Live Action Role Playing (LARPing) For Propertarians

Milton Friedman was an illogical advocate of right wing capitalism. C. B. MacPherson, in examining Friedman's Capitalism and Freedom, writes "One almost despairs of logic". Harry Johnson writes about the success of Friedman's monetarist counter-revolution by treating Friedman 'as if' he made up an oral tradition at Chicago. I am finding James Forder's Milton Friedman (2019) very critical of Milton. He writes of other accusations of Milton just making things up or otherwise behaving as a charlaton, including in Great Britain.

But never mind that. This post is about how his descendants engage in LARPing. Do you find them absurd?

Capitalism and Freedom is co-dedicated to Milton's son, David. David continues the silliness with his book, The Machinery of Freedom. His fantasy novel, Salamander, has the system of magic partially taken from LeGuin's Earthsea series and partially built on linear algebra. (This is the only one of his three fantasy novels I have read. I find it amusing.) David is an active participant in the Society of Creative Anachronisms, where he is known as Duke Cariadoc of the Bow. In addition to this LARPing, he writes about saga-period Iceland as a model of how law might work in a capitalist society.

Patri Friedman is the son of Davd Friedman. His confusion about LARPing can be seen in his founding of the Seasteading Institute. He was the executive director at its founding in 2008, with a large donation from Peter Thiel. He continued the LARPing with the founding of the Future Cities Development Corporation. No, Patri, you are not Lycurgus, the legendary author of Sparta's constitution. I am sorry that Paul Romer promotes this anti-democratic idea. Furthermore, Patri promotes the bizarre ideas of trans-humanism.

This LARPing may strike you as a combination of harmless recreation and silliness with no chance of being implemented. But here we are, with rich effs close to political power.

On Equilibrium

I have found a common misrepresentation from many, including mainstream economists, is that critics of their models do not understand them or the role of the assumptions. Those mainstream economists rely on an incoherent essay from Milton Friedman to dismiss criticism of the realism of assumptions.

My favorite criticism, though, is that their conclusions do not follow from their assumptions. I like to show this by constructing numerical examples that contradict their teaching.

On the other hand, some do criticize the realism of assumptions. I have seen some complain that the economy is never in equilibrium. It is unrealistic to assume equilibrium. I often find this unconvincing.

One can go back at least as far as Adam Smith, the distinction he draws between market prices and 'natural' prices, and his metaphor of a gravitational process. At any given time, some commodities may remain unsold on the market, and the quantity demanded for some may exceed the quantity supplied at a moment in time. The rate of profits may vary among firms and industries more than one might expect because of differences in risk, the desirability of certain industries, and so on. A leveling process that may never be completed exists at a given moment in time. Capitalists, reacting to price signals, will be disinvesting in some industries and expanding in other industries.

One who studies 'natural' prices, that is, the system of prices of production, is investigating tendencies, not making a claim that equilibrium exists. Even after the marginalists started constructing an incorrect theory, they kept this approach. Alfred Marshall wrote about, market prices, the short run, and the long run. Here is Walras:

Finally, in order to come still more closely to reality, we must drop the hypothesis of an annual market period and adopt in its place the hypothesis of a continuous market. Thus, we pass from the static to the dynamic state. For this purpose, we shall now suppose that the annual production and consumption, which we had hitherto represented as a constant magnitude for every moment of the year under consideration, change from instant to instant along with the basic data of the problem... Every hour, nay, every minute, portions of these different classes of circulating capital are disappearing and reappearing. Personal capital, capital goods proper and money also disappear and reappear, in a similar manner, but much more slowly. Only landed capital escapes this process of renewal. Such is the continuous market, which is perpetuating tending towards equilibrium without ever actually attaining it, because the market has no other way of approaching equilibrium except by groping, and, before the goal is reached, it has to renew its efforts and start over again, all the basic data of the problem, e.g. the initial quantities possessed, the utilities of goods and services, the technical coefficients, the excess of income over consumption, the working capital requirements, etc., having changed in the meantime. Viewed in this way, the market is like a lake agitated by the wind, where the water is incessantly seeking its level without ever reaching it. But whereas there are days when the surface of a lake is almost smooth, there never is a day when the effective demand for products and services equals their effective supply and when the selling price of products equals the cost of the productive services used in making them. The diversion of productive services from enterprises that are losing money to profitable enterprises takes place in various ways, the most important being through credit operations, but at best these ways are slow. It can happen and frequently does happen in the real world, that under some circumstantces a selling price will remain for long periods of time above the cost of production and continue to rise in spite of increases in output, while under other circumstances, a fall in price, following upon this rise, will suddenly bring the selling price below cost of production and force entrepreneurs to reverse their production policies. For, just as a lake is, at times, stirred to its very depths by a storm, so also the market is sometimes thrown into violent confusion by crises, which are sudden and general disturbances of equilibrium. The more we know of the ideal conditions of equilibrium, the better we shall be able to control or prevent these crises." -- Walras (1954: Lesson 35, Section 322).

