Milton Friedman Prize Lecture

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INFLATION AND UNEMPLOYMENT

Nobel Memorial Lecture, December 13, 1976

by MILTON FRIEDMAN

The University of Chicago, Illinois, USA

When the Bank of Sweden established the prize for Economic Science in

memory of Alfred Nobel (1968), there doubtless was - as there doubtless still

remains - widespread skepticism among both scientists and the broader public

about the appropriateness of treating economics as parallel to physics, chem-

istry, and medicine. These are regarded as “exact sciences” in which objective,

cumulative, definitive knowledge is possible. Economics, and its fellow social

sciences, are regarded more nearly as branches of philosophy than of science

properly defined, enmeshed with values at the outset because they deal with

human behavior. Do not the social sciences, in which scholars are analyzing

the behavior of themselves and their fellow men, who are in turn observing and

reacting to what the scholars say, require fundamentally different methods of

investigation than the physical and biological sciences? Should they not be

judged by different criteria?

1. SOCIAL AND NATURAL SCIENCES

I have never myself accepted this view. I believe that it reflects a misunder-

standing not so much of the character and possibilities of social science as of

the character and possibilities of natural science. In both, there is no “certain”

substantive knowledge; only tentative hypotheses that can never be “proved”,

but can only fail to be rejected, hypotheses in which we may have more or less

confidence, depending on such features as the breadth of experience they

encompass relative to their own complexity and relative to alternative hypoth-

eses, and the number of occasions on which they have escaped possible

rejection. In both social and natural sciences, the body of positive knowledge

grows by the failure of a tentative hypothesis to predict phenomena the

hypothesis professes to explain; by the patching up of that hypothesis until

someone suggests a new hypothesis that more elegantly or simply embodies

the troublesome phenomena, and so on ad infinitum. In both, experiment is

sometimes possible, sometimes not (witness meteorology). In both, no experi-

ment is ever completely controlled, and experience often offers evidence that

is the equivalent of controlled experiment. In both, there is no way to have a

self-contained closed system or to avoid interaction between the observer and

the observed. The Gödel theorem in mathematics, the Heisenberg uncertainty

principle in physics, the self-fulfilling or self-defeating prophecy in the social

sciences all exemplify these limitations.

Of course, the different sciences deal with different subject matter, have

different bodies of evidence to draw on (for example, introspection is a more

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important source of evidence for social than for natural sciences), find different

techniques of analysis most useful, and have achieved differential success in

predicting the phenomena they are studying. But such differences are as great

among, say, physics, biology, medicine, and meteorology as between any of

them and economics.

Even the difficult problem of separating value judgments from scientific

judgments is not unique to the social sciences. I well recall a dinner at a

Cambridge University college when I was sitting between a fellow economist

and R. A. Fisher, the great mathematical statistician and geneticist. My fellow

economist told me about a student he had been tutoring on labor economics,

who, in connection with an analysis of the effect of trade unions, remarked,

“Well surely, Mr. X (another economist of a different political persuasion)

would not agree with that.” My colleague regarded this experience as a terrible

indictment of economics because it illustrated the impossibility of a value-free

positive economic science. I turned to Sir Ronald and asked whether such an

experience was indeed unique to social science. His answer was an impassioned

“no”, and he proceeded to tell one story after another about how accurately

he could infer views in genetics from political views.

One of my great teachers, Wesley C. Mitchell, impressed on me the basic

reason why scholars have every incentive to pursue a value-free science, what-

ever their values and however strongly they may wish to spread and promote

them. In order to recommend a course of action to achieve an objective, we

must first know whether that course of action will in fact promote the objective.

Positive scientific knowledge that enables us to predict the consequences of a

possible course of action is clearly a prerequisite for the normative judgment

whether that course of action is desirable. The Road to Hell is paved with

good intentions, precisely because of the neglect of this rather obvious point.

This point is particularly important in economics. Many countries around

the world are today experiencing socially destructive inflation, abnormally

high unemployment, misuse of economic resources, and, in some cases, the

suppression of human freedom not because evil men deliberately sought to

achieve these results, nor because of differences in values among their citizens,

but because of erroneous judgments about the consequences of government

measures: errors that at least in principle are capable of being corrected by

the progress of positive economic science.

Rather than pursue these ideas in the abstract [I have discussed the method-

ological issues more fully in (l)], I shall illustrate the positive scientific charac-

ter of economics by discussing a particular economic issue that has been a

major concern of the economics profession throughout the postwar period;

namely, the relation between inflation and unemployment. This issue is an

admirable illustration because it has been a controversial political issue

throughout the period, yet the drastic change that has occurred in accepted

professional views was produced primarily by the scientific response to ex-

perience that contradicted a tentatively accepted hypothesis - precisely the

classical process for the revision of a scientific hypothesis.

I cannot give here an exhaustive survey of the work that has been done on

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