This is the day when I have nothing to say. My mind is a total blank, and all I feel is the need to exchange my books for a guitar. To buy a one-way ticket to a small-town in the wild-west, to marry a fancy cowgirl and to spend my days cleaning the barn. I am away.

An outsider history from an insider point of view. Edward Nelson’s recent book on Milton Friedman

Edward Nelson, Milton Friedman & Economic Debate in the United States, 1932–1972 (volumes 1 and 2), Chicago and London: The University of Chicago Press, 2020, 737 + 587 pages, 978-022668377-5 and 978-022668489-5

Edward Nelson’s name is one of those widely known brands in monetary economics that need no special introduction. He has been a fixed star of the profession for decades. Right after earning his PhD degree at Carnegie Mellon University under the supervision of Bennett T. McCallum and Allan H. Meltzer, household names in the field, he started his professional career as a central bank economist at the Bank of England, then proceeded to the Federal Reserve Bank of St. Louis. His current position is at the Division of Monetary Affairs of the Board of Governors of the Federal Reserve System, Washington DC, where now as a senior advisor (and former assistant director, and former senior economist of the monetary studies section) he is responsible for supporting the decision makers at the Board and the Federal Open Market Committee.

An outstanding publication record comes with this high impact in monetary policy affairs. Nelson owns dozens of papers in leading journals and has acted as the associate editor of the Journal of Monetary Economics and the Journal of Money, Credit and Banking, and as reviewer for a wide range of periodicals including the American Economic Review, the European Economic Review, or the Journal of Political Economy. This line of research and policy advising, however, is only one thread in Nelson’s portfolio. His profound expertise in monetary policy matters is combined with an unflinching interest in Milton Friedman’s life and work. These two lines sometimes converge and unite in papers like Reaffirming the Influence of Milton Friedman on U.K. Economic Policy (2020) or Friedman’s Monetary Economics in Practice (2013). It is thus no wonder that Nelson put forward his recent, two-volume monograph on Milton Friedman, the subject of the present review, not as a historian of economic thought but as a monetary economist specialized the same field of research as Friedman was. It leads to a unique perspective that has the promise of a more in-depth understanding of Friedman’s theoretical achievements and his involvement in the professional and public debates on economics and economic policy between 1932 and 1972, in the heyday of his activity in monetary economics research, than what common historical accounts could offer.

Nelson’s main rationale for this claim is the interest that historical works show in unpublished materials like letters, notes, and drafts. As he argues, historians rely on such items only to hide their ignorance about theories. The exact theoretical message, Nelson continues, can always be reconstructed accurately on the basis of published works, so unpublished materials cannot take us closer to this core content (vol. 1, ix–x). What is needed is thus not a broadening of the textual basis but the ordering of published works into a coherent picture. This coherence by no means presuppose consistency, though. Following the general trend in the recent Milton Friedman literature (Forder, 2014; 2019), Nelson also admits that Friedman was not free from inconsistencies—although from this fact, unlike others in the field, Nelson draws no inferences regarding Friedman’s sanity or honesty (vol. 1, 22-26). The fact that some of Friedman’s views and statements cannot be taken at face value is just a fact to highlight. By setting his own standards and priorities for historical work, and by laying a claim to looking at Friedman in his own way, Nelson’s purpose is to keep as huge a distance from the existing Milton Friedman literature as possible.

This attitude, serving as the backbone of the whole book, turns into an open negligence of the rival interpretations. Nelson neither takes issue with the alternative readings nor casts doubt on their plausibility. This is rendered obvious by the reference sections of the volumes in which the works of the widely known historians and methodologists of Friedman scarcely come up. A good example is where Nelson sets out to provide an interpretation of Friedman’s (1953) positivist methodology—a paper that played a special role in the emergence of economic methodology as a subdiscipline of economics. Initiated by Uskali Mäki (1989), since 1980s a growing body of literature has aspired to approach the positivist methodology in philosophical terms with the aim of elaborating a genuinely methodological terminology, while depriving the paper of its historical context to a large extent. Even if the Mäkian realist reading has never become generally accepted, it stirred up a controversy that presupposed a specific terminology and knowledge in the background—so economic methodology distinguished from both the history of economic thought and history of economics was born in this debate. As the positivist methodology was taken in itself and not as a constituent of Friedman’s oeuvre (only years after the start of the methodological controversy did Hoover (2009) pose the question whether Friedman had actually followed the methodological principles he laid down in the paper), there was no problem in labelling the study as F53, which unintentionally implies that the positivist methodology is an iconic, typical and representative item of 1953.