So Walras did not think any economy would ever be in equilibrium. On the other hand, many may incorrectly think Austrians, like Ludwig von Mises, dispensed with the assumption of equilibrium. But here he is asserting that the assumption of equilibrium is necessary for economic theory:

One must not commit the error of believing that the static method can be used only to explain the stationary state of an economy, which, by the way does not and never can exist in real life, and that the moving and changing economy can be dealt with only in terms of a dynamic theory. The static method is a method which is aimed at studying changes; it is designed to investigate the consequences of a change in one datum in an otherwise unchanged system. This is a procedure which we cannot dispense with." -- Ludwig von Mises, 1933. Intervention. (quoted by Kurz and Salvadori)

I do think, however, one can criticize the Arrow-Debreu model as not being consistent with this approach and always assuming that equilibrium exists. Any time to reach equilibrium in the Arrow-Debreu is too long. Any such equilbirum that might have a tendency to be approached cannot be expected to be consistent with the data. Many supposed dynamic models in economics are still subject to this old objection.

Many questions remain about how to analyze whatever tendencies to equilbrium that may exist. I have barely even touched on the distinction between logical and historical time, a distinction commmon to Joan Robinson and Ludwig Lachmann.

Jonathan Nitzan On The Factual And Logical Invalidity Of Neoclassical Economics

Neoclassical Political Economy

You may have seen the above overly polite video.

I have not done this in a while, even before the pandemic. I used to, when I visited an academic bookstore or a college library, skim through textbooks, concentrating on introductory or intermediate microeconomics. Economics is in an extraordinary state, where the textbooks are full of nonsense that has been known to be logically invalid for half a century.

Here is an example. David D. Friedman (Milton's son) has made the 1990 or second edition of his Price Theory: An Intermediate Text available online. And it contains this manure:

This conclusion is useful for seeing how various changes affect the distribution of income. Suppose the number of carpenters suddenly increases, due to the immigration of thousands of new carpenters from Mexico. Both before and after the change, carpenters receive their marginal revenue product. Both before and after, they receive a wage equal to the marginal value of the last hour of leisure they give up.

But the wage after the migration is lower than the wage before. Since the supply of carpenters is higher than before, the equilibrium wage is lower. At that lower wage more carpenters are hired and their marginal product is therefore lower. With lower wages, the existing carpenters work fewer hours (assuming a normally shaped supply curve for their labor) and, when they are working fewer hours, have more leisure and value the marginal hour of leisure less. Some carpenters--those with particularly good alternative occupations--find that, at the lower wage, they are better off doing something else. The marginal cost to the worker of working an additional hour falls, either because the marginal hour is worked by one of the old carpenters who is now working fewer hours or because the marginal carpenter is now one of the new immigrants. -- David D. Friedman Chapter 14

Is Friedman a liar or a fool?

Arguing Against "Libertarianism"

1.0 Introduction

By "libertarianism", I mean propertarianism, a right-wing doctrine. In this post, I want to outline some ways of arguing against this set of ideas. (On this topic, Mike Huben has much more extensive resources than I can allude to.)

2.0 On Individual Details

I like to use certain policy ideas as a springboard for arguments that they have no coherent justification in economic theory. Unsurprisingly, the outdated nonsense market fundamentalists push does not have empirical support either. I provide some bits and pieces here.

Consider the reduction or elimination of minimum wages. More generally, consider advocacy of labor market flexibility. I like to provide numerical examples in which firms, given a level and composition of net output, want to employ more workers at higher wages. Lots of empirical work suggests wages and employment are not and cannot be determined by supply and demand.

