Economics

Economists Should Stop Defending Milton Friedman’s Pseudo-science

On the pseudo-scientific nature of Friedman’s “as if” methodology

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By  George H. Blackford

“Consider the problem of predicting the shots made by an expert billiard player. It seems not at all unreasonable that excellent predictions would be yielded by the hypothesis that the billiard player made his shots as if he knew the complicated mathematical formulas that would give the optimum directions of travel, could estimate accurately by eye the angles, etc., describing the location of the balls, could make lightning calculations from the formulas, and could then make the balls travel in the direction indicated by the formulas. Our confidence in this hypothesis is not based on the belief that billiard players, even expert ones, can or do go through the process described; it derives rather from the belief that, unless in some way or other they were capable of reaching essentially the same result, they would not in fact be expert billiard players.”

Milton Friedman, Essays in Positive Economics, 1953 (p. 21)

It was 1967 when I first read Friedman’s essay on “The Methodology of Positive Economics” in which the above billiard-player analogy can be found. I was dumbfounded. To say an expert billiard player plays “as if he knew . . . complicated mathematical formulas” may be an interesting analogy, but it tells us nothing about billiard players. It was obvious to me at the time that Friedman’s argument to the contrary is circular: How do we know expert players play this way? If they didn’t play this way they would not be expert players. And I was not at all impressed by the fact that Friedman’s logic is firmly rooted in his “belief” that this makes sense.[1]

Friedman poses this analogy in the midst of a convoluted argument by which he attempts to show that a scientific theory (hypothesis or formula) cannot be tested by testing the realism of its assumptions. All that matters is the accuracy of a theory’s predictions, not whether or not its assumptions are true. He attempts to demonstrate this by examining “the law of falling bodies” where he tells us that it “is an accepted hypothesis that the acceleration of a body dropped in a vacuum is a constant—g, or approximately 32 feet per second per second on the earth . . . .” (p. 18) According to Friedman, it is meaningless to argue this law assumes a vacuum. The only thing that matters is the accuracy of the predictions obtained if we assume bodies fall as if they are falling in a vacuum. It is the role of the scientist to “to specify the circumstances under which the formula works or, more precisely, the general magnitude of the error in its predictions under various circumstances.” Even though a more general theory exists that can give more accurate predictions “it does not always pay to use the more general theory because the extra accuracy it yields may not justify the extra cost.” [Friedman (pp. 18-9)]

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Now it seemed quite clear to me back in 1967, and it still seems quite clear to me today, that it is the purview of engineering, not science, to catalog the circumstances under which a theory works and does not work and to estimates the errors in the predictions of theories along with the cost involved in using one approach or another. The purview of science, as I saw it then and still see it today, is to understand and explain the subject matter of a scientific discipline. This cannot be done by simply cataloging when a theory works and the magnitude of errors when it does not, and yet Friedman’s engineering view of science has stood at the very core of mainstream economics for well over sixty years. [2]

There are, of course, a number of economists who openly reject the descriptive static equilibrium methodology of mainstream economists embodied in Friedman’s as if methodology, but they appear to be relatively few and to have relatively little influence within the discipline. At the same time there are many mainstream economists who reject Friedman’s methodology on its face when confronted with it directly but are compelled, as a result of their training and the need to accumulate publications in mainstream economic journals, to abide by its rules which are imbedded in the culture of the discipline. The result has proved to be disastrous. The fundamental paradigm of economics that emerged from this methodology not only failed to anticipative the Crash of 2008 and its devastating effects, it has proved incapable of producing a consensus within the discipline as to the nature and cause of the economic stagnation we find ourselves in the midst of today.

In attempting to understand why this is so it is instructive to examine the nature of Friedman’s arguments within the context in which he formulated them, especially his argument that the truth of a theory’s assumptions is irrelevant so long as the inaccuracy of a theory’s predictions are cataloged and we argue as if those assumptions are true. The place to begin is with the history of the law of falling bodies that Friedman alludes to, and then ignores.

The Law of Falling Bodies

Our understanding of this ‘law’ did not just suddenly appear out of nowhere. It grew out of the work of Galileo in attempting to explain the anomalies in Aristotle’s theory of motion. According to Aristotle, a constant force applied to an object will cause it to move at a constant velocity, the greater the force the greater the velocity. He also assumed that heavier bodies fall with a greater velocity than lighter bodies. [ Galileo (p. 61)] This seemed to make perfect sense as an explanation of the way in which a feather falls compared to a stone, but Galileo observed that heavier stones do not fall at greater velocities than lighter stones and that the longer a stone falls the greater its velocity becomes (up to a point) even though the force of gravity acting on it (apparently) does not change.

As a result of his incredibly complex and thorough analysis of falling bodies Galileo concluded that the differences in the behaviors he observed could be understood and explained if he rejected Aristotle’s assumptions and, instead, assumed: 1) the existence of momentum (i.e., that a body at rest tends to remain at rest and a body in motion tends to remain in motion) and 2) that when a constant force is applied to an object it causes that object to accelerate at a constant rate rather than to move at a constant velocity. He also concluded, guided by observations, measurements, logic, and reason that in the absence of external resistance caused by the medium through which an object fell—that is, in a vacuum—all falling bodies would accelerate at the same constant rate irrespective of their shape, density, weight, or the distance through which they fell. [Galileo (pp. 118-9)]

While these assumptions were enough to arrive at Galileo’s understanding of the law of falling bodies it was not until Newton had integrated the observations of Copernicus, Kepler, and Galileo to arrive at Newton’s three laws of motion and theory of universal gravitation that the Newtonian understanding of this law emerged. This understanding differed from Galileo’s in that Galileo had assumed the rate of acceleration of a falling body in a vacuum would be constant throughout its fall. This assumption is logically inconsistent with Newton’s second law of motion and theory of universal gravitation.

Newton’s second law assumes that force is equal to mass times acceleration. His theory of gravity assumes that there is an inverse-square relationship between the force of gravity and the distance between the centers of gravity of the earth and a falling body. These two assumptions, taken together, imply that the rate of acceleration must increase as a falling body and earth approach each other. [Newton (p. 398, 83)] Thus to make Galileo’s law of falling bodies logically consistent with Newton’s integration, not only must the validity of this law assume a vacuum, it must also assume that the rate of acceleration increases as the falling body and earth approach each other in accordance with Newton’s theory of gravity and second law of motion.

At this point it should at least be apparent that Friedman’s assertion that the law of falling bodies “is accepted because it works” is not nearly as clear cut as Friedman tries to make it seem. Friedman, himself, expounded on but a few of the innumerable situations in which this law, as he states it, does not work, and, in fact, there are relatively few practical applications for Friedman’s statement of this law other than as a basis on which high-school physics students can construct lab experiments. The fact is that Galileo accepted his understanding of this law, not simply because it works, but because his understanding of this law is implied by the assumptions embodied in the cosmology within which Galileo attempted to understand and explain the physical universe. Similarly, Newton accepted his version of Galileo’s law, not simply because it works, but because his understanding of this law is implied by the assumptions embodied in the cosmology within which Newton attempted to understand and explain the physical universe.

Newton’s cosmology made it possible to understand and explain astronomical observations with a degree of accuracy that was heretofore impossible. As a result, after Newton, any other interpretation of Galileo’s law would be viewed as pure nonsense by any educated person other than those who wished to cling desperately to the cosmology implicit in the Ptolemaic view of the universe and who were unwilling or unable, for whatever reason, to accept a heliocentric view of reality.

