Milton Friedman’s causal realist stance?

Edward Mariyani-Squire

doi:10.1093/oep/gpy004

Mariyani-Squire, Edward

2018-03-08 00:00:00

Abstract Since the 1990s, a causal realist interpretation of Milton Friedman’s 1953 essay ‘The Methodology of Positive Economics’ has been advocated. This article recounts three arguments for this interpretation and then critically examines them. The arguments are: (1) Friedman’s methodology is based upon Alfred Marshall’s own realist methodology; (2) key passages in Friedman’s 1953 essay express a causal realist stance; and (3) Friedman and Schwartz’s work on US monetary history presupposes causal realism. These arguments are contestable. First, there are important differences between Marshall’s and Friedman’s methodology. Second, key passages in the 1953 essay are prima facie incompatible with a causal realist stance. Third, Friedman and Schwartz’s ‘transmission mechanism’, appended to their monetary history, is arguably instrumentalist in character. The article concludes with some brief reflections on how Friedman’s approach to economics, including his 1953 essay, could be read as strategically malleable, rather than being an ‘objectively’ prescriptive methodology. 1. Introduction Milton Friedman’s methodology, and particularly his famous 1953 essay ‘The Methodology of Positive Economics’ (hereafter Positive Economics), has been widely taken to be an example of methodological instrumentalism (e.g. Coddington, 1972; Wong, 1973; Boland, 1979; Blaug, 1992; Caldwell, 1994). Methodological instrumentalism holds that a theory is a discursive tool which should parsimoniously summarize existing observations and generate accurate predictions of interest. The tool need not refer to existent causal mechanisms, although it may coincidentally do so. A parsimonious fiction that is useful—that summarizes and predicts well—is sufficient for the instrumentalist (Boland, 1979; Mäki, 1998a). For a long time, this has been the dominant interpretation of Positive Economics. However, from the 1990s onwards, a realist—indeed, a causal realist—interpretation of Positive Economics has emerged. For a causal realist, one should seek to establish why or how empirically observed phenomena exist; one needs an existent (a ‘real’) mechanism that would ontologically link and thereby explain observed associations. For example, a causal realist will not be happy to simply find a stable relation between atmospheric temperature and the viscosity of metals, or to just assert that changes in the former somehow mysteriously ‘lead to’ changes in the latter. The apparently lawful relation requires a real mechanism—such as the molecular structure of metals—before one can say a realist causal explanation has been provided. (This is not to imply a causal mechanism must entail some kind of ‘micro-level’ explanation. For example, in seeking to account for significantly different rates of infant mortality between two racially distinct populations, one may posit politically mandated race-based control over access to medical services, such as was the case in South Africa. The actually existing causal mechanism in this case was, summarily, an institutionalized apartheid system—entailing a ‘macro-level’ explanation.) For the causal realist, one should seek to develop theories that are true discursive representations of actually existing causal mechanisms; posited causal mechanisms should explain observed patterns; and theories should be tested, where possible, by empirically checking postulates, by their unifying explanatory power, and by their predictive power (cf. Lawson, 1997; Runde, 1998; Machamer et al., 2000; Hoover, 2002). To say that Positive Economics expresses such a stance is a remarkable about-face in the literature. What arguments could support this interpretation? Briefly, three arguments have been offered in support of the causal realist interpretation: (1) The Marshall Argument: In his various methodological statements, including Positive Economics, Friedman asserts that he follows Alfred Marshall’s lead. Because Marshall’s own methodological statements, especially his 1885 essay ‘The Present Position of Economics’, exhibit a causal realist stance, it is therefore reasonable to infer that Positive Economics similarly reflects a causal realist stance. (2) The Key Passages Argument: There are key passages in Positive Economics that can be plausibility interpreted as reflecting a causal realist stance. (3) The Monetary History Argument: Friedman and Schwartz’s (1963a,b) work on the monetary history of the USA seeks to provide explanations of macroeconomic fluctuations based on underlying causal mechanisms. A number of prominent commentators have championed one or more of the above three arguments. They include Daniel Hammond (e.g. 1990, 1996), Abraham Hirsch and Neil de Marchi (e.g. 1990), Tony Lawson (e.g. 1992a), and Uskali Mäki (e.g. 2009). It is Kevin Hoover (2009), however, who has most recently and usefully brought all three arguments together to make the explicit case for a causal realist interpretation of Positive Economics. This article is concerned with whether the realist interpretation of Positive Economics is strong enough to warrant assent.1 It is contended here that the above arguments are insufficiently strong to definitively establish that Positive Economics in fact advocates a causal realist position. First, there are important differences between Marshall’s methodology and Positive Economics which undermine the postulate that they are essentially the same. The differences relate to certain features of their respective conceptions of theory and method. Second, the prima facie instrumentalist passages in Positive Economics are probably just that. Friedman’s use of the ‘as if’ formulation suggests that he is at best indifferent to underlying real causal mechanisms involving motives and decision-making. Finally, although Friedman and Schwartz’s work on monetary history is highly suggestive of an implicit causal realist stance, it is nonetheless arguable that their crucial ‘transmission mechanism’ relies on fictional ‘as if’ decision-making. 2. Arguments for reading Positive Economics as a causal realist text 2.1 The Marshall argument Hirsch and de Marchi (1990), Hammond (1990, 1996), and Hoover (2009) have all advanced the argument that Positive Economics should be interpreted in the light of Alfred Marshall’s methodology because Friedman himself repeatedly identified Marshall as his guiding light in such matters. Hirsch and de Marchi (1990) and Hammond (1990, 1996) both point out that from the 1940s onwards the only label Friedman ever used to identify his own method was ‘Marshallian’. Hoover (2009, p. 307) goes so far as to say that Friedman read Marshall ‘like a fundamentalist Christian who constructs his theological position by direct quotation from scripture’. Assuming that Marshall’s own methodological position can be characterized as causal realist, it follows that Friedman must have been a causal realist, not an instrumentalist. A number of essential methodological commonalities between Friedman and Marshall have been identified to justify the kinship between them, and thereby imply that Friedman’s work should be understood as articulating a Marshallian realist position. First, for Friedman, Marshall’s approach was diametrically opposed to Walrasian formalism. Friedman explicitly opposed the Walrasian approach on methodological grounds and championed what he called the superior Marshallian approach (Hirsch and de Marchi, 1990, pp. 19–27; Hammond, 1996, pp. 30–39). The latter was focused on particular, compartmentalized concrete market phenomena and problems (‘partial analysis’), and it sought empirically supported solutions based on causal explanations. For Friedman, Walrasian economics by contrast never rose to the challenge of dealing with empirical ‘concrete truth’ and instead beat a ‘retreat into purely formal or tautological analysis’ that was little more than ‘disguised mathematics’ (Friedman, 1953, pp. 11–12; cf. Friedman, 1946, 1947, 1949, 1955, 1974). Second, it has been argued that Friedman and Marshall held a common view on what constitutes ‘theory’ and its function (Hammond, 1990, 1996; Hoover, 2009). Marshall’s (1885, p. 159) ‘economic organon’ is ‘an engine for the discovery of concrete truth, similar to, say, the theory of mechanics’. Ideally, the organon is composed of true universal laws which can be used to explain concrete phenomena by supplementation with particular facts. Similarly, Positive Economics characterizes a theory as having a ‘filing’ component (its logical structure), and a ‘substantive’ component (with empirical referents). According to Friedman, this ‘substantive’ component abstracts ‘essential