Assumptions, Milton Friedman and wise trees

Invisible hand-waving

“But how can we have a theory where the assumptions are so obviously false?” After expressing such a crisis of faith, many an economics student has been directed towards Milton Friedman’s famous essay ‘The Methodology of Positive Economics’. This text has become something of an unofficial statement of the mode of operation of many, perhaps most, economists. It represents a great dividing line between those who want to criticise assumptions and those who just love to make them. It seems like a good starting point for this blog.

How can economists possibly defend their constant invoking of a completely rational, self-interested and perfectly calculating agent (to pick one of many counterfactual assumptions) as the starting point of many economic theories? Friedman said that economists, as scientists, are concerned primarily with whether their theory makes novel and accurate predictions about things not yet observed. An economist can make whatever assumption she…

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