Friedman contends that an hypothesis can be tested only by
the conformity of its predictions or implications with
observable phenomena and not by comparing its assumptions
with reality. He applied the ideas developed by Karl Popper
for use in the natural sciences in the realm of economics.
Friedman argues that, as in the natural sciences, theories
should be accepted provisionally or rejected only on the
basis of the degree of correspondence of the predictions of
a theory with the factual evidence obtained. Friedman
asserted that a single empirical counterexample to a
theory's predictions will falsify the theory. His idea of
the role of testing thus involves induction via elimination
or rejection. Friedman's approach is similar to the
pragmatism of John Dewey.
For Friedman, the significance of a theory is not considered
to be a direct result of the descriptive realism of the
theory's assumptions. In fact, he extols the virtues of
descriptively false assumptions. According to Friedman,
"Truly important and significant hypotheses have assumptions
that are wildly inaccurate descriptive representations of
reality, and in general the more significant the theory, the
more unrealistic the assumptions." Friedman explains that a
person cannot say that a theory's assumptions are true
because any of its conclusions are true but that a person
could say that there must be at least one assumption that is
false whenever some specific conclusion is false.
Friedman states that for a theory to be useful it must be an
oversimplification of reality and therefore a false picture
of reality. He goes on to say that, depending upon the
theory and its uses, some of these false pictures, along
with their assumptions, may be more appropriate (i.e., more
predictively accurate) than others. For Friedman,
abstraction involves a theory in which many actual
characteristics of reality are designated as absent from the
theory. Given this perspective, every advance in knowledge,
new discovery, or inclusion of additional attributes would
defeat, invalidate, and falsify the previous theory.
Friedman views any theory as deficient and descriptively
false when it fails to specify all of the characteristics of
reality including all extraneous, non-explanatory, and
irrelevant characteristics. It follows that, for Friedman,
all models or theories are imperfect or incomplete because
they do not take into account all aspects of the economy. It
is no wonder that he turned his attention to prediction
rather than to explanation(1).
It is difficult to reconcile Friedman's practice with his
methodological principles. In practice, he frequently argues
on the basis of the plausibility or realism of a model's
assumptions. After comparing predictions with outcomes he
revises hypotheses and assumptions with the intention of
making them more realistic. In the light of test results,
economists (including Friedman) modify their hypotheses and
assumptions in an ongoing and iterative process of
observation and theory. Of course, Friedman should be
concerned with the realism of assumptions. How else would he
know what to attempt next when his predictions fail to
square with the facts? If an economist does not assess the
realism of his assumptions, the process of theory
modification would be inefficient, futile, and based on
speculative guesswork. It is apparent that Friedman is not a
great theoretical system builder and is even inconsistent
with respect to conforming his theory with his practice.
Ayn Rand's theory
of concept formation transcends both Mises' apriorism and
Friedman's empiricism. Rand explains that the acquisition of
knowledge requires both induction and deduction. What is
known is distinct from, and independent of, the knower.
Knowledge is therefore gained via various processes of
differentiation and integration from perceptual data.
Empirical knowledge is acquired through observational
experience of external reality. For example, people observe
goal-directed actions from the outside and attain an
understanding of causality and other categories of action by
observing the actions of others to reach goals. Individuals
also learn about causality by means of their own acting and
their observation of the outcomes. Introspection is a
reliable but ancillary source of evidence and knowledge with
respect to what it means to be rational, purposeful,
volitional, and acting human being.
For Rand, the essential characteristics of a concept are
epistemological rather than metaphysical. Concepts are
epistemologically objective in that they are produced by a
man's consciousness in accordance with the facts of reality.
Concepts are mental integrations of factual data. Rand
explains that concept formation involves the process of
measurement omission. A concept is a mental integration of
units possessing the same differentiating characteristics
with their particular measurements omitted.
Mises explained that a man's introspective knowledge that he
is conscious and acts is a fact of reality and is
independent of external experience. Mises deduced the
principles of economics and the complete structure of
economic theory entirely through the analysis of the
introspectively-derived a priori idea of human action. While
it is certainly important to understand and acknowledge the
useful role of introspection in one's life, it is also
necessary to realize that its role is limited, secondary,
and adjunct to the empirical observation and logical
analysis of empirical reality. It would have been better if
Mises had said that external observation and introspection
combine to reveal that people act and employ means to
achieve ends. Introspection aids or supplements external
observation and induction in disclosing to a man the
fundamental purposefulness of human action.
Randian epistemology recognizes that Mises' action axiom
could be inductively derived from perceptual data. Human
actions would then be viewed as performed by entities who
act in accord with their natural attributes of rationality
and free will. All the essential principles and laws of
economics could then be deduced from the action axiom.
The Randian or Objectivist view is that the best way for
judging a model or a theory is to examine the plausibility
of its assumptions. As Ayn Rand herself would put it, "Check
your premises." Things which the assumptions abstract from
should pertain importantly to the problem under examination.
An hypothesis, complete with its assumptions, is both
explanatory and predictive if it abstracts the crucial and
common elements from the mass of detailed and complex
conditions surrounding the phenomenon to be explained and
furthers valid predictions of that phenomenon. The
Objectivist view is that economic and other theories need to
omit a lot of details. Randian realism does not require that
all nonexplanatory extraneous particulars be specified.
The Randian conception of abstraction is to attend to some
aspects or attributes of a phenomenon and to exclude others.
From this perspective, certain actual characteristics are
simply absent from specification or measurement. This is far
different from and superior to Friedman's view that some
actual characteristics are specified as nonexistent or
lacking. From a Randian perspective, new knowledge may
expand or refine a theory, concept, or model but it does not
necessarily contradict or invalidate it. In other words and
contrary to Friedman's view, the theory does not have to be
Ayn Rand's methodological approach overcomes the false
alternatives of rationalism and empiricism by explaining how
abstract knowledge of reality can be soundly derived from
valid perceptual experience. Her method for overcoming these
dichotomies includes a number of processes such as
differentiation, induction, integration, deduction,
reduction, measurement omission, and so on.