The Method of Milton Friedman’s Practice Was Better Than the Method of His Essay

The method of the Chicago School is often thought to be the method outlined in Friedman’s famous essay “The Methodology of Positive Economics.” It can be (and has been) persuasively argued that the actual methodology practiced by Friedman is broader, and more eclectic than that advocated in his early essay.
His practice continued to exemplify a kind of empiricism, but it was a kind of empiricism that included, not only ‘rigorous’ econometrics, but also economic history, case studies, and ‘stylized facts.’
I believe that the method of Friedman’s practice is sounder than the method of his essay. So it is unfortunate that the Institute founded in Friedman’s name will probably only support those who practice the formal method of the essay.

(p. B5) The University of Chicago will announce Thursday that it plans to establish a center for economics honoring the late economist Milton Friedman.
The school plans to raise an endowment of $200 million to support the Milton Friedman Institute.
. . .
. . . his approach to economics embodies what has come to be known as the Chicago School. He defined that as “an approach that insists on the empirical testing of theoretical generalizations and that rejects alike facts without theory and theory without facts.”
It is that approach, and the intellectual rigor that Mr. Friedman brought to it, that the Friedman Institute is meant to advocate, rather than any ideology, says Chicago economist Gary Becker, a Nobel Prize-winning former student of Mr. Friedman’s who was on the faculty committee that recommended the institute.

For the full story, see:
JUSTIN LAHART. “University Plans Institute to Honor Milton Friedman.” The Wall Street Journal (Thurs., May 15, 2008): B5.
(Note: ellipses added.)
The famous Friedman method essay is:
Friedman, Milton. “The Methodology of Positive Economics.” In Essays in Positive Economics, 3-43. Chicago: University of Chicago Press, 1953.

Increase in Minimum Wage Hurts Poor

 

The strong bipartisan support for increasing the federal minimum wage to $7.25 an hour from the current $5.15 — a 40% increase — is a sad example of how interest-group politics and the public’s ignorance of economics can combine to give us laws that manage to be both inefficient and inegalitarian.

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers’ output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.

Although some workers benefit — those who were paid the old minimum wage but are worth the new, higher one to the employers — others are pushed into unemployment, the underground economy or crime. The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people. And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods. And many, maybe most, of the gainers from a higher minimum wage are not poor. Most minimum-wage workers are part time, and for the majority their minimum-wage income supplements an income derived from other sources. Examples are retirees living on Social Security or private pensions who want to get out of the house part of the day and earn pin money, stay-at-home spouses who want to supplement their spouse’s earnings, and teenagers working after school. An increase in the minimum wage will thus provide a windfall to many workers who are not poor.

Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40% increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don’t they propose $10, or $15, or an even higher figure?

A number of countries, including France, have conducted such experiments; the ratio of the minimum wage to the average wage is much higher in these countries than in the U.S. Economists Guy Laroque and Bernard Salanie find that the high minimum wage in France explains a significant part of the low employment rate of married women. Mr. Salanie has argued that the minimum wage also contributes to the dismal employment prospects of young persons in France, including Muslim youths, an estimated 40% of whom are unemployed. 

 

For the full commentary, see: 

GARY S. BECKER and RICHARD A. POSNER.  "How to Make the Poor Poorer."  The Wall Street Journal (Fri., January 26, 2007):  A11.

 

Becker on Friedman

 

MiltonFriedmanDay.jpg   Source of graphic:  http://www.ideachannel.com/Friedman.htm

 

David Levy has noted in an email that at the reception to preview the new Friedman documentary, Gary Becker gave a great presentation on Milton Friedman, and it was a great shame that no one recorded it.  I feel especially guilty, because I had thought of recording it, and had even brought a small camera that would have (badly) done the job.  But the room was dark and crowded, and by the time the talk started, I was in conversation a long way from where Becker started speaking. 

Levy suggests that maybe those of us who were there, should record our memories of what Becker said.  I like that idea, and will record mine here.

 

Becker started out by saying to Bob Chitester that he wasn’t sure that the documentary did justice to Friedman.  (Chitester was the producer, I think, of the original Free to Choose series, and a moving force behind the new Friedman documentary, to be first shown on PBS on January 29th, 2007.)  

Becker mentioned that Friedman was a missionary.  He would talk economics to anyone–if a taxi driver made a mistaken comment about economics, Friedman would set him straight.

Becker mentioned that while Friedman liked to argue about ideas, he never saw him be mean to anyone.

Becker mentioned that a friend of his taking Friedman’s price theory class (I think Becker may have said the friend was Gregory Chow?) asked Becker how he could keep asking questions in Becker’s class, when Friedman would keep showing the ways in which Becker was mistaken.

Becker mentioned that he talked to Friedman a few days before his death, and that they even talked a little economics.

Becker emphasized that Friedman had been both a great economist, and had made an enormous difference in the world, in particular in making the world more free.

