David R. Henderson  

Coase on Friedman's Methodology

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My post this morning will be briefer than usual because I'm busy writing a piece for the Wall Street Journal, due this morning, on the late Ronald Coase. But I can't resist quoting from a review of his book of essays, a review I wrote for Reason in 1994. The book was titled, Essays on Economics and Economists and my review was titled "Coase Encounters."

Here's the excerpt:

A gentle man, Coase is also quite willing to take on some of the giants of economics when he disagrees with them. In one essay, "How Should Economists Choose?," Coase criticizes a famous 1953 article on methodology by Milton Friedman. Friedman had argued that the correctness of one's assumptions is unimportant and that all that matters for an economic theory is that it be capable of accurate predictions. Coase responds with a devastating counterexample.

"We could have predicted," writes Coase, "over the last few years what the American government's policies on oil and natural gas would be if we had assumed that the aim of the American government was to increase the power and income of the OPEC countries and to reduce the standard of living in the United States. But I am sure that we would prefer a theory that explains why the American government, which presumably did not want to bring about these results, was led to adopt policies which harmed American interests. Testable predictions are not all that matters. And realism in our assumptions is needed if our theories are ever to help us understand why the system works the way it does. Realism in assumptions forces us to analyze the world that exists, not some imaginary world that does not."

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COMMENTS (8 to date)
George Selgin writes:

That's a very nice quote from Coase, David. Although I consider myself a great admirer of Friedman, his 1953 venture into methodology is one of his least satisfactory performances. Yet I wish I had a nickel for every occasion when some economist, who evidently never bothered to read anything else on the topic, treated that essay as the last word on the subject!

Coase was an admirer of Friedman. Here's what he had to say to Tom Hazlett in 1997 about the famous 'debate' on what Stigler called the Coase Theorem;

I remember at one stage, Harberger saying, "Well, if you can't say that the marginal cost schedule changes when there's a change in liability, he can run right through." What he meant was that, if this was so, there was no way of stopping me from reaching my conclusions. And of course that was right. I said, "What is the cost schedule if a person is liable, and what is the cost schedule if he isn't liable for damage?" It's the same. The opportunity cost doesn't shift.

There were a lot of other points too, but the decisive thing was that this schedule didn't change. They thought if someone was liable it would be different than if he weren't. This meeting was very grueling for me. I don't know whether you've had a conversation with Milton Friedman, but an argument with Milton Friedman is a pretty strenuous affair. He's very good. He's very fair, but he doesn't let you slip up on anything. You're constantly being pressed. But when at the end of whatever the time was--say, an hour--I found I was still standing, I knew I'd won. Because if Milton can't knock you out in a few rounds, you're home.

Tom writes:

I'm not sure that counterexample by Coase is actually very compelling. In the paper, Friedman says that accurate predictions (and wide applicability) are all that matters. Presumably, the theory which Coase suggests does not generally produce accurate predictions; it was merely accurate in this one instance. So, on Friedman's terms, we wouldn't accept it.

Though, Coase's point that we want to understand the mechanism is good.

James A. Donald writes:

Actually I think the theory - that the US government hates Americans, America, and itself, does produce broadly successful predictions.

Progressivism says we should all be utilitarians, and that the US government has an equal duty to savages in far away lands, as it has to Americans. But, alas, the evil influence of the voters inclines the government to wickedly pander to those vile selfish redneck Americans.

The way to power is to be lefter than thou, so, the way to power is to furtively pursue policies that are more favorable to savages in far away lands than to Americans, if you can get away with fooling those vile selfish redneck American voters.

I endorse Moldbug's Cathedral model of governance. Progressivism is a state religion, Harvard is the ruling elite at prayer. Consensus and the continual struggle to be lefter than thou causes the Cathedral to be evil, insane, destructive and self destructive. The ruling doctrine, the religion of the elites, hates Americans, and hates themselves, wishes them all dead, every American dead in the most horrible possible fashion, and is moving to achieve this worthy goal.

For this belief system in full deranged suicidal masochistic flower, see Amy Elizabeth Biehl and her parents, and the works of David Foster Wallace.

A government that bestows sainthood on Wallace and Biehl, is a government that will intentionally harm Americans to benefit their enemies.

Wallace wanted very much to be utilitarian, and indeed more utilitarian than thou - but it was easier to hate himself and those near to him, than to love those far away and different from himself.

Of course few of the elite are really as crazy as Wallace or Biehl, but the way to power is to appear to endorse such madness. Amy Biehl and Foster Wallace have officially been deemed official saints, like the Holy child Martin Trayvon.

Daniel writes:

If I produce a theory derived from a list of axioms and it is shown to be true for some high number of instances, it is either the case that (1) my axioms are true or (2) I have somehow produced a list of axioms which are not representative of reality but whose implications are representative of reality. I'm not entirely certain that this is possible.

LD Bottorff writes:

Your piece in the WSJ was excellent. It gave a good overview and left the reader with a desire to learn more.

Jason Scheppers writes:

I am only tagging on to your tribute. Consider the power in Coase at the time of this photo circa 1930+/-


[From http://organizationsandmarkets.com/2013/08/27/young-ronald/ -- Econlib Ed. ]

David R. Henderson writes:

@LD Bottorff,
@Jason Scheppers,
Thanks for the photo.

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