features of complex reality’ to explain concrete phenomena of interest (Friedman, 1953, p. 7). Further, both Marshall and Friedman reject pure empiricism and pure rationalism by claiming, on the one hand, that theory must be involved in selecting, organizing, and interpreting facts so that they may ‘speak’ (Friedman, 1953, p. 34; Marshall, 1885, pp. 166–68), but on the other hand, that theory not informed by and tested by factual evidence from real, concrete situations is empty (Friedman, 1953, pp. 11–12; Marshall, 1885, pp. 154–56). Thus, on this view, as Hammond (1990, pp. 203, 204) succinctly put it, ‘For Friedman the subject matter of economics is a reality that exists independently of the economist and his theory. The economist going about his business is involved in a search for truth. … Friedman’s Marshallian view is realist’. Third, it has been argued that both Friedman and Marshall were interested in the acquisition of causal truths—that is, in discovering real underlying causal mechanisms, or in Hirsch and de Marchi’s (1990, p. 169) words, ‘seeking the causes of causes’. Marshall explicitly discusses the importance of the search for causal relations (Marshall, 1885, pp. 166–68), and Friedman, quoting Marshall, affirms that theory should ‘provide a body of substantive hypotheses, based on factual evidence, about “the manner of action of causes”’ (Friedman, 1949, p. 490). And just as Marshall employed what Hirsch and de Marchi (1990, p. 168) call a ‘[causal] factors of influence strategy’ in much of his work, so too ‘Friedman adopts the “factors of influence” strategy in most of his empirical work’. Finally, just as Marshall (1885, p. 157) conceives of causal relations as lying ‘deep below the surface’ of observed phenomena, Positive Economics refers to the ‘fundamental hypothesis of science … that appearances are deceptive and that … superficially disconnected and diverse phenomena … [are] manifestations of a more fundamental and relatively simple structure’ (Friedman, 1953, p. 33). Indeed, Friedman and Schwartz (1963a, p. 676) say that ‘appearances are deceiving; the important relationships are often precisely the reverse of those that strike the eye’. 2.2 The key passages argument A hurdle which the causal realist account of Friedman’s methodology must jump is the seemingly recalcitrant passages in Positive Economics. Front and centre are the notorious passages about unrealistic assumptions and ‘as if’ consciously calculating leaves. These passages have usually been taken to be evidence of either instrumentalism or sheer confusion. Rising to the challenge, advocates of the causal realist interpretation have argued that when examined more closely, these seemingly instrumentalist passages are in fact consistent with causal realist tenets. 2.2.1 Unrealistic assumptions The following famous passage in Positive Economics is often taken to be either an egregious blunder (e.g. Rotwein, 1959; Rosenberg, 1972) or exemplifying an instrumentalist stance (e.g. Boland, 1979). Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (Friedman, 1953, p. 14) Hirsch and de Marchi (1990), Lawson (1992a), Mäki (2009), and Hoover (2009) argue that such interpretations are misreadings. They all note that for Positive Economics, ‘unrealistic’ often just means an incomplete description of reality due to abstraction from irrelevant features of the world; it does not preclude reference to ‘essential features’ of reality. In fact, ‘“Lack of realism” for Friedman is just another … way of referring to the desirable property that a theory captures the essence of a deep relationship’ (Hoover, 2009, p. 313). Hoover also takes the advocacy of ‘unrealisticness’ in Positive Economics as recognition of the imperfect and pragmatic nature of economic investigation. Despite assumptions not being perfectly descriptively true, they ‘may be as accurate as we can use given our ability to measure or as accurate as we need for some practical purposes’. This is ‘perfectly compatible with the project of a constructive causal realism’ (Hoover, 2009, p. 314; cf. Mäki, 2009, p. 96). Further, the emphasis on predictive testing in Positive Economics can be construed as a causal realist method of seeking out underlying causal truths. Hirsch and de Marchi (1990, pp. 73ff) argue that concomitant meanings of ‘unrealistic’ in Positive Economics include ‘going beyond the data’ to formulate (initially) ‘implausible’ theoretical postulates (about causes). Such postulates can be rendered plausible/believable by demonstrating that they imply empirically true predictions from which one can abductively infer the truth of the seemingly ‘unrealistic’ assumptions. Hoover similarly argues that premises referring to unobservables can be subjected to ‘indirect tests’ of their truth: empirically confirmed predictions provide ‘indirect evidence’ of underlying causal mechanisms expressed in premises (assumptions) (Hoover, 2009, p. 311; cf. Mäki, 2009, p. 96). Insofar as, say, the ‘ideal type’ of perfect competition generates accurate behavioural predictions, one may infer that it ‘works’ because it contains some real ‘essential features’ explaining that market behaviour. Thus, ‘it is unrealisticness that serves and underwrites Friedman’s realism with respect to the deep causal mechanisms’ (Hoover, 2009, p. 313). 2.2.2 ‘As if’ conscious leaves The other major textual difficulty with interpreting Positive Economics as a causal realist text is its advocacy of ‘as if’ assumptions. Since Positive Economics says ‘as if’ formulations are ‘valid’ as long as they predict well, this is often taken as evidence of an instrumentalist position—or even as signally explicit opposition to causal realism (e.g., Blaug, 1992, p. 92). The most notorious passage in this regard is the one referring to ‘as if’ conscious leaves: 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, 1953, p. 19) This hypothesis, says Positive Economics, can legitimately be used to ‘explain’ the position of leaves on a tree, despite the fact that … leaves do not ‘deliberate’ or consciously ‘seek’, have not been to school and learned the relevant laws of science or the mathematics required to calculate the ‘optimum’ position, and cannot move from position to position. (Friedman, 1953, p. 20) How could this be interpreted in a causal realist fashion? Lawson (1992a, pp. 156ff) argues that the example implicitly suggests a realist ontology because it is restricted to a ‘particular class of circumstances’—that is, to a ‘closed system’—which is only intelligible if one presupposes certain real causal mechanisms have been isolated. Hoover, however, goes further. He points out that after saying that ‘the hypothesis does not assert that leaves do these things but only that their density is the same as if they did’ (Friedman, 1953, p. 20), Friedman goes on to say ‘that we should prefer an explanation in terms of the mechanisms that make the tree behave as if (counterfactually) it were a conscious maximizer’ (Hoover, 2009, p. 312). Thus the predictive success of the ‘as if’ hypothesis demands that one search for the real underlying mechanism that would explain such success, such as a ‘purely passive adaptation to external circumstances’ mechanism (Friedman, 1953, p. 20). Such an explanation ‘will be more general and, therefore, more fruitful in making predictions about a wider range of phenomena’. Further, ‘predictive power … in other domains lends indirect evidence’ to the causal explanation’s plausibility (Hoover, 2009, p. 312). 