Nick Rowe Goes Bonkers over Milton Friedman

Nick Rowe, usually a very cool guy, recently wrote a gushing post about the awesomeness of Milton Friedman. How uncool of him. As followers of this blog may know, even though I like free markets, am skeptical of big government programs, believe that the business cycle is largely a monetary phenomenon, I am not a fan of Milton Friedman. So I am going to offer some comments about Nick’s panegyric to Friedman.

I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left.

Bob Lucas and Ned Prescott have not had as much influence on modern macroeconomics as Milton Friedman? I am less of a fan of  Lucas and Prescott than I am of Friedman, but surely Nick can’t be serious.

If you had a time machine, went back to (say) 1985, picked up Milton Friedman, brought him forward to 2015, and showed him the current debate over macroeconomic policy, he could immediately join right in. Is there anything important that would be really new to him?

We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right. Using the nominal interest rate as the monetary policy instrument is non-Friedmanite, but the new-fangled “Quantitative Easing” is just a silly new name for Friedmanite base-control.

Certainly Friedman looms large, and New Keynesianism is indeed a way of rationalizing the price and wage stickiness that Friedman, like so many others, relied on to account for the correlation between downward cyclical movements in nominal GDP, or in its rate of growth, and real GDP. To be sure the permanent-income hypothesis was a great achievement, for it wasn’t just Friedman’s, but the expectations-augmented Phillips Curve was anticipated by far too many people (including David Hume) for Friedman to be given very much credit. He certainly gave an influential statement of the reasoning behind the expectations-augmented Phillips Curve, but that hardly counts as a breakthrough. So of the three key elements of New Keynesianism for which Nick credits Friedman only one was (co-)invented by Friedman; the other two were promoted by Friedman, and he certainly influenced the profession, but they were ideas already out there, when he picked them up. And just what does Nick mean by “Friedmanite base-control?” That Friedman invented open-market operations? Good grief!

Then Nick waxes nostalgic:

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages.

And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Many economists unfortunately either supported, or did not forthrightly oppose, wage and price controls when they were imposed successively in the US, UK and Canada in the early 1970s. And Friedman was certainly right to oppose them, and deserves credit for speaking out eloquently against them. But their failure became palpable to most economists, and it is not as if Friedman required any special insight to see the underlying fallacy that Nick nicely articulates. He was just straightforwardly applying Econ 101.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

I hope zero, but are we indebted to Friedman for any argument against wage and price controls that was not understood by economists long before Friedman appeared on the scene?

Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.

Great men like Friedman require a great job to do, or else they can’t become great men. They also require an aristocracy, oligarchy, or monarchy, where only a few voices can get heard, or else they can’t become one of the few voices. The internet actually makes it harder to create great public intellectuals, which is probably a good thing, simply because it’s harder to stand out as great, when there’s lots of competition.

The right won the economics debate; left and right are just haggling over details. The big debate is no longer about economics (sadly for me); and it won’t be held on the pages of the New York Times or in the economics journals.

Actually I agree with Nick that Friedman was a great man and a great economist. He did make a difference, but the difference was not mainly the result of any important theoretical discoveries or contributions, his theory of the consumption function being his main theoretical contribution. Otherwise, he was a great applied and empirical economist, specializing in US monetary history, but his knowledge of the history of monetary theory was sketchy, causing him to make huge blunders in describing the quantity theory of money as a theory of the demand for money, and in suggesting that his 1956 restatement of the quantity theory was inspired by an imagined Chicago oral tradition, when, in fact, his restatement was a reworking of the Cambridge theory of the demand for money that Keynes had turned into his theory of liquidity preference. He hardly cited the work of earlier monetary theorists, aside from Keynes and Irving Fisher, completely ignoring the monetary theory of Hawtrey and Hawtrey’s monetary explanation of the Great Depression, which preceded Friedman’s by some 30 years. Friedman also wrote a famous paper repackaging a slightly dumbed down version of Karl Popper’s philosophy of science as the methodology of positive economics, without acknowledging Popper, an omission that he seems never to have been called on. But his industriousness and diligence were epic, he had a fine intellect and a true mastery of microeconomic theory, coupled with great empirical and statistical insight when applying theory. His ability to express himself cogently and forcefully in writing and in speech was remarkable, and he had a gift for strategic simplification, which unfortunately often led him to convenient oversimplification. Nor do I doubt that he was sincerely motivated by an idealistic dedication to his conception of free-market principles, which he expounded and defended tirelessly.

