preceding list of analogical questions. Viewed as elements of the inguage of economic theory, these are the two major categories into which factors affecting the relative prices of products or factors of production are classified. The usefulness of the dichotomy depends on the "empirical generalization that an enumeration of the forces affecting demand in any problem and of the forces affecting supply will yield two lists that contain few items in common. Now this generalization is valid for markets like the final market for consumer good. In such a market there is a clear and sharp distinction between the economic units that can be regarded as demanding the product and those that can be regarded as supplying it. There is seldom much doubt whether a particular factor should be classified as affecting supply, on the one hand, or demand, on the other; and there is seldom much necessity for considering cross-effects (cross-references) between the two categories. In these cases the simple and even obvious step of filing the relevant factors under the headings of"supply"and"demand"effects a great simplification of the problem and is an effective safeguard against fallacies that otherwise tend to occur. But the generalization is not always valid For example, it is not valid for the day-to-day fluctuations of prices in a primarily speculative market Is a rumor of an increased excess-profits tax, for example, to be regarded as a factor operating primarily on today s supply of corporate equities in the stock market or on today's demand for them? In similar fashion, almost every factor can with about as much justification be classified under the heading"supply"as under the heading demand. "These concepts can still be used and may not be entirely pointless; they are still"right but clearly less useful than in the first example because they have no meaningful empirical counterpart Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to"explain "Only factual evidence can show whether it is right"or wrong"or, better, tentatively "accepted"as valid or rejected. As I shall argue at greater length below, the only relevant test of the validity of a hypothesis is 7. The Marshallian Demand Curve, " infra, p. 57
8 preceding list of analogical questions. Viewed as elements of the language of economic theory, these are the two major categories into which factors affecting the relative prices of products or factors of production are classified. The usefulness of the dichotomy depends on the "empirical generalization that an enumeration of the forces affecting demand in any problem and of the forces affecting supply will yield two lists that contain few items in common.7 Now this generalization is valid for markets like the final market for a consumer good. In such a market there is a clear and sharp distinction between the economic units that can be regarded as demanding the product and those that can be regarded as supplying it. There is seldom much doubt whether a particular factor should be classified as affecting supply, on the one hand, or demand, on the other; and there is seldom much necessity for considering cross-effects (cross-references) between the two categories. In these cases the simple and even obvious step of filing the relevant factors under the headings of "supply" and "demand" effects a great simplification of the problem and is an effective safeguard against fallacies that, otherwise tend to occur. But the generalization is not always valid. For example, it is not valid for the day-to-day fluctuations of prices in a primarily speculative market, Is a rumor of an increased excess-profits tax, for example, to be regarded as a factor operating primarily on today's supply of corporate equities in the stock market or on today's demand for them? In similar fashion, almost every factor can with about as much justification be classified under the heading "supply" as under the heading "demand." These concepts can still be used and may not be entirely pointless; they are still "right" but clearly less useful than in the first example because they have no meaningful empirical counterpart. Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to "explain." Only factual evidence can show whether it is "right" or "wrong" or, better, tentatively "accepted" as valid or "rejected." As I shall argue at greater length below, the only relevant test of the validity of a hypothesis is 7. "The Marshallian Demand Curve," infra, p. 57
comparison of its predictions with experience. The hypothesis is rejected if its predictions are contradicted ("frequently"or more often than predictions from an alternative hypothesis) it is accepted if its predictions are not contradicted; great confidence is attached to it if it has survived many opportunities for contradiction. Factual evidence can never"prove"a hypothesis it can only fail to disprove it, which is what we generally mean when we say, somewhat inexactly, that the hypothesis has been"confirmed"by experience To avoid confusion, it should perhaps be noted explicitly that the predictions" by which the validity of a hypothesis is tested need not be about phenomena that have not yet occurred, that is, need not be forecasts of future events; they may be about phenomena that have occurred but observations on which have not yet been made or are not known to the person making the prediction. For example,a hypothesis may imply that such and such must have happened in 1906, given some other known circumstances. If a search of the records reveals that such and such did happen, the prediction is confirmed; if it reveals that such and such did not happen, the prediction is contradicted The validity of a hypothesis in this sense is not by itself a sufficient criterion for choosing among alternative hypotheses Observed facts are necessarily finite in number; possible hypotheses infinite. If there is one hypothesis that is consistent with the available evidence, there are always an infinite number that are. For example suppose a specific excise tax on a particular commodity produces a rise in price equal to the amount of the tax. This is consistent with competitive conditions, a stable demand curve, and a horizontal and stable supply curve. But it is also consistent with competitive conditions and a positively or negatively sloping supply curve with the required compensating shift in the demand curve or the supply curve, with monopolistic conditions, constant marginal costs, and stable demand curve, of the particular shape required to produce this result; and so on indefinitely. Additional evidence with which the 8. The qualification is necessary because the "evidence"may be internally contradictory, so there may be no hypothesis consistent with it See also " Lange on Price Flexibility and Employment, infra, pp 282-83