Lately, I have been developing examples of international trade. (I think these examples need work when produced means of production can be traded.) In these numerical examples, the firms in each country specialize as in the theory of comparative advantage. That is, they produce those commodities that are relatively cheaper to produce domestically. I explicitly show processes for producing capital goods and assume that capitalists obtain accounting profits. Numeric examples demonstrate that a country can be worse off with trade than under autarky. Their production possibilities frontier (PPF) is moved inward. So much for the usual opposition to tariffs.

Some like to talk about the marginal productivity theory of distribution. But no such valid entity exists. I suppose one could read empirical data on the distribution of income and wealth and mobility as support for this, although others might talk about monopsony and market power.

No natural rate of interest exists. So some sort of market rate would not be an attractor, if it wasn't for the meddling of Jerome Powell and the Federal Reserve. As I understand it, this conclusion also has empirical support.

A whole host of examples arises in modeling preferences. I do not think I have previously mentioned, for example, Sen's demonstration of The Impossibility of a Paretian Liberal.

One can point out sources of market failure from a mainstream perspective. I think of issues arising from externalities, information asymmetries, principal agent problems, and so on. As I understand it, John Quiggin is popularizing such arguments in his upcoming Economics in Two Lessons.

3.0 Arguments From Legitimate Authority

I like to cite literature propertarians claim as their own. One set of arguments is of their experts advocating policies on the other side. For example, in The Road to Serfdom, Hayek advocates a basic income and social security. He says his disagreement with Keynes is a technical argument about whether fiscal or monetary policy can stabilize the economy and prevent business cycles, not a matter of the fundamental principles he is arguing about in the book. Adam Smith argues for workers and against businessmen, projectors, and speculators. He doesn't expect rational behavior, as economists define such. Among scholars, those building on Marx could with more right wear Smith ties than Chicago-school economists.

A second set of arguments from authority provide a reductio ad absurdum. One points out that propertarian authorities seem to end up praising authoritarians and fascists or adopting racists as allies. I think of Von Mises praising Mussolini, Friedman's advice to Pinochet, and Hayek's support for the same. The entanglement between propertarianism and racists in the USA has been self-evident at least since Barry Goldwater's run for president. I might also mention Ron Paul's newsletters.

4.0 Hermeneutics of Suspicion

Instead of arguing about the validity of certain supposed propositions, one might argue about why some come to hold them. Why do so many argue against their concrete material interests and for the whims of malefactors of great wealth? In social psychology, one can point to research on the need for system justification and on the just world fallacy. Marxists can draw on Lukács' analysis of reification or Gramsci's understanding of civil society and hegemony.

I also like how doubt is cast on the doctrines just by noting their arguments are easily classified as falling into a couple of categories. Propertarians can be seen as hopping back and forth from, on one foot, justifying their ideas on consequential, utilitarian, or efficiency grounds to, on the other foot, justifying it based on supposed deductions from first principles. So when you attack one argument, they can revert to the other, without ever admitting defeat. (Am I stealing from John Holbo here? From Cosma Shalizi?)

Albert Hirschman classified arguments into three categories: perversity, futility, and jeopardy. One could always say, "I agree with your noble goals", but:

• Your implementation will lead to the opposite.
• What you are attempting is to change something that is so fundamental (e.g., human nature) that it cannot succeed.
• Your attempt risks losing something else we value (e.g., self-reliance, innovation, liberty etc.)

If the arguments are always so simply classified, they cannot be about empirical reality, one might think.

5.0 Conclusion

None of the above addresses issues of political philosophy that propertarians may think central to their views. I do not talk about what roles of the state are legitimate, the source of authority in law, the false dichotomy of state versus markets, negative liberties and positive liberties, or the exertion of private power by means of the ownership of property. In short, this approach is probably irritating to propertarians. I'm good with that.

On The Ideological Function Of Certain Ideas Of Friedman And Barro

A Simple Keynes-Like Model

1.0 Introduction

I want to comment on an ideology that would lead to an acceptance of:

• Milton Friedman's Permanent Income Hypothesis (PIH)
• Robert Barro's so-called theory of Ricardian Equivalence

My claim is that Friedman and Barro were each responding, in their own way, to the (policy implications suggested by) Keynes' General Theory. So first, I outline, very superficially, some ideas related to the General Theory. I then briefly describe how Friedman and Barro each tried to downplay these ideas, before finally concluding.

