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There is a difference between achieving power and winning a debate. Also, if the right really won the economic debate where is Piketty coming from?

"I wonder how many young economists have even heard of Galbraith?"

Being reasonably young and having read (and enjoyed) two of Galbraith's books but none of Friedman's I'd have to argue with you there. Until recently I didn't even know Friedman had written any books. Add to this the fact that I'm moderately right-wing (at least in the Swedish political context). I will also note that the policy proposal that is (to me) most clearly associated with Friedman is the k-percent rule and it doesn't appear to be very popular today.

That said, I read Brad DeLong's post a few days ago and also thought it was far too categorical.

> "The big debate is no longer about economics (sadly for me)"

Nick, there is a very important debate going on about monetary policy. I don't know if it's "the" big debate, but it's one of the big ones, and it is most definitely about economics. I believe we need to switch our CB from inflation targeting to NGDP level targeting or similar (e.g. aggregate nominal labor income targeting). Surely this is a debate that a great person or two could influence.

As I know you know, I'm supporting Scott Sumner's efforts in this area at the new Mercatus Program on Monetary Policy. If you have any interest in this area, please let me know, kjd@duda.org or 956-433-3339.


Nick, Excellent post, you convinced me.

Jim, Income and wealth inequality were not major issues when Friedman and Galbraith debated. Friedman won the issues they debated, he would do much less well in this environment.

Hugo, Back when Friedman was alive he was most closely associated with policies like ending the military draft, school vouchers (which I gather are very popular in Sweden) and legalizing drugs. And as Nick noted, many of his views on monetary economics became a part of New Keynesianism.

Jim: "There is a difference between achieving power and winning a debate."

True. But they are not unrelated. (Though we might want to distinguish between "winning the debate" and "being right".) Within economics, the Friedmanite perspective achieved power, because economists thought it was right. Outside of economics, it's different.

"Also, if the right really won the economic debate where is Piketty coming from?"

I haven't read Piketty, except for snippets, and reviews, so I don't know. But is his economic analysis any different from the Friedman's in any important respect?

Hugo Andre: "I will also note that the policy proposal that is (to me) most clearly associated with Friedman is the k-percent rule and it doesn't appear to be very popular today."

That's because you are young. Fish don't notice the Friedmanite water they swim in. They only associate Friedman with the one policy he advised that was rejected, because it sticks out.

Hugo Andre,

"I will also note that the policy proposal that is (to me) most clearly associated with Friedman is the k-percent rule and it doesn't appear to be very popular today."

I think that's largely a matter of the forgettability of the banal. One of the things about Friedman's macroeconomics that was different from standard middle-of-the-road New Keynesianism today was the k-percent rule, and so it stands out.

Jim Roothman,

That's an important distinction, in that very often the right won the debate but didn't win power, i.e. left-wing parties won office but had been persuaded by many of the ideas that were once fringe right-wing ideas. Indeed, in Australia in the 1980s it was the Australian Labor Party that was the dynamic force in favour of floating exchange rates, deregulation, and lower taxes. And Bill Clinton or Tony Blair certainly didn't propose a national wage & prices policy, currency controls, or fiscal stimulus in response to 1990s unemployment.

Now you can still think that Friedman was wrong on a lot of these issues, but it's a fact of intellectual history that there was a widespread change of opinion on them, and so at least in a loose sense a "winning of the debate".

Actually the National Security Council won the debate in 1950 but had to keep it secret. Friedman was just some guy with a broom sweeping up the droppings after the parade.

Ken: monetary policy is important, and the switch from IT to NGDPLT is important, for human well-being. And I think it's great what you are doing to support what Scott is doing. But it isn't really much of a left/right issue. (The small-c conservative in me actually leans towards sticking with IT, because it doesn't like changing the rules, and IT is the devil we know, and it wasn't until the Canadian data hit me between the eyes that I gave up on IT.) NGDPLT has support from lefties too, as it should. The left/right debate has moved on from economics.

Scott: thanks! (I was a bit uncertain about this post myself.) You are very nearly my age, so probably remember the debates over price/wage controls, and what caused inflation? I think the "sociological"/anti-monetarist perspective on inflation was more influential in the UK though, which is where I spent my early years. Remember the "competing claims" theory? When British monetarists crossed the Atlantic, it was said they looked like Keynesians.

