Machlup and Friedman: Why Economists Disagree

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Originally written for the Students For Liberty Blogging Series, posted here on 2.2.15.

We see their televised debates, their influence on the floor of Congress, and their arguments in our bank accounts. Economists are powerful, but are notorious for disagreement. But, why?

Milton Friedman, Source: University of Chicago

This is one of the questions Fritz Machlup and Milton Friedman ask in their separately written, but identically named, essays, “Why Economists Disagree.” Published years apart, Machlup and Friedman seemed to agree that there were two major reasons economists disagree over what policies to pursue. These two issues take form in what Friedman labeled “Scientific Disagreements,” different interpretations of policy consequences; and “Value Judgments,” differences in policy goals. While economists may disagree vehemently on both scientific and value judgments, these disagreements are an indicator of healthy debate in field that agrees on many core principles.

For example, Friedman cites the dominance of Keynesian economics in America. Keynes’ theory of money rose to prominence when the majority of economists saw what they believed to be the failure of monetary policy in the US during the Great Depression. For decades to come, Keynes’ theories would drive economic thought until individuals like Friedman revitalized interest in monetary theory. This was a process that took years, and according to Milton, is a prime example of scientific disagreement.

Machlup goes even further on this point. Not only do economists disagree on scientific facts, they disagree on countless factual assumptions. Economics is largely a backward-looking science. There are no controlled experiments similar to those conducted in hard sciences, and often (and at best) economists are left with countless data points that they must try to put together and comprehend post-event, e.g. the Great Depression. Economists are scientists who make countless presumptions on the past, the present, and the future, attempting to use as much empirical experience and data as possible to try to accurately forecast economic phenomena. Thus, when we see economists disagree on TV about who, what, and why something happened, it’s oftentimes the result of innumerable factual presumptions on both sides of the debate.

Fritz Machlup in his later years, Source: Unkown

Damned if they do and damned if they don’t, economists have to attempt to explain and predict markets, which inevitably will lead to disagreements. Even worse, given the nature of economic policy making, people generally prefer assurance to disagreement from economists. To quote Machlup himself, “Economists need not feel ashamed about their ignorance of an unknowable future. They can do no better than make assumptions, and it would be an inexcusable deception to the public if in the face of extreme uncertainty they conspired to make the same assumptions.”

While having economists disagree may be annoying when a nation is trying to choose what economic policy would be best for it, it’s also a good thing. When economists disagree, it means that there is an active debate on what would be best for a nation, rather than a dangerously presumptuous consensus that could do much more harm.

What we’re left with is Value Judgments, an issue that is much more prickly than mere factual disagreement. When an economist looks over a policy, one will evaluate it on two fronts: 1) the economist’s assumptions about relevant data and 2) the economist’s predispositions to certain ideas or priorities. For example, when an economist believes that security is the ultimate value (Machlup’s term) in terms of government or the individual, one will biased towards any policy that furthers that ‘ultimate value.’ Policies then can become ‘instruments’ to reach that goal, even if the policy in and of itself might not work.

It should come as no surprise that this is an extremely problematic issue. Not only can ‘scientific disagreement’ be heavily influenced by value judgments, but an economist might even choose a policy that is  likely to do harm on the basis that it furthers a personal ideology. Milton gives a good example how value judgments can warp an individual’s temporary preferences. In his example, Friedman argues that those who are primarily concerned with security are short sighted, and will advocate for any policy of government intervention to immediately solve a problem. This then leads to a string of government policies and interventions that remediate the unintended consequences of previous interventions, internalizing a cycle that is purely focused on the short run effects of government action. Conversely, someone who places liberty as the ultimate value will favor the long run, just as businesses and individuals plan ahead for what is best for them,. When things go wrong, businesses will try to plan around the long term goals, rather than put everything on the line, ad infinitum.

Fed Chairman Bernanke gives farewell speech at the annual American Economic Association Meeting, Source: Getty Images/Jessica Kourkounis

All of this brings to light a very disheartening fact: Policy making and ideology may be irrevocably intertwined. Friedman argues that “a scholar’s basic values undoubtedly affect the way he resolves the inevitable uncertainties in his scientific judgements.” What Friedman is saying is that, when an individual is faced with a decision that could go wrong, one will err on intrinsic presumptions. For example, someone who is cautious may avoid an action that leaves room for danger, while someone adventurous may attempt it. We as humans cannot avoid this facet of our nature.

Despite the dreary outlook of economists disagreeing over facts, data analysis, and (worse yet) ideology, things are actually not that bad. Economists may disagree over a progressive income tax because of the equity-efficiency trade-off and a whole host of issues, but they also manage to agree on just as many issues, if not more. The price mechanism as a signal, incentives, the role of institutions, and the general efficiency of markets over centrally controlled economies are things all economists agree on. This should be taken as a hopeful prospect, because while the economists still debate over specifics, things like the importance of individual choice and freedom remain foundational to the majority in the profession. This is something we can all take relief in, as did Machlup and Friedman.