2.3 The monetary history argument As Hammond (1996) shows, from 1948 on, Friedman and Schwartz presupposed the existence of an asymmetric causal relation running from monetary factors to production. Friedman’s (1956) ‘The Quantity Theory of Money—A Restatement’ provided some of its theoretical backing, and A Monetary History of the United States, 1867–1960 (hereafter Monetary History), was to serve as the chief empirical demonstration of the presumed relation. Hirsch and de Marchi (1990, p. 169) also argue that Friedman ‘had to be seeking the causes of causes; the more directly obvious or proximate causes would not do. … Friedman and Schwartz’s Monetary History and Monetary Trends are perhaps the best examples of this belief at work’. Hoover (2009, p. 305) similarly points out that one would be hard pressed to read Monetary History without being aware that it is ‘a detailed marshalling, not only of the facts implied by Friedman’s monetary theory, but of the evidence for the truth of its underlying mechanisms and initial conditions: its assumptions’. Hoover (2009) further points out that contra instrumentalism, Monetary History is not interested in utilizing demonstrably fictitious theoretical constructs that would merely predict fluctuations in the economy. Rather, Friedman and Schwartz were concerned to show that the core assumptions of their underlying monetary theory were most likely true. This stance is made plain in their follow-up article ‘Money and Business Cycles’, where a ‘pin theory’ of consumption expenditure is used to argue by reductio ad absurdum that mere correlation and predictive success is insufficient to choose between rival theories (Friedman and Schwartz, 1963b, pp. 48–49). The pin theory, as compared to a monetary theory, is unsatisfactory because it does not conform to already existing evidence, and violates evidentially based common sense. This, argues Hoover, shows that for Friedman, evidence does bear upon the plausibility of assumptions (Hoover, 2009, p. 305). Further, in line with a position that seeks to ‘get to the essence of the matter’, Monetary History appeals to ‘categories of entities that are not directly observable’ but presumed to be real (Hoover, 2009, p. 311). Most obviously, as articulated in Friedman (1959), the velocity of circulation of money, only indirectly observed, plays an important causal role in the subsequent empirically filled-out historical case for the effect of changes in the money stock on income, inflation, and output. As to ‘initial conditions’, Hoover notes that Monetary History makes numerous counterfactual claims and calculations ‘grounded in common assumptions about the mechanisms governing different [cyclical] episodes’ (Hoover, 2009, p. 315). Hoover sees this use of counterfactual initial conditions as important because it is evidence of implicit causal realist presuppositions. Since underlying causal mechanisms cannot be directly observed, they must be checked ‘indirectly’ by the veracity of their predictive claims in application and by the plausibility of their counterfactual claims. Counterfactual thought experiments would not be conducted unless Friedman had a ‘commitment to the reality of a causal structure that can be faced with alternative initial conditions’ (Hoover, 2009, p. 316; cf. Lawson, 1992a). A potential problem for a causal realist account of Friedman’s Monetary History is the near absence of explicit ‘causal talk’ from its pages. Clearly, it is difficult to call Friedman, and by extension Positive Economics, ‘causal realist’ if there are not explicit textual references to the concept of causation. This apparent problem, however, may be a superficial one which can be made to serve a causal realist interpretation. As Hammond (1996) shows, although Friedman and Schwartz were freer in their use of causal language at the inception of their monetary project in 1948, as time went on, they became more and more cautious about using the word ‘cause’, so that by the 1960s it was absent from their published work. Nonetheless, as Hoover (2009, pp. 206–308) shows, the concept of causation remained, re-expressed in a variety of synonyms, such as ‘produces’, ‘influences’, ‘engenders’, ‘affects’, ‘brings about’, ‘offsets’, ‘initiates’ ‘determine’, ‘source’, and ‘promotes’. One may thus conclude that Monetary History is in fact liberally peppered with ‘causal talk’. 3. Critical reflections on the arguments 3.1 How Marshallian? If one assumes Marshall’s methodological position is causal realist in nature, and Friedman’s and Marshall’s methodological positions are in essence the same, then of course it follows that Friedman holds to a causal realist position. One may make a reasonable case on textual grounds that Marshall’s 1885 essay, ‘The Present Position of Economics’, and his general methodology, takes a causal realist stance.2 The question then is whether Friedman read Marshall’s essay as exhibiting such themes, and then followed them faithfully. If he did, then the Marshallian Argument is sound; if he didn’t, then it is not. Now, even if Friedman treated Marshall’s essay like a ‘fundamentalist Christian’ treats the Bible (Hoover, 2009, p. 306), it is possible that he still imposed his own, perhaps different, methodological beliefs on Marshall’s text rather than absorbing what Marshall ‘really’ thought. It is contended here that there are significant differences between Marshall and the methodological prescriptions of Positive Economics, such that one cannot directly map Friedman’s ‘official’ methodology onto Marshall’s. 3.1.1 Theory When it comes to what constitutes a theory, Friedman’s account in Positive Economics does bear some resemblance to Marshall’s, but there are salient differences between the two. Marshall (1885) repeatedly characterizes economic theory as the ‘economic organon’. In scholarly circles ‘organon’ implied at least an affinity with, if not a reference to, Aristotle’s Organon (ὄργανον), which set out the ‘truth-preserving’ rules of logical inference, whatever the content of syllogisms happened to be. Marshall’s organon, however, was not content-free and confined itself to economic matters—particularly, at base, to the force of those human motivations that could be represented quantifiably in terms of money (Marshall, 1885, p. 159, 161; Marshall, 1920, p. 38). For Marshall, a theory should ideally be composed of quantifiable ‘transcendent’ universal laws which express the motivational tendencies governing economic behaviour. In this sense, the economic organon was not merely about tools of abstract reasoning. Although the economic organon could be used to understand particular concrete events, it was not composed of, nor did it refer to, particular facts or problems per se—it was ‘not a body of concrete truth, but an engine for the discovery of concrete truth’; it contained no empirical ‘dogma’ (Marshall, 1885, pp. 159–61). It is in this sense that Marshall favourably compared his ‘economic organon’ to the theory of classical mechanics.3 Let us compare the above account of Marshall’s conception of theory with that articulated in Positive Economics. In the latter, a theory is ‘a complex intermixture of two elements’. One element of a theory is (i) a ‘language’ with ‘no substantive content’; a ‘set of tautologies’; a ‘filing system for organizing empirical material’; a ‘conceptual world or abstract model … containing only the forces it asserts to be important’ to some class of phenomena (Friedman, 1953, pp. 7, 24). The other element is (ii) ‘a body of substantive hypotheses designed to abstract essential features of complex reality’. The ‘empirical counterpart[s]’ to an abstract model are governed by ‘a set of rules defining the class of phenomena for which the “model” can be taken to be an adequate representation of the “real world” and specifying the correspondence between the variables or entities in the model and observable phenomena’ (Friedman, 1953, pp. 7, 24). Now, although element (ii) is essential to the conception of a theory in Positive Economics, it does not appear to be a specified feature of Marshall’s conception of theory. Friedman seems to be concerned here with theory construction for the purpose of summarizing and predicting data in concrete cases such that a theory can empirically compete with rivals on policy questions (cf. Friedman, 1953, pp. 5ff). This is perhaps why, for Friedman, the specification of empirical counterparts to concepts and their conditions of applicability are built into his conception of theories. There is nothing comparable to this in Marshall. It is not clear that this supports a causal realist view of theories. If anything, it has more in common with some kind of empiricism: a ‘substantive’ theoretical statement should not remain purely analytical; it should be operationalized by observable ‘counterpart[s]’ which are either directly observable or observable proxies. Such a concern is certainly evident in Friedman’s A Theory of the Consumption Function: ‘The central idea [of the permanent income hypothesis] is to interpret empirical data as observable manifestations of theoretical constructs that are themselves regarded as not directly observable’ (Friedman, 1957, p. 21; cf. Chao, 2003).4 As for element (i), it does seem closer to Marshall’s organon, but it is not identical. It is basically a list of abstracted ‘forces’ that could be given substance so as to account for some phenomenon (effect) of interest. However, unlike Marshall’s work, it does not seem to include actual motives of human decision-makers who would then exhibit actual psychological tendencies. One may say the above difference is a relatively minor one, but looking a little closer reveals that Friedman has made a major shift with respect to what makes up an economic theory. Marshall makes the tendencies of underlying, actually existent human motives an essential feature of his organon. A salient example is his general account of consumer behaviour, the core of which is the ‘familiar