realism. It also requires taking a crit-ical stance on much of what economists themselves and other commentators haveclaimed. Yet, historically, there is much wisdom available in the philosophicalself-image of the discipline.

2 SCIENTIFIC REALISM IN CONVENTIONAL PHILOSOPHY OFSCIENCE

Conventional versions of scientific realism characteristically celebrate science for itsachievements in penetrating into the secrets of nature and manipulating it [Psillos,1999]. Indeed, much of the philosophy of science literature on scientific realismseems tailored for discussing issues around successful physical sciences. Given thateconomics does not deal with physical subject matter, that it does not obviouslyexhibit the sort of predictive and technological success usually attributed to thephysical sciences, and that chronic controversy seems constitutive of economics,there is reason for some rethinking. One might simply conclude that scientific

Handbook of the Philosophy of Science. Volume 13: Philosophy of Economics.Volume editor: Uskali Maki. General editors: Dov M. Gabbay, Paul Thagard and John Woods.c© 2012 Elsevier BV. All rights reserved.

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realism is not a relevant issue for economics and its philosophy [Hausman, 1999;2000; 2009]. Or one could conclude that formulations of scientific realism needto be adjusted so as to bring them closer to the concerns of a larger variety ofdisciplines such as economics [Maki, 1996; 2000; 2005].

That these two indeed are the major options becomes obvious as we cite someof the representative formulations of scientific realism in the philosophy of sci-ence. Michael Devitt puts his version in primarily ontological terms: according toscientific realism “[t]okens of most current unobservable scientific physical typesobjectively exist independently of the mental.” [Devitt, 1991, 24] Among thetroubling elements here are ‘unobservable’, ‘physical’ and ‘exist independently ofthe mental’. Economics does not deal with entities that are unobservable in thesame way as paradigm cases in physics are, such as electrons and electromagneticfields and ions. And the entities that economics does deal with do not exist in-dependently of the mental. Just think of preferences and expectations, moneyand prices, households and business firms: they depend on human minds for theirexistence.

The famous Boyd-Putnam formulation was suggested as part of an argumentfor scientific realism: “terms in a mature science typically refer” and “the laws of atheory belonging to a mature science are typically approximately true” [Putnam,1975-76, 179]. These claims are proposed to define scientific realism and are thensupposed to provide the best explanation for the uncontroversial predictive andtechnological success of science: if scientific realism were not true, the success ofscience would be an inexplicable miracle. However, in the case of economics, thereis no such similar obvious fact of success to be explained. Given that it is notclear whether there is any other sense in which economics might be a “maturescience” whose “laws” are “approximately true”, it is also not clear whether theBoyd-Putnam formulation is relevant to economics.

Rather strong epistemological formulations are popular in the philosophy ofscience. Instead of just suggesting that the world is knowable — that justifiabletruths about it are attainable — scientific realism is taken to make the empiricalclaim that quite a bit of it is already known — that we are entitled to believe thatmany extant theories are true about it. Here is a characteristic formulation thatstresses epistemic achievements: “Scientific realists suggest we have good reasonsto believe that our best current scientific theories offer us literally true (or probablytrue, or approximately true, or probably approximately true) descriptions of howthings stand in otherwise inaccessible domains of nature” [Stanford, 2003, 553].Economists are typically very cautious in attributing literal truth to their theoriesand models (yet they tend to be more relaxed when talking about approximatetruth), while they are far more prepared to attribute literal falsehood to models andtheir parts. But whatever beliefs and reasons about the truth of theories individualeconomists and their groups may have, they do not collectively share those beliefsand reasons to the extent of warranting the claim that as a disciplinary communityof economists “we have good reasons” to have any, or at least very many, suchbeliefs.

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The above selective summary suggests that the two options mentioned indeedseek to resolve a real discrepancy between standard formulations of scientific re-alism and the disciplinary reality of economics. One option is to put scientificrealism aside as irrelevant; the other is to adjust those formulations so as to im-prove its relevance to economics and its philosophy. By taking the latter line wecan see that much of the apparent antirealism in and about economics is just that,apparent only.

3 INGREDIENTS OF A MINIMAL SCIENTIFIC REALISM

The received conception of scientific realism has become an empirical thesis sug-gesting that good science (or most of current mature science) is justifiably believedto have gotten its theories (approximately) true about (mind-independently ex-isting) unobservables, and this is why science is (explanatorily, predictively, andtechnologically) successful. In order not to drop economics from the realm of re-alism, we should see that we can instead drop all these elements and still keep ourmembership in the scientific realist club. What the members of the club share isa weaker version of realism: minimal scientific realism [Maki, 2005; 2008].

Scientific realists should insist — as they have actually done — that beingunobservable (a la electrons) is not an obstacle to existing in some required realistsense. But they should not insist that not being unobservable is an obstacle tobeing recognized as a philosophical issue to scientific realism. This is why minimalscientific realism does not include the notion of unobservability in its definition ofscientific realism. It is enough to suppose that an item of interest to science mayexist regardless of how that item is related to human perceptual faculties. Thisis important for accommodating many scientific disciplines that do not postulateelectron-like unobservables.

Minimal realism should also avoid being specific about the kinds of thing thatare considered for their existence. It should not take a restrictive stance on whetherthe existents are objects, properties, relations, structures, processes, events, pow-ers, and so on. So minimal realism is uncommittal in the debates, say, over variousversions of ontic structural realism as well as over the issue of dispositional andcategorical properties. Closer scrutiny of research fields and specific theories isrequired in developing more local versions of scientific realism that include spe-cific ideas about more specific sorts of thing that qualify as candidates for existingthings. To flag this neutral attitude I use ‘item’ as a generic name for all conceiv-able existents.

