Milton Friedman’s Methodology Essay

The economist Milton Friedman wrote an essay called “The Methodology of Positive Economics” (reprinted as Chapter 7 of The Philosophy of Economics: An Anthology edited by Hausman). This essay is influential, but it is also bad.

Positive and normative economics

Friedman writes about a distinction between positive and normative economics:

Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with “what is,” not with “what ought to be.” Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields. In short positive economics is, or can be, an “objective” science, in precisely the same sense as any of the physical sciences.

In Section I, Friedman writes more about positive and normative economics:

Normative economics and the art of economics, on the other hand, cannot be independent of positive economics. Any policy conclusion necessarily rests on a prediction about the consequences of doing one thing rather than another, a prediction that must be based – implicitly or explicitly – on positive economics. There is not, of course, a one-to-one relation between policy conclusions and the conclusions of positive economics; if there were, there would be no separate normative science. Two individuals may agree on the consequences of a particular piece of legislation. One may regard them as desirable on balance and so favor the legislation; the other, as undesirable and so oppose the legislation.

I venture the judgment, however, that currently in the Western world, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action – differences that in principle can be eliminated by the progress of positive economics – rather than from fundamental differences in basic values, differences about which men can ultimately only fight. An obvious and not unimportant example is minimum-wage legislation. Underneath the welter of arguments offered for and against such legislation there is an underlying consensus on the objective of achieving a “living wage” for all, to use the ambiguous phrase so common in such discussions. The difference of opinion is largely grounded on an implicit or explicit difference in predictions about the efficacy of this particular means in furthering the agreed-on end. Proponents believe (predict) that legal minimum wages diminish poverty by raising the wages of those receiving less than the minimum wage as well as of some receiving more than the minimum wage without any counterbalancing increase in the number of people entirely unemployed or employed less advantageously than they otherwise would be. Opponents believe (predict) that legal minimum wages increase poverty by increasing the number of people who are unemployed or employed less advantageously and that this more than offsets any favorable effect on the wages of those who remain employed. Agreement about the economic consequences of the legislation might not produce complete agreement about its desirability, for differences might still remain about its political or social consequences; but, given agreement on objectives, it would certainly go a long way toward producing consensus.

Friedman thinks that there are basic values and that there is no rational way of deciding between basic values. He thinks he can avoid talking about those issues by discussing issues of implementation of supposedly shared values. There are at least two problems with this.

The first problem is that people don’t all share similar values. Friedman’s description of the minimum wage controversy is false. There are people who think the minimum wage will help the poor. There are many other people who don’t think that, including many politicians. Politicians will vote for minimum wage legislation to get elected even if they think it’s harmful.

The second problem is that it is possible to have critical discussions about values because values are linked to other ideas, including other values. If a person is a socialist and claims to value science, then you could explain to him  that socialism is incompatible with science. Scientists create knowledge by guessing solutions to problems and then criticising and testing the guesses. They have to be free to guess even if the government dislikes a guess. They also have to be free to obtain the resources needed to test guesses. Since socialism destroys resources, the resources needed for experiments are difficult or impossible to obtain. So a socialist who values science and comes to understand these problems will stop being a socialist.

Friedman’s epistemology

In Section II, Friedman writes:

The ultimate goal of a positive science is the development of a “theory” or “hypothesis” that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed.

Friedman claims that the point of science is to make predictions – he is an instrumentalist. The point of science is to explain how the world works, it is not primarily to make predictions. One weakness of this way of looking at science is that it neglects the problem that predictions and observations are both explanations. For example, if you want to explain a decline in employment by the imposition of a minimum wage then you have to understand the means by which that reduction is supposed to happen. If employers are anticipating that the minimum wage will rise in the future they may stop hiring people at wages below the new proposed minimum before the legislation is passed. If employers don’t anticipate the minimum wage rise, then many people working below that wage may be fired quickly. Government unemployment figures may also need some interpretation and explanation. The government may choose only to count as unemployed people who have signed on for government benefits, so if lots of people who were fired go into black or grey markets instead it might be difficult to see the effect of the minimum wage on unemployment.

Friedman continues:

Such a theory is, in general, a complex intermixture of two elements. In part, it is a “language” designed to promote “systematic and organized methods of reasoning.” In part, it is a body of substantive hypotheses designed to abstract essential features of complex reality.

Languages include substantive claims about how the world works that have come to be regarded as uncontroversial, and those claims are sometimes wrong. For example, the term “price gouger” implies an adverse moral judgement of people who charge high prices for goods to those who are in less fortunate circumstances, e.g. – people charging a lot for food after a hurricane. In reality, “price gougers” often had the foresight to store goods in anticipation of a disaster and if they don’t charge high prices they may run out of rare goods quickly so there is nothing left for some people who would otherwise get those goods. So “price gougers” are sometimes in the right.

