Essays in Positive Economics
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Milton Friedman's book Essays in Positive Economics (1953) has as its lead an original essay "The Methodology of Positive Economics," on which this article focuses.
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[edit] The Methodology of Positive Economics
The most basic counsel of this essay is to respect John Neville Keynes's distinction between positive and normative economics, what is vs. what ought to be in economic matters.[1] The essay sets out the epistemological course for Friedman's own subsequent research, although, as the other essays indicate, he was practicing it well before he wrote the essay.
The essay argues that economics as science should be free of normative judgments for it to be respected as objective and to inform normative economics (for example whether to raise the minimum wage). Normative judgments frequently involve implicit predictions about the consequences of different policies. The essay suggests that such differences in principle could be narrowed by progress in positive economics (1953, p. 5).
The essay argues that a useful economic theory should not be judged primarily by its tautological completeness, however important in providing a consistent system for classifying elements of the theory and validly deriving implications therefrom. Rather a theory (or hypothesis) must be judged by its:
- simplicity in being able to predict at least as much as an alternate theory, although requiring less information[2]
- fruitfulness in the precision and scope of its predictions and in its ability to generate additional research lines (p. 10).
In a famous and controversial passsage, Friedman writes that:
- Truly important and significant hypotheses will be found to have "assumptions" that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense) (p. 14, emphases added}.
Why? Because such hypotheses extract only those crucial elements sufficient to yield relatively precise, valid predictions, omitting the welter of predictively irrelevant details. Of course descriptive unrealism by itself does not ensure predictive success (pp. 14-15).
From such Friedman rejects testing a theory by the realism of its assumptions. Rather simplicity and fruitfulness incline toward such assumptions and postulates as utility maximization, profit maximization, and ideal types -- not merely to describe (which may be beside the point) but to predict economic behavior and to provide an engine of analysis (pp. 30-35).
[edit] Place in economic methodology
Friedman significantly influenced the Chicago School of economics. The essay can be read as a manifesto for that school. Still, M.W. Reder (1987, p. 415) writes that a significant minority of Chicago-school economists such as Ronald Coase and James M. Buchanan have written as if "the validity of an economic theory lies in its intuitive appeal and/or its compatibility with a set of axioms rather than the conformity of its implications with empirical observation." Friedman's criterion of fruitfulness and usage of 'positive', however, seem to blur this point.
The essay and discussion that followed contributed to raising the sophistication of methodological commitments in economics. Its core claim and representation are now widely deployed in mainstream economics, even if methodological judgments themselves, like other regulative judgments, are not purely positive (Wong, 1987, p. 921).
[edit] Notes
- ^ A more general distinction was made by David Hume in his discussion of the is-ought problem.
- ^ Simplicity in Friedman's sense may be described as an application of Occam's razor. The essay refers to Occam's razor in a different context (Friedman, 1953, pp. 12-13n).
[edit] References
- Milton Friedman (1953), Essays in Positive Economics, University of Chicago Press
- Lawrence A. Boland, (1987), “methodology," The New Palgrave: A Dictionary of Economics, v. 3, 455-58
- M.W. Reder (1987), “Chicago School," The New Palgrave: A Dictionary of Economics, v. 1, 413-18
- A. Walters (1987), “Friedman, Milton," The New Palgrave: A Dictionary of Economics, v. 2, 422-26
- S. Wong (1987), “positive economics," The New Palgrave: A Dictionary of Economics, v. 3, 920-21
[edit] External links
- Milton Friedman (1970). "The Methodology of Positive Economics," pp. 3-43 (with link)
- ____ (1966). "The Methodology of Positive Economics," pp. 3-16, 30-43 (esp. good font)
- Link to text of Nobel prize lecture with pp. 1-2 on econ. methodology & the rest as example
