My Milton Friedman Problem

In my previous post , I discussed Keynes’s perplexing and problematic criticism of the Fisher equation in chapter 11 of the General Theory, perplexing because it is difficult to understand what Keynes is trying to say in the passage, and problematic because it is not only inconsistent with Keynes’s reasoning in earlier writings in which he essentially reproduced Fisher’s argument, it is also inconsistent with Keynes’s reasoning in chapter 17 of the General Theory in his exposition of own rates of interest and their equilibrium relationship. Scott Sumner honored me with a whole post on his blog which he entitled “Glasner on Keynes and the Fisher Effect,” quite a nice little ego boost.

After paraphrasing some of what I had written in his own terminology, Scott quoted me in responding to a dismissive comment that Krugman recently made about Milton Friedman, of whom Scott tends to be highly protective. Here’s the passage I am referring to.

PPS.  Paul Krugman recently wrote the following:

Just stabilize the money supply, declared Milton Friedman, and we don’t need any of this Keynesian stuff (even though Friedman, when pressured into providing an underlying framework, basically acknowledged that he believed in IS-LM).

Actually Friedman hated IS-LM.  I don’t doubt that one could write down a set of equilibria in the money market and goods market, as a function of interest rates and real output, for almost any model.  But does this sound like a guy who “believed in” the IS-LM model as a useful way of thinking about macro policy?

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

It turns out that IS-LM curves will look very different if one moves away from the interest rate transmission mechanism of the Keynesians.  Again, here’s David:

Before closing, I will just make two side comments. First, my interpretation of Keynes’s take on the Fisher equation is similar to that of Allin Cottrell in his 1994 paper “Keynes and the Keynesians on the Fisher Effect.” Second, I would point out that the Keynesian analysis violates the standard neoclassical assumption that, in a two-factor production function, the factors are complementary, which implies that an increase in employment raises the MEC schedule. The IS curve is not downward-sloping, but upward sloping. This is point, as I have explained previously (here and here), was made a long time ago by Earl Thompson, and it has been made recently by Nick Rowe and Miles Kimball.I hope in a future post to work out in more detail the relationship between the Keynesian and the Fisherian analyses of real and nominal interest rates.

Please do.  Krugman reads Glasner’s blog, and if David keeps posting on this stuff then Krugman will eventually realize that hearing a few wisecracks from older Keynesians about various non-Keynesian traditions doesn’t make one an expert on the history of monetary thought.

I wrote a comment on Scott’s blog responding to this post in which, after thanking him for mentioning me in the same breath as Keynes and Fisher, I observed that I didn’t find Krugman’s characterization of Friedman as someone who basically believed in IS-LM as being in any way implausible.

Then, about Friedman, I don’t think he believed in IS-LM, but it’s not as if he had an alternative macromodel. He didn’t have a macromodel, so he was stuck with something like an IS-LM model by default, as was made painfully clear by his attempt to spell out his framework for monetary analysis in the early 1970s. Basically he just tinkered with the IS-LM to allow the price level to be determined, rather than leaving it undetermined as in the original Hicksian formulation. Of course in his policy analysis and historical work he was not constained by any formal macromodel, so he followed his instincts which were often reliable, but sometimes not so.

So I am afraid that my take may on Friedman may be a little closer to Krugman’s than to yours. But the real point is that IS-LM is just a framework that can be adjusted to suit the purposes of the modeler. For Friedman the important thing was to deny that that there is a liquidity trap, and introduce an explicit money-supply-money-demand relation to determine the absolute price level. It’s not just Krugman who says that, it’s also Don Patinkin and Harry Johnson. Whether Krugman knows the history of thought, I don’t know, but surely Patinkin and Johnson did.

Scott responded:

I’m afraid I strongly disagree regarding Friedman. The IS-LM “model” is much more than just the IS-LM graph, or even an assumption about the interest elasticity of money demand. For instance, suppose a shift in LM also causes IS to shift. Is that still the IS-LM model? If so, then I’d say it should be called the “IS-LM tautology” as literally anything would be possible.

When I read Friedman’s work it comes across as a sort of sustained assault on IS-LM type thinking.