I have a number of inspirations for this post, including Robert Waldmann's assertion that the denial of the PIH is consistent with the data; Brad DeLong noting Simon Wren-Lewis and Chris Dillow commenting on the incompetence of, say, Robert Lucas; and Josh Mason pointing out the nonsense that is taught in graduate macroenonomics about the government budget constraint and interest rates.

2.0 Governments Can End Depressions

The figure above illustrates some basic elements of Keynes' theory. This specification of a discrete-time, dynamic system includes an accounting identity for a closed economy, namely, that national income in any time period is the sum of consumption spending, investment, and government spending. And it includes a behavioral relation, namely, a dynamic formulation of a consumption function. In this system, consumption is the sum of autonomous consumption and a term proportional to national income in the previous period. One should assume that the parameter b lies between zero and one.

A policy consequence follows: government can lift the economy out of a depression by spending more. Government spending increases national income immediately. Through the consumption function, it has a positive feedback on next period's income, as well.

3.0 The Permanent Income Hypothesis

Suppose you are hostile to this policy conclusion and, like the current Republican party in the USA, dislike your fellow countrymen. How might you suggest a theoretical revision to the system structure to mitigate the influence of current government spending? One possibility is to suggest more terms enter the consumption function. With the proper manipulation, current government spending will have a smaller impact, since current income will have a smaller impact on consumption.

So, suppose the consumption function does not contain a term multiplying b by income lagged one period. Instead, assume b multiplies an unobserved and (directly) unobservable state variable which, in turn, is an aggregate of current income lagged multiple periods (Y_{t - 1}, Y_{t - 2}, ..., Y_{t - n}). Call this state variable "permanent income", and assume the aggregation is a matter of forming expectations about this variable based on a number of past values of income.

This accomplishes the goal. Current government spending can directly affect current income. But to have the same size impact as before on future income, it would have to be maintained through many lags. The policy impact of increased government spending is attenuated in this model, as compared to the dynamic system illustrated in the figure.

4.0 "Ricardian" Equivalence

One can go further with unobserved state variables. Suppose that households consume based less on recent income, but, once again, on expected values of future income. And suppose that consumers operate under the mainstream economist's mistaken theory of a government budget constraint. So consumers expect increased income today, if it results from increased government spending, to be accompanied by some combination of future decreased government spending and increased taxes. So the same current upward shock to the system causes an expectation of a future downward shock.

This is the theory of Ricardian equivalence. And, like the PIH, it suggests that Keynesian effects are not as dependable as otherwise would be the case.

5.0 Conclusion

The above story portrays economics as driven by results favorable to the biases and perceived self-interests of the extremely affluent. One would hope that academic economics is not entirely like this.

Economists For The General Reader

What economists would you expect somebody with a general university education to have heard of? My list is quite short:

• Adam Smith
• Karl Marx
• John Maynard Keynes

I expect these authors to function mostly as symbols in the popular consciousness. I might expect Americans above a certain age to have heard of John Kenneth Galbraith and Milton Friedman. Would they have heard of Paul Samuelson? He did have a column in Newsweek for a while. I first became aware of the existence of Joan Robinson by seeing a reference to her as the "British Galbraith". From what I've read, Nicholas Kaldor also had a certain public presence in Britain for a certain generation.

Given the highly technical nature of academic economists these days, it is hard for economists to invite the public into their discussions. I guess a theme of this blog is that most academic economists are not to be trusted. Others, such as Steve Keen, Fred Lee, and Bill Mitchell say fairly much the same. But I am not opposed to thinking of economics as a technical subject. I do not think I have resolved a tension here in my own mind.

Elsewhere

• Steve Denning, a writer for Forbes, describes Milton Friedman as being the source of "The world's dumbest idea". (I have written on Milton Friedman's confusion. incoherence, and lack of integrity, as well as Michael Jensen's (ir)responibility. See also Unlearning Economics.)
• Mike Konczal on Philip Mirowski's new book.
• Henry Scowcroft on the need for communicating economics to the public.
• Michael Lind on supposedly "Econ 101". Noah Smith complains about the public impression of what economists teach.
• Robert Neild on a 1981 anti-monetarism petition. I am especially amused about him losing his cool in a debate with Milton Friedman.
• Mark van Vugt and Michael Price, two psychologists, I gess, comment on Homo Economics. They link to a website which has David Sloan Wilson as editor in chief.
• Floyd Norris, in the New York Times, explains that Steve Keen foresaw the global financial crisis better than Ben Bernanke did.