Later Friedman writes:

Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to “explain.” Only factual evidence can show whether it is “right” or “wrong” or, better, tentatively “accepted” as valid or “rejected.” As I shall argue at greater length below, the only relevant test of the validity of a hypothesis is comparison of its predictions with experience.

This claim is wrong. Many ideas can be rejected without testing as pointed out by David Deutsch in The Fabric of Reality Chapter 1. For example, I can reject the theory that what I will have for lunch is determined by the atmospheric pressure in Baltis Vallis on Venus without bothering to test it. There is no explanation of why the atmospheric pressure in Baltis Vallis should have anything to do with what I eat and there are explanations of why they shouldn’t be related. I am not measuring that pressure and have no way of knowing about it, and my decisions are a result of my knowledge.

Friedman continues:

The hypothesis is rejected if its predictions are contradicted (“frequently” or more often than predictions from an alternative hypothesis); it is accepted if its predictions are not contradicted; great confidence is attached to it if it has survived many opportunities for contradiction. Factual evidence can never “prove” a hypothesis; it can only fail to disprove it, which is what we generally mean when we say, somewhat inexactly, that the hypothesis has been “confirmed” by experience.

If a hypothesis is contradicted by evidence that’s a problem for the hypothesis regardless of whether it happens frequently. “Frequently” is a vague description that Friedman doesn’t explain. You might expect that your experimental data won’t lie perfectly on the curve predicted by a theory as a result of imperfections in the experimental apparatus, small fluctuations in the environment surrounding the apparatus and that sort of thing. Does that count as frequent deviation? If these “deviations” are understood properly then they don’t count as deviations from the theory being tested. Friedman is correct when he claims that factual evidence can’t prove a theory. He doesn’t explain how failing to refute a theory can give you confidence in it. Nor does he explain why confidence, which is a subjective feeling about a theory, is relevant to methodology.

Friedman on unrealistic assumptions

Friedman also has bad ideas about unrealistic assumptions in theories. In Section II he writes:

In so far as a theory can be said to have “assumptions” at all, and in so
far as their “realism” can be judged independently of the validity of predictions, the relation between the significance of a theory and the “realism” of its “assumptions” is almost the opposite of that suggested by the view under criticism. 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 crucial 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.

Not all abstractions are unrealistic. For example, treating a particular region on a computer chip as a NAND gate is an abstraction, but it may be a very realistic abstraction that models what that section of the chip will do very accurately. And there are many other examples like this. So why is Friedman saying this?

In Section III he gives an example that explains why he’s saying it:

It is only a short step from these examples to the economic hypothesis that under a wide range of circumstances individual firms behave as if they were seeking rationally to maximize their expected returns (generally if misleadingly called “profits”) and had full knowledge of the data needed to succeed in this attempt; as if, that is, they knew the relevant cost and demand functions, calculated marginal cost and marginal revenue from all actions open to them, and pushed each line of action to the point at which the relevant marginal cost and marginal revenue were equal. Now, of course, businessmen do not actually and literally solve the system of simultaneous equations in terms of which the mathematical economist finds it convenient to express this hypothesis, any more than leaves or billiard players explicitly go through complicated mathematical calculations or falling bodies decide to create a vacuum. The billiard player, if asked how he decides where to hit the ball, may say that he “just figures it out” but then also rubs a rabbit’s foot just to make sure; and the businessman may well say that he prices at average cost, with of course some minor deviations when the market makes it necessary. The one statement is about as helpful as the other, and neither is a relevant test of the associated hypothesis.

Friedman’s assumption isn’t just unrealistic. It contradicts the explanation for why businessmen actually make a profit on a free market. An individual businessman has to make guesses about how to make money and then test those guesses. The businessman might do AB testing of different products or different ways of displaying products. So the businessman would do lots of stuff that doesn’t work. And a businessman who tries too many experiments that don’t work will fail and will stop being a businessman. The resources he would have used will go to businessmen who haven’t failed. The operation of the market depends on profit and loss. Leaving out loss eliminates part of the explanation of how markets work in reality. The reason Friedman made this assumption is that it provided him with a way to construct a tractable mathematical model of a business. This made Friedman look clever to people who are easily impressed by maths. This is also the reason for his instrumentalism. By ignoring the requirements for coming up with a correct explanation he could construct a model that bears scant resemblance to reality but appears to make predictions if you don’t pay enough attention.