It is essential to understand, however, that the Newtonian understanding of this law was not simply accepted because it worked in the way Friedman describes Galileo’s law as working. The Newtonian understanding of this law was accepted because neither the law itself, nor any of the assumptions embodied in Newton’s cosmology that were needed to derive the Newtonian understanding of this law were demonstrably false in the sense of being contradicted by empirical observations. If it could have been shown that any of the assumptions on which the derivation of the Newtonian understanding of this law depend were demonstrably false, the Newtonian understanding of this law would most certainly not have been accepted, at least not by physicists. That this is so is made clear by the rejection of the Newtonian understanding of this law by physicists after it was discovered that Newton’s assumption of the independence of space and time was contradicted by empirical observations and replaced by Einstein’s assumption of a space-time continuum as embodied in Einstein’s theory of relativity. Einstein’s theory of relativity led to an entirely different understanding of Galileo’s law.[3]

Thus, when we examine the history of the law of falling bodies that Friedman alludes to and then ignores we find that all of the major advances in the physical sciences that have come about since the time of Galileo were accomplished as a result of 1) Galileo rejecting the unrealistic assumptions of Aristotle, 2) Newton rejecting the unrealistic assumptions of Galileo, and 3) Einstein rejecting the unrealistic assumptions of Newton, and, yet, Friedman argues:

“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. 14)”

The Irrelevance of Logic in Friedman’s Methodology

The degree to which Friedman’s arguments are totally oblivious to the central role played by assumptions in scientific inquiry is indicated by his delineation of this role as he sees it:

“So far as I can see, the “assumptions of a theory” play three different, though related, positive roles: (a) they are often an economical mode of describing or presenting a theory; (b) they sometimes facilitate an indirect test of the hypothesis by its implications; and (c) . . . they are sometimes a convenient means of specifying the conditions under which the theory is expected to be valid. (p. 23)”

There is not even a hint of acknowledgement in this passage of the fact that a scientific theory is, in fact, the embodiment of its assumptions. There can be no theory without assumptions since it is the assumptions embodied in a theory that provide, by way of reason and logic, the implications by which the subject matter of a scientific discipline can be understood and explained. These same assumptions provide, again, by way of reason and logic, the predictions that can be compared with empirical evidence to test the validity of a theory. It is a theory’s assumptions that are the premises in the logical arguments that give a theory’s explanations meaning, and to the extent those assumptions are false, the explanations the theory provides are meaningless no matter how logically powerful or mathematically sophisticated those explanations based on false assumptions may seem to be.

It is the form of a logical argument that makes it valid, irrespective of the truth of its premises. The argument a) all men with blue eyes are infallible, b) I have blue eyes, therefore, c) I am infallible is logically valid even though, in light of reason, this is not the kind of argument my wife would find convincing.  And even if I were infallible this argument would still have no substantive meaning, in spite of its logical validity and my blue eyes, because it is based on the demonstrably false premise that all men with blue eyes are infallible.  It is intuitively obvious that a logical argument only has substantive meaning if its premises are true even to those who lack a formal understanding of logic. As a result, few scientists would be willing to follow Friedman’s methodology and attempt to catalog when the blue-eyed theory of infallibility ‘works’ and when it doesn’t. And, yet, this is the kind of reasoning in which mainstream economist indulge when they ignore the realism of their assumptions. [4]

In spite of the simple fact that scientific understandings and explanations arise through logic and reason from the implications of the assumptions (i.e., premises) on which scientific arguments are based, and that a logical argument only has substantive meaning to the extent the premises on which it is based are true, Friedman argues that the relevance of a theory cannot be judged by the realism of its assumptions so long as it is also argued that it is as if its assumptions were true. Aside from the fact that this argument makes absolutely no sense at all as a foundation for scientific inquiry, it begs the question: Why should mainstream economists be taken seriously if their theories and, hence, their arguments are based on false assumptions? This question is particularly relevant with regard to the policy recommendations of mainstream economist when the realism of the assumptions on which the arguments that justify their recommendations are blithely ignored.

Today we find ourselves in the midst of a world-wide economic, political, and social catastrophe that has followed in the wake of the worst financial crisis since the 1930s. This crisis, in turn, was the direct result of the financial deregulation policies implemented over the past forty years at the behest of mainstream economists—policies that mainstream economists justified on the basis of an economic theory that assumes speculative bubbles cannot exist in spite of the innumerable economic, political, and social catastrophes that have followed in the wake of speculative bubbles throughout the course of history.[5] And yet, mainstream economists are at a loss in trying to come to a consensus as to what went wrong. Such is the power of Friedman’s as if methodology within the discipline of economics.

The Ideological Nature of Friedman’s Logic

Even more problematic is Friedman’s attempt to give substance to his engineering view of science by arguing that after all of the situations in which hypotheses work and do not work have been cataloged within a discipline, and afterall of the evidence with regard to the lack of realism of the assumptions embodied in these hypotheses has been ignored, the scientist should look to “the tradition and folklore of a science revealed in the tenacity with which hypotheses are held” to find the truth. He then argues that since the “capacity to judge . . . is something that cannot be taught [and] can be learned . . . only by experience and exposure in the ‘right’ scientific atmosphere” we must look to the wise men and women of the discipline who have been exposed to “the ‘right’ scientific atmosphere” to find where “the thin line is drawn which distinguishes the ‘crackpot’ from the scientist.” [Friedman (pp. 22-3, 25)]

This may seem to make sense to an engineer who wishes to learn the current state of the art of bridge building, or to an ideologue who wishes to provide a logical foundation for his or her most cherished delusions irrespective of the circular reasoning and false assumptions upon which that logic is based, but this is not science! If physical scientists had taken this approach to science throughout the course of history—relying on “folklore” and “the tenacity with which hypotheses are held” and on those who have been exposed to “the ‘right’ scientific atmosphere” as they ignored the realism of assumptions—we would still be living in a Ptolemaic universe cataloging the situations in which Aristotle’s assumptions do and do not work.

Friedman is quite wrong in his assertion that there is a “thin line . . . which distinguishes the ‘crackpot’ from the scientist.” That line is not thin. It is the clear, bright line that exists between those who accept arguments based on circular reasoning and false assumptions as meaningful and those who do not. This should be obvious, yet there are economists who hold tenured positions at prestigious universities and responsible positions in government agencies and international institutions who accept Friedman’s nonsense as gospel. They delude themselves into believing that on the basis of their faith in this gospel they are among the privileged few capable of drawing the line that “distinguishes the ‘crackpot’ from the scientist.” They are also without a clue as to the fact that they are not on the side of that line they believe themselves to be. To make matters worse, the vast majority of economists seem to assume that since so many others accept this kind of nonsense it must, somehow, make sense, and relatively few speak out against it. Nor do they seem to realize the extent to which this kind of pseudo-scientific reasoning permeates the discipline of economics or to understand the harm that it does. [Blackford (2016a; 2016b)]

What Friedman’s Methodology has Wrought

As a result of the centrality of Friedman’s understanding of science within the discipline of economics, the discipline has become dominated by a nineteenth century, Walrasian free-market ideological view of reality that, at its core, consists of a logically consistent and mathematically elegant paradigm of market behavior that describes how an ideal system of human interaction in a hypothetical free-market society is supposed to work, as well as the prerequisites for such a system to actually work, that is totally out of touch with reality.  A paradigm in which the assumptions on which its logical consistency depends—the most important being that no economic actor has the power to directly influence market prices, all market participants have perfect information as to the determination of market prices, that there are no external costs or benefits associated with the production or consumption of goods, and that people behave rationally as the term “rationally” is defined by economists—are not simply unrealistic and contradicted by empirical evidence but are, in fact, impossible to achieve in the real world. [Blackford (2013)]

Is it any wonder that this paradigm ignores the relevance of the essential role of cooperative action through democratic government to “establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity” in spite of the fact that the nature of economic behavior is critically dependent on the extent to which government is able to perform these vital functions, and to the extent the government fails to perform these functions an efficiently functioning economic system is not only impossible, but the entire concept of economic efficiency [Heyne] that economist hold dear is meaningless?[6]

Is it any wonder that the assumptions on which this paradigm is based has provided the foundation for mainstream economist to delude themselves into believing in a world in which markets are efficient; expectations are rational; there is no need to regulate international capital flows; speculative bubbles are a figment of the imagination; the economic system automatically adjusts to achieve full employment; fraud is not a problem given the efficacy of market discipline; factors of production receive the value of their marginal products; monopolies, monopsonies, and oligopolies are irrelevant as is an increasing concentration of income and a rising debt relative to income; increasing the propensity to save increases economic growth to the benefit of all; trade deficits are inconsequential; and in which financial institutions are fully capable of regulating themselves for the good of all humanity due to the enlightened self interest of bankers? [Blackford (2014, Ch. 1; 2016a; 2016b)]

Is it any wonder that the economic models created by mainstream economists in the wake of Friedman’s billiard-player analogy have ignored the long-run relationship between consumption and effective demand, output, and employment examined by Keynes in The General Theory of Employment, Interest, and Money to the effect that the logical implications of mainstream economic models have been used to justify deregulating the domestic and international financial systems, cutting taxes on the wealthy and increasing taxes on the not so wealthy, eliminating usury laws, promoting the adoption of private retirement accounts, destroying labor unions, converting Social Security from a pay-as-you-go into a partial-prepayment system, opposing increases in the minimum wage and many other policies that only make sense within a paradigm that not only ignores the essential role of government in providing for the common good but also ignores the long-run relationship between consumption and effective demand as well and simply assumes that increasing saving enhances economic growth in spite of the utterabsurdity of this assumption? [Blackford (2014Ch. 3; 2016a; 2016b)]