And by the way, what is Piketty's actual policy proposal? A wealth tax? Big deal. For someone who as an undergraduate expected the eventual victory of communism (I got that one dead wrong), the eventual full nationalisation of the means of production, who listened to the Beatles singing Taxman Mr Wilson (Labour), taxman Mr Heath (Conservative) about 95% marginal tax rates on income (one for you 19 for me), direct controls on prices and wages, etc., etc., Piketty's proposed wealth tax is peanuts. Lloyd George destroyed a whole social class, with inheritance taxes.

> But it isn't really much of a left/right issue.

Thanks for the response. Yes, I see what you mean; agreed, the left-versus-right wars are mostly not about economics. I'm actually glad that NGDPLT is neither red nor blue, because I think that improves its odds of happening. Agreed also that the Fed is very small-c conservative so NGDPLT won't happen unless/until it is an accepted among mainstream monetary economists.


Ike, September 23, 1952 (cancelled campaign speech):

"The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism...

"Now the weakness of the Democratic Party for 'cheap' or 'soft' money is well known. For the last 20 years, it has practiced this policy faithfully. Of late, it has given it a new twist: it is now called 'controlled inflation.' But this name does not mean what it says.

"It really means inflation plus controls.

"The way this policy has worked out is easy to describe. With one hand the Administration has been turning up the water pressure at the hydrant, while with the other hand it has been trying to check the water's flow. The Administration's controls over prices are nothing but weak stop-gaps...

"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."

Richard Nixon brought in wage and price controls in 1971. By the way, it was Nixon's "Checkers speech" that caused Eisenhower to cancel his scheduled Sept. 23 speech.

See Fred L. Block, "The Origins of International Economic Disorder: A Study of United States International Monetary Policy from World War II to the Present" (1977).

Turns out there was a lot more going on in those days than a "debate" between Milton Friedman and John Kenneth Galbraith.

@Nick Rowe and W. Peden
Of course you have a point. I am a fish.

@Scott Sumner
Thanks for the examples! Yes, the school vouchers work quite well here. On the other hand we are considering switching back to military draft because of the Russian aggression.

Jim Rooghan also has a point though. Yes there was some daft left-wing economics during the post-war years (I didn't live back then but I do read) but today it seems to have been replaced by some daft right-wing economics. For example I had a course in public economics last term where the teacher apparently saw it as her purpose to convince us that the state is bad. period. I am open to the idea that the state can be inefficient and that many regulations are bad but that course made me wonder if I am wrong about this. Surely this teacher is also a part of Friedman's legacy.

Another thing: while Friedman certainly did many different kinds of economics his home field was monetary theory. While he got some important things right he also seems to have gotten some big things wrong. Didn't he for example repeatedly warn that the rapid growth in monetary aggregates during the late 80's would lead to high inflation?

W Peden: I had forgotten about currency controls. When my parents took us on holiday to France, mid/late 1960's, we were allowed to take 50 pounds each. There was also a Selective Employment Tax, on every worker not in the export sector, to encourage exports.

Not about economics among economists, but as much bad economics beyond economists as ever, though it doesn't really qualify as economics or debate and doesn't even rise above politics.

The permanent income hypo was collaterally invented by Modigliania, although under a different name, but is empirically false. Duesenberry's relative income hypo is the one that is correct, which Galbraith supported. Friedman was crucial in developing the expectations-augmented Phillips Curve, although others were involved as well such as Phelps (ahead of Friedman to be precise). As you note, Nick, that central banks play an important role in controlling inflation predated Uncle Miltie, but he deserves credit for reminding everybody vigorously of this important fact.

Probably the public policy that he was most responsible for advocating against all forces and odds to achieve, for better or worse, was the flexible exchange rate system.

Barkley: I think there's a general law in the history of economic thought: any idea that any economist has ever invented was always previously invented by someone else, if you look hard enough for that someone else.