Scientific realists should insist that many items in the world have a chanceof existing mind-independently. The existence of electrons and solar systems, ofmountains and monkeys is in no way dependent on the contents of human minds:what beliefs people have about them, what concepts and theories are held whentalking about them. But minimal scientific realism does not include the notionof mind-independence in its definition of scientific realism. It is enough and ap-propriate to suggest that the items in the world exist science-independently. How

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exactly this will be cashed out in more detail depends on the further characteristicsof the scientific discipline that is being considered.

A further important move is to set scientific realism free from establishedachievements by actual science. Instead of requiring that an item examined orpostulated by science exists, it is enough to suppose that there is a chance thatthe item exists. Another way of putting this is to say that there is a fact of thematter as to whether an item does or does not exist science-independently. Noth-ing more is required by minimal scientific realism. This implies that one can bea realist about items that are only conjectured to exist. The insight behind thisis that it takes a realist attitude for scientists to conjecture, and then conclude,perhaps after persistent inquiries, that an item does not exist after all — or elsethat it does. It is also no violation of realism not to draw either of these conclu-sions, but rather to suspend judgement, even indefinitely. Skepticism of this sortis compatible with minimal realism.

The same applies to truth. Instead of requiring that a theory is (approximately)true, it is enough to suppose that there is a chance that it is. In other words, thereis a fact of the matter as to whether, and in what way, a theory is or is not true ofthe world, and this is independent of the beliefs scientists hold, of the evidence theyhave for or against the theory, of the persuasiveness of the arguments presented,and so on. For whatever reason, scientists can change their views about the truthof a theory, but this does not imply a change in its truth. Again, it takes a realistattitude to have such views as well as to change them. And it is no violation of thisattitude if scientists suspend judgement as to whether a theory is true and remainagnostic, for however long. Scientists believing in the truth of theories with goodreasons is too much to ask as a mark of scientific realism. A weaker sort of beliefwill do.

Minimal scientific realism does not require that science be portrayed as an un-controversial success story. It is possible to be a realist about science withoutrequiring that science has established its postulated entities as real and its the-ories as true, and it is not required that science exhibits triumphal predictiveand technological achievements. Minimal scientific realism therefore is not set foroffering a philosophical explanation of such achievements.

The minimalism suggested here enables accommodating scientific disciplinesand episodes of scientific inquiry that are strongly hypothetical (speculative, con-jectural, tentative) or erratic and uncertain, or predictively and technologicallyunsuccessful, or subject to chronic controversy and internal divisions. Perhapsthey are like this because they are at their early or transitional stages of devel-opment; or because they are stuck on mistaken tracks of inquiry; or because theyare subject to distorting political, ideological or commercial pressures; or becausethey deal with hard-to-access, epistemically recalcitrant materials. None of thisas such rules out the possibility that theoretically postulated and examined thingsmight exist in the world and that theories might be true about them; and thatscientists, collectively and in the course of sufficiently long time spans, are inter-ested in finding out the science-independent matters of fact about existence and


truth; and that, prescriptively, scientists are to be urged to be so interested. Andthis — with qualifications — is all minimal realism is asking for.

One motive for formulating a minimal version of scientific realism is the recog-nition of diversity among scientific disciplines and research fields — not just anydiversity, but one that has consequences for issues of realism and antirealism.While standard formulations of scientific realism fail to accommodate this diver-sity and therefore have limited scope, minimal realism is suitably undemandingand abstract to have a maximum reach or “applicability” across branches of sci-ence by depicting what they minimally share in common. Particular disciplines orresearch fields or even theories (or perhaps sufficiently uniform families of these)have special characteristics that can be captured by more specific local versions ofrealism.

Consider the role of epistemic confidence. Some disciplines are in a better po-sition than others in determining whether a postulated item is real and whethera proposed theory is true. This difference may be due to the properties of thesubject matter examined or to the stage or special trajectory of a discipline’sdevelopment. The epistemically unlucky or immature disciplines should appropri-ately avoid excessive confidence and suspend definite epistemic judgement withoutviolating realist principles.

Economics deals with a complex subject matter and is charged by its critics tohave stuck on misguided tracks of inquiry and erroneous theoretical frameworks,but this does not appear to shake the confidence among many economists thatthey are doing the right thing. There is confidence on both sides, but this shouldnot result in, respectively, antirealism and realism about economic theory. Both ofthem, as well as the various epistemic attitudes that reflect higher degrees of uncer-tainty, can be construed as attitudes compatible with, even presupposing, realism.So instead of implying a philosophical conflict between a realist and antirealistinterpretation of (the success of) economics, we should construe the situation asa scientific conflict between two or more conceptions of whether economics hasbeen successful. Grounds for confidence vary from discipline to discipline as wellas within disciplines.

Consider then the issue of unobservables. Some disciplines face the issue ofwhether electron-like unobservables exist. Others don’t. Economics deals withhouseholds and business firms, governments and central banks, preferences andexpectations, money and prices, costs and revenues, wages and taxes, contractsand conventions. These are ordinary items that are recognizable experientially, andthis is what distinguishes economics from physics. What economics and physicsshare in common is that they build models that are based on the heavy use ofidealizations that are taken to be literally false about the world. Scientific realismfaces special challenges in dealing with such falsehood. I will discuss these issuesin the next section.

Then consider the issue of independence. Electrons and viruses and galaxiesexist — if they do — mind-independently. Many central items in the domainof economics don’t so exist. Their existence is essentially dependent on human

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minds. So we need to check if we can resort to the idea of science-independencein minimal scientific realism. Might the entities of economics and their propertiesexist economics-independently? This idea is challenged by the easy observationthat ideas developed and promoted by academic economists at least occasionallyappear to have consequences for the economy. Does scientific realism have a wayof accommodating this observation? The literature on social constructivism and“performativity” prompts issues that I will discuss in the final section.

