The main thing people know about Friedman is "inflation is always and everywhere a monetary phenomenon". You justly called it his most famous idea.
I pretty much think it's wrong.
Sure - print tons of money, don't increase supply of goods/services and you're bound to get some inflation at some point (though, the collapse in the velocity of money will work very hard against you ; so printing isn't everything - as we saw with QE. Giving money to bankers doesn't do jack shit to standard everyday prices. Asset prices otoh...)
So already we got qualifiers.
And that's before we get into things like supply shocks that can generate inflation, whatever the money supply or money printing powers do.
Also note the difference (for inflation) between the QE stuff by the Central Banks and the fiscal spending/COVID relief done by the governments. One generated at most "asset inflation", invisible by and large to the CPI or PCE while the other has gotten us an honest to God inflation crisis.
Now, you can say that the fiscal powers can only send money to people because the CB enables it by printing money but this is getting stupid/tautological. Inflation is not always and everywhere a monetary phenomenon. Indeed, it seems to be the exception rather than the norm, at least for the last 40-50 years in developed countries.
Liking this comment with the caveat that I'm skeptical of the penultimate paragraph's claim that COVID relief and attendant fiscal spending led us to our "honest to God inflation crisis" — but all the rest makes sense.
Well, it's not me alone saying it. I think our host Noah had a post about it. The evidence isn't 100% but it seems clear, on balance, that the fiscal support we received was a bit excessive and is at the very least partially responsible. How much vs. supply chains snags, changing consumer behaviours and the war in Ukraine? Harder to tell. I think it's responsible for quite a big chunk of the inflation but thoughtful people are honestly disagreeing on that one.
Noah did have a(t least one) post about it: https://noahpinion.substack.com/p/was-the-american-rescue-plan-a-mistake. It didn't remotely convince me that CARES/ARP explains most of the past 6 months' inflation. Probably CARES/ARP made some small contribution to recent inflation, but I'd ballpark it as tenths of a point rather than most of the 9% from the latest CPI data. Reasonable people can disagree about the exact number — so I am!
Sure. Starting with Noah's post, it didn't have strong evidence. It mentioned a note from the San Francisco Fed suggesting that COVID relief accounted for most core CPI inflation from late 2020 onwards. But the note's methodology, while reasonable as a back-of-envelope exercise, wasn't that convincing: it assumed a particular relationship between core inflation and disposable income, which probably isn't super robust (and is circular reasoning if the note's used as evidence of the causal relationship existing in the first place). Also, the note looked at core inflation, which screens out the obvious direct impact of exploding oil prices. Also also, the note only used inflation data up to the end of 2021. Finally, Noah's post mentions another note from the same bank that estimated an impact of just 0.2–0.3 points.
That's why Noah's post didn't convince me. On a wider view, the US has similar CPI inflation to the whole OECD (https://data.oecd.org/price/inflation-cpi.htm), so good explanations for US inflation should probably be global rather than US-specific. And there are multiple plausible global-scale contributors to inflation:
• oil prices (already increasing/high before Russia re-invaded Ukraine),
• consumers shifting services spending to goods spending and then back (which disrupts the balance of the economy even if total aggregate demand doesn't change),
• a noisier and reduced supply of workers (not just from direct illness but also older workers quitting to hide from the virus),
• office workers' housing demand sloshing back and forth due to the shift to WFH and partially back,
• and now the direct impact of Russia's war on Ukraine hitting supplies of wheat, gas, and neon (neon is a key input to semiconductor manufacturing).
And to throw in a more speculative inflation driver, there's climate change as well. Remember the extreme weather from 2020 and 2021, like how half the West Coast seemed to be on fire in the summer of 2020? Well, now India's suffering a fearsome heat wave that's turned forecasts on their heads: instead of "a record wheat crop" India's resorted to banning all wheat exports (https://www.politico.eu/article/climate-change-heats-up-south-asia-global-food-crisis/).
True but Milton and people in his days thought V was more or less constant. Hence they got the wrong conclusions. MV = PY is derived from accounting identities. It's clever and I wouldn't have figured it out so by all means give Friedman a Nobel Prize but it's a tautology.
What's not tautological is the reasoning behind why this equation is true and what it implies when you want to do QE or fiscal spending etc. But here Friedman failed.
