On Ethics & Economics and the Pre-History of Friedman’s ‘as if’

But this, measured by the standard of natural science, is not very far. There are no data for a science of conduct in a sense analogous to natural science. The data of conduct are provisional, shifting, and special to individual, unique situations in so high a degree that generalization is relatively fruitless. For the time being, an individual acts (more or less) as if his conduct were directed to the realization of some end more or less ascertainable, but at best provisional and vague. The person himself is usually aware that it is not really final, not really an "end"; it is only the end of the particular act, and not the ultimate end of that. F.H. Knight (1922) "Ethics and the Economic Interpretation," The Quarterly Journal of Economics, 475.(Emphases in original--ES.)

"[E]conomic hypothesis that under a wide range of circumstances individual firms behave as if they were seeking rationally to maximize their expected returns (generally if misleadingly called "profits")16 and had full knowledge of the data needed to succeed in this attempt; as if, that is, they knew the relevant cost and demand functions, calculated marginal cost and marginal revenue from all actions open to them, and pushed each line of action to the point at which the relevant marginal cost and marginal revenue were equal." Milton Friedman (1953) "The Methodology of Positive Economics" (Emphases in original--ES.)

The distinguished historian of economics, Ross Emmett, called my attention to the 1922 piece by Frank Knight. For, as Emmett notes, in the passage quoted above Knight partially anticipates the central methodological stance made famous by Milton Friedman in his 1953 piece (hereafter F1953). There is a known biographical connection between the two—Knight is what I call 'the Godfather' of Chicago economics because he taught so many future 'Chicago-economists' (and non-Chicago Nobel laureates), including Friedman.

In the quoted passages Knight and Friedman both recognize that the mathematical structure of economics should not be taken as a literal description of what goes on inside the minds of individuals or the decision procedures of economic agents (Friedman talks as much about "firms" as about "businessmen"); they also agree that in real life there is no "full knowledge" of the relevant data. Knight had just published a famous book, Risk, Uncertainty, Profit, in which he had defended the idea that because such relevant data were absent – that is we really live in a world of (unmeasurable) uncertainty -- entrepreneurs could make a profit. Friedman takes a different approach: according to him the as-if strategy is vindicated by the predictions that follow from assuming as-if maximization (etc.); these, Friedman expects, will be good enough (in part because, following a hint of Alchian, he assumes that in markets economic agents that deviate too much from the assumption will not survive).

Knight and Friedman both distinguishing economics from ethics; economics is independent and capable of generating agreement--a realm free from "controversies" (Knight 455; recall this post on Friedman). Before I go into the details of the distinction between ethics and economics (in both), it is worth stressing that Knight's defense of the independence and scientific nature of economics is also extremely deflationary; "it is substantially correct for practical purposes." (462) But Knight goes on to claim that,

"A science of conduct is…possible only if its subject-matter is made abstract to the point of telling us little or nothing about actual behavior. Economics deals with the form of conduct rather than its substance or content. We can say that a man will in general prefer a larger quantity to a smaller (the principal trait of the economic man) because in the statement the term "wealth" has no definite concrete meaning; it is merely an abstract term." (Knight 475; the position is echoed partially by Friedman: "Viewed as a language, [economic] theory has no substantive content; it is a set of tautologies." (F1953, 11; see also 7))

Knight's reasons for claiming that the science of economics cannot provide enduring results about the content of economic behavior rests on two methodological observations: first, "constants from one point of view may be variables from another, particularly that factors which are sensibly constant over short periods of time must be treated as variables when longer periods are under discussion." (455) Second, the "wants which impel economic activity and which it is directed toward satisfying are the products of the economic process itself" (457; Knight credits his Institutionalist target, JM Clark, but the idea goes back to Rousseau and Smith). Knight's negative claim also leads to a useful prediction: when economists can predict the content of economic life then there are social mechanisms or institutions (e.g., bans on advertising, lack of educational opportunities, media control) that are preventing the formation or expression of (new) desires. It is no surprise that later in life Knight seemed to move further and further away from the idea that economics can be a science at all.