By contrast, Nelson approaching from a historical point of view did not intend to separate the paper from Friedman’s lifework, so he disregards the whole methodological literature on Friedman for seriously missing the mark by attempting to evaluate a paper isolated. As the methodological paper inherently raises some methodological questions, and these questions are normally treated in the realism–instrumentalism framework of the economic methodology literature, however, Nelson’s originality in interpretation and his prejudice result in a compatibility problem—the negligence of the realism–instrumentalism duality is not the same as replacing it with a more effective and illuminating interpretive framework. Accordingly, Nelson boils down the problem of Friedman’s assumptions, the focus of the methodological debate, to the tolerability of the inaccuracy of predictions (vol. 1, 352-353). This point is admittedly in accordance with Friedman’s ideas—for him, any model was acceptable as long as it provided sufficiently good predictions. However, there are questions that can hardly be addressed outside the realism–instrumentalism framework. Such a question regards the nature of the assumptions that Friedman found preferable. Is it true that Friedman judged models by their predictive performance only, hence was he a pure instrumentalist subscribing to the option of anything goes? Or, being a realist, did he add truth requirements to the basic need for satisfying predictions? Such methodological questions cannot be answered by referring to the commonplace that macroeconomics in the 1950s was empirical.

The fact that Nelson walks his own way in understanding Friedman stems from his basic position of a practicing monetary economist. His methodological toolkit is that of a non-philosopher economist. Likewise, Nelson by no means turns into a historian of economic thought. He considers Friedman’s theory from the viewpoint of a modern successor of his, and this stance does imply a historical perspective. However, Nelson remains the man of today throughout the book, who looks back on the past of our discipline only to draw conclusions for current practice—his tools and methods are all rooted in today’s knowledge (a good example is the section where Nelson reformulates Friedman’s aggregate demand framework under rational expectations assumption; vol. 1, 188-189). Consequently, he regards Friedman’s system not as a relic from the past but as a relevant theoretical response to the events and problems of the socio-economic environment. This is one of the merits of the book—Nelson keeps Friedman’s professional milieu and the embedding socio-economic setting in the focus of his discussion. To this end, he shows great proficiency in applying the interview technique (vol. 1, xiii-xviii). Dozens of interviews complement the material Nelson assembled by thoroughly browsing Friedman’s works. Unfortunately, the reader receives no information about the contents or the structures of such conversations—they were likely to be informal chats conducted along pre-established lines to remain in touch with the thread of the discussion. Especially with these interviews can Nelson provide an insider look into the personal and scholarly connections around Friedman—and in this regard Nelson, thanks to his exhaustless working capacities, goes farther than any piece in the existing literature. What is more, Nelson’s brilliance aided him in treating these interviews as pieces of a puzzle to combine with the facts found under Friedman’s pen and to put them together into a comprehensive big picture in the end.