and fundamental tendency of human nature’ expressed as the law of diminishing marginal utility (Marshall, 1920, p. 93). With respect to this law, Marshall refers to what he believes is a real psychological mechanism that is fundamental to the decision-making of ‘flesh-and-blood’ buyers. Although it is an idealisation in the sense that a ceteris paribus clause is applied (the buyer’s ‘character’ does not change over the course of acquiring marginal units), Marshall does not posit any extraordinary powers of calculation or foresight that a common person would not possess. One is inclined to think that if psychologists were to discover that in fact, for the vast majority of humanity, no such psychological tendency was actually experienced, Marshall would be inclined to reconstruct his explanation of demand behaviour in line with whatever were the discovered real psychological tendencies. Indeed, as Medema (2015) has pointed out, Marshall recognized the importance of altruism, and non-deliberative customs and habits, but tended to abstract from them when he could not render them measurable. The implication is that if they could be captured with any degree of precision, Marshall would have given them a place in a more complete scientific explanation of economic behaviour. Friedman, by contrast, would seem to eschew reference to real decision-making processes of flesh-and-blood human beings in theories. This is not to say that he doesn’t believe there are real psychological mechanisms at work in agents causing systematic behaviour. It is just that an accurate representation of them (even in the abstract) is not integral to his conception of economic theory. Friedman instead theorized his decision-makers by using the ‘as if’ formulation. Rather than making the riskier claim that ‘we hypothesise phenomenon p occurs because mechanism m exists’, in his economic analyses Friedman fairly consistently proposes that ‘we hypothesise p occurs because it is as if m exists’. Examples abound.5 In his 1949 exegetical analysis of Marshall, Friedman attaches the ‘as if’ formulation to Marshall’s law of demand, despite the fact that one finds no such theoretical device in Marshall’s organon: … on my interpretation this [law of demand] is truly a general law, not subject to the exceptions that have been made in recent literature. It depends for its validity only on (a) the postulate that consumers can be treated as if they behaved consistently and attempted to maximize some function of the quantity of commodities consumed … (Friedman, 1949, p. 479) Indeed, in his 1948 article with L. J. Savage on choices involving risk, Friedman goes so far as to correct his Marshallian ‘Bible’ by suggesting that gambling behaviour can be ‘rationalised’ under a single hypothesis: In choosing among alternatives open to it, whether or not these alternatives involve risk, a consumer unit (generally a family, sometimes an individual) behaves as if (a) it had a consistent set of preferences; (b) these preferences could be completely described by a function attaching a numerical value—to be designated ‘utility’—to alternatives each of which is regarded as certain; (c) its objective were to make its expected utility as large as possible. (Friedman and Savage, 1948, pp. 287–88) In his 1950 article on Wesley C. Mitchell, Friedman characterizes not just his own efforts but economic theory per se as deploying the ‘as if’ device: ‘Economic theory’ is often taken to be a label for an existing body of doctrine concerned primarily with the allocation of resources among alternative ends and the division of the product among the cooperating resources, and based on the hypothesis that economic events can be ‘explained’ and ‘predicted’ by supposing men to behave as if they sought single-mindedly and successfully to pursue their own interests and as if their interests were predominantly to maximize the money income they could wring from a hostile environment. (Friedman, 1950, pp. 466–67) In Positive Economics, Friedman applies the ‘as if’ formulation to firms: … under a wide range of circumstances individual firms behave as if they were seeking rationally to maximize their expected returns (generally if misleadingly called ‘profits’) and had full knowledge of the data needed to succeed in this attempt; as if, that is, they knew the relevant cost and demand functions, calculated marginal cost and marginal revenue from all actions open to them, and pushed each line of action to the point at which the relevant marginal cost and marginal revenue were equal. (Friedman, 1953, pp. 21–22) In A Theory of the Consumption Function, Friedman again applies the formulation in theorizing his permanent income consumption function: The distinction between permanent and transitory is intended to interpret actual behaviour. We are going to treat consumer units as if they regarded their income and their consumption as the sum of two such components, and as if the relation between the permanent components is the one suggested by our theoretical analysis. (Friedman, 1957, p. 23) And in the section ‘Utility Analysis of Demand’ of his textbook Price Theory, Friedman (1962, p. 37) tells his students that ‘we shall suppose that the individual in making these decisions acts as if he were pursuing and attempting to maximise a single end’. In each of these cases, Friedman’s ‘as if’ theoretical formulation is not a Marshallian abstraction from anomalous exceptions or the imposition of clarifying ceteris paribus clauses that would throw into relief a real underlying ‘universal’ psychological mechanism. Rather, it is the attribution of prima facie extraordinary imaginary capacities to decision-makers in order to ‘rationalise’ (render coherent) existing patterns of behaviour and predict new ones. This being so, an essential feature of a Marshallian organon—real motives and actual deliberative powers that provide the basis of tendencies and thence laws—is conspicuously absent from Friedman’s account of the constitution of economic theory. 3.1.2 Method In ‘The Present Position of Economics’, Marshall (1885) took his economic organon to be an assistant to the ‘common sense’ method of investigating ‘complex’ social problems.6 This method involved two stages. The first was an analysis (compartmentalizing) stage in which aspects of a complex problem were divided into parts, each part being analysed separately and in isolation from the others. Broadly, the aspect of a complex social problem dealing with price-related decisions and actions was to be abstracted from other elements, including sociological and institutional ones, and then empirically investigated to establish economic causal relations relevant to the problem. Within the narrower realm of price-related phenomena, they themselves were to be compartmentalized and examined in isolation (by deployment of the ‘prison’ of ceteris paribus). The second stage was to synthesize the various elements that had been investigated in isolation, re-integrating them to arrive at a better understanding of the true nature of the complex problem under investigation. By this two-stage method, one was better equipped to formulate solutions to the social problem at hand (Marshall, 1885, pp. 164–65). Marshall pithily recapitulates this method in his 1898 essay ‘Distribution and Exchange’: Man’s powers are limited: almost every one of nature’s riddles is complex. He breaks it up, studies one bit at a time, and at last combines his partial solutions with a supreme effort of his whole small strength into some sort of an attempt at a solution of the whole riddle. (Marshall, 1898, p. 40) Although Positive Economics strongly appeals to the importance of abstraction (roughly, Marshall’s analysis stage), it makes no mention whatsoever of the essential synthesis component of Marshall’s ‘common sense’ method. For Friedman, Marshall’s theory was always taken to be a tool (‘an engine’) to be used to deal with particular concrete empirical puzzles/problems (cf. Hammond, 1996, pp. 35, 36, 44). As Friedman (1974, p. 160) reiterated in debate with Patinkin, the ‘Marshallian [is] concerned with the construction of special tools for special problems’; and as Friedman (1941, p. 310) said dismissively of monopolistic competition, it ‘adds little to our box of tools’. But Friedman never seems to go beyond that to Marshall’s vision of a holistic organon that, through synthesis, develops into a complete, complex total system of evolving, interrelated causal relations. Instead, for Friedman, Marshall’s tools remain just that. This enables us to make sense of the insistence in Positive Economics that one theoretical instrument, such as the ‘ideal type’ of perfect competition, could be applied to different markets—even ostensibly