Friedman’s methodological folly

19 November, 2016 at 10:59 | Posted in Theory of Science & Methodology | 2 Comments

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 …

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 journals being filled with articles supporting the stories with empirical evidence confirming the predictions. However, 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 explicit discussion, argumentation and justification on the subject isn’t considered to be required.

If the ultimate criterion 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-1There 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

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  1. “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 journals being filled with articles supporting the stories with empirical evidence confirming the predictions.”

    You are assuming here (as you do elsewhere), without any historical or empirical basis, that the success of economic storytelling is measured by the accuracy of prediction.

    I’m assuming you’ve read The Great Transformation. It might benefit to review chapters 10-12. The liberal economic order is artificial and inherently unstable. It has, since its inception, relied on a constant diet of economic storytelling to counteract the political forces which otherwise tend to undermine it.

    An excellent recent example is Reinhart and Rogoff’s “This Time Is Different”. Put aside the predictive accuracy of the work. Put aside the mathematical flaws, both trivial and profound, which would have undermined any predictive success, should there have been any.

    As economic storytelling, it was enormously successful. Just as the world teetered on the brink of a global deflationary spiral, the book arrived just in time to induce a hard fiscal shove into the chasm from OECD policymakers.

    The result has been both an unprecedented upward transfer of global wealth, and a reinforcement of the institutional privileges of international finance.

    Had this book not arrived exactly when it did, looser fiscal policy may well have resulted in downward redistribution and populist pressures may have resulted in unfavorable policy outcomes for the financier class.

    “Be careful how you make those statements, gentlemen. The public isn’t buying that. My administration is the only thing between you and the pitchforks.”
    –Barack Obama, 27 Mar 2009

    Economic storytelling which facilitates policies favorable to the stabilility and perpetuation of the liberal economic order is successful storytelling, for without the liberal economic order, there would be no market for economic storytelling.

  2. Correction: “Growth in a Time of Debt” (although the political influence of that paper was no doubt boosted by the status of “This Time Is Different” amongst the Davos set).


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