Some British Nineteenth Century Controversies In Monetary Theory

Britain suspended convertibility during the Napoleonic wars. During that period, until 1821, money in England was paper, unbacked by gold. The restoration of convertibility was followed by a stagnant period in British development, with a crisis in 1825 and a reform in 1844 called the Bank Charter Act.

This post recalls some debates in monetary theory among British political economists while these events were occurring. (I don't consider myself expert on monetary theory during the Classical period.) Table 1 shows some schools of thought in monetary theory. The term schools is traditional with respect to the currency and banking schools, but should not be interpreted too strongly for any groups in the table. These schools, unlike, say, the Physiocrats, do not have a recognized leader, followers, popularizers, etc. Rather, they are more like the Mercantilists, a diverse set of pamphleteers and politicians grouped together by later writers.

Table 1: Some "Schools" and Example Members

Years	Contending Schools
1797-1821	Bullionists Henry Thornton David Ricardo	Anti-Bullionists Robert Torrens Robert Malthus
1825-1844	Currency School Robert Torrens Samuel Jones Lloyd Mountifort Longfield	Banking School Thomas Tooke John Stuart Mill
2nd Half of the 20th Century	Quantity Theory Milton Friedman	Endogenous Money Nicholas Kaldor

In each period shown in the table, I have listed two schools. Economists in the first school in each row argued that the money supply was exogenous and that the price level varied with amount of money issued by central bank. Economists in the second school in each row argued that the money supply was endogenous, that is was not capable of being controlled by the central bank, and that it varied with demand for it. The details of these arguments varied among these and other economists.

The last row suggests that these arguments are still current. In fact, advocates of Modern Monetary Theory currently argue that the money supply is endogenous.

The (??) Natural Rate of Unemployment

Milton Friedman defined the natural rate of unemployment, also known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU), at least at the level of abstraction of this post:

"The 'natural rate of unemployment' in other words, is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets." -- Milton Friedman (1968), as quoted in James K. Galbraith (1998)

Two mathematical mistakes are embedded in the above definition.

First, what does Friedman mean by the "Walrasian system"? At the time of his statement, the Arrow-Debreu model of intertemporal equilibrium was becoming the canonical statement of general equilibrium theory. But the Arrow-Debreu model is a very short run model, in which the initial quantities of capital equipment are among the given endowments. Consequently, a solution to the model yields neither a rate of employment nor a rate of unemployment, independent of time. Rather, these rates are time-varying. So he cannot mean to refer to that model.

Now, Walras himself presented a model with given quantities of capital goods and a supposed steady state set of prices and quantities. But this model was just logically inconsistent. In consistent long-run economic models the set of capital goods are found by solving the model, not taken as givens. Thus, the logic of such models is not about allocating given resources among alternative ends. To refer to such a model as "the Walrasian system of general equilibrium" is dubious.

Second, Friedman's definition relies on an implicit mathematical theorem: that the equilibrium solution of whatever model he is talking about is unique. But no reason exists for such a theorem to hold in either the Arrow-Debreu model or a long run equilibrium model with many markets. I have myself created a model with multiple equilibria.

Here, then, is another example of right-leaning economists giving decades of policy advice based on theoretical claims with no support in economic theory. Unsurprisingly, the policy did not work empirically either, as can be seen by looking at results in the 1980s and 1990s. (These claims are not new. James Galbraith made my second point long ago.)

Have mainstream economists ever addressed this failure? Did they not mostly just continue their mistake with Dynamic Stochastic General Equilibrium (DSGE) models?

References

• Milton Friedman (1968) "The Role of Monetary Policy", American Economic Review Papers and Proceedings (May): pp. 1-17
• James K. Galbraith (1998) Created Unequal: The Crisis in American Pay, The Free Press.

On The Road From Mont Pelerin

I have been reading The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective, a collection edited by Philip Mirowski and Dieter Plehwe (Harvard University Press, 2009). One theme I find emergent in this book is the influence of funders (e.g., Harold Luhnow, Jasper Crane) on the redirection of economic thought, without any corresponding empirical evidence.

But I'm not yet ready to offer too many thoughts on this book. Instead I'm interested in the cover photo, reproduced as Figure 1.

