On the irrelevance of Milton Friedman

17 Aug, 2016 at 17:16 | Posted in Economics | 5 Comments

In producing theories couched in terms of isolated atoms that are quite at odds with social reality, modellers are actually compelled to make substantive claims that are wildly unrealistic. And because social reality does not conform to systems of isolated atoms, there is no guarantee that event regularities of the sort pursued will occur. Indeed, they are found not to …

milton_friedman_1Friedman enters this scene arguing that all we need to do is predict successfully, that this can be done even without realistic theories, and that unrealistic theories are to be preferred to realistic ones, essentially because they can usually be more parsimonious.

The first thing to note about this response is that Friedman is attempting to turn inevitable failure into a virtue. In the context of economic modelling, the need to produce formulations in terms of systems of isolated atoms, where these are not characteristic of social reality, means that unrealistic formulations are more or less unavoidable. Arguing that they are to be preferred to realistic ones in this context belies the fact that there is not a choice.

What amazed me about the initial responses to Friedman by numerous philosophers and others is that they mostly took the form: prediction is not enough, we need explanation too. Rarely, if ever, was it pointed out that because the social world is open, we cannot have successful prediction anyway.

So my own response to Friedman’s intervention is that it was mostly an irrelevancy, but one that has been opportunistically grasped by some as a supposed defence of the profusion of unrealistic assumptions in economics. This would work if successful prediction were possible. But usually it is not.

Tony Lawson

If scientific progress in economics – as Robert Lucas and other latter days followers of Milton Friedman seem to think – lies in our ability to tell ‘better and better stories’ one would of course expect economics journal being filled with articles supporting the stories with empirical evidence confirming the predictions. However, I would argue that the journals still show a striking and embarrassing paucity of empirical studies that (try to) substantiate these predictive claims. Equally amazing is how little one has to say about the relationship between the model and real world target systems. It is as though thinking explicit discussion, argumentation and justification on the subject isn’t considered required.

If the ultimate criteria of success of a model is to what extent it predicts and coheres with (parts of) reality, modern mainstream economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models, is a gross misapprehension of what an economic theory ought to be about. Deductivist models and methods disconnected from reality are not relevant to predict, explain or understand real-world economies.

the-only-function-of-economic-forecasting-is-to-make-astrology-look-respectable-quote-1A scientific theory is, in fact, the embodiment of its assumptions. There can be no theory without assumptions since it is the assumptions embodied in a theory that provide, by way of reason and logic, the implications by which the subject matter of a scientific discipline can be understood and explained. These same assumptions provide, again, by way of reason and logic, the predictions that can be compared with empirical evidence to test the validity of a theory. It is a theory’s assumptions that are the premises in the logical arguments that give a theory’s explanations meaning, and to the extent those assumptions are false, the explanations the theory provides are meaningless no matter how logically powerful or mathematically sophisticated those explanations based on false assumptions may seem to be.

George Blackford

5 Comments

  1. Bruce-

    At what point does the problem become, more or less, “Lars Syll”?

    Krugman and Smith have consistently phrased their response to the heterodox: “We will listen when you do what we do with better results?”

    The correct response is, “WTF?!?”
    Or
    As Thomas Reid put it (far better than Tony Lawson, also following Hume, ever could) “Useful discoveries are sometimes found by superior minds, but more frequently they come from the passage of time and from accidental events. A traveller who has good judgment may mistake his way, and be led unawares onto a wrong route; and for as long as the ·wrong· road in front of him is open and passable he may go on without suspicion, and be followed by others; but when the road ends at a coal-pit, he doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.” (Inquiry Into Human Mind, Chapter 1, Section 8.)

    Syll, et al, choose to debate the size, scope, and shape of the coal pit. A century later, we’ve gotten nowhere.

