On the Methodology of The Methodology of Positive Economics By James Devine at http://maxspeak.org/devine.html on January 29, 2007.
When people talk back to the new breed of laissez-faire (neoliberal) economists, they are often told that the policy recommendations - the imposition of free markets, privatization, etc. - are based on positive economics, not on normative judgments. That is, it's based on "just the facts ma'am" and not on blatant free-market biases. These economists always base their assertions on models. But they do not want to get high on modeling glue (like abstract economists of the Gérard Debreu sort). Instead, they defend their models on the basis of the claim that they predict events in the economy. Models always and everywhere involve unrealistic assumptions. Some simplification is needed, to emphasize what's important. But Milton Friedman - the guru of the neoliberals - went far too far down this road. He lost sight of the need for models to be reasonable. That is, the assumptions that form the basis for model-building must approach fitting that's true in the real world. For him, the validity of assumptions are totally secondary to the model's ability to predict.[1] A good model may involve assumptions that are "wildly inaccurate descriptive representations of reality." Friedman suggests a model of tree behavior based on the conscious decisions of leaves. If this model consistently predicts better than one based on another explanation, the former is to be preferred.[2] The only proof of the assumption is in the prediction. This creates a Green Zone around the free-market assumptions such as that people are totally greedy and markets work perfectly. Criticism of these assumptions is totally irrelevant as long as the model that they add up to predicts well. But no model can be treated as a unified whole. Each assumption should be treated separately. Each implies predictions. If leaves are conscious, for example, that implies a specific result for an EEG. This has some truth to it, but not much. You can create a model that predicts (fits the data) pretty well, despite an unrealistic assumption, if you add in another unrealistic assumption! The EEG suggests that we dump the conscious leaves assumption, no matter how well the model as a whole predicts. But Friedman can save the model by assuming that leaves think in a different way than we do. Similarly, the Ptolemaic Earth-centered model of the solar system can be made to predict the movement of planets better than the Copernican one -- by assuming new epicycles (unrealistic complications). Friedman, of course, assumed that free markets always produce the best of all possible worlds. But then people pointed to poverty, pollution, or pestilence. He defended the model with another assumption: when markets don't do a good job, it's because the government meddled with them. Similarly, the assumption that each of us is totally individualistic does not to fit with experience. But the added assumption that each is operating within market institutions makes models based on the first one much more accurate in their predictions. This is because trying to survive in markets encourages people to act in an individualistic way (a fact that Friedman ignored). Instead of Friedman's view, we must ask: is the cost of an unreasonable assumption (consciously-calculating leaves) worth the value of the resulting prediction? Crucially, it's a judgment call. Thus, our value judgments help us to decide which assumptions to make. Friedman and his followers make assumptions based on laissez-faire ideology, which is heavily based on value judgments. They then use his imprimatur to defend their unreasonable assumptions. This transforms their normative views into "positive economics." But this is merely legerdemain. [1] 1953. The Methodology of Positive Economics. In his Essays in Positive Economics. U. of Chicago, pp. 3-43. http://members.shaw.ca/compilerpress1/Anno%20Friedman%20Positive.htm, as of Jan. 26, 2007. [2] "I suggest the hypothesis that the leaves are positioned as if each leaf deliberately sought to maximize the amount of sunlight it receives, given the position of its neighbors, as if it knew the physical laws determining the amount of sunlight that would be received in various positions and could move rapidly or instantaneously from any one position to any other desired and unoccupied position." (Friedman, p. 19.) -- Jim Devine / "Doubt is uncomfortable, but certainty is ridiculous." -- Voltaire.