The expectations-augmented Phillips Curve is there, in the Phelps volume, and in more than just Phelps' chapter in that volume IIRC, but unless you had read that volume after having read Friedman you wouldn't see the implications of that idea, and you wouldn't see it as a general property of any reasonable model of a monetary economy, as opposed to a specific model of firms or labour markets.

Modigliani's version of PIH fits more naturally in OLG models with finite-lived agents. The standard NK model has an infinitely-lived agent. And it was Friedman's little book that provided the mass of persuasive empirical evidence that made the PIH the standard assumption.

Duesenberry's RIH has two components, IIRC: 1. C(t) is a function of C(t-1). That idea has survived, in attenuated form, as habit-persistence (though I wonder how many macroeconomists who build NK models with habit-persistence have ever heard of Duesenberry?). 2. My C(t) is a function of average C(t). I still don't see how that doesn't violate the long run budget constraint, and how it is empirically compatible with a world in which the distribution of wealth sometimes gets more unequal and sometimes less unequal.

I had forgotten about flexible exchange rates. Again, it is an idea that seems utterly normal now, and we forget that when Canada floated it was seen as breaking the rules of civilised behaviour, and that Friedman was the rebel who supported Canada's break with Bretton Woods, and said it didn't mean we were an irresponsible basket case.

I wrote that second comment a bit too late at night. Since there is no delete or edit button, please disregard it.

I do have one (hopefully useful) piece of information. Professor Rowe asks about Piketty's policy proposals. Since I just finished a thesis work on one of Piketty's formulas I have been able to ask questions to a few teachers who work with inequality. The consensus is that Piketty's sugesstion of a wealth tax is less a serious proposal, more a way to get people to discuss what can actually be done about inequality. Basically he and others who worry about inequality want governments to do as much as it takes to halt and reverse the trend. Whatever means are used to achieve this, it would almost certainly mean a pretty radical transformation of economic society.

Hugo: I could delete it if you really want me to, but I thought it was a good comment, except for typos (spelling Jim's name wrong)! It's OK to disagree with your teacher's perspective, or even think it's daft. She would probably agree it's OK too, if she's as libertarian as she sounds.

Hugo Andre,

On Milton Friedman's mistaken forecasts using monetary aggregates in the 1980s, I recommend looking at some of Edward Nelson's work, especially his article on Friedman and US monetary policy from 1960-2007.

On consumption, the key question again is who won the debate, and thus who were the contestants. There are now very few economists who would say that the absolute income effect is more important to understanding consumption than consumption smoothing and the permanent/transistory income distinction, whereas if you read a Cambridge University Library copy of "The Theory of the Consumption", as I did, you can find plenty of increasingly faint pencil comments in the margins on how ridiculous Friedman's ideas were and how Keynes was clearly right on the consumption function.

Nick Rowe,

To be fair to economists in the 1960s, plenty of those economists not called Nicholas Kaldor thought that SET was a bad idea. And it was predictably farcical: my father was classified as a manufacturing worker for the only time in his life, because he was a sub-editor, and journalists were classified as manufacturing workers rather than service workers, and thus didn't pay SET. What a peculiar decision by the government! Almost as strange as the notion that hotel workers should pay SET, unless they were in the Scottish Highlands, which coincidentally had a large number of very marginal Labour-Liberal and Labour-Tory seats during that period.

As for Kaldor, I really commend Alec Cairncross's books on what it was like to work alongside Kaldor in a serious policy environment.

To be precise: SET was paid by most service-sector workers, not export-workers. The idea was that encouraging the development of manufacturing rather than services would increase productivity.

I remember (or at least I think I do) newspaper articles of 30-odd years ago claiming that Bobby Fischer won the Cold War. This post reminded me of that. In reality Friedman had as much to do with the rise of conservatism as Fischer had to do with the collapse of the USSR. The real protagonists were people like Thatcher and Reagan, who triumphed over Callaghan and Carter because they exploited weaknesses in the Labour and Democratic bases. I can't see that the elections would have gone any differently if Galbraith and Friedman had never been born. Arthur Scargill, Ayatollah Khomeini and General Galtieri, on the other hand, made a difference.