    Comment by Thornton Hall— 19 Aug, 2016 #

    • Economics is fundamentally about forming an over-arching view of the political economy as a functional system, its analytic power and insight in all particulars, stemming from the common context supplied by this core idea of the political economy as a system paralleling political economy as a systematic body of thought. For the neoclassical economist, the ability to bring this system of thought to bear on a problem one knows nothing about and to generate at least a superficially plausible analysis that puts the problem in the context of the system as whole — that feels like power.
      .
      What does not feel much like power is having a gadfly say, “yes, that’s interesting, . . . but is it true?” in tones suggesting he expects a sensible answer referencing some critical method.
      .
      Method combined with a critique of method separates science from religion. I am not sure some economists really want neoclassical economics to be separated from religion, but even those who would be willing to give up the faith are not willing to give up the system that gives them a feeling of intellectual power without a ready substitute. It is not scientifically defensible to cling to a wrong idea because it feels like a powerful idea (and may be is powerful, not incidentally, in objectively political terms as ideology), but that’s the way things are.
      .
      When I matriculated college in the early 1970s, economics was quite confident, proud of its systematic theory but also expecting to transcend that theory by tackling well-recognized shortcomings in that theory, especially as regards uncertainty and power. In the event, the mainstream of the profession followed Lucas (and even more implausibly, Prescott) to the played-out coal pit of the self-regulating economy. It was and is madness, but the idea of system remains a powerful force. Lars Syll, I am fairly certain, plays no part in keeping economics from wider and more pleasing vistas.
      .
      Economics will change, I expect, when someone writes a new canonical textbook to supplant Samuelson’s heirs, the way Samuelson supplanted Marshal, Marshall Mill back to Adam Smith and before. The whole system will have to change at once and in all its parts. It is what Keynes hoped to do,or catalyze, with the General Theory. Maybe, it is what Marx hoped to do, with his monumental Critique. But, it requires a sweeping treatment. In the meantime, all we can do is try to tell the truth, piece by piece, part by part, and hope that prepares the way.

      Comment by Bruce Wilder— 21 Aug, 2016 #

  2. Science does NOT predict the future
    Comment on Lars Syll on ‘On the irrelevance of Milton Friedman’
    .
    The representative economist has no idea of what science is all about. First of all, science does NOT ‘predict the future’ simply because, as a genuine scientist said: “The future is unpredictable.” (Feynman, 1992)
    .
    What is called prediction in science is categorically different from the commonsensical meaning of ‘predicting the future’. The sole criterion of science is true/false and not predicting the next crash or any other extraordinary event. This is the occupation of prophets, fear mongers, astrologers, psychics, poultry entrails readers, sensationalists, half-witted journalists, etcetera. In marked contrast, science is about invariants or eternal laws.
    .
    So, scientists do not predict when the next apple will fall from the tree. What they indeed predict is position and velocity at any point in time once the apple has started to fall. The commonsenser’s view of reality is entirely DIFFERENT from the scientist’s view. The commonsenser’s view is practical, trivial, and false but utterly convincing for other commonsensers. This is why false world views/theories that have no immediate grave negative practical consequences can survive for an indefinite time.
    .
    Each falling apple is an unique historical event. There are arbitrary many proximate causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so OBVIOUS that no physicist ever lost many words about the historicity and uncertainty of falling apples. Not more can be reiterated about uncertainty than five words: “We simply do not know.” (Keynes)
    .
    A scientific ‘prediction’ is a conditional proposition which presupposes: (i) the exact knowledge of initial conditions, (ii) the knowledge of one or more universal laws, (iii) the absence of disturbances. (Popper, 1994)
    .
    Where do we get the universal laws from? They follow from a mental construct called theory. A theory in turn must satisfy TWO criteria: material consistency and formal consistency (Klant, 1994). The former is established by observation/testing the latter by the axiomatic-deductive method, which in turn only works when the axioms/premises are true or as Aristotle said: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”*
    .
    Now it is pretty obvious that the behavioral premises/axioms of economics (agents individually optimize subject to constraints; agents have full relevant knowledge etcetera) are NOT certain, true, and primary. And this means that the whole analytical superstructure of orthodox economics is false, even if each intermediate logical step is correct.
    .
    Neither Friedman nor Samuelson nor the rest of the scientifically incompetent orthodox and heterodox crowd got this elementary methodological point. And this is why Walrasianism, Keynesianism, Marxianism, and Austrianism are provably false. The common underlying error of these approaches consists of the naive commonsensical belief that economics is a social science.
    .
    Egmont Kakarot-Handtke
    .
    * For more details see exhibit on Wikimedia https://commons.wikimedia.org/wiki/File:AXEC77.png