To which I replied:

I think that if you look at Friedman’s responses to his critics the volume Milton Friedman’s Monetary Framework: A Debate with his Critics, he said explicitly that he didn’t think that the main differences among Keynesians and Monetarists were about theory, but about empirical estimates of the relevant elasticities. So I think that in this argument Friedman’s on my side.

And finally Scott:

This would probably be easier if you provided some examples of monetary ideas that are in conflict with IS-LM. Or indeed any ideas that are in conflict with IS-LM. I worry that people are interpreting IS-LM too broadly.

For instance, do Keynesians “believe” in MV=PY? Obviously yes. Do they think it’s useful? No.

Everyone agrees there are a set of points where the money market is in equilibrium. People don’t agree on whether easy money raises interest rates or lowers interest rates. In my view the term “believing in IS-LM” implies a belief that easy money lowers rates, which boosts investment, which boosts RGDP. (At least when not at the zero bound.) Friedman may agree that easy money boosts RGDP, but may not agree on the transmission mechanism.

People used IS-LM to argue against the Friedman and Schwartz view that tight money caused the Depression. They’d say; “How could tight money have caused the Depression? Interest rates fell sharply in 1930?”

I think that Friedman meant that economists agreed on some of the theoretical building blocks of IS-LM, but not on how the entire picture fit together.

Oddly, your critique of Keynes reminds me a lot of Friedman’s critiques of Keynes.

Actually, this was not the first time that I provoked a negative response by writing critically about Friedman. Almost a year and a half ago, I wrote a post (“Was Milton Friedman a Closet Keynesian?”) which drew some critical comments from such reliably supportive commenters as Marcus Nunes, W. Peden, and Luis Arroyo. I guess Scott must have been otherwise occupied, because I didn’t hear a word from him. Here’s what I said:

Commenting on a supremely silly and embarrassingly uninformed (no, Ms. Shlaes, A Monetary History of the United States was not Friedman’s first great work, Essays in Positive Economics, Studies in the Quantity Theory of Money, A Theory of the Consumption Function, A Program for Monetary Stability, and Capitalism and Freedom were all published before A Monetary History of the US was published) column by Amity Shlaes, accusing Ben Bernanke of betraying the teachings of Milton Friedman, teachings that Bernanke had once promised would guide the Fed for ever more, Paul Krugman turned the tables and accused Friedman of having been a crypto-Keynesian.

The truth, although nobody on the right will ever admit it, is that Friedman was basically a Keynesian — or, if you like, a Hicksian. His framework was just IS-LM coupled with an assertion that the LM curve was close enough to vertical — and money demand sufficiently stable — that steady growth in the money supply would do the job of economic stabilization. These were empirical propositions, not basic differences in analysis; and if they turn out to be wrong (as they have), monetarism dissolves back into Keynesianism.

Krugman is being unkind, but he is at least partly right.  In his famous introduction to Studies in the Quantity Theory of Money, which he called “The Quantity Theory of Money:  A Restatement,” Friedman gave the game away when he called the quantity theory of money a theory of the demand for money, an almost shockingly absurd characterization of what anyone had ever thought the quantity theory of money was.  At best one might have said that the quantity theory of money was a non-theory of the demand for money, but Friedman somehow got it into his head that he could get away with repackaging the Cambridge theory of the demand for money — the basis on which Keynes built his theory of liquidity preference — and calling that theory the quantity theory of money, while ascribing it not to Cambridge, but to a largely imaginary oral tradition at the University of Chicago.  Friedman was eventually called on this bit of scholarly legerdemain by his old friend from graduate school at Chicago Don Patinkin, and, subsequently, in an increasingly vitriolic series of essays and lectures by his then Chicago colleague Harry Johnson.  Friedman never repeated his references to the Chicago oral tradition in his later writings about the quantity theory. . . . But the simple fact is that Friedman was never able to set down a monetary or a macroeconomic model that wasn’t grounded in the conventional macroeconomics of his time.

