June 09, 2003

PY Is Not Proportional to M

Edward Hugh finds the Financial Times's Simon London having lunch with Milton Friedman somewhere on the road to Damascus:


BONOBO LAND: The Financial Times Simon London has had lunch with Milton Friedmann, and discovers he has changed his mind about targeting the quantity of money, which is, as Stephen Roach notes ironic at a time when Bernanke and company would have things otherwise: 'Hold on to your hats and prepare to be amazed: Milton Friedman has changed his mind. "The use of quantity of money as a target has not been a success," concedes the grand old man of conservative economics. "I'm not sure I would as of today push it as hard as I once did." Granted, this is hardly a conversion of Damascene significance. But, heck, it's a start.'

To be fair to Uncle Milton, his focus on having a central bank set and hit its targets for monetary aggregates always had as much to do with building central bank credibility--demonstrating that it would keep the promises it made, and that it was serious about constraining the growth of nominal variables, and in versions like his Program for Monetary Stability the recommendation to target M was accompanied by plans for banking regulation (very strict and onerous regulation!) that would more-or-less force M to be proportional to PY. The argument for targeting M was as much political-economy as economic.

Posted by DeLong at June 9, 2003 06:49 PM | TrackBack

Comments

So, to sum up:

Brad bangs his head against the wall when there are reports that Paul Wolfowitz made some (off-the-record) statements that may or may not have been meant to mislead the press...

He bangs his head against the wall about people showing any admiration for Leo Strauss, who argues that public figures may sometimes have to mislead the public in order to promote the general good...

But when Uncle Milty admits that his monetary perscriptions were wrong, Brad excuses him on the grounds that he didn't really believe it, anyway, and it was necessary in order to convince the public of the Fed's "credibility".

A non-economist shows the merest hint of hypocrisy and it generates more headbanging than a Sabbath concert, but economists are apparently judged by different standards 'round these parts...

Posted by: jimbo on June 9, 2003 07:18 PM

"But when Uncle Milty admits that his monetary perscriptions were wrong, Brad excuses him on the grounds that he didn't really believe it, anyway, and it was necessary in order to convince the public of the Fed's "credibility"."

Isn't being able to say "I was wrong" supposed to be a virtue?

Posted by: Abiola Lapite on June 9, 2003 08:24 PM

"has changed his mind about targeting the quantity of money, which is, as Stephen Roach notes ironic at a time when Bernanke and company would have things otherwise"

I don't understand this sentence. Does Bernanke want to target a monetary aggregate? I thought he wanted to target inflation. . . .

Posted by: Bobby on June 9, 2003 08:59 PM

And inflation targetting and monetary aggregate targetting aren't the same thing if the velocity of the monetary aggregate is changing rather than staying the same.

Posted by: Bobby on June 9, 2003 09:02 PM

Why is it "hypocrisy" to say "I thought at one time this plan would work, but experience seems to show it doesn't"?

Posted by: Jeffrey Kramer on June 10, 2003 12:58 AM

Yup, hypocracy and a change of mind are quite different. A changes of mind in the face of new information is in keeping with one of the better known Keynes quotes, in fact, a mark of honor.

Posted by: K Harris on June 10, 2003 04:47 AM

I agree with Kramer and Harris: saying that velocity has now become too volatile for monetary aggregates to be useful in controlling inflation does not in any way diminish the light that Friedman (who I don't agree with on many political dimensions) shed on so many dark unexplained corners of economics in his day.

If Wolfowitz has ever shed any light into any dark corners in any field, Brad would perhaps give him the benefit of the doubt and spend less time banging his (by now bruised) cranium against the wall.

Posted by: achilles on June 10, 2003 07:50 AM

Just how many economies do Milton's theories need to destroy before someone calls time? His theories were tested to destruction in Chile and later in the UK with disasterous results (The Money Supply! The Money Supply!)