4 COMMONSENSIBLES AND THEIR MODIFICATIONS IN ECONOMICMODELLING

Economics: science of commonsensibles

Land, labour, and capital. Markets, money, prices. Private good, public good,merit good. Demand and supply. Individuals, households, business firms, centralbanks, government bureaus. Preferences, expectations, greed and fear. Cost andchoice, budget and benefit. Competition, contract, convention. Auction, arbi-trage, alertness. Risk, uncertainty, learning. Exchange and externality, propertyright and moral hazard. Wages, profits, taxes, subsidies, fairness. Saving andinvestment. Debt, mortgage, interest, trust. Unemployment, inflation, growth,recession. Trade, exports, imports. Competitiveness, comparative advantage, ex-change rate. Gross Domestic Product, Sustainable Economic Welfare.

None of these look like electrons and their properties and behaviour. Indeed,there is a long tradition in economics of viewing the basic constituents of itssubject matter as being familiar to us through commonsense experience. This hasoften been presented as a source of an epistemic advantage enjoyed by economicscompared to physics. There is no direct access to the ultimate constituents ofphysical subject matter, so physics must infer to them from their effects, whileeconomics deals with a domain that is more directly accessible through ordinaryexperience [Cairnes, 1888, 84]. This has implications for realism: “. . . the ultimateconstituents of our fundamental generalizations are known to us by immediateacquaintance. In the natural sciences they are known only inferentially. There ismuch less reason to doubt the counterpart in reality of the assumption of individualpreferences than that of the assumption of the electron” [Robbins, 1935, 105; seealso 78-79]. Note that this optimism goes beyond mere minimal realism.

The idea should not be that economics deals with things of which we can havedirect sense perception. The preferences and expectations of economic agentsare unobservable in the sense of being inaccessible directly by senses. So are,say, multinational companies and the revenues they make and the institutionalconstraints they face. But they, just as money and prices, salaries and taxes, arefamiliar parts of our commonsense view of the social world within which we live ourdaily lives. These are commonsensibles rather than perceptibles or observables inany strict or pure sense. Commonsensibles involve concepts and inference, culturalmeanings and shared interpretations - they involve the unavoidable hermeneutic


moment of economics.

A further remove from being directly observable is due to the various modifi-cations that the economically relevant commonsensibles undergo when theorizedand modelled by economists. Goods exchanged in markets may become perfectlydivisible in theoretical models. The messy local preferences familiar to us be-come transformed into the transitive and complete preferences of expected utilitytheory. Our local and flawed expectations become transformed into comprehen-sive rational expectations. Ordinary mortal people like us become infinitely livedagents in some models. Time-consuming and otherwise costly transactions becomefree and instantaneous. Internally structured business organizations with multi-ple goals become modelled as devoid of internal structure and pursuing nothingbut maximum profits. Strategic rivalry between powerful price-making firms be-comes non-strategic perfect competition among powerless price-taking firms. The(institutionally, culturally, politically and otherwise) complex structures of inter-national trade of multiple goods between multiple countries become modeled asperfectly free trade of two goods between two countries with same technologiesand same consumer tastes. Mathematical techniques of representation often makethe items in such models even more poorly recognizable from the point of view ofcommonsense experience.

Given such theoretical transformations, one may wonder whether economics isreally about commonsensibles after all. A natural doubt is that the items that ap-pear to be talked about in economic theories and models are too far removed fromordinary experience and commonsense frameworks to qualify as commonsensibles,so it would be better to liken them with unobservables akin to electrons and viruses.In response to this doubt, one can argue that in modifying commonsensibles byvarious simplifications and idealizations the theorist does not thereby introduceentirely new kinds of entities and properties. There is no radical ontological depar-ture from the realm of commonsense items when moving from boundedly rationalto perfectly rational agents, or from messy preferences to well defined preferences,or from costly transactions to free transactions, or from time-consuming and per-manently out-of-equilibrium processes to instant adjustments to market equilibria,or from particular market prices to inflation rates. Commonsensibles are modi-fied by cognitive operations such as selection, omission, abstraction, idealization,simplification, aggregation, averaging. None of these amount to postulating newkinds of unobservable entities (but see the queries about macroeconomic entitiesby Hoover [2001]).

It is also possible to turn the above doubts about commonsensibles into doubtsabout existence. Not only do the idealizing modifications of ordinary items takethem away from the commonsense realm, but they are taken away also from therealm of existents. Those idealized entities are fictions rather than candidates forreal things. The philosophically minded economist Fritz Machlup has suggestedjust this idea. His prime example was the neoclassical or marginalist theory of theperfectly competitive firm [Machlup, 1967]. The theory depicts firms [1] as devoidof internal structure; [2] as perfectly informed; [3] as taking price signals as the

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only source of information; [4] as not interacting through rivalry; [5] as price takersrather than price makers; [6] as pursuing maximum profits as their only goal.

Machlup’s reasoning is straightforward in concluding that in the neoclassicaltheory of the competitive firm, “all firms are pure fictions” [1967, 30], that thetheory postulates “this purely fictitious single-minded firm” [1967, 10]. He warnsagainst failing to keep apart these fictional theoretical firms and the familiar realorganizations also called ‘firms’. This may be interpreted as a claim about refer-ence, implying that the term ‘firm’ in the neoclassical theory of the competitivefirm fails to refer to real firms; and not only does it fail to so refer, but it is noteven purported to refer. In the old-style instrumentalist manner, it is just an“intermediate variable” that serves useful functions in scientific inference withoutitself being connected to any real entities.

This conclusion derives from an implicit premise, the description theory of ref-erence [Maki, 1998]. According to this theory, the factual reference of a term isdetermined by the associated descriptions. Whenever those descriptions do notfit with anything in the world, the term fails to refer. So, the term ‘firm’ in theneoclassical theory of the competitive firm fails to refer to real firms simply be-cause the assumptions of the theory [1]–[5] are not true of any real entities in thesocial world. This is why the assumptions cannot be used for identifying any realobjects of reference.

