How come no economist on the right is asking "Where are the Galbraiths of yesteryear?"? It's because Milton Friedman won the debate, and John Kenneth Galbraith lost. Both Friedman (on the right) and Galbraith (on the left) were once leading public intellectuals and economists. I used to read them both. I wonder how many young economists have even heard of Galbraith?
[I wrote this a couple of days back, but wasn't sure whether to post it. Today I asked a colleague in Political Science/Political Economy about Galbraith's reputation as an academic, and he said it was high – in the same ballpark as Friedman's academic reputation in economics. Then, by sheer chance, I found a Brad DeLong post, recently hoisted from his archives, saying something similar. In an alternate universe, Galbraith won and Friedman lost, and economics would be very different today. So I decided to post this, FWIW.]
I can't think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left.
If you had a time machine, went back to (say) 1985, picked up Milton Friedman, brought him forward to 2015, and showed him the current debate over macroeconomic policy, he could immediately join right in. Is there anything important that would be really new to him?
We are all Friedman's children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right. Using the nominal interest rate as the monetary policy instrument is non-Friedmanite, but the new-fangled "Quantitative Easing" is just a silly new name for Friedmanite base-control.
We easily forget how daft the 1970's really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.
Imagine if I argued today: "Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less." What are the chances my policy proposal would be accepted?
Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.
Great men like Friedman require a great job to do, or else they can't become great men. They also require an aristocracy, oligarchy, or monarchy, where only a few voices can get heard, or else they can't become one of the few voices. The internet actually makes it harder to create great public intellectuals, which is probably a good thing, simply because it's harder to stand out as great, when there's lots of competition.
The right won the economics debate; left and right are just haggling over details. The big debate is no longer about economics (sadly for me); and it won't be held on the pages of the New York Times or in the economics journals.
Worthwhile Canadian Initiative 
David: “Oh, and Galbraith’s son has WAY more influence than a nobody like you.”
Which, whether true or false, (and it’s more true than false) adds nothing to the conversation here.
Go away.
In the Delong link he says this: “Nearly all economists today are Paul Samuelson’s children. Many are Keynes’ children. Friedman, Robert Lucas, Robert Solow, and James Tobin all have plenty of descendants. But there are few Galbraithians on the ground.”
Do you agree that Friedman comes from the Samuelson line? If so he’s more primary than Friedman
[edited to add link to good post/paper on Friedman by Thomas Palley. Good find. NR]
Kevin: what I meant about GE theory and socialist planning: if I wanted a model to help a central planner decide how to allocate resources, I would start with something that looked very much like GE theory. How useful it would be in practice is one question, but it would give me a useful conceptual framework. And I thought that Lange and Lerner were saying the same thing. The “market socialism” (was that what they called it?) thing was more of a side detour.
I vaguely remember a story told by, I think it was Samuelson. Russian engineers were trying to decide how thick to make the wires for transmitting electricity. The thicker the wires, the less the resistance, and the lower the power losses, but the bigger the one-time cost of the copper. So they needed some sort of rate of interest to compare the one-time costs of copper to the flow of benefits from reduced power losses that might continue forever. They called head office in Moscow, and the reply came back that interest was capitalist exploitation, and they should use 0%. The engineers realised that this would mean the wires should be infinitely thick. So they thought about it, and reinvented GE theory on the spot, to figure out what rate of interest they should use.
Jacques Rene: “If one of my most astute students ask me what’s the difference with BoC having a 2% inflation target, what is humble I/O guy supposed to answer?”
We hear that question quite a lot, in various forms. People who aren’t clear on the difference between using price controls to fix some price (or exchange rate, or interest rate) and using monetary policy to target that price. I usually answer it by drawing a simple supply and demand diagram. Then I draw a horizontal line across it, and say that’s a price control, like rent control or minimum wage. Then I rub out the line, and say the central bank prints or burns money to shift the demand and supply curves vertically up or down until they intersect where the horizontal line was. And that’s monetary targeting.
One example I use is the two different ways to fix an exchange rate: pass a law to make it illegal to buy or sell USD at any price above or below C$1 (The Venezualan method); have the BoC print or burn C$ (maybe by buying and selling USD) to make the S&D equilibrium be C$1 per USD (the Canadian method, in olden days).
Mike: “As for Piketty, he argues that the age of productivity may be over and that we’re going to see much lower GDP [you mean lower GDP growth] in the future.”