When the Conservative government started to implement his ideas in the early eighties, unemployment exploded, we lost a third of our manufacturing base almost overnight, union busting hit new heights and our economy has never really recovered. If it hadn't been for North Sea Oil, Britain would be as rich as, um, probably Poland.

So, drop dead Milton and someone attach magnets to Keynes' grave. The rate he's turning in his grave you could power the National Grid.

ps I am not bitter or anything.

Posted by: Larry Lurex on June 10, 2003 09:06 AM

Just how many economies do Milton's theories need to destroy before someone calls time? His theories were tested to destruction in Chile and later in the UK with disasterous results (The Money Supply! The Money Supply!)

When the Conservative government started to implement his ideas in the early eighties, unemployment exploded, we lost a third of our manufacturing base almost overnight, union busting hit new heights and our economy has never really recovered. If it hadn't been for North Sea Oil, Britain would be as rich as, um, probably Poland.

So, drop dead Milton and someone attach magnets to Keynes' grave. The rate he's turning in his grave you could power the National Grid.

ps I am not bitter or anything.

Posted by: Larry Lurex on June 10, 2003 09:10 AM

Just how many economies do Milton's theories need to destroy before someone calls time? His theories were tested to destruction in Chile and later in the UK with disasterous results (The Money Supply! The Money Supply!)

When the Conservative government started to implement his ideas in the early eighties, unemployment exploded, we lost a third of our manufacturing base almost overnight, union busting hit new heights and our economy has never really recovered. If it hadn't been for North Sea Oil, Britain would be as rich as, um, probably Poland.

So, drop dead Milton and someone attach magnets to Keynes' grave. The rate he's turning in his grave you could power the National Grid.

ps I am not bitter or anything.

Posted by: Larry Lurex on June 10, 2003 09:10 AM

Stephen Roach is criticizing central bankers for thinking that simply increasing the money supply will prevent deflation or end deflation. What has kept Japan going is not increasing the money supply but government deficit spending.

Posted by: jd on June 10, 2003 10:51 AM

Larry, exactly how did the Chicago boys mess up Chile? You gonna blame the currency run on them?

Posted by: Stan on June 10, 2003 12:45 PM

Note: I'm not criticizing Freidman for admitting he was wrong - that's actually admirable. I'm criticizing Brad for excusing monetarism as a "noble lie" (i.e., one that provided an excuse for sadistic monetary policies in the name of "credibility"), when he excoriates others who defend the use of such lies. It's Brad's double standard toward other's hypocrisy, and his williginess to excuse virtually any behavior so long as the perpetrator has by an economics Ph.d., that I'm after here...

Posted by: jimbo on June 10, 2003 12:46 PM

http://www.nytimes.com/2003/06/08/magazine/08WWLN.html

June 8, 2003

Deficits and Dysfunction
By PETER G. PETERSON - NYT

I have belonged to the Republican Party all my life. As a Republican, I have served as a cabinet member (once), a presidential commission member (three times), an all-purpose political ombudsman (many times) and a relentless crusader whom some would call a crank (throughout). Among the bedrock principles that the Republican Party has stood for since its origins in the 1850's is the principle of fiscal stewardship -- the idea that government should invest in posterity and safeguard future generations from unsustainable liabilities. It is a priority that has always attracted me to the party. At various times in our history (especially after wars), Republican leaders have honored this principle by advocating and legislating painful budgetary retrenchment, including both spending cuts and tax hikes.

Over the last quarter century, however, the Grand Old Party has abandoned these original convictions. Without ever renouncing stewardship itself -- indeed, while talking incessantly about legacies, endowments, family values and leaving ''no child behind'' -- the G.O.P. leadership has by degrees come to embrace the very different notion that deficit spending is a sort of fiscal wonder drug. Like taking aspirin, you should do it regularly just to stay healthy and do lots of it whenever you're feeling out of sorts....

