Friedman, Milton. 1953. "The Methodology of Positive Economics." in Essays in Positive Economics, edited by Milton Friedman. Chicago: University of Chicago Press.

The relation between positive and normative economics

Positive economics are in principle independent of any particular ethical or normative position. But normative economics is dependent on positive economics.

The ultimate goal of a positive science is to develop a theory or hypothesis that yields valid and meaningful predictions about phenomena not yet observed. Theory is judged by it's predictive power. Factual evidence can nover prove a hypothesis, only fail to disprove it. There is also an infinite number of valid hypotheses for a given phenomenon. Choosing between hypotheses that equally explain the data is problmatic, but often we choose those that are simpler (requires fewer parameters to predict) and yields a more precise prediction.

Since "real" data is always full of noise and multiple influences, there is a tendency to retreat to more formal, mathematical analyses. But it needs to be something more than just "disguised mathematics" -- it needs to be truly useful.

Truly important and signficant hypotheses will almost always have assumptions that are wildly inaccurate descriptions of reality. A hypothesis is important if it explains much of the observed behavior by abstracting the crucial elements from a mass of complex circumstances of the phenomenon to be explained and permits valid predictions on the basis of them alone.

Thus it isn't important whether classical economic theory really describes how managers make decisions, only that the hypotheses predict the decision made.

Can a Hypothesis Be Tested by the Realism of It's Assumptions?

A hypothesis can't be tested by its assumptions. What is important is specifying the conditions under which the hypothesis works. What matters is it's predictive power, not it's conformity to reality.

Often the "continued use and acceptance of the hypothesis over a long period, and the failure of any coherent, self-consistent alternative to be developed and be widely accepted, is strong indirect testimony to its worth. The evidence for a hypothesis consists of its repeated failure to be contradicted.

The Significance and Role of the Assumptions of a Theory

The use of assumptions in stating a theory:

Assumptions can help save space in describing a theory, and by specifying the most important factors important to it.

The crucial assmuptions of a theory try to state the key elements of the abstract model extracted from the real situation.

The use of assmuptions as an indirect test of a theory.

The methodological issue here is the criticism that economics is "unrealistic" and assumes purely self-interested economic gain as the primary motivator of behavior. That criticism is irrelevant -- all theories are by nature unrealistic and don't completely describe situations. There is a basic confusion between descriptive accuracy and analytical relevance.