Let's argue about tastes (2): values edition

The Knightian roots of Friedman’s methodology

Last week we discussed how Frank Knight’s ideas about tastes and values shaped later discussions in the Chicago School. By coincidence there was another great post about the same Knight essay by Nik Prassas. So, I thought it would make sense to continue the conversation.

In Frank Knight’s economics the way we think about individual tastes is closely related to how we think about human values. Value judgments in our individual lives, even mundane ones, are of the same type as political judgments about social values (and as aesthetic judgments as Nik’s post argued). The knowledge and competence of the economist is thus not merely limited by the fact that individuals are the best judge of their own (consumption) choices, but also by the fact that judgments about social values are always external to economics proper.

James Buchanan, who is certainly not a member of the postwar Chicago School, but is a Frank Knight student, develops this Knightian line into an argument about the importance of democracy. The economist in Buchanan’s political economy can only ever propose policies to democratic decision-makers. The citizens should have the sovereignty to make their own value-judgments to evaluate which of the proposed policies is most preferable. Economists can outline expected effects, but the desirability of these effects cannot be evaluated scientifically.

This obviously leads to the major question of how the diverging opinions of individual citizens are to be reconciled. Knight, in another instance where the remnants of Progressivism are very evident in his work, was hopeful that some kind of procedure for collective rationality could be found. Knight therefore proposed what he called ‘government by discussion,’ a kind of Habermasian conversation aimed at finding normative consensus (but not normative truth!). Buchanan had sympathy for this solution, as is for instance evident in his engagement with deliberative democratic thinkers in the 1980s.

But in most of his work Buchanan stayed a bit closer to the aggregation paradigm that came to dominate neoclassical economics. Not in the sense that he thought that a social welfare function aggregating individual preferences could be formulated, but in the sense that he treated the problem of collective rationality primarily as one of agreement between individuals who have already made up their mind. The search is consequently for policies, or better rules, to which all individuals can agree (consensus), or for which supermajorities of various specifications can be found. Simple majority decisions are suspicious because they violate the preferences of too many individuals.

But my main argument today is not about Buchanan, but rather about Milton Friedman. The most famous of the postwar Chicago economists was more ambitious when it came to policy. One might well argue that his most important legacy is a set of creative and original policy solutions: rule-based monetary policy, school vouchers, the end of the military draft, drug decriminalization, flexible exchange rates and the negative income tax (now often understood as a universal basic income), to name a few. Friedman’s reputation is precisely the type of legacy that Frank Knight associated with John Dewey and the generation of Progressive economists before him. They were better known for the ‘solutions’ they advocated to a wide variety of social problems, than for their theoretical or empirical contributions to economic science. Now it would be unfair to suggest that Friedman made no such contributions, but that does not take away that he also engaged in wide-ranging policy advocacy – and in doing so also had a significant impact on the identification of the social problems which required our attention.

George Stigler, who stayed closer to the spirit of their mentor, certainly believed that Friedman was crossing the lines that Knight had drawn in the sand. He accused his good friend Friedman (and many others in the profession) of ‘preaching,’ rather than practicing economic science. It is wrong, however, to think that Friedman simply ignored the methodological strictures of his mentor. Instead, Friedman made a move in discussing collective rationality that interestingly resembles the move that Becker and Stigler made in their ‘De Gustibus’ paper.

This is not obvious when we reread Friedman’s famous essay ‘On the Methodology of Positive Economics,’ in which he writes:

I venture the judgment, however, that currently in the Western world, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action - differences that in principle can be eliminated by the progress of positive economics - rather than from fundamental differences in basic values, differences about which men can ultimately only fight.

It is easy to read that passage and come away with the idea that Friedman is an adherent of what philosopher Alasdair MacIntyre would later call ‘emotivism’: the idea that our values are little more than tastes which we hold without good reason. We cannot seriously discuss our preferences, or for that matter talk about better and worse tastes as Frank Knight desired. It is this view that inevitably turns collective rationality into an aggregation problem of heterogenous preferences because preferences are not only believed to be more or less fixed, but also because they are not formed based on reasons. If you deeply hold this view, as Stigler claimed to do, it makes a lot of sense to make fun of a good friend, who is constantly trying to change the political views of citizens. From this perspective such advocacy is not only improper, but also pointless.

So, what did Friedman do? Well, he argued, much like Stigler and Becker in their ‘De Gustibus’ paper that we could move the problem one level up. Yes, preferences about policies (market goods) differed between individuals, but such differences could be understood as different expressions of the same underlying values. This move is noticeably clear in the first example he provides, the discussion about minimum-wage legislation:

Underneath the welter of arguments offered for and against such legislation there is an underlying consensus on the objective of achieving a “living wage” for all, to use the ambiguous phrase so common in such discussions. The difference of opinion is largely grounded on an implicit or explicit difference in predictions about the efficacy of this particular means in furthering the agreed-on end.

Friedman is convinced that he can provide economic arguments which demonstrate that a living wage is better secured by the free movement of wages, than by minimum-wage legislation. And thus, he claims, that his argument is merely about means to achieve the agreed-upon end, rather than about ends (values). He is not preaching, but correct misperceptions about the appropriate means. He is not operating in the domain of tastes and values, but in the domain of technique, or as Friedman called it positive economics.

I will leave it to you to figure out, or should I say fight out, whether Friedman, Stigler, or Buchanan is right in their resolution of Knight’s dilemma. I will just add that Knight in the essay that started all of this ‘Ethics and the Economic Interpretation’ is skeptical that means and ends can really be distinguished neatly, after all, our actions are all part of a long chain of means and ends, and to call some end ultimate is necessarily arbitrary. Secondly, when we move the agreement too far up, say to the level of ‘welfare’ or ‘happiness’ then Friedman’s position simply collapses into the construction of a social welfare function. At that point we have certainly departed from Frank Knight’s worries:

But the test is not happiness. And by this we do not mean that it ought not to be but the simple fact that that is not what men want. It is a stock and conclusive objection to utopias that men simply will not live in a world where everything runs smoothly and life is free from care.

Milton Friedman busy correcting mistakes. Source Wikimedia Commons