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." This essay posits Friedman's famous, but controversial,[ citation needed ] principle (called the F-Twist by Samuelson) that assumptions need not be "realistic" to serve as scientific hypotheses; they merely need to make significant predictions.
The book is organized in four parts: [1]
This first essay in the book explores John Neville Keynes'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:
This is 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 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). 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).
Friedman is acknowledged as a pivotal figure in the Chicago school of economics. The essay can be read as a manifesto for that school[ dubious – discuss ][ citation needed ]. Still, Melvin Reder 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 common-sense axioms rather than the conformity of its implications with empirical observation." [3] Friedman's criterion of fruitfulness and usage of 'positive', however, seem to blur this point.
The essay's core claim and representation were by the late 1980s widely deployed in mainstream economics, even if methodological judgments, like other regulative judgments, are not purely positive. [4] Its critics however, had by then long pointed out the flaw in Friedman's reasoning: by shielding assumptions from the requirement of realism, Friedman admits falsehoods as part of his theory. He defends against this by requiring only certain phenomena of interest to be explained, but as Samuelson pointed out, this can lead to unscientific cherry-picking of results. Samuelson dubbed Friedman's principle the F-Twist, avoiding naming it after Friedman directly out of courtesy. [5]
Daniel M. Hausman described "The Methodology of Positive Economics" as "the most influential work on economic methodology of [the twentieth] century." [6] He later noted that its influence was waning due to an empirical turn in economics that took place at the end the century, although by 2012 it still commonly served "as a way of avoiding awkward questions concerning simplifications, idealizations, and abstraction in economics rather than responding to them." [7]
Economics is a social science that studies the production, distribution, and consumption of goods and services.
Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good or service is determined through a hypothetical maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production. This approach has often been justified by appealing to rational choice theory.
Paul Anthony Samuelson was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "has done more than any other contemporary economist to raise the level of scientific analysis in economic theory".
Law and economics, or economic analysis of law, is the application of microeconomic theory to the analysis of law. The field emerged in the United States during the early 1960s, primarily from the work of scholars from the Chicago school of economics such as Aaron Director, George Stigler, and Ronald Coase. The field uses economics concepts to explain the effects of laws, assess which legal rules are economically efficient, and predict which legal rules will be promulgated. There are two major branches of law and economics; one based on the application of the methods and theories of neoclassical economics to the positive and normative analysis of the law, and a second branch which focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.
Decision theory or the theory of rational choice is a branch of probability, economics, and analytic philosophy that uses the tools of expected utility and probability to model how individuals should behave rationally under uncertainty. It differs from the cognitive and behavioral sciences in that it is prescriptive and concerned with identifying optimal decisions for a rational agent, rather than describing how people really do make decisions. Despite this, the field is important to the study of real human behavior by social scientists, as it lays the foundations for the rational agent models used to mathematically model and analyze individuals in fields such as sociology, economics, criminology, cognitive science, and political science.
An economic model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed to illustrate complex processes. Frequently, economic models posit structural parameters. A model may have various exogenous variables, and those variables may change to create various responses by economic variables. Methodological uses of models include investigation, theorizing, and fitting theories to the world.
George Joseph Stigler was an American economist. He was the 1982 laureate in Nobel Memorial Prize in Economic Sciences and is considered a key leader of the Chicago school of economics.
Philosophy and economics studies topics such as public economics, behavioural economics, rationality, justice, history of economic thought, rational choice, the appraisal of economic outcomes, institutions and processes, the status of highly idealized economic models, the ontology of economic phenomena and the possibilities of acquiring knowledge of them.
Social choice theory is a branch of welfare economics that analyzes methods of combining individual opinions, beliefs, or preferences to reach a collective decision or create measures of social well-being. It contrasts with political science in that it is a normative field that studies how societies should make decisions, whereas political science is descriptive. Social choice incorporates insights from economics, mathematics, philosophy, political science, and game theory to find the best ways to combine individual preferences into a coherent whole, called a social welfare function.
In philosophy of science, idealization is the process by which scientific models assume facts about the phenomenon being modeled that are strictly false but make models easier to understand or solve. That is, it is determined whether the phenomenon approximates an "ideal case," then the model is applied to make a prediction based on that ideal case.
Positive economics is the study of the facts in economics and normative economics is the study of the values in economics. In the philosophy of economics, economics is often divided into positive and normative economics. Positive economics focuses on the description, quantification and explanation of economic phenomena; normative economics often takes the form of discussions about fairness and what the outcome of the economy or goals of public policy ought to be, as well as prescriptions regarding rational choice.
Economic methodology is the study of methods, especially the scientific method, in relation to economics, including principles underlying economic reasoning. In contemporary English, 'methodology' may reference theoretical or systematic aspects of a method. Philosophy and economics also takes up methodology at the intersection of the two subjects.
Foundations of Economic Analysis is a book by Paul A. Samuelson published in 1947 by Harvard University Press. It is based on Samuelson's 1941 doctoral dissertation at Harvard University. The book sought to demonstrate a common mathematical structure underlying multiple branches of economics from two basic principles: maximizing behavior of agents and stability of equilibrium as to economic systems. Among other contributions, it advanced the theory of index numbers and generalized welfare economics. It is especially known for definitively stating and formalizing qualitative and quantitative versions of the "comparative statics" method for calculating how a change in any parameter affects an economic system. One of its key insights about comparative statics, called the correspondence principle, states that stability of equilibrium implies testable predictions about how the equilibrium changes when parameters are changed.
Lionel Robbins' Essay sought to define more precisely economics as a science and to derive substantive implications. Analysis is relative to "accepted solutions of particular problems" based on best modern practice as referenced, especially including the works of Philip Wicksteed, Ludwig von Mises, and other Continental European economists. Robbins disclaims originality but expresses hope to have given expository force on a very few points to some principles "not always clearly stated"
Qualitative economics is the representation and analysis of information about the direction of change in some economic variable(s) as related to change of some other economic variable(s). For the non-zero case, what makes the change qualitative is that its direction but not its magnitude is specified.
In economics, distribution is the way total output, income, or wealth is distributed among individuals or among the factors of production. In general theory and in for example the U.S. National Income and Product Accounts, each unit of output corresponds to a unit of income. One use of national accounts is for classifying factor incomes and measuring their respective shares, as in national Income. But, where focus is on income of persons or households, adjustments to the national accounts or other data sources are frequently used. Here, interest is often on the fraction of income going to the top x percent of households, the next x percent, and so forth, and on the factors that might affect them.
Economic justice is a component of social justice and welfare economics. It is a set of moral and ethical principles for building economic institutions, where the ultimate goal is to create an opportunity for each person to establish a sufficient material foundation upon which to have a dignified, productive, and creative life.."
The following is a list of works by the prominent American economist Milton Friedman.
Mathematical economics is the application of mathematical methods to represent theories and analyze problems in economics. Often, these applied methods are beyond simple geometry, and may include differential and integral calculus, difference and differential equations, matrix algebra, mathematical programming, or other computational methods. Proponents of this approach claim that it allows the formulation of theoretical relationships with rigor, generality, and simplicity.
Daniel M. Hausman is an American philosopher. His research has focused primarily on methodological, metaphysical, and ethical issues at the boundaries between economics and philosophy. He is currently Herbert A. Simon Professor Emeritus in the Department of Philosophy at the University of Wisconsin–Madison.