Instead of going after the usual low hanging fruit, I thought I’d try a critique of something a bit more challenging, and critique one of my favorite essays, Milton Friedman’s The Methodology of Positive economics. No essay on economic methodology has been more influential or widely read and anyone would be hard pressed to argue it’s legitimately bad economics. Instead, I would like to highlight a couple of the more salient that arise from the essay.

First, some quick historical context. By the mid-twentieth century, there was a growing among economists between the growing disconnect the economic methodology as described by John Stuart Mill and contemporary views of the philosophy of science. By the time this article was published in 1953, economists widely agreed there was a need for methodological changes, there was disagreement on how or what form they should take. Views fell into roughly two camps, economists who thought mill’s views were defensible apriori and those who favored more empirical approaches. Several philosophically inclined Economists suggested several ways Mil’s views could be synthesized with contemporary methodology that provided an adequate justification of the current methodological paradigm. Of these defenses, “The Methodology of Positive Economics.” Is by far the most famous. Summary

The essay begins by making a distinction between positive and normative economics and speculates that disagreements regarding economic policy are disagreements of predicted consequences and therefore be resolved by progress in positive economics. Friedman contends (surprisingly, no explanation) that the goal of all positive sciences is to predict concerning unobserved phenomena and holds a pragmatic view of science as a way to guide policy.

The impracticality of creating economic experiments of uncontrolled events and difficult nature of interpreting uncontrolled events makes it hard to judge whether a theory can accurately make predictions. As a result, economists have incorrectly believed theories could be tested the accuracy of their “assumptions” than the accuracy of their predictions. A theory may have incredible predictive value even if it’s assumptions are not realistic. Friedman goes even further, arguing that the realism of a theory’s assumptions is irrelevant to its predictive value. Thus, whether firms maximize profits or not is not important, what’s is important is that theory of the firm makes correct and significant predictions.

Argument

Throughout the essay, Friedman refers to several things as “assumptions” of a theory and means several different things when referring to these assumptions as “unrealistic.” Friedman’ criticism of other economists attempts to empirically investigate whether firms actually maximize profits suggests that “assumption” must include central economic generalizations, like “firms attempt to maximize profits,” and by unrealistic, he must among other things he means “false”. By arguing it is a mistake to appraise theories on the realism of their assumptions, he is also arguing that at the very least, it is a mistake to appraise theories by investigating whether their essential assumptions are true or false.

This would appear to make Friedman's beliefs inconsistent because by testing whether firms maximize profits, you are additionally checking whether the predictions of a theory are true or false I.E an “assumption like “firms maximize profits” is also a prediction, itself.

But wait, There’s more! Friedman is not concerned with all the predictions of an economic theory but only the one’s it’s intended to explain. Other, implications, like company culture, are irrelevant to creating policy. Stated differently, Friedman believes economic theories should only be assessed by their ability to predict changes in prices and quantities exchanged in markets. So, what matters is not the overall accuracy of a theories prediction but a narrow predictive success.

Therefore, economists do not have to concern themselves with empirical evidence that contradict their assumptions. That preferences or circumstances may have changed or that exchange may be coerced or involuntary, can be ignored. All that matters is whether a theory accurately predicts market phenomenon. And, because market outcomes not predicted by the model could be a result of any number of uncontrolled factors, and the impossibility or impracticability of experiments, economists should not be bothered by encountering evidence that disapproves fundamental theory. So while models can be proved or disapproved fundamental theory is safe.

From this perspective, we can see how Friedman’s methodology, which appears to be on the surface an eclectic and pragmatic view could be used rhetorically to enforce firm theoretical orthodoxy.

Bibliography

Why look under the hood by Hausman Reflection Without Rules: Economic Methodology and Contemporary Science Theory by hands The methodology of positive economics by Friedman