There is no established account of reference to social objects that could here beappealed to in response to Machlup’s fictionalism, but an obvious point of depar-ture would be Donnellan’s [1966] distinction between the attributive and referentialuses of definite descriptions, the latter enabling the use of false descriptions refer-entially. We could generalise on this idea and suggest an analogous distinction forgeneral descriptive terms such as ‘firm’: the assumptions associated to the termin neoclassical theory can be used both referentially and attributively. Machlup’ssuggested primary use of ‘firm’ is attributive. This enables him to infer to theconclusion that because nothing in the world satisfies the description provided byneoclassical assumptions, the term in this theoretical context is not to be used torefer to any things in the world. The alternative is to use the term referentially.In this case we hold that even if nothing in the social world satisfies the attributeof being a perfectly informed atomistic price-taking maximizer, it is not out ofthe question that the description can be used to pick out a class of non-fictionalentities, namely real business firms. Just as I can be mistaken about your age andshoe size and still be talking about you, economists may employ false assumptionsabout firms and yet talk about them.

Once reference to real things is secured, we are ready to ask for the rationale forfalse descriptions. The literature in the theory of reference usually cites error, ig-norance, and incompleteness as sources of falsehood. However, when an economistmakes unrealistic assumptions, she is often not making an error or being ignorant.She is instead deliberately employing strategic falsehoods in order to attain someepistemic and pragmatic gains. This is the point of idealization.


Isolation by idealization

In 19th century economics, it was popular to think of economic theory as focusingon just a limited set of causally relevant factors and to examine the consequencesof their functioning in the absence of other factors, that is, in the abstract. A moreconcrete account of the empirical world would require incorporating further causesthat also contribute to the shaping of phenomena. Emphasizing different aspectsof variations of this overall image of economic theorizing, J.S. Mill [1832] had ideasabout the decomposition and composition of causes, Karl Marx [1858] entertaineda Hegelian dialectics of the abstract and the concrete, Carl Menger [1883] pursuedeconomics as what he called an exact science, Alfred Marshall [1890] explicitlyemployed the ceteris paribus clause, and so on.

Economic theories were often conceived in terms of their “premises” that werebelieved to be true even if incomplete. In these premises, agents were described asselfish and seeking nothing but maximum wealth, and returns in agriculture weredescribed as diminishing. So on the one hand, it is

“positively true ... to assert that men desire wealth, that they seek,according to their lights, the easiest and shortest means by which toattain their ends, and that consequently they desire to obtain wealthwith the least exertion of labor possible”. [Cairnes, 1888, 62]

On the other hand, it is

“surely possible that the premises should be true, and yet incomplete— true so far as the facts which they assert go, and yet not includingall the conditions which affect the actual course of events”. [Cairnes1888, 68]

Since not all causally influential factors are covered by a theory, its implicationscannot be expected to match the phenomena. The factors covered by the theoryin the real world combine with others not included in the theory. Therefore, itsimplications are true “hypothetically” only. As Cairnes writes, the conclusions ofeconomics (but also of mechanics and astronomy)

“when applied to facts, can only be said to be true in the absence ofdisturbing causes; which is, in other words, to say that they are trueon the hypothesis that the premises include all the causes affecting theresult”. [Cairnes, 1888, p. 61]

A set of premises can be incomplete in two senses: first, in not listing all relevantcauses (thus violating the whole truth); second, in not explicitly listing all theimplicitly required idealizations (thus hiding its violation of nothing but truths).The first is the sense we find in Cairnes in the passages above. It enables Cairnesto claim that the premises can be true even if incomplete. The second can beunderstood as we notice that not listing all relevant causes – incompleteness inthe first sense — can be implemented by way of formulating idealizing premises

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that neutralize some causes and so exclude them from theory or model. In themodellig style characteristic of 19th century economics, such idealizations (or manyof them) typically are not explicitly listed. Such idealizations are typically false iftaken as claims about the world.

A strikingly modern approach was pursued by J.H. von Thunen [1826] whoformulated a model of agricultural land use that has many characteristics of the20th century idea of economic model. He shared the idea that a model would onlyinclude a small set of causally relevant factors, but he also formulated his modelusing a number of explicitly stated idealizing assumptions of which he knew theyare false — such as the region being of homogeneous fertility and climate, devoidof mountains and valleys, rivers and canals, with just one town in the middle, andno connections with the outer world. The point of the model was to isolate thecausal role of distance from the town (mediated by transportation costs and landrents) in shaping the land-use structure in the region. The ensuing pattern in themodel, that of concentric rings, is empirically inaccurate about any actual land-usestructure, often by wide margins. This is unsurprising given the many causallyrelevant factors that the model excludes by its idealizations. Yet, von Thunenbelieved that his model managed to provide a true account of the functioning ofthe economic mechanism of distance. (See [Maki, 2011].)

This work anticipated later styles of economic modelling, in which assumptionswere formulated explicitly and more completely (but never fully) so as to makeclear which potentially efficacious factors are being excluded. These assumptionsstate that some factors are absent or that some variables have the value of zero,while some others remain constant or within some normal intervals, and so on.Now these assumptions often are not true, and some of them never are. They arethe idealizations that help neutralize the impact of many factors so as to enablefocusing on the behaviour of and relationships between just a few at a time. Thelatter are thereby theoretically isolated from the former.

Given that one cannot guarantee that either those idealizations be true or thatthey are relaxed and replaced by other assumptions that jointly capture all rele-vant causal factors contributing to the occurrence of the phenomena of interest,predictive testing becomes particularly difficult. Indeed, the mainstream view in19th century economics was that theories cannot be expected to exhibit remarkablepredictive successes and so are not to be tested by their predictions. Yet theoriesand models can be true of (fragments of) the world. This is in line with minimalscientific realism.

Friedman’s 1953 essay

The realist tradition has been supposed to be discontinued with Milton Friedman’sand Fritz Machlup’s statements in the early 1950s. The received interpretation ofFriedman’s 1953 essay portrays it as an antirealist and instrumentalist manifesto[Wong, 1971; Boland, 1979; Caldwell, 1990]. And given that Friedman’s statementis typically taken to correctly characterize the theories, practices and attitudes


of (“mainstream”) economists, these practices and attitudes themselves are thentaken to be antirealist rather than realist.

