Fritz Machlup, “Professor Samuelson on Theory and Realism” (1964)

Machlup’s communication is a compact methodological rebuttal to Paul Samuelson’s criticism of unrealistic abstract models. Its governing irony is that Samuelson’s methodological strictures would condemn not only Friedman-style defenses of assumptions but also much of Samuelson’s own most powerful theory. Machlup does not exempt economics from empirical discipline; he argues that theories are tested and used through auxiliary conditions, applications, and comparisons with rival explanations, not by demanding literal realism at every premise.

Machlup first reconstructs Samuelson’s objection. Samuelson treats theory as a set of propositions about observable reality and presses the idea that assumptions, theory, and consequences must be equivalent in empirical meaning. This leads to the sweeping prescription:

“If the abstract models contain empirical falsities, we must jettison the models, not gloss over their inadequacies”

For Machlup, this confuses explanation with mere restatement. If a theory’s consequences had to imply the theory as fully as the theory implies them, theoretical explanation would collapse into a catalogue of observations. His reply is therefore deliberately stark:

“What Samuelson does here is to reject all theory.”

Machlup’s alternative account of testing is more plural and less deductivist. Empirical implications are not drawn from a theory in isolation but from a theory plus assumed circumstances, disturbances, and auxiliary propositions. A theory survives when the stipulated occurrence and predicted consequence find acceptable empirical counterparts; it is not thereby proven, but neither is it refuted simply because its assumptions are idealized. The relevant judgment is comparative: an abstract model should be abandoned only when a better explanatory instrument is available.

The essay then turns Samuelson against Samuelson. Machlup examines the factor-price equalization theorem, built from a deliberately simplified model of two countries, two commodities, identical production functions, factor immobility, free trade, no transport costs, constant returns, and diminishing marginal productivity. Samuelson himself warns against simplified application, yet defends the model’s heuristic force:

“strong simple cases often point the way to an element of truth present in a complex situation”

This, for Machlup, is precisely the normal work of economic theory. The theorem’s conclusion is exact only within its stipulated construction:

“Under these conditions, real factor prices must be exactly the same in both countries”

Machlup’s point is not that the assumptions are realistic, but that their unreality is analytically productive. The representative firm and the perfectly specified trading world are not empirical objects waiting to be observed; they are idealized constructions that make relations among commodity prices, factor prices, and production techniques intelligible. Samuelson’s theorem gains its power from controlled abstraction, not from literal description.

The irony deepens because Samuelson’s own qualifications to the theorem use deviations from ideal conditions to explain observed differences in international productivity and factor rewards. Abstract theory establishes a limiting case; empirical variation is then interpreted through departures from that case. Machlup therefore presents the theorem not as an embarrassment for realism but as evidence that economic understanding often begins with counterfactual simplification.

The communication’s broader argument detaches theoretical significance from literal descriptive accuracy without licensing arbitrary model building. Unrealistic assumptions may be defects, but they may also define the simplified environment in which an important relation becomes visible. For Machlup, Samuelson’s best economics demonstrates what his methodological critique denies: that rigorous theory can illuminate reality by first departing from it.