Since the 2008 financial crisis, economists have been blamed for their incapability to predict the collapse of the financial system with economic models. It has been widely debated about the role of economic models, in particular their underlying assumptions and their ability to predict the upcoming events. Colander et al pointed out that unrealistic assumptions plays a main role in the failure of economic models (Colander et al 2009: 7-10). Opponents would invariably point their fingers towards Friedman’s ‘Methodology of Positive Economics’; where he proposed that the validity of assumptions is totally irrelevant when evaluating economic models, only the usefulness of ...view middle of the document...
Rather, they can be jointly benefitted from trade. As it assumes away the effects of trade on distribution of income within countries, international trade is advantageous to both countries in the model.
Friedman’s profound position can be summarised as follows (Friedman 1953: 7, 14):
The goal of science is, via the development of hypothesis, to achieve ‘valid and meaningful’ predictions to unobserved phenomena and that the ‘realism’ of assumptions does not matter
Friedman emphasizes that the success of predictions that a model yield is independent of the truthfulness of the underlying assumptions. Here, by the ‘truth’ of assumptions means the ‘descriptive reality’ of the real world. Once economists have obtained a useful model, the underlying assumptions are practically redundant. He explained by using Galileo’s falling body example (Friedman 1953: 16-19). By assuming zero air resistance, the equation yields a ‘well enough’ prediction in the distance travelled of a falling object. However, he ignores the fact that on Earth, nothing drops in a vacuum and that the assumption is vastly incorrect. He argues that since we know that the model provides good reality approximations to a majority of bodies, it is still a credible theory despite exceptional cases such as a falling feather.
Although he has two other sub-claims regarding the relationship between the significance of theories and realism of assumptions, for the purpose of this essay, I will only focus on his main assertion, which is explained above.
Friedman concerns only the methodology side of the hypothetical entity, not the epistemological side of the coin. Wong was the first to identify that Friedman was methodologically an ‘instrumentalist’ (Wong 1973: 314). Instrumentalism disregards the descriptive accuracy in a theory’s assumptions so long as the subsequent conclusions are correct. According to their view, theories are best to viewed merely as instrument tools and therefore it is meaningless to judge their falsity. Rather, one should evaluate the adequacy of prediction. The verification should be done by testing the result approximations against reality.
I have now reconstructed Friedman’s account of instrumentalism. Now I shall proceed to discuss my two claims in detail.
Vagueness of ‘Assumptions’
As we are taking underlying factors for granted, the validity of these factors should therefore affect the subsequent result. It is important to consider the roles of each specific assumption and weigh them against the success of the theory. What is relevant is not whether the assumptions are completely true, but whether their falsehood matters for adequate approximations.
The identification of ‘assumptions’ made by Friedman is somewhat vague. Clarifications have been made by Musgrave (Musgrave 1981: 378-87). The ‘no transportation cost’ assumption in the Ricardian model, according to Musgrave, would fit the status of a negligible assumption. As...