As further evidence of Friedman’s very conventional theoretical conception of monetary theory, I could also cite Friedman’s famous (or, if you prefer, infamous) comment (often mistakenly attributed to Richard Nixon) “we are all Keynesians now” and the not so famous second half of the comment “and none of us are Keynesians anymore.” That was simply Friedman’s way of signaling his basic assent to the neoclassical synthesis which was built on the foundation of Hicksian IS-LM model augmented with a real balance effect and the assumption that prices and wages are sticky in the short run and flexible in the long run. So Friedman meant that we are all Keynesians now in the sense that the IS-LM model derived by Hicks from the General Theory was more or less universally accepted, but that none of us are Keynesians anymore in the sense that this framework was reconciled with the supposed neoclassical principle of the monetary neutrality of a unique full-employment equilibrium that can, in principle, be achieved by market forces, a principle that Keynes claimed to have disproved.

But to be fair, I should also observe that missing from Krugman’s take down of Friedman was any mention that in the original HIcksian IS-LM model, the price level was left undetermined, so that as late as 1970, most Keynesians were still in denial that inflation was a monetary phenomenon, arguing instead that inflation was essentially a cost-push phenomenon determined by the rate of increase in wages. Control of inflation was thus not primarily under the control of the central bank, but required some sort of “incomes policy” (wage-price guidelines, guideposts, controls or what have you) which opened the door for Nixon to cynically outflank his Democratic (Keynesian) opponents by coopting their proposals for price controls when he imposed a wage-price freeze (almost 42 years ago on August 15, 1971) to his everlasting shame and discredit.

Scott asked me to list some monetary ideas that I believe are in conflict with IS-LM. I have done so in my earlier posts (here, here, here and here) on Earl Thompson’s paper “A Reformulation of Macroeconomic Theory” (not that I am totally satisfied with Thompson’s model either, but that’s a topic for another post). Three of the main messages from Thompson’s work are that IS-LM mischaracterizes the monetary sector, because in a modern monetary economy the money supply is endogenous, not exogenous as Keynes and Friedman assumed. Second, the IS curve (or something corresponding to it) is not negatively sloped as Keynesians generally assume, but upward-sloping. I don’t think Friedman ever said a word about an upward-sloping IS curve. Third, the IS-LM model is essentially a one-period model which makes it difficult to carry out a dynamic analysis that incorporates expectations into that framework. Analysis of inflation, expectations, and the distinction between nominal and real interest rates requires a richer model than the HIcksian IS-LM apparatus. But Friedman didn’t scrap IS-LM, he expanded it to accommodate expectations, inflation, and the distinction between real and nominal interest rates.

Scott’s complaint about IS-LM seems to be that it implies that easy money reduces interest rates and that tight money raises rates, but, in reality, it’s the opposite. But I don’t think that you need a macro-model to understand that low inflation implies low interest rates and that high inflation implies high interest rates. There is nothing in IS-LM that contradicts that insight; it just requires augmenting the model with a term for expectations. But there’s nothing in the model that prevents you from seeing the distinction between real and nominal interest rates. Similarly, there is nothing in MV = PY that prevented Friedman from seeing that increasing the quantity of money by 3% a year was not likely to stabilize the economy. If you are committed to a particular result, you can always torture a model in such a way that the desired result can be deduced from it. Friedman did it to MV = PY to get his 3% rule; Keynesians (or some of them) did it to IS-LM to argue that low interest rates always indicate easy money (and it’s not only Keynesians who do that, as Scott knows only too well). So what? Those are examples of the universal tendency to forget that there is an identification problem. I blame the modeler, not the model.

OK, so why am I not a fan of Friedman’s? Here are some reasons. But before I list them, I will state for the record that he was a great economist, and deserved the professional accolades that he received in his long and amazingly productive career. I just don’t think that he was that great a monetary theorist, but his accomplishments far exceeded his contributions to monetary theory. The accomplishments mainly stemmed from his great understanding of price theory, and his skill in applying it to economic problems, and his great skill as a mathematical statistician.

1 His knowledge of the history of monetary theory was very inadequate. He had an inordinately high opinion of Lloyd Mints’s History of Banking Theory which was obsessed with proving that the real bills doctrine was a fallacy, uncritically adopting its pro-currency-school and anti-banking-school bias.

2 He covered up his lack of knowledge of the history of monetary theory by inventing a non-existent Chicago oral tradition and using it as a disguise for his repackaging the Cambridge theory of the demand for money and aspects of the Keynesian theory of liquidity preference as the quantity theory of money, while deliberately obfuscating the role of the interest rate as the opportunity cost of holding money.

