A theorem on the methodology of positive economics

Abstract

It has long been recognized that the Milton Friedman’s 1953 essay on economic methodology (or F53, for short) displays open-ended unclarities. For example, the notion of “unrealistic assumption” plays a role of absolutely fundamental importance in his methodological framework, but the term itself was never unambiguously defined in any of the Friedman’s contributions to the economics discipline. As a result, F53 is appealing and liberating because the choice of premises in economic theorizing is not subject to any constraints concerning the degree of realisticness (or unrealisticness) of the assumptions. The question: “Does the methodology of positive economics prevent the overlapping between economics and science fiction?” comes very naturally, indeed. In this paper, we show the following theorem: the Friedman’s methodology of positive economics does not exclude science fiction. This theorem is a positive statement, and consequently, it does not involve value judgements. However, it throws a wrench on the formulation of economic policy based on surreal models.

Keywords:

• Friedman’s methodology
• science fiction
• fictional assumptions
• riddle of surreal models
• rational expectations
• www constraint

JEL classification:

• B.41

Public Interest Statement

It is generally accepted that idealized models have a role to play in economics. However, university students and the public in general seem to perceive an element of bizarreness in some of the assumptions underpinning these models. Sometimes, the content of the assumptions are reminiscent of science fiction. For example, the assumption that an economy is populated by individuals with surpassingly rare attributes such as automatic understanding of any piece of information publicly available is preposterous. Under this assumption, the disastrous 2008 financial crisis could not have happened. It appears that concerns about the economics discipline going astray are gaining momentum. The movement “Rethinking Economics”—an international network of students, thinkers, and citizens who seek to demystify and diversify economics—materializes these concerns. Krugman (2014) has lent the weight of his authority to the view that “Rethinking Economics” has value.

Acknowledgement

I am deeply indebted for helpful criticisms and suggestions to Professor Uskali Mäki. Since Mäki has not seen the final draft he must be relieved of responsibility for any errors the paper still contains.

Notes

1. The terms “realism” and “unrealistic assumption” are not defined in F53. Friedman uses a variety of terms to refer to the idea of unrealistic assumptions, such as “descriptively inaccurate” and “descriptively false” (Friedman, 1953, p. 14). These expressions are not characterized other than through examples. The examples, in turn, are not free of ambiguities.

2. A terminological digression is pertinent here. Professor Uskali Mäki has stressed the importance of distinguishing between “Friedman’s methodology” and the “methodology of F53” to avoid confusion: “Indeed, Friedman’s methodology and the methodology of F53 are not one and the same thing, even though the two are likely to be connected” (Mäki, 2009b, p. 52 [Italics in original]). From now on, we confine attention to the methodology of F53.

3. A road map (in chronological order) for readers that wish to enter the labyrinth engendered by the multiple evaluations of the methodology of positive economics is as follows: Rotwein (1959), Nagel (1963), Melitz (1965), Boland (1979), Mäki (1986, 1992, 2002b, 2009b).

4. “Paraphrasing” is not the “open sesame” to justify the reasonableness of any assumption. There are limits to the art of paraphrase. A general principle has been suggested by Uskali Mäki: “a paraphrase can be used to justify a sentence if it transforms the sentence into a statement that involves factual claims about the domain of study”. (Mäki, 2000, p. 332 [Italics in original])

5. For a precise definition of “negligibility assumption”, (see Mäki, 2000, p. 322).

6. For the purposes of the present paper, these differing views are immaterial.

7. A stronger version consists of assuming that people have probability beliefs that coincide with the probabilities predicted by the model.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Eduardo Pol

My complete name is Jorge Eduardo Fernandez-Pol. I firmly believe that the growth of genuine knowledge is the prime mover of human progress. There are many activities carried out by humans that contribute to the growth of knowledge. These include research and teaching. I define myself as a social scientist whose specialization is economics. I have always had a passion for research and teaching. My main research interests focuses on three areas: economic methodology, causality in economics and innovation as an economic activity. The research reported in this paper is in line with my permanent interest in making the economics discipline rigorous and transparent.