ABSTRACT
Once these two assertions are demonstrated to be fallacies, the task of convincing students that a different approach should be considered – even if it is incomplete – is much easier.
I begin my course with a computer simulation that demonstrates the falsity of the first proposition, and effectively turns Friedman’s methodological defense of orthodoxy on its head (Friedman 1953). Friedman argued that while expert billiard players did not know “the complicated mathematical formulas that would give the optimum directions of travel . . . unless in some way or other they were capable of reaching essentially the same result, they would not in fact be expert billiard players” (1953: 21). By analogy, he argued that the same could be said of firms: while they did not do calculus to set their output levels, unless they behaved
as if . . . they knew the relevant cost and demand functions, calculated marginal cost and marginal revenue . . . and pushed each line of action to the point at which the relevant marginal cost and marginal revenue were equal . . . it seems unlikely that they would remain in business for long. Let the apparent immediate determinant of business behavior be anything at all – habitual reaction, random chance, or whatnot. Whenever this determinant happens to lead to behavior consistent with rational and informed maximization of returns, the business will prosper . . . whenever it does not, the business will tend to lose resources.