3 His theory of international monetary adjustment was a naïve version of the Humean Price-Specie-Flow mechanism, ignoring the tendency of commodity arbitrage to equalize price levels under the gold standard even without gold shipments, thereby misinterpreting the significance of gold shipments under the gold standard.

4 In trying to find a respectable alternative to Keynesian theory, he completely ignored all pre-Keynesian monetary theories other than what he regarded as the discredited Austrian theory, overlooking or suppressing the fact that Hawtrey and Cassel had 40 years before he published the Monetary History of the United States provided (before the fact) a monetary explanation for the Great Depression, which he claimed to have discovered. And in every important respect, Friedman’s explanation was inferior to and retrogression from Hawtrey and Cassel explanation.

5 For example, his theory provided no explanation for the beginning of the downturn in 1929, treating it as if it were simply routine business-cycle downturn, while ignoring the international dimensions, and especially the critical role played by the insane Bank of France.

6 His 3% rule was predicated on the implicit assumption that the demand for money (or velocity of circulation) is highly stable, a proposition for which there was, at best, weak empirical support. Moreover, it was completely at variance with experience during the nineteenth century when the model for his 3% rule — Peel’s Bank Charter Act of 1844 — had to be suspended three times in the next 22 years as a result of financial crises largely induced, as Walter Bagehot explained, by the restriction on creation of banknotes imposed by the Bank Charter Act. However, despite its obvious shortcomings, the 3% rule did serve as an ideological shield with which Friedman could defend his libertarian credentials against criticism for his opposition to the gold standard (so beloved of libertarians) and to free banking (the theory of which Friedman did not comprehend until late in his career).

7 Despite his professed libertarianism, he was an intellectual bully who abused underlings (students and junior professors) who dared to disagree with him, as documented in Perry Mehrling’s biography of Fischer Black, and confirmed to me by others who attended his lectures. Black was made so uncomfortable by Friedman that Black fled Chicago to seek refuge among the Keynesians at MIT.


32 Responses to “My Milton Friedman Problem”

  1. 1 Ritwik August 1, 2013 at 3:39 pm


    Will read your LONG (and I’m sure AWESOME) post fully later, but just a quick note. When challenged by Tobin during the whole slope-of-LM-curve debate of the early 70s, Friedman essentially replied with a framework that when translated into IS/LM implied a horizontal IS curve.

    Tobin’s response to this (to which Friedman never responded) was one of surprise – he said that yes, a horizontal IS would indeed produce all the substantive results of a vertical LM – and then, of dismissal. You should read that article if you haven’t already – I believe it’s called ‘Is Milton Friedman a Monetarist’.

    Later, Tobin would write up his own macro-models with IS/LM extensions, which featured *stock* WW’ curves, which indeed sloped upwards. I believe these are similar to the Thompson FF’ curve and Sargent KI curve (that MIles K refers to), though those two deal with factors of production while Tobin tried to model the financial assets that represent claims on those factors of production.


  2. 2 Luis August 1, 2013 at 3:51 pm

    As always, very brilliant David. You are a permanent source of clarification. Thanks.


  3. 3 Luis August 1, 2013 at 4:02 pm

    By The way, I think the (insolvable) problem between Keynes and Monetarists is the abyss Bt the saving interest rate and the MEC. If I don’t be wrong, Friedman’s model was base in the Natural interest rate, Which Keynes reject.
    In this moment I believe Keynes was right. At least more than Friedman.


  4. 4 Benjamin Cole August 2, 2013 at 3:22 am

    Glasner, with this one post, has caused me to re-assess Friedman.

    Yes, he was a wonderful thinker…but also a bit popularist.

    Anyway, what it comes down to in the present case: Print a lot more money.


  5. 6 David Glasner August 2, 2013 at 1:33 pm

    Ritwik, Are you talking about the back and forth in Milton Friedman’s Monetary Framework: A Debate with his Critics? I haven’t read Tobin’s article, but will look for it. Do you have a reference for the Tobin article you mention at the end of your comment?

    Luis, Thank you. Interesting that Friedman talked about a natural unemployment rate, but never, to my knowledge, mentioned the natural interest rate.