Nick seems to believe that because hardly any younger economists recognize then name J. K. Galbraith, and because no one any longer advocates imposing wage and price controls to control or speed up inflation, it is obvious that the right won the economics debate. I don’t entirely disagree with that, but I do think it is more complicated than that, the terms right and left being far too limited to portray a complex reality. Galbraith believed that the book he published in 1967 The New Industrial State was going to demonstrate the market economics was a snare and a delusion, because both the Soviet Union and the US were moving toward an economic system dominated by huge enterprises that engaged in long-term planning and were able to impose their plans on unwilling consumers and workers. The most devastating review of Galbraith’s book was published in the June 1968 edition of The Economic Journal by James Meade, an eminent British economist who had been a close disciple of Keynes at Cambridge, and was a kind of market socialist, or a self-described LibLaberal. The entire essay is worth reading, but I just want to highlight a few excerpts from it.

This argument for a national indicative plan is strangely overlooked by Professor Galbraith. Indeed, there is a great hiatus in his analysis of the economic system as a whole or, perhaps more accurately, in his implied analysis of what the economic system as a whole would be like when virtually the whole of it was controlled by large modern corporations. Professor Galbraith asserts that each modern corporation plans ahead the quantities of the various products which it will produce and the prices at which it will sell them; he assumes we will discuss this assumption later that as a general rule each corporation through its advertising and other sales activi-ties can so mould consumers’ demands that these planned quantities are actually sold at these planned prices. But he never explains why and by what mechanism these individual plans can be expected to build up into a coherent whole. . . .

In short, if all individual plans are to be simultaneously fulfilled they must in the first instance be consistent. But Professor Galbraith never considers this problem. It is a strange oversight in a modern professional economist-to overlook the problem of general, as contrasted with particular, equilibrium. (pp. 377-78)

Professor Galbraith writes always as if planning meant deciding in advance what should be produced and sold, in what quantities, at what cost and at what prices, and then taking effective steps to ensure that quantities and prices of inputs and outputs developed in precisely this way, and as if the market mechanism meant taking no thought for the morrow, taking no initiative in planning ahead the introduction of new products and processes, but just waiting for consumers to come to the firm and order a new car of such-and-such a bespoke design. It is by silly contrasts of this kind that Professor Galbraith pokes fun at his professional colleagues. (p. 382)

In the modern complex economy there are two major forces at work. One of these is that which Professor Galbraith rightly emphasises, namely the increased need for careful forward planning in a system which involves the commitment of large resources to inflexible uses over long periods of time.

But there is a second and equally important trend, which he entirely neglects: namely, the increased need in the modern industrial economy for a price mechanism, that is to say for reliance on a system of prices as a signaling device to indicate to producers and consumers what is and what is not scarce. This increased need for a price mechanism arises because in the modern industrial system input-output relationships have become so complex and the differentiation between products (many of which are the technically sophisticated inputs of other productive processes) has become so manifold that simple quantitative planning without a price or market mechanism becomes increasingly clumsy and inefficient. Moreover, this increased need for a signaling system through prices is occurring at a time when advances in mathematical economics and in the electronic and other technologies for measuring and metering have made a great extension of the price mechanism possible. Public authorities begin to make serious quantitative cost-benefit studies where previously pure hunches would have had to serve; and we nowadays seriously consider as, for example, in electronic metering devices for charging for the use of road space by motor vehicles-extensions of the use of pricing which would previously have been considered technologically impossible.

The particular brand of conventional wisdom which Professor Galbraith promotes in his recent book overlooks all these increased needs and opportunities for the use of the price mechanism. But many of the planned socialist societies are not falling into this error. Experiments which they are making in such devices as setting the maximisation of profit as the success criterion for the managers of socialised plants, in the direct use of the free market as in Yugoslavia, and generally in an increased reliance on price-mechanism indicators for many decentralised decisions constitute an undoubtedly significant development. The use of the price mechanism is, of course, not the same thing as the use of a market mechanism. A completely planned socialist economy could theoretically be run without any markets at all but with a complete system of “shadow prices” to measure relative scarcities and to be used as the decisive indicators for the adjustments to be made in the economy’s quantitative planned inputs and outputs. But in many, though not of course in all, cases an actual market mechanism will be found to be institutionally the best way of operating a price mechanism. There are many degrees and forms of such extensions of the market; for example, in some cases the prices at which transactions take place might be centrally controlled and adjusted, while in others they might be freely determined by supply and demand in the market. But in one form or an-other increased reliance on a price mechanism does imply increased reliance at least on something closely analogous to a market mechanism.

