Essays in Positive Economics

by Milton Friedman

"Stimulating, provocative, often infuriating, but well worth reading."—Peter Newman, Economica

"His critical blast blows like a north wind against the more pretentious erections of modern economics. It is however a healthy and invigorating blast, without malice and with a sincere regard for scientific objectivity."—K.E. Boulding, Political Science Quarterly

"Certainly one of the most engrossing volumes that has appeared recently in economic theory."—William J. Baumol, Review of Economics and Statistics

Genres: Economics, Philosophy, Nonfiction, Politics, Money, Essays

334 pages, Paperback

First published January 1, 1953

About the author

Milton Friedman was an American economist who became one of the most influential and controversial figures of the twentieth century, widely recognized for his profound contributions to monetary economics, consumption theory, and the defense of classical liberalism. A leading figure of the Chicago School of Economics, Friedman challenged the prevailing Keynesian consensus that dominated mid-century policy and instead placed monetary policy at the center of economic stability, arguing that changes in the money supply were the primary drivers of inflation and fluctuations in output. His groundbreaking permanent income hypothesis reshaped the study of consumer behavior by suggesting that individuals make spending decisions based on long-term expected income rather than current earnings, a theory that profoundly influenced both academic research and practical policymaking. Alongside Anna Schwartz, Friedman coauthored A Monetary History of the United States, 1867–1960, a monumental work that emphasized the role of Federal Reserve mismanagement in deepening the Great Depression, a thesis that redefined historical understanding of the period and helped establish monetarism as a major school of thought. His broader philosophy was articulated in works such as Capitalism and Freedom, where he argued that political and economic liberty are interdependent and advanced ideas like educational vouchers, voluntary military service, deregulation, floating exchange rates, and the negative income tax, each reflecting his conviction that society functions best when individuals are free to choose. Together with his wife Rose Friedman, he later brought these ideas to a global audience through the bestselling book and television series Free to Choose, which made complex economic principles accessible to millions and expanded his influence beyond academia. Awarded the Nobel Prize in Economic Sciences in 1976 for his achievements in consumption analysis, monetary history, and stabilization policy, Friedman became a prominent public intellectual, sought after by policymakers and leaders around the world. His ideas strongly influenced U.S. policy in the late twentieth century, particularly during the administration of Ronald Reagan, and found resonance in the economic reforms of Margaret Thatcher in the United Kingdom, both of whom embraced aspects of his prescriptions for free markets and limited government intervention. Friedman’s policy recommendations consistently opposed measures he regarded as distortions of market efficiency, including rent control, agricultural subsidies, and occupational licensing, while he proposed alternatives such as direct cash transfers through a negative income tax to replace complex welfare bureaucracies. His teaching career at the University of Chicago shaped generations of economists, many of whom extended his research and helped institutionalize the Chicago School as a major force in global economic thought, while his later role at the Hoover Institution at Stanford University provided him with a platform to continue his scholarship and public advocacy. Beyond technical economics, Friedman’s clarity of expression and ability to frame debates in terms of individual freedom versus state control made him one of the most recognizable intellectuals of his era, admired by supporters for his defense of personal liberty and market efficiency, and criticized by detractors who accused him of underestimating inequality, social costs, and the complexities of government responsibility. Despite the controversies, his impact on the development of modern economics was immense, reshaping debates about inflation, unemployment, fiscal policy, and the role of the central bank. His writings, lectures, and media appearances consistently reinforced his belief that competitive markets, voluntary exchange, and limited government intervention offer the most effective means of promoting prosperit

Reviews

[sidnawi]

Only read the chapter entitled "The Methodology of Positive Economics" - so will be summarising the key ideas there.

Friedman begins this essay by referencing John Neville Keynes and defining these terms:

- a positive science: a body of systematized knowledge concerning what is;
- a normative or regulative science: a body of systematized knowledge discussing criteria of what
ought to be;
- an art: a system of rules for the attainment of a given end

The main aim of this essay is to try and ground orthodox economic theory as a positive science - i.e develop a theory based on assumptions that are "true" and "observable" (my quotes). In Friedman's words,

Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields. In short, positive economics is, or can be, an “objective” science, in precisely the same sense as any of the physical sciences.

In this light, Friedman dismisses criticisms of orthodoxy as unrealistic as "besides the point" - they are general axioms which hold true given a set of assumptions about certain factors: i.e only several factors are assumed to have an appreciable impact on the set of equations determining equilibrium, price, etc. He backs this up with the vivid example of the equations of motion (remember Year 12 projectile motion? t = 1/2 m*v^2) - a ball obviously falls faster than a feather, and the equation only holds given some assumption about air pressure and distance being negligible. Sure, you can use a more complicated formula accounting for drag, surface area, etc, but it "costs" more in that it's more difficult to understand, harder to generalize across other falling objects, and so on.

Economics is a “dismal” science because it assumes man to be selfish and money-grubbing, “a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact”; it rests on outmoded psychology and must be reconstructed in line with each new development in psychology; it assumes men, or at least businessmen, to be “in a continuous state of ‘alert,’ ready to change prices and/or pricing rules whenever their sensitive intuitions... detect a change in demand and supply conditions”; it assumes markets to be perfect, competition to be pure, and commodities, labor, and capital to be homogeneous.

