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Quote #255: Friedman on theory


Viewed as a language, theory has no substantive content; it is a set of tautologies. Its function is to serve as a filing system for organizing empirical material and facilitating our understanding of it; and the criteria by which it is to be judged are appropriate to a filing system. Are the categories clearly and precisely defined? Are they exhaustive? Do we know where to file each individual item, or is there considerable ambiguity? Is the system of headings and subheadings so designed that we can quickly find an item we want, or must we hunt from place to place? Are the items we shall want to consider jointly filed? Does the filing system avoid elaborate cross-references?

Milton Friedman, in Essays in Positive Economics (1953). Chicago: University of Chicago Press. (thanks Dan!)

14 replies on “Quote #255: Friedman on theory”

I think, my favourite quote (which becomes a guideline when quoted by itself):

“Construct a language that will yield as many substantive propositions as possible.”

Which I guess is the same as saying “a good theory makes bold hypotheses”, but I prefer the idea of modelling as a language you help to construct. It makes more sense to me than the rarified concept of “theory-building”. And it’s absolutely true of economic theory – a very effective language is constructed. Though you don’t start with the language – that’s as much a result of the process as a necessary foundation.

Does the fact that Milton Friedman’s theory of economics could be held responsible for a substantial portion of the world’s ills in any way affect the validity of this quote?

All I meant, is that deregulation of corporations, and of markets themselves, seems (from what I admit is a limited knowledge of economics) to be the chief engine that has been widening the gap between rich and poor – a trend which has, I believe, been seen in all the countries that moved towards deregulation starting in the 1980s (I’m thinking especially of the US and the UK here, though the fact that the Chicago School’s neoliberal philosophy drove the shaping of the post-Soviet states also seems relevant). I’m convinced by Richard Wilkinson’s evidence that relative measures of inequality matter as much to a society’s well-being (in terms of physical and mental health, social cohesion, and crime levels) as absolute measures of wealth and poverty (as long as people aren’t literally starving – in which case absolute poverty is unquestionably worse than relative poverty). So, I’m inclined to think that a philosophy that drives (or rather, has been shown to drive) greater inequality is a philosophy that carries responsibility for, at least, quite a lot of the world’s ills.

I’d add to that the fact that we live on a finite planet, and capitalism (particularly of the sort advocated by Friedman) requires infinite growth. Now, I know one can argue that the fact that ‘externalities’ like forests, oceans, the atmosphere, and the other ecosystems that have borne the brunt of capitalist growth wouldn’t be in the state they are in if their well-being had become a marketable commodity – but the fact is that they didn’t, and so since destroying them has not, except in extreme instances, carried a price tag, there have been no incentives for corproations not to ruin them. And again, Friedman’s version of capitalism has been the one that has (as far as I know) been most conducive to this kind of destruction.

So the ills I’m talking about are inequality (leading to higher crime, physical and mental health problems, and weakened social cohesion as measured by things like ‘trust’), and environmental destruction. And I do think the evidence of Wilkinson (and others) makes a compelling case (now endorsed by the tories, of all people) that inequality is a social ill in its own right.

First, I hope you’ll admit that your reasoning stands or falls with the demonstration that there is a direct link between Friedman’s writings and actions and the “ills” you denounce. As matters stand it falls, especially because your criticism is very unspecific and applies to 80% of all economic litterature.

It’s certainly true that Friedman had an influence on the thinking of the likes of Reagan and Thatcher, but it’s only incidental (in the sense that politicians are always happy to claim that X or Y defends the positions that the politicians have already taken) and there is little doubt that both the Gipper and Maggie’s economic policies were considered as broadly positive by the US and the UK electorate. I can understand why: I have been both to the US and the UK, and people did not appear to live in misery. Moreover, when their political opponents took over, they did not roll back the economic achievements of the Reagan and Thatcher era, which is in itself a very valid comment on their success.

As for the former Soviet Union, it is disingenuous to pretend that any type of laissez-faire capitalism ever got a foothold there. What really happened is that the people who already had the power kept it, only the labels changed. Where first there was the administrator of a plant owned by the state, the same guy suddenly became the “owner” of the plant, with the blessing of the state, at least in those cases where the so-called owner was loyal to the new masters. The same goes for China. Friedman never defended this kind of crony capitalism, which could only grow out of the structures of a communist dictatorship anyway.

Let’s get to the more interesting questions. You are certainly right that people perceive the relative measure as more relevant than the absolute measure of wealth once an economy rises above subsistance levels – I even think there is a fair amount of research which proves your point. But is it right, is it moral to legitimize envy ? I don’t think so.

Another interesting question is that it might be envy (“my neighbour just bought a new car, I need a new car”) which drives the economic growth that you complain about. If I can be a bit provocative, inequality has less impact on the environment than equality, so there is a major contradiction in your thinking there, or at least in the way you expressed it. Getting back to Friedman and all other free-market economists, growth isn’t only a capitalist thing, it’s also a socialist fetish. So again, your demonstration fails. Which brings us to my last point, which is that the type of economy that would respect our environment has yet to be invented, that it would very probably not be democratic since most people wouldn’t vote for a reduction in their relative well-being, and that the left-right divide is absolutely irrelevant in this respect.

I’ll concede the first point – you’re right that Friedman isn’t alone in advocating unregulated capitalism, he’s just become famous as, if you will, its poster child. So it’s no more fair to hold him responsible for Reagan and Thatcher than it is to hold Marx responsible for Lenin and Mao (though to my knowledge, Friedman didn’t disavow ‘Reaganomics’, though he had the opportunity to do so – an opportunity denied to Marx by the iron fist of chronology).

I’d be interested in hearing more about the sample of the American and UK citizenry that you used to determine that they did not live ‘in misery’.

