How to Criticize and How Not to Criticize Positive Neoclassical Economics I: Models

It is a familiar refrain in criticisms of positive economics, in particular positive neoclassical economics (which indeed has by far the lion’s share of work of this kind), that it relies too strongly on unrealistic theories. Now when people speak of unrealistic theories, what they tend to mean in practice is the reliance in positive neoclassical economics on modelling, and more specifically modelling on the basis of assumptions that are known to be false. More than any other aspect of neoclassical methodology, this has come in for much criticism both from within and without the discipline of economics. It has nonetheless also had its defenders – most famously Milton Friedman, to whom is ascribed the thesis that the unrealisticness of assumptions does not matter at all as long as the theory so developed has better predictive value than any other.(1) This has also often in the minds of the critics been associated with the mathematization of modelling and economics in general that has taken place in the second half of the 20th century, and which is often seen as masking the falsehood of the models and thereby the theories by hiding it behind mathematical formulae. Yet although I think neoclassical economics is by and large poor economics and much of these things are very worth criticizing, it is important to look more closely at these matters and to separate some of the different aspects of these methodological issues and the basis for criticizing them. Continue reading “How to Criticize and How Not to Criticize Positive Neoclassical Economics I: Models”