Tyler Cowen argues the same thing. I don’t think that’s a left/right thing. I don’t know. There are two effects, going in opposite directions: all the easy discoveries (the low hanging fruit) have already been discovered; our past discoveries act like a ladder to make it easier to discover new things. Plus, GDP growth doesn’t really work that well as a measure of what we want to measure here. Too much stuff gets either left out or added in that shouldn’t be. I always tell my students that for me, personally the cost of living (the price level) has actually gone down over the last 100 years. That I am richer now than I would be in 1915 with my 2015 dollar income. Because: my little Mazda MX6 is a much better car in every respect than even the very best cars of 100 years ago; I had my appendix out a few years back, and I might well have been dead if I had needed that operation 100 years ago.
“In the Delong link he says this: “Nearly all economists today are Paul Samuelson’s children. Many are Keynes’ children. Friedman, Robert Lucas, Robert Solow, and James Tobin all have plenty of descendants. But there are few Galbraithians on the ground.””
I agree with Brad (but he’s better at this sort of thing than me, and IIRC somewhere he already made the point I make above about NK models being more Friedman than keynes.)
Friedman is in some respects, a Samuelsonian, as we (nearly) all are (see my next post based on Samuelson’s 1958 model). It’s hard to say who was most influential, because they were influential in different ways.
It’s sort of funny, with some lefties like dreadful David above getting so irate about this post, I’m not saying anything so very different from what lefty Brad DeLong is saying. (And Brad actually put my post on his yesterday’s “Must Read” list, which at least suggests he thought it wasn’t total rubbish.)
Nick: “Lloyd George destroyed a whole social class, with inheritance taxes.”
Fortunately they seem to have bounced back quite nicely.
Nick; “Plus, GDP growth doesn’t really work that well as a measure of what we want to measure here. Too much stuff gets either left out or added in that shouldn’t be.”
Like the quality of the ice on the canal this morning – see you out there shortly?
Nick: There is a parallel between what you call ‘lefties’ and their excitement for Piketty, and the Sumnerites and their excitement for NGDPLT. It’s actually astounding that you missed that, given that the latter appeared right here in this very same thread.
The only difference is that the reaction to the Sumnerites is quiet, slightly annoyed inattention, while the reaction to the Pikettyites is of a much more fire-breathing nature.
Frances: yes, but with a different group of members in that set? (And the new ones aren’t quite the same, at least not yet.)
Yes! It’s all blue, this morning.
Jonas: I think what I missed was the fire-breathing reaction to Piketty. My own reaction is of the “slightly annoyed inattention” variety. I think Scott deserves more attention than Piketty, but has gotten less. (Though maybe, just maybe, if I start seeing Scott’s upcoming book on airport shelves, I might go into a slight “Bah humbug!” mode there too. There’s a lot to be said for knee-jerk reactionaries of all stripes, to offset the human tendency for fads and bubbles!)
Thanks Nick. I think that as for GDP a big reason it’s supposed to drop is population growth. What you say about being richer than a 100 years ago makes a lot of sense to me. I think Morgan Warstler gets a little carried away with his technophilia but I do think that for example things like the PC and the Internent have enriched us in ways that are scarcely quantifiable.
Think of the economic blogs and how much we’ve all learnt in the last 6 years-none of this would have been possible prior to the tech revolution. Which makes me think that maybe Cowen and Piketty are wrong about falling productivity. The trouble is it also seems to me that tech has kind of hurt the workers. I don’t know if it’s cut down the number of jobs but it does seem to have hurt the number of good paying jobs.
As for David-he probably doesn’t realize how he sounds. Probably a lot of us need to learn how to disagree without being disagreeable. In all honesty, Nick, you’re better at that than most.
If you weren’t all the way in Canada I actually would like to have gotten a chance to take your class-I don’t know how much longer you will be in teaching.
@Sax:
Nick: I was unclear on my astute student question: one mechanism is efficient another isn’t (which I knew, after all not for nothing Brad De Long follow me on Twitter…). Her point is : is 2% objective different? (And I think she knows anything done in Venezuela will be a comedy, that is tragedy plus time.)
Nick. Nice post, and I agree with you on Friedman over Phelps on the expectations-augmented Phillips curve. But I beliece Friedman got the idea on a London park bench from Phillips himself.
Thanks Seamus. I hadn’t heard that, but it sounds plausible.
Sam Peltzman made some similar points in his contribution to the “Why Is There No Milton Friedman Today?” symposium in Econ Journal Watch.
Re: that Pinochet connection I think the responses here are a bit insouciant. This is not so much about Friedman’s economiv legacy but his political convictions – but then, I am not sure if they can always be clearly distinguished (it’s also notable today how adherence or hostility to “Keynesianism” or “market monetarism” tends to follow political fault lines, so there).