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The end result of these policies has been a dramatic increase in our current account deficit along with an equally dramatic increase in the concentration of income at the top of the income distribution. This, in turn, has led to a situation in which saving in the foreign sector has increased dramatically (by way of our increased current account deficit) and at the top of the income distribution in the private sector (by way of the higher propensity to save at the top of the income distribution than at the bottom). This increase in saving in the foreign sector and at the top of the income distribution in the private sector has been partially offset by dissaving in the public sector and at the bottom of the income distribution in the private sector. It has also been accompanied by dramatic increases in investment as a result of speculative bubbles in the commercial real estate market in the 1980s, in the markets for tech stocks in the 1990s, and in the housing market in the 2000s. [Blackford (2014, Ch. 1 and Ch. 3)]

To the casual observer it would appear that as a result of the policies supported by mainstream economists over the past fifty years our economic system has been transformed in such a way that, given the resulting current account deficits and concentration of income at the top, the mass markets for consumption goods in the United States have been undermined to the point that the economic system can no longer achieve potential output and employment with the given state of mass-production technology in the absence of a continual increase in debt relative to income. It would also appear that it is the unsustainability of a continual increase in private-sector debt relative to income that eventually led to the Crash of 2008. And it would appear that, given the distribution of income and the state of mass-production technology, it is the inability to either a) continually reduce the trade deficit, b) continually increase debt relative to income through dissaving at the bottom of the income distribution, c) continually increase debt relative to income in the public sector, or d) continually create speculative bubbles that has led to the diminished long-term expectation with regard to consumption that is the primal cause of the economic stagnation we have experienced since 2007. [Blackford (2014, Ch. 1, Ch. 3, Ch. 12; 2016a; 2016b)]

And, yet, in spite of the mighty accomplishments in economic theory that have been achieved since the publication of Friedman’s essay on “The Methodology of Positive Economics” that so many economists hold dear, the fundamental paradigm of economics that has emerged from these accomplishments is incapable of providing a consensus within the discipline of economics as to the nature and cause of the economic stagnation we find ourselves in the midst of today. To make matters worse, the kind of explanation of this stagnation given above cannot even be examined within the context of this fundamental paradigm let alone understood within this context since the effects of accumulating debt or of changes in the distribution of income are assumed to be irrelevant within this paradigm. [Blackford (2014, fn4)]

It’s as if mainstream economists are so enthralled with Friedman’s billiard-player analogy that it is virtually impossible for them to even imagine the possibility that the acceptance of a lack of realism in their assumptions, fostered by a free-market, ideological bias, is the reason for their inability to come to a consensus with regard to the nature and cause of the economic catastrophe we are in the midst of today. This is the legacy of Friedman’s pseudo-scientific as if methodology.

The processes by which the paradigmatic revolutions took place in the physical sciences are examined in detail by Kuhn in terms of the empirical evidence against the assumptions embodied in an accepted paradigm growing until the paradigm collapses and is replaced by a new paradigm. A similar revolution took place in economics following the 1930s collapse of the nineteenth century classical/neoclassical economic paradigm embedded in a free-market ideological view of reality. That paradigm was replaced following World War II by what became known as the neoclassical-synthesis embedded in a Walrasian mixed-economy ideological view of reality. The collapse of the neoclassical-synthesis in the 1970s led to its integration with the old nineteenth century free-market paradigm into what is referred to by Goodfriend and King as the new-neoclassical synthesis. That synthesis, as with those that came before, proved to be little more than a house of cards resting on a foundation of sand.

It is not at all clear what kind of paradigm will emerge from the chaos within the discipline of economics that has resulted from the dramatic failure of the new-neoclassical synthesis to provide a context within which the Crash of 2008 and its aftermath can be understood or explained. It is clear, however, or at least it should be clear, that continuing to adhere to Friedman’s as if methodology, guided by a Walrasian free-market ideology, and ignoring the unrealistic nature of the assumptions on which mainstream economic theories and arguments are based is not going to provide a useful guide to solving the economic, political, and social problems we face today. Nor will it provide a useful guide to solving the economic, political, and social problems our children and grandchildren will be forced to endure in the future if mainstream economists continue to accept this absurd methodology. [Blackford (2013; 2014, Ch. 1, Ch. 3, Ch. 12; 2016a; 2016b)]

Originally published at Real-World Economics.

References

Acemoglu, Daron and James Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012) (Amazon)

Amy, Douglas J., Government Is Good: An Unapologetic Defense of a Vital Institution (2010) (Amazon) (WEB)

Blackford, George H., “Ideology Versus Reality” (2013) (WEB)

———, Where Did All The Money Go?: How Lower Taxes, Less Government, and Deregulation Redistribute Income and Create Economic Instability (Amazon) (Ch. 1; Ch. 3; and Ch. 12 WEB)

———, “A Note on Keynes’ General Theory of Employment, Interest, Money, and Prices” (2016a) (WEB)

———, “Liquidity-Preference/Loanable-Funds and The Long-Period Problem of Saving” (2016b) (WEB)

Dal Bó, Ernesto, Pablo Hernandez-Lagos, Sebastián Mazzuca, “Failed states and the paradox of civilisation: New lessons from history” (2016) (WEB)

Einstein, Albert and H. Minkowski, Original Papers by A. Einstein and H. Minkowski (1920) (PDF)

Fox, Justin, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (2009) (Amazon)

Friedman, Milton, Essays in Positive Economic (1953) (PDF)

Galilei, Galileo, Dialogues Concerning Two New Sciences (1632) Translated (1914) (PDF)

Goodfriend, Marvin, and Robert G. King, The New Neoclassical Synthesis and the Role of Monetary Policy” (1997) (PDF)

Heyne, Paul, “Efficiency” (2008) (WEB)

Kindleberger, Charles P.The World in Depression, 1929-1939: Revised and Enlarged Edition (1986) (Amazon)

Kuhn, Thomas, The Copernican Revolution: Planetary Astronomy in the Development of Western Thought (1957) (PDF)

———, The Structure of Scientific Revolutions (1962) (PDF)

Keynes, John M., The General Theory of Money, Interest, and Prices (1936) (PDF)

MacKay, Charles, The Great Transformation (1841) (Amazon)

Minsky, Hyman P., Stabilizing an Unstable Economy (1986/2008) (Amazon)

Newton, Isaac, The Principia (1686) Translated (1846) (PDF)

Polanyi, Karl, The Great Transformation (1944) (PDF) (Amazon)

Suppes, Patrick, Introduction to Logic (1957) (PDF)

End Notes

[1] An excellent example of the kind of fallacy involved in Friedman’s argument to the effect that an expert billiard player plays “as if he knew . . . complicated mathematical formulas” because if he didn’t play that way he wouldn’t be an expert billiard player is to be found in Collin’s discussion of the gaze heuristic.

[2] While Friedman published his essay on methodology in 1953 it was circulated in the 1940s, and the acceptance of his engineering view of science by economists is implicit in the Keynesians’ rejection of Keynes’ Marshallian dynamic cause and effect methodology following World War II in favor of the Walrasian descriptive static equilibrium methodology. See Blackford (2016).

[3] See Einstein’s “§21. Newton’s theory as a first approximation” (Einstein and Minkowski, pp. 229-32) and also P. C. Mahalanobis in (Einstein and Minkowski, pp. 30-1).

[4] See Suppes and cf. Galileo, Newton, Einstein, Keynes, and Blackford (2016a; 2016b).

[5] See Fox, Minsky, Polanyi, MacKay, Kindleberger, and Blackford (2014).

[6] See Amy, especially his website at www.GovernmentIsGood.com, Acemoglu and Robinson, and Blackford (2013).


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  • Derryl Hermanutz

    Somewhere between 1948 when Friedman published A Monetary and Fiscal Framework for Economic Stability advocating a version of Irving Fisher’s radical monetary system reform (stripping banks of their credit-creation function, and having a government monetary authority issue 100% of the national money supply: creating money to fund government deficits and extinguishing money when governments had a surplus); and 1963 when Friedman published Capitalism and Freedom: the original financially literate Friedman was abducted by space aliens who melted his brain.

    How else do you explain Friedman’s transformation from clear understanding of the monetary nature of a money-using capitalist buy-sell financial economy, and his 1963 assertion that capitalist economies can be fully described as barter economies without Cost-money investing, Price-charging, Sales Revenue-earning businesses; without Income-earning, Price-paying consumers; and without “money”?