Posted by: jd on June 10, 2003 01:25 PM

or like keyne's said, "when the fact change, i change! what, sir, do you do?" or something like that :D

http://www.trinity.edu/org/tricksters/TrixWay/current/Vol%202/Vol2_2/DKnickrehm.htm

Posted by: kenny on June 10, 2003 02:41 PM

Biggest surprise in that FT interview:

Uncle Milton lives in San Francisco (in North Beach).

Posted by: Tom on June 10, 2003 02:48 PM

I don't understand where "noble lie" comes in, Jimbo. A "noble liar" tells hoi polloi "follow my prescription, and inflation will be cured," then turns around and whispers to the elite "follow my prescription, and we will add some needed rigor to bank regulation; but since hoi polloi can't understand such subtleties, we'll promise them something ridiculous, like an end to inflation." But in BDL's account, Friedman began by explicitly and sincerely arguing that his prescription would be beneficial for BOTH reasons, and only later concluded that one of those benefits didn't seem to follow from the prescription. I don't detect the lie.

Posted by: Jeffrey Kramer on June 11, 2003 12:26 AM

Keynes, Friedman, now (oddly) Krugman - can anybody think of any other economists who have provoked public desplays of emotion as these three?

Posted by: K Harris on June 11, 2003 07:54 AM

The gradual collapse of conservative economic theory--first Greenspan with "not nature, but culture" and now Friedman with "The use of quantity of money as a target has not been a success"--is starting to remind me of the collapse of the scientific eugenics, back in the late 20s.

With those two masters saying "no, it wasn't like we thought"--what distinctively conservative part of economic theory now stands?

Or am I all wet?

Posted by: Randolph Fritz on June 11, 2003 07:48 PM

Stan, Milton's ideas had a lot to do with 1973 and all that in Chile, along with all the Chicago school. Their ideas did not help Chileans.

Posted by: Larry Lurex on June 12, 2003 07:13 AM

I ran across this website looking for leads to answers to questions that I've come up with microeconomics as a degree requirement at the age of 55 after 35 years as a computer programmer, computer software engineer, computer system engineer. A long time ago, I stumbled on "A Monetrary History of the US 1850-1950" and I read Milton Friedmann's columns faithfully.

What I learned over the years from these readings was that there was great uncertainty in matters of how the economy works, and that contrary to popular claims, controlling the economy was impossible.

Even in the 50s, defining the quantity of money was difficult, and even more difficult to measure. Then came disintermediation which progressively blurred the lines between capital and money.

Milton Friedmann has argued for economic policies that don't or minimally distort the market because market distortions always lead to bad outcomes.

For the Fed to attempt to control the economy is an extreme act of hubrius. The Fed "controls" the rate of change of M1 which is about a trillion dollars, and affects the longer term M's to lesser degrees. But the stock market lost, what 3 trillion?, in a year or two? For the people who treated their trading accounts as virtual checking accounts, or the common savings account tied to the checking account, the stock market reduced their supply of money just as certainly as the Fed squeezing money out of the market through higher interest rates. Now let's not quibble over the details and definitions and policies, but instead focus on the fact that I, a non-economist taking "econ 101 - micro" learned from Milton Friedmann that money is difficult to define and constantly changing.

In fact, I will argue that Milton Friedmann's focus on "money" and the different types of "money" enabled many people to recognize the value of blurring the distinction between capital and money, in effect, making it impossible for "money" to be controlled. During the 70s, the Fed was able to effect the money supply and we got inflation leading to mortgage interest rates of about 20% (I had one). To control inflation and to prevent its reappearance, it was necessary to make sure that the Fed didn't act to expand the money supply as it had done in the 70s. Today, the Fed can not initiate inflation nor prevent inflation - it no longer has sufficient control of the money supply. Still, control of the money supply by the Fed is like religion - it has the power of myth. Everyone tries to figure out what the Fed is going to do, and many argue the Fed should do such and such to improve the economy; Funny that no one says the Fed should do thus and so to destroy the economy.