    Benjamin, Friedman, like most of us, had his good points and bad points.

    aldreym, Actually Keynes supported FDR’s devaluation of gold, and supported FDR’s refusal to agree to a quick restoration of the gold standard at the international monetary conference at London in July 1933, saying that FDR was not only right, “but magnificently right.” Then FDR proceeded to snatch defeat from the jaws of victory by implementing the NIRA.


  6. 7 aldreym August 2, 2013 at 3:45 pm

    @DavidG That’s because Keynes was a monetarist once (You should know that) we don’t discussing about what they think in their earliers works, for instance, he once said that the only monetary regime that was worse than a pure gold standard was a pure fiat money regime, when FDR finally gave in to pressure from people like Keynes, and stopped devaluing the dollar, Keynes congratulated him for ignoring the advice of the extreme inflationists.

    To understand Keynes, I always like this anecdote about his reaction to a question by Abba Lerner.

    “…Lerner recalled putting the matter to Keynes in Washington in 1946, at the time of BrettonWoods: “Mr. Keynes, why don’t we forget all this business of fiscal policy, public debt, and all those things and have some printing presses?” To which Keynes replied: “It’s the art of statesmanship to tell lies, but they must be plausible lies” (Colander, David. 1984. Was Keynes a Keynesian or a Lernerian? J. Econ. Lit. 22(Dec.):1572-75.p. 1574)).
    (Kenneth Arrow heard a somewhat different version from Paul Baran, who remembers Keynes’s reply as, “Mr. Lerner, how many times do I have to remind you that you cannot run a government on transparent humbug?”)”
    (cited from Biographical Memoirs V.64, p.208-231: ABBA PTACHYA LERNER by DAVID S. LANDES)

    Keynes thought all hell would break loose if people saw money as something which has no inherent value or isn’t backed up by something which is sawn a having inherent value like gold. Since Keynes knew quite well that money (or gold) has no (or only a very small) inherent value apart from being the medium of exchange, people have to be tricked into believing this. Fiscal policy does the trick, monetary policy does not. It’s like the difference between a good and a bad magic trick.

    Friedman as you know got it right on his final work, and Keynes as you know got it wrong.


  7. 8 EconPerspective (@EconPerspective) August 2, 2013 at 4:10 pm

    It’s like if you just remember one side of the Keynes way of thinking and the one side of the Friedman way of thinking. In my opinion the post is worthless because I can use the same arguments against Keynes and Fisher and even Mises or Marx. all economists have influences for previous works and there’s nothing wrong with that.


  8. 9 Luis August 2, 2013 at 4:23 pm

    David, you are wrong. See

    Click to access 58.1.1-17.pdf

    “Tlhanks to Wicksell, we are all acquainted with the concept of a
    “natural”rate of interest and the possibility of a discrepancy between the “natural”and the “market”rate. The preceding analysis of interest rates can be translated fairly directly into Wickse]lian terms.”


  9. 10 Paul August 2, 2013 at 5:34 pm

    “But, Fischer, there is a ton of evidence that money causes prices!” Friedman would insist. “Name one piece,” Fischer would respond. … All the while he was taking on Friedman, Fischer was also pressing hard on Merton Miller and Charles Upton to treat their subject more fundamentally in their macroeconomics book.

    Fischer doesn’t sound too oppressed here. Everyone agrees that Friedman was a fierce debater, and blunt in the classroom. Does that count as being an intellectual bully? How did he change the minds of so many students then, if that’s all he was? Was this a Professor Kingsfield deal?


  10. 11 Niklas Blanchard August 3, 2013 at 12:37 am

    Is it useless to note that Black never found refuge among the Keynesians at MIT?


  11. 12 dajeeps August 3, 2013 at 1:28 am

    I don’t believe Friedman’s works to be mere samplings of stolen generalities. He took the ideas he discussed 3/4 of the way, doing the work it took to put the meat on the bones and also to sell ideas that were previously rejected to the peril of multitudes. He deserves the credit he got because ideas are only ideas until put into practice. Results matter, dusty papers on shelf do not.


