Rational Choice Theory - Essay Example

The natural reaction of many economists to criticisms about assumptions is to quote a famous paper by Friedman (1953, pp. 14-15): If a theory can be stated to make assumptions, and in so far as their “realism” can be evaluated independently of the validity of predictions, the relation between the significance of a theory and the “realism” of its assumptions is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).

The reason is simple. A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. To be important, therefore, a hypothesis must be descriptively false in its assumptions; it takes account of, and accounts for, none of the many other attendant circumstances, since its very success shows them to be irrelevant for the phenomena to be explained.

To put this point less paradoxically, the relevant question to ask about the “assumptions” of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only be seeing whether the theory works, which means whether it yields sufficiently accurate predictions. The two supposedly independent tests thus reduce to one test. Friedman therefore maintains that the only valid criticisms of a theory are empirical criticisms.

Samuelson (1963) responds to this idea with the following example: . what I and other readers believe is his [Friedman’s] new twist – which from now on I shall call the “F-twist” . is the following: A theory is vindicable if (some of) its consequences are empirically valid to a useful degree of approximation; the (empirical) unrealism of the theory “itself,” or of its “assumptions,” is quite irrelevant to its validity and worth. . . the nonpositivistic Milton Friedman has a strong effective demand which a valid F-twist brand of positivism could supply.

The motivation for the F-twist, critics say, is to help the case for (1) the perfectly competitive laissez faire model of economics, which has been under continuous attack from outside the profession for a century and from within since the monopolistic competition revolution of thirty years past; and (2), but of lesser moment, the “maximization of profit” hypothesis, that mixture of truism, truth, and untruth. If Dr. Friedman tells us this was not so; if his psychoanalyst assures us his testimony in this case is not vitiated by subconscious motivations; even if Maxwell’s Demon and a Jury in Heaven concur – still it would seem a fair use of the F-Twist itself to say: “Our theory about the origin and purpose of the F-twist may be ‘unrealistic’ (a euphemism for ‘empirically dead wrong’), but what of that.

The consequence of our theory agrees with the fact that Chicagoans use the