Philosophical Perspectives on Economics and Social Science (ECON/PHIL 3620) - Essay Example

PHILOSOPHICAL PERSPECTIVES ON ECONOMICS AND SOCIAL SCIENCES and Friedman’s argument Milton Friedman confidently argues that the assumptions made by any theory in science do not matter, all that matters is the correctness of its predictions. He says that a theory is to be judged and evaluated by its ability in the category or class for which it is intended. The fundamental assumptions that he postulates, for the judgment of theory, include that simplicity should characterize the theory, where it can be used to predict as much outcomes as an alternate one, while requiring less information.

The second basic assumption is on the fruitfulness of the model, in the area of the scope and the precision of the predictions developed using a theory, as well as its capacity to yield further research leads (Friedman, 1953). Friedman continuously argues that there is no factual evidence which can prove the correctness or depth or the incorrectness of it, the mush that can be done is to disprove it. The fundamental argument is that theories that are forwarded should not be all believed to hold, and to illustrate this, he gives an illustration of the law of falling bodies, and the theories of perfect competition and imperfect competition.

Friedman argues that these theories inspire neoclassical economic beliefs which in real sense present a false image of realism. In explaining his theory using the law of falling bodies, he questions whether the theoretical formula given by physicists, s=1/2 gt2 provides similar and correct results for a compact ball thrown from the top of a building and or a feather dropped from the same height. He uses this to prove that not all theories hold, but their effectiveness is determined by the correctness of the theory’s prediction (Friedman, 1953).

Friedman’s argument, to an extent is relevant and does make sense, and as such, social scientists ought to be self conscious and very keen when forming their methodologies. However, Friedman should consider the fact that in science, a theory only becomes valid and acceptable only when the assumptions underlying the theory have been proven to be realistic. Also, Friedman’s theory leaves one wondering how to explain the extensive use of hypothetical concepts by [people, scientists and businesses.

It is only because they have been proved to work that they have been greatly and widely used. Assumptions do matter, and without them, without considering their applicability, then the forwarded hypothesis would definitely be highly questionable. Pascal’s and Bernoulli’s accounts of rational choice Pascal and Bernoulli both try to explain the applicability of rational choice, especially when making a risk choice. A similarity between them is that they both apply the experienced pressure of making a choice under uncertainty.

In this, Pascal gives an example of how a person can chose to believe that God exists or He doesn’t, and the choices that come with either choice. He says that when a man is obliged to play, he is definitely likely to choose life preserving choices rather than opt to risk it for infinite gain, which has equally higher chances of occurring as the risk of losing (Armour, 1993). On the same, Bernoulli explains this by the illustration of a poor man who has bought a lottery ticket. The chances in both are that the poor man might win the 20,000 ducats or win nothing.

To reduce the risk, he can choose to sell this lottery and risk losing the chance for winning the 20,000 ducats. For both scholars, the risks of uncertainty are inevitable, and an individual has to make a choice on what to believe. The other similarity is on the aspect of the finite or infinite risks associated with whichever action one chooses to undertake (Bernoulli, 1954). There are differences however. While Pascal chooses to explain his concept through a Christian perspective, Bernoulli on the other hand uses a mathematical-economics combination to explain his take on risk measurement.

As a result, he comes up with the utility value, which states that risks taken on an item, an action or a product should be determined by the value of utility to be derived from the item and not from the money. He explains that different people will drive different levels of utilities from a similar item. The other difference is that in Pascal’s theory, for whatever action that one undertakes, for instance whether to believe that God exists or not, t6he value of risks or consequences is almost similar.

On the other hand, Bernoulli emphasizes that the risks are very different, depending on the utility that one expects top derive from the item. Bernoulli account however seems more appealing and convincing. Different people purchase similar items with different levels of expected utility, and as a result, the risks are therefore different. It is also true that higher expected value investments attract more risk aversion. Shortcoming of Bernoulli’s account The main problem with Bernoulli’s account of rational choice is the theory itself, the expected utility model, which emphasizes utility over monetary value.

He argues that people should not take into account the monetary value of an action, but that they should take into account the utility that yields from it (Bernoulli, 1954). In solving the problem identified from Bernoulli’s theory of rational choice, utility is redefined in monetary terms, as the major influencers of individual preferences. In building on Bernoulli’s model, so as to address its major problem, Friedman and Savage attempt to redefine and expand the theory developed by Bernoulli.

Unfortunately, the redevelopment of theory is not successful, and the outcome is the separation of psychology and economics, where economics adopts the positive-normative distinction model developed by Friedman (Friedman, 1953). On the other hand, the study of psychology is redirected towards the normative descriptive distinction developed by Savage. Following the redevelopments of theoretical models for Friedman and Savage, the study of psychophysics is widened through the broadening of normative-descriptive distinction, which amplified the influence of a descriptive theory that could be used to justify rational behavior (Loewenstein, 1999).

Following the redevelopments of the two, contemporary behavioral economics is based on the study of the two branches of study. One branch emphasizes the descriptive model used to explain rational behavior and which widens the scope of normative-descriptive distinction, by incorporating a prescriptive outlook. The second branch adopts the outlook of falsifying positive economics, where the argument is that economics should take into consideration, the psychological critique, while at the same time upholding the thorough mathematical model and the positive-normative distinction of Friedman.

From an economic point of view, Friedman and savage are successful, because they point the study and theory towards the study of behavioral economics, by noting that money among other exceptions modify the rational outlook of choice-making, without emphasizing that people behave irrationally (Loewenstein, 1999). References Armour, L. (1993). “Infini Rien”: Pascal’s Wager and the Human Paradox. Illinois: Southern Illinois University Press. Bernoulli, D. (1954). Exposition of a New Theory on Measurement of Risk.

Econometrica, 22(1), 23-36. Friedman, M. (1953). Essays in Positive Economics: The Methodology of Positive Economics. Chicago: University of Chicago Press. Loewenstein, G. (1999). Experimental Economics from the vantage-point of Behavioural Economics. The Economic Journal, 109, F25-F34.