One can argue that this is not quite accurate and that Friedman’s essay can beread as a realist statement and therefore not at all entirely out of phase with theearlier traditions (see e.g. [Maki, 1990; 2009]; on realism in Friedman’s economics,see [Hoover, 2009]).

Friedman had set out to defend conventional theory — in particular, the modelof perfect competition and the assumption of profit maximization — against thecriticisms that had been made against their unrealisticness. Friedman grantedthat many such assumptions are indeed unrealistic, but that this is irrelevant totheir scientific value, or more strongly, a virtue in that “[t]ruly important and sig-nificant hypotheses will be found to have ‘assumptions’ that are wildly inaccuratedescriptive representations of reality” [1953, 13]. All that matters — and this is amajor deviation from the 19th century tradition — is whether a theory or modelpredicts well, or predicts better than its rivals for a given purpose. From this manycommentators have concluded that Friedman is committed to an instrumentalistconception of scientific theory that is uninterested in having true theories aboutthe world.

While very insightful, Friedman’s essay is also terribly confused and ambiguous,so readers can take liberties to provide their own favourite interpretations. Arealist reading would appeal to passages like this: “the relevant question to askabout the ‘assumptions’ of a theory is . . . whether they are sufficiently goodapproximations for the purpose at hand” [Friedman, 1953, 15]. So there is a factof the matter as to how the assumptions relate to the world — and whether this is“sufficiently good” depends on the pragmatics of their use. Prediction fits in thispicture in a non-instrumentalist manner, as a criterion of sufficient realisticness:

the question whether a theory is realistic ‘enough’ can be settled onlyby seeing whether it yields predictions that are good enough for thepurpose in hand or that are better than predictions from alternativetheories. [1953, 41]

In other words, the unrealisticness of assumptions is not irrelevant after all. Thetask is to pay attention to their actual degree of realisticness and to judge whetherit is sufficient for a given purpose.

Among the purposes or functions served by false idealizing assumptions is tohelp implement theoretical isolations in a controlled manner. One of Friedman’sexamples is Galileo’s law of freely falling bodies and the associated assumptionthat air pressure is zero, so that bodies fall in a vacuum. To this we must addother idealizing assumptions, such as no magnetic forces and no other kinds ofpushes and pulls such as the pull of the Moon and the other planets. These aremostly false assumptions that play the role of helping to isolate the impact of theEarth’s gravity from other causal influences on the falling body. In analogy (thatFriedman himself missed in his essay), one can construe the profit maximizationassumption as involving the composite idealization that all other motives except

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the maximization motive have zero strength. The general realist principle is thattheory construction is a matter of theoretical isolation whereby economists “ab-stract essential features of complex reality” (7).

This helps see why it is also a mistake to link Friedman’s favourite as-if formu-lation of theory to instrumentalism. The as-if locution as such is a philosophicallyneutral tool that can be used for expressing a number of different ideas. A realistcan use it for modelling phenomena in isolation, saying, “phenomena behave as ifcertain ideal conditions were met, viz. conditions under which only the theoreti-cally isolated real forces are active (and we know those conditions are not actuallymet)”, while an instrumentalist version suggests that “phenomena behave as ifthose forces were real (and we know those forces are not real)”. Friedman uses theas-if in both ways, but here is a passage exhibiting his realist inclinations:

A meaningful scientific hypothesis or theory typically asserts that cer-tain forces are, and other forces are not, important in understandinga particular class of phenomena. It is frequently convenient to presentsuch a hypothesis by stating that the phenomena it is desired to predictbehave in the world of observation as if they occurred in a hypothet-ical and highly simplified world containing only the forces that thehypothesis asserts to be important. (40)

A major mistake by the proponents of the instrumentalist reading of Friedman’sessay is to believe that the truth-value of a theory or model derives directly fromthe truth-values of its assumptions: false assumptions, therefore false theory, there-fore instrumentalism. A minimal realist would argue that a theory or model withfalse assumptions is in principle capable of conveying true information about theworld; or more strongly, that those idealizations are necessary strategic falsehoodsfor effecting theoretical isolation and thereby for acquiring true information aboutbits and pieces of the complex world.

Closed systems: Ontology vs methodology

The above observations aspire to show how isolative theories and models based onidealizing assumptions are in line with scientific realism. This is not the only ac-count available under the label of ‘realism’ in the philosophy of economics. Thereis a different understanding of realism whose proponents have argued otherwise,drawing their inspiration from Roy Bhaskar’s work [Bhaskar, 1975; Lawson, 1997;1999]. Their claim is that in its modelling practices “mainstream economics”depicts the economy as consisting of closed systems within which regular connec-tions obtain between observable events. Economics is thereby committed to a“closed systems ontology” and an associated “Humean ontology of event regulari-ties” while the underlying real causal mechanisms are not accessed by this method.This “positivist” and “deductivist” package essentially includes the extensive useof mathematics in creating and examining such closed system phenomena: “. . .the generalized use of formalistic economic methods presupposes that the social


world is everywhere closed” [Lawson, 1999, 273]. Given that the real social worldis open rather than closed, and given that causal mechanisms rather than eventregularities are the real basis of social phenomena, mainstream economics is non-realist.