  12. 13 Blue Aurora August 3, 2013 at 2:47 am

    I’m glad to see another reminder that one can’t paint all advocates of the Quantity Theory of Money with the same paintbrush. (The paint on the brush being the colour of a fanatical and uncritically-devoted follower of Milton Friedman, which David Glasner clearly is not.)

    BTW, David Glasner…you briefly mention the 19th Century Controversy between the Banking School and the Currency School in Great Britain in this post. Sorry to pester you, but I would like your thoughts in response to the following comment I made a short while back, please.

    Also, I think that this post by J.P. Koning from March 2012 is interesting.


  13. 14 Luis August 3, 2013 at 5:02 pm

    In short, not only Friedman mencioned the NIR, but he link it strongly with his UNR..

    Click to access 58.1.1-17.pdf


  14. 15 David Glasner August 3, 2013 at 9:46 pm

    aldreym, I’m not sure what the argument is here, I merely pointed out that Keynes supported FDR’s devaluation of the dollar when FDR asserted that his goal was to raise US prices back to their level in 1926. The exchange between Keynes and Lerner is very interesting (in either version). Thanks for sharing.

    EconPerspective, I am not arguing on behalf of Keynes. I don’t think any literate reader of this blog would conclude that I am a Keynesian.
    Luis, And you are right. I forgot about that passage. Thanks for correcting me.

    Paul, I didn’t say that he was oppressed. I said that he was bullied; I didn’t say that he was cowed. Here are the two paragraphs (p. 158) above the one that you quoted from:

    “Friedman’s Workshop in Money and Banking was the most famous workshop at Chicago, and special rules applied. You had to have Friedman’s permission to attend, and one of the requirements for attendance was to offer work of your own for discussion by the other members of the workshop. Furthermore, in Friedman’s workshop presentation was limited to just a few minutes at the beginning. Everyone was expected to have read the paper already, and to have come prepared to discuss it. Friedman himself always led off the discussion, framing the issues that he thought most needed attention.

    “Into the lion’s den went Fischer with the very paper that Friedman had dismissed as fallacious. Jim Lorrie recalls, ‘It was like an infidel going to St. Peter’s and announcing that all this stuff about Jesus was wrong.” Friedman led off the discussion: “Fischer Black will be presenting his paper today on money in a two-sector model. We all know that the paper is wrong. We have two hour to work out why it is wrong.” And so it began. But after two hours of defending the indefensible, Fischer emerged bloodied but unbowed. As one participant remembers, the final score was Fischer Black 10, Monetary Workshop 0.”

    Niklas, Again my memory has played tricks on me. Dipping into Mehriling’s biography, I see that Black left Chicago for family reasons not because of Friedman. And you are right that he was not happier at MIT than at Chicago.

    dajeeps, I agree that Friedman deserves credit, but I think that there is a lot to criticize in his work.

    Blue Aurora, You are right that there is a resemblance between the theory of endogenous money and versions of the real bills doctrine. Have a look at my papers on “the real bills doctrine in the light of the law of reflux “, “Classical monetary theory and the quantity theory of money” and “Monetary disequlibrium and the demand for money in Ricardo and Thornton.”


  15. 16 AldreyM August 4, 2013 at 2:04 pm

    The only argument that hasn’t been debunked yet its that Friedman was a bully. Now I remember a debate in the public Iceland TV of Friedman against 3 social-democrats, the debate last an hour and even in that situation Friedman clearly won. But obviously Friedman is the bully just because he’s more smart.


  16. 17 AldreyM August 4, 2013 at 2:21 pm

    What I’m trying to say is that you cannot be smart and not be a bully. I think you should look how bully Krugman can be sometimes.


  17. 18 Blue Aurora August 5, 2013 at 5:10 am

    Blue Aurora, You are right that there is a resemblance between the theory of endogenous money and versions of the real bills doctrine. Have a look at my papers on “the real bills doctrine in the light of the law of reflux “, “Classical monetary theory and the quantity theory of money” and “Monetary disequlibrium and the demand for money in Ricardo and Thornton.”

    David Glasner: I was able to get a copy of the first piece and the third piece over the web, but since I’m not at a university, I wasn’t able to access your second piece…could you please provide a way for me to access a copy somehow?