Figure 1: Cover Photo

I cannot find photo credits in the book. Presumably, this photo is of attendees at a Mont Pelerin society meeting, maybe the first. Can anybody identify these people? Figure 2 letters them to facilitate referring.

• F. Ludwig Von Mises
• G. Friedrich Hayek

Figure 2: Cover Photo with Annotations

Suppressed Empirical Results

"An overwhelming majority of the entrepreneurs thought that a price based on full average cost (including a conventional allowance for profit) was the 'right' price, the one which 'ought' to be charged...

...the procedure can be not unfairly generalized as follows: prime (or 'direct') cost per unit is taken as the base, a percentage addition is made to cover overheads (or 'oncost' or 'indirect' cost), and a further conventional addition (frequently 10 per cent.) is made for profit. Selling costs commonly and interest on capital rarely are included in overheads; when not so included they are allowed for in addition for profits." -- R. L. Hall and C. J. Hitch, "Price Theory and Business Behavior", Oxford Economic Papers, (May 1939): 12-45

These findings motivated Milton Friedman in his badly-argued work on methodology.

Friedman Blinded Me With Science

Scientists aspire to develop theories that observations can potentially demonstrate to be wrong. Here I examine whether this aspiration can possibly be achieved when economics is practiced in keeping with one of two views on methodology, the deductive-nomological or the instrumental view. I get the argument below from Donald P. Green and Ian Shapiro, Pathologies of Rational Choice Theory: A Critique of Applications in Political Science (Yale University Press, 1994).

Consider the covering law model, also known as the deductive-nomological view of scientific methodology. In this view, scientists formulate universal laws, in some sense. In an application of a scientific law, the hypotheses or antecedents are asserted to be true. That is, the statement of scientific law is conjoined with initial conditions. One then checks that the consequent holds. If observation is inconsistent with the consequent and one is sure that the initial conditions are true, the law is refuted.

Milton Friedman advocates instrumentalism, in which the assumptions of a scientific theory are false. (Actually, his famous essay, "The Methodology of Positive Economics", is so incoherent, Friedman can be interpreted as advocating almost any methodology you care to name. But let's stick with a widely argued view.) In Friedman's view the antecedents are always false in a significant theory:

"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" -- Milton Friedman

Thus, if one holds that economic theories state covering laws and that economists are and should be instrumentalists, economic theories cannot be refuted by observation. The logical implications of false antecedents need not be true.

Can economics be a science if it is practiced in keeping with Friedman's strictures?

You Got Me Babe

Here are two books one can read on-line and that I may read:

• Protecting Individual Privacy in the Struggle Against Terrorists: A Framework for Program Assessment, National Academies Press (2008)
• Nicholas Kaldor, The Scourge of Monetarism, Second Edition, Oxford University Press (1986)

The first book discusses data mining in an anti-terrorism context. Success of this tchnology in this context is difficult, while false positives are a threat to privacy. At least this is the conclusion - if I am fairly summarizing - of the Committee on Technical and Privacy Dimensions on Information for Terrorism Prevention and Other National Goals. (The National Academies Press publishes reports by the National Academies and by the National Research Council, organizations of some importance in the formation of United States policies on science and technology.)

The second book is Nicholas Kaldor's demonstration that monetarism does not work. On this blog, Kaldor should need no introduction.

Both books are in a freely readable on-line format that I find annoying. I suppose the format of the free version of the first is a business decision to encourage the purchase of the PDF version. And I blame copyright law for the format of the second.

Against Propaganda Being Institutionalized In Universities

In The Chronicle of Higher Education, Marshall Sahlins criticizes the proposed establishment of the Milton Friedman Institute (MFI). (Hat tip to Brad DeLong.)

The Committee for Open Research on Economy & Society (CORES) has a web site collecting criticism of the MFI.

As indicated by my post title, I think the MFI sounds like it should shame any serious university.

Madrick on the End of an Age

Jeff Madrick has a Huffington Post column titled, "The End of the Age of Milton Friedman".

Since this is short and popular, one could think up lots of caveats. I'll go first. "Crisis in the 1970s" does not explain why Friedman's ideas became popular. Economists had available another account of stagflation. Something else remains of Friedman's academic contributions other than "the overstated natural rate of unemployment philosophy". I think most working economists would still echo something of Friedman's views on methodology, despite their rejection by specialists in the field.

Judge Friedman's Advice To Pinochet Yourself

Naomi Klein makes available Milton Friedman's 21 April 1975 letter to mass murderer Augusto Pinochet.

