IMPLICIT MARGINALISM AND FRIEDMAN'S DEFENCE
In this section, I discuss the implicit understanding of marginalism that emerged in the course of the marginalist controversy and has, since then, prevailed in orthodox economic theory. The foundation of implicit marginalism was coherently summarized by the following statement by Langholm (1969, p.10): The marginal theory of price was never intended to serve as a blueprint for entrepreneurial decision making or indeed to describe or explain in detail what actually takes place in the firm. It is of the nature of an explanatory device on a much higher level of abstraction, permitting only broadly generalized deductions about the aggregate effects of entrepreneurial behaviour. Its merit as such was never a fully settled question. But obviously, it takes more to disprove it than demonstrating that actual price makers do without marginal reasoning. The crucial question is whether the prices reached in a different way, reproduce aggregate effects which are predictable in the marginal system. In the following section, we will focus on the question of whether we should rely on the validity of marginalist price theory to deliver viable predictions of industrial pricing. Being probably the most prominent figure in the instrumentalist view on marginalism that allowed its implicit understanding, we will concentrate with the methodological contributions of Milton Friedman, first and foremost on his 1953 article “The Methodology of Positive Economics”.
188.8.131.52 Neoclassical Economics, Marginalism and Instrumentalist Reasoning
In order to correctly assess this question, we must first further clarify the exact aim and scope that underlies marginalist price theory. In the past, it seems that a major proportion of the anti-marginalist attacks were more or less easily refutable by marginalists since they aimed at a realistic interpretation of marginalist price theory. Such an attack could be easily deflected by a reformulation of marginalist principles along the instrumentalist interpretation. Probably the most cited defendor of the maximization hypothesis along the lines of instrumentalism is Milton Friedman. His methodological work had a significant impact on economic research as a whole, and its underlying mindset can still be recognized in the profession today. Many of the arguments in defence of marginalism, most notably by Machlup (1946), use a logic similar to what Friedman made explicit in his work of 1953. Interestingly, both the leading voices around the Oxford Economists’ Research Group, such as Hall and Hitch, Andrews or Harrod, and Milton Friedman were - although out of completely different motives - unsatisfied with the theory of imperfect competition developed by Robinson (1953, first published 1933) and Chamberlin (1933). The former were unsatisfied with the theory’s lack of “realism”, in that sense that the assumptions the theory made, such as taking it as given that managers followed some sort of marginalist rationale, were not an accurate description of reality. Friedman, on the other hand, criticized it for the inclusion of “realistic” assumptions as a starting point for building a theory of the firm. Friedman’s basic assertion is that, for an economic model such as the neoclassical framework to be applicable and useful, only the performance of the model’s ability to predict the effects as observed in reality matters. Specifically, he sees the task of positive economics as to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields. (Friedman, 1953, p. 4) In this understanding, neoclassical theory not describes firm behaviour, but rather represents it. Most commonly, Friedman’s arguments were understood as being instrumentalist. In its purest form, an instrumentalist theory is not...
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