Professor Galbraith expressly denies that recent developments in the socialist countries have any significant connections with the use of the market as a controlling device. This denial would, by the uncouth, be called drivel-if I may be permitted to use Professor Galbraith’s own expression. But he has to hold this view simply because the socialist countries continue to plan while he, drawing no distinction between the price mechanism and a market mechanism, believes that one can have either planning or a market-price mechanism but not both. In fact, “planning and the price mechanism” not “planning or the price mechanism” should be a central theme of every modern economist’s work. (pp. 391-92)

In his 1977 Nobel Lecture, as Marcus Nunes informed us a few days ago, Meade explicitly advocated targeting nominal GDP writing as follows:

I have told this particular story simply to make the point that the choice between fiscal action and monetary action must often depend upon basic policy issues which should certainly be the responsibility of the government rather than of any independent monetary authority. Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt.

So let me ask Nick the following: Was Meade right or left? And was he on the winning side or the losing side?


26 Responses to “Nick Rowe Goes Bonkers over Milton Friedman”

  1. 1 Nick Rowe January 22, 2015 at 9:58 pm

    Et tu David! What is it with this Friedman Derangement Syndrome?

    OK, recall that my post was in response to Paul Krugman’s asking: “Where are the Friedman’s of yesteryear?”. He was talking about economists who are *public intellectuals* on the right.

    A couple of points, because it’s late:

    “And just what does Nick mean by “Friedmanite base-control?” That Friedman invented open-market operations? Good grief!”

    Of course not! Jeez! But Friedman thought in terms of base control, and 2008/9 saw a return to “QE” which is base control, and away from the “un-Friedmanite” interest rate control.

    “Bob Lucas and Ned Prescott have not had as much influence on modern macroeconomics as Milton Friedman? I am less of a fan of Lucas and Prescott less than I am of Friedman, but surely Nick can’t be serious.”

    I said “influence on economics and *economic policy*”. Can you imagine Larry Summers saying “We Democrats are all Lucasians/Prescottians now”? It just sounds daft, but he did say we Democrats are all Friedmanites now. Has Prescott had *any* influence on economic policy? (I’m not even sure about Lucas.) Are either Lucas or Prescott *public* intellectuals?

    “…but are we indebted to Friedman for any argument against wage and price controls that was not understood by economists long before Friedman appeared on the scene?”

    Not to my knowledge. But Friedman was the one actually making the public arguments against wage and price controls. Tobin, by contrast, despite being a great (Keynesian) economist, was still arguing in favour of “incomes policy” in 1983! Did Tobin fail to understand those arguments?

    “Friedman also wrote a famous paper repackaging a slightly dumbed down version of Karl Popper’s philosophy of science as the methodology of positive economics, without acknowledging Popper, an omission that he seems never to have been called on.”

    Because it had little to do with Popper (and even less to do with Positivism, despite Friedman’s title). It was Instrumentalism, as Stan Wong convincingly argued. And that too was another of Friedman’s victories, because when economists use models today they do so in a decidedly un-Popperian way (and even less a Positivist way); they use them in an Instrumentalist way. “All models are false, but some are useful” has become a cliche. (Though that saying does not originate with Friedman.)

    “So let me ask Nick the following: Was Meade right or left? And was he on the winning side or the losing side?”

    Reading Meade in the 1970’s, knowing nothing of which party he voted for, he always struck me as being centre. And in this bit of Meade you quote:
    “But he never explains why and by what mechanism these individual plans can be expected to build up into a coherent whole.”
    he sounds to me like pure Hayek, even to the point of using Hayekian terminology, by speaking of individuals’ “plans”, rather than demands and supplies. And the Meade you quote there was mostly on the winning side, but on the losing side with the Market Socialism aspects.

    Let’s just hope Meade turns out to be on the winning side with NGDP.


  2. 2 Morgan Warstler January 23, 2015 at 1:58 am

    “Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt.”