I'm skeptical of economics as a discrete branch of human thought, yet nonetheless have spent decades reading through the greats (as a lay person), from Hayek and Friedman, Adam Smith and Ricardo, Keynes and Galbraith, to Marx and neo Marxists, Lenin and Mao and MMTers.
I come to the Tolstoyian resignation that it's all so complicated, we're better off calling it God's Will, making our propitiations, keeping our heads down, and plodding on.
So I figure I should comment when I like one of your articles and say so. This analysis is more than silly spreadsheetery and humble enough to be harmless. I think grading Uncle Miltie as C-level work is fair and instructive.
Keynes of course rejected the quantity theory of money. And so does prof. Bill Mitchell, who observed that if more money is spent to increase supply (before increasing consumption) , or if supply is already adequate, ( eg excess food available, or sufficient housing stock for everyone) then demand inflation will be avoided
Also I think Friedman's "supply side" theory (in the 70's) failed to take account of the loss of 1st world manufacturing to low wage Asia., apart from the Arab oil-price shock.
"Plus, it's likely that big structural changes make it such that the discipline has few eternal verities - what describes the economy well in 1976 might have little to do with the events of 2016."
Right! But isn't this also true of the verities professed about economic systems at all?
E.g., if you put a Marxist and free market absolutist in a small room together, would either of them ever yield to the reality that whatever they might have argued about in 1930 looked different by 2020? Globalized capitalism and technological advance together inevitably produce economic dislocations that require government intervention to prevent or assuage political upheaval, so unless you just expect to purge a chunk of your population periodically, more capitalism eventually must lead to more socialism even if the electorate/proletariat does not rule per se, there is no brotherhood of man etc.
My comment is more of a question. It is a little off-topic but still concerns the Fed and monetary policy. With rising inflation, I read complaints about how it was hurting people; with the Fed's raising interest rates to control inflation, I heard how this response was hurting people and would lead to a recession. How long and how deep is up in the air. I hear and read about complaints, but I never see or read any suggestions on controlling inflation without raising the interest rate. Anyone, even us non-economists, can look back and say this or that action was incorrect. I feel Chairman Powell is doing as good a job as can be expected, and time will show how well he responded to the problem. My question to you is, "What would you do to combat inflation?" Please keep in mind the old military dictum - any action, even if later proven to be incorrect, is better than no action at all.
You could apply classical economics and let the prices rise and demand fall. The current practice is to drastically reduce demand to crush rather than slow demand. Some call it supply side economics, but its actual mechanism requires managing demand in as crude and punitive way as possible.
You're right. Economists have a specific definition for wage price spirals. They are different from rising wages putting pressure on supplies which drives up prices as the rising demand for labor raises wages. In a wage price spiral, the wages and prices rise but the quantity of goods doesn't change much. In the latter, more goods come available and are sold though at higher prices.
And then there's Milton Friedman's innovation of the Shapiro-Crowder technique of visiting college campuses to rattle off right-wing talking points (while controlling the mic) faster than the undergrads can improvise comebacks. Like that time Friedman inspired Nick Fuentes to write off Africa's colonization on the grounds that some Africans hadn't discovered the wheel: https://www.youtube.com/watch?v=ry2cRP73h9s&t=189s
The Friedman test isn't very relevant either, being purely a statistical device rather than an economic idea, but Noah included it in his list anyway. So clearly Friedman's non-economic innovations are in scope.
I don't claim to be clever, merely correct. As to the actual substantive disagreement: if a non-economic innovation is rendered relevant when applied to economic ends, I can just point out that Friedman applied his film-oneself-trolling-campus-teenagers-with-right-wing-talking-points shtick to promulgating his economic ideology, rendering that shtick relevant to this conversation.
I recognize the distinction made in your first sentence. It just doesn't "obviously" follow that the distinction's material and relevant. If Friedman had popularized the use of RCTs in economic research and the use of the printing press to promulgate economic research, I'd call them as relevant here as the PIH and the Friedman test.
What Friedman theories were actually based on published research or books. Or did he obtain guru like status and in interviews he made a brief, often succint, answer to a question, which was taken up by his followers as the way forward. With Keynes you have a published work easily examined and marked. Friedman, perhaps not so easily done.
You indicate more is to come on inflation, monetary policy, etc. In these times again very topical.
Your second paragraph mentions things that caused the ferment of the 60s and 70s. Are you to posit solutions to these specific things. Bit of history would go down well.
