Essays in Positive Economics
Encyclopedia
Milton Friedman
's book Essays in Positive Economics (1953) is a collection of earlier articles by the author with as its lead an original essay "The Methodology
of Positive Economics," on which this article focuses.
's distinction between positive and normative economics
, what is vs. what ought to be in economic matters. The essay sets out an epistemological program for Friedman's own research.
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:
In a famous and controversial passage, Friedman writes that:
Why? Because such hypotheses and descriptions extract only those crucial elements sufficient to yield relatively precise, valid predictions, omitting a welter of predictively irrelevant details. Of course descriptive unrealism by itself does not ensure a "significant theory" (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 type
s -- 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).
On profit maximization, for example, firms are posited to push each line of action to the point of equating the relevant marginal revenue
and marginal cost
. Yet, answers of businessmen to questions about the factors affecting their decisions may show no such calculation. Still, if firms act as if they are trying to maximize profits, that is the relevant test of the associated hypothesis (pp. 15, 22, 31).
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 has been described as "the most influential work on economic methodology of this century." It and the 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, like other regulative judgments, are not purely positive.
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
's book Essays in Positive Economics (1953) is a collection of earlier articles by the author with as its lead an original essay "The Methodology
Economic methodology
Economic methodology is the study of methods, especially the scientific method, in relation to economics, including principles underlying economic reasoning...
of Positive Economics," on which this article focuses.
The Methodology of Positive Economics
The most basic counsel of this essay is to respect John Neville KeynesJohn Neville Keynes
John Neville Keynes was a British economist and father of John Maynard Keynes.-Biography:Born in Salisbury, he was the son of Dr John Keynes and his wife Anna Maynard Neville . He was educated at Amersham Hall School, University College London and Pembroke College, Cambridge, where he became a...
's distinction between positive and normative economics
Positive economics
Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories...
, what is vs. what ought to be in economic matters. The essay sets out an epistemological program for Friedman's own research.
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
Minimum wage
A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about...
). 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
Vacuous truth
A vacuous truth is a truth that is devoid of content because it asserts something about all members of a class that is empty or because it says "If A then B" when in fact A is inherently false. For example, the statement "all cell phones in the room are turned off" may be true...
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
- 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 passage, 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}.
Why? Because such hypotheses and descriptions extract only those crucial elements sufficient to yield relatively precise, valid predictions, omitting a welter of predictively irrelevant details. Of course descriptive unrealism by itself does not ensure a "significant theory" (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
Profit maximization
In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem...
, and ideal type
Ideal type
Ideal type , also known as pure type, is a typological term most closely associated with antipositivist sociologist Max Weber . For Weber, the conduct of social science depends upon the construction of hypothetical concepts in the abstract...
s -- 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).
On profit maximization, for example, firms are posited to push each line of action to the point of equating the relevant marginal revenue
Marginal revenue
In microeconomics, marginal revenue is the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price...
and marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
. Yet, answers of businessmen to questions about the factors affecting their decisions may show no such calculation. Still, if firms act as if they are trying to maximize profits, that is the relevant test of the associated hypothesis (pp. 15, 22, 31).
Place in economic methodology
Friedman is acknowledged as a pivotal figure in the Chicago school of economics. The essay can be read as a manifesto for that school. Still, Melvin Reder writes that a significant minority of Chicago-school economists such as Ronald CoaseRonald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
and James M. Buchanan
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...
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 has been described as "the most influential work on economic methodology of this century." It and the 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
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
, even if methodological judgments, like other regulative judgments, are not purely positive.
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