There is an offshot of libertarian thinking advocating primacy of economic freedom above democracy, explicitly this can be found by Hayek, who openly endorsed Pinochet. Now, Hayek and Friedman obviously do not belong to the same economic school, but there libertarian convictions were enough common ground to find them both in the Mont Pelerin Society. And the sins of the latter regarding a nonchalant approach to Pinochet are far from trivial, see e.g. here:
http://coreyrobin.com/?s=Mont+Pelerin&submit=Search
Yes, I know, it’s Corey Robin – but what he recounts there seems indeed problematic. And inasfar as Friedman thought anything about all of this wrong, he didn’t exactly feel to vent his misgivings. This, too, wouldn’t be a problem, hadn’t Freedman been such an outspoken person. You (Rowe) mentioned you consulting Castro’s regime: well, I’d be very disturbed by this if at the same time you’d have loudly and incessantly denounced, say, Mobutu’s (then-dying) regime and would not have considered conulting them besides telling them to do away with their whole regime altogether – while also being member of an organisation that praises Cuba’s health care system and sense of community.
What I mean by all this is that as a libertarian, Friedman wasn’t free of the specific traps this ideological underpinning posed to his thinking. Another example: last year, much has been made about a comment by Friedman indicating that he would have judged CO2 emissions to be a negative externality which should therefore be taxed or something the like. On the other hand, there is this blurb by Friedman:
http://books.google.at/books?id=3pvCAmsjbO8C&pg=PA190&lpg=PA190&dq=milton+friedman+climate+of+fear&source=bl&ots=D0xvsyVz-d&sig=Smpmw_8xtWKtScKGxEIGgaER6d8&hl=en&sa=X&ei=IXs2VKzMHtGHyASd44LoAg&redir_esc=y#v=onepage&q=milton%20friedman%20climate%20of%20fear&f=false
(1998, when this book appeard, Nordhaus, among others, had already gathered enough evidence to show that marginal costs of CO2 emissions and thus the externality are very likely negative, so it was already very clear at the time, even among economists, that global warming was not going to be a “global benefit”, net or otherwise, even less so “conclusively”. Also note the sad “raging hysteria” nonsense).
I do not think that people on the left do themselves a favor by looking to find bad stuff about Friedman at the expense of learning from his far greater achievements, or by conflating his political stance with his economic achievements. But if such issues are brought up, I also do not think that simpy brushing them aside is a good idea. Put differently: I guess anybody would agree that Friedman was not a perfect human being without any faults at all. Perhaps one should consider that this simple statment does not only exist in the purely abstract, but has actual manifestations, lest this shall be anything other from hagiography.
Some of the “details” that Friedman got wrong are at the very core of economic science and are massive enough to generate enormous pathological business cycles of the sort Friedman fails to anticipate in 2006, see the work of Roger Garrison on this topic ie Garrison on Friedman’s failure to get the valuation of production goods right. See also Hayek’s work on Friedman’s failure to get the relationship between asset prices, interest rates and money right.
These are massive failures in the heart of economics which lead to contemporary pathologies in he economy and contemporary pathologies in economic science.
JBriggeman: good find. It is very similar to what I am arguing here.
Martin: I knew very little about Cuba when I went over there to teach economics in the 1990’s. I knew it was communist, and I was an anti-communist (I certainly wasn’t one of the Birkenstock Bolshie Brigade). I was puzzled (I’m still puzzled) as to why they let someone like me in to teach their best and brightest about the joys of capitalism and capitalist economics. I wondered if maybe it signified a possible big policy regime change? (No, though there were small policy changes at the time, and slightly bigger ones 15-20 years later.) I worried about it a bit, but I didn’t think about it much. I think my attitude was: we take the world as it is, and if a bit of it is communist then it is communist, and I can’t do anything about that, but if I can improve their teaching of economics, and maybe their economic policy a bit, and get some time in the sun and see an interesting place, I will do it.
I talked to people who were desperate to leave, including one Balsero who was ready to risk a high probability of death trying. And to those who knew people who had either disappeared, or been disappeared. Who only knows what will finally come to light, in future? How much has Pierre Trudeau’s legacy been tarnished by his hobnobbing with the Castros (little, I think)? One still sees moral idiots wearing Che T-shirts (how many executions did he order?). Pinochet isn’t as cute (no equivalent of Motorcycle Diaries for him). There’s a double standard.
Greg: Fair enough; I don’t remember Friedman writing much if anything about the theory of capital and interest. Probably not his strong suit.
Nick:
Great post and some wonderful responses. Here are some reactions.
