The Pitfalls of Friedman’s Positive Economics

Methodology – the branch of epistemology that specifies the proper method for theory appraisal (i.e., selecting among competing theories) – is not a favorite topic for many neoclassical economists. For example, Varian says:

In my view, many methodologists have missed this essential feature of economic science. It is a mistake to compare economics to physics; a better comparison would be to engineering. Similarly, it is a mistake to compare economics to biology; a better comparison is to medicine. I think that Keynes was only half joking when he said that economists should be more like dentists. Dentists claims that they can make peoples’ lives better; so do economists. The methodological premise of dentistry and economics is similar: we value what is useful. None of the ‘‘policy subjects’’— engineering, medicine, or dentistry—is much concerned about methodology, and economists, by and large, aren’t either.[ref]Varian, R. H. 1989. What Use is Economic Theory? University of California at Berkeley, p. 2.[/ref]

But, here, we need to note that engineering, medicine and dentistry are practical applications of different sciences (physics, chemistry, biology, etc.), but they are not sciences in themselves, while economics is supposed to be a science itself. Therefore, this analogy is not appropriate if we want economics to qualify as a science, and we can see that Varian does use the term economic science.

Milton Friedman, on the other hand, was more receptive of the methodological criticisms directed at economics. He proposed to solve this problem by applying methodological monism by expanding the methodology of natural sciences like physics and chemistry to economics. This is what he calls positive economics.

Nowadays, most economists practice economics in the belief that they are following Friedman’s recipe. But, it seems that many of them are not aware of the implications of the methodology they are supposedly following. They often give policy advice based on their findings. But, applying the positivist worldview in the context of human action brings with it some fundamental implications.

This article demonstrates that if one adopts the worldview that underlies the positivist methodology, giving policy recommendation on the basis of selecting different possible future paths is self-contradictory.

There are many strands of positivism but Friedman’s name is probably most associated with positivism (or what some call instrumentalism) in economics. Thus, I will focus on his view of positivism and its implications.

The Methodology of Friedman’s Positive Economics

Friedman’s 1953 essay attempts to establish economics as a positive science on the grounds of the methodology of natural sciences, primarily classical physics. Consequently, Friedman sees the objective of economics in developing theories that can be used to predict economic phenomena. In building such a theory, an economist should employ assumptions that are sufficiently realistic but not overly detailed. This is because a theory is supposed to be a generalization of the principles underlying reality but not a description of reality.

All this seems reasonable. After all, this is the methodology of natural sciences that brought us most of the technological developments of the last 200 years.  But, this methodology has some deeper assumptions about the nature of reality under investigation that bear important implications for human action.

The basic assumption on which the positivist (or logical positivist) methodology of classical physics rests is the assumption of causality. This means that there are strict quantitative laws that relate the elements of reality over space and time in the domain of the scientist’s investigation. [ref]Note that the assumed nature of the system under examination in quantum mechanics is still open for interpretation, but there is a non-falsified theory of quantum mechanics (De Broglie–Bohm theory) consistent with the principle of causality.[/ref] (If we expected some laws of nature to change or appear and disappear at any instant, prediction would be pointless.)

For example, if the physicist wants to predict what would happen to an apple thrown at an angle into the air, she would need to know the relevant beginning conditions (i.e., the angle, spin, force, mass of the apple, air density, moisture, temperature, etc.)  and the laws that relate the physical matter under investigation.

Once the physicist knows this; she is able to predict the outcome of the event. If she knew all the beginning conditions and all the laws with perfect accuracy, she could predict the exact trajectory (and anything else) with perfect precision as well. However, the physicist does not know all the details precisely.

For example, she may not know how much the fact that the surface of the apple is not a sphere, as may be unrealisticall[ref]A sphere is an ideal shape that exists only in the abstract, not in reality (as far as we know).[/ref] assumed in her theory, will affect the trajectory of the apple compared to an ideal sphere. However, if this effect is not sufficiently large, it may be ignored and the apple may be treated as a sphere. Moreover, the physicist might even decide to treat the apple as a dimensionless point in a 3-dimensional coordinate system.

It is assumed that any lack of prediction accuracy is thus due to the lack of knowledge (or intentional exclusion) of the minute details of the particular situation but not due to some uncertainty in the laws of nature. This is what Einstein meant when he said: “God does not play dice.”[ref]Einstein, A. 1926. Letter to Max Born (4 December); The Born-Einstein Letters (translated by Irene Born), Walker and Company, New York, 1971).[/ref]

Friedman applies the same logic. He says that exact prediction of economic phenomena is impossible because the economist does not and cannot know all the relevant facts:

A completely “realistic” theory of the wheat market would have to include not only the conditions directly underlying the supply and demand for wheat but also the kind of coins or credit instruments used to make exchanges; the personal characteristics of wheat-traders such as the colour of each trader’s hair and eyes, his antecedents and education, the number Of members of his family, their characteristics, antecedents, and education, etc.; the kind of soil on which the wheat was grown, its physical and chemical characteristics, the weather prevailing during the growing season; the personal characteristics of the farmers growing the wheat and of the consumers who will ultimately use it; and so on indefinitely. Any attempt to move very far in achieving this kind of “realism” is certain to render a theory utterly useless.

