Tuesday, July 31, 2012

Friedman's Century

Milton Friedman would have turned 100 years old today. The economics blogosphere is abuzz -- see Matt Yglesias, Mark J. Perry, Miles Kimball, Lars Christensen, etc. -- with all manner of tribute and grievance.

I recognize Friedman's direct and explicit influence on my thinking in a number of areas. Besides his obvious contributions to monetary theory, Friedman had thought about human equity contracts long before I did, and he fought with as much passion for charter schools as he did against the draft. I read Free to Choose a few years ago and Capitalism and Freedom more recently; both are important to how I think about political questions.

And yet, I feel Friedman's influence most strongly in another respect. In 1953, Friedman published Essays in Positive Economics, a book which informs at the deepest level how I approach economics and how I write on this blog.

John Neville Keynes, the father of the later Keynes, made a historic distinction between positive and normative economics. The former is (or aspires to be) an objective analytical field which examined trade-offs individuals, firms, societies, etc. make in the face of scarcity; the latter is a moral or philosophical endeavor which argued for one side of a trade-off or another. In the first essay in this collection, Friedman argued that economists project too many controversial questions into the normative realm, when more careful positive analysis would give us enough insight as to defuse a great deal of the rancor:
I venture the judgment, however, that currently in the Western world, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action--differences that in principle can be eliminated by the progress of positive economics--rather than from fundamental differences in basic values, differences about which men can ultimately only fight.

The difference of opinion is largely grounded on an implicit or explicit difference in predictions about the efficacy of this particular means in furthering the agreed-on end.

Agreement about the economic consequences...might not produce complete agreement about its desirability, for differences might still remain about its political or social consequences but, given agreement on objectives, it would certainly go a long way toward producing consensus.

If this judgment is valid, it means that a consensus on “corrrect” economic policy depends much less on the progress of normative economics proper than on the progress of a positive economics yielding conclusions that are, and deserve to be, widely accepted.
That is a fundamentally optimistic view; it implies that you can show people the honest data, the un-spun facts, the cost-benefit calculations, and they will listen, sober up, and make good, responsible decisions. I have found it to be largely true.

Lastly, it's worth pointing out that Friedman explicitly names macroeconomic stabilization policy as one area where positive economics has a long way to go before leaving only normative questions:
Superficially, divergent views on this question seem to reflect differences in objectives; but I believe that this impression is misleading and that at bottom the different views reflect primarily different judgments about the source of fluctuations in economic activity and the effect of alternative countercyclical action.

1 comment:

  1. This was a man who was truly one of the giants of the 20th century. One would have to put him right up there with Keynes in terms of his global influence. Some of today's central bankers like Bernanke and Mervyn King look like pygmies in comparison.
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