    However, the interesting thing I’ve noticed is that apart from brief references in the scholarly literature of Post-Keynesian economics, there is not extensive comparison between the Real Bills Doctrine and Post-Keynesian formulations of “Endogenous Money”.

    Nicholas Kaldor’s Scourge of Monetarism does not mention either the RBD or the Banking School v. Currency School Controversy. Through the grapevine, I hear that Matthew Smith, a historian of economics who is inclined to Post-Keynesianism, has written a book on Thomas Tooke before – although I don’t know if he mentions the RBD.

    Somebody ought to do a comparison-and-contrast eventually…

    However, how many varieties of the RBD are there?

    Also, doesn’t your limited degree of sympathy for endogenous money technically make you aligned with the RBD?


  18. 19 robert waldman August 6, 2013 at 6:30 pm

    Here you correctly note that the price level was taken as given by Hicks rather than Keynes in the GT.

    Solow and Samuelson (in the famous paper 1960 in the AEA papers and procedings) argued that there can’t be a liquidity trap due to the Pigou effect. Like Keynes, they argued that depressions couldn’t last forever.

    I’d be very interested to know if you can find anything written by Friedman about unemployment and inflation which isn’t there in Samuelson Solow (1960). In contrast, Samuelson and Solow (1960) note that cyclical unemployment can become structural. Friedman ignored this possibility in 1968. It was quite a hot topic in 1985 when OJ Blanchard and Samuelson’s nephew dusted off the concept and named it “hysteresis”.

    The Friedman Samuelson Solow Pigou effect argument against the liquidity trap depends entirely on the undefended and indefensible assumption that the marginal propensity to consume out of wealth is higher for nominal creditors than for nominal debtors. This silly idea is possible if one first simplifies by assuming there are two agents — the public sector and the private sector.

    Also the Pigou effect depends on assuming Ricardian non equivalence. Friedman asserted both that Pigou’s argument against the liquidity trap is obviously correct and also that “to spend is to tax.” I am sure that he was smart enough to notice the contradiction. I think he chose not to mention it because of intellectual dishonesty.


  19. 20 David Glasner August 7, 2013 at 7:16 pm

    AldreyM, Well, you are entitled to your opinion about what has and has not been debunked, but I think that everyone can make up his or her own mind about that without your pronouncement. At any rate, about bullying, the passage that I quoted from Mehrling’s biography quoting from Friedman’s introduction of Black at the Money Workshop seems dispositive to me. But perhaps I am too sensitive.

    Blue Aurora, Sorry, I don’t have a way unless you send me your mailing address and I can send you an offprint. However, the first and second papers were both published in HOPE so if you can access the first you should be able to access the second which was published about eight years later.

    You are right that there is a similarity between what the post-Keynesians call endogenous money and what I refer to as the law of reflux. Perhaps one day I will try to analyze that systematically. Mike Sproul like to think in terms of the real bills doctrine, I prefer to think in terms of the law of reflux, but we seem to be getting at the same idea.

    Robert, I agree that the Pigou Effect was not as big a deal as it was made out to be in the 1930s and 1940s. I actually don’t know how much time Friedman spent discussing it either in his lectures or in his writings. It would be interesting to look into that, but I am not promising


  20. 21 Bill Woolsey August 10, 2013 at 7:27 am

    The Pigou effect only works with outside money. With commodity money, like a gold standard, gold is outside money. Fiat money is less clear. If, like Friedman, you frame the matter as one of the quantity of money, and in particular, assume that the quantity of the fiat currency is either fixed or always grows at some particular rate, then characterizing the paper money as if it were paper gold seems reasonable. That is, the fiat currency is outside money that generates a Pigou effect.

    I happen to have a special interest in pure inside monetary systems, which have no Pigou effect. All money takes the form of either deposits or banknotes. They are wealth to those holding them but liabilities to those issuing them.

    Government issued hand-to-hand currency subject to an inflation target is more of a grey area. I think a Pigou effect does “violate” Ricardian equivalence. But that is not problem with me. I don’t believe in Ricardian equivalence.

    As a matter of history, Keynes was thinking of a gold standard and the Pigou effect applies. Gold is wealth to the holder and a liability to no one. Lower prices enough, and raise the real value of gold enough, and real consumption will rise enough so that there is enough real demand to purchase everything that can be produced.

