Friday, March 2, 2012

Romer on Friedman

Lars Christensen sends us to an interesting post at The Daily Beast.

I find two things interesting about the post. First, the title is a fascinating peek into the way conservatives think about non-conservatives. It's called "Even Obama's Economist Loves Milton Friedman".

Here's a newsflash, in case you aren't aware: most economists are quite fond of Milton Friedman. The man was a giant in the field, and he did excellent work. You will see economists criticize him, to be sure. He said some things that we didn't universally agree with. Most of this stuff got into the realm of normative economics. That's life -we don't all agree. But he's still universally revered, and his monetary and macroeconomic work is extremely highly regarded (even if some of his more political pronouncements aren't). The only people you really find without a deep appreciation for Friedman are non-economists on the left. I say - screw them. They really don't know what they're talking about. Anyway, the title of the post makes it sound like the author is surprised about this, which I find kind of humorous.

The other thing I find fascinating is what Romer actually said (this is in her five books interview):

"When you asked me for my list of books, I debated about whether to put The General Theory by John Maynard Keynes on the list. The General Theory is an incredibly important book, but it's basically a theoretical explanation of how aggregate demand could affect output. It was Friedman and Schwartz who provided the empirical evidence that supported the theory."

You don't often hear about Friedman and Schwartz as vindicating Keynes. I think she's exactly right, given how she's phrased it. There really was a paradigm shift with Keynes towards a view of macroeconomics where output in the short-run is demand determined. Friedman and Schwartz were part of solidifying that paradigm shift, despite the fact that they had nits to pick and that we've been fighting over details.

Generally, I think Keynes's appreciation of monetary factors is undersold. Part of this is the fault of the Old Keynesians themselves. I don't entirely blame them. The Great Depression was really a time that highlighted how important fiscal policy could be, so it's no wonder they would emphasize that. However, they didn't have that big of an excuse. You don't need to wait until Friedman and Schwartz to recognize the 1933 turnaround after all.

I think The General Theory would be on my short list. I'd have to think about what else would be.


  1. I agree with you and Mrs. Romer that Friedman and Schwartz vindicated John Maynard Keynes's contributions to monetary economics.

    However, Milton Friedman was himself influenced by Leonard J. Savage, one of the founders of the so-called "Savage Axioms". (The others were Bruno de Finetti and Frank P. Ramsey, I believe.)

    Because Friedman and Schwartz accepted the Savage Axioms, they can only deal with a world of risk. They cannot deal with John Maynard Keynes's world of uncertainty or Daniel Ellsberg's role of ambiguity.

    Therefore, the policy implications stemming from A Monetary History of the United States, 1867-1960, are flawed, despite it being a commendable effort in research.

    1. How are the policy suggestions flawed? What do you think would have been different?

      The difference in policy prescriptions - it seems to me - don't stem from uncertainty vs. risk. They stem from Keynes's focus on what firms would do in the face of a monetary expansion with demand expectations so depressed that the marginal efficiency of capital is substantially below zero (or some minimum rate).

      You can talk about all that with a concept of uncertainty - but it's not strictly necessary. I don't see how moving from risk to uncertainty solves this. The Austrians certainly have ideas similar to uncertainty, and they're not closer to Keynes.

      Perhaps it's a valid critique, but I'm wondering if you've drawn too many conclusions from the critique.

  2. Daniel Kuehn: The reason the policy implications are flawed is because Friedman's theory can only deal with risk, meaning it can only deal with small "risky" recessions.

    Did you notice the part in the review where Dr. Brady indicates that Friedman "admits" that he has no generalized equation of exchange that can deal with Ellsbergian ambiguity? Keynes's theory deals with the "volatility" in the equation specified by Dr. Brady. Keynes's world can deal with Ellsbergian "ambiguity" and Mandelbrotian "wild risk". Keynes's view on expectations is tied to his approach to uncertainty, Daniel.

    Mechanical monetary expansion doesn't necessarily increase the weight of evidence on the part of the general public at large.

    As for the Austrians having a "similar" approach to uncertainty...I've gone through this before. But I'll keep it simple. Do Austrians have an analogue to Keynes's "weight of evidence"?

  3. Per DeLong:

    But, as I have said before, those of us who learned this stuff from Blanchard, Dornbusch, Eichengreen, and Kindleberger--who made us read Bagehot, Minsky, Wicksell, Metzler, and company--have a huge intellectual advantage over others.

    Minsky is the one

  4. "With regards to Fluke’s case specifically, Boudreaux might be mistaking the issue: forcing a religiously-binded institution to purchase something that it doesn’t ethically agree with v. public subsidization of birth control."

    Isn't it true, Daniel, that circa-Treatise on Money era Keynes was basically a pseudo-monetarist?


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