This account is questionable. The correct observation is that economists usemethods of isolation, those of building and examining models that depict closedsystems in some obvious sense, and that they use formal techniques in doing this. Itis incorrect to infer from this observation that this practice is somehow committedto the ontology of closed systems and event regularities. To do so is to conflatemethodology and ontology — to commit a fallacy of mistaking closed systemsmethods for a closed systems ontology. Instead of “economists use closed systemsmethods” implying “economists are committed to a closed systems ontology” themore likely correct inference would be from “economists believe the social worldto be a very complex open system” to “economists use closed system methodsas a way of addressing the complexity of the open social world” or some such.At any rate the latter is close to the spirit of the long methodological traditionin economics as outlined above – a spirit that I would characterize as realist. Itis a different issue whether the methods actually used by economists – and theway they are used - are successful in accessing the complex subject matter (forexample, whether the Millian tradition of composition of causes does justice tothat complexity, see e.g. [Hausman, 2001]; or what roles econometrics can play inmeeting the challenge, see e.g. [Hoover, 2001]).

Modelling invisible-hand mechanisms

‘Mechanism’ is one of the most popular words used by economists. Indeed,economists believe to be modelling mechanisms of a variety of different kinds.Many of these mechanisms have an invisible-hand structure. Individuals with be-havioural dispositions and powers act in pursuit of their individual goals; theseare coordinated by some social structure, such as some market or market-likemechanism; and some aggregate level outcome will be produced, but not in virtueof individuals aiming at it. The invisible hand can generate welfare-enhancingoutcomes in the spirit of Mandeville’s “private vices, public virtues” as well assuboptimal outcomes of prisoner’s dilemma type, mediated by the “invisible back-hand” [Aydinonat, 2008].

Invisible-hand mechanisms often produce “counter-intuitive” outcomes in thesense that they appear surprising or paradoxical from the point of view of ordi-nary uneducated points of view. Indeed, there is often a conflict between economictheory and the commonsense understanding of how the economy works — man-ifesting in conflicting perceptions such as free trade vs protectionism or growinggovernment budget deficit vs spending cuts during recession. This might be takento speak against the idea that economics is about commonsensibles.

One way of resolving the conflict is to recognize that the components of invisible-hand mechanisms are commonsensibles and that the way their mutual connections

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in causal structures are described in economic models departs from ordinary con-ceptions. In this sense, the familiar commonsensibles are both modified (by ide-alization etc.) and rearranged in theoretical economics. Given that economistsbelieve that the causal rearrangement (possibly) gets the way the world worksright, they thereby come to subscribe to more than just commonsense realism,namely scientific realism [Maki, 1990; 1996].

Economists often initially only believe that the model they have built capturesa mechanism that might be responsible for some phenomenon or pattern — ratherthan asserting that this is the mechanism actually responsible. So they use themodel in offering a how-possibly explanation rather than a how-actually expla-nation. The abductive reasoning characteristic of much of theoretical modellingin economics is not inference to the best explanation but rather inference to apossible explanation. This feature of economic modelling fits very nicely with thestress in minimal realism on models and theories having a chance of being true(rather than having been established as true or being justifiably believed to betrue of actual causation).

5 SOCIAL CONSTRUCTION (WHAT?) OF WHAT?

As economists in the 19th century understood so well, it follows from the opensystems character of the economy that theories and models are hard or impossibleto test conclusively by their predictive implications. Later, Friedman exhibitedawareness of these issues, downplaying his own emphasis on prediction as thegoal and criterion of theorizing, and paying attention to its subjective and socialaspects. In passages mostly neglected by commentators, Friedman stresses theroles of subjective judgement, disciplinary tradition and institutions, and consen-sus among economists, in shaping theory choice. These statements reinforce theadmission that objectively decisive predictive tests are unavailable in economics.Here is a representative passage:

Of course, neither the evidence of the economist nor that of the sociol-ogist is conclusive. The decisive test is whether the hypothesis worksfor the phenomena it purports to explain. But a judgment may berequired before any satisfactory test of this kind has been made, and,perhaps, when it cannot be made in the near future, in which case, thejudgment will have to be based on the inadequate evidence available.In addition, even when a test can be made, the background of the sci-entists is not irrelevant to the judgments they reach. There is nevercertainty in science, and the weight of evidence for or against a hypoth-esis can never be assessed completely “objectively.” The economist willbe more tolerant than the sociologist in judging conformity of the im-plications of the hypothesis with experience, and he will be persuadedto accept the hypothesis tentatively by fewer instances of “conformity”.(30; emphases added)


So complete objectivity in testing a theory is unattainable since judgment andpersuasion are involved, and these are shaped by the background of the scientistand the degree of tolerance characteristic of a disciplinary culture. Another keypassage recognizes the tenacity with which hypotheses are held against negativeevidence and the powerful role of disciplinary folklore and tradition as well ascontinued use in creating the image of an acceptable hypothesis:

[The evidence for the maximization-of-returns hypothesis] is extremelyhard to document: it is scattered in numerous memorandums, articles,and monographs concerned primarily with specific concrete problemsrather than with submitting the hypothesis to test. Yet the continueduse and acceptance of the hypothesis over a long period, and the failureof any coherent, self-consistent alternative to be developed and be widelyaccepted, is strong indirect testimony to its worth. The evidence fora hypothesis always consists of its repeated failure to be contradicted,continues to accumulate so long as the hypothesis is used, and by itsvery nature is difficult to document at all comprehensively. It tends tobecome part of the tradition and folklore of a science revealed in thetenacity with which hypotheses are held rather than in any textbooklist of instances in which the hypothesis has failed to be contradicted.(22-23; emphases added)

So Friedman’s views in his 1953 essay were connected backwards to the 19th cen-tury realist tradition as well as forward to later Kuhnian and social constructivistideas about science [Maki, 2009]. But social constructivism is usually consideredan antirealist idea. Again, things are more complex and not always quite as theymight first appear. We must ask: how much and what kinds of social constructioncan realism accommodate? Economics has been claimed to be rhetorical and “per-formative” with apparently antirealist implications, and it is by discussing theseclaims that we can set out to answer the question.

Rhetorical construction of world and truth?