    By the way, I also think that Friedman assumed the IS curve is horizontal. It fits in pretty well with old Chicago views about the interest depending on the marginal product of capital, Knight’s view.


  21. 22 Tas von Gleichen August 17, 2013 at 3:50 am

    How do you always have so much time to write so much? I would take forever.


  22. 23 Nathan Towne November 16, 2020 at 8:03 am

    Krugman’s quote here is far more applicable to Market Monetarism, as espoused by Scott Sumner, than to classical monetarism, espoused by Milton Friedman.

    Friedman’s view was really very different and is what we basically do today, i.e. that monetary policy should target the stability of monetary aggregates, protecting a stable foundation upon which markets can go to work. His foremost proposal was to do this by targeting specifically the rate of growth of the total money stock per unit of output. The same fundamental objective is attained today, largely through direct price targeting, at a very low level of inflation, which, consequently, results in control of the the rate of growth of the total money stock per unit of output.

    Market Monetarism, as championed by someone like Scott Sumner is much closer to what Krugman is detailing, despite the obvious differences pertaining to the use of IS/LM, in that Market Monetarism is essentially monetary supremacy, counter-cyclical, demand management. That is a very different thing than what Friedman espoused, I think.


  23. 24 Nathan Towne November 23, 2020 at 1:21 pm

    Nevermind. I think that I misunderstood initially what Krugman was saying here.


  24. 25 Nathan Towne December 13, 2020 at 1:52 pm

    Yeah, after reading it again, I misunderstood what Krugman was saying.

    What Milton said was that the problem is that money demand is sufficiently stable, in terms of being influenced by inflation and deflation, to the extent that the alteration in expectations is greater than the alteration in incentives. Therefore, in terms of judging the effects of monetary policy, we can operate as if fluctuations in the rate of inflation and deflation are only impacting expectations. Therefore, counter-cyclical monetary policy intended to stimulate demand will ultimately fail and monetary policy should be based on underlying stability, first and foremost, price stability. This is what monetarism really is. Krugman’s definition, in which the Fed only tries to do so via targeting the rate of growth of the money stock directly, is simply not an accurate definition of monetarism. So, yes, Krugman is, in part, correct.

    However, there is, I think, absolutely no question that this conclusion is correct. Nor is there any question that stability of monetary aggregates, whether via targeting the rate of growth of the money stock directly, or indirectly via price targeting, is a necessary condition to economic stability. Furthermore, the monetary authority, at all times, has the power to control these factors. This has also been proven correct, I think.

    Milton did not say that it was, in itself, a sufficient condition. He said that it was the fundamental, necessary condition.


  25. 26 Nathan Towne December 13, 2020 at 2:32 pm

    So, what Milton actually said was that the money stock is the core factor relating to economic stability, at which point, recessions and contractions, over time, become something which is much less of a threat. He did not say that other factors can induce recessions. Such a position is obviously silly, as the extreme case of the socialization of industry would obviously produce a shock of a large enough scale to induce a severe recession, not to mention it’s longer term consequences. What Milton said is that stability of monetary aggregates is the core, essential component in economic stability. This has proven correct.

    Now, Milton also did not say that fiscal policy did not affect the rate of growth of the economy. He always said that, of course, it did.

    As far as the challenge to Keynesianism is concerned, Krugman is seriously understating the scale of the differences, especially regarding prices and interest rates.


  1. 1 TheMoneyIllusion » Friedman was not a Keynesian Trackback on August 1, 2013 at 6:48 pm
  2. 2 Advocates of Reason: 5 August 2013 | Economic Thought Trackback on August 5, 2013 at 8:00 am
  3. 3 Second Thoughts on Friedman | Uneasy Money Trackback on August 5, 2013 at 9:34 pm
  4. 4 Isn’t Economic History grand | TVHE Trackback on August 8, 2013 at 1:01 pm
  5. 5 What Would Uncle Miltie Say? | Van Wallach's Blog Trackback on October 26, 2014 at 8:15 pm
  6. 6 Milton Friedman, Monetarism, and the Great and Little Depressions | Uneasy Money Trackback on March 31, 2015 at 2:48 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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