Friedman’s and Modigliani’s consumption functions were much richer than that of Duesenberry. They provided an explanation for consumption over a life-time that could be used for explaining cross-section data across individuals.
It is not appreciated that Friedman’s theory had more to it than the concept of permanent income. His definition of consumption consisted of expenditure of non-durables plus the service flow from durables. Thus, my consumption includes the services of my house (>$30,000), my car ($3000), my TV (10 years old), furniture, appliances, and all my economics books among other things. This idea was quite subversive to Keynesian economics. It explained something other than consumption expenditure, the focus of Keynesians.
His definition also helps explain the ideas behind Frances’s nice post on stuff. Much of stuff yields us consumption services – though perhaps not the three cast iron fry pans. The elderly, like me, do maintain their consumption but it just does n’t show up as expenditure.
Among his other contributions was a proposal for a negative income tax for dealing with inequality. His plan was very similar to that of James Tobin, an advisor to Kennedy.
He also appears to be the grandfather of ideas for which others got the credit. The Lucas critique is implicit his own 1960s critique of a paper in which Modigliani compared the outcomes of different policies.Friedman pointed out that the model Modigliani used was derived on the policies that has occurred and could change in response to other policies. Lucas, of course, was a student of Friedman. The expectations-adjusted Phillips curve was in the air by the early 1960s. I learned about from a new colleague who just arrived from Chicago. The 1969 article was no surprise.
Finally, Friedman was not an out- and-out libertarian in all respects. He argued for 100% reserve banking, a policy far more draconian than the Volker plan or any other policies enacted in the wake of the financial crisis.
He is with us in more ways than we think.
John Chant
Nick Rowe,
just if I wasn’t clear enough: I didn’t criticize you for this consulting gig, not per se, or not for the consulting. I think it is perfectly OK to take an apolitical approach and separate economic and political sphere (though, I also guess that this is also to undermine what economics is actually good for). Greg Mankiw took this line defending Friedman:
http://gregmankiw.blogspot.co.at/2007/09/on-ethics-of-advising.html
I also don’t have a problem with the suggestion that you simply didn’t know much about Cuba – though I think there is at least a smidgeon of an inconsistency here: either you didn’t know much about Cuba, which implies, I think, that something would have been different had you known more; or it’s “just” consulting and perfectly OK anyway, so there is nothing to talk about.
Anyway, I think all this is besides the point concerning Friedman; He was anything but apolitical – neither ignorant nor uninterested. The blind spot and tendentious approval by libertarians of Mont Pelerin Society flavor with regard to right-wing despotes – combined with a downright hysterical rejection of anything “progressive” or “socialist” governments of the Allende-type – is neither new, nor something unheard of, see e.g. this here a whole journal issue about the topic:
http://www.tandfonline.com/action/showAxaArticles?journalCode=crpe20#.U8_2L_l_tHV
IMO, the point here is that this is not a coincidence, but that there is a clear connection between this libertarian brand and the position on Pinochet. As there is one to the knee-jerk denial of global warming and/or its negative marginal effects, which by now has basically become a litmus test of libertariaism having gone insane.
Yes, the Che T-shirts are awful; yes also, of course, not all libertarians are the same; and yes, there are plenty of instances where other political philosophies lead people astray on a variety of issues, not doubt. But all this doesn’t make the issue with Friedman showing ill judgment in some instances go away. Besides, again you can’t have it both ways: either there is a double standard and, by implications, Friedman’s stance was indeed problematic, and it’s just about those on the left not acknowledging their own failings – or there is nothing to see here, as your earlier comment seems to suggest. (Also, I have a longstanding crush on Gael García Bernal, which is why the Motorcycle Diaries are retroactively and forever awesome!).
Martin: yes, my reflections about Cuba were really just reflections, and wondering about my own motivation, and wondering if I was being inconsistent, and wondering if I should have thought about it more at the time, and wondering if other economists who went on foreign jaunts to questionable regimes thought about it the same way as I did.
Your criticisms of Friedman are reasonable, and are much more reasonable than many — who do seem to be struck by “Friedman Derangement Syndrome”, who can see only his warts and can’t see past them, but ignore the warts of their heroes (for example, Keynes being a big supporter of eugenics, at least until 1944). Neither gives us a reason not to be a Friedmanite, or a Keynesian. (I’m actually sort of both, and would defend Keynes on that charge as much as I would defend Friedman, even though one could similarly argue that Keynes’ support of eugenics is hard to separate from his political philosophy.) Was it Daniel Dennett who was shocked to discover that Frege was a raving anti-semite, but kept on thinking highly of him as a logician? (maybe I’m muddled.)
John: Thanks! And good comment.
