Robbins, Friedman, and Economic Methodology

Three Basic Topics1. Late 19th and Early 20th Century

Background (J. S. Mill, Nassau Senior, John Cairnes, Neville Keynes, … Focus on Mill 1974)

2. Lionel Robbins (An Essay on the Nature and Significance of Economic Science, 1932/1935)

3. Milton Friedman (The Methodology of Positive Economics, 1953, i.e. F53)

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Millian Background1. Naturalistic

Framework: Presumption that economics produces scientific knowledge, the task is to explain exactly how.

2. Mill's (Humean) Empiricism: knowledge = sensations, laws = constant conjunctions

3. Ricardian Economics = Economics

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Mill's Bottom Line: Economics (Moral Science) is an empirical science (like

physics), but it is unique (i.e. not exactly like physics)

Four Main Parts to the Story (each in turn)1. Non-Experimental (unlike physics)2. Wealth-based Definition of Economics3. Deductive (like physics)4. Tendency Laws (laws about tendencies)

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The Non-Experimental Character of Economics

Controlled experiments are:a. Not generally available in economics

(Mill's example of trade between nations)b. Even if experiments were available, they

would not help because of the nature of the domain of inquiry. Human choice, unlike say chemistry, is not reversible (many different sets of causes produce the same outcome)

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Mill's Definition: Economics = the science of Wealth (economics is thus an abstract science)

"Political Economy … does not treat of the whole of man's nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficiency of means for obtaining that end." (Mill, 1874, p. 137)

"Political Economy considers mankind as occupied solely in acquiring and consuming wealth … Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed. (ibid., pp. 138-39)

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Economics is thus a Deductive (a priori) science of Tendency Laws

"But we can go further than to affirm that the method a priori is a legitimate mode of … investigation in the moral sciences; we contend that it is the only mode … the method a posteriori, or that of specific experience, is altogether inefficacious in those sciences, as a means of arriving at any considerable body of valuable truth … (Mill, 1974, p. 145)

But the "laws" are laws of tendencies only (true laws about tendencies, not ceteris paribus laws)

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Economics is thus an inexact deductive science of tendency laws, but that does not mean that it is not useful for practical/empirical applications and/or policy, or that such exercises do not involve the facts of the matter.

Concrete cases and real-world applications require knowledge about specific conditions and disturbing causes, and that in turn requires empirical verification, since the "discrepancy between our anticipations and the actual fact is often the only circumstance which would have drawn our attention to some important disturbing cause which we had overlooked." (Mill, 1974, p. 154)

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Lionel Robbins (1898-1984)The Nature and Significance of Economic Science (1st edition 1932, 2nd edition 1935)

Three main theses in Robbins's N&S1. His rational choice (non-Wealth Based)

Definition of Economics2. His argument against making interpersonal

utility comparisons within scientific economics3. His desire to provide economics with more

adequate (and contemporary) psychological & epistemological foundations by defending marginalism without psychological hedonism (and I would note, without behaviorism)

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Background/Context for Robbins's N&S

• Critics of orthodox economics (particularly Institutionalist critics)

• LSE vs Cambridge• Marshallian welfare

economics based on the diminishing MU of money

• The rise of positivist ideas with the philosophy of natural science

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1. Robbins’s Definition of Economics: Not a Materialist or Wealth-based definition, but a particular "kind" of activity (an aspect of all

human activities).

"Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses." (p. 75)

"But when time and the means for achieving ends are limited and capable of alternative application, and ends are capable of being distinguished in order of importance, then behavior necessarily assumes the form of choice. Every act which involves time and scarce means for the achievement of one end involves the reliquishment of their use for the achievement of another. It has an economic aspect." (p. 74)

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2. The (scientific) Impossibility of making interpersonal utility comparisons

"It is a comparison which necessarily falls outside the scope of any positive science. To state that A’s preference stands above B’s in order of importance is entirely different from stating that A prefers n to m and B prefers n and m in a different order. It involves an element of conventional valuation. Hence it is essentially normative. It has no place in pure science." (p. 90)

"Now of course, in our daily life we do continually assume that the comparison can be made … it would really be silly if we continued to pretend that the justification for our schemes of things was in any way scientific." (p. 91)

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The absence of interpersonal utility comparisons has serious implications for welfare economics and policy:

It means the end of hedonistic utilitarian welfare economics and thus opens the door for Ordinal-based Paretian concepts of welfare.

"The conception of diminishing relative utility … does not justify the inference that transferences from the rich to the poor will increase total satisfaction." (p. 92)

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3. Robbins on Economics and Psychology

a) No particular psychology is needed (or wanted), but economics does require a psychological notion of human action (desires/preferences + beliefs/information cause/explain individual choices). It just should not be the "psychological hedonism of Jevons and Edgeworth." (pp. 83-84)

"… it is impossible to explain them unless we invoke elements of a subjective psychological nature." (p. 85)

"We must include psychological elements" (p. 85)

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d) But not behaviorism (not strictly observable):

"It is an attitude which is very frequently among those economists who have come under the influence of Behaviourist psychology or who are terrified of attack from exponents of this queer cult." (p. 84)

"… inner experience. The idea of an end, which is fundamental to our conception of the economic, is not possible to define in terms of external behavior only." (p. 84)

"It is really not possible to understand the concepts of choice, of the relationship of means and ends, the central concepts of our science, in terms of observation of external data." (p. 85)

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Tensions in Robbins’s Essay[Hands, Economica, 2009]

1. The goal of providing more scientifically acceptable foundations for choice theory seems contrary to introspection (Why not go all the way with behaviorism a la Samuelson 1938?)

