The Methodology of Positive Economics an essay by Milton Friedman

1. The Methodology of Positive Economicsan essay byMilton Friedman ( “Essays in Positive Economics”,University of Chicago Press, 1953 ) Fabiana Sacchetti Course: “Social Science Methods” (Prof. A.Vannucci) PhD Program in “Political Systems and Institutional Change” (XXIII cycle)

2. Milton Fiedman • Nobel in Economics in 1976 • Leading proponent of Monetarist School in Economics • Chicago School of Economics (liberism, free market)

3. Positive Economics “ A system of accepted generalizations about economic phenomena that can be used to make correct predictions about not yet observed facts” (Predictive Instrumentalism) It concerns “What is?” Objective science: independent of any particular ethical position or normative judgments Normative Economics It concerns “What ought to be?” It cannot be independent of positive economics : policy conclusions rest on predictions that must be based on positive economics Positive and Normative Economics

4. Positive Economics Goal of Positive Sciences: to develop a TheoryorHypothesis yielding valid and meaningful predictions (2) As a Body of Substantive Hypotheses (1) As a Language • Systematic and organized method of reasoning, set of tautologies, no substantive content • Criteria to judge it : canons of • formal logic (completeness and • consistency) • Abstraction of essential features of complex reality • Test of validity : judging the conformity of its predictions (implications) with the experience, for the class of phenomena it is entended to explain

5. Test of validity of an Economic Theory Critical points • Facual evidence can never “prove” an hypothesis, it can only “fail to disprove it” • The choice among alternative hypotheses (equally consistent with the experience) is always arbitrary, even if it’s based on the criteria of “simplicity” and “fruitfulness” • Inability to conduct “controlled experiments”(explicitly designed to eliminate the most important disturbing influences): we must rely just on evidence from experience (abundant but more difficult to explain because it’s complex, indirect and incomplete) Misunderstanding of the role of the Empirical Evidence

6. Misunderstanding of the role of the Assumptions • The difficulty of getting new evidence make it easy to take other more readily available experience as relevant. Methodological mistake Testing a theory by its “Assumptions” instead of by its “Implications” Conformity of Assumptions to reality : a theory is valid if its assumptions are descriptively realistic, if they are far from reality the theory is unaccetable Example: Theory of Imperfect Competition against Marshall’s Theory of Perfect Competition “Ideal types” (atomistically competitive firms – monopolistic firms) in the abstract model are regarded as descriptive categories intended to correspond directly and fully to entities of the real world

7. Impossibility of testing a theory by its Assumptions Assumptions • Not whether they are descriptively realistic but • Whether they are sufficient good approximations for the purpose (i.e. the theory yelds accurate predictions for a wider range of phenomena) • Example : Law of falling bodies (The formula s= ½ gt2 is accepted because it works, not because the assumption of “approximate vacuum” fits with reality) “Behave as if ...”= “It assumes ...” Assumptions specify the circumstances under which the theory is expected to be valid (significance or non significance of a departure from them)

8. Significance and role of the Assumptions • Assumptions as an economical mode of describing a theory  A “set of rules” defining the class of phenomena for wich the model can be taken as an adequate representation of the real world  “Crucial assumptions” of a theory are key elements of the abstract model, selected among many different “sets of postulates” on grounds of their convenience (i.e. simplicity, economy, plausibility, etc..) • Assumptions as an indirect test of the theory by its implications • Possibility of interchanging implications and assumpions: the success of the theory for one purpose doesn’t necessarly imply the success for another purpose, but gives more confidence that it could • Assumptions can bring out kinship with other theories (that have the same assumptions) and make the evidence of their validity relevant to the validiy of the theory in question

9. Conclusions • Reliance on uncontrolled experience does not affect the fundamental methodological principle that a theory can be tested only by the conformity of its implications or predictions with observable phenomena (but it makes difficult to test theories and gives scope to confusion about methodological principles) • The role of assumptions in economic analysis: complete realism is unattainable; whether a theory is realistic enough can be settled only by seeing whether it yelds predictions that are good enough for the purpose or are better than predictions from alternative theories (Marshall’s model is the most comprehensive: it yelds better predictions for a wider range of phenomena)