Friedman apparently thought, and I agree, that his little book on the consumption function is the best thing he did. Such a lovely mix of theory and empirical evidence. And the “empirical evidence” was not just one regression, but a whole slew of apparently unrelated observations that could all be made sense of in terms of the same theory.
Yes too on Friedman thinking in terms of policy rules, rather than actions, which Lucas formalised. That was a massive change, because it didn’t just change the answers, but changed the questions we asked.
Actually, now I think of it, suppose I wrote a post on how influential Keynes had been in macroeconomics and macroeconomic policy. I think it is unlikely that anyone would mention, even though it’s right there on Wiki for all to see: “Keynes was a proponent of eugenics. He served as Director of the British Eugenics Society from 1937 to 1944. As late as 1946, shortly before his death, Keynes declared eugenics to be “the most important, significant and, I would add, genuine branch of sociology which exists.””
Nick Rowe,
As I said w/r/t Friedman above: I do not think concentrating on Keynes’ bad ideas (also his antisemitism that he had never fully gotten over, according to the late Paul Samuelson) at the expense of his lasting contributions is not a very good idea – but if it is brought up, wiggling out and trying to find excuses isn’t either. And actually, you will find this issue brought up a lot, but from the other side of the political spectrum, as some googling will show.
Similarly: I really thing reading Voltaire can be very enlightening (literally), but I also don’t think that this justifies brushing is horrible antisemitism aside. Or, I think Immanuel Kant is very much worth reading, but trying to defend his blatant racism is not such a good idea.
These last two exemples are rather clear-cut, at least in hindsight. It might well be possible that there is a much more complicated case w/r/t Friedman. But I think, given the context of his political affiliations, that there actually is a there there and this is not just an obvious nonsene-accusation by some left-wingers. And while it might be reasonable to mount a defence (full context, times, etc.) it’s at least worth considering if Friedman got a couple of things wrong here, too – e.g. that he was, after all, a human being.
Nick Rowe,
Bertrand Russell is most famous for his astonishment at Frege’s antisemitism and extreme nationalistic politics, although Frege was more pleasant to Jews in his personal life than many people not known for being antisemitic-
http://en.wikipedia.org/wiki/Gottlob_Frege#1924_diary
As for Keynes, there is absolutely a double-standard. Consider the counterfactual further: people have been bringing up Hayek’s (not exactly zealous, but still badly mistaken) approval of Pinochet’s regime. Imagine if there was a post on Keynes’s legacy in economics, and people started bringing up the politics of people connected in some way to Keynes, e.g. other members of the Galton Institute. How often do people bring up Neville Chamberlain’s foreign policy when discussing Keynes’s economics? Never, as far as I know, because it’s irrelevant. Yet some people have seen fit to bring up Hayek’s views on Chilean politics when discussing Friedman’s economics.
(Yes, in certain company people will make the most outrageous accusations about Keynes and the Nazis, for example, just like in certain company people will claim that Friedman was a supporter of Pinochet. However, it’s common in even well-informed and reasonable company, like on here, for people to try to associate Friedman as closely as possible with Pinochet.)
It’s important to be analytic in these things. I can think that Keynes’s contribution to economics was mostly negative, while still thinking that his work in probability theory has been hugely positive and beneficial.
No doubt Friedman was brilliant. Reagan/Friedman definitely won the political debate. Free market = good. Government = bad. Friedman probably won the economic debate, too. Depression a failure of monetary policy => Friedman Monetary policy => no Depression. Fiscal policy = bad.
Too bad they didn’t live to see their crowning glory => Great Recession.
One influential economist/public intellectual writing about another:
http://www.nybooks.com/articles/archives/2007/feb/15/who-was-milton-friedman/
What bugs or puzzles me is that this rather unoriginal and not very great post, which I nearly didn’t bother publishing at all, is getting all the attention in the econoblogosphere, while my following post, on red money, which (I think) is far more original, and far more interesting, and a far better post, is getting almost none.
I really shouldn’t complain of course. A no-name economist like me should feel lucky to get any attention at all, even if it’s for something that is not my comparative advantage (except I’m old, so can sort of remember the 1970’s). But that does tell us something about the econoblogosphere. Politics trumps economics, and Friedman Derangement Syndrome is real.
“We are all Friedman’s children and grandchildren.”
For I the LORD your God am a jealous God, visiting the iniquity of the fathers upon the sons unto the third and fourth generation.