Galbraith and Friedman each produced a fairly popular TV series: respectively, The Age Of Uncertainty and Free To Choose. Neither of them came anywhere close to the sort of viewing numbers David Attenborough regularly achieves.

Of course, this has no bearing on the validity of their arguments. Some of those stand up pretty well and some don't.

I continue to have trouble seperating Friedman's economics and his politics in my evaluation. The most extreme was his support of the Pinochet regime. Then there was his idea that anti-discrimination legislation is unnecessary because discrimination against equally qualified workers was inefficient, and firms which practiced it would be competed out of existance. Somehow, I can't recall any forecast as to how long that might take. (They say it'll kill me, but they don't say when.) After all, the slaves were only freed when? Give it time.

He didn't like unions. He's gotten his wish; unions are much diminished. He thought inequality would continue to decrease (back in the 70s). Anyone happy with the results? Anyone think they're not related?

Paul Samuelson is on record as saying that the way he stayed friends with Friedman was to make a point of never mentioning how crazy his libertarian politics were. He also commented that he often had the feeling, debating with Friedman, that he had won all the points and lost the debate.

IMHO a large part (I do not undertake to say how large) of Friedman's policy influence is the result of the fit those policies have with the interests of the wealthy and powerful.

I'm staying away from technical issues; I'm not entitled to an opinion. (Although I take my actual opinions from Robert Waldmann.) But a fair amount of his policy prescription were driven by his politics, which were not nice.


"I continue to have trouble seperating Friedman's economics and his politics in my evaluation."

And perhaps understanding either. However, this is a distraction from the actual question, which was why there isn't a Friedman-type figure in economics today.

Kevin Donoghue,

As I noted above, the triumph (or defeat?) of conservativism is a separate question from Friedman's impact on economics. Nick's point that New Keynesianism has a lot more to do with Friedman than Keynes is a separate question from what happened with the Reagan administration or the rise of the religious right in the US etc. New Keynesianism is not about the Moral Majority or Victorian Values or Pinochet or whatever else people would rather talk about than a New Keynesian Phillips Curve.

Jonathan, Friedman "supported" the Pinochet regime in exactly the same sense that he "supported" the communist government in China. (I.e. he gave economic policy advice to both governments and opposed the human rights policies of both governments.) His politics were libertarian, not right-wing. Unlike like President Obama, he opposed imprisoning 100,000s of drug users (disproportionately minorities.)

Nick, Yes I do recall that era, and I also recall being confused every time I heard a British reporter talk about "monetarism," as it was clearly something very different from American monetarism.

I can agree that what Piketty is asking for is not such a big deal, but then the question begs: why is there such feverish opposition to him then?

I'm not naming names though if you insist I can.

In any case, even if Piketty's answer is not so earth shattering, his claim as to the problem is: if the golden age of productivity and growth are behind us-the golden age according to him was 1700-2000-then it's earth-shattering indeed. I'm not saying he's right-obviously one would certainly wish he was wrong if wishes were worth anything.

Mike: "I can agree that what Piketty is asking for is not such a big deal, but then the question begs: why is there such feverish opposition to him then?"

I want to ask the exact opposite question: why do so many lefties treat him like such a big deal, like....a rock star? Nothing I have read about his book, from supporters or detractors, tells me it's any big deal. Fairly standard economics, by an economist who's more concerned about inequality than many. (But Sen is also concerned about equality, IIRC, and does more exciting stuff.) And the bit I did read for myself (on the theory of interest rates and capital productivity) suggests he doesn't understand it very well. But he's treated like...the Great White Hope of the left?

Justin Bieber isn't himself particularly annoying. He's OK. It's his drooling fans that make people want to take him down.

Hugo Andre said this above, and felt I couldn't be silent about it either: "The consensus is that Piketty's sugesstion of a wealth tax is less a serious proposal, more a way to get people to discuss what can actually be done about inequality. Basically he and others who worry about inequality want governments to do as much as it takes to halt and reverse the trend. Whatever means are used to achieve this, it would almost certainly mean a pretty radical transformation of economic society."

Radical transformation of economic society is the fearful claim here. I don't know what is meant by 'economic society'. Like Mike Sax above, why is there such feverish opposition to Piketty's recommendation? Do you think Milton Friedman justifies a fear of radical transformation?

