Robbins, Friedman, and Economic Methodology by 5KxFLO6

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									     Robbins, Friedman, and Economic
               Methodology

Three Basic Topics
1. Late 19th and Early 20th Century
    Background (J. S. Mill, Nassau Senior, John
    Cairnes, Neville Keynes, … Focus on Mill
    1974)
2. Lionel Robbins (An Essay on the Nature and
    Significance of Economic Science, 1932/1935)
3. Milton Friedman (The Methodology of Positive
    Economics, 1953, i.e. F53)
Millian Background
1. Naturalistic Framework:
   Presumption that
   economics produces
   scientific knowledge,
   the task is to explain
   exactly how.
2. Mill's (Humean)
   Empiricism: knowledge
   = sensations, laws =
   constant conjunctions
3. Ricardian Economics =
   Economics

                             2
  Mill's Bottom Line: Economics (Moral
   Science) is an empirical science (like
 physics), but it is unique (i.e. not exactly
                like physics)

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


                                                3
     The Non-Experimental Character of
               Economics

Controlled experiments are:
a. Not generally available in economics (Mill's
   example of trade between nations)
b. Even if experiments were available, they
   would not help because of the nature of
   the domain of inquiry. Human choice,
   unlike say chemistry, is not reversible
   (many different sets of causes produce the
   same outcome)

                                             4
 Mill's Definition: Economics = the science of Wealth
        (economics is thus an abstract science)

"Political Economy … does not treat of the whole of
  man's nature as modified by the social state, nor of
  the whole conduct of man in society. It is concerned
  with him solely as a being who desires to possess
  wealth, and who is capable of judging of the
  comparative efficiency of means for obtaining that
  end."      (Mill, 1874, p. 137)
"Political Economy considers mankind as occupied
  solely in acquiring and consuming wealth … Not that
  any political economist was ever so absurd as to
  suppose that mankind are really thus constituted,
  but because this is the mode in which science must
  necessarily proceed. (ibid., pp. 138-39)

                                                   5
   Economics is thus a Deductive (a priori)
        science of Tendency Laws
"But we can go further than to affirm that the method
  a priori is a legitimate mode of … investigation in
  the moral sciences; we contend that it is the only
  mode … the method a posteriori, or that of specific
  experience, is altogether inefficacious in those
  sciences, as a means of arriving at any
  considerable body of valuable truth … (Mill, 1974,
  p. 145)
But the "laws" are laws of tendencies only (true laws
  about tendencies, not ceteris paribus laws)



                                                   6
Economics is thus an inexact deductive science of
  tendency laws, but that does not mean that it is
  not useful for practical/empirical applications
  and/or policy, or that such exercises do not
  involve the facts of the matter.
Concrete cases and real-world applications require
  knowledge about specific conditions and
  disturbing causes, and that in turn requires
  empirical verification, since the "discrepancy
  between our anticipations and the actual fact is
  often the only circumstance which would have
  drawn our attention to some important
  disturbing cause which we had overlooked."
  (Mill, 1974, p. 154)

                                                 7
 Lionel Robbins (1898-1984)
 The Nature and Significance of Economic Science
 (1st edition 1932, 2nd edition 1935)

Three main theses in Robbins's N&S
1. His rational choice (non-Wealth Based)
    Definition of Economics
2. His argument against making interpersonal
    utility comparisons within scientific economics
3. His desire to provide economics with more
    adequate (and contemporary) psychological &
    epistemological foundations by defending
    marginalism without psychological hedonism
    (and I would note, without behaviorism)

                                                      8
Background/Context for
  Robbins's N&S
• Critics of orthodox
  economics (particularly
  Institutionalist critics)
• LSE vs Cambridge
• Marshallian welfare
  economics based on the
  diminishing MU of
  money
• The rise of positivist
  ideas with the
  philosophy of natural
  science

                              9
     1. Robbins’s Definition of Economics: Not a
     Materialist or Wealth-based definition, but a
     particular "kind" of activity (an aspect of all
                   human activities).
"Economics is the science which studies human behavior as a
  relationship between ends and scarce means which have
  alternative uses." (p. 75)
"But when time and the means for achieving ends are limited
  and capable of alternative application, and ends are capable of
  being distinguished in order of importance, then behavior
  necessarily assumes the form of choice. Every act which
  involves time and scarce means for the achievement of one
  end involves the reliquishment of their use for the
  achievement of another. It has an economic aspect." (p. 74)