In Knight's approach in the 1920s and 30s, (economic) history is the distinct from economics discipline that offers a "genetic" account of actual economic life. But this enterprise will not be capable of generating agreement, and so is not a "science." (476) By contrast, Friedman's approach is a defense of the very idea of a scientific economic history (and he and Piketty are its great practitioners), in which we use, if not predictions then at least retro-dictions to test hypotheses. In fairness to Friedman, and this has not been sufficiently appreciated, according to him a theory "works" (p. 15) if it generates interesting empirical research projects. (This is why he values how an economic theory can be "fruitful" (p. 10); see my paper.)

Now, given that Knight thinks values are not especially stable entities, we might expect him to embrace, like the famous paper of his student GJ Stigler (co-authored with Becker), de gustibus non disputandum est, as externally 'given' to the 'form' of economics (recall). But, with an eye on Marxism, Knight is extremely resistant to treat the economist as engineer working with given constraints (see Emmett's piece). And he is equally resistant to reducing "virtue" to prudence." (477) So, in the 1922 paper, Knight insists that "the main argument for the validity and necessity of a real, non-scientific, transcendental ethics comes out of the limitations of scientific explanation." (479) It is a bit surprising to see Knight endorse the validity of a "transcendental ethics," because in the brief passages that follow he appeals to Chicago pragmatists, Tufts and Dewey (neither, I think, but would love to be corrected, fans of transcendental ethics). In fact, Knight's description suggests that ethics always partakes in the "figurative." And, he concludes his piece with the claim that

There are no rules for judging values, and it is the worst of errors to attempt to make rules - beyond the rule to "use good judgment"; but it is also most false to assert that one opinion is as good as another, that de gustibus non disputandum est. Professor Tufts has put the question in a neatly epigrammatic way which emphasizes its unsatisfactoriness from a rational, scientific standpoint: "The only test for goodness is that good persons on reflection approve and choose it-just as the test for good persons is that they choose and do the good." (Knight 480)

So, on Knight's account virtue or goodness (he uses them interchangeably) is distinct from economic behavior. It is, thus, also for him a way of knowing that has to be distinct from science in general, and economic science in particular. While this is not the place to explore the merits of Professor Tufts' (unsatisfying) proposal, we can recognize that such a position is more plausible in societies with a great deal of moral consensus.

As I have noted before, even though Friedman states that (so-called 'positive') "economics is in principle independent of any particular ethical position or normative judgments. As [J.N.] Keynes says, it deals with "what is," not with "what ought to be," in F1953 Friedman explicitly presupposes some such consensus over values in a policy context: "in the Western world, and especially in the United States, differences about economic policy among dis-interested 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." (And so 'positive economics' becomes the input to normative enterprise.) So, while Knight and Friedman both are 'Chicago school' economists, and both embrace markets, in Knight the economist self-consciously makes space for virtue, and practices the art of self-command on limiting her scientific aspirations, of self-limitation, while Friedman's economist knows no limits. To put it in a slogan, this is the difference between a Liberal, neo-Weberian conception of markets and a neo-Liberal, technocratic conception of markets.*

 

*I have remarked elsewhere that from the late 1930s, Knight plays a non-trivial role in articulating the role of social consensus over values.

Comments

[cameron majidi]

Could either Knight or Friedman (or both) have been alluding to Hans Vaihinger's notion of the "als ob" and his concept of a model? Vaihinger's book was translated into English in 1924, but had been well known in German since its original appearance in 1911. Vaihinger's influence on various psychologists is well known, but it'd be interesting if he'd also influenced some economists.

[Eric Schliesser]

It's not impossible, of course. Frank Knight, especially, was very well read in German philosophy. But I think Pareto is the common source here. I also think there is a shared Weberian background. (But, of course, the Weber-Vaihinger connection is also worth exploring.) But I'll keep an eye out for Vaihinger in Knight (who tends to be generous in his citations)>

[Ross Emmett]

Roger Backhouse and I are looking into the Knight - Vaihinger connection. When one searches for "as if" in Knight's work, there are a lot of mentions of the term, and often used in the "as if" methodological way. Knight's knowledge of German, and of German philosophy in particular, would suggest a connection.

Otherwise: thanks for such a great post, Eric. I plan to use some of your ideas in writing about the Ethics of Competition in the next month.

[Eric Schliesser]

Thank you, Ross.