9 comparison I of its predictions with experience. The hypothesis is rejected if its predictions are contradicted ("frequently" or more often than predictions from an alternative hypothesis); it is accepted if its predictions are not contradicted; great confidence is attached to it if it has survived many opportunities for contradiction. Factual evidence can never "prove" a hypothesis; it can only fail to disprove it, which is what we generally mean when we say, somewhat inexactly, that the hypothesis has been "confirmed" by experience. To avoid confusion, it should perhaps be noted explicitly that the "predictions" by which the validity of a hypothesis is tested need not be about phenomena that have not yet occurred, that is, need not be forecasts of future events; they may be about phenomena that have occurred but observations on which have not yet been made or are not known to the person making the prediction. For example, a hypothesis may imply that such and such must have happened in 1906, given some other known circumstances. If a search of the records reveals that such and such did happen, the prediction is confirmed; if it reveals that such and such did not happen, the prediction is contradicted. The validity of a hypothesis in this sense is not by itself a sufficient criterion for choosing among alternative hypotheses. Observed facts are necessarily finite in number; possible hypotheses, infinite. If there is one hypothesis that is consistent with the available evidence, there are always an infinite number that are.8 For example, suppose a specific excise tax on a particular commodity produces a rise in price equal to the amount of the tax. This is consistent with competitive conditions, a stable demand curve, and a horizontal and stable supply curve. But it is also consistent with competitive conditions and a positively or negatively sloping supply curve with the required compensating shift in the demand curve or the supply curve; with monopolistic conditions, constant marginal costs, and stable demand curve, of the particular shape required to produce this result; and so on indefinitely. Additional evidence with which the 8. The qualification is necessary because the "evidence" may be internally contradictory, so there may be no hypothesis consistent with it. See also "Lange on Price Flexibility and Employment," infra, pp. 282-83
hypothesis is to be consistent may rule out some of these bilities; it can never reduce them to a single possibility alone of being consistent with the finite evidence. The choice among alternative hypotheses equally consistent with the available evidence must to some extent be arbitrary, though there is general agreement that relevant considerations are suggested by the criteria"simplicity and"fruitfulness, "themselves notions that defy completely objective specification. A theory is"simpler"the less the initial knowledge needed to make a prediction within a given field of phenomena; it is more "fruitful "the more precise the resulting prediction, the wider he area within which the theory yields predictions, and the more additional lines for further research it suggests. Logical completeness and consistency are relevant but play a subsidiary role; their function is to assure that the hypothesis says what it is intended to say and does so alike for all users-they play the same role here as checks for arithmetical accuracy do in statistical computations Unfortunately, we can seldom test particular predictions in the social sciences by experiments explicitly designed to eliminate what are judged to be the most important disturbing influences. Generally, we must rely on evidence cast up by the"experiments"that happen to occur. The inability to conduct so-called"controlled experiments does not, in my view, reflect a basic difference between the social and physical sciences both because it is not peculiar to the social sciences- witness astronomy and because the distinction between a controlled experiment and uncontrolled experience is at best one of degree. No experiment can be completely controlled, and every experience is partly controlled, in the sense that some disturbing influences are relatively constant in the course of it Evidence cast up by experience is abundant and frequently as conclusive as that from contrived experiments; thus the inability to conduct experiments is not a fundamental obstacle to testing hypotheses by the success of their predictions. But such evidence is far more difficult to interpret. It is frequently complex and always indirect and incomplete. Its collection is often arduous, and its interpretation generally requires subtle