Nelson is uninterested in the reasons why Friedman’s theory has become obsolete by today. He wants to show how and why Friedman once was able to provide effective answers to substantial questions raised by his own society. Friedman’s theory is no longer a fossil, which it unavoidably would become in the hands of an ’armchair’ historian, but a framework changing as both society and knowledge changed. Nelson can clearly see the theoretical connections leading to and from Friedman’s theory (e.g. vol. 2, 297-318), so for him studying Friedman is a stimulating way of learning about today’s practice. This is the reason why Nelson neglects the whole historical literature. Nelson is an active monetary economists who falls closer to the cutting edge of our science than to the cluster of passive chroniclers. His negligence is only a symptom of the gap between practitioners of economics and historians (Galbács, 2020, pp. xi-xii). A cutting-edge economist is interested in the past only insofar as it helps him somehow to find adequate methodological and theoretical answers regarding present and future. This attitude renders Friedman’s theory alive, which is out of use now just because society has changed by today. This is admittedly true of all social theories—we are always shooting at a moving target. It, however, does not stop Nelson from treating Friedman and his lifework as an outstanding lesson of how to form meaningful theories.

Sad but true, Nelson is justified to distinguish economics, even if approached from a historical perspective, and history of economic thought (let alone the history of economics). In the past history of economic thought was a constituent part of the training of economists. As Ross Emmett (2009, p. 131) pointed out, it is especially true of the Chicago economics tradition where history was the vehicle for honing disciplinary competence. In Knight’s and Viner’s views, studying past theories was economists’ best bet to avoid past mistakes. It no longer holds. Once sharply distinguished (Emmett, 1997), history of economic thought and history of economics are merging into each other (exemplified by the fact that the journal of the ‘History of Economics Society’ is called the ‘Journal of the History of Economic Thought’), and today it is not uncommon to come across papers that have nothing to do with theory or the social background. History of economic thought is becoming like a sport where performance is measured by the number of facts an author can pile up, irrespective of whether these facts are relevant or not, interesting or not, have anything to do with theory or not. History papers have lost their relevance to economics to the extent that being an economist is no longer a prerequisite for publishing in the history of economic thought. By today, history of economic thought seems to have become a subdiscipline of a more general history of ideas whose subjects happen to be economists and economic texts. But focusing on questions like who, where and when can easily discourage cutting-edge economists from paying any attention to history.

The result is a profession tending to turn a blind eye to the past—quite typically, a young but emblematic member of the current Chicago department has just asked his Twitter friends to suggest papers from the past five years for his seminar. Admittedly, turning away from the past has been a hallmark of economics for decades, but openly atheoretical historical investigations cannot appeal to historically disillusioned practitioners. At the same time, historical works falling into the scope of interest of the hard-core economics profession are squeezed into economic journals like Cambridge Journal of Economics, Oxford Economic Papers or even the Journal of Political Economy. A 2017 special issue of the latter devoted to the history of Chicago economics is a good example for history done by non-historians. This is exactly what Nelson does.

The merging of the history of economic thought and the history of economics is also present in Nelson’s book—but in a stimulating way. Instead of camouflaging a history of economics as a history of economic thought, he does both in full-fledged forms. Realizing this twofold aspiration helps us to find an adequate scope for Nelson’s endeavour. His Friedman monograph can be a first step towards the reintegration of historical studies into cutting-edge economics.

Peter Galbács

associate professor of economics, Budapest Business School, and ‘Bolyai’ distinguished research professor of the Hungarian Academy of Sciences


Emmett, R. B. (1997). Reflections on “Breaking away”. Economics as science and the history of economics as history of science. Research in the History of Economic Thought and Methodology, 15(1), 221-236.

Emmett, R. B. (2009). Frank Knight and the Chicago school in American economics. London: Routledge.

Forder, J. (2014). Macroeconomics and the Phillips curve myth. Oxford: Oxford University Press.

Forder, J. (2019). Milton Friedman. London: Palgrave Macmillan.

Friedman, M. (1953). The methodology of positive economics. In M. Friedman, Essays in positive economics (pp. 3-43). Chicago: The University of Chicago Press.

Galbács, P. (2020). The Friedman-Lucas transition in macroeconomics. A structuralist approach. Cambridge, MA: Elsevier Science.

Hoover, K. D. (2009). Milton Friedman’s stance. The methodology of causal realism. In U. Mäki (Ed.), The methodology of positive economics. Reflections on the Milton Friedman legacy (pp. 303-320). Cambridge: Cambridge University Press.