Every day a person who has net worth has the ability to use this net worth to their advantage. The value of their wealth and their advantage comes from govt providing civil and market order. Govt taxation policies can and should consider net worth - as a matter of economics and as a matter of common sense - people should expect to contribute in some way proportionate to the benefit they receive, even those of high net worth believe in use-taxes or benefit-taxes don't they.

Does this thing called 'economic society' expect people to ignore net worth as a matter of economics? Does entry into this society mean that the accepted, dominating burden of taxation is to be placed on income and consumption in a 12-month period and NOT on net worth? And even though net worth is now, by far, the largest definable tax base in the UK, US, Japan and Europe, it should not be considered in taxation policy? Ouch.

Does Milton Friedman's writing justify this type thinking and 'society'? Does monetarism justify this?

W Peden: Ah yes, I misremembered the SET. I remember my father complaining that farm workers originally came under SET, but UK farmers complained that agriculture was import-competing, and I think got an exclusion, IIRC.

Jonathan: I tried (and failed, except perhaps very indirectly) to give economic policy advice to the Castro regime in the 1990's. Their human rights record is no better than Pinochet's. Does that make me beyond the pale too?

W. Peden: "the triumph (or defeat?) of conservativism is a separate question from Friedman's impact on economics."

Is it? Try to imagine a world in which McGovern and Dukakis were US presidents and Neil Kinnock was a UK prime minister. Can you see Friedman being remembered, in that world, as an important contributor to the development of economics? That seems implausible to me.

Conversely, I can't see how Lorie Tarshis's ill-fated textbook could have fared well during the great Red Scare no matter how gifted he might have been. Theory isn't developed in a sterile environment free of political contamination.

I grant you New Keynesianism has more to do with Friedman than Keynes. But then it has more to do with Louis Bachelier and Frank Ramsey than with either of them. Once economists started farting around with stochastic processes they were bound to produce some stuff of that sort. Which prompts another banal observation about theory: there's a kind of momentum inherent in it, leading from the likes of Walras to the likes of Debreu.

But it takes a political transformation to make it possible for someone to lift a purely theoretical idea from Ramsey and pass it off as a serious attempt to describe a real-world economy. Nobody could hope get away with that in the 1930s.

I find this essay shockingly bitter, shockingly close-minded. I can understand arguing in favor of Friedman's ideas but to insult other scholars who might disagree is simply being bitterly close-minded.

Kevin: interesting. But what about Lange and Lerner and the socialist planning debate? Those guys were taking what is basically the same sort of GE theory and applying it (or wanting to apply it) in a very different political system?

Kevin Donoghue,

"Try to imagine a world in which McGovern and Dukakis were US presidents and Neil Kinnock was a UK prime minister. Can you see Friedman being remembered, in that world, as an important contributor to the development of economics?"

Yes, not least because something similar happened in Australia in the 1980s, and as far as I know Friedman's reputation as an economist in Australia is not significantly different from elsewhere.

One has to distinguish parties from policies, and economic policies from other policies. After all, in the strict sense of the term, Friedman was not a conservative.

Or strict senses of the term, as 'conservative' is a highly ambigious term.

ltr: huh? I thought I was giving Galbraith his due, as a serious academic who might have won the debate, and who is still influential, only not (much) in economics. I didn't feel 'bitter" writing it. More...nostalgic (old guys get like that).

Incidentally, on the success of right-wing politics in the UK and North America (?) in the 1980s, I remember reading a paper that looked at a lot of opinion polling evidence that suggested that in the US and UK public opinion tended to move to the right on taxation and the size of government BEFORE 1979. During the 1980s, on average American and British opinion moved slightly to the left. This was used as evidence for the claim that the rhetorical powers of Reagan and Thatcher were much less important than people think, and that they were the result of changing public opinion, not the cause.

An alternative explanation could be done in terms of the tax effects and unemployment of inflation/disinflation: during the 1970s there was bracket-creep of income tax, whereas through most of the 1980s there was disinflation and indexation. Moving up tax-brackets quickly will naturally annoy voters, whereas during the 1980s the fall in inflation resulted in a rise in cyclical unemployment (due to the early 1980s recession) and structural unemployment (due to the rise in the real value of benefits) and so people's concerns were focused more on the social safety net.

