Milton Friedman's Stance: The Methodology of Causal Realism

TLDR: In this article, the authors try to reconcile Friedman's methodological writings with his practices as an empirical economist by, first, taking his roots in Alfred Marshall seriously and, second, by taking the methodological implications of his empirical work seriously.

Abstract: Milton Friedman is usually regarded as an instrumentalist on the basis of his infamous claim that economic theories are to be judged by their predictions and not by the realism of their assumptions This interpretation sits oddly with Friedman's empirical work - eg, Friedman and Schwartz''s monetary history - and his explicit rejection of theories of the business cycle that, while based on accurate correlations, nevertheless do not make economic sense In this paper, I try to reconcile Friedman's methodological writings with his practices as an empirical economist by, first, taking his roots in Alfred Marshall seriously and, second, by taking the methodological implications of his empirical work seriously Friedman dislikes the word "cause" Nevertheless, appearances to the contrary notwithstanding, Friedman is best understood as a causal realist - that is, one who understands the object of scientific inquiry as the discovery through empirical investigation of the true causal mechanisms underlying observable phenomena

Figures

Figure 1. The Reception of Friedman's Positivism and the Fate of Causal Language in Econometrics

Table 1 Uses of Causal Language in Friedman and Schwartz’s

Full text


Working Paper Series
Milton Friedman’s Stance: The Methodology of Causal
Realism

KevinHoover
UniversityofCalifornia,Davis

February01,2004

Paper#06-6

MiltonFriedmanisusuallyregardedasaninstrumentalistonthebasisofhis
infamousclaimthateconomictheoriesaretobejudgedbytheirpredictions
andnotbytherealismoftheirassumptions.Thisinterpretationsitsoddlywith
Friedman’sempiricalwork–e.g.,FriedmanandSchwartz’smonetaryhistory–
andhisexplicitrejectionoftheoriesofthebusinesscyclethat,whilebasedon
accuratecorrelations,neverthelessdonotmakeeconomicsense.Inthispaper,
ItrytoreconcileFriedman’smethodologicalwritingswithhispracticesasan
empiricaleconomistby,first,takinghisrootsinAlfredMarshallseriouslyand,
second,bytakingthemethodologicalimplicationsofhisempiricalwork
seriously.Friedmandislikestheword“cause”.Nevertheless,appearancestothe
contrarynotwithstanding,Friedmanisbestunderstoodasacausalrealist–that
is,onewhounderstandstheobjectofscientificinquiryasthediscovery
throughempiricalinvestigationofthetruecausalmechanismsunderlying
observablephenomena.

DepartmentofEconomics
OneShieldsAvenue
Davis,CA95616
(530)752-0741

http://www.econ.ucdavis.edu/working_search.cfm

Milton Friedman’s Stance:
The Methodology of Causal Realism
Kevin D. Hoover
Department of Economics
University of California
One Shields Avenue
Davis, California 95616-8578
Telephone + (530) 752-2129
Fax + (530) 752-9382
E-mail kdhoover@ucdavis.edu
Revised, 5 February 2004

1
Milton Friedman’s Stance: The Methodology of Causal Realism
I. The God of Abraham; the Methodology of Marshall
1
The philosopher Bas Van Fraassen opens his Terry Lectures (published as The Empirical
Stance) with an anecdote: “When Pascal died, a scrap of paper was found in the lining of
his coat. On it was written ‘The God of Abraham, Isaac and Jacob, not the God of the
philosophers’” (Van Fraassen 2002, p. 1). Pascal’s God talks and wrestles with men;
Descartes’ God is a creature of metaphysics. Analogously, with respect to the
“Methodology of Positive Economics,” there are two Friedmans. Most of the gallons of
ink spilled in interpreting Friedman’s essay have treated it as a philosophical work. This
is true, for example, for those who have interpreted it as an exemplar of instrumentalism,
Popperian falsificationism, conventionalism, positivism and so forth. And it is even true
for those critics, such as Samuelson (1963), whose credentials as an economist are
otherwise secure. Mayer (1993, 1995, 2003), and Hands (2003) remind us that Friedman
was philosophically unsophisticated, and in the essay Friedman tried a fall with other
economists, not with philosophers. The origin of the essay was the quotidian practice of
economics, not abstract epistemology. To know the Friedman of the economists, I
propose to read the essay in light of Friedman (and Schwartz’s) A Monetary History of
the United States, 1867-1960 (1963a) and “Money and Business Cycles” (1963b),
perhaps his most characteristic economic investigations.
1
I thank Uskali Mäki, Thomas Mayer, and the participants in the F53 Conference at the Erasmus Institute
of Philosophy and Economics, Rotterdam 12-13 December 2003 for comments on an earlier draft. I also
thank Ryan Brady for research assistance. J. Daniel Hammond (1996) wrote an important book that
examines Friedman’s economic thought from a causal perspective. While I intentionally did not reread that
book in trying to develop my own views somewhat independently, I could not help but be influenced by it.