 

Some background:  Becker spoke about Friedman at two sessions at the Allied Social Sciences Association meetings in Chicago in early January.  One was in the afternoon (about 2:30 PM?) of January 5, 2007, and also included Robert Lucas, and Tom Sargent.  I missed that session because I wanted to attend a session featuring the research program of Robert Fogel on longevity.  The second session, at 6:00 – 7:30 PM on Sat., January 6, 2007 was at a reception sponsored by the University of Chicago to preview the new documentary on Friedman.  I attended this reception through Becker’s presentation, but did not stay for the documentary preview.  My friend Luis Locay attended both sessions, and told me that some, but not all, of the stories Becker told were similar in both sessions.  Locay also mentioned that Becker appeared to get more choked-up at the session on January 5, 2007.

 

Added Evidence for Weidenbaum’s ‘Birth Dearth’

 

BirthDearthBK.gif Source of book image:  http://www.aei.org/books/bookID.497,filter.all/book_detail.asp

 

Ben Wattenberg had already been predicting a world population decline for years, when he published The Birth Dearth in 1987.  Back then, scepticism was widespread.  Governments and philanthropists spent billions promoting birth control to restrain population growth.  Many were still convinced of the wisdom of Isaac Ehrlich, darling of the environmentalist enemies of economic growth, who had predicted disaster in his Population Bomb.

(Note that the plausibility of many environmentalist disaster scenerios is based on the assumption of continuous population growth.) 

The current decline in birth rates is not a total puzzle.  Nobel-prize winner Gary Becker long-ago claimed that quality of children is what economists call a ‘normal’ good, which means that families invest more in quality as their incomes rise.  As families invest more in quality, they invest less in quantity.

Whatever the reasons, the evidence continues to accumulate that Wattenberg was right:

 

After a long decline, birthrates in European countries have reached a historic low, as potential parents increasingly opt for few or no children.  European women, better educated and integrated into the labor market than ever before, say there is no time for motherhood and that children are too expensive anyway.

The result is a continent of lopsided societies where the number of elderly increasingly exceeds the number of young — a demographic pattern that is straining pension plans and depleting the work force in many countries.

 

For the full story, see:

ELISABETH ROSENTHAL.  "European Union’s Plunging Birthrates Spread Eastward."  The New York Times   (Mon., September 4, 2006):  A3.

 

 EuropeanBirthratesGraph.gif  Source of graphic:  online version of the NYT article cited above.

 

Becker on Goals of Economics: Understand the World, and Improve It

 

Becker.jpg   Gary Becker at April 7, 2006 tribute dinner.  Source of image:  online press release cited below.

 

Gary Becker has made enormous contributions to economic theory, most notably in convincing the profession of the importance of human capital and the family.  A new center has been established at the University of Chicago in Gary Becker’s honor.

 

Becker’s brief remarks concluded the evening.  Economics will change over time, but one constant—whatever the tools or techniques—is the goal of economics, he said.   “It is judged ultimately by how well it helps us understand the world, and how well we can help improve it.”

 

For the full story, see:

Goddu, Jenn Q.  "Gift Names the Becker Center on Chicago Price Theory, Founded by Richard O. Ryan."  University of Chicago News Office, 2006.

 

The Market Rewards the Unprejudiced

 

  Source of book cover image: Amazon.com.

 

In his doctoral disseratation on the economics of discrimination, Gary Becker argued that those who discriminate in the labor market pay a price for their prejudice in the form of having to pay higher wages. Those who do not discriminate have open to them an additional pool of workers, whose talents will contribute to the firm’s bottom line. GE’s Jack Welch recounts a story that supports Becker’s claims:

 

(p. 212) Another idea I’ll leave behind is one that developed when I was visiting Japan in the fall of 2000. I had been going there for years and found it difficult to get the best male Japanese graduates (p. 213) to join us. We were having increasing success, but still had a long way to go. Finally, it dawned on me. One of our best opportunities to differentiate GE from Japanese companies was to focus on women. Women were not the preferred hires for Japanese companies, and few had progressed far in their organizations. Again, I got revved up. Fortunately, we had Anne Abaya, an ideal Japanese-speaking U.S. woman in a senior position at GE Capital. She agreed to go to Tokyo to become head of human resources for GE Japan. I gave her a million dollars for an advertising campaign to position GE as "the employer of choice for women. What I didn’t know was how much talent we already had in place. In May 2001, when Jeff and I were on a Japanese business trip, we had a private dinner with 14 of our high-potential women. They ranged from CFO of GE Plastics Japan, general manager of sales and marketing of GE Medical Systems Japan, marketing director of GE Consumer Finance Japan, to the heads of human resources for GE-Toshiba Silicones and GE Medical Systems. Jeff and I had never been with a more impressive young crowd. It confirmed for me how big the opportunity could be.

 

Source:

Welch, Jack. Jack: Straight from the Gut. New York: Warner Business Books, 2001.

 

For the revised version of Becker’s dissertation, see:

Becker, Gary S. The Economics of Discrimination. 2nd Rev. ed., Economic Research Studies. Chicago: University of Chicago Press, 1971.