Methodologies of positive economics - Milton Friedman
10 important questions on Methodologies of positive economics - Milton Friedman
What was Milton Friedman's methodology of positive economics?
Instead of making an analysis with a correct model for an entire economy, it is better to start small. (Like locally)
- Build a model and check it, then slowly expand it by adding other areas.
- Anti-realisticness: The assumptions need not to be realistic, as long as they provide good predictions. (The more significant a model is, the less realistic the assumptions are)
What are the three kinds of assumptions according to Alan Musgrave that an instrumentalist position stems from?
2. A domain assumption: an expected factor is absent, and is therefore used to specify the domain of applicability of the theory concerned.
3. A heuristic assumption: a factor is considered negligible, to simplify the logical development of the theory.
What are the two options to deal with the problem of specification of domain? By Friedman
2. To select the phenomena for which the theory works (domain), does the law of falling bodies work outside the vaccum
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What was Cowles Commission's view on the incompleteness problem?
The solution is to construct an increasingly more comprehensive model
How was it tested what the solution of incompleteness was? Tested by Christ
Two naive models:
1. Next years value will be equal to this years value + a normal disturbance with mean zero and a constant variance
2. Next years value will be equal this years value + the change in this years value + a disturbance.
2/3 times more accurate predictions, but can only predict if there is an effect, not the actual effect
What was Friedman's critique?
Friedman saw the simple models as null hypotheses (standards of comparisons)
What was the Marshallian approach? (Adopted by Friedman)
The more significant a theory is, the less realistic the assumptions are
How should a model be evaluated according to Friedman?
However: this is not realistic, since economists are always dependent on circumstances (passive observations)
How does Friedman give critique on the standard view of laws?
Friedman argues: the specification of a domain must be given with the generalization for which this applies.
What parts should a hypothesis consist of according to Friedman?
2. Domain specifications
3. Specifications of correspondence between the variables in the model and the observable phenomena
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