    “Despite the important role of enterprises and money in our actual economy, and despite the numerous and complex problems they raise, the central characteristic of the market technique of achieving co-ordination* (*i.e. between production and consumption) is fully displayed in the simple exchange economy that contains neither enterprises nor money.”

    In his 1986 Stabilizing an Unstable Economy (cited in your bibliography) Hyman Minsky quotes Keynes who realized by 1931 that banks create credit to monetize assets: banks create and lend credit-money to borrowers who spend the new money buying previously existing assets, which inflates asset prices and increases the economy’s money supply (asset sellers earn the new money). Minsky quotes Friedman (1963 version) and describes neoclassical barter economics,

    “…the neoclassical synthesis became the economics of capitalism without capitalists, capital assets, and financial markets.”

    So what’s the neoclassical solution to a debt crisis? Produce more stuff, and pay your debts with the value of the stuff you produce. No need to sell the stuff first to get money to pay your debts. Grow some carrots, haul a wagonload of carrots to your bank, and make your mortgage payment with the “value” of the carrots. Easy peasy.

    In Friedman’s defense: even though he conformed to mainstream barter economics orthodoxy to become a “recognized” bankster-serving economist, he never abandoned his understanding of financial economics. In 1969 Friedman came up with the “helicopter money” solution to the problem of insufficient demand money-spending.

    • As I understand it, Friedman’s remark resp. view on the equivalence of a barter economy to a monetary backed exchange mechanism economy relates to the *coordination mechanism* between producers and consumers – between supply and demand. As you quote this mechanism is *displayed* *also* in barter economies. That money resp. monetary notes allow for other processes and complication is correct, but not the point. Even in a barter economy you can introduce credit notes and IOUs as done by traders in the late medieval ages, which then also requires more elaborate bookkeeping procedures.

      Money in this exchange function is a medium of value transfer between goods and services and transfer over time that eases exchange (because not (parts of) two goods like e.g. shovels and carriages need to be made ‘divisible’ and traded for one another, the ‘right’ counterpart does not need to be found immediately, but value can be stored in money notes).

      One example of a barter economy where a similar in-between-medium of value transfer and exchange existed between the ‘really intended transactions’ was the cigarette-based currency after WWII in Germany. There was no accepted medium of monetary notes available, so easily transportable, divisible, and inherently valueable cigarettes took over this role (‘again’).

      However, technically you can do away with the exchange and accounting medium to describe the process of exchange of goods for goods, labour, land, and knowledge, if you want to describe how coordination between buyers and sellers / producers can/not work resp. plans (do not) adapt to each other.

  • ohminus

    While there are overall very good points, the statement

    “Now it seemed quite clear to me back in 1967, and it still seems quite clear to me today, that it is the purview of engineering, not science, to catalog the circumstances under which a theory works and does not work and to estimates the errors in the predictions of theories along with the cost involved in using one approach or another.”

    is way off the mark.

    It is very much the purview of science to determine the limits of a certain model. What engineering deals with is the question as to whether the limitations have a sufficiently large effect for a given problem to bother taking them into account or not.

    • I think we may have a problem with semantics here.

      I do not deny the fact that scientists have a responsibility to serve the needs of engineers. There would be no need to teach Newtonian mechanics if that were not the case. What I’m arguing is that this is not the essence of science. The essence of science is to understand and explain, and this is not accomplished by simply cataloging when a certain model works and when it doesn’t work and then ignoring when it doesn’t work as if that doesn’t matter.

      This is particularly problematic when the models being catalogued are based of demonstrably false assumptions, and policy advice is given on the basis of the logical implications of those demonstrably false assumptions that goes far beyond anything that has been catalogued.

      Think about this. In spite of the fact that speculative bubbles have created the kind of financial crises we saw in 2008 throughout history, crises that have led to economic disasters, mainstream economists supported policies that led to the deregulation of the financial system throughout the 1970s into 2008 on the basis of a theory (the efficient market hypothesis based on the assumption of rational expectations) that is not simply based on demonstrably false assumptions, but that, in fact, implies that speculative bubbles cannot exist!

      This is Friedman’s methodology at work. What does this have to do with science? What
      am I missing here?

      • ohminus

        “I think we may have a problem with semantics here.”

        I don’t think so at all.

        “I do not deny the fact that scientists have a responsibility to serve the needs of engineers. ”

        Which, I’m afraid, has very little to do with my points.

        “What I’m arguing is that this is not the essence of science. The essence of science is to understand and explain, and this is not accomplished by simply cataloging when a certain model works and when it doesn’t work and then ignoring when it doesn’t work as if that doesn’t matter.”

        Quite the contrary. In order to be able to understand and explain, it is necessary to be able to make predictions of future observations – whether these manifest or not is the ultimate test of a scientific model. And to make such predictions, it is critically necessary to understand the limitations of a model.

        “This is particularly problematic when the models being catalogued are based of demonstrably false assumptions, and policy advice is given on the basis of the logical implications of those demonstrably false assumptions that goes far beyond anything that has been catalogued.”

        But that’s a whole different issues. False assumptions are “garbage in->garbage out”.

        “This is Friedman’s methodology at work. What does this have to do with science?”

        Nothing – or very little. But that doesn’t change the fact that probing the limitations of a scientific model is the fundamental task of scientists, not of engineers. Engineers apply that knowledge.

        The fundamental difference between science and Friedman-style economics is that scientists say “Yes, we cannot reconcile quantum field theory with general relativity. We know there is a gap in our understanding, it bugs us and we’re working to close it” whereas Friedman-style economists reject the notion of any problem when their predictions don’t come to pass and jump to search for sundry excuses why they could not do what is the hallmark of science – make a prediction on a future observation that actually manifests. Some of Einstein’s predictions were shown to be accurate decades after his death. He didn’t have the technical means to make the necessary observations, but he was very much capable of saying that if his model was accurate, then future observations would have to show ABC, and if not, then his model was not accurate in some aspect.

        • I really don’t think we have anything to disagree on here.

          Friedman didn’t use the example of quantum field theory and general relativity as his example of probing the limitations of a scientific model. He used Galileo’s law of falling bodies. I seriously doubt there are many physicists who spend much time on this kind of problem though I don’t deny that physicists have every right to spend their time in this way if they wish to do so. I just don’t think this is the sort of thing that is the essence of science.

          What Friedman actually said with regard to the nature of scientific theory is:

          “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).”

          It seems to me that this is pure gibberish. Utter nonsense. It’s akin to arguing that it was a mistake for astronomers to switch from a Ptolemaic view of the universe to a heliocentric view when they could have achieved a much more “important and significant” hypothesis by adopting a lunar-centric view of the universe.

          What I take exception to is the fact that economists accept this kind of nonsense and that so much of economic theory is based on false assumptions that it is virtually impossible for an economist to become successful within the discipline of economics without at lease implicitly accepting this nonsense even if they reject it explicitly.

          I don’t believe this kind of thinking permeates the discipline of physics in the way that it permeates the discipline of economics. But then I don’t know that much about physics. I could be wrong, but I don’t think so.

          • Hi George

            Milton was a very bright individual, deeply engaged in statistics.
            In what he wrote I am very confident that he was pointing to something deeper than a surface level interpretation.

            And it seems there is something there, and I tend to agree with you that he got the wrong end of the bone he was worrying, and it seems likely to me that it was a different bone from the one you seem to be pointing to.

            I’ve come to a different set of metaphors, to try and point towards the levels of complexity present in human beings, and the sorts of behaviours that are possible in different contexts.

            If we go back to an understanding of falling bodies, that is a really complex set of systems.
            At that time they did not even have an atomic model of gases, let alone decent understanding of turbulence induced drag. So while there was the presence of gravity, for many everyday objects, in the atmosphere, the acceleration due to gravity was rapidly countered by other effects.

            One had to be very selective about contexts in order to be able to detect some of the deeper truths.

            Like the idea of the earth being at the center of things.
            That is in fact what we see.
            We look out, and the Sun rises and sets.
            The stars do their annual rotation.
            The planets wander about.
            That is what we see.

            Creating a context where it seems sensible that the Earth is not the center of things requires far greater modeling complexity.

            It is all about searching for contexts that provide maximal explanatory power. Such models can be far from simple, with many levels of abstraction.

            Every individual has to start out making simple distinctions.
            One has to be able to count to 2 before one can count to 3, or 4, or 1,000, or 10^220.
            Simple binaries are always the simplest and first distinctions we make, and most often they are essentially random divisions of potentially infinite spectra, like the notion of light and dark, heavy and light, good and bad, right and wrong, and (in most real contexts) true and false.

