Milton Friedman’s Methodology: A Critique

Economics has come under a lot of criticism recently, and proponents sometimes try to defend themselves by pointing to Milton Friedman’s methodology of positive economics. In this essay, Friedman loses his mind argues that the assumptions of a theory do not matter as long as its predictions are correct. Of course, even if you accept this there are still plenty of criticisms of neoclassical economics – the theories internally contradict themselves, and it is also incredibly hard to verify empirical predictions in social science, making Friedman’s litmus test somewhat of a damp squib. However, let’s put these objections to one side.

In the essay, Friedman takes us on a typical Friedman logic train to his preordained conclusion and leaves you to puzzle over how you got there. He argues that to be completely realistic a theory would have include everyone on earth’s eye colour, qualifications, etc. But how do you test whether or not to include these things? You see whether evidence corroborates the theory without them! Fantastic – assumptions don’t matter.

In this case, Friedman’s sleight of hand lies in not properly defining the word ‘assumption’. This is, in fact, so significant that it means his paper is effectively advocating any methodology whatsoever (if I assume throwing darts at this board will give me the GDP figures for next year…). The crucial characteristic of assumptions in engineering or science is that they eliminate specific variables. A perfect gas is one where many of the smaller forces between molecules are ignored. Assuming a vacuum eliminates air resistance. This gives us an appropriate method, as ‘relaxing’ an assumption means adding in more variables, and this process can continue for as long as it is practically feasible.

However, many economic assumptions could not be argued to be eliminating a certain variable – assuming that people are rational self maximisers, or that firms calculate expenditure based on marginal costs and revenue, are actually hypotheses, not ‘assumptions’ in the scientific sense of the word. As such, the ‘assumptions’ themselves are empirically falsifiable and cannot be swept under the rug.

Furthermore, in science theories are only deemed as valid as their assumptions are realistic. A theory can always be improved by making the assumptions resemble reality more accurately. So even if we were to accept Friedman’s premise, we could still improve theories by abandoning rationality based on behavioural evidence, or abandoning marginal cost based on surveys*. Unsurprisingly, in the case of widely used economic models such as Arrow-Debreu, it is incredibly difficult to relax assumptions before the theory collapses – if this were true in physics, the model would be abandoned.

To be honest, it is a sad indictment of economics that an essay which contains the passage:

The articles on both sides of the controversy [regarding marginalist analysis]…concentrate on the largely irrelevant question of whether businessmen do or do not in fact reach their decisions by consulting schedules, or curves, or multivariable functions showing marginal cost and marginal revenue.

has to be critiqued formally. A theory’s assumptions are always relevant to its conclusions, and improving them will always yield more accurate results. That much is obvious to the man on the street, but clearly not to economists.

*Friedman argues surveys are as useless as asking octogenarians how they account for their long life. I can only interpret this as him saying businesses have no idea what they are doing, which sort of undercuts him intellectually elsewhere.

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  1. #1 by Blue Aurora on December 1, 2011 - 7:30 pm

    Do you have access to a university library? If so, this is a good article criticizing Milton Friedman on his own record of forecasting.

    http://www.jstor.org/stable/10.2307/4225761

  2. #5 by JD on December 3, 2011 - 10:54 pm

    I have just run across your “Unlearning economics” website and I’m delighted! My background was in philosophy and I did not take a course in economics until graduate school, about ten years later. What a shock! Economists base their reasoning on obviously flawed assumptions, use bad logic to proceed, and routinely ignore common sense truths. They also seem to be unaware of the possibility of non-transitive preferences and the simple problem that from a contradiction you can logically prove anything. I found Friedman’s “Methodology” essay hilarious. As you point out, he’s essentially trying to persuade the reader that it doesn’t matter what you assume, that hypotheses and assumptions are interchangeable, and that you can verify hypotheses masquerading as assumptions based on the apparent empirical validity of the conclusions. Amazing. The example of leaves on trees distributing themselves as if they knew how to take best advantage of available sunlight was wonderful. Friedman didn’t explicitly carry this to the conclusion that leaves really do know how to distribute themselves for maximum sunlight, but he might as well have.

    • #6 by Unlearningecon on December 6, 2011 - 6:42 pm

      Thanks for the comment.

      It does not surprise me that someone with formal training in logic and epistemology would find Friedman’s essay hilarious. I think Friedman illustrates the problems that arise when economists venture into the realms of political philosophy and ideology without learning about them, instead using their ‘economics’ hammer on things that are a far cry from nails.

  3. #7 by chris y on December 4, 2011 - 4:08 pm

    So if I assumed that the sun is carried across the sky in a chariot pulled by four fiery horses and driven by the demi-god Phaeton, and concluded from this that tomorrow it will rise in the east and set in the west, Friedman would say that my cosmology was just fine? They gave him money for this?

    • #8 by Unlearningecon on December 4, 2011 - 8:02 pm

      If by ‘they’ you mean big business then the answer is potentially yes ;)

  4. #9 by BobbyFlint (@BBFlint) on December 5, 2011 - 12:58 pm

    Another good post. It’s hard to believe that Friedman’s “Methodology” retains any credibility at all.

  5. #10 by Mandos on December 6, 2011 - 7:22 pm

    Excellent post and I really need to get that Ha-Joon Chang book. I’ve got into Yet Another Free Trade debate with the Worthwhile people. It’s utterly astonishing how people cannot see what is in front of their eyes.

    • #11 by Unlearningecon on December 6, 2011 - 7:56 pm

      I plan to do a post on how comparative advantage does not support free trade arguments for developing countries. Maybe if we can explain it to them in theory they’ll have a better time with reality.

      • #12 by Mandos on December 6, 2011 - 8:57 pm

        Looking forward to it!

  6. #13 by Lao Tzu (@isomorphisms) on January 19, 2012 - 1:06 am

    Some economists are just getting humbler. My favourite example being Russ Roberts. “Rabid free-market fundamentalist” is a description he’s often defended himself against by rewording to “fan of free markets”.

    He was humble before the ’08 crash, but after he’s even more so. “We really don’t understand things, and we should work harder to try to” might be putting words into his mouth, but not many.

    This is the guy who runs http://www.econtalk.org. BTW, if you don’t listen to their shows, you might enjoy them, and if you listen to recent shows you could probably leave thoughtful comments that contrast to the libertarian viewpoint common to the usual commenters. RR is a great interviewer and gets some of the most interesting guests of any podcast. @econtalker as well.

  7. #14 by Lao Tzu (@isomorphisms) on January 19, 2012 - 1:30 am

    To be honest, it is a sad indictment of economics that an essay which contains the passage:

    The articles on both sides of the controversy [regarding marginalist analysis]…concentrate on the largely irrelevant question of whether businessmen do or do not in fact reach their decisions by consulting schedules, or curves, or multivariable functions showing marginal cost and marginal revenue.

    has to be critiqued formally. A theory’s assumptions are always relevant to its conclusions, and improving them will always yield more accurate results. That much is obvious to the man on the street, but clearly not to economists.

    “improving them will always yield more accurate results”

    This is not true except tautologically (only define an improvement as one which leads more accurate results).

    Important counterexample: web.mit.edu/krugman/www/dishpan.html

    • #15 by Unlearningecon on January 19, 2012 - 11:34 am

      Improving meaning ‘making them resemble reality better’. In physics this is easy to do because eliminating an assumption tends to add a variable. In economics theories sort of implode when you change the assumptions too much.

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