Essays in Positive Economics

• 1. Introduction

  ›

  Essays in Positive Economics is a 1953 book by Milton Friedman, organized around a lead essay written fresh for this volume. Paul Samuelson found the essay's central argument so provocative that he invented a special name for it. He kept Friedman's own name out of the label out of courtesy. He called it the F-Twist. Whether that label described a breakthrough in economic thinking or a licensed form of self-deception was argued for decades after the book appeared. The answer turns on what a scientific theory is actually supposed to do.

  26

• 2. Positive and Normative

  ›

  Friedman traced his starting point to John Neville Keynes and a distinction Keynes had drawn between positive and normative economics. Positive economics describes what is; normative economics addresses what ought to be. The essay's ambition was to establish positive economics as an objective, value-free discipline. Without that foundation, Friedman argued, economics could not earn the credibility to inform normative debates. A question like whether to raise the minimum wage sits on the normative side. Behind it, however, lie predictions about what will follow from raising the wage, and those predictions are testable.

  Page 5 of the essay put the practical stakes plainly: progress in positive economics could, in principle, narrow disagreements over policy. The criteria for what counted as progress, set out on page 10, were simplicity and fruitfulness. A simpler theory, one that predicts at least as much as a rival while demanding less information, is preferable. A fruitful theory produces precise predictions and opens new questions for research. Those two criteria pointed toward what would become the most disputed feature of Friedman's position: the role of realistic assumptions.

  23

• 3. Unrealistic Assumptions

  ›

  Page 14 of the essay contains the passage that drew the most sustained fire. Friedman wrote that truly important and significant hypotheses will be found to have assumptions that are wildly inaccurate descriptive representations of reality. He added a further claim: in general, the more significant the theory, the more unrealistic the assumptions. This was not a reluctant admission but a logical consequence of how good theories work. A powerful hypothesis extracts only those elements sufficient to yield precise, valid predictions. Everything else, the welter of details that do not affect the outcome, gets left out.

  The profit maximization example, cited across pages 15, 22, and 31, made this concrete. Standard economic models assume firms push each line of business to the point where marginal revenue equals marginal cost. Ask actual businessmen what drives their decisions, however, and they report no such calculation. Friedman's response was that this discrepancy does not matter. The relevant test is whether firms behave as if they are trying to maximize profits, not whether they consciously apply the formula. Friedman's language for this was deliberate: the theory's assumptions were to serve as an engine of analysis for prediction, not a portrait of business behavior.

  23

• 4. The Chicago School

  ›

  Melvin Reder identified a fault line within the Chicago school that Friedman's essay could not fully resolve. Friedman is acknowledged as a pivotal figure in that school, and his methodology essay reads as something close to a manifesto for it. Yet Reder observed that a significant minority within Chicago disagreed about what made a theory valid. Ronald Coase and James M. Buchanan were both prominent in that dissenting group. They wrote as if a theory's validity rested on intuitive appeal and compatibility with common-sense axioms. For these economists, what mattered was not whether a theory's implications matched empirical observation but whether its premises felt intuitively sound. Friedman's criterion of fruitfulness, with its emphasis on predictive power, sat uneasily alongside this rival view. How Friedman's use of the word positive blurred that line became one of the contested points in the essay's critical reception.

  45

• 5. Reception and Legacy

  ›

  Frank Hahn published a critical review of the book in Econometrica in 1954. The challenge that would prove most lasting, however, came from Paul Samuelson. Samuelson's argument was that by shielding assumptions from any requirement of realism, Friedman had opened his framework to falsehood. Friedman defended the position by limiting what a theory needs to explain. A theory, he argued, need only account for the phenomena of interest. Samuelson saw this as an invitation to select results that confirm the theory and ignore those that do not. His label for this maneuver was the F-Twist.

  By the late 1980s, the essay's core approach was widely deployed in mainstream economics, even by economists who had not engaged its methodological arguments. Daniel M. Hausman described The Methodology of Positive Economics as "the most influential work on economic methodology of the twentieth century." Hausman later observed that the essay's influence was beginning to wane as economics turned sharply empirical near the end of the century. As of 2012, he noted, the essay still commonly served a particular purpose. It helped economists sidestep awkward questions about simplifications, idealizations, and abstraction. For Hausman, that persistent function said as much about the state of economic methodology as the essay itself ever had.

  91678