Nick Rowe,

I always think that if Galbraith and Buckley could be good friends, the rest of us can at least be fairly civil with each other!

W. Peden: "as far as I know Friedman's reputation as an economist in Australia is not significantly different from elsewhere."

Two points: (1) I think Australian lecturers use American textbooks (I know Irish ones do). If American politics had taken a different course then the textbooks would be different and, in consequence, Friedman's reputation also. (2) To the extent that Australia does have a tradition of its own, I'd say neoclassical thinking holds less sway there than it does in the US. If I'm right about that, then Friedman probably suffers. Like Irving Fisher, he wasn't truly neoclassical but he tried to be, more than was wise. (In general, for reasons Krugman has often discussed, economists in smaller, more open economies are less likely to be receptive to Chicago ideas; it's hard to take the neutrality of money seriously if exchange rates impact your daily life.)

Nick: "But what about Lange and Lerner and the socialist planning debate?"

I'm not sure what you're getting at. I'd have thought that ties in quite well with what I'm saying. To the extent that that stuff was ever taken seriously, it was during the period when Hungary, for example, seemed to be doing reasonably well. This was an illusion which both the commies and the CIA fostered, for different reasons. So the politics led people to take GE theory more seriously than they should have done.

But as I say, you've lost me. Still, it's a good excuse to link to the best-ever title for a blog post:



That's because Joe Stalin won the debate, and Leon Trotsky lost.

Kevin Donoghue,

"If American politics had taken a different course then the textbooks would be different and, in consequence, Friedman's reputation also."

That's a bold counterfactual.

A bunch of points.

I was too terse in my response. By referencing Piketty I was not so much referring to his work but to the wealth disparities underlying it.

Inequality not being a major issue at that time was a mistake. In about 1970 Leo Johnson at Waterloo calculated that the bottom 10% of income earners in Canada reached a maximum share of total income in 1948. Downhill ever since. Inequality increased throughout the period, reaching higher into the distribution over time. This did not show up in mainstream stats (Statscan) because they used quintiles (minor effect) and household income (major effect). People responded to impoverishment by having more people (women) in the household go to work.

Friedman's error on inequality is sufficiently large to pretty much invalidate his entire work.

In the model building world Friedman does well, outside, not so much. There was a joke in Chile that the most elite unit in the military was 12 Chicago school economists. They could destroy ANYTHING.

Cuba's human rights record is not good. Pinochet's is much worse. Cuba never had desaparecidos.

Yes, Friedman won the ideology battle and millions of unemployed and underemployed are paying the price. Sidelining fiscal policy in favor of monetary policy to manage an economy has been a disaster for millions of unemployed. The Great Recession has proved that Friedman and Schwartz were wrong about the cause of the Great Depression. Friedman was wrong about the ability of monetary policy in the absence of fiscal stimulus and large enough automatic stabilizers to manage economic recovery from large downturns. Greenspan tried monetary policy without appropriate fiscal policy and blew up a housing bubble that eventually tanked the economy. If fiscal policy would have been used instead, the economy would be healthy. Thanks, Milton. Friedman ideology has paralyzed fiscal policy response to economic downturn ruining the lives of millions of long term unemployed. Adequate fiscal stimulus and job creation could have saved millions from misery and poverty.

Monetary policy alone is great for making the rich richer but it is grossly inadequate to manage an economy. Elitist economists can gloat over a win for their ideological side. The masses suffer the consequences.

I think I understand Nick. Advocates probably can get annoying for others who can't see it. I for one don't consider myself some big advocate for Piketty in any case.

Saying that I think that if advocates of Piketty get annoying so do some of his most determined opponents. I tend to agree with his policy proposal you mentioned above and I probably follow him in having more concern about inequality than average.

For me really it's less about even inequality than stagnation of the average guy's wages. I think there certainly has been a problem of wage stagnation where the average or median person has seen their standard of living flat line. I've tried to write about this myself.