Mäki, U. (1989). On the problem of realism in economics. Richerche Economiche, 43(1-2), 176-198.

INEM’s list on contributors to philosophy and methodology of economics

It is a fact of life that those communities are the most interesting and most precious that you are a member of. Apart from it, the International Network for Economic Method (INEM) has just started a fancy list on contributors to philosophy and methodology of economics–and I am proud to be on it. I can hardly wait for the discussions.

Philosophy, Politics and Economics Research Seminar series is kicked off today

The 2021 spring season of the Philosophy, Politics and Economics Research Seminar of the Center for the Study of Economic Liberty, Arizona State University, starts today. Weekly presentations are open to the public, but registration is needed. You can find all the information at the page of the Center, just follow the link above. As a reminder, here is the complete schedule of the spring edition.

Friday, February 5Philip Arthur, ASU School of SustainabilityEscaping Paternalism: A Response
Friday, February 12Tyler DesRoches, ASU School of SustainabilityWhat Justifies Green Nudging?
Friday, February 19School of Civic and Economic Thought and Leadership Spring Conference
Friday, February 26Michiru Nagatsu, University of Helsinki
Friday, March 5Jennifer Jhun, Duke University
Friday, March 12Spring Break
Friday, March 19Steven McMullen, Hope CollegeCan Baby Bonds Address Historic Racial Injustice?
Friday, March 26Glory Liu, Harvard UniversityAdam Smith, Political Theory, and the Uses of History
Friday, April 2Brianne Wolf, Michigan State University
Friday, April 9Stefanie Haeffele, George Mason University
Friday, April 16Spencer Banzhaf, Georgia State UniversityPricing the Priceless: A History of Environmental Economics
Friday, April 23Peter Galbacs, Budapest Business SchoolThe Representative Firm in Chicago: From Marshall to Lucas

RUP Symposium, Session 3

The final session consists of one paper.

This is Richard Wagner’s Frank Knight, James Buchanan, and Classical Political Economy–The Long Shadow of Risk, Uncertainty, and Profit.

The author has been asked to explore how James Buchanan’s work on public finance and constitutional political economy might have emerged out of themes present in Frank Knight’s oeuvre, especially his Risk Uncertainty, and Profit. Buchanan’s body of work has inspired the development of a style of political economy sometimes described as Virginia or Constitutional Political Economy to distinguish it from the Chicago Political Economy with which George Stigler is associated, and with Stigler and Buchanan both being students of Knight. While Buchanan, unlike Stigler, did not write his dissertation under Knight’s supervision, this is a minor distinction because Buchanan regarded Knight as his de facto supervisor even though Roy Blough was his de jure supervisor. Wagner explains how Knight’s scholarly oeuvre can in large measure be detected in Buchanan’s effort to fashion an alternative approach to public finance and to articulate the field of study now called constitutional political economy.

RUP Symposium, Session 2

Session 2 consists of two papers.

The one is Ross Emmett’s What Can We Learn about Frank Knight’s Economic Theory from the Prefaces to the Reprints of Risk, Uncertainty and Profit?

In 1921, Frank H. Knight published Risk, Uncertainty and Profit through an arrangement between the Hart, Schaffner and Marx economics essay competition and Houghton Mifflin. Knight had revised his doctoral thesis, “A Theory of Business Profit” and submitted it to the 1917 essay competition bearing the title “Cost, Value and Profit.” Knight was awarded second place; E. E. Lincoln’s study of The Results of Municipal Electrical Lighting in Massachusetts (1918) was awarded first place. Houghton Mifflin expected delivery of the manuscript within six months, but Knight’s ongoing revisions meant that four years elapsed before publication. Knight acknowledged that he had “entirely rewritten” the manuscript after 1917 “under the editorial supervision of Professor J. M. Clark”, although Clark and Allyn Abbott Young convinced Houghton Mifflin that only minor organizational changes to the book had been made. Somewhere near the end of the revision process, Knight hit upon the title that became famous.

