Unrealistic assumptions in economics

In the philosophy of economics, it is a common tendency to talk about unrealistic assumptions with respect to mainstream theory and especially F53. Professor Friedman is said to have defended the model building technique of neoclassical economics, however, it is only one of the possible intetpretations of his classical and seminal paper. For me, and it has been my main concern for a period of time, this system of thinking is too oversimplifying. We can talk about unrealistic assumptions in various ways.

First of all, we have the Friedmanian interpretation, according to which assumptions in models should be unrealistic in order that we could have general models. This is undeniably true, but there is a problem: namely the exact content Friedman attributed to such unrealistic assumptions. His parable about the profitmaximizing leaves on a tree is highly illuminating. In this example, Friedman highlights that it is no need to link our models to reality through precisely formulated assumptions. The only purpose is to have a model which is capable of considerable empirical success. In this meaning of the word ‘unrealistic’, assumptions are untealistic, because they are not isolated from actual social-economic-natural reality or environment.

This is the reason why I tend to think that we should not use the word ‘unrealistc’ in cases in which we are talking about assumptions which are the result of precise isolation processes. When isolating, we start from our everyday reality, from our experience, and, of course, we abstract from certain aspects of this reality and exaggertate the remaining, non-abstracted, or non-omitted part, but in such cases the resulting ideal type will not contain anything which is not an actual part of the big picture: that is, of reality. Our final ideal type will not be realistic, but, in my opinion, it will not be unrealistc either, because its ultimate sources are in reality. It is not justified to regard such an ideal type as unrealistic, because an isolation-based assumption or concept has a very special connection to reality, while the Friedmanian leaves have no connection at all. The rationality of the leaves is not a result of abstraction and idealization.


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