A Friedman Model

Friedman freed the economists with his argument that economic theories did not need to be tied to realistic assumptions:

a theory cannot be tested by comparing its “assumptions” directly with “reality.” Indeed, there is no meaningful way in which this can be done. Complete “realism” is clearly unattainable, and the question whether a theory is realistic “enough” can be settled only by seeing whether it yields predictions that are good enough for the purpose in hand or that are better than predictions from alternative theories. Yet the belief that a theory can be tested by the realism of its assumptions independently of the accuracy of its predictions is widespread and the source of much of the perennial criticism of economic theory as unrealistic. Such criticism is largely irrelevant, and, in consequence, most attempts to reform economic theory that it has stimulated have been unsuccessful.

Milton Friedman, 1953, Some Implications for Economic Issues

Maybe Friedman fully understood the implications of what he suggested.  But it seems likely that many of the folks who used this argument to justify their models and theories definitely took them to extremes.

You see, the issue relates to the question of how you test that the theory predictions are realistic.  Because it is quite easy to imagine that a theory could make good predictions during a period of time when the missing or unrealistic assumptions are not important because they are constant or are overwhelmed by the importance of other factors.

The alternate idea that a model has both realistic inputs and outputs is more encouraging.  The realistic inputs will be a more stringent test of the model’s ability to make predictions that take into account the lumpiness of reality.  A model with unrealistic assumptions or inputs does not give that.

Friedman argued that since it was impossible for a theory (or model) to be totally realistic, that realism could not be a criteria for accepting a theory.

That is certainly an argument that cannot be logically refuted.

But he fails to mention an important consideration.  All theories and models need to be re-validated.  His criteria of “seeing whether it yields predictions that are good enough for the purpose in hand or that are better than predictions from alternative theories” can be true for some period of time and then not true under different conditions.

So users of theories and models MUST be constantly vigilant.

And they should be aware that since their test of model validity is purely empirical, that as things change that are not included in the partial reality of the theory or model, that the model or theory may no longer be valid.

So a Friedman Model is one that lacks some fundamental realism in its inputs but gives answers that give “good enough” predictions.  Users of Friedman models should beware.

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4 Comments on “A Friedman Model”


  1. […] RISKVIEWS wonders if that is in any way related to the famous Friedman principle that economics models need not be at all realistic.  See post Friedman Model. […]

  2. riskviews Says:

    Eddie,

    Thanks for the help with spelling. A blog allows one to make a fool of one’s self very publicly.

  3. Eddie Says:

    Friedman? Good points though. Love the perspective.


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