The other is Roni Hirsch’s Creativity and Social Organization–The Pragmatist Foundations of Knight’s Theory of the Entrepreneur.

In Risk, Uncertainty and Profit, Frank Knight laid out a seminal distinction between risk and uncertainty. Its most important political implication was the division of society into uncertainty bearers and everyone else, with the former clearly assuming society’s leadership roles. In this article, Hirsch’s focus is on the challenges this social division—rooted in a form of natural selection—posed for Knight’s own liberal commitments; the inherent tension between his view of a free society, the dictates of evolution, and the ravages of uncertainty. Knight’s solution was a social “double contract,” whereby uncertainty bearers earn the “rights to control” from those to whom they can (convincingly) guarantee “freedom from uncertainty.” Uncertainty bearing was not merely a technical designation, therefore, but a substantive social and political relation: the assumption of responsibility for outcomes affecting others. Knight’s “responsible direction” thus stands in stark contrast to Schumpeter’s “creative destruction:” entrepreneurial leadership as a form of domination by superior will. To explain Knight’s unique formulation, the article turns to its underexplored origins in the American pragmatist tradition. Though Knight owes a significant debt to the pragmatists’ ethical method, evolutionary psychology, and theory of human consciousness, Hirsch argues, his theory of the entrepreneur should also be seen as an important political critique. Knight challenged the pragmatists on the illiberal potential of their key claim that organisms, especially humans, were future-oriented and added responsibility for uncertainty as the unstated social significance of their experimental ethical method.

RUP Symposium, Session 1

Session 1 consists of two papers.

The one is Per Bylund’s Understanding the Limits of Pure Theory in Economics–Knight and Mises.

Frank H. Knight’s magnum opus Risk, Uncertainty, and Profit is, by the author’s [i.e. Knight’s] own account, “a study in ‘pure theory’.” In this paper, Bylund studies Knight’s view of pure theory and its demarcation in Risk, Uncertainty and Profit. For comparison and contrast, Bylund uses Ludwig von Mises’s Austrian aprioristic methodology praxeology and its strict distinction between theory and thymology. As the author argues, Knight and Mises largely agree on the nature and importance of pure theory. But their interpretations of its use in economics differ. Bylund’s findings suggest that Knight, while arguing for aprioristic pure theory, still places empirical observation first.

The second is Ali Khan, Edward Schlee and Aniruddha Ghosh’s On Reading Vining Reading Knight–Concepts and Data in Economic Theorizing.

This essay reads Vining’s 1950 variations on Knight’s methodological themes as much for itself as for the transition that it sees Knight aecting the economic theory that he had received: as an indispensable point of entry to the first two-thirds of his 1921 magnum opus. The authors address Vining’s comparisons of Knight with Marshall Stone and Cornell student Thorstein Veblen: the first in the vernacular of mathematical logic, and the second in the vernacular of institutional economics. They read both Knight and Vining, as well as Hayek in his 1936 LSE inaugural lecture and elsewhere, in anticipating (i) Oakeshott’s critique of Rationalism in human conduct, and the (ii) dominance of Walrasian general equilibrium theory and stable steady-state economic dynamics in three decades of post WWII economic thought. Their reading uses as its footholds the following dichotomies: (i) natural and social science, (ii) inert and active objects, (iii) processes and procedures, (iv) action and the conditions for the action, (v) existing and anticipatory understandings, and (v) statistical and theoretical economics. Last but not least, they connect Knight to Thoreau through Cameron’s 1985 reading of his Journals.

‘Risk, Uncertainty and Profit’ 100th Anniversary Symposium at ASU CSEL

Initiated by Ross Emmett, director of the Center for the Study of Economic Liberty at Arizona State University, there is a fancy mini-conference on schedule at the center today. In 2021 we celebrate the 100th anniversary of Frank H. Knight’s seminal book entitled ‘Risk, uncertainty and profit’. In honour of this occasion, Ross accompanied by Per Bylund, Oklahoma State University, Ali Khan, Johns Hopkins University, Edward Schlee, Arizona State University, Aniruddha Ghosh, Johns Hopkins University, Roni Hirsch, Harvard University and Richard Wagner, George Mason University gave six talks about the importance of the book, its influences on economic or political thinking and its diverse implications. The event is open to the public, but registration is required. See you there – the conference starts in an hour. Hurry up!