imperfectly competitive ones—depending on one’s aims or interests (Friedman, 1953, pp. 36ff). And as Friedman (1953, p. 42) suggests in the conclusion to Positive Economics, when it comes to ‘relative price and static monetary theory’, the main concern is with knowing how, when, and where to apply given tools: … we must have a comparable exploration of the criteria for determining what abstract model it is best to use for particular kinds of problems, what entities in the abstract model are to be identified with what observable entities, and what features of the problem or of the circumstances have the greatest effect on the accuracy of the predictions yielded by a particular model or theory. In sum, there is almost nothing in Friedman’s methodological statements that suggest a post-analysis synthesis of discoveries in order to construct a complex representation of a whole system.7 Yet without this second stage, one cannot complete Marshall’s process of scientific analysis; one cannot come to a full understanding of the phenomenon of interest, nor can one make (according to Marshall’s account) sensible policy prescriptions on the basis of the first stage alone. By contrast, Positive Economics seems to suggest that without Marshall’s synthesis stage, one can come to understand phenomena of interest and, presuming consensus on ‘basic values’, then move directly to policy prescriptions (Friedman, 1953, pp. 5ff; cf. Colander and Freedman, 2011). 3.2 Recalcitrant passages 3.2.1 Unrealistic assumptions It has been compellingly argued that ‘unrealistic’ in the sense of ‘incomplete description’, as suggested in Positive Economics, is perfectly compatible with causal realism (Hirsch and de Marchi, 1990; Lawson, 1992a; Mäki, 2009; Hoover, 2009). Compatibility, however, is not sufficient to establish identity. After all, even logical empiricists allow ‘unrealistic’ theories in this sense of the term (e.g. Braithwaite, 1962). To establish identity, one also has to show that Positive Economics further means ‘that a theory captures the essence of a deep [causal] relationship’ (Hoover, 2009, p. 313). One may appeal to the assertion in Positive Economics that a theory is ‘[i]n part … a body of substantive hypotheses designed to abstract essential features of complex reality’ (Friedman, 1953, p. 7). However, these words are not entirely unambiguous; causal realism is not necessarily implied. For example, in ‘abstract[ing] essential features of complex reality’, does Positive Economics mean the features are ‘essential’ in an ontological sense àlaBhaskar (1975) or Ellis (2002)? Or does it merely mean ‘features F are essential to our current purpose of predicting event E to degree of accuracy A in cases of interest C’? The former meaning licences the latter, but the converse need not be so. The latter meaning is compatible with (but not identical to), say, an instrumentalist stance: given some decided upon E, A, and C, then F may be deemed ‘essential’ to the investigation. If E, A, or C were to change, however, F might become ‘inessential’. Positive Economics does not rule out this latter methodological (as opposed to ontological) meaning of ‘essential’, so it is possible that the references to ‘unrealistic’ theories may indeed reflect an underlying instrumentalist stance. This possibility gains plausibility when we find Positive Economics asserting that Everything depends on the problem; there is no inconsistency in regarding the same firm as if it were a perfect competitor for one problem, and a monopolist for another, just as there is none in regarding the same chalk mark as a Euclidean line for one problem, a Euclidean surface for a second, and a Euclidean solid for a third. (Friedman, 1953, p. 36) The perfect competition model apparently identifies ‘essential’ features of a firm for some purposes/problems of interest, but not for others with respect to the same firm. One may therefore be reasonably entitled to say that the ‘essentials’ at issue here do not lie in reality itself, but rather are a property of the theory’s use according to the investigator’s interests. 3.2.2 ‘As if’ passages Coming to the apparently problematic ‘as if’ conscious and calculating leaves analogy in Positive Economics (Friedman, 1953, pp. 19–20), Hoover (2009), more so than other commentators, takes this passage to be indicative of the imperative to search for real causal mechanisms that in fact produce the effects predicted by the ‘as if’ formulation. This interpretation, however, involves a subtle rewriting. Positive Economics does not actually speak of shifting from an initial, fictive ‘as if’ hypothesis to a ‘real causal mechanisms’ hypothesis. The text does refer to an ‘alternative hypothesis’ that is ‘more attractive’ to the ‘constructed’ (as if) hypothesis.8 The alternative natural selection hypothesis … is more attractive than the constructed hypothesis [about conscious, calculating leaves] not because its ‘assumptions’ are more ‘realistic’ but rather because it is part of a more general theory that applies to a wider variety of phenomena, of which the position of leaves around a tree is a special case, has more implications capable of being contradicted, and has failed to be contradicted under a wider variety of circumstances. (Friedman, 1953, p. 20) Note that this passage does not suggest that the ‘validity’ or the ‘great plausibility’ of the ‘constructed’ (‘as if’) conscious leaves hypothesis is refuted or undermined by the superior alternative; it is just that its application is restricted to ‘a particular class of circumstances’ (Friedman, 1953, p. 20). Note also that Positive Economics does not actually stipulate that the ‘as if’ appellation should now be dropped from the alternative, superior hypothesis. Positive Economics would seem to allow one to say (if one wished) that trees behave as if unconsciously maximizing their chances of survival, or trees behave as if unconscious genetic mutations suitable for the survival of the species occurred. In fact, retaining the ‘as if’ appellation for the alternative hypothesis has the advantage of removing the obligation to make the risky ontological claim that this is how reality actually functions. Further, it should be recalled that the ultimate purpose of the conscious leaves example is to give legitimacy to ‘the economic hypothesis that under a wide range of circumstances individual firms behave as if they were seeking rationally to maximize their expected returns … and had full knowledge of the data needed to succeed in this attempt’ (Friedman, 1953, p. 21). If Hoover’s interpretation were correct, then in the spirit of the causal realist stance, one would expect to find Positive Economics advocating the search for the real causal mechanisms of market behaviour to replace the ‘as if consciously maximizing expected returns’ assumption with a postulate about actual decision-making. Yet Positive Economics does no such thing; instead, it seems to encourage the continued use of the former. Two possible accounts of this complacency suggest themselves—one charitable, the other more pessimistic. A charitable account is to see Positive Economics as simply indifferent to a real decision-making mechanism that causes business behaviour. This is suggested by the following passages: The articles on both sides of the controversy [over marginalism in the American Economic Review] largely neglect what seems to me clearly the main issue—the conformity to experience of the implications of the marginal analysis—and concentrate on the largely irrelevant question 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. (Friedman, 1953, p. 15) Let the apparent immediate determinant of business behavior be anything at all—habitual reaction, random chance, or whatnot. Whenever this determinant happens to lead to behaviour consistent with rational and informed maximization of returns, the business will prosper and acquire resources with which to expand. (Friedman, 1953, p. 22) This suggests that the ‘as if’ formulation can be read as merely saying: no matter what happen to be the real mechanisms causing firms’ behaviour, firms behave as if they were (fictional) conscious maximizers because the maximizing assumption enables one to make accurate predictions about their behaviour. If one takes the subsequent claim about natural market selection seriously—viz., that ‘acceptance of the [as if maximizing] hypothesis can be based largely on the judgment that it summarizes appropriately the conditions for survival’ (Friedman, 1953, p. 22)—then the ‘as if’ formulation can also be read as saying: since predictive tests establish that firms behave as if they were conscious maximizers, the fiction serves as a de facto permanent place-holder for the causal mechanisms and