Cambridge Journal ofEconomics 1998, 22, 261-276 The genesis of 'positive economics' and the rejection of monopolistic competition theory: a methodological debate Jan Horst Keppler* In 'The methodology of positive economics' (1953), Milton Friedman linked the adoption of a falsificationist methodology to the rejection of monopolistic competition as a valid assumption, thus elaborating a point made earlier by George Stigler in 'Monopolistic competition in retrospect'(1949B). Both failed to demonstrate that the alternative assumption of perfect competition would perform better under falsificationist rules. These rules themselves are an expression of the ambition to establish an economic science rather than a convincing framework for research. Monopolistic competition theory became the main target of attack, as it highlighted the problematic nature of empirical research interested in perfectly generalisable results. Introduction What constitutes progress in economic research? Which cognitive processes lead to generally acceptable results? Academic economists tend to agree that progress in economic theory is achieved by the formulation of new hypotheses that can be mathematically expressed and whose predictions are tested against statistical data. A bad fit of the prediction will lead to the rejection of the underlying hypothesis, while a good fit will allow it to be retained. The procedure of testing a general hypothesis against empirical data mirrors Karl Popper's 'deductive method of verification' which he formulated in his 1934 book, Die Logik der Forschung (The Logic of Scientific Discovery). Popper identified the 'deductive method of verification' as the only appropriate method for evaluating scientific sentences and systems. The fact that scientific sentences are falsifiable, i.e., capable of being refuted by empirical testing, enables them to be distinguished from unscientific ones. Hence, the methodology that requires the formulation and testing of predictions in order to reject, or fail to reject, the underlying system of postulated assumptions and relations is referred to as falsificationism. Milton Friedman's 1953 article, 'The methodology of positive economies', established falsificationism as the dominant methodology in economic research, as far as the self- perception of academic economists was concerned. However, and as will be argued below, Friedman's article suffers from two major shortcomings. First, the methodological Manuscript received December 1995; final version received 3 April 1997. Organisation for Economic Co-operation and Development, Paris. I would like to thank Neil Jamieson for many constructive suggestions in the final stages of this paper. Two anonymous referees and the editors of the Cambridge Journal of Economics also provided helpful comments. Any errors and omissions remain, of course, my own responsibility. © Cambridge Political Economy Society 1998