Conference program

7:45 a.m.— Introduction

8:00 a.m. — Session 1

  • Per Bylund, Oklahoma State University
  • Ali Khan, Johns Hopkins University with Edward Schlee, Arizona State University, and Aniruddha Ghosh, Johns Hopkins University

9:00 a.m. — Break

9:30 a.m. — Session 2

  • Ross Emmett, Arizona State University
  • Roni Hirsch, Harvard University

10:30 a.m. — Break

11:00 a.m. — Session 3

  • Richard Wagner, George Mason University

11:30 a.m. — Conclusion Conversation on RUP

Noon — End

Winter Institute 2021, Session 10

Hayekian Economic Policy. Lars P. Feld, University of Freiburg and Walter Eucken Institute – Daniel Nientiedt, New York University.

To begin with, even if it is personal, this paper was by far my favourite in the conference program. Far from the usual historical work of document-based story-telling, Lars and Daniel digged deep in Hayek’s works to identify his economic policy principles–which is more a theoretical problem than a historical question. This is the reason why I loved this paper the most–this is an idea I also subscribe to. We are economists, so I think we should use history to underpin our theoretical statements, instead of limiting ourselves to historical facts.

Lars and Daniel, as a starting point, made it clear that neoliberalism by no means dooms economic policy to complete passivity in a laissez-faire sense. Neoliberals doubted that letting market participants do what they want really leads to economically desirable outcomes. So Hayek, accordingly, tried to find an adequate scope for economic policy where it does not interfere with individual freedom and does not endanger market efficiency, but, instead, can contribute to improving market efficacy when needed. So for Hayek, there were cases where collective actions proved to be justified. In their paper, Lars and Daniel made efforts to identify these cases. This is an uneasy task–the more so as Hayek’s related views were constantly changing.

Simply put, Hayek argued for a role of the state in economic policy making as an agent laying down the rules of market actions and interactions. As human beings have limited information processing abilities and as knowledge is dispersed among the individual members of a society, this is the most economic policy can do. If economic policy is correctly done, it establishes only the conditions under which a spontaneous and effective market order can emerge. On this basis, Hayek argued against any more ‘activist’ role to be taken up by the government, because active, so to say, Keynesian-type economic policy interventions would require more knowledge than economic policy can have. So Hayekian economic policy principles suggest an indirect policy to improve the framework of general rules–instead of putting forward direct interventions.

Again, I loved the paper very much. It is clear, conveys a straightforward message and effectively makes its point.

Winter Institute 2021, Session 9

James Buchanan as an Urban Economist. Daniel Kuehn, The Urban Institute.

It is a less-known fact that James Buchanan significantly contributed to the development of urban economics and urban public finance. As Daniel argued, highlighting this aspect of Buchanan’s oeuvre is fruitful and has the hopes of new insights and conclusions as Buchanan had never defined himself as an urban economist. Today he is widely acknowledged for his groundbreaking work in public finance and externalities, which somehow overshadows his accomplishments in urban economics–works in the latter field are merged into his overall theoretical contribution. As Daniel pointed out, Buchanan developed a special ‘urban fiscal club’ framework to address problems in urban public finance and urban economics like taxation or the negative externalities of congestion. In Buchanan’s view, opertions of a city can be described as if a city community taken as a club was sustained by the city provison of public goods, while some diseconomies emerging from larger city size exert opposing influences.

Even if it is brief, Daniel’s paper provided a comprehensive look into this side of Buchanan’s lifework. After a discussion on Buchanan’s professional connections with urban theorists involved in the Chicago Planning Program, Daniel gave an effective review on Buchanan’s contributions to urban economics dated to the 1960-70s.