Btw, he came up with a proof that satisfied me as an engineer that control of the economy was virtually impossible, using physics - your predictions on the future must be 75% accurate to just break even. If you can predict the future with a 90% accuracy, then you can make the economy 50% more stable. Now if you could predict the future of the economy with a 90% accuracy, would you tell the government, or anyone???? Idiot investor that I am, I wouldn't - I'd trade and become a billionaire in a short time.

And the business about Chile - well, I read what he had to say when it was happening, as it happened. All I can say is that both Dems and Reps have consistently pursued policies far more cruel and idiotic and claim that they are fighting for freedom, right, etc. Rather than trade with Cuba and support Castro, we've sanctioned Cuba for four decades and kept them impoverished - and then justified this because we're punishing Castro and because he wouldn't kill himself, he's really to blame for the suffering of the Cuban people.

Rather than trade with Iraq, we sanctioned Iraq to punish Saddam, and the suffering isn't our fault, its all his fault. Even the chaos, lack of commerce, lack of jobs, lack of law, are all the fault of Saddam and has nothing to do with the US bombing and invading Iraq. Why the reason we can't get the infrastructure working that the Iraqis under Saddam kept working for a decade is Saddam's fault because its so old and in need of spare parts, etc. Well, if the US paid the Iraqis who maintained the infrastructure so they could readily buy the goods to live, and put them in charge and gave them the money, the Iraqi economy would return to what was there a year ago. No, the solution that the Bush adminstration sees is to take Iraqi oil and use it to pay foreign companies to build new infrastructure and probably eventually pay off the people if Iraq to create the same kind of society as Saudi Arabia which looks out for the "good" of its citizens.

Milton Friedmann recognizes that both the Dems and Reps believe that the government should intrude in everyones life to make sure they live life the "correct" way. But when it comes to economics, we see the real split - on the one side is the central planning, ignore the market approach, and on the other side we have the greed is good and the good thing about government is it holds many resources that can be given to the people, and who better to give it to then the people with money since they've demonstrated their adherance to the creed. Milton Friedmann rejects both parties, but focused most of his energy on rational and fair economic policy.

Cuba is a 40 year lesson in the futility of not pursuing a market solution to a political problem. Asia is a lesson in good that comes from pursuing a market solution to a political problem - unless one wants to argue that China's political situation is worse today than it was 40 years ago. Milton Friedmann has long criticised the US Cuba policy for the same reasons as the he supported the Chile economic policy of moving toward a market economy. If you believe that he was wrong in Chile, then you must consider the US Cuba policy to be a correct, and a success????

Anyway, the real significance of Milton Friedmann is that he attempted to, and to a degree did, make economics relevant to the "masses". Can anyone point to anything equivalent to "Free to Choose" from any other economist?

Posted by: michael pettengill on June 22, 2003 01:32 PM

Quite a few economists have had an impact (Keynes and Smith for instance), but your example of Cuba as an economic basket case is a bad one. Cuba is one of the richest economies in the Caribbean (which isn't saying much, admittedly) but she has done so in spite of the military cordon placed around her by American warships for the past 40 years. That, and the attempts by America to undermine her at every opportunity.

Friedman saying that "the market will provide" is just downright wrong. The market will provide what it is profitable to sell. If it is profitable to sell hard drugs and guns then these will be sold in preference. Social provision, hospitals, schools and policing are not well catered by the private sector and are things which the public sector demonstrably (at least in Europe) does better.

Friedman's denial of government intervention for good is one of the lasting terrible legacies of his thinking. "Free trade" as America currently calls it is supported by enormous government interventions and money. Cutting some of these "invisible" subsidies for defence companies, farming, steel and stopping tariffs against other nations might be helpful but these are not on any right wingers radar at the moment, concerned as they always are with maintaining the inequal status quo.

Posted by: Larry Lurex on June 23, 2003 02:43 AM

Quite a few economists have had an impact (Keynes and Smith for instance), but your example of Cuba as an economic basket case is a bad one. Cuba is one of the richest economies in the Caribbean (which isn't saying much, admittedly) but she has done so in spite of the military cordon placed around her by American warships for the past 40 years. That, and the attempts by America to undermine her at every opportunity.

