>New York TIMES / Ideas & Trends
>A Fresh Look at the Apostle of Free Markets
>By PETER S. GOODMAN / April 13, 2008
>Among professional economists, Mr. Friedman's analytical mastery was
near-universally admired.
> His first breakthrough came in the 1950s with his idea that people's savings
> and spending were not a function of psychological factors, but based on
> rational estimations of wealth.<
it's interesting how MF's research (his THEORY OF THE CONSUMPTION
FUNCTION) is misrepresented. It's true that he rid the theory of
consumer decisions about how much of income to spend of all
social-psychological elements (get thee behind me Duesenberry!) But
the theory is still very psychological: people consume based on their
expectations of the future, i.e., their guesses. In recent years, MF's
theory doesn't do very well. Duesenberry's "keeping up with the
Joneses" theory (along with the enablers of the credit industry)
explains why middle-class US consumers have saved so little much more
than MF's theory. Sure, MF could argue that saving was low because
consumers' "permanent income" (expected wealth stated in flow terms)
was high. But that expectation was quite irrational, seemingly based
on the idea that there's no place to go but up.
> His greatest contribution came the following decade, when Mr. Friedman
> dismantled the consensus view that inflation was a tolerable byproduct of
> high employment. He demonstrated that high inflation would eventually cost
> jobs, as businesses were discouraged to [sic] invest by the higher wages they
> had to pay.<
It's not that businesses are "discouraged [from] invest[ing]" by
higher wages. That's closer to Marx's theory in volume I of CAPITAL
(in which high growth leads to high wages which squeeze profits and
discourage accumulation) than MF's. Instead, it's that high money
wages lead to high prices which lead to higher money wages prices --
and rising expectations of higher money wages, which reduces the
amount of real GDP demanded. (There's no inflation in Marx's theory,
since he assumed that the gold standard prevailed.)
By the way, MF's theory of inflation was first developed by Abba
Lerner in the 1940s or 1950s. He differed from MF because he didn't
think the world was symmetrical: when demand was low, below his "low
full employment," inflation rates didn't fall very easily. When demand
was high, above "high full employment," inflation tended to take off
(fitting with what Joan Robinson called the "inflation barrier"). MF
combined Lerner's "low full employment" and "high full employment" as
one package, the "natural" rate of employment. Lerner thought that the
real world was more complicated than Friedman's hand-waving reference
to the "Walrasian system." The economy, in his view, could be made
more efficient (using incomes policies), so that the actual employment
rate could be raised.
>"This triumph, more than anything else, confirmed Milton Friedman's
status as a great economist's economist, whatever one may think of his
other roles," Paul Krugman...<
that's quite a critique of the economics profession.
>Mr. Friedman captured the era with a new formulation known as
monetarism: that the government [i.e., the Fed] should gradually and
predictably inject cash into the financial system, and then let the
market figure out where it should go.<
this, of course, assumes that the Fed can control the money supply
("cash") and that the demand for money is stable. Most macroeconomists
have rejected the latter.
> "Any honest Democrat will admit that we are now all Friedmanites," Lawrence
> H. Summers, the Harvard economist and former Clinton administration Treasury
> secretary, wrote in an appreciation published in this newspaper when Mr.
> Friedman died. "He has had more influence on economic policy as it is
> practiced around the world today than any other modern figure."<
that's quite a critique of the Democrats.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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