Hi Noah, I am a big fan of you. Can you write a post on why much of the entire consulting industry is a scam? I saw your twitter today and got interested.
I think Friedman did a lot of harm both as the results of his specific policies and with his focus on money supply. I think it was Samuelson who said, roughly, Friedman's problem is that he thinks about money supply all the time. I think about sex all the time but that isn't good economics either.
We've seen that the adoption of Friedman's way of economic thinking has slowed economic growth for the last four decades. We are still paying for the triumph of Friedman's ideas around 1980, most recently with the up and coming Federal Reserve induced recession we are about to enter. It has been easy to predict recessions since 1980. Every time economic growth starts showing up as wage growth for the bottom 20%, the Fed will slam on the brakes and return wages (inflation adjustment) to their original level. It's almost as if the Federal Reserves policy is that people are born to their station in life and it is defying the gods to expect more.
Worse in some ways, is the fixation on money supply which has encouraged the financialization of the economy at the cost of economic health and growth. Economics is supposed to be about how people get goods and services. In any useful and effective study of economics, money is seen as something that works in service of that end. Treating money as an end, an economic entity in and of itself, as Friedman does, gets one a sterile economics and sterile economy. Through a fixation on inflation, growth becomes the enemy rather than a goal.
The world would have been a better place if Friedman had never lived.
I made a plot of the income of the top 5% versus that of the bottom 20% since the 1960s using census data. Income is adjusted for inflation. You can see income rising through the inflationary 1960s and 1970s but then reaching a baseline. (See: http://www.kaleberg.com/wagesandshare/top5-vs-bot20.jpg). Economic growth, when allowed, raises bottom 20% incomes, but every time, including now, a recession comes and moves everyone back to the baseline. If I were doctrinaire, I would simply attribute this to an iron law of economics and call that vertical line the Kaleberg Kurve. Rather, I think it is simply a matter of policy. Providing more goods and services for the bottom 20% requires more inflation than the powers that be will accept. They want growth but not so much growth that everyone benefits.
I also think understanding this gives some insight into the so called middle income trap. Nations that have managed to get out of this trap managed to develop broad based prosperity usually through social revolution as in 19th and 20th century Europe, the US and Japan. Economists, and American economists especially, rarely talk about the Congress of Vienna, 1848 or 1870. The necessary kind of redistribution changes power relationships leaving the less well off feeling almost as entitled as the wealthy, so it is resisted politically, violently when necessary. In England, the benefits of industrialization required the violent Chartists movement and intervention by the king. In the US, there was a violent labor movement, a depression and a world war. This is playing out in China now. We saw rising wealth developing alternate centers of power, and now we see a wave of repression, and we aren't just talking about rising interest rates.
To the extent that economics ever exists as a "science" capable of explaining and predicting things, it will be as a branch of psychology -- a discipline that itself isn't really capable of explaining or predicting anything, and may never be able to do so to any useful degree.
And even if psychologists could make reasonably accurate predictions about how we are likely to think and behave, we'd need philosophers and ethicists to tell us whether we ought to think and behave as we do. And those people have never agreed on anything, and never will.
I'm going back to tend my garden. Which is probably just a simulacrum of a garden that exists only as bits of data in the quantum computing devices of some far more advanced civilization running an n-dimensional game for their own amusement.
What if the vigorous and enthusiastic application of Friedman's more political ideas - that corporations have no responsibility but to maximize returns to shareholders and that government shouldn't interfere with their doing so - has led to a concentration of wealth and power so extreme that it threatens the basic functioning of our political system and the existence of our democracy? I'd give that an F.
I’m not sure that’s had much impact in real life because in real life nobody actually believes it - at least the CEOs and shareholders don’t. Online people believe this because it’s a rational argument using logic, which is considered valuable when posting, but nothing actually makes the real world operate logically.
What we do have is CEOs like Jack Welch manipulating their stock prices, but rather than following a rational principle he was kind of just cheating.
I do think you're a little harsh on some of these (especially floating exchange rates vs pegs and capital controls).
Ultimately, I don't think the best way to understand theories like PIH is as eternal standalone laws, but as improvements or counters to existing ideas that expect to be improved upon further. - i.e. you wouldn't give Isaac Newton an 'F' because all of his ideas have been overturned.
Newton's ideas haven't been overturned. They've been subsumed. The new theories are valid across a broader range of parameters, higher speeds, smaller objects, but Newton's ideas still work very nicely and are still taught and used every day.