2
My point is not that there is a particular philosophers’ position that can be
contrasted with a particular economists’ (or even Friedman’s) position. After all, Pascal
surely recognized that there were a variety of views of God among the philosophers. Nor
would I suggest that philosophy has nothing valuable to say about, or learn from,
Friedman’s essay; nor Friedman about or from philosophy. It is rather a matter of
approach. Friedman cares most about doing economics and is largely innocent of the
interests of philosophers and, equally, of the distinctions and nuances that philosophers
routinely employ. If we – either as economists or philosophers – insist on reading the
essay as a philosophical work addressed to philosophers, we must misread it.
The most infamous passage in Friedman’s essay runs: “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 (in this sense)” (p. 14).
2
Samuelson (1963, pp. 232-
233) sees this as the extreme version of Friedman’s general proposition that “[a] theory is
vindicated if (some of) its consequences are empirically valid to a useful degree of
approximation; the (empirical) realism of the theory ‘itself,’ or of its ‘assumptions,’ is
quite irrelevant to its validity and worth,” which he stigmatizes with the shorthand F-
twist.
3
The view that Friedman does not care about the truth of the assumptions faces a
serious difficulty. After recounting the detailed evidence on the cyclical behavior of
2
Except where context would render it ambiguous, references to Friedman (1953) will be referred to
hereinafter by page numbers without dates.
3
Replacing Friedman by his initial is an indication that Samuelson (1963, p. 232) is aware that the F-twist
may be “a misinterpretation of [Friedman’s] intention.” While Samuelson rails against Friedman’s
apparent abandonment of truth and realism, Frazier and Boland (1983) turn it into a positive virtue. They
interpret Friedman as an instrumentalist and defend instrumentalism as a logically sound doctrine. My
suggestion here is that they have misinterpreted Friedman – he is not an instrumentalist – and my
suggestion in Hoover (1984) is that Frazer and Boland’s version of instrumentalism is not sound doctrine.

3
money and the real economy, Friedman and Schwartz (1963b, pp. 213-214) raises the
question, how we can be sure about the direction of influence?
It might be, so far as we know, that one could marshal a similar body of evidence
demonstrating that the production of dressmakers’ pins has displayed over the past
nine decades a regular cyclical pattern; that the pin pattern reaches a peak well
before the reference peak and a trough well before the reference trough; that its
amplitude is highly correlated with the amplitude of the movements in general
business. It might even be demonstrated that the simple correlation between the
production of pins and consumption is higher than the simple correlation between
autonomous expenditures and consumption; that the partial correlation between
pins and consumption – holding autonomous expenditure constant – is as high as
the simple correlation; and that the correlation between consumption and
autonomous expenditures – holding the production of pins constant – is on the
average zero. . . [B]ut even if [these statements] were demonstrated beyond a
shadow of a doubt, they would persuade neither us nor our readers to adopt a pin
theory of the cycle.
But why not? In Friedman and Schwartz’s thought experiment, the pin theory of the
cycle has implications that are confirmed facts. Why should the same variety of evidence
that supports a monetary theory not equally well support a pin theory? “Primarily, the
difference is that we have other kinds of evidence” (Friedman and Schwartz 1963b, p.
214): (i) pins are a trifling element in the economy, and “[w]e expect the effect to be in
rough proportion to the cause”, but money is pervasive in economies that experience
business cycles; (ii) with money we can, and with pins we cannot, conceive of channels
through which large autonomous changes in them might affect the economy; (iii) in
contrast to a monetary theory, no serious student of business cycles has ever seriously
suggested a pin theory.
It is not good enough for Friedman that a pin theory implies the facts. His
criticisms are based on evidence relevant to the truth of its assumptions. The Monetary
History can be seen as 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

Frequently asked questions

Q1. What have the authors contributed in "Milton friedman’s stance: the methodology of causal realism" ?

Milton Friedman is usually regarded as an instrumentalist on the basis of his infamous claim that economic theories are to be judged by their predictions and not by the realism of their assumptions. This interpretation sits oddly with Friedman ’ s empirical work – e. g., Friedman and Schwartz ’ s monetary history – and his explicit rejection of theories of the business cycle that, while based on accurate correlations, nevertheless do not make economic sense. In this paper, I try to reconcile Friedman ’ s methodological writings with his practices as an empirical economist by, first, taking his roots in Alfred Marshall seriously and, second, by taking the methodological implications of his empirical work seriously. 

Q2. What is the essence of Friedman’s Marshallian stance?

The essence of Friedman’s Marshallian stance is that the pursuit of substantiveknowledge cannot be stymied by the incompleteness and, therefore, “unrealism” of theory. 

Q3. What is the problem that bothers Friedman about cause?

In his interview with Hammond (1992, p. 92), Friedman said: “The problem that bothers me about cause is that it almost invariably leads into a problem of infinite regress. 

Q4. What is the problem with talking about causes?

The problem with talking about causes is that, working backwards in time, the chain never ends and, working contemporaneously, the array of causes is (perhaps infinitely) wide. 

Q5. What is the meaning of causal talk?

Friedman routinely employs a large varietyof synonyms and circumlocutions, so that he clearly engages in causal talk, even when explicit causal words are not in play. 

Q6. What can the authors do to avoid a lack of realism?

All the authors can do is to work back and forth between theory and facts, starting with the primitive and highly tentative and working towards the sophisticated and more secure. 

Q7. What is the link between the fall and rise of causal language in economics?

But The authorhave argued at length elsewhere that the fall and rise of causal usage is connected to the rise and fall of formalism in econometrics, which is itself closely connected to the rise and fall of formalism in economics generally (Hoover 2004) . 

Q8. What is the reckless and treacherous of all theorists?

“[T]he most reckless and treacherous of all theorists is he who professes to let the facts and figures speak for themselves . . . ” (p. 168; cf. Friedman 1949, p. 90).