One aspect I have not seen with the debates about inflation of 1970s vs. 2010s and opposing economist is how much is a product of the 1950s Baby Boom vs. the modern Baby Bust. Why was there so much inflation in the 1970s? In all reality the number of jobs in the 1970s looks very good to point that Jimmy Carter one term had more jobs created than either Reagan term alone. (I am guessing the average unemployment rate during Obama will be less than the average unemployment of Reagan. Consider the US unemployment if 5.6% while Reagan Jan 1987 unemployment was 6.6%.) Now, we are stuck in low inflation despite all kinds of monetary policy? Well, Japan had a huge Baby Bust in the 1970s and have not generated an sustainable inflation for 25 years. Germany had a Baby Bust in the 1990 range and Europe is following Japan.
Collin said: “Why was there so much [price, my add] inflation in the 1970s?”
I’d say a negative real AS shock from oil along with the labor market being tight enough.
I’d say the late 1990’s and on had a positive real AS shock.
“What bugs or puzzles me is that this rather unoriginal and not very great post, which I nearly didn’t bother publishing at all, is getting all the attention in the econoblogosphere, while my following post, on red money, which (I think) is far more original, and far more interesting, and a far better post, is getting almost none.”
Ha! Gossip always trumps thinking, Nick.
Nick,
I found your post through Economist’s View. I go there because I’m interested. I’m just a no-name winemaker and former no-name electrical engineer/computer scientist, not even a no-name economist. I don’t feel qualified to comment on his research. One thing that bugged me in my former career was when I did something very cool, people would just roll their eyes when I tried to tell them about it. Wine is a little easier to share!
It’s the topic, not the quality of the post. It isn’t that politics trumps economics, it’s that politics is intertwined with economics. Friedman loudly and proudly espoused an economic philosophy and proposed policy as an public intellectual ECONOMIST. As you argued, he was most influential in that role. Are you really puzzled about why people would respond to what you referenced in your post?
I’ve gotten videos of Friedman espousing the free market/laissez faire from right wingers that have taken it as gospel. At my limited knowledge level, it isn’t gospel. It’s BS. Free market philosophy appears to me to ignore the role of Democracy. Free markets can and do fail. Some regulations work and some don’t.
It sure looks to me like we had a massive bank run where deregulation, publicly espoused by Friedman, played a major role. Wasn’t Friedman’s essential argument let’s effectively go back to the deregulation of the 1920’s because it’s more efficient and monetary policy can be used to prevent another depression? I may be ignorant, but I don’t think that’s politics and I don’t think it’s gossip either. I think it’s an economic argument and Friedman was proven terribly wrong in 2008.
By the way, I think Paul Krugman has the economist/public intellectual role now and nobody else is close.
“I would add one more political point – Friedman had a side industry of hawking books that if you had some form of capitalism DemocrY as inevitable. Ask China how that worked out. Or Vietnam, or half the Middle East. Or Hungary.”
Or Chile, or South Korea or Taiwan… wait.
Well now, it seems to me that Friedman was all for monetary policy being the key tool, and fiscal policy not having much importance. That is not what many policymakers think today
Friedman specifically opposed price level/inflation targeting, yet what do we have?
Friedman specifically opposed central bank independence, yet what do we have?
Friedman was very much opposed to “fine tuning’, yet we have great policy arguments about 0.25% changes in interest rates.
Friedman was all in favour of steady growth of the money supply, yet we have vast QE changes in it, and no hint of steady growth in it being a target.
As to the expectations augmented Phillips curve, I wrote a paper in European J History of Economic Thought 2010 with about a dozen earlier examples of statements of the point that continuous inflation would come to be expected, and therefore effects, such as on the level of employment, which it had in the short run would dissipate as this adjustment occurred. In my book ‘Macroeconomics and the Phillips curve myth’ (OUP 2014) I gave yet more such examples, (and some other arguments to the effect that everyone knew the “Friedman/Phelps” argument long before 1967 or 1968). If anything, I argued, it was Friedman and Phelps’ presentations of the argument that caused it to be doubted – before their presentations it was frequently stated, and as far as I can see, never questioned.
So, all in all, the case for Friedman having such a great influence looks a bit fragile to me ….
James: “Well now, it seems to me that Friedman was all for monetary policy being the key tool, and fiscal policy not having much importance. That is not what many policymakers think today”
Many macroeconomists argue that the ZLB is a special case, where fiscal policy is needed. But the only country I know of where fiscal policy was correctly used at the ZLB is Canada. (the cuts came after the Bank of Canada lifted off the ZLB.)
“Friedman specifically opposed price level/inflation targeting, yet what do we have?”
Yep, he wanted k% M2 growth, and he lost on that one, because we have IT instead.
“Friedman specifically opposed central bank independence, yet what do we have?”
