If we are to use effectively these abstract models and this descriptive material, we must have a comparable exploration of the criteria for determining what abstract model it is best to use for particular kinds of problems, what entities in the abstract model are to be identified with what observable entities, and what features of the problem or of the circumstances have the greatest effect on the accuracy of the predictions yielded by a particular model or theory."The Methodology of Positive Economics" (1953).The one statement is about as helpful as the other, and neither is a relevant test of the associated hypothesis. The billiard player, if asked how he decides where to hit the ball, may say that he "just figures it out" but then also rubs a rabbit's foot just to make sure and the businessman may well say that he prices at average cost, with of course some minor deviations when the market makes it necessary. Now, of course, businessmen do not actually and literally solve the system of simultaneous equations in terms of which the mathematical economist finds it convenient to express this hypothesis, any more than leaves or billiard players explicitly go through complicated mathematical calculations or falling bodies decide to create a vacuum. It is only a short step from these examples to the economic hypothesis that under a wide range of circumstances individual firms behave as if they were seeking rationally to maximize their expected returns (generally if misleadingly called "profits") and had full knowledge of the data needed to succeed in this attempt as if, that is, they knew the relevant cost and demand functions, calculated marginal cost and marginal revenue from all actions open to them, and pushed each line of action to the point at which the relevant marginal cost and marginal revenue were equal. Our confidence in this hypothesis is not based on the belief that billiard players, even expert ones, can or do go through the process described it derives rather from the belief that, unless in some way or other they were capable of reaching essentially the same result, they would not in fact be expert billiard players. It seems not at all unreasonable that excellent predictions would be yielded by the hypothesis that the billiard player made his shots as if he knew the complicated mathematical formulas that would give the optimum directions of travel, could estimate accurately by eye the angles, etc., describing the location of the balls, could make lightning calculations from the formulas, and could then make the balls travel in the direction indicated by the formulas. Consider the problem of predicting the shots made by an expert billiard player. A largely parallel example involving human behavior has been used elsewhere by Savage and me.
A society which is socialist cannot also be democratic.
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