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.
The most basic counsel of this essay is to respect 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 wages). 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.
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 there from. 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)”.
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".
"Stimulating, provocative, often infuriating, but well worth reading."—Peter Newman, Economica
"His critical blast blows like a north wind against the more pretentious erections of modern economics. It is however a healthy and invigorating blast, without malice and with a sincere regard for scientific objectivity."—K.E. Boulding, Political Science Quarterly
"Certainly one of the most engrossing volumes that has appeared recently in economic theory."—William J. Baumol, Review of Economics and Statistics
Milton Friedman (1912-2006) was an American economist, statistician, a professor at the University of Chicago, and the recipient of the Nobel Memorial Prize in Economic Sciences (1976). Among scholars, he is best known for his theoretical and empirical research, especially consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy. He was an economic advisor to U.S. President Ronald Reagan. Over time, many governments practiced his restatement of a political philosophy that extolled the virtues of a free market economic system with little intervention by government. As a leader of the Chicago school of economics, based at the University of Chicago, he had great influence in determining the research agenda of the entire profession. Milton Friedman's works, which include many monographs, books, scholarly articles, papers, magazine columns, television programs, videos, and lectures, cover a broad range of topics of microeconomics, macroeconomics, economic history, and public policy issues.
The Economist described him as "the most influential economist of the second half of the 20th century…possibly of all of it".
Friedman was originally a Keynesian supporter of the New Deal and advocate of government intervention in the economy. However, his 1950s reinterpretation of the Keynesian consumption function challenged the basic Keynesian model. At the University of Chicago, Friedman became the main advocate for opposing Keynesianism. During the 1960s he promoted an alternative macroeconomic policy known as "monetarism". He theorized there existed a "natural rate of unemployment" and he argued the central government could not micromanage the economy because people would realize what the government was doing and change their behavior to neutralize such policies. He rejected the Phillips Curve and predicted that Keynesian policies then existing would cause "stagflation". Friedman's claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of Keynes, who argued that monetary policy is ineffective during depression conditions, and that large-scale deficit spending by the government is needed to decrease mass unemployment. Though opposed to the existence of the Federal Reserve, Friedman argued that, given that it does exist, a steady, small expansion of the money supply was the only wise policy, and he warned against efforts by a treasury or central bank to do otherwise.
Influenced by his close friend George Stigler, Friedman opposed government regulation of many types. He once stated that his role in eliminating U.S. conscription was his proudest accomplishment, and his support for school choice led him to found The Friedman Foundation for Educational Choice. Friedman's political philosophy, which he considered classically liberal and libertarian, emphasized the advantages of free market economics and the disadvantages of government intervention and regulation, strongly influencing the opinions of American conservatives and libertarians.
In his 1962 book Capitalism and Freedom, Friedman advocated policies such as a volunteer military, freely floating exchange rates, abolition of medical licenses, a negative income tax, and education vouchers. His books and essays were well read and were even circulated illegally in Communist countries.
Most economists during the 1960s rejected Friedman's methodology, but since then they have had an increasing international influence (especially in the USA and Britain). Some of his laissez-faire ideas concerning monetary policy, taxation, privatization and deregulation were used by governments, especially during the 1980s. His monetary theory has had a large influence on economists such as Ben Bernanke and the Federal Reserve's response to the financial crisis of 2007–2010.