10 hypothesis is to be consistent may rule out some of these possibilities; it can never reduce them to a single possibility alone capable of being consistent with the finite evidence. The choice among alternative hypotheses equally consistent with the available evidence must to some extent be arbitrary, though there is general agreement that relevant considerations are suggested by the criteria "simplicity" and "fruitfulness," themselves notions that defy completely objective specification. A theory is "simpler" the less the initial knowledge needed to make a prediction within a given field of phenomena; it is more "fruitful" the more precise the resulting prediction, the wider the area within which the theory yields predictions, and the more additional lines for further research it suggests. Logical completeness and consistency are relevant but play a subsidiary role; their function is to assure that the hypothesis says what it is intended to say and does so alike for all users-they play the same role here as checks for arithmetical accuracy do in statistical computations. Unfortunately, we can seldom test particular predictions in the social sciences by experiments explicitly designed to eliminate what are judged to be the most important disturbing influences. Generally, we must rely on evidence cast up by the "experiments" that happen to occur. The inability to conduct so-called "controlled experiments" does not, in my view, reflect a basic difference between the social and physical sciences both because it is not peculiar to the social sciences - witness astronomy and because the distinction between a controlled experiment and uncontrolled experience is at best one of degree. No experiment can be completely controlled, and every experience is partly controlled, in the sense that some disturbing influences are relatively constant in the course of it. Evidence cast up by experience is abundant and frequently as conclusive as that from contrived experiments; thus the inability to conduct experiments is not a fundamental obstacle to testing hypotheses by the success of their predictions. But such evidence is far more difficult to interpret. It is frequently complex and always indirect and incomplete. Its collection is often arduous, and its interpretation generally requires subtle
analysis and involved chains of reasoning, which seldom carry real conviction The denial to economics of the dramatic and direct evidence of the"crucial"experiment does hinder the adequate testing of hypotheses; but this is much less significant than the difficulty it places in the way of achieving a reasonably prompt and wide consensus on the conclusions justified by the available evidence. It renders the weeding-out of unsuccessful hypotheses slow and difficult. They are seldom downed for good and are always cropping up again There is, of course, considerable variation in these respects Occasionally, experience casts up evidence that is about as direct dramatic, and convincing as any that could be provided by controlled experiments. Perhaps the most obviously important example is the evidence from inflation on the hypothesis that a substantial increase in the quantity of money within a relatively short period is accompanied by a substantial increase in prices Here the evidence is dramatic, and the chain of reasoning required to interpret it is relatively short. Yet, despite numerous instances of substantial rises in prices, their essentially one-to one correspondence with substantial rises in the stock of money, and, the wide variation in other circumstances that might appear to be relevant, each new experience of inflation brings forth vigorous contentions, and not only by the lay public, that the rise in the stock of money is either an incidental effect of a rise in prices produced by other factors or a purely fortuitous and unnecessary concomitant of the price rise One effect of the difficulty of testing substantive economic hypotheses has been to foster a retreat into purely formal or ie an extremely important place in economics and other sciences as a specialized language or "analytical filing system. Beyond this formal logic and mathematics, which are both tautologies. are essential aids in checking the correctness of reasoning, discovering the implications of hypotheses, and determining whether supposedly different hypotheses may not really be equivalent or wherein the differences lie But economic theory must be more than a structure of tautologies 9. See"Lange on Price Flexibility and Employment, "infra, passim
11 analysis and involved chains of reasoning, which seldom carry real conviction. The denial to economics of the dramatic and direct evidence of the "crucial" experiment does hinder the adequate testing of hypotheses; but this is much less significant than the difficulty it places in the way of achieving a reasonably prompt and wide consensus on the conclusions justified by the available evidence. It renders the weeding-out of unsuccessful hypotheses slow and difficult. They are seldom downed for good and are always cropping up again. There is, of course, considerable variation in these respects. Occasionally, experience casts up evidence that is about as direct, dramatic, and convincing as any that could be provided by controlled experiments. Perhaps the most obviously important example is the evidence from inflation on the hypothesis that a substantial increase in the quantity of money within a relatively short period is accompanied by a substantial increase in prices. Here the evidence is dramatic, and the chain of reasoning required to interpret it is relatively short. Yet, despite numerous instances of substantial rises in prices, their essentially one-to one correspondence with substantial rises in the stock of money, and, the wide variation in other circumstances that might appear to be relevant, each new experience of inflation brings forth vigorous contentions, and not only by the lay public, that the rise in the stock of money is either an incidental effect of a rise in prices produced by other factors or a purely fortuitous and unnecessary concomitant of the price rise. One effect of the difficulty of testing substantive economic hypotheses has been to foster a retreat into purely formal or tautological analysis.9 As already, noted, tautologies have an extremely important place in economics and other sciences as a specialized language or "analytical filing system." Beyond this, formal logic and mathematics, which are both tautologies, are essential aids in checking the correctness of reasoning, discovering the implications of hypotheses, and determining whether supposedly different hypotheses may not really be equivalent or wherein the differences lie.. But economic theory must be more than a structure of tautologies 9. See "Lange on Price Flexibility and Employment," infra, passim