Just so I'm clear it's less wage inequality than simply a lot aren't seeing their wages rise at all.

As for Piketty, he argues that the age of productivity may be over and that we're going to see much lower GDP in the future. I have certainly seen more than one economist make your complaint: that he doesn't understand productivity growth and interest rates well.

As I find his theory kind of depressing it may not be a bad thing if that's true. Do you disagree with his conclusions about slowing growth?

Humble I/O guy joining late and hoping to be not that irrelevant...
Marxism influential? Maybe among those without influence. Being influential among sociologist or litterature majors is about as funny as those Joan Collins mini-series where she fought nazi war criminals by opening a haute couture shop.
Passing a law where prices must rise by 2% a year? 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?

My recollections from the time (PhD in 1970) was that the arguments for wage and price controls, fixed exchange rates, and airline/trucking price regulation were pushed by non-economist politicians and resisted by economists (granted, often with less than Friedmanite vigor). And I was sort of surprised to learn that Galbraith (whom I had read in the '60's) was an economist.


There is nothing in Friedman's views or those of his descendants, the NGDPLTers that implies that "fiscal policy" -- rising fiscal deficits during a recession -- should not occur. As the monetary authority pursues returning NGDP to its trend level, interest rates on long-term government bonds will fall. With lowering borrowing rates, standard microeconomic investment theory says governments should start investing more in projects with present costs and future benefits. That this common sense outcome is opposed by VSP (and once they hear about it and understand what it means, VSP won't like NGDPLT either) is not the fault of Milton Friedman.

Blindly adducing that the right won the argument and obliquely insulting Krugman is childish and not an argument.

The right have made arguments about inflation for the past 5 years and been proved wrong. Austerity has been proved disastrous.

If you're going to make an argument, make one. Show charts, graphs.

You sound like an amateur.

Oh, and Galbraith's son has WAY more influence than a nobody like you.

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.

About 10 years ago I picked-up JKG last "The Economics of Innocent Fraud" in an airport bookstore. I wish more lefties would read it. Especially the part where he disabuses the reader of the notion that shareholders matter to (large) corporations. If more lefties understood that labor and capital have a common enemy in the form of a management class who are extracting rents on a massive scale - money that rightly belongs to labour and owners (e.g. Grannies pension fund) - we might make some headway with that thing Piketty is so concerned about.

Patrick: not the first time the mayor of the palace usurped the throne.

W. Peden: "I always think that if Galbraith and Buckley could be good friends, the rest of us can at least be fairly civil with each other!"

Yes, just imagine! Two white successful males from OPPOSITE sides of the Ivy Curtain! Such comity! I suppose they found common ground when they noticed that each other held his fork in the same hand when cutting his lamb chop.

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.


> 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.

I like to think of it as an increase in the period of dependency.

Automation has acted more to supplant low-skill jobs than high-skill jobs. This is sensible, but it means that a person must have more and longer training to be qualified for the "average" job.

Think of it historically: a century ago the barest literacy was nice but ultimately optional for farm-labourers. A few generations ago any amount of secondary education left one qualified for factory work. One generation ago a high school diploma sufficed for clerical work. Now, a student isn't qualified for the mainstream job market until their early or mid 20s, after either postsecondary education or an apprenticeship.

However, our societal standards have not kept pace with this change. We generally expect children to be more or less self-sufficient by their early twenties, even if they're still in schooling or training, yet they'll most likely lack self-generated income to that effect.

Consumption smoothing makes this problem worse, in that it encourages the youth to take on substantial debt to finance their living and training expenses. This can ultimately work out just fine (just ask the average doctor), but it puts a segment of society in a highly-leveraged position.

So don't think of the economy as cutting "the number of good-paying jobs" in the abstract, since "good-paying job" is not an independent category. Think instead of the supply and demand for labour: we still expect youth to earn independent incomes, but we have little need for unskilled labour. Of course those wages will in turn be low.

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:


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:


(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.

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:


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:


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-


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:


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.

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.)

> 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.

Interestingly, I think this rule would have run into difficulties in just the same way that the Fed and ECB have had problems. 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.

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-


(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-


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.:

Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

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:

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

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.

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