Koopmans On Friedman's Claimed Methodology

Over on Crooked Timber, "reason" says he likes a James Galbraith quotation I refer to. Galbraith mentions Koopmans. I suppose Galbraith is talking about this:

"Here the 'direct' implications of the postulates, their accuracy in describing directly observed individual behavior, are placed [by Friedman] in a category with which we need to be less concerned.

There are several objections to such a concept of theory construction. In the first place, in order that we shall have a refutable theory at all, the postulates then need to be supplemented by a clear description of the class of implications by which the theory stands or falls. Otherwise, every contradiction between an implication and an observation could be met by reclassifying the implication as a 'direct' one.

This objection is met by Friedman's suggestion that there should in each case be 'rules for using the model,' that is, a specification of the 'class of phenomena the hypothesis is designed to explain.' But a second objection arises out of this answer to the first. To state a set of postulates, and then to exempt a subclass of their implications from verification is a curiously roundabout way of specifying the content of a theory that is regarded as open to empirical refutation. It leaves one without an understanding of the reasons for the exemptions. The impression of ingeniousness that this procedure gives is reinforced by the fact that in each of Professor Friedman's examples he knows more about the phenomenon in question than he lets on in his suggested postulates. He is willing to predict the expert billard player's shots from the hypothesis that the player knows the mathematical formulae of mechanics and computes their application to each situation with lightning speed, even though he (Friedman) knows that most experts at billards do not have these abilities. He is willing to predict the distribution of leaves on a tree from the hypothesis that each leaf seeks a position of maximum exposure to sunlight (given the position of all other leaves), although no one has reported observing a leaf change its location on a tree.

One cannot help but feel uneasy in the face of so much ingenuity. Truth, like peace, is indivisible. It cannot be compartmentalized. Before we can accept the view that obvious discrepancies between behavior postulates and directly observed behavior do not affect the predictive power of specified implications of the postulates, we need to understand the reason why these discrepancies do not matter. This is all the more important in a field such as economics where, as Friedman also emphasizes, the opportunities for verification of the predictions and implications derived from the postulates are scarce and the outcome of such verification often remains somewhat uncertain..." -- Tjalling C. Koopmans (1957). Three Essays on the State of Economic Science, McGraw-Hill: 139-140

Koopmans also discusses methodology, in an attack on American institutionalism, in his "Measurement without Theory" (Review of Economic Statistics, V. 29, N. 3 (August 1947)). I have already pointed out some more recent criticisms of Friedman's methodology.

Milton Friedman's Elegant Tombstones

"Professor Friedman's demonstration [in Capitalism and Freedom] that the capitalist market economy can coordinate economic activities without coercion rests on an elementary conceptual error. His argument runs as follows. He shows first that in a simple market model, where each individual or household controls resources enabling it to produce goods and services either directly for itself or for exchange, there will be production for exchange because of the increased product made possible by specialization. But 'since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence no exchange will take place unless both parties do benefit from it. Cooperation is thereby achieved without coercion'...So far, so good. It is indeed clear that in this simple exchange model, assuming rational maximizing behavior by all hands, every exchange will benefit both parties, and that no act of coercion is involved in the decision to produce for exchange or in any act of exchange.

Professor Friedman then moves on to our actual complex economy, or rather to his own curious model of it:

'As in [the] simple model, so in the complex enterprise and money-exchange economy, cooperation is strictly individual and voluntary provided: (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange so that every exchange is strictly voluntary...'

...Proviso (b) is 'that individuals are effectively free to enter or not to enter into any particular exchange', and it is held that with this proviso 'every exchange is strictly voluntary'. A moment's thought will show that this is not so. The proviso that is required to make every transaction strictly volunatry is not freedom not to enter into any particular exchange, but freedom not to enter into any exchange at all. This, and only this, was the proviso that proved the simple model to be voluntary and noncoercive; and nothing less than this would prove the complex model to voluntary and noncoercive. But Professor Friedman is clearly claiming that freedom not to enter into any particular exchange is enough: 'The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal...The employee is protected from coercion by the employer because of other employers for whom he can work...'

