That Toddlin Town

Milton Friedman infamously wrote:

“Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense). The reason is simple. A hypothesis is important if it “explains” much by little, that is, if it abstracts the common and critical elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone. To be important, therefore, a hypothesis must be descriptively false in its assumptions; it takes account of, and accounts for, none of the many other attendant circumstances, since its very success shows them to be irrelevant for the phenomena to be explained.”

What he had in mind here, I suspect was defending the idea that a theory based on immortal nad farseeing rational agents could work in the real world of irrational actors who know very little and live lives nasty, brutish, and short. His way is a very odd way to put it, however. I think that it would be far more rational just to say that a theory based on drastically simplified assumption can sometimes make good predictions anyway. My formulation has the advantage of not ignoring the fundamental principle of logic that deductions from a false premise imply everything and nothing. If such a deduction happens to work in a particular case, either the assumptions *did* hold, or else the math was faulty.

The recent economic collapse was a dagger in the heart of the Chicago school, since neither did any of them predict it nor does its actual evolution fit any of their models. The problem, says Brad DeLong, is that Chicago can't bring itself to admit that the Earth goes around the Sun rather than vice-versa. Ideologues always have a last redoubt, however, and Chicago's is the big bad boogeyman government. This theory can never be wholly wrong, since the government is always the biggest and most important player in the economy. The real problem though, is the fact that what broke down here were the key assumptions of their religion, and the way it occurred follows exactly the pattern predicted by a failure of their sacred principles.

My principle in such cases is to never trust an ideologue, especially when he is trying to explain why the facts don't fit his theory.

See also, this commentary by Arun. I also like the comments to Brad's post.