                                                             10
   2. The (scientific) Impossibility of making
       interpersonal utility comparisons
"It is a comparison which necessarily falls outside the scope of
    any positive science. To state that A’s preference stands above
    B’s in order of importance is entirely different from stating
    that A prefers n to m and B prefers n and m in a different
    order. It involves an element of conventional valuation. Hence
    it is essentially normative. It has no place in pure science."
    (p. 90)
"Now of course, in our daily life we do continually assume that
    the comparison can be made … it would really be silly if we
    continued to pretend that the justification for our schemes of
    things was in any way scientific." (p. 91)



                                                                11
The absence of interpersonal utility comparisons
  has serious implications for welfare economics
  and policy:

It means the end of hedonistic utilitarian welfare
   economics and thus opens the door for Ordinal-
   based Paretian concepts of welfare.
"The conception of diminishing relative utility …
   does not justify the inference that transferences
   from the rich to the poor will increase total
   satisfaction." (p. 92)



                                                   12
     3. Robbins on Economics and Psychology
a)   No particular psychology is needed (or wanted),
     but economics does require a psychological
     notion of human action (desires/preferences +
     beliefs/information cause/explain individual
     choices). It just should not be the "psychological
     hedonism of Jevons and Edgeworth." (pp. 83-84)

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

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


                                                     13
d) But not behaviorism (not strictly observable):

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

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

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



                                                                14
       Tensions in Robbins’s Essay
        [Hands, Economica, 2009]

1. The goal of providing more scientifically
   acceptable foundations for choice
   theory seems contrary to introspection
   (Why not go all the way with
   behaviorism a la Samuelson 1938?)
2. Robbins needs introspection for both
   the definition (choice) and the argument
   against interpersonal utility
   comparisons.

                                          15
Behaviorism (at least 1930s behaviorism) is about
  law-like constant conjunctions connecting
  stimulus (x) and response (y) in the form y=f(x). No
  choice or purpose.

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

                                                    16
   Introspection essential to the argument against
  interpersonal utility comparisons (they come from
        neither observation nor introspection):

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

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


                                                               17
   The Methodological Problem Situation of
         Marginalism in the 1930s

Two concerns (both important):
1. The Scientific Credibility Problem: Respond to
   institutionalists and others who criticized the
   unscientific and old-fashioned psychological
   foundations of marginalism (psychological
   hedonism).
2. The Choice Problem: To defend marginalism while
   preserving the idea of the freely choosing
   volitional agent. Choice is what distinguishes
   markets from other economic institutions and
   choice is essential to understanding economizing.


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

                                          19
   Friedman's "Essay on Positive Economics" (F53)
F53 Background/Context (a
    number of theoretical
    developments which
    Friedman opposed on
    practical, empirical, and
    political grounds)
1. Walrasian and Keynesian
    ideas, particularly at Cowles
    (1933-55)
2. The Rise of Imperfect
    Competition (Chamberlin,
    Robinson, …)
3. The "marginal cost pricing"
    debate (Hall, Hitch, Lester,
    …)

                                                    20
 Freidman maintained a sharp distinction
(dichotomy) between positive and (ethically)
          normative economics
Positive = What "is"
Normative = "What ought to be"
"Positive economics is in principle independent of any
  particular ethical position or normative judgments. As
  Keynes says, it deals with "what is," not with "what
  ought to be." Its task is to provide a system of
  generalizations that can be used to make correct
  predictions about the consequences of any change in
  circumstances. Its performance is to be judged by the
  precision, scope, and conformity with experience of the
  predictions it yields. In short, positive economics is, or
  can be, an "objective" science, in precisely the same
  sense as any of the physical sciences." (Friedman, p.
  146)


                                                          21
 Economic Theories are just tools for empirical
                 prediction

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

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


                                                            22
Example the Quantity theory of money:

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

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

                                              23
The "Realism" of the Assumptions.

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

"In so far as a theory can be said to have "assumptions" at
   all, and in so far as their 'realism' can be judged
   independently of the validity of predictions, the relation
   between the significance of a theory and the 'realism' of
   its 'assumptions' is almost the opposite of that suggested
   by the view under criticism. Truly important and
   significant hypotheses will be found to have
   'assumptions' that are wildly inaccurate descriptive
   representations of reality, and, in general, the more
   significant the theory, the more unrealistic the
   assumptions (in this sense)." (p. 153)



                                                          24
As If

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

Billiard Player example (p. 157)

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

                                                25
The Message for Economic Practice

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

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