On Jewish Perspective Online, I read Shmuel Safrai's "The Value of Rabbinic Literature As an Historical Source". Safrai's argument is that rabbinic literature accurately reflects realities in the Second Temple Period. This is a controversial proposition. Scholars have disputed that rabbinic literature is useful for understanding the New Testament, since rabbinic literature emerged after the historical setting that the New Testament depicts. Moreover, some, such as Jacob Neusner, appear to be skeptical about attempts to reconstruct the history of the rabbis from rabbinic literature, for rabbinic literature is edited and quite ideological.
Like many Israeli scholars in the field of rabbinics, Safrai has been characterized as a maximalist when it comes to rabbinic literature. But my impression from this essay is that he's not uncritical in his treatment of sources. Safrai acknowledges that rabbinic literature conflates historical events and contains layers, and that there were cases in which the names of sages attached to a tradition were replaced with names of other sages, which shows that oral traditions were changed as they were passed along. Safrai says that it's not always evident to which period a piece of rabbinic literature belongs, or what is behind a saying, act, or debate. Safrai also states that not everything in rabbinic literature that is attributed to the Second Temple Period is really from that period, and he admits that there are times when aggadot exaggerate.
But Safrai documents that rabbinic literature does overlap in areas with things that we know about the Second Temple Period, from such sources as Josephus, Philo, the Dead Sea Scrolls, the New Testament, Roman records, and archaeology. Examples of issues on which rabbinic literature coincides with Second Temple sources include: the existence of an educational system for Jewish children in Palestine; the leniency of the Pharisees in capital cases; the widespread annual donation of a half-shekel to the Temple, which the Pharisees advocated, but which the Sadduccees and Qumran community did not; a high priest who had a nocturnal emission the night before Yom Kippur; the prominence of the Pharisees in Second Temple Judaism, explaining why the Sadduccees followed Pharisaic halakhah on many occasions; the physical dimensions of the Temple; and a dispute over whether water in a pure cup becomes impure after some of it has been poured into an impure cup (the Pharisees and the rabbis say "no", whereas the Sadduccees and Qumran say "yes").
Some of Safrai's arguments here may be problematic. For example, Safrai presumes that Palestinian Jewish literacy was widespread during the Second Temple Period and the time of the rabbis, but such a notion is disputed on the basis of rabbinic literature itself (see my post here, and also Steph's comment, which argues that literacy actually was widespread). While Josephus affirms in Against Apion 2:178 that the Jews know their laws, he does not say (as far as I can see) that most of them were literate and educated in formal institutions. As I talked about here, Ben Zion Walcholder argues that the Temple in the Mishnah is different from the Second Temple, for the Mishnaic Temple resembles the eschatological Temple of Ezekiel 40-48, showing that the Mishnah was presenting halachah for the Messianic Age, not discussing the Second Temple. And there are scholars who have disputed Josephus' claim that the Pharisees were influential in the Second Temple Period, contending that Josephus was portraying the Pharisees as influential so that the Romans would put their successors (the rabbis) in charge of Palestine after 70. In my opinion, some of Safrai's specific arguments may be off, but he's not wrong in his overall proposition that there are times when rabbinic literature accurately reflects the Second Temple Period.
But what are the implications of Safrai's argument? That we should generally believe rabbinic literature because there are times when it is right? Or that we should accept what rabbinic literature says about the Second Temple Period when it coincides with Second Temple sources? My impression is that Safrai does not necessarily require that rabbinic literature be supported by Second Temple sources to be accepted as historically-accurate. For example, he states that we can conclude from the various rabbinic stories about Yochanan ben Zakkai that Yochanan did not join the rebellion against Rome, that Yochanan left Jerusalem and turned himself in to the Romans, and that Yochanan sought to rebuild Judaism at Yavneh---and that Yavneh gradually (and with difficulty) became a center of Jewish leadership and Torah study. Safrai appears to look at these stories for something plausible, which he can use to reconstruct a historical event.
And there are times when Safrai concludes that the rabbinic narrative is historically implausible. For instance, when Tannaitic sources claim that there were very few disputes before the deaths of Hillel and Shammai, and that disputes proliferated because their pupils did not learn Torah adequately, Safrai does not think that this picture is historically accurate, for the Mishnah and rabbinic literature also talk about disputes occurring during the time of Hillel and Shammai. Safrai also notes an example of the Mishnah projecting second century C.E. terms---such as nasi---onto the Second Temple Period. So there are times when Safrai deems the text to be plausible, and times when he does not.