As an important part of a larger rhetoric of inquiry movement, the rhetorical as-pects of economics started being highlighted in the emerging literature and debatefrom the early 1980s onwards (e.g., [McCloskey, 1985; McCloskey et al., 1988;Maki, 1995]). The general idea of rhetoric is that in writing and talking, peopleattempt to persuade their audiences by influencing the intensity of their beliefs.Scientific writing and talking is no exception: much of what scientists do is totry to persuade their various audiences (such as colleagues in their own and otherfields, students, administrators, funding agencies, political decision makers, layaudiences).

Much of the literature on the rhetoric of economics has been preoccupied withthe identification of various rhetorical ploys and textual strategies used by economistsin their attempts to persuade. These include the use of metaphors (many of them

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having sources in physics and medicine), appeals to academic authority, intuitionand introspection, and exhibiting mathematical brilliance. The rhetorical imageof economics entertained by Deirdre McCloskey and Arjo Klamer has employeda “conversational model” of rhetoric: economics is conversation, and persuasiontakes place within a conversation. McCloskey has enriched this into the notion of“honest conversation” by incorporating the idea of Sprachethik, defined in terms ofprinciples such as, “Don’t lie; pay attention; don’t sneer; cooperate; don’t shout;let other people talk; be open-minded; explain yourself when asked; don’t resort toviolence or conspiracy in aid of your ideas.” (For the ethics of conversation aboutrhetoric, see [McCloskey, 1995; Maki, 2000]).

None of the above as such has antirealist implications, but a central feature ofthe rhetoric of economics project (as pursued by McCloskey and Klamer) has beenits outright antirealism, variously self-identified as relativism, pragmatism, socialconstructivism, or postmodernism. On this image of economics, whatever thereis in the world and whatever is true about it, become just a result of rhetoricalpersuasion, a variant of social construction. Truth is nothing but persuasiveness,so truths are not something to be discovered, but rather to be constructed byway of rhetorical efforts. Truths are made in the conversations among those whoare eligible of participation – the well-educated and well-behaved economists, asMcCloskey has it. This sort of antirealism has been marketed as part of thepackage of economics as rhetorical.

However, it is obvious that one may acknowledge the reality and efficacy ofrhetoric in scientific practice without implying such radically constructivist con-clusions. The presence of rhetorical persuasion alone in no way rules out thepossibility of attaining and communicating persuasion-independent truths abouteconomic reality. While beliefs can be manipulated by rhetoric, truths cannot.A realist rhetoric, or rhetorical realism, is an option [Maki, 1995]. Rather thantaking reality and truth as outcomes of successful persuasive efforts, they canbe viewed as independent of any such efforts, whether successful or unsuccess-ful, whether addressing some local audience or the “universal” audience, whethermorally appropriate or inappropriate from the point of view of any formulationof the Sprachethik. The statements made by using economic models are true orfalse regardless of the successes and failures of the proponents of those statementsin their attempts to persuade others to accept them. A model or a statementmade in using the model is not true or false in virtue of being found persuasiveor unpersuasive by a cohort of economists with a certain educational background,academic incentive structure, and moral standards.

This is not to say those factors are unimportant, on the contrary. It is obviousthat various background beliefs and the institutional structure of economic re-search shape what is found persuasive and what counts as true at any given time.They also shape the likelihood of discovering persuasiveness-independent truthsabout the world by a community of inquirers. Admitting this much is to accept amodest social constructivism without radical antirealist implications. Yet in gen-eral, the recognition that rhetoric is real and consequential in scientific practice


does not alone commit one to either antirealism or realism: such a recognition isrelatively neutral regarding its philosophical implications and presuppositions.

“Performativity” and the economics-dependence of the economy

While electrons and their kin exist — if they do — mind-independently, manycentral things in the domain of economics don’t. Their existence is essentiallydependent on human minds. What about the idea of science-independence inour minimal scientific realism? Might the entities of economics, their propertiesand behaviour exist economics-independently? Or might they and truths aboutthem be dependent on economic theories and economists’ beliefs? We have justdiscussed these issues in relation to the rhetoric of economics. Now we focus on theidea that economics is “performative” and thus shapes the social world — whichimplies that the world does not exist economics-independently after all.

There is a sense in which many things in society depend on science for their ex-istence. Indeed, our social institutions and practices, beliefs and norms are deeplyshaped by the products of science, from physics and biochemistry to epidemiologyand psychology. Evidently, economics can be added to this list. There is a con-nection between the science of economics and the economic world that flows fromthe former to the latter. Economic theories and research results somehow directlyshape people’s beliefs and worldviews in ways that are relevant to their economicbehaviour. Policy advice based on economic theories and research results shapeseconomic policies, and these in turn shape the economy. Moreover, economic the-ories, people’s beliefs and economic facts are often connected through mechanismsof self-fulfillment and self-defeat. So there is no doubt that the economy is de-pendent on economics. One might conclude that the idea of science-independencedoes not serve scientific realism at all well in the case of economics.

To examine the issue, it will be useful to look more closely at the thesis of“performativity” — the idea that economics “performs” facts in the economy (e.g.[MacKenzie, 2006]). And in order to examine this performativity thesis, it will beuseful to begin with a brief look at the original idea. On Austin’s [1962] accountof performativity, one performs an action by uttering some string of words, aperformative sentence. If I say “I promise to deliver the paper by the deadline” Iam thereby promising to deliver the paper by the deadline. To utter a performativesentence is not to describe a pre-existing action (e.g. of promising), it is to performthat action. Saying so makes it so. The connection between speaking words anddoing things is one of constitution rather than causation. Saying “I apologize”constitutes the act of apologizing. Saying “I agree” constitutes the act of agreeing.Those utterings do not cause those acts, rather those acts are constituted by thoseutterings. To utter those sentences is to take those actions.

This authentic meaning of performativity has been obscured by the recent litera-ture on how economic theory can have consequences for economic reality. MacKen-zie recognizes the Austinian use of the term in characterizing certain speech actsin the world of finance such as when agreements and contracts are made. When,

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in response to an offer to sell or buy an asset at a particular price, someone says“done” or “agreed”, then a deal is agreed [MacKenzie, 2006, 16]. Indeed, utteringsuch words performs the act of agreement, or in other words, constitutes it in anon-causal manner.