Thus, the economist needs to make some generalizing assumptions, (i.e., like the physicist assumes apple is a sphere) select the important facts (i.e., like the physicist may choose the initial force, angle, and mass) and exclude those less important ones (i.e., like the physicist may exclude air density, moisture, temperature, etc.). Friedman then explains that the important facts are those that affect prediction accuracy the most:

Why is it more “unrealistic” in analysing business behaviour to neglect the magnitude of businessmen’s costs than the colour of their eyes? The obvious answer is because the first makes more difference to business behaviour than the second; but there is no way of knowing that this is so simply by observing that businessmen do have costs of different magnitudes and eyes of different colour. Clearly it can only be known by comparing the effect on the discrepancy between actual and predicted behaviour of taking the one factor or the other into account.

However, this still does not clearly state whether what Friedman has in mind is the same kind of positivism as the positivism of, say, classical physics. But then he clarifies that the only difference between economic prediction and prediction in a controlled experiment is not of a conceptual but of a practical nature:

The necessity of relying on uncontrolled experience rather than on controlled experiment makes it difficult to produce dramatic and clear-cut evidence to justify the acceptance of tentative hypotheses. Reliance on uncontrolled experience does not affect the fundamental methodological principle that a hypothesis can be tested only by the conformity of its implications or predictions with observable phenomena; but it does render the task of testing hypotheses more difficult and gives greater scope for confusion about the methodological principles involved.

This is crucial, for this confirms Friedman’s belief that there is no conceptual difference between prediction in a controlled experiment and prediction in (only apparently unpredictable) economic context.[ref]Note a striking similarity with Bohm’s (1957) interpretation of the hidden causality in the apparent uncertainty in the results of quantum mechanics experiments:

First of all, let us recall that no matter how far one goes in the expression of the laws of nature, the results will always depend in an unavoidable way on essentially independent contingencies which exist outside the context under investigation, and which are therefore undergoing chance fluctuations relative to the motions inside the context in question. For this reason, the causal laws applying inside any specified context will evidently not be adequate for the perfect prediction even of what goes on inside this context alone.

Bohm, D. (1957). Causality and Chance in Modern Physics. London: Routledge.[/ref]

The difference is only in the economist’s ability to perform controlled experiments in the domain of reality she is investigating, but not in the underlying guiding principles of that reality.

Thus, the economist, like a classical physicist, could (conceptually) predict with perfect accuracy if she included all the relevant facts and the laws that relate those facts. However, since she does not (and cannot) know all the facts and/or the laws, she will predict with a margin of error. As long as the error is small enough, some facts can be overlooked and some assumptions unrealistic.

This is a statement about the nature of the domain of reality under the economist’s investigation. It assumes that the path of history under the economist’s investigation is predetermined by the initial conditions and the laws that relate all the elements of reality under investigation – just like the trajectory of the physicist’s apple.

Even though this statement sounds disturbing in the context of human action, it is a possibility, which Mises recognized but concluded that:

We may or may not believe that the natural sciences will succeed one day in explaining the production of definite ideas, judgments of value, and actions in the same way in which they explain the production of a chemical compound as the necessary and unavoidable outcome of a certain combination of elements. In the meantime we are bound to acquiesce in a methodological dualism.[emphasis added][ref]Mises, Ludwig von. 1949. Human Action, San Francisco: Fox and Wilkes (1996), p. 18.[/ref]

The determinism implied by a possible truthfulness of this belief may have a fundamental bearing on social institutions (i.e., law) because personal responsibility loses any meaning in light of this conclusion. However, I won’t dwell on this. Instead I would like to point out the implications of the implied determinism for “policy advice” made by those adhering to what seems to be Friedman’s understanding of the positivism of classical physics (and Bohmian quantum mechanics).

First we need to note the distinction between the physicist and the economist to clarify the contextual difference between the physicist’s prediction and economist’s prediction.

The Physicist’s vs. the Positivist Economist’s Policy Advice

The physicist’s prediction is limited to the domain of the reality that she is observing (and controlling). In the above example, it was the apple and the relevant conditions surrounding it. The physicist herself is not included in the system on which this prediction methodology applies.

Thus, the statement about the deterministic nature of the physical reality, for the physicist, applies only to the part of the universe that she is examining (i.e., the apple and the relevant conditions surrounding it). Whether the deterministic philosophy that the physicist applies to her experiment applies to her as an acting being, is of no importance to her. She is not trying to predict her own action based on her brain chemistry, speed of the electromagnetic impulses in her neurons, color of eyes, hair or anything else that may be relevant. This is outside of her subject matter.

