Friedman’s Methodology of Positive Economics After 50 Years (Part 1)
By: The Moral Economist
Tags: Philosophy, Capitalism, Economics, Politics, Sociology

Friedman’s Methodology of Positive Economics After 50 Years (Part 1)

Milton Friedman is one of the most famous (or infamous, depending on your view) economists of all time. He is well known for his libertarian ideology, but lesser known to the public for his contributions to economic theory, including not only macroeconomics and monetary theory/policy, but also micro-foundations for both macro and micro alike.

Source: The Methodology of Positive Economics, Milton Friedman

One of his most influential papers is “The Methodology of Positive Economics”, which has been cited over 7500 times. What’s interesting about this article is that it can be considered one of the first modern works in the philosophy of economics, which was basically non-existent at the time of publication (1966).

As such, it is interpretable by the general public and does not include any mathematics or technical research, although it is certainly dense at points (in a good way).

Nevertheless, I believe it operates as an excuse for other economists to not think philosophically: “Didn’t Friedman already address this issue?”

There are many important insights in Friedman’s paper, but it is far from authoritative in the field of philosophy of economics compared to Professor Alexander Rosenberg’s “Economics- Mathematical Politics or Science of Diminishing Returns” (which is way more dense, but also comprehensive and is a brutal critique of the field of economics).

The purpose of Friedman’s paper, in his own words is to discuss “certain methodological problems that arise in constructing the “distinct positive science” Keynes called for — in particular, the problem how to decide whether a suggested hypothesis or theory should be tentatively accepted as part of the “body of systematized knowledge concerning what is.””

There are equal parts truth and flaw in “The Methodology of Positive Economics”. My purpose here is to summarize and criticize Friedman’s methodology after 50 years.

Part 1 focuses on the distinction between positive and normative economics. Part 2 focuses on problems with economic theory, in particular micro and utility theory. Part 3 discusses the so called F-twist, or Friedman’s assumption that a theory’s purpose is only predictive ability and not the realism of its assumptions.

Source: Market Business News. I believe this graphic is overly simplistic. Normative statements can be proven if certain assumptions are made. Likewise for positive statements. This is not to claim that there is no difference between positive statements and normative ones, but the example that orange is better than green is a poor one. For example, less inequality is good can be proven within certain meta-ethical systems that obviously contain assumptions that are likely much less dubious than utility theory.

Positive vs. Normative Economics

Friedman begins his article by distinguishing between positive and normative economics. Positive economics refers to statements of fact, whereas normative economics refers to statements of ethics. Friedman quotes John Neville Keynes, the father of John Maynard Keynes:

a positive science . . . a body of systematized knowledge concerning what is; a normative or regulative science … a body of systematized knowledge discussing criteria of what ought to be . . . ; an art … a system of rules for the attainment of a given end

— Friedman quoting Keynes’ father

Friedman is interested in what theories should be accepted as knowledge, but he also assumes that positive and normative economics can easily be separated. To be fair, he admits that there is much confusion between the two, but I believe he does not sufficiently resolve these issues.

The bulk of his argument is taken from below:

Confusion between positive and normative economics is to some extent inevitable. The subject matter of economics is regarded by almost everyone as vitally important to himself and within the range of his own experience and competence; it is the source of continuous and extensive controversy and the occasion for frequent legislation.

…

The conclusions of positive economics seem to be, and are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained. Laymen and experts alike are inevitably tempted to shape positive conclusions to fit strongly held normative preconceptions.

…

Of course, the fact that economics deals with the interrelations of human beings, and that the investigator is himself part of the subject matter being investigated in a more intimate sense than in the physical sciences, raises special difficulties in achieving objectivity at the same time that it provides the social scientist with a class of data not available to the physical scientist. But neither the one nor the other is, in my view, a fundamental distinction between the two groups of sciences.

— Friedman, Pgs. 3–4

Friedman, however, appears to contradict himself by arguing that normative economics 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”.

He points out that there need not be a one-to-one relationship (i.e. sometimes even if there is predicted less economic growth and inequality, different people will end up on different sides of the issue); however, there need not be any relationship at all! We can independently come up with optimal ethical solutions prior to knowing anything about predictions.

For example, we should not support a system where 99% of the economic benefits go to .1% of the population. This statement is independent of any positive considerations; it is simply an ethical fact.

Only if one presupposes utilitarian ethics can one claim that all normative economic factors must be considered in relation to their consequences. On the other hand, deontological principles based in complete disregard to their consequences seems suboptimal as well.

That’s why I’ve previously argued for a combination of both meta-ethical systems through something called weighted utilitarianism.

Under such a situation, we must consider the consequences, but certain strategies may be considered unethical, even if utilitarian, due to deontological weights.

So, Friedman wants to have his cake and eat it too. He wants to claim that positive and normative economics are branches that can be easily disentangled, yet he assumes utilitarianism and claims that all normative statements must be based on positive predictions!

Furthermore, we shall see later that much of the problem with this paper is that Friedman focuses way too much on predictions- both for informing normative statements, but as the ultimate test of a theory’s truth.

Friedman then makes a strong claim that I believe he fails to prove:

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.

Friedman uses the minimum wage law to illustrate his point. He argues that people on both sides of the issue want a “living wage”; however, those opposing minimum wage laws simply support lower unemployment rates based on a positive prediction.

However, this is clearly not entirely true. Many of those opposing minimum wage laws simply believe that low skilled workers shouldn’t be entitled to higher than market wages. This is partially based on a positive prediction that there will be reduced work incentives, but who’s to say that many people don’t just have a “gut” feeling that others shouldn’t be paid as much as they are?

Friedman seems to think that progress on positive economics is all that is needed to settle these important issues, yet it is clear that there must be improvements in our normative understanding to come to satisfactory and complete solutions.

My point is that ultimately normative and positive economics are intricately intertwined in a two way street of causation. Consider the above graphic from Khan Academy. The statements on the right seem like they are claims about predictions, while the ones on the left are claims for ethics. However, we could “predict” how many people and to what degree they support that normative statement.

Likewise, all positive claims that are held by prominent economists influence public and government opinion. Therefore, positive claims have an effect on what we end up doing, so called economics squared, or as I like to call it Crony Capitalism Choice Theory.

Finally, Friedman claims that men can only fight over normative statements, whereas positive statements can be objectively found out. But doesn’t this assume that moral realism is false?

Let me elaborate. Suppose moral realism is true (i.e. there are certain moral facts that exist). Then, we can debate those facts with increasing prediction and accuracy over time, much as analytic and meta-ethical philosophy have improved over the decades.

If moral realism is true, then you can derive an ought from an is. In fact, you can derive all other oughts from that is!

Stay tuned for parts 2 (problems with economic theory) and 3 (F-Twist).