    This doesn’t sound like:

    under 5% NGDPLT, the fiscal side assumes full responsibility for whether we have inflation or not.

    5% RGDP and no inflation = govt is run great

    5% inflation and no real growth = govt is run badly


  3. 3 fsateler January 23, 2015 at 6:09 am

    So of the three key elements of New Keynesianism for which Nick credits Friedman only one was (co-)invented by Friedman

    I’m going to pick this as a summary of a strong sentiment underlying this post: (almost) nothing Friedman said was new, it was all known to economists. This may well be true (I am not an economist, let alone an economic historian).

    However, I think this focus misses the key point: in terms of the public discourse and policymaking it does not matter who invents something, but rather who “massifies” it. If I may make an analogy, a few years ago in the computing circles people sometimes complained about Bill Gates or Steve Jobs as people that really didn’t invent anything: all their user interface “innovations” (from the 80s and 90s) where really “stolen” from the Xerox PARC labs (and Jobs even had the nerve to accuse MS from stealing from Apple!). And yet today it is MS and Apple the software giants, and Xerox still makes photocopy machines. I would say the public is correct when they say Apple and MS revolutionized the PC market with their UI innovations, and Xerox did not.

    Friedman may or may not have invented most of his ideas, but he still seems to have been the most forceful public advocate of such ideas.


  4. 4 Nick Rowe January 23, 2015 at 6:40 am

    Basically agreeing with fsateler: if you ask any serious historian of economic thought, like David, “Who invented/discovered X?” the answer is always “It’s complicated”. There almost seems to be a general law: for any claimed discovery, a determined historian of thought can always find another economist who discovered it earlier. Was the Phillips Curve discovered by Phillips, Irving Fisher, David Hume, or a dozen other earlier thinkers a historian of thought might unearth?


  5. 5 David Glasner January 23, 2015 at 9:47 am

    Nick, Please don’t take it personally. For sure, it’s not you; it’s Milton. And thanks for reminding me of the context, but I don’t think your going on and on about the greatness of Friedman answers Krugman’s complaint about the total collapse of standards in the contemporary right wing.

    Yes, I knew you weren’t crediting Friedman with inventing open market operations. It just seemed odd to me that you would suggest that such a well-understood and long-standing technique of central-bank policy should be viewed as Friedmanite. I understand the contrast between using the target and the target as the target, but the Fed was doing both.

    I know that you said “economic policy,” but you also said “economic theory,” and I felt entitled to single out the economic theory part. I can imagine Larry Summers saying a lot of things. He has a history of making outrageous statements in public that have gotten him into deep trouble. The point about Friedman is that he was both a public intellectual and a highly regarded academic economist. I am not disputing his importance as a public intellectual; I am saying that, although he was a great economist, his reputation as an economist is overrated. People like Don Patinkin and Harry Johnson thought so as well.

    Just as a quibble, “incomes policy” is a very elastic term. I don’t think that Tobin supported Nixon’s wage and price controls (but I could be wrong about that), but I am pretty confident that whatever he meant by incomes policy in 1983, it was not anything resembling the formal wage and price controls of the 1970s. I think the point of the incomes policy was to create expectations of what future wage and price increases would be and to adopt a monetary and fiscal policy that would be consistent with those overall targets. So you could actually think of it as another approach to nominal GDP targeting.

    Yes, you are right that Friedman was an instrumentalist while Popper was a realist. Still, that is a difference of interpretation in the role of a scientific model. That doesn’t absolve Friedman from the obligation to have acknowledged that the falsificationist paradigm he was adopting was derived from Popper.

    I would say that Meade was center-left, which I think is a fair characterization of LibLaberalism. He was explicitly redistributionist. The quote does sound like Hayek, but there is no reason why intelligent leftists should not be able to learn from Hayek. Galbraith actually was a student at LSE in the 1930s, and took courses from Hayek, Robbins et al, but apparently didn’t learn much from them. I think the point is that, within limits, it’s possible to mix and match right and left. We seem to be going in the opposite direction, and thinking about right and left as tribes that we belong to or pledge allegiance to. My tribe, right or wrong.

    Morgan, Actually it sounds like Sumnerian monetary offset.

    fsateler, As I just noted in replying to Nick, my focus was on Friedman as an economist, not as a public intellectual. I agree that his importance as a public intellectual was huge. Whether it would have been as huge if he were not overrated as an economist is an interesting but unanswerable question.