            It now seems clear that all human experience is of a subconsciously created model of reality, rather than of reality itself, but until we invented computers, and virtual reality games, how could most people have any access to a concept like that?

            Games theory now tells us quite clearly, that provided a context has sufficient resources that all can survive and prosper, then cooperation always out performs competition, at every level. And cooperation requires attendant strategies to prevent cheating strategies from destroying it – recurs to infinity down that nest.

            Wolfram has clearly shown many aspects of maximal computational complexity in reality (ie even if things were entirely causal, they would still be unpredictable).
            Quantum mechanics seems to be telling us that our assumptions about causality are fundamentally flawed, and that our experience of a causal world is the product of massive collections of random events within probabilistic constraints.

            Computational ability is doubling at times between 10 months and two years, depending upon which aspect of it one looks most closely at. Automation is proceeding at a similar pace.
            Robotics is an aspect of automation.

            We are not quite at the level of molecular precision in manufacturing (as per Drexler at al) and we are not that far away from it.

            It is now clear, beyond any shadow of reasonable doubt, that the major purpose (in practice) of our legal system is now to put in place barriers to the production of universal abundance that would otherwise threaten the structure of the scarcity based economic system (it may not have started out that way, and that is what it has become in practice).

            We have the technical capacity to produce a universal abundance of a large and exponentially expanding set of goods and services, but our modes of thinking and valuing prevent it from happening in practice.

            So I do kind of agree with you, and I also don’t.

            I know that Milton understood this aspect of the limitation of markets, because I personally had that conversation with him.

            I think he was pointing to a limitation on the modeling capacity of people, and I think we now have tools to allow us to overcome such limitations.

            I probably am a weird geek, who has spent far more time concerned with abstract spaces than with making money, and I have actually operated a software company for 30 years, so I do have some practical experience.

            I am confident, beyond any shadow of reasonable doubt, that we need to go beyond money and markets, and that if we do so, we can experience an age of abundance and security beyond anything possible in a market based system.

            And we do need to provide replacement (non-market) systems for all the many complex functions that markets provide, and that isn’t actually that much of a problem.

          • Ted,

            I appreciate your take on Friedman. I do realize Friedman was a very bright person and not everything he had to say was nonsense. He was, in fact, a very good neoclassical economist.

            I also realize, however, that he was a free-market ideologue who often had serious blind spots when it came to defending his ideological beliefs which he hung onto tenaciously in spite of the fact that they were fundamentally out of touch with reality. (See http://www.rwEconomics.com/IVR.htm ) He was not totally oblivious to reality in that he was willing to recognize some market failures and to accept some governmental solutions to those failures such as his proposed fixed money supply increase rule, for example, and his proposal for a negative income tax. On many other issues, however, he was simply unwilling to budge and, instead, offered convoluted arguments in defense of his positions that made no sense at all—the kinds of arguments we find in his “The Methodology of Positive Economics” essay.

            I try to give Friedman the benefit of the doubt whenever I can, but when I read something like:

            “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).”

            and:

            “So far as I can see, the “assumptions of a theory” play three different, though related, positive roles: (a) they are often an economical mode of describing or presenting a theory; (b) they sometimes facilitate an indirect test of the hypothesis by its implications; and (c) . . . they are sometimes a convenient means of specifying the conditions under which the theory is expected to be valid. (p. 23)”

            I come away with the notion that you are correct in your belief that “he was pointing to something deeper than a surface level interpretation” but that “something deeper” has nothing to do with realism in the sense of what we see when the sun rises in the east and sets in the west and, thus, appears to go around the earth. The example Friedman gave was Galileo’s law of falling bodies, not the rising and falling of the sun, and what he argues here is that this law does not assume a vacuum. His arguments to this effect defy all of the rules of logic and reason. They just make no sense at all unless you assume he meant something different than what he actually said.

            As I said, I think you are correct with regard to the deeper meaning of his arguments, but that deeper meaning is that his ideological beliefs are correct irrespective of the false assumptions and logical fallacies on which they are based and irrespective of the evidence to the contrary that may be offered because, in his mind, these beliefs work. This way of thinking may work for Friedman, but it doesn’t work for science, and the adoption of Friedman’s idea that policy recommendations can be derived from models that are based on demonstrably false assumptions because it can be argued that these models logically make sense in terms of his beliefs irrespective of the false assumptions on which they are based or that sometimes they work has proved disastrous.

            As I summarize in http://www.rweconomics.com/EVKGT.htm
            and explain in detail in http://www.rweconomics.com/htm/LPLFLPPS.htm , this methodology contributed to a rejection of the insights embodied in Keynes’ general theory to the effect that insights were ignored (for ideological reasons I would note) in formulating the models that justified the economic policies that led us down the road to the Crash of 2008 and to the economic, political, and social problems we face today. And as I argue above, it is my belief that continuing to adhere to Friedman’s as if methodology, guided by a Walrasian free-market ideology, and ignoring the unrealistic nature of the assumptions on which mainstream economic theories and arguments are based is not going to provide a useful guide to solving the economic, political, and social problems we face today. Nor will it provide a useful guide to solving the economic, political, and social problems our children and grandchildren will be forced to endure in the future if mainstream economists continue to accept this absurd methodology. See: http://www.rweconomics.com/LTLGAD.htm

          • Hi George,

            This is really tricky.
            In one sense, I agree with almost everything you say, and in that context, what Milton said makes little sense.

            In another sense, a more deeply probabilistic one, Milton still seems to be wrong to me, and he does seem to be pointing to something real, even if he made some errors along the way.

            And it is really abstract, and really difficult to discuss with any clarity.

            I read your http://www.rweconomics.com/EVKGT.htm paper, and it makes good sense as far as it goes. It just doesn’t go nearly far enough.

            I am fundamentally questioning causality.
            I am instead pointing in the direction of complexity, towards dispositionality, and to a potentially infinite nest of levels in a really complex set of systems.

            To me, the behaviour of markets more closely resembles waves on the ocean. Waves form as a result of boundary turbulence between fast moving air masses and slower moving water. These waves change their shape when the deeper areas of their influence interact with another boundary layer (the ocean floor), causing the waves to stand up and sometimes to “break”. In the context of markets most of these flows and boundaries are currently in terms of information, concepts, and paradigms. Some people get great pleasure from “surfing” those high energy zones.

            The system within which humans exist has far more than two boundary layers, many more than 4 dimensions, and the “wave” forms that result are far more complex. And many people seem to have an addiction to “surfing” those zones – they have adapted to live there, and seem to “like it”.

            I think we can create conditions such people would enjoy, without the significant risk to the rest of us that their behaviours currently pose.

            So while I kind of agree with a lot that you said – I am also clear that the fundamental assumptions underlying market based thinking now pose such a significant existential risk that they can no longer be tolerated. It seems that the most probable scenarios are, we either transition beyond market thinking, or we perish. And it is a complex disposition system, seemingly without hard causality, and to a good first order approximation, that does seem to be the most probable set of outcomes.

            I am very conscious of Goodhart’s Law of complex systems “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes”.

            So for me “The ultimate justification for” anything, is empowering the life and liberty of every individual (without exception). And liberty has to be in a context of responsibility in a set of physical, ecological, and social contexts- all of which are highly dimensional, dispositional complex systems.

            Simple laws, simple models, while we must each use them as part of our personal growth paths, are not appropriate in adulthood.

            The simplifying assumptions of economics can no longer be tolerated (in the context of the ability to fully automate the production and delivery of a large and exponentially expanding set of goods and services).

            And it is really difficult writing of third level and higher abstractions when no accepted vocabulary exists for such things.

          • Ted,

            You are absolutely right when you say “In one sense, I agree with almost everything you say, and in that context, what Milton said makes little sense. . . .
            In another sense, a more deeply probabilistic one, Milton still . . . seem[s] to be pointing to something real, even if he made some errors along the way.”

            This is the problem with Friedman’s essay. What he actually says makes no sense at all, and, yet, people attempt to give Friedman the benefit of the doubt and try to read into it something that does make sense. This kind of ambivalence has made it possible for Friedman’s essay to be used to justify ideological beliefs and economic policies based on those beliefs that are out of touch with reality, and the result is the economic, political, and social mess we find ourselves in today. ( http://www.rweconomics.com/Ch_1.htm )

            To make matters worse this methodology has taken over the discipline of economics to the point that the kinds of problems we face today can’t even be examined within the basic paradigm of economics that has resulted from the acceptance of Friedman’s methodology. ( http://www.rweconomics.com/htm/LPLFLPPS.htm ) Nor is it possible to discuss the fundamental causes of these problems or potential solutions within this paradigm. ( http://www.rweconomics.com/LTLGAD.htm ) Instead economists are forced to talk in terms of monetary policy and federal deficits while discussions of the real issues are ad hoc.