Friedman saying that "the market will provide" is just downright wrong. The market will provide what it is profitable to sell. If it is profitable to sell hard drugs and guns then these will be sold in preference. Social provision, hospitals, schools and policing are not well catered by the private sector and are things which the public sector demonstrably (at least in Europe) does better.

Friedman's denial of government intervention for good is one of the lasting terrible legacies of his thinking. "Free trade" as America currently calls it is supported by enormous government interventions and money. Cutting some of these "invisible" subsidies for defence companies, farming, steel and stopping tariffs against other nations might be helpful but these are not on any right wingers radar at the moment, concerned as they always are with maintaining the inequal status quo.

Posted by: Larry Lurex on June 23, 2003 02:45 AM

Quite a few economists have had an impact (Keynes and Smith for instance), but your example of Cuba as an economic basket case is a bad one. Cuba is one of the richest economies in the Caribbean (which isn't saying much, admittedly) but she has done so in spite of the military cordon placed around her by American warships for the past 40 years. That, and the attempts by America to undermine her at every opportunity.

Friedman saying that "the market will provide" is just downright wrong. The market will provide what it is profitable to sell. If it is profitable to sell hard drugs and guns then these will be sold in preference. Social provision, hospitals, schools and policing are not well catered by the private sector and are things which the public sector demonstrably (at least in Europe) does better.

Friedman's denial of government intervention for good is one of the lasting terrible legacies of his thinking. "Free trade" as America currently calls it is supported by enormous government interventions and money. Cutting some of these "invisible" subsidies for defence companies, farming, steel and stopping tariffs against other nations might be helpful but these are not on any right wingers radar at the moment, concerned as they always are with maintaining the inequal status quo.

Posted by: Larry Lurex on June 23, 2003 02:46 AM

Quite a few economists have had an impact (Keynes and Smith for instance), but your example of Cuba as an economic basket case is a bad one. Cuba is one of the richest economies in the Caribbean (which isn't saying much, admittedly) but she has done so in spite of the military cordon placed around her by American warships for the past 40 years. That, and the attempts by America to undermine her at every opportunity.

Friedman saying that "the market will provide" is just downright wrong. The market will provide what it is profitable to sell. If it is profitable to sell hard drugs and guns then these will be sold in preference. Social provision, hospitals, schools and policing are not well catered by the private sector and are things which the public sector demonstrably (at least in Europe) does better.

Friedman's denial of government intervention for good is one of the lasting terrible legacies of his thinking. "Free trade" as America currently calls it is supported by enormous government interventions and money. Cutting some of these "invisible" subsidies for defence companies, farming, steel and stopping tariffs against other nations might be helpful but these are not on any right wingers radar at the moment, concerned as they always are with maintaining the inequal status quo.

Posted by: Larry Lurex on June 23, 2003 02:49 AM

Larry- Hit the post button ONCE.

Posted by: Bob on June 25, 2003 11:45 AM

Friedman changed the way we see the world, just as Keynes and Smith did. None of them reached the absolute "truth" but they did focused in crucial issues that were formerly disregarded. Friedman was a heck of a theorist and his extreme ideas on freedom and markets moved the pendulus from the Statists and Structuralists that made so much harm in Latin America. Chile suffered their worst crisis because of Chicago boys technical mistakes in 1982, but Chile is today the most modern economy in Latin America thanks to market free policies that follow the pathbreaking toughts of Prof Friedman. UK suffered from monetarism and the M2 or-whatever rules, but gloomed after the deregulation of markets and privatization took place, again following Friedmanian principles.
Summing up, we can critizise the strict "moneymania" monetarism but we should recognize Friedman's long lasting heritage.

Posted by: Juan Cayo on June 25, 2003 06:47 PM
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