    Nick, Not to disagree with you too strenuously, but most important discoveries in science, even if there were precursors, can at least be considered to have been subjectively original. In Friedman’s case, apart from the consumption function, I see nothing that was even subjectively original. But subjective originality is not the only criterion for judging the contribution of an economist.


  6. 6 Mark January 23, 2015 at 11:05 am

    @ fsateler

    This is also not an excuse to ascribe everything to a few personalities we remember best and dearest (for whatever reason) just because one is too lazy to work out who actually made a particular contribution. Friedman derangement syndrom goes both ways, and quite heftily so if one is not even interested in finding out if he actually made a particular contribution or just talked about it most eloquently – or thinks that the difference between these two ist just nitpicking.


  7. 7 csissoko January 23, 2015 at 11:15 am

    “Hawtrey’s monetary explanation of the Great Depression”

    I would be very much obliged to you, if you could give me the source(s) where I will find this most clearly stated.

    Thanks again for a great blog.


  8. 8 David Glasner January 23, 2015 at 11:22 am

    He discussed the causes of the Great Depression in his books The Gold Standard (post 1930 editions), Trade Depression the Way Out, and The Art of Central Banking. Ron Batchelder and I have a still unpublished paper on Hawtrey and Cassel (who gave essentially the same explanation). It’s available at


  9. 9 csissoko January 23, 2015 at 11:33 am

    Thank you!


  10. 10 Bill Woolsey January 23, 2015 at 11:37 am

    I think the proper point of comparison would be Friedman and Samuelson rather than Galbraith.

    Much of Friedman’s positions were a return to the old orthodoxy of economics as opposed to the neo-Keynsian approach of Samuelson.

    Rather than focusing on Friedman’s particular approach to the long run vs. short run phillips curve, or even claiming that he was the first to have the notion that real output is impacted by aggregate demand in the short run but prices do all the adjusting in the long run, the point is rather that Friedman was a key intellectual leader in promoting what had become a minority position, and since, more due to events, it has become a majority position, more or less.


  11. 11 LAL January 23, 2015 at 11:56 am

    lucas sites friedman…a lot…especially in Lucas’ early influential papers


  12. 12 Nick Rowe January 23, 2015 at 3:44 pm

    We’re good David! Just took me unawares, as I was heading off for bed. Though boy, people do get riled up about Friedman!

    Back later, because this is an interesting discussion. (Had a good email discussion too with james Fordor, he backing up what you said re expectations and the Phillips curve.)


  13. 13 Kurt Schuler January 23, 2015 at 7:18 pm

    Six more words on Friedman’s influence, in areas not mentioned by you or Nick Rowe: Volunteer military. School vouchers. Drug legalization. Which of these don’t you like?


  14. 14 Babyconomist (@KoniniSt) January 23, 2015 at 9:11 pm

    Kurt, if I may volunteer an opinion, only the last item deserves serious attention.

    A volunteer military sterilises the act, the nastiness, of war as the human price is largely paid by the poorest in society. If the toll, as opposed to just the cost, was also paid by society’s wealthiest we would most certainly see fewer wars.

    School vouchers (depending on your exact meaning) are almost unmitigated disasters (e.g. see PISA studies) wherever they are enforced for a variety of reasons – an experiment in New Zealand simply accelerated ‘white flight’. But we still have a rump, rich and influential, who continue to mess with our world class system.

    Finally, drug liberalisation is certainly worth a close look. The toll on people, especially the poorest who end up being the ones jailed or killed in the crossfire e.g.Mexico, is horrendous. And that it stems (according to Michelle Alexander) from a right wing backlash against the civil rights successes of African-Americans circa 1960s-1970s, makes it all the more tragic. Drug use is a public health issue, not a pathway to riches for arms dealers and crooked police forces.


  15. 15 Nick Rowe January 24, 2015 at 3:08 am

    David: (You will probably remember this, but your younger readers will not) from a common 1970’s perspective, inflation before “full employment” was reached was viewed as a negative externality like pollution– profitably for the individual that raised prices or wages, but costly for the economy as a whole. And just like pollution, there were three variants on “prices and incomes policy” that economists advocated to deal with it: direct controls on prices and/or wages; a Pigou tax TIP Taxed based incomes policy, where you got taxed for raising P or W; tradeable emissions permits, or MAP. In Tobin’s 1983 paper he is arguing for the TIP or MAP variants.