            Free-market ideologues rail against government as if we can just cut taxes and eliminate government programs and everyone will prosper. As I show in http://www.rweconomics.com/IVR.htm , this does not make sense when we examine the essential role played by government in those nations that have, in fact, actually become prosperous in the real world. (It should also be noted that Douglas Amy does an excellent job of explaining why this does not make sense even in theory at http://www.governmentisgood.com/ .)

            The fact is that government is the glue that holds society together, and if we succeed in destroying government, as free-market ideologues such as Grover Norquist and other right-wing ideologues have been trying to do with varying degrees of success over the past forty odd years, we are doomed ( http://www.rweconomics.com/IVR.htm ).

            I don’t believe that trying to make sense out of Friedman’s essay is going to save us. It makes much more sense to me to just examine what Friedman actually said in that essay and face the fact that what Friedman actually said is nonsense that has been used to justify policies by mainstream economists that have led to a disaster that is going to get worse if something isn’t done about it.

            I should also note that I am aware that you do not disagree with me on the most important issues that I raise, and I do not disagree with the issues you raise either. All I’m trying to do in this reply is stay on message.

          • Yeah – OK

            Granted on all points.

            The question then becomes, how do we transition, without falling either into low level chaos, or into a conformity to rules, yet retain sufficient structure to deliver real security to all.

            In the 42 years that problem has been uppermost in my mind, some key themes seem to be relevant:
            distributed networks;
            massive amounts of high fidelity data;
            massive redundancy;
            automate production and delivery of all essential services;
            large capacity high fidelity memory;
            community consensus decision making at local levels;
            high order values of life and liberty, which demand a radical tolerance of diversity;
            getting effective secondary strategies to maintain a cooperative context (and Ostrom’s catalog is a good starting set).

            Exchange based thinking, market based economics as it is currently known, cannot be a major part of that future – the incentive structures are inverted from what is actually required.

  • skippy

    Milton constantly confused Scientism for Science e.g. scientism focuses an inordinate amount of its attention on human behavior and beliefs.

    This correlates with the authors reference to engineering.

  • Some Soros is funding this?

    • skippy

      Droll

  • Agree with Ohminus – and it is also a bit deeper.

    Milton was a very smart guy.
    It took him all of about 30 seconds to get that fully automated production of goods and services completely changes the game – his response to a question I posed him was “that would be Nirvana wouldn’t it” – that was on 15th March 2003 – unfortunately he died 3 years later.

    Yes there were paradigm changes from Aristotle to Galileo to Newton to Einstein and since.

    Quantum Mechanics gave us the notion that the idea of causality might be just a useful approximation to something.
    Wolfram’s investigations support that notion from a different paradigm again.

    It is now clear, in both logic and experimental data, that this universe we find ourselves in is fundamentally unknowable and unpredictable in some very profound ways, and at the same time it is sufficiently close to causal at the scale of normal human perceptions that the difference is usually within the measurement error limits of our tools (and therefore itself uncertain).

    It is now also clear that all human perception is of a subconsciously created, and slightly predictive, model of reality, created by the subconscious processes of our brains. The inputs from our senses usually keep this model entrained to reality quite closely, and the nature of the model is strongly influenced by our cultural and paradigmatic background. A lot of philosophers have a lot of work to do, both in epistemology and ontology, reworking their understandings to match this reality.

    In the sense of managing our household, the household of humanity, and all the other life forms we share this third rock from the sun with, then yes, economics has a future, and it must be a future where markets and any value measure derived from them are bit players in a much broader set of values – prime amongst them individual life and individual freedom (in a responsible social and ecological context).

    The age of money must end.

    It was a valuable tool in our past, and the context has changed fundamentally, and the utility of money is now overshadowed by its dangers.

    Money is a scarcity based measure of value.

    Money cannot give a positive value to any universal abundance – no matter how important it is. Like the air we breath, arguably the most important thing to any human being, yet of zero market value wherever it is abundant.

    Automation has the potential to deliver any definable good or service (or something sufficiently similar that no unaided human senses could distinguish the difference) in universal abundance.

    Climate change, ecological destruction, poverty, etc are all true enough, real enough, in a very real sense, and at the same time each are trivial problems to solve with fully automated systems.

    We are not short of energy, or matter, or ways of organising either.

    What is currently limiting humanity is the ways of thinking about things and valuing things and interpreting things, that biology and culture have handed to us through their respective evolutionary processes.

    We have some very complex social systems that are optimised for scarcity, and cannot deal usefully with universal abundance.

    We can go beyond such things, into an age of security and abundance for all, and only if it empowers all and accepts the diversity that must result.

    If we hold onto the idea of markets, then there will be poverty for the masses.

    Poverty for the masses means injustice for the masses.

    It is not safe being the target of someone with justice on their side.

    The only stable way out of that, is to deliver justice to all.
    That is incompatible with any market based system.

    Markets always give a greater value to things that are scarce over things that are abundant (all other things being equal).
    Markets (and exchange based thinking more generally) will always tend to destroy any universal abundance.

    If we really value life and liberty, then the only stable option is universal cooperation (in a context of valuing individual life and individual liberty for all sapient entities, human and non human, biological and non-biological).
    And we all know that raw cooperation is unstable, so we require sets of stabilising strategies (recurs to infinity). Hence the ancient maxim – the price of liberty is eternal vigilance.

    In times of real abundance, cooperation always out performs competition, in all meaningful metrics.

    We can deliver abundance to all.
    We have the technology.

    We just need to escape the dogma of our culture, and our blind reliance on the past as a guide to the future. In times of exponential change, such a strategy is far from optimal.

    • We do not have the technology. Not yet. What we need are universal replicators, able to replicate any of millions of goods, including food, and most importantly, themselves. Once this happens, radical decentralization occurs. “We” don’t “deliver” a thing to people. At that point, everyone does everything for themselves with their personal replicators. At that point, economics, every single form of economics, vanishes around the world.

      • Hi Sally,

        Depends a lot on how one defines such terms.

        I say we do, right now, have the technology to fully automate the production and delivery of a large, and exponentially growing class of goods and services.

        I have owned and operated a software company for 30 years.
        16 years ago I was leading a largish team of developers on a largish project, when it became clear that there were constraints in the project that were not spoken of directly by any of the upper management parties. I was offered an ongoing job at $1600 / day plus expenses (working for a much larger company). It was very clear that I could make this money by putting about 100 people per year out of work.

        Like many others I know, I chose a much lower income rather than pursue that path.
        I devoted my systems skills to other levels of possibility space.

        The technology has existed for many years.

        The technology is not the issue. (And we can always develop better technology.) Sure, we don’t yet have Drexler’s atomic level precision ready for mass production, and we don’t need it, and it will be great when it gets here.

        The issues are complex, and mostly have to do with the ways in which we think about things, the ways we value things.

        All people use heuristic “hacks” when making value judgments.
        Some people use money.
        Some use “triple bottom line”.
        Both have deep issues.
        There are an infinite class of possibilities available.

        For me, my choice is first and foremost the life of sapient individuals (all of them), and their liberty (in both social and ecological contexts). All other values being subservient to these.

        And the journey of exploration of the space of the possible is an infinite one.
        It seems likely that it will always be true that there are more efficient ways of doing things in the spaces yet to be explored.

        And it is now true that we could fully automate production of key goods and services with existing technology.

        Sure, it is a significant engineering challenge to assemble and debug the systems – that is definitely true. In this engineering sense, the technology doesn’t yet exist, and there is work to be done. And there isn’t anything fundamental that needs to be discovered to make it possible. And there are an infinite class of things that are yet to be discovered that could make it smaller and more efficient – that seems likely to always be true.

        Lots of intersecting curves in lots of different dimensions – and many of them are exponential – heading for or having just crossed axes of interest.

        Change, really fundamental change, even for the most conservative in society, is now unavoidable. The probabilities are now moving very much into a realm where we either all win, or we all lose. I don’t see many high probability areas in between.

        Universal cooperation is definitely the low risk high reward option – for everyone.
        We now have a very large set of classes of well documented stabilising strategies available to ensure the cooperative is not invaded by cheating strategies.

        In times of exponential change, the past is not a good predictor of the future. That can be very difficult to come to terms with.

        The most powerful long term outcomes are (beyond any shadow of reasonable doubt) in the “all win” class of possibilities.