No. He was specifically opposed to central banks having independence to do whatever they wanted in a discretionary manner. He wanted a rule, and IT is a rule.
“Friedman was very much opposed to “fine tuning’, yet we have great policy arguments about 0.25% changes in interest rates.”
There’s an important distinction between instrument fine-tuning and target fine tuning. See my next point:
“Friedman was all in favour of steady growth of the money supply, yet we have vast QE changes in it, and no hint of steady growth in it being a target.”
Friedman wanted base money control as an instrument to target steady k% M2 growth. QE is just a silly new name for base money control.
Regarding the EAPC, as I said above, there is a general rule in the History of Thought: every economic idea was always invented by someone else earlier, and a determined historian of thought can always find an antecedent for everything, if he looks hard enough, and interprets it loosely enough. For example, you could argue it’s all in Hayek, but only if you read Hayek after reading Friedman would you figure out that maybe that’s what Hayek was trying to say. “First they laugh at you,….then they say they knew it all along”.
But then I haven’t read your book, and maybe it’s a very good book, so maybe you really do make the case that Friedman was saying nothing new in 68. But as a student in the 70’s, it (the approx vertical LRPC) sure looked new and controversial to me. And I wish I could remember the name of the Keynesian economist I was reading back then saying that Friedman was wrong. And man, if you hang around the econoblogosphere long enough, you know that mentioning “the natural rate of unemployment” still ignites a firestorm, 45 years later! (And not always a sensible substantive criticism, like Roger Farmer’s.)
I hope I can avoid getting too deeply into arguing minutiae, but let me respond to some of those.
I think the idea that Friedman would have been happy with independent central banks with inflation targets comes from a very thin reading. Support for independence is so nearly universal that I suppose it is difficult to believe that such a presumptively-great-prophet took a different view. But to take one of his arguments – he saw, as most economists today, I fear, do not, a problem about executive agencies which were unaccountable. Now, the positions of central banks varies, but in many cases, although they have inflation targets, nothing much happens when they miss them (which is frequent). Why would someone who has seen the problem about executive agencies be happy if they have a target the missing of which has no consequences?
I find it hard to know what to make of the point about M2 and QE. Supposing that QE is merely a new name for base control, it does not seem to be aimed at achieving a steady growth of M2, does it? I can’t see where the ECB say their latest move is aimed at stabilizing the growth of M2, for example. But the ECB is surely the major central bank most likely to be strongly Friedman-influenced.
Thank you for contemplating the possibility that I wrote a good book ☺. Of course it is right that most of the time one can find earlier hints at the ideas. But I didn’t say I could do that. Precisely the point of the Euro J Hist Econs 2010 piece is to argue that the expectations argument was well known and routine. It is not to argue that I have found some shadow of it in an unread source from a few years earlier. It was consistently and clearly advanced by prominent people in prominent places. (And, before 1968, pretty well undisputed). In “Macroeconomics and the Phillips curve myth”, I have some other types of argument to the same conclusion. In the book I also trace the appearance of the idea that the argument was original to Friedman and Phelps. That fills in the story a bit. I hope it does so in a way that makes the unoriginality of Friedman and Phelps seem more plausible. Indeed, it appears during the 1970s. That can be seen in the textbooks too. One minute it is not there, the next it is (That argument is in a paper forthcoming in History of Political Economy 2015). So it is no surprise if it seemed new to a student reading textbooks that said it was new. But so what? And the fact that there might be some people who still deny it is certainly not a way of showing it was invented in 1968, is it?
Majromax said: “Looking at US data, MBase does not seem to be a great predictor of M2, with to-eye vanishingly small correlations over the QE periods.”
My guess is that is true.
What if MBase is zero? Any reason it could not be zero?
Majro: incidentally, what happened to M2 during the Great Recession? If the Friedman of (say) 1970 saw recent M2 data, would he be saying: “I told you to keep M2 growing at k%, and look what happens when you don’t!” ?
If the correlation between MB and M@ were very high, it wouldn’t matter whether you had a k% MB target or a k% M2 target. But IIRC Friedman said that the great Depression was caused by bank failures causing M2 to fall, because the Fed did not respond appropriately.
James: you would very probably beat me hands down on the minutae!
“Why would someone who has seen the problem about executive agencies be happy if they have a target the missing of which has no consequences?”
Whether you have an independent central bank, or it’s under the direct control of the government of the day, and whether you have a 2% inflation target, or a k% M2 target, this would seem to be a general problem. Having a transparent observable target at least gives the possibility of holding the central bank accountable for missing that target. What, in your view, was Friedman’s position on this? How did he propose to resolve the problem?
