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".