        And nothing is certain.

  • Tobias

    Thanks a lot for this insightful article, which led me to revise respectively refine my opinion on how to think about economics and economic models.

    You particularly emphasize the role of assumptions for theories and that it is not enough to judge the prediction the theory delivers. However I don’t know any such model/theory which has “false” assumptions and which predicts fine in a reasonable number of situations. To my knowledge there are many prediction that are presented in research papers as well as in textbooks which I would label as wrong because there are way to many counterexamples. I think this is one of the core points.

    A second remark I want to make is on the meaning of “false” assumptions. Almost all assumptions are somehow false. But nevertheless there are examples where you can successfully use models with false assumption, for example I recently tested a Value-at-Risk model which performed perfectely fine and also the Newtonian mechanics is usable for many (most?) applications.

    • Re point one: One example of a theoretical system resp. model that worked resp. could be kept working is the ptolemaic system of accounting for movements of celestial bodies through adding epicycles to existing cycles of movement that were supposed to describe the movement ‘correctly’.

      Re point two: I agree – A better version to account for celestial movement was only gradually reached with the research of Tycho Brahe, Johannes Kepler and Galileo culminating in the dispute of Leibniz and Newton on how to account for gravity ‘properly’ – which was later superseded by Einstein’s time-space continuum.

      Human knowledge grows and theories and assumptions get vindicated, falsified, modified, proven (wrong) and change based on the onflux of new ‘facts’ and refutations – panta rhei, if you want. Evolution of knowledge as ‘adaptation of fact to thought and thought to fact’ as Ernst Mach put it.

      • Tobias

        Thanx for the examples. Does anybody know examples from economics?

        • Examples in which Ptolemaic type theories work in economics can be found whenever a set of structural or reduced form equations seem to fit the data in an acceptable way. The problem is that this doesn’t tell us very much when all of the ways in which these equations do not fit the data are ignored. Carl tells us that: “Human knowledge grows and theories and assumptions get vindicated, falsified, modified, proven (wrong) and change based on the onflux of new ‘facts’ and refutations – panta rhei, if you want. Evolution of knowledge as ‘adaptation of fact to thought and thought to fact’ as Ernst Mach put it.” This is the way it is supposed to work, and, indeed, the way it seems to work in physics. Unfortunately, it’s not the way it has worked in the past in economics.

          A major part of the problem here is the attempt by economists to follow the methodology of physics in using deductive reasoning from fundamental economic assumptions while ignoring inductive reasoning from experience to establish basic economic relationships and facts. The problem is that while the fundamental assumptions of physics are not demonstrably false, those used by economists often are demonstrably false, and Friedman’s arguments tell us that we don’t have to worry about this so long as we can find situations in which they work. This has led to a world in which economists can play with mathematical models to their heart’s content without having to pay attention to the realism of the assumptions on which their models are based. It has also led to overconfidence in the efficacy of those models as economists keep track of the ways in which their equations fit the data and discount the ways in which they do not. This makes it possible for economists to defend ideological views and beliefs that at are totally out of touch with reality and to advocate economics policies on the basis on those views and beliefs as if those policy recommendations are rooted in sound scientific thinking when, in fact, they are not.

          As I try to explain in http://www.rweconomics.com/htm/LPLFLPPS.htm and http://www.rweconomics.com/htm/KGT.htm , this sort of thinking has not only corrupted the discipline it has led to disaster.

          • Data fitting onto models to identify patterns of relations is not wrong per se, imho. The scientific and practical value depends on whether it is used from an empirical worldview (I wonder what is going on?) vs. one of proving a worldview.

          • I agree completely. (See: http://www.rweconomics.com/Ch_1.htm or http://www.rweconomics.com/htm/WDCh3e.htm ) but this is not the way most neoclassical economists use data.

            If you wish to get some idea of what I’m complaining about here, think about this. In spite of the fact that speculative bubbles have created the kind of financial crises we saw in 2008 throughout history, crises that have led to economic disasters, mainstream economists supported policies that led to the deregulation of the financial system throughout the 1970s into 2008 on the basis of a theory (the efficient market hypothesis based on the assumption of rational expectations) that is not simply based on demonstrably false assumptions, but that, in fact, implies that speculative bubbles cannot exist!

            This is the kind of reasoning you get if you believe, as Friedman argued, that the realism of assumptions are irrelevant and all that is important is cataloging when a theory works and when it doesn’t. For the true believers, all the housing bubble means is that they have found a situation in which their theory didn’t work. They can still hang on to their theory (and their policies) without having to question the demonstrably false assumptions on which it is based as they try to rationalize away, or simply ignore, all of the situations in which it didn’t work that non-believers complain about.

          • John C

            Pennies starting to drop…fascinating conversation (for someone who is not an economist, but something far worse: the son of one).

          • Tobias

            But just fitting the data well (in-sample performance) is not a sufficient criterion for a good performance of a theory or a model. In particular if one uses a theory for policy advice (which is a kind of a forecast: if you do x then y will happen), then it has to have a reasonably well performance in forecast (out-of-sample performance). And still I don’t know any example of an economic theory with a good performance according to this definition with fundamentally flawed assumptions. I have seen a lot of talks in economics where there was a conclusion just considering in-sample fit as a criterion. To use such a model for forecast, policy advice or whatever is just wrong, because the model was not tested for this purpose. For many policies, mainly attributed to neoclassical economics there are many examples (, e.g. deregulation, lowering taxes (for the rich), more free trade,…) where, in the best case, they did not work or, in the worst case, did much more harm than good. Good assumptions do not prevent us from producing flawed theories, good performance measures might.

          • You are, of course, correct about the relevance of out-of-sample predictions. Actually, for macro models this is rather easy since much of the data is dominated by trends. It is a bit more difficult, however, when it comes to predicting out-of-sample changes in macro data or when dealing with cross-section data. I have no objection when it comes to this kind of research, and neoclassical economics does provide a place to begin (but not a place to end) in producing forecasts. In this area economists do the best they can, and, out of necessity, much of the research is inductive when it comes to forecasting models.

            The main problem in economics arises in ‘pure’ theory where neoclassical economists try to understand and explain how an ideal market system should work on the basis of assumptions that cannot, by their very nature, exist in the real world, and then attempt to formulate policies designed to make the real world more like their conception of how an ideal system should be. This kind of theorizing contributes little, if anything to out-of-sample forecasting, and has little or nothing to do with science. The only way I can make sense out of it is in terms of ideology.

            Friedman’s methodology of ignoring the realism of assumptions, cataloging when a theory that embodies your beliefs is supported by evidence, and conveniently ignoring when it is contradicted by evidence combined with the belief that

            a) scientist should look to “the tradition and folklore of a science revealed in the tenacity with which hypotheses are held” to find the truth,

            b) the “capacity to judge . . . is something that cannot be taught [and] can be learned . . . only by experience and exposure in the ‘right’ scientific atmosphere”,

            c) we must look to those who have been exposed to “the ‘right’ scientific atmosphere” to find where “the thin line is drawn which distinguishes the ‘crackpot’ from the scientist”

            is the mechanism by which free-market ideological beliefs are fostered and maintained within the fundamental paradigm of neoclassical economics.

            The problem with this methodology is that it is possible to find within-sample support through data mining and out-of-sample support through spurious correlation for almost any hypothesis. When an ideologue catalogues this kind of support and ignores other evidence there is never a reason to reject anything he or she wishes to believe. As a result, just about anything that is consistent with ideological beliefs becomes acceptable no matter how absurd it may be.

            One of the more salient examples of the way in which this sort of nonsense has permeated the discipline of economics is the efficient market hypothesis based on the assumption of rational expectations. In spite of the fact that speculative bubbles have created the kind of financial crises we saw in 2008 throughout history—crises that have systematically led to economic, political, and social disasters—mainstream economists supported policies that led to the deregulation of the financial system throughout the 1970s into 2008 on the basis of this theory even though this theory is not simply based on demonstrably false assumptions but, in fact, implies that speculative bubbles cannot exist!