I take your point that (as I also said) the post-Soviet states are a special case. But my understanding was that the decision to use so-called ‘shock therapy’ as a means of switching to a capitalist economy, as opposed to a more gradualist model, was a decisions whose chief advocates were neoliberal economists. If you accept that, then to absolve them of all responsibility for the current state of the post-Soviet states is pretty dubious. If you say you’ve got the best solution, you bear responsibility for the results of the solution you propose.

Now, I have to say I don’t have a lot of time for your claim that whatever inconveniently substantial body of research argues that societies function better when they are more equal, that for a government to take account of this finding would be to ‘legitimise envy’, and therefore wrong. Compressing the full impact of inequality into the ‘envy’ of all those not at the top of the heap is a gross oversimplification. People are less healthy in unequal societies – that’s a fact about the sort of beings that we are. I can’t read your claim in any way other than that your are saying ideology trumps evidence.

Finally, regarding your claim that ‘equality’ causes more detrimental impact on the ecosystem than inequality. I am fairly certain that if you totted up all the human organisational models that have existed since prehistory, you’d find that the most egalitarian ones were almost always also the ones that most effectively ‘lived within their means’ ecologically, and did not end up using enough resources that they needed to expand and conquer other groups in order to maintain their levels of consumption. The notion that ‘equality’ can only mean ‘everybody consuming the same amount as the planet’s biggest consumers’ is, to say the least, a highly specific definition of the word.

Sorry, but you can hold Marx responsible for what was done in his name: he theorized the “dictature of the proletariat” and advocated the elimination of class ennemies explicitly. If you’re interested I can look up the exact references for you. He also favoured colonialism, but that is another story. On the other hand, I’ve read a couple of Friedman’s books, and he never advocated dictatorships or the exploitation of the poor by the rich; on the contrary, he justifies his economics with the observation that a rising tide lifts everybody’s boat. By and large, that is exactly what happened in countries which liberalized their economies. I take from your remark about the economic state of the US and the UK that you have never been to a third world country, because otherwise it just doesn’t make any sense. It also does not explain why so many people are willing to risk live and limb just to get to the US and the UK.

As for the post-Soviet states, sorry, but you’re being cheeky: as I pointed out, Friedman or for that matter other free-market economists did NOT defend the appropriation of the means of production by apparatchiks. If you say otherwise, prove it. If you can’t prove it, knock it off.

Perhaps I’ve been unclear on the last point, but you stated substantially two things: implicitly you recognized that free-market economies have produced enough to survive (which is more than can be said for command economies, see e.g. the famines that have regularly affected communist countries) but you observed that relative inequality is more important. My first remark is very simple: you legitimize jealousy, envying someone who is doing better than you, even if the system has allowed you to have enough to live on. I admit that it is a powerful motivation (maybe Tom can help us out here, but to my knowledge there is indeed research that confirms that people, when given a choice of doing very well or doing slightly less well but better than their neighbour go for the second option) but I refuse to accept its moral validity. My second remark is that if you want to close the relative equality gap, you will need to raise consumption, even if you soak the rich. As on the other hand you seem to attack consumption as such as being destructive of the environment, you are incoherent. Moreover, you blame free-market economists and specifically Friedman for the growth ideology, whereas all economists, left and right, defend the idea of growth. The only exceptions are a few hardy souls who take an environmentalist view, and they can be found both on the left and on the right, hence my observation that the left-right divide is not relevant in this discussion.

Finally, loads of societies have destroyed their environment, and their economic systems were wildly different, going from the inhabitants of the Easter Island over MIddle Eastern states during antiquity to the Soviet Union. Destroying our environment seems to be a very human thing to do. A good reference on this is Jared Diamond’s “Collapse”. You might be fairly certain that egalitarian societies do not destroy the environment (whatever an “egalitarian” society is supposed to be, since somehow some pigs are always more equal than others) but the evidence is that you are mistaken.

One last thing, maybe you should read what people really did write before accusing them of having caused all the ills of mankind. I’m no big fan of Friedman, but scapegoating him for everything wrong with the world and using this straw-man to delegitimize even what he writes on a wildly different subject than economics is blatantly unfair.

I haven’t read “The Shock Doctrine” yet – as Tom recommended it, I will – but here’s a good defence of Friedman against Klein’s allegations.

http://www.cato.org/pubs/bp/bp102.pdf
http://www.cato.org/pub_display.php?pub_id=9626

Moreover, I recommend reading “Free to choose” and “Capitalism and Freedom” if you want to have a taste of what Friedman really defended – and by the way, these books illustrate that he was a fundamentally decent guy, whatever mistakes he might or might not have made. Finally, I would like to point out that there are a number of instances in which he took standpoints against the interests of big business, like e.g. on copyright extension.

I look forward to discussing these books with you. If there is anything you would like to recommend to me, please do so, I’m interested in new ideas.

A lively exchange, indeed. One observation; Alec’s original formulation was “Milton Friedman’s theory of economics could be held responsible for a substantial portion of the world’s ills”. The subject of his accusations is not Milton Friedman, but his theory of economics. I’m guessing Alec isn’t in fact trying to “scapegoat[e] him for everything wrong with the world”, or even delegitimize his writings on topics other than his “theory of economics”, and, of course, the original quote of this blog post.

Perhaps it helps to contextualize it in that quote, which presents Friedman’s unusual (and worthy of exploration) definition of a theory. As I understand it, the original issue is, simply, if Friedman’s main theoretical legacy (his formulation of laissez-faire capitalism) has been shown to be extremely problematic in practice, should we question the legitimacy of his own criteria for how to assess a theory?

I like the ideas of the quote, and certainly find it refreshingly counter-intuitive, giving me a different perspective on analyzing theories. However, if Friedman was rigorously employing those criteria on his own theories, I am not convinced of their efficacy.

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