Friedman's Permanent Income Hypothesis as an Example of Diagnostic Reasoning

Many recent developments in artificial intelligence (AI) research are relevant for traditional issues in the philosophy of science. One of the developments in AI research we want to focus on in this article is diagnostic reasoning, which we consider to be of interest for the theory of explanation in general and for an understanding of explanatory arguments in economic science in particular. Usually, explanation is primarily discussed in terms of deductive inferences in classical logic. However, in recent AI research it is observed that a diagnostic explanation is actually quite different from deductive reasoning (see, for example, Reiter, 1987). In diagnostic reasoning the emphasis is on restoring consistency rather than on deduction. Intuitively speaking, the problem diagnostic reasoning is concerned with is the following. Consider a description of a system in which the normal behavior of the system is characterized and an observation that conflicts with this normal behavior. The diagnostic problem is to determine which of the components of the system can, when assumed to be functioning abnormally, account for the conflicting observation. A diagnosis is a set of allegedly malfunctioning components that can be used to restore the consistency of the system description and the observation. In this article, this kind of reasoning is formalized and we show its importance for the theory of explanation. We will show how the diagnosis nondeductively explains the discrepancy between the observed and the correct system behavior. The article also shows the relevance of the subject for real scientific arguments by showing that examples of diagnostic reasoning can be found in Friedman's Theory of the Consumption Function (1957). Moreover, it places the philosophical implications of diagnostic reasoning in the context of Mill's aprioristic methodology.