2. Robbins needs introspection for both the definition (choice) and the argument against interpersonal utility comparisons.

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Behaviorism (at least 1930s behaviorism) is about law-like constant conjunctions connecting stimulus (x) and response (y) in the form y=f(x). No choice or purpose.

Introspection actually gives us foundations that are more firm than natural science: “In Economics, as we have seen, the ultimate constituents of our fundamental generalisations are know to us by immediate acquaintance. In the natural sciences they are known only inferentially. There is much less reason to doubt the counterpart in reality of the assumption of individual preferences than that of the assumption of the electron.” (1935, p. 105)

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Introspection essential to the argument against interpersonal utility comparisons (they come from neither observation nor introspection):

“Introspection does not enable A to discover what is going on in B’s mind, nor B to discover what is going on in A’s. There is no way of comparing the satisfactions of different people.” (Robbins, 1932, p. 124 and 1952, p. 140)

“The assumptions of the propositions which did not involve interpersonal comparisons of utility were assumptions which had been verified by observation or introspection, or, at least, were capable of such verification. The assumptions involving interpersonal comparison were certainly not of this order.” (Robbins, 1938, p. 637, emphasis added)

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The Methodological Problem Situation of Marginalism in the 1930s

Two concerns (both important):1. The Scientific Credibility Problem: Respond to

institutionalists and others who criticized the unscientific and old-fashioned psychological foundations of marginalism (psychological hedonism).

2. The Choice Problem: To defend marginalism while preserving the idea of the freely choosing volitional agent. Choice is what distinguishes markets from other economic institutions and choice is essential to understanding economizing.

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The bottom line is that there were “tensions” in Robbins's N&S (from the psychological or philosophical perspective then or now), but they simply involved effective trade-offs between the three goals given the constraints that Robbins faced. A more “pure” position would have failed at least one of the goals: Mill’s introspection-based view (would have failed the “better scientific foundations goal”) and behaviorism the other two (the choice-based definition and the denial of interpersonal utility comparisons).

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Friedman's "Essay on Positive Economics" (F53)

F53 Background/Context (a number of theoretical developments which Friedman opposed on practical, empirical, and political grounds)

1. Walrasian and Keynesian ideas, particularly at Cowles (1933-55)

2. The Rise of Imperfect Competition (Chamberlin, Robinson, …)

3. The "marginal cost pricing" debate (Hall, Hitch, Lester, …)

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Freidman maintained a sharp distinction (dichotomy) between positive and (ethically)

normative economics

Positive = What "is"Normative = "What ought to be""Positive economics is in principle independent of any

particular ethical position or normative judgments. As Keynes says, it deals with "what is," not with "what ought to be." Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields. In short, positive economics is, or can be, an "objective" science, in precisely the same sense as any of the physical sciences." (Friedman, p. 146)

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Economic Theories are just tools for empirical prediction

Theories are not right or wrong; the function of a theory is "to serve as a filing system for organizing empirical material and facilitating our understanding of it" (p. 148). Theories are not "'right' or 'wrong''(ibid.), but an "analytical filing system" (ibid.)

"Viewed as a substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to 'explain.' Only factual evidence can show whether it is 'right' or 'wrong' or, better, tentatively 'accepted' as valid or 'rejected.' As I shall argue at greater length below, the only relevant test of the validity of a hypothesis is comparison of its predictions with experience." (p. 149)

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Example the Quantity theory of money:

"Perhaps the most obviously important example is the evidence from inflations on the hypothesis that a substantial increase in the quantity of money within a relatively short period is accompanied by a substantial increase in prices." (p. 151)

"Given that the hypothesis is consistent with the evidence at hand, its further testing involves deducing from it new facts capable of being observed but not previously known and checking these deduced facts against additional empirical evidence. (p. 152)

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The "Realism" of the Assumptions.

The truth of the "assumptions" do not matter. In fact assumptions are always false, and often the more wrong the better.

"In so far as a theory can be said to have "assumptions" at all, and in so far as their 'realism' can be judged independently of the validity of predictions, the relation between the significance of a theory and the 'realism' of its 'assumptions' is almost the opposite of that suggested by the view under criticism. 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. 153)

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As If

Agents act "as if" they are maximizing. This, Friedman argues, provides good predictive results.

Billiard Player example (p. 157)

Profit maximization assumption in microeconomics it like the billiard player + if they were not maximizing "it seems unlikely that they would remain in business for long" (p. 158)

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The Message for Economic Practice

"The abstract methodological issues we have been discussing have a direct bearing on the perennial criticism of 'orthodox' economic theory as 'unrealistic' as well as on the attempts that have been made to reformulate theory to meet this charge. "

"As we have seen, criticism of this type is largely beside the

point unless supplemented by evidence that a hypothesis differing in one or another of these respects from the theory being criticized yields better predictions for as wide a range of phenomena. Yet most such criticism is not so supplemented; it is based almost entirely on supposedly directly perceived discrepancies between the 'assumption' and the 'real world.'" (pp. 164-65)