    You can read some of Tobin’s paper here:

    On the Phillips Curve: Before (the year of our Lord) Friedman 68, monetary (and/or fiscal) policy was supposed to target “full employment”, or “full employment output”. Central banks were supposed to try to make the AD curve vertical at Y*. The key theme of Friedman 68 is “what monetary policy *cannot* do”, and “target full employment” is precisely the thing it cannot do, because in the LR there is a natural rate of unemployment (who before Friedman invented that concept?) that is determined by many things, but is independent of nominal variables, and their rates of change, and so is independent of monetary policy. A vertical AD curve makes no sense at all if the LRAS (or LRPC) is vertical too. You either get no LR equilibrium or (by sheer fluke if the central bank guesses Y* exactly right) an infinite number of equilibrium inflation rates.

    That was a major change in our way of thinking. You either needed policy to create a downward-sloping AD curve (like with Friedman’s k% M2 target), or else a horizontal AD curve (like with the inflation target we eventually got).

    And many Keynesians did not accept that new way of thinking about what monetary policy can and cannot do. Those who did accept it, and incorporated the natural rate in their models, became New Keynesians. Those who did not accept it, and who saw inflation as just an annoying side-effect of monopoly power and/or the central bank being over-optimistic about Y*, became post-Keynesians. Friedman split the Keynesians in two.

    (I think I ought to do a post on this, trying to write it up more clearly, and see what you and James Fordor think about my hypothesis.)


  16. 16 Nick Rowe January 24, 2015 at 3:21 am

    As an aside: and NGDP targeting creates a downward-sloping AD curve too, avoiding both the worst effects of a vertical AD and a horizontal AD. In that sense we are very much centrists, steering a sensible compromise path between the crazy verticalists and horizontalists, in a very Friedmanite manner (except that the NGDPT AD curve won’t flop around like Friedman’s k% M2 AD curve).


  17. 17 Nick Rowe January 24, 2015 at 3:34 am

    In 1983, when Tobin published that paper, macroeconomists did not have formal macro models where firms had market power. Those only arrived in 1987, and were quickly incorporated into NK models, so are now standard. So Tobin could only use informal reasoning to make his case for “incomes policies”. If we wanted to revisit that question (funny how it totally disappeared off the agenda) we now have the tools to do it properly. I just did a post on this.


  18. 18 W. Peden January 24, 2015 at 1:48 pm

    On the philosophical question, it’s possible to be both an instrumentalist and a falisficationist (and a positivist!) consistently, though there may not be many examples. It’s not clear that Friedman was any of these, but he was probably closest to a rather limited sort of instrumentalism. (Limited in that most instrumentalists, like Bas Van Fraassen, think that assumptions DO matter insofar as their predictive content is important.) The details of Friedman 1953 are notoriously muddled but the general spirit of empiricism and usefulness is one that economists should take to heart, and Friedman’s engagement with institutional, historical and econometric* issues was an example of good methodology in practice. My favourite economics is empirical economics practiced by people with a solid theoretical background, who know how to do interesting tests.

    * Admittedly the econometrics of the 1930s-1950s, though the attacks on Friedman by later econometricians in the 1980s tended to vary from the silly (accusing him of failing to read advanced econometric methodology articles published around or even after the date of the publication of Monetary Trends) to the hysterical (the accusations that his work was largely fraudulent).

    Anyway, David Glasner, I was shocked at your post: it’s probably the most positive thing I’ve read by you on Friedman!;) I actually think that you and Nick can agree here (and that you’re right) and all I shall add is that Friedman was also good picking the right causes, except the k% rule. Even the search for a stable income velocity function was an interesting and empirically minded inquiry, even if it was ultimately unsuccessful, and added to our understanding of money, macroeconomic measurement, and inspired good technical innovatioms like those of Granger and Sims.


  19. 19 W. Peden January 24, 2015 at 1:54 pm

    Now that I think about it, the idea of constitutional limits on government spending was also a fool’s errand, though I’m not sure how clear this was at the time. (Maybe they would have been better off going via the Supreme Court and arguing that it came under the right to privacy!) Nor was “starving the beast” a good strategy, as it turned out. However, the most plausible alternative was that there is no effective way to reduce or even control the size and power of government, at least in the US, which might be true but would be anathema to an optimist like Friedman.


