Tuesday, March 30, 2010

Max Weber in Friedman's Methodology of Positive Economics

I am working on a paper showing the Weberian influence on methodological developments in (early) "Chicago" economics.
The link between Chicago and Weber is not as far-fetched as it sounds because Frank Knight (a fascinating character), the supervisor of Milton Friedman and George Stigler, was Weber's early English translator and popularizer and remained interested in Weber throughout his life. (This has been ably demonstrated by Ross Emmett.)

In 1949 Stigler gave five lectures at the LSE. At one point Stigler remarks, “I wish to close by offering an estimate of the net contribution of the attempt to construct a theory of monopolistic competition. Before undertaking this appraisal, however, it is necessary to set forth certain methodological principles,” (GJS, Five Lectures, 23) He then adds the following footnote: “The present interpretation of these principles is due to Professor Milton Friedman; see Talcott Parsons, *The Structure of Social Action*.” This footnote is the basis of the paper I am writing. (Turns out Parsons' Structure is fascinating -- it anticipates Kuhn's Structure in various ways -- and it had non trivial impact on early Stigler.)

Once sensitized, I re-read Friedman's famous "Methodology of Positive Economics" (F1953) in light of Parsons' Structure. I found a lot of similarities, including Friedman's treatment of Galileo's Law of Fall, and found evidence for an earlier speculation that Friedman's scare quotes (used with remarkable frequency in F1953) betray a kind of neo-Kantianism. But I was absolutely delighted to note the following passage:

“The abstract model corresponding to this hypothesis contains two “ideal” types of firms: atomistically competitive firms, grouped into industries, and monopolistic firms. A firm is competitive if the demand curve for its output is infinitely elastic with respect to its own price for some price and all outputs, given the prices charged by all other firms; it belongs to an “industry” defined as a group of firms producing a single “product.” ... A firm is monopolistic if the demand curve for its output is not infinitely elastic at some price for all outputs.29 … As always, the hypothesis as a whole consists not only of this abstract model and its ideal types but also of a set of rules, mostly implicit and suggested by example, for identifying actual firms with one or the other ideal type and for classifying firms into industries. The ideal types are not intended to be descriptive; they are designed to isolate the features that are crucial for a particular problem,”

It is accompanied by the following footnote:
“29. This ideal type can be divided into two types: the oligopolistic firm, if the demand curve for its output is infinitely elastic at some price for some but not all outputs; the monopolistic firm proper, if the demand curve is nowhere infinitely elastic….”

Here one can see Friedman casually employing the very Weberian language of “ideal types” and explaining their function in Weberian terms.

4 comments:

  1. This is very interesting, Eric! To me, this seems good evidence that Friedman did not have a consistent methodological picture. I have not read the whole of 1953 book, but I cannot fathom how the talk of ideal types can be reconciled with his other famous claims:

    “Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to ‘explain’” (Friedman 1953: 184 Hausman's 1994 anthology).

    He explicitly rejects any attempt to evaluate economic theory on the basis of realism of its assumptions. Its only evaluation is in the correctness of models' predictions, and only in some of them. This is very different from saying that models must capture some essential and abstract features of the situation in question.

    I know that a historian should look for a charitable (i.e. consistent) interpretation of a thinker's views. But here is one possible?

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  2. Anna,
    I am not claiming that Friedman had a consistent articulated method (his practice is a different issue). But I think there is less inconsistency than meets the eye, and I think the 'Weberian' element helps reduce confusion about this.
    The way Parsons (and Weber) understands an ideal type, it is not merely an abstraction from the facts (and capturing something essential about them), but the abstraction may also instantiate unreal 'assumptions.' (This becomes most clear in Parsons' treatment of Pareto of all people. [Not irrelevant because there we find the treatment of Galileo's law of fall that we also find in Friedman!])
    Where Friedman is really different from Weber is the aim/end of the deployment of these ideal types. Friedman emphasizes as you rightly note predictions (and retrodictions) rather than understanding.

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  3. please i want more informations about your article max weber/chicago school of economics if the article is ready please sendo to me claudiomendes@uol.com.br são paulo brasil

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  4. This looks like a very interesting observation. It would be interesting to know whether (and how) the potential influence of Weber on Friedman counts for the second Chicago School (e.g. Becker, Stigler etc.) in general. Friedmans essay was and is the most influencial piece in economic methodology for economists since then, which probably influenced their instrumental stance towards price theory as being a tool for prediction rather than for providing a description and/or even an explanation of reality and the actual behavior of economic agents.

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