The position of the economist in relation to the statement about the nature of the subject matter that she is studying is different. The economist studies human action and its outcomes. Thus, being a human being, the economist is within her own subject matter; any statement that she makes about the nature of the elements of that subject matter must apply to her equally as to all other elements.

Thus, if an economist adopts Friedman’s positivist methodology, she is claiming that if she knew all the relevant facts and the laws relating those facts, she could make perfectly accurate predictions. But, since this is practically infeasible, she will be making some generalizing assumptions, excluding some minor facts and thus have some errors in prediction of the observed phenomena. The smaller the errors are, the better is the theory that the economist developed.

For example, in line with Friedman’s claim about knowing everyone’s eye and hair color, etc., the economist might claim that if she knew the brain chemistry of all the individuals in the society and all the other minute details of their present and past (and anything else that determines their action), she would predict the outcome of everyone’s action perfectly. Thus when the future comes, it will coincide completely with her prediction, like the actual trajectory of the apple coincides with the one predicted by the physicist who included all the details in her equations.

This again implies a statement that there is only one future. Consequently, human choice is just an illusion. For what else could it be if it is predetermined by the strict quantitative relationships of the physical reality?[ref]Even though this determinism may sound strange, we cannot claim that it is impossible. As mentioned above, Mises was aware of this possibility as well as of the metaphysical and speculative nature of claiming its certainty.[/ref]

What is crucial here is that many economists overlook the fact that the statement that they are making about their subject matter applies to them as well. They are humans and part of the society. Therefore, if everyone’s action could conceptually be predicted, so can theirs. If there is only one future for everyone in the economy, there is only one future for the economist as well.

Furthermore, the present was future yesterday. Therefore, those who adopt positivism and prediction as the ultimate measure of truthfulness in the context of human action must also accept that the present was already determined yesterday (or at any point in the past). Consequently, the policy recommendation that an economist is giving was already determined.

Moreover, the aim of the policy recommendation to “prevent” something or “improve” something is absurd[ref]Note that I am not making any claims about any actual determinism of reality but examining the mutual relationship of the positivist economist’s implied claim about the deterministic nature of the economic reality and her policy recommendation.[/ref] because, according to the positivist worldview, the future is already determined. The only thing we need to do is to discover the future, like the physicist discovers (with a margin of human error) what will happen in the next few seconds after throwing an apple in the air. To illustrate this let us compare a hypothetical policy advice by a physicist and an economist.

An Illustration

While the economist’s positivism implies the statement that the outcome of human action is a strict consequence of the initial conditions of the potentially observable elements of reality and the laws that relate them, the physicist’s positivism does not. The physicist can, for example say: “My findings suggest that more people will be able to cross this river next year if we build a bridge here, compared to leaving it bridgeless.”

But, the positivist economist cannot make such a statement without contradicting herself because the worldview underlying her methodology implies that the future existence or nonexistence of the bridge is already predetermined by the fact that this existence is a result of a predictable economic activity. Instead, the positivist economist could say: ”My findings suggest that there will be a bridge here next year (but, if I’m wrong, this is only due to a lack of information today and maybe a poor theory that I am using).

Her conclusion might be based on, say, a correlation of the characteristics of this area and the characteristics of all other areas a year before a bridge was built there. Her theory may be that any time a given set of initial conditions for building a bridge is met, there will be a bridge built within a year.

Thus, if the positivist worldview is correct, the economist is not giving any “policy advice.”She is merely performing her role in the inevitable historical path of the society, like each atom in the physicist’s apple is performing its role in its inevitable trajectory.

Conclusion

Applying the positivist worldview that assumes strict causality to the society implies that everything is predetermined by the initial arrangement of the elements of reality and the laws relating them. Those who accept positivism in social sciences must also accept that human choice is an illusion. Even the economist’s “decision” to develop a model that she would use to draw policy recommendations is an illusion of choice. The aim of that recommendation to change something in the society would likewise be an illusion in such a world.

If, on the other hand, positivist interventionists want to free themselves from this trap by abandoning complete determinism, the first thing that needs to be explained is how to discern whether a theory predicted poorly because it is an unsatisfactory theory or because the strict causality in the true underlying nature of the economic reality was broken down at the time and place of measurement.

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One Response to “The Pitfalls of Friedman’s Positive Economics”

  1. docguy31 says:

    I think that a lot of academic studies such as economics is an art and science. I think one thing can be wrong one time but right another time. I think our knowledge is the sum of all our knowledge, but knowledge without experience and worthless. I am not so sure if knowledge is anymore important that the mans that holds that knowledge. childrens dentist las vegas

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