            It seems to me that debating the finer epistemological points of reason in trying to make sense out of what Friedman said in his essay misses the point of the kind of impact this essay has had within the discipline of economics. While I definitely believe that what Friedman said makes no sense at all, the real issue is not what I believe but what economists have done with what Friedman said. What they have done is inculcate a free-market ideological view of reality into the basic paradigm of economics that is out of touch with reality—a view of reality that willfully demonizes the vital role played by government in the economic system. ( http://www.rweconomics.com/IVR.htm
            and http://www.GovernmentIsGood.com/ ) This has not only corrupted the discipline of economics it has proved to be a major factor in the economic, political, and social catastrophe we find ourselves in the midst of today. A catastrophe that can only get worse in the absence of effective government cooperation and action. ( http://www.rweconomics.com/LTLGAD.htm )

            I do not deny that there is a lot that can be accomplished with an understanding of neoclassical economics. I was trained in neoclassical economics and have gained a lot from that training. In fact, I would at a loss without it. But in order to make sense out of economic reality I have had to go well beyond the fundamental paradigm and methodology of neoclassical economics. ( http://www.rweconomics.com/htm/LPLFLPPS.htm ) Unfortunately, many if not most neoclassical economists are either unable or unwilling to do this.

        • One could see economists using insights and models derived from a more detailed view of human psychology as in behavioral economics, but still based on ‘neoclassical’ foundations and / or in this neoclassical framework as examples.

          • George H. Blackford

            What I do in economics is more or less based on ‘neoclassical’ foundations simply because of the fact that is the environment in which I was trained.

            The problem is that things like behavioral economics are considered ad hoc to the extent it is not integrated into the basic neoclassical paradigm, ( http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677168 ) and they have virtually no influence within the discipline, especially when it comes to policy. ( http://www.rweconomics.com/Ch_1.htm )

            This is particularly a problem when it comes to things like increases in the concentration of income and in the debt to income ratio. It seems quite obvious to me that herein lies the source of the economic problems we see today ( http://www.rweconomics.com/htm/WDCh3e.htm ) , and, yet, these problems cannot even be examined within the mainstream paradigm as they are simply assumed to be irrelevant within this paradigm.

  • Patrick cardiff

    The Asian economies and especially the Mideast oil exporters’ current account surpluses mirror our current account deficits. We buy a lot of oil to run our cars, industries, homes, etc. But it’s cheaper than ever now, I would tend to believe that over time, a macroeconomic element might encourage some total economic effect (stagnation?) but I would never single out one factor and say “hey this is the main covariate for stagnation!” The economy is one integrated hydra, like the weather.
    Before we determine the factors of stagnation, it would be better, I think, to discuss what we mean by growth. Expenditure is two-thirds of our economy if you believe the national accountants. Since money is involved in the things national accountants account for, and Economics is brutally about money, there is some precedent for associating GDP with growth. But we don’t say, “our economy grew by 1.2% at an annualized basis last quarter” without a good deal of hemming and hawing, and hedging. I mean, it’s not real. Let’s drop the pretense and ask “What does it mean?” We need to start evaluating what use we make of macro, which translates as “why do we talk about aggregates at all?” The illogic comes from the primary sin of economists: generalization.
    So to use macro to explain a macro thing that affects every individual is, …, meh. Domestic is more real than foreign. I think the culprit is more home-grown, it’s that there is not enough effective demand. We don’t have enough effective demand because our wages and salaries have been kept artificially low by ascendant capital and a malleable labor force – big business could easily pay bigger salaries but basic greed (1985, remember?) keeps them from doing that. Business tradition dies hard; it’s a structure. So to get the money to the people (stimuli) the government needs to take charge, tax business, and then what happens: the Right, the bastion of owners, gets pissed and then Congress can’t agree because the lobbyists are well-financed.
    Then there’s finance. Low demand really came from citizens making relative consumption comparisons with the rich. There has been a great “scaling up” of dollars in the last decade from permitted financial transactions that originated with the big banks, financial houses and insurers acting as investors. The sheer size of the non-investor class props up the dollar value while our imports feed external trade of nations clambering for a similar economic model. But trade is only about one-fifth of our GDP, so can domestic stagnation be due to the balance of payments?
    But all that is my opinion, and here’s why it’s hogwash: because never in a thousand years could I ever even slightly prove what I just said with real numbers. It is therefore meaningless even in a positive economics manner. It’s navel gazing. Instead, what the 99% want is hard truth. We want “news we can use.” It’s nice to talk about theory, sort of like bedtime stories, but bedtime stories don’t feed the cat. Look, most people in the USA are just scraping by in the “Best Country in the World.” Now what’s wrong with that picture?
    “Mama don’t let your babies grow up to be Macroeconomists.”

  • John C

    I am in full sympathy with your post-Keynesian cri-de-coeur, but may I gently suggest that poor Dr Friedman is not really the villain of the piece, as you have so artfully presented him. His little thought experiment (or curiosity reality), no more even than the purist theorising of a Kenneth Arrow, is not the reason for the seeming unwillingness of orthodox economists to face up to the obvious absurdities which you catalogue, no more than EMH is the cause of the 2008 debt crisis, inadequate cornerstone though it may be. On the one hand we have had a proud tradition of academic economists, sometimes brilliant, sometimes merely unsocialised, who proud of their ivory tower detachment and status as such, have not fully engaged with the so-called real world. On the other hand we have had cohorts of politicians and business men who have seized upon these economic models and curiosities and made use of them for their own purposes. I am thinking here of men like Nixon, John Connolly, Paul Volker, Robert Rubin, Larry Summers, and of course Alan Greenspan (but without meaning to single any of them out for particular culpability). We must face up to the fact that not all if any of them have shared a concern for a macroeconomic system of maximum optimisation. To say they don’t care, is not the point. Rather, there were geopolitical ambitions behind the engineering that went into the abandonment of Bretton Woods, for instance, followed by interest rate policies which permitted the US to uncannily maintain global financial hegemony despite its double-deficit, putting the shadow banking sector on steroids perhaps only incidentally as it were. So, we can’t say that the economics profession has come off the rails (taking the global economy with it) through ignorance or stupidity or lack of clear thinking. Choices have been made which were clearly in some people’s interests, if not everyone’s. Entertaining theories have been sometimes created for one purpose, or no real purpose at all, then picked up, perhaps vulgarised and used for other purposes; sometimes there has been rationalisation pure and simple, whether conscious or unconscious, no doubt; sometimes obfuscation or misdirection; but the problem, as I see it, has never been about the quality of the science, or the logic, and I am sure that we must be in agreement on this. We must face up to the fact that what has been missing from academic economics has been the politics, much like the ‘assumptions’, from Friedman’s positivist model, air-brushed out, too cleverly by half.

    • I apologize for not responding to this earlier.

      “the problem, as I see it, has never been about the quality of the science, or the logic, and I am sure that we must be in agreement on this. We must face up to the fact that what has been missing from academic economics has been the politics, much like the ‘assumptions’, from Friedman’s positivist model, air-brushed out, too cleverly by half.”

      Yes, I do believe we agree on this. I also believe that this air-brushing began with Hicks’ static IS-LM model and the refusal by Keynesians to deal with Robertson’s objections to Keynes’ theory of interest directly by insisting that it didn’t make any difference which theory you accepted since the static results were the same no matter which theory you choose. This made it possible to avoid the fundamental issue raised by Keynes, namely, what Robertson dubbed “the long-period problem of saving.”

      See: http://www.rweconomics.com/htm/KGT.htm and especially http://www.rweconomics.com/htm/LPLFLPPS.htm

      I also find it interesting that the refusal to face this issue solidified during the McCarthy Era in the United Sates, but I will leave it to others to speculate on the relevance of this coincidence.

      • John C

        Thank you for your courteous and unpatronising reply to me. I am in the process of teaching myself something about economics (my own personal response to the GFC) and am currently reading Hyman `Minsky’s book on JMK, stuck/paused on his review of IS/LM, which I first encountered courtesy of Paul Krugman’s blogs in the NYT, along with ‘liquidity trap’. I am beginning to see, thanks to you as well, that this tidy little model has been the source of much misdirection and look forward to better mastering it in order to assist in the project of chucking it once and for all off the plane.

  • Dick Burkhart

    Economists are at a loss without Friedman’s rejection of the scientific method because they have ignored modern science. Complexity economics works quite well without false assumptions. Beinhocker (“The Wealth of Nations”) gives many examples. Even Ptolemy’s epicycles look pretty good compared to neoclassical economic theory when confronted with actual booms and busts.

  • BetterFailling

    I’m sorry but the real problem here is not the circular nature of Friedman’s logic but what he identifies as the goal of the game.
    While it is very simple to identify the expert billiard players as those who pocked more balls in the least amount of time it is our current insistence in naming the most profitable entrepreneurs as the ‘best economic operators’, regardless of the other consequences that the entire society has to face as a result of their ‘profitable’ activity.
    https://nicichiarasa.wordpress.com/2013/10/08/profit-might-it-be-overrated/