Do you have a link to a working paper version of your forthcoming paper? It would be an interesting read for me. (Though I admire historians of thought, I also think they suffer from a terrible vice, that’s almost an occupational hazard, in paying too much attention to the trees!)
M2 and a Divisia M2 series going back to 1968-
http://research.stlouisfed.org/fred2/graph/?g=Y2Z
(Unfortunately, the US doesn’t publish sectorial analyses of broad money, so we don’t know the extent to which M2/MSI M2 numbers have been affected by the financial crisis (intermediation of the interbank lending market into deposits) as we do with the EU and UK for their broad money series.)
Friedman was interested in what we now call Divisia monetary aggregates back in the early ’70s, but didn’t know how to compile them. A k%-targeting central bank would have presumably done worse during the earlier part of the crisis, better in the latter part and poorly after 9/11, with either M2 or MSI ALL as the monetary aggregate being used.
Sorry, that should be-
http://research.stlouisfed.org/fred2/graph/?g=Y31
W. Peden, what exactly is MSI ALL?
I’m glad to see James Forder here. The Phillips curve myth has always annoyed me, but of course I’ve never gone to the trouble of tracking down its origins. More generally, I think economics has suffered because of the way Old Keynesians came to be regarded as sloppy thinkers who could safely be ignored. I suppose a less sympathetic observer would say: poetic justice innit? — the Old Keynesians had no qualms about treating Pigou & Co. with similar disdain. Maybe so, but two wrongs don’t make a right.
Too Much Fed,
A very wide Divisia-type index.
Kevin Donoghue,
The lesson one should take from the 1970s inflation, I think, is that serial output-gap misestimation can be hugely problematic, especially if cost-push views of inflation are influential. That’s not just a point against Keynesian demand management (and not just Old Keynesian demand management) but also inflation-targeting that uses estimates of the output gap. Once we see that the Phillips Curve was not the problem, the recent problems with targeting the output gap are part of a long sordid history of the concept.
Incidentally, occasionally Keynesians try to defend a sloping long-run Phillips Curve, under the misapprehension that they are obliged as Keynesians to do so.
Kevin: James Forder emailed me his paper, and it was a very interesting read. He does indeed give loads of pre-Friedman/Phelps examples, to back his claim. But it makes me wonder: why for example did Richard Lipsey, who wrote a paper on the theory of the Phillips Curve in the mid-60’s, say in the late 70’s that his big mistake in that paper was assuming it was money wages rather than (expected) real wages that adjusted to excess demand or supply for labour? (And Lipsey’s paper was a really good paper otherwise, and Lipsey is a very good economist, who knows his stuff.)
“the Old Keynesians had no qualms about treating Pigou & Co. with similar disdain..”
On that vein, the Old Keynesian young turks used to try to shut down “classical” economists with the one-liner “You’re just assuming full employment!”, and the New Classical young turks used to do the same with “keynesian” economists with “You’re just assuming sticky prices!”
W Peden: relatedly, we went from the policymakers trying to make the AD curve vertical at the right spot (target Y), to trying to make the AD curve horizontal at the right spot (IT). Both have failed, for symmetrically opposite reasons. A downward-sloping compromise (NGDPT) seems reasonable.
Y targeting, with a vertical AD curve, makes no sense at all after you’ve read Friedman. If every economist already knew what Friedman said in 68, why did they try to target Y*?
When I eyeball the data, ISTM that the LRPC maybe slopes the “wrong” way. Though that could easily be spurious.
Nick: “[Lipsey’s mistake] was assuming it was money wages rather than (expected) real wages that adjusted to excess demand or supply for labour?”
That seems a very strange way of expressing it. Let x = W/E(P) be expected real wages. If I say x adjusts to excess demand, I am surely saying that W increases as demand rises. An unworldly mathematician might say I could just as easily be saying that E(P) falls, but an economist can hardly say that. The bargain is expressed in money terms. I’d need a bit more context to make sense of the above remark.
I think the following is a fair summary of where Old Keynesians, in England especially, went wrong in the 1960s and 70s. They observed high unemployment and they assumed it to be involuntary in Keynes’s sense, i.e.:
As men like Joe Gormley and Arthur Scargill came to dominate the union movement, it was increasingly clear that their followers were not at all willing to accept price increases without a fight. In Keynes’s terms, unemployment was voluntary. Attempts to stimulate demand followed the pattern described by James Callaghan:
That’s the background to what Hicks called The Crisis in Keynesian Economics. I don’t deny Milton Friedman his role in the story, but I don’t think it was the starring role he gets in your account.