    Comment by Egmont Kakarot-Handtke— 18 Aug, 2016 #

  3. There are so many misapprehensions in play all around that it is difficult to know how to proceed. If science was competing with religion in offering prophecy and meaningful stories, some of what is being said might make sense. Whatever might be said of Friedman’s methodological gambits, he was a remarkably effective storyteller He convinced a sizeable portion of a generation not just of economists but of many ordinary, but politically interested citizens that a capitalism of giant business corporations was a market economy in which the individual consumer was a sovereign, “free to choose”. When we scoff at telling ‘better and better stories’, we might pause to consider how much was accomplished — for better and worse — by Friedman’s telling of stories and the unwillingness or incapacity of academic economists to effectively contest those stories.
    .
    Economic theory, as codified by Paul Samuelson from the Chicago School idea of a competitive market economy, is a system of theorems very much on the model of Euclid’s Elements of Geometry (which after 2300 years remains a pedagogical model at least in part for instruction in elementary algebra and geometry). In other words, Samuelson took up the form of possibly the most successful pedagogy in human history. And, Samuelson offered as a methodological gambit the seductive idea that if the premises fit the case, then the conclusions of the theorem applied with the force of logical necessity.
    .
    Friedman, very cleverly, reverses this formula. He says we should not trouble ourselves with whether the premises are accurate with respect to a case. This will be a relief for anyone who has gone very far down the path suggested by Samuelson and found that the premises are “simplified” in ways that make their relationship to actual cases . . . difficult. It is enough, says Friedman, if our conclusions seem descriptively accurate; if so, then we can have confidence in the practical relevance of our model of logical necessity at work.
    .
    Neither Samuelson nor Friedman are correct about the epistemic status of an axiomatic – deductive theorem of the sort Samuelson offered in abundance. A theorem is never about a specific case. That’s part of its appeal: its apparent generality shows its power. Pythagoras did not prove a proposition about the height of a particular flagpole calculated from a measurement of its shadow on the ground; he proved a theorem about the properties of right triangles, particularly the ratios in length of the sides, with no measurement in the reasoning at all.
    .
    All the primitives and premises of Euclid’s Geometry are false in the sense that they are in no way representative of any actual thing in the world. A point with location but without length, area, volume, or any other dimension — what is that? We can accept this and still see the power of geometry, because we take the extra step of going out into the world, where we measure and describe actual things without imagining that geometry by itself provides a map; we understand that we have to make maps. In Popper’s terms, we have to build operational models and in the process, adopt auxiliary assumptions that bridge the gap between the a priori world of conceptual, analytic theory and the far rougher and more specific world of observable facts.
    .
    Economists are notoriously resistant to doing this work of making accurate maps of the world. A map is not “accurate” in its premises, but rather in its measurements. A map doesn’t have premises per se, although it implicitly makes use of something like Popper’s auxiliary hypotheses to apply principles of geometry in its construction as well as various conventions of map-making.
    .
    The position of Lucas seems to be that if we just do enough hard math constructing a sufficiently esoteric geometry, we will never have to do the messy work of mapping the world: we will have a map and that map will have the power of logical necessity behind it, so that no matter what picture the world may present, we will be justified in interpreting it as consistent with our geometry and its normative strictures.
    .
    Knowledge doesn’t work that way. Science is not a way of testing the “predictions” of geometry, if geometry even had such.
    .
    The New Keynesian alternative — to genuflect at the altar cum smorgasbord of analytic models accumulating without end — and then go merrily about practicing a solipsistic ad hocery doesn’t seem like much of an alternative.
    .
    Neither seems to recognize or respect knowledge of the economy or what kinds of effort it might require or the forms it would take.

    Comment by Bruce Wilder— 17 Aug, 2016 #

  4. This string of 4 statements–Lawson, Syll, Gailbraith, Blackford–is it supposed to be coherent? It reads as non sequiturs.

    Lawson is saying the science of social reality shouldn’t have predictions. Blackford seems to think you can’t confirm a theory without predictions. Gailbraith says Econ makes bad predictions. Syll says something about “stories” which are supposed to be synonymous with predictions?

    Force yourself to think of evolution as the paradigmatic science. Evolution does not predict the future. It does, however, give a guide as to the past. Nonetheless, no amount of knowledge will ever successfully predict an exact missing fossil species. The fact must always be discovered. The theory is never “simply confirmed”, but reality always adds new knowledge.

    Comment by Thornton Hall— 17 Aug, 2016 #


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