  20. 20 sumnerbentley January 24, 2015 at 1:59 pm

    David, As you know Friedman is one of the few areas where we disagree. Here I’ll just address one point, the expectations augmented Phillips Curve. Although I love Hume, he didn’t quite get there, although he did discuss the simple Phillips Curve.


  21. 21 David Glasner January 24, 2015 at 7:33 pm

    Bill, I agree with your characterization of Friedman’s role. He did a lot of good work, but his role was more in promoting a particular point of view than in making substantive contributions to monetary theory. His theory of the consumption function was such a contribution, but I can’t think of another one.

    LAL, Yes, Lucas was influenced by Friedman, no doubt about it. But that doesn’t mean that Friedman made any important contributions to monetary theory.

    Nick, It’s good that we’re good!

    Kurt, What do any of these issues have to do with monetary economics?

    Nick, Actually, the analogy between inflation and pollution had slipped my mind. I think Abba Lerner may have been the one who invented that analogy. It’s also interesting that Samuelson, who loved to point out that the idea that total savings would increase if people became more thrifty was an example of the fallacy of composition, could not detect that to blame inflation on monopoly power was also a fallacy of composition.

    You seem to think that nobody before Friedman understood that total output and employment depend on real variables as well as nominal variables. I don’t understand where you got that idea? What Friedman called the “natural rate of unemployment” was not a new concept; he just gave it a catchy name. Pigou in 1945 wrote a book called Lapses from Full Employment. Doesn’t that sound pretty close to what Friedman was discussing?

    I think the origins of post-Keynesianism goes back way before Friedman, to Joan Robinson and to Nicky Kaldor and their disgust with the neoclassical synthesis. But I will be interested in looking at your next post.

    W., Thanks for the comment about instrumentalism, about which I don’t feel capable of commenting in a substantive way, except that I agree with your point about the general spirit of empiricism and usefulness of his 1953 paper.

    My only defense for writing anything positive about Friedman is that either I must be mellowing in my old age, or I was treading very softly lest I cause Nick Rowe any emotional discomfort.

    Scott, There is a wonderful quote by Hume about how low prices or high prices are irrelevant to total output, profits and employment, but that unexpected increases in prices are a stimulus to profits, output, and employment. I’ll look for it, and post it.


  22. 22 Nick Rowe January 25, 2015 at 4:18 am

    David: Here, to my mind, is the “money quote” (pun not originally intended) from David Hume’s “Of Money”:

    “From the whole of this reasoning we may conclude, that it is of no
    manner of consequence, with regard to the domestic happiness of a
    state, whether money be in a greater or less quantity. The good policy
    of the magistrate consists only in keeping it, if possible, still
    encreasing; because, by that means, he keeps alive a spirit of
    industry in the nation, and encreases the stock of labour, in which
    consists all real power and riches.”

    The first sentence is fine. But the second sentence is very clearly a problem.

    Was it Friedman who said “we have only advanced one derivative since Hume”?


  23. 23 Nick Rowe January 25, 2015 at 4:54 am

    If anyone else wants to read Hume’ essay “Of Money”, it’s strongly recommended, and available here:

    In the first sentence I quote above, the only reason he adds the “domestic” bit is that he acknowledges that a large stock of money (gold and silver) in a nation could be useful when fighting foreign wars, to pay for troops abroad.

    But by saying “the good policy of the magistrate” it is very clear he is making a policy recommendation to slide up along the non-vertical Phillips Curve. In Hume’s defence, he would not have seen this as very important, because the chance of any magistrate actually being able to follow this policy advice, before fiat money, would have been small. And this was 1752, and it is only by standing on his shoulders that we can kick him in the teeth. And it was only one sentence. But it was a howler.


  24. 24 Kurt Schuler February 1, 2015 at 10:53 am

    David, you asked what the items in my earlier comment had to do with monetary economics. Nothing, obviously. I mentioned them because you said that you are “not a fan of MIlton Friedman,” rather than not a fan of just his monetary economics.


  1. 1 Did David Hume Discover the Vertical Phillips Curve? | Uneasy Money Trackback on January 25, 2015 at 7:37 pm
  2. 2 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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