As we have seen, criticism of this type is largely beside the point unless supplemented by evidence that a hypothesis differing in one or another of these respects from the theory being criticized yields better predictions for as wide a range of phenomena. Yet most such criticism is not so supplemented; it is based almost entirely on supposedly directly perceived discrepancies
between the “assumptions” and the “real world.”

Basically he's saying- sure, it doesn't explain things. Do you have a better theory?

In Friedman's system, you can't test a hypothesis by the realism of it's assumptions, "logic and reasoning plays a subsidiary role," for the simple fact that nobody actually sits down and calculates the marginal cost/benefit - no pool player calculates trajectories in their head before they hit the ball, no industrialist calculates the cost of every possible variable input changing on their margins - it's impossible. That's why we have these arbitrary designations of supply, demand and industry groupings (assuming products are largely indistinguishable - otherwise it'd be impossible for any meaningful analysis of competition to happen. we'd have to look at farmer hair colour, soil quality, etc for any real degree of realism, and at that point the theory becomes useless).

Friedman gives several examples of debates where several paradigms clash on what is ostensibly a common goal. For example, the much done debates on minimum wage (enforcing one could either result in unemployment, compounding poverty, or make no difference in existing business practices) both share an end goal of improving general quality of life, or so the bureaucrats and policymakers purport. He argues that recognising this shared goal, and focusing on "positive" applications of economics will allow the field to converge on axioms and theories that work.

Of course - there's many ways to approach this. The arbitrary and easily malleable nature of "truth" and evidence that forms the basis of a positivist approach, the evidence for other economic systems working to bring previously developing nations out of poverty, the failure of neoliberal reform to do so, and the simple fact that economics isn't a science - it's a study of human behaviour, which is imbibed by thousands of years of history, geography, material endowment, culture, religious belief and so on.

Criticism is likely better placed elsewhere, but it's important to recognise that the orthodoxy is a paradigm, like many paradigms before and after it, and it has been recognised as such by one of its foremost preachers.

[Nick Geiser · Rating 4 out of 5]

Interesting collection that contains a number of MF's well-known essays.

"The Methodology of Positive Economics." MF argues that the only test of an economic hypothesis is the comparison of its predictions with experience and that a hypothesis cannot be tested by the realism of its assumptions. Regarding the second, MF relies on a Duhem-style argument that because hypotheses cannot be tested in isolation but only along with various "auxiliary hypotheses." Regarding the first, MF seems to neglect other virtues such as coherence with other parts of theory or the causal mechanisms a theory proposes.

"The Marshallian Demand Curve." Interesting example of the points Friedman argues for in "Methodology." The demand curve is a functional relationship between price and quantity demanded, other things equal. The question is what else is held equal. MF contrasts two different approaches to this "ceteris paribus" condition as well as an exegetical argument regarding Alfred Marshall's own view. MF also introduces a distinction between "Marshallian" and "Walrasian" approaches in economics.

"The Case for Flexible Exchange Rates." This essay is mostly of historical interest now since fixed exchange rates are largely a thing of the past. The basic argument is that flexible exchange rates are the only way for countries to have both independent monetary policies and unrestricted free trade in goods/capital. Another interesting point is that many of the arguments for fixed exchange rates reflect confusion between changes in prices and changes in the underlying economic structure.

"A Monetary and Fiscal Framework for Economic Stability." This is MF's policy brief for how to deal with business cycles. I am not an economist and don't know how to evaluate his proposals accurately, but the basic elements are 1) eliminating fractional reserve banking, so banks would need to hold liquid assets equal to 100% of their depository liabilities, 2) public goods financing based on the community's collective willingness to pay (rather than countercyclical factors), 3) automatic stabilizers such as unemployment insurance or income support, and 4) a progressive personal income tax.

[Frederick Hammill · Rating 1 out of 5]

👎🏻👎🏻👎🏻👎🏻👎🏻

[Bakunin · Rating 2 out of 5]

Read it as I was writing my thesis on monetary theory. Friedmans theories have their foundation in empiricism: if economics is ever to become a science, it has to be guided by empirical research. It is for this reason that he has become so influential. Being more of an austrian myself I can't help but ask how we are every to know that our research is true if we are not guided by theory that is a-priory? Could one not analyze the same material and reach different conclusions? How is one to resolve this problem?

Another problem associated with this empiricist stance is that the use of statistics is not necessarily value-free. One needs to know what to measure and how is one to know that unless one has a theory which is a-priory? I agree that the opposite view is also problematic: how are we to know that a theory is true unless we can test it?

Worth reading if you are curious about the major currents in economics and which still influence our view of monetary theory today.

[Spencer Marlen-Starr · Rating 5 out of 5]

This blew my mind, pure and simple. Friedman presents a completely different way to look at verification of knowledge in general and the actual usefulness of how realistic to reality the assumptions of any given scientific theory really are.

[Craig Bolton]

Essays in Positive Economics (Phoenix Books) by Milton Friedman (1966)

[for-much-deliberation ...]

Essays in Positive Economics by Milton Friedman (1966)

[Cecilia · Rating 3 out of 5]

Quite interesting but mostly surface level analysis and repetitive.