However, right thereafter the word ‘performativity’ is given three meaningsthat as such seem unrelated to the authentic meaning: an aspect of economics,such as an economic model, is performed in the sense of being used by economicagents (“generic performativity”); its use has consequences, it makes a difference(“effective performativity”); and its use makes the model more true (“Barnesianperformativity”) (17-19). MacKenzie’s prime example is finance, so this gives three(or at least two) kinds of dependence of certain practices of finance in the realworld on certain theories of finance – such as the Black–Scholes–Merton formulafor option pricing.

In none of these three types of case is the relationship between an aspect of eco-nomics and some aspect of the economy constitutive. A constitutive relationshipwould require that uttering or writing down an economic model for an audience(that understands the model and perceives the uttering as genuine) establishesthe model world as part of the real world. What is important is that in McKen-zie’s three kinds of case, the connection between economics and the economy issupposed to be implemented by the “use” of economics by economic actors. Butusing an economic model goes well beyond just recognizing it uttered or writtendown. Use involves taking further action. This undermines the idea that sayingso non-causally makes it so.

Whatever one thinks of using the terms ‘perform’ and ‘performativity’ in novel(and somewhat obscure) ways, the important observation here is that a distinctionmust be drawn between constitution and causation, between an economic theoryor model being connected to economic reality constitutively and causally. Thisis an important distinction because these two types of relationship have differentimplications for scientific realism.

The distinction has no such implications when applied to the subject matter ofeconomics. The social world contains both causal and constitutive relationships,and realism is comfortable with both, simply because they are part of social reality.There is a formal contract between two economic actors provided these actors be-lieve it is there and they — sometimes together with third parties – have performedthe right sorts of speech acts indicating agreement. Such contracts belong to thesubject matter of the economic theory of contracts. They are science-independentin that they are not created by acts of economic theorizing. Facts about suchcontracts are constituted by the beliefs and performative speech acts by the con-tracting parties, but they are not constituted (let alone “performed”) by acts ofscientific theorizing (let alone theories) about them. This is performativity withinthe economy, but not between economics and the economy.

Naturally economic theorizing can have consequences for the economy. Butthese consequences flow through indirect causal rather than direct constitutiveconnections. The popular phrase used is that the economy is “shaped” by eco-


nomics. Literally speaking, economic theories do not shape the economy. Nor doeseconomic inquiry. People do. In their various roles (as policymakers, students, in-vestors, entrepreneurs, workers, consumers) people are exposed to the results ofeconomic inquiry and learn, directly or indirectly, about the contents of economictheories, explanations and predictions, and are inspired by them, perhaps by beingpersuaded by the proponents, so as to modify their beliefs and perhaps their mo-tives. These modified beliefs and motives make a difference for their behaviour,and this has consequences for the economy. The flow of these connections is amatter of causal influence rather than direct constitution. Hence the admissionthat some economic facts can be causally economics-dependent.

The same holds for MacKenzie’s strongest form of “performativity” wherebythe use of a model makes it more true, makes it more closely correspond to theworld. If it happens that certain practices in real world finance are in line withthe Black–Scholes–Merton formula for option pricing, this does not mean thatthe theoretical formula or its uttering by those three and other academic scholars“performs” those practices, making them occur by constitution. They may occurbecause the theoretical formula has managed to travel from academic research toeconomic practice in the manner outlined above. The connections are causal.

The possible causal connections between a theory and economic reality arelimited in their powers to alter reality. Many of the idealizations of finance theoryor particular models such as Black-Scholes-Merton are not made true by becomingknown or found inspiring among market agents. Many of them just cannot bemade true. Agents won’t become omniscient or hyperrational even if they wereto become increasingly calculative and self-seeking by being exposed to economicmodels in which agents are so portrayed. Transaction costs may diminish but notall the way to zero in consequence of using models that assume they are zero.

It is no threat to scientific realism about economics to acknowledge the possibil-ity of causal economics-dependence of some items in the real-world economy. Afterall, economics as an academic discipline is itself social activity exercised within so-ciety, so such connections are a natural feature of social reality. Good social sciencewill investigate such connections together with other causal connections in societyat large.

What scientific realism about a fragment of science insists is the non-causalscience-independence of the objects examined by that fragment (where ‘science-independence’ means independence of that fragment). This also suggests howto identify some of the opponents of scientific realism. Some versions of scientificantirealism hold that matters of fact in the (social) world are non-causally science-dependent, so can be created just by creating theoretical models of them. Thiswould be a version of social constructivism too radical for scientific realism toaccommodate.

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6 CONCLUSION

Many further issues would have to be discussed in order to provide anything closeto a comprehensive treatment of the issue of realism about economics. And manyof the issues that have been discussed could be framed differently (for examplein terms of more refined ideas about theoretical models). The foregoing remarksmerely try to give a flavour of the sorts of special issues that need to be addressedin the case of economics, by general philosophers of science interested in scientificrealism as well as those concerned about how economics performs and comparesas a scientific discipline.

Philosophers of science should see that a narrow focus on a limited set of disci-plines (such as physics) in developing generalized ideas about scientific realism (orjust any philosophical account of science) will easily result in distorted images ofsome other disciplines or in dropping them from the realm of realism, thereby ex-pelling them to the antirealist camp. Practicing economists and their critics shouldsee that characteristics such as employing unrealistic assumptions, not postulat-ing electron-like new unobservables, and the occasional economics-dependence ofthe economy are no obstacles to entertaining a scientific realist philosophy abouteconomics.

One important lesson to draw is that formulating and using versions of scientificrealism at different levels of abstraction and specificity (such as the most abstractminimal version and thicker versions tailored for particular disciplines or theirparts) is useful in recognizing and examining what scientific disciplines share incommon and how they differ from one another.

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