One almost despairs of logic, and of the use of models. It is easy to see what Professor Friedman has done, but it is less easy to excuse it. He has moved from the simple economy of exchange between independent producers, to the capitalist economy, without mentioning the most important thing that distinguishes them. He mentions money instead of barter, and 'enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods'...as if money and merchants were what distinguished a capitalist economy from an economy of independent producers. What distinguishes the capitalist economy from the simple exchange economy is the separation of labor and capital, that is, the existence of a labor force without its own sufficient capital and therefore without a choice as to whether to put its labor in the market or not. Professor Friedman would agree that where there is no choice there is coercion. His attempted demonstration that capitalism coordinates without coercion therefore fails...

...The logical humanist liberal will regret that ... and the fallacies make Capitalism and Freedom not a defense but an elegant tombstone of liberalism." -- C. B. Macpherson, "Elegant Tombstones", Canadian Journal of Political Science, March 1968.

Irrelevant Aside On Friedman's Methodology

You may sometimes read (neoclassical) "Economic theory shows" p. Often these claims are untrue. One can prove this falsity by constructing examples in which the assumptions of (neoclassical) economic theory hold, but not p results. So the statement you have read is logically flawed.

I sometimes encounter people who respond with the non sequitur, "Assumptions do not need to be realistic." If this response made sense, those who propound it would be able to specify which assumption is claimed to be unrealistic in these examples. Good neoclassical economists understand this logic.

Anyways, those economists that insist that assumptions do not need to be realistic - that, in fact, unrealistic assumptions are actually desirable - probably take their position from Milton Friedman. From Steve Keen's Debunking Economics, I found a response by Alan Musgrave to this idea. Musgrave, perhaps when combined with a later Uskali Mäki comment, seems to me perceptive. From these two authors, one can get a taxonomy of assumptions. Here's Musgrave's, albeit with the first reworded following Mäki's suggestion:

• Negligibility: "The hypothesis that some factor", or combination of factors "has an effect upon" "the phenomenon under investigation" "small enough to be neglected relative to a given purpose".
• Domain: A specification of the domain of applicability of a theory.
• Heuristic: An assumption for developing a theory in a simple form that can be removed in later approximations.

The same wording might be used to express an assumption in all categories. For example, a model assumption might be "The government has a balanced budget". This might mean that the effects of budget imbalances have a negligible effect on the results of the model, that the model only applies when the budget is balanced, or that the model can be developed in a more complicated fashion with no assumption on the balance of the budget. Pace Friedman, assumptions, properly paraphrased, better be true ("realistic") in applications.

Update: Radek doubts some economists write "Economic theory shows..." As far as I am concerned, this is close enough:

"These observations should not be puzzling, for they are what standard economic theory predicts." -- Edward C. Prescott (1986). "Theory Ahead of Business Cycle Measurement", Quarterly Review, Federal Reserve Bank of Minneapolis (Fall): 9-22

References

• Milton Friedman (1953). "The Methodology of Positive Economics", in Essays in Positive Economics, University of Chicago Press
• Uskali Mäki (2000). "Kinds of Assumptions and Their Truth: Shaking an Untwisted F-Twist", Kyklos, V. 53, Fasc. 3: 317-336
• Alan Musgrave (1981). "'Unreal Assumptions' in Economic Theory: The F-Twist Untwisted", Kyklos, V. 34, Fasc 3: 377-387

Welcome To The Party

Compare and contrast this:

"When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I'd argue, is a counter-counterreformation." - Paul Krugman (2007). Who Was Milton Friedman?, New York Review of Books, V. 54, N 2 (February 15)

And this:

"What professional economics now needs is a rebellion against supply and demand. We need a rebellion against the idea that people are actually paid in proportion to the value of what they produce. We need a rebellion against the metaphor of the labor market - an entity that no one has ever seen, where no one has ever been, an entity that lacks the mechanishms of price adjustment that would be required for the marginal productivity theory to work. Economics needs a rebellion that is almost less against the system under which we live, as against the sources of our complacency about that system. We need a rebellion, not so much as against existing market institutions, as against the analytical tyranny of the idea of the market, as it applies to pay.

[Footnote:] Such a rebellion almost got going in the 1960s, when a dispute known as the 'Cambridge controversies' challenged the concept of capital as a factor of production and hence the coherence of the notion of marginal productivity. But the marginal productivity theory of the labor market survived that challenge, and its success in so doing is the root of the difficulty today." - James K. Galbraith (1998). Created Unequal: The Crisis in American Pay, Free Press: 265-266