conditions underlying firm-behaviour, irrespective of what those mechanisms and conditions happen to be. Both of these interpretations can be characterized as instrumentalist in that neither demands that one seek out and explicate the real causal mechanisms—the fictional ‘as if’ assumption is more than enough to do the required work. Indeed, in the first appearance of the ‘as if’ formulation in Friedman’s work, Friedman and Savage (1948) very explicitly express a principled lack of interest in the real underlying decision-making mechanism for choices involving risk. In answer to the ‘understandable’ objection that their theoretical construction ‘conflicts with the way human beings actually behave and choose’, they assert that because it is not about actual decision-making, it … does not depend on whether individuals know the precise odds, much less on whether they say that they calculate and compare expected utilities or think that they do, or whether it appears to others that they do, or whether psychologists can uncover any evidence that they do, but solely on whether it yields sufficiently accurate predictions about the class of decisions with which the hypothesis deals. (Friedman and Savage (1948, p. 298) Note that the hypothesis would be untouched by the discoveries of psychologists. No matter what psychologists discover to be the real causal mechanism underlying risky choices, whether it be favourable or not to expected utility theory, it matters not. All that is of interest is whether it does its predictive work well. Friedman and Savage drive the point home with the analogy of the billiard player who makes her/his shots as if he were a well-programmed Newtonian calculating device (cf. Friedman, 1953, pp. 21–22). It is utterly irrelevant to Friedman ‘if it should turn out that the billiard player had never studied any branch of mathematics and was utterly incapable of making the necessary calculations’. The same considerations are relevant to our utility hypothesis. Whatever the psychological mechanism whereby individuals make choices, these choices appear to display some consistency, which can apparently be described by our utility hypothesis. (Friedman and Savage, 1948, p. 298) A less charitable account of the apparent lack of enthusiasm for seeking out real causal mechanisms is the following: Positive Economics is not merely indifferent to, but is opposed to, the investigation of real decision-making mechanisms. This is suggested by one of Friedman’s letters to Patinkin (in 1950) when discussing the marginalist controversy of the 1940s: … economic theorists do not (or should not) say anything about how businessmen behave or how they make their decisions. They should say: the consequences of such and such a ch[an]ge can be predicted by treating bus[iness]. men as if they did such and such. (Friedman, in Backhouse, 2009, p. 234, emphasis added) Given this strident imperative, one may say that in Positive Economics, Friedman wasn’t just attacking the critics of marginalism9 because they allegedly took questionnaire studies of managers’ decision-making to be evidence against marginalism. Arguably, he was also attacking them because they were seeking to introduce empirically based accounts of managers’ actual decision-making processes (real causal mechanisms) that would, if persuasive to the discipline, displace the fictive marginalist account. Certainly, Friedman does not encourage the anti-marginalists’ efforts to get a handle on the real decision-making mechanisms underlying firms’ behaviour; he does not offer advice on how their efforts may be improved; nor is he merely indifferent to their alternative postulates. Rather, he eviscerates their work, effectively warning the economics profession off such a research programme (cf. Backhouse, 2009). It is difficult to square such an approach with the imperatives of a causal realist stance. 3.2.3 Belief and truth talk Lawson (1992a), Mäki (2009), and Hoover (2009) all presume, in line with a causal realist view, that Positive Economics implies that predictive success helps justify belief in the truth of a theory’s core assumptions. Unfortunately, a closer examination of the text does not support this view. Both belief-talk and truth-talk about assumptions are studiously avoided in Positive Economics; prima facie synonyms for ‘belief’ and ‘true’ are also conspicuously absent. This is at least odd if the text is to be taken as exhibiting a causal realist stance. Instead of ‘belief’, Positive Economics in fact speaks of ‘confidence’ in and ‘acceptance’ of a theory (e.g. Friedman, 1953, pp. 8, 9, 18, 21, 22, 27, 28, 41). Does Positive Economics mean confidence/acceptance that a hypothesis/theory is true? It is not clear that it does. It instead speaks of theories being ‘tentatively “accepted” as valid’ (Friedman, 1953, p. 8) and of ‘our confidence in their validity’ (Friedman, 1953, p. 40). What then does validity mean here? At one point Positive Economics is explicit about this: ‘The constructed hypothesis [about conscious leaves] is presumably valid, that is, yields “sufficiently” accurate predictions about the density of leaves, only for a particular class of circumstances’ (Friedman, 1953, p. 20). This definition of validity indicates that it is not synonymous with truth, unless ‘truth’ just means pragmatically satisfactory predictive success. In short, one cannot be assured that Positive Economics is suggesting that a test of a theory warrants belief in the existence of theoretically expressed mechanisms. It could be that Positive Economics only means that a test justifies the continued use of the theoretical apparatus for similar phenomena of interest. And when Positive Economics speaks of having ‘confidence’ in or ‘accepting’ the validity of a theory, it does not seem to mean that the content of its core ‘as if’ assumptions are believed to be true. It only seems to mean that they are believed to be sufficiently good for the purposes in hand—viz., predicting phenomena of interest with sufficient accuracy. 3.3 A realist transmission mechanism? Hirsch and de Marchi (1990), Hammond (1996), and Hoover (2009) argue that Monetary History provides the strongest evidence that Friedman was interested in drawing inferences about causal relationships. Hoover is most insistent in his argument that this constitutes evidence of an ontologically robust causal realist stance, which then bears upon the interpretation of Positive Economics. The example, however, is not perfect because Friedman and Schwartz’s (1963b) ‘transmission mechanism’, which links money stock growth to business activity, appended to Monetary History, may be implicitly populated by fictionalized ‘as if’ optimizers. As one moves through Monetary History, one develops a distinct impression that Friedman and Schwartz are building a data-driven narrative which is highly suggestive of an asymmetric causal relationship between changes in monetary base growth and net national product. As Clower (1964) points out, the authors achieve the cumulative impression that a causal case is being built by a number of moves. First, they established an empirical regularity between the key variables over long historical periods that constitute something like an ‘equilibrium’ state (fairly steady growth in the money base and business activity, with the latter lagging the former). Second, they identified periods of ‘disequilibrium’ where the key variables are disturbed by ‘transitory’ factors, which themselves could be accounted for by exogenous factors. And third, they conducted thought experiments for various historical periods to see if rival accounts of the correlative data could be given. It is difficult to make sense of such moves if one doesn’t assume that Friedman and Schwartz are seeking to infer a causal relation. To this Hoover adds the points that Monetary History is in fact replete with ‘causal talk’, and that Friedman and Schwartz (1963b) lay out what amounts to criteria for assigning causal responsibility via their pin theory reductio. A problem remains, however, for a causal realist interpretation of Monetary History—viz., the absence of a mechanism which would explicitly link money base growth to business activity. No such mechanism is ever explicated in Monetary History. For a causal realist stance, this ingredient should do the crucial explanatory work. Its conspicuous absence leaves unanswered the question of precisely why the temporal asymmetric relation between the variables exists—it is not enough to just say one causes the other. In ‘Money and Business Cycles’, Friedman and Schwartz themselves openly acknowledge the lacunae and seek to ‘specify in some detail the mechanism that connects the one with the other’ (Friedman and Schwartz (1963b, p. 59). They thus offer a ‘tentative sketch’ of a ‘transmission mechanism’. This mechanism basically has the following sequential structure. An exogenous increase of the growth in the money stock via central bank open market operations leaves wealth-holders with excess money. They adjust their asset portfolios in response by first purchasing other financial assets, which raises their prices, and then shift to non-financial assets, raising their prices too. The latter has a positive wealth effect, and makes current productive services more attractive. ‘These effects raise demand curves for current productive services, both for producing new capital goods and for purchasing current services. The monetary stimulus is, in this way, spread from the financial markets to the markets for goods and services’ (Friedman and Schwartz, 1963b, pp. 60–61). This transmission mechanism could be said to serve the role of an underlying causal mechanism which explains the asymmetric relation between growth in money stock and aggregate money income. It seems to fit a causal realist schema of ‘x, operating via mechanism m, causes y’. And yet, a fly in the ointment remains for such a causal realist interpretation—viz., how the transmission mechanism is to be understood in the light of Friedman’s representation of decision-making agents. A central presupposition of the transmission mechanism is Friedman’s conception of the demand for money: it is the excess money holdings which result in a disjuncture in the preferred and actual composition of households’ and firms’ asset portfolios, and thence leads to the purchase of other assets. Friedman’s (1956) theory of the demand for money is based on a Fisherian intertemporal utility maximizing rationalisation of decision-making. Now, if the account in the previous section about the way Friedman theorizes choice-making is correct—that he explicitly eschews an investigation of actual decision-making processes with respect to asset portfolios in favour of an instrumentalist ‘as if’ formulation—then one may also say that the latter is implicit in the transmission mechanism too. Mutatis mutandis, the subsequent behaviour of firms in the mechanism: ‘as if’ return-maximizing firms increase demand for productive services and thence increase output. If this is so, then the transmission mechanism is populated by a series of imaginary ‘as if’ processes connecting intermediate observables, and so it is perhaps more accurately characterized as instrumentalist in its nature. Perhaps an analogy will make this claim clearer. The depression of the brake pedal in a moving car is associated with the car decreasing its velocity. One may posit a real causal mechanism at the same ‘macro’ level to explain the association. The braking mechanism may be composed of real ‘parts’ structured in a certain way (e.g. a lever, pistons, master and slave cylinders containing hydraulic fluid, pads, and wheel discs). Depressing the brake pedal activates the braking mechanism which slows the rotation of the wheels, thereby decreasing a moving car’s velocity. That may be deemed sufficient to say that a realist causal explanation has been offered. One could (if one wished) go on to posit the molecular structure and processes of the various parts of the mechanism, which could be said to provide ‘micro-foundations’ to the mechanism. So long as these are posited to be real too, then one may say (metaphorically) that a ‘deeper’ realist causal explanation has now been offered. But what if the parts of the mechanism were not characterized in terms of real properties, but rather in terms of fictional ‘as if’ properties (e.g. as if composed of tiny conscious beings that communicate perfectly with each other)? One may now be inclined to say this is no longer a causal realist explanation—that it is, rather, instrumentalist in character. It is argued that this is analogous to what happens with Friedman and Schwartz’s transmission mechanism. It is ultimately premised on—albeit not formally derived from—fictional ‘as if’ decision-making processes, which thereby renders it instrumentalist in character. 4. If not realist, then what? Against the instrumentalist interpretation, a number of commentators have offered reasons for thinking that Positive Economics takes a causal realist stance. To wit, Friedman’s affinity with a Marshallian methodology, along with his empirical work on monetary history, is suggestive of an abiding concern to discover underlying causes of economic phenomena. This is said to back a causal realist reading of Positive Economics—including of its seemingly instrumentalist passages. This article has argued that the case for the realist interpretation is not sufficiently strong to compel assent. In sum, first, when it comes to a comparison of Positive Economics and Marshall’s methodology, there are key differences between them, especially as they relate to the place of human motives and actual decision-making in theory. Second, the passages in Positive Economics which are usually taken to exemplify instrumentalism do not easily bend to a causal realist view. The passages about ‘unrealistic’ assumptions are ambiguous; and the ‘as if conscious leaves’ analogy is even more problematic. Finally, although Friedman and Schwartz’s Monetary History and ‘Money and Business Cycles’ undoubtedly presuppose a belief in causal relations, including a transmission mechanism linking monetary changes to the real economy, that crucial transmission mechanism is populated by decision-makers who, if Friedman’s other work is to be taken at face value, are fictionalized entities of the ‘as if’ variety. If Positive Economics is not a causal realist text, then what is it? Certainly the passages in Positive Economics that undermine this interpretation are suggestive of a kind of fictive instrumentalism. But if we accept, with Hammond (1990,1996), Hirsch and de Marchi (1990), Mayer (1993), and Hoover (2009), that Positive Economics should be read through the contextual lens of Friedman’s work as a practicing economist, it is by no means clear that a consistent and coherent methodological approach shines through. For example, Friedman’s revision of expected utility theory relied only on casual observation, intuitive plausibility, and deductive analysis, not predictive testing (Friedman and Savage, 1948). The same is true of his welfare analysis of sales vs income tax (Friedman, 1952). His survival-of-the-fittest argument to justify the theoretical premise that firms behave ‘as if’ they maximized returns ultimately relied on intuitive plausibility and a vague appeal to the authority of past successes (Friedman, 1953). Although Friedman subjected his permanent income hypothesis to numerous partial tests which he deemed successful (Friedman, 1957), he never sought to test the theory as a whole.10 And despite his oft-repeated criticisms of Walrasian formalism, when pressured by critics for a ‘rigorous’ theoretical account of his monetary analysis, Friedman (1970, 1971) developed an IS-LM model with the very ‘formalistic’ characteristics he disparaged early in his career (e.g. Friedman, 1946)—even his most sympathetic critics judged not to be ‘a particularly useful basis for empirical work’ (Brunner and Meltzer, 1972, p. 838; cf. Hirsch and de Marchi, 1990, p. 260). A different way of approaching Friedman’s various methodological choices is to shift from the search for a specific prescriptive methodology to a focus on Friedman’s discursive habitus. Friedman operated in a milieu which, first and foremost, prized winning arguments against rivals and persuading others of a Chicagoan politico-economic Weltanschauung (Freedman, 2006, 2008; Colander and Freedman, 2011). Thus Friedman’s methodological pronouncements almost always involved tailor-made attacks on rivals/enemies (such as anti-marginalism, imperfect competition models, Institutionalism, Walrasianism, Keynesianism). Concomitantly, this overarching habitus necessitated a great deal of methodological flexibility; to adhere strictly to a highly specified set of philosophically rigorous methodological rules would be like nailing one’s feet to the canvas—hardly conducive to maximizing one’s strategic manoeuvrability in discursive combat. With this in mind, a re-examination of Positive Economics reveals that the text in fact affords Friedman considerable room to manoeuvre in debate whilst simultaneously retaining the mantel of science (self-defined). How is this achieved? At crucial points, Positive Economics embeds personal judgements unconstrained by ‘objective’ prescriptions. For example, although a theory should draw upon ‘comprehensive evidence’, theory construction is ultimately ‘a creative act of inspiration, intuition, invention’ (Friedman, 1953, pp. 12, 43). When applying a theory to concrete circumstances, ‘there inevitably will remain room for judgment in applying the rules [of theory-use]’ (Friedman, 1953, p. 25). For theory testing, what counts as a relevant predictive implication depends on the ‘purpose in hand’ (Friedman, 1953, pp. 15, 41)—a decision to be made by the investigator. And since Positive Economics is silent on the matter, how (in)accurate, how (im)precise, and how narrow in scope a prediction can acceptably be also ends up being dependent on the judgement of the investigator. Further, whether a theory’s abstractions are ‘sufficiently good approximations’ and whether one can have ‘confidence’ in them is ultimately subject to the decision of the investigator: ‘There is never certainty in science, and the weight of evidence for or against a hypothesis can never be assessed completely “objectively”’ (Friedman, 1953, p. 30). Finally, since theory choice (vis-à-vis rivals) is supposed to be determined by a combination of relative predictive success, ‘simplicity’, and ‘fruitfulness’ for which there are no pre-set quantifiable specifications, this too must ultimately be a matter of subjective judgement (Friedman, 1953, pp. 10, 26). One can thus see that Positive Economics actually gives Friedman a great deal of flexibility in his practices as an economist, and this is often reflected in the variety of pragmatic methodological choices he made in his work (as suggested above). Perhaps as Mäki (1986, pp. 139–40) once suggested, for Positive Economics ‘there are no ‘rules of the game’ in economics that are or should be uniformly obeyed. … Everything … become[s] a matter of purposeful decision’. On this account, one may say that Positive Economics does not really express or demand adherence to a causal realist or a strictly instrumentalist set of philosophical principles; but neither does it preclude Friedman from drawing upon aspects of them when it suits his purpose. Footnotes 1 A question that is beyond the scope of this article, but which nonetheless may be asked, is this: following Hahn (1992a,b 79), why should practicing economists concern themselves with methodological matters at all? The sceptic is directed to responses elicited by Hahn’s note: e.g. Backhouse (1992, 2010), Lawson (1992b, 1994), Hoover (1995), and Hargreaves-Heap (2000). A related question is: why should practicing economists be concerned about Friedman’s Positive Economics in particular? Two reasons are offered here. First, Positive Economics holds a special place in the history of economics. It has had a major impact on the trajectory of mainstream economics (cf. Hammond, 1996; Mayer, 2009) such that, arguably, some of its prescriptions have become the methodological intuitions of many practicing economists today (see e.g. Rogeberg and Melberg, 2011). As Hoover (1995, p. 733) once put it, adapting Keynes, ‘Practical economists, who believe themselves to be quite exempt from any methodological influences, are usually slaves of some defunct methodologist’. (The debatable issue here is whether the influence of Positive Economics is just a subconscious intuition; after all, Positive Economics is still one of the most cited texts on economic methodology—Google Scholar citations of Positive Economics have steadily grown since the year 2000.) If Positive Economics is still as influential as it seems, then the outcome of debates over its interpretation just might have an impact (in the long term) on some economists’ practices. Second, to this day attacks on mainstream economics draw on that ‘perennial criticism’ (Friedman, 1953, p. 30, 41) of unrealistic assumptions which Friedman sought to bury. Indeed, one could argue that the rise and rise of behavioural economics is crucially premised on precisely this criticism (cf. Heukelom, 2014; Kao and Velupillai, 2015). In this respect alone, the realism-instrumentalism debate over assumptions, of which Positive Economics is a touchstone, is relevant not just to the past but also to the future of the discipline. Further, beyond the gates of orthodoxy, the unique influence of Positive Economics has been cited by heterodox critics as being partly responsible for the failure of the discipline to predict and diagnose the most recent economic-financial crisis (e.g. Mosini, 2012; Crotty, 2013; Palley, 2014). If one believes the best response to upstarts and heretics is silence, then an examination of the interpretations of Positive Economics is of course entirely unnecessary, but if one thinks engagement with rivals and critics is worthwhile, then being clear about what the famous essay actually says is a necessity. 2 See e.g. Barrotta (2006), but it should be noted that this interpretation is itself contested (e.g. Pratten, 1998). 3 Later, however, Marshall’s 1885 hope for ‘transcendent’ universal laws as per classical mechanics was rendered less ambitious in Principles of Economics (Marshall, 1920, pp. 31–32, 772). 4 The positing of real unobservable entities is certainly a paradigmatic feature of scientific realism, but it is not at all clear that this is how Friedman conceives of permanent income in his permanent income hypothesis. As suggested by the passage above, Friedman couches it in terms of a ‘theoretical construct’ rather than a real entity, and the chief purpose of the hypothesis is to render disparate observations coherent (such as MPC < APC in short-run time-series data, but MPC = APC in the long run), rather than to discover a previously unknown real entity. Also, as noted later, Friedman (1957, p. 23) couches households’ decisions to divide income into permanent and transitory components as follows: ‘We are going to treat consumer units as if they regarded their income and their consumption as the sum of two such components’. As to the fact that Friedman uses the permanent income ‘theoretical construct’ in other contexts, such as Friedman (1959, pp. 33ff), this does not establish that he regards it is a real entity per se; it may just as well indicate that he thinks it is a very useful device for other empirical purposes (just as it is useful to use the device of perfect competition in many contexts). 5 It should be noted that there are different ways of using an ‘as if’ locution (Mäki, 1998b). Mäki (2009, p. 104ff), who is concerned to make the case that Positive Economics is essentially a realist text, identifies an instance of ‘as if’ in the text—when it speaks of scientific hypotheses in general—that is consistent with realism (viz. Friedman, 1953, p. 40). However, even Mäki argues that when it comes to concrete illustrations, Positive Economics reverts to an unambiguously instrumentalist sense of the ‘as if’ formulation. If we assume that the function of the illustrations is to clarify the meaning of Friedman’s general statements about science, then the illustrations undermine the veracity of the realist interpretation. 6 In any discussion of Marshall’s method, one must acknowledge that he appealed to different metaphorical analogies to elucidate his conception of the method appropriate to economics. See e.g. Raffaelli (2007) and Hart (2013). 7 Indeed, Positive Economics does not recommend even interdisciplinary dialogue or cross-disciplinary collaboration, let alone synthesis. See Pooley and Solovey (2010, p. 226) for evidence of Friedman’s opposition to interdisciplinary collaboration. 8 The alternative hypothesis is one of ‘purely passive adaptation to external circumstances’: ‘… sunlight contributes to the growth of leaves and … hence leaves will grow denser or more putative leaves survive where there is more sun’ (Friedman, 1953, p. 20). 9 Such as Harrod (1939), Hall and Hitch (1939), Lester (1946, 1947), and Oliver (1947). 10 As Thomas Mayer (1972, pp. 59–60) puts it in his comprehensive study of the permanent income hypothesis: ‘Friedman presented a wide variety of tests, the results of which are consistent with his theory. But most of the tests are no more than this; they do not require a full permanent income theory to explain the observations. They are tests of the direction only, rather than rigorous tests of the full theory. 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Publisher: Oxford University Press
ISSN: 0030-7653
eISSN: 1464-3812
DOI: 10.1093/oep/gpy004
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Oxford Economic Papers – Oxford University Press

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Should we ignore methodology?,

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Milton Friedman’s causal realist stance?

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Milton Friedman’s causal realist stance?

Milton Friedman’s causal realist stance?

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