In fact, Newton’s theory is more useful in most situations - QFT is of course impossible to calculate in all kinds of reasonable situations, but quantum mechanics isn’t quite sure about some real situations that classical theory is fine with.
Empirically, the likeliest outcome is that industrial policy is that it is the only way to industrialize a nation. Friedrich List was forced into exile for his ideas, but eventually, after the German states used his ideas to industrialize, he was allowed back and rewarded. England had an industrial policy backed by imperial expansion. The US had an industrial policy and fought a Civil War over its application. Every nation in Europe relied on industrial policy. Japan, Korea and the Asian "tigers" all relied on industrial policy. China has had some success with its industrial policy as has Vietnam. I can't think of a nation that managed to industrialize without an industrial policy. Perhaps someone can provide an example.
The reign of quantity theory extended beyond the time frame you mention for the Feds devotion to it. For my sins, I became a regular reader of the Wall Street Journal in the early 1980s. At that point, the Fed was reporting weekly money supply figures. When those figures got released they moved markets. I.e. Traders still believed Friedman's Quantity Theory.
A "B" for the quantity theory of money? That's nuts!
Of course in very high inflation economies, growth of money supply is closely related to inflation. Such high inflation rates are as a rule driven by some kind of rapid expansion of fiscal or quasi-fiscal spending funded by money issuance. Usually it's simply central government spending, but it can be any kind of spending as long as the group doing the spending de facto controls the central bank and has exclusive access to its money issuance.
But the relationship between money supply and inflation is not a rule that normally holds except in a few countries. It's a rule that holds only in high inflation countries and does not hold in normal, developed countries.
The fundamental error behind the quantity theory of money is that it wrongly imagines that currency is equivalent to a stake in the country's real wealth, and therefore wrongly assumes that the value of a currency is equal to a country's real wealth divided by its quantity of money, plus or minus sentiment.
But currency is a monetization of future national output, in the same sense that a debt instrument is a monetization of an income-producing asset's future income. The value of money doesn't depend on its quantity any more than the value of individual debt instruments depends on total debt issuance volumes.
In a closed economy, currency value would depend on relative volumes of nominal spending and real output. In a globalized economy it's much more complicated.
Yes, money issuance likely impacts nominal spending, but the relationship is anything but 1:1, and can be 1:0, if the money issuance is all saved.
The quantity theory of money is first and foremost a failure of logic, but it is also a failure in practice. Give it the F it deserves.
The main thing people know about Friedman is "inflation is always and everywhere a monetary phenomenon". You justly called it his most famous idea.
I pretty much think it's wrong.
Sure - print tons of money, don't increase supply of goods/services and you're bound to get some inflation at some point (though, the collapse in the velocity of money will work very hard against you ; so printing isn't everything - as we saw with QE. Giving money to bankers doesn't do jack shit to standard everyday prices. Asset prices otoh...)
So already we got qualifiers.
And that's before we get into things like supply shocks that can generate inflation, whatever the money supply or money printing powers do.
Also note the difference (for inflation) between the QE stuff by the Central Banks and the fiscal spending/COVID relief done by the governments. One generated at most "asset inflation", invisible by and large to the CPI or PCE while the other has gotten us an honest to God inflation crisis.
Now, you can say that the fiscal powers can only send money to people because the CB enables it by printing money but this is getting stupid/tautological. Inflation is not always and everywhere a monetary phenomenon. Indeed, it seems to be the exception rather than the norm, at least for the last 40-50 years in developed countries.
Liking this comment with the caveat that I'm skeptical of the penultimate paragraph's claim that COVID relief and attendant fiscal spending led us to our "honest to God inflation crisis" — but all the rest makes sense.
Well, it's not me alone saying it. I think our host Noah had a post about it. The evidence isn't 100% but it seems clear, on balance, that the fiscal support we received was a bit excessive and is at the very least partially responsible. How much vs. supply chains snags, changing consumer behaviours and the war in Ukraine? Harder to tell. I think it's responsible for quite a big chunk of the inflation but thoughtful people are honestly disagreeing on that one.
Noah did have a(t least one) post about it: https://noahpinion.substack.com/p/was-the-american-rescue-plan-a-mistake. It didn't remotely convince me that CARES/ARP explains most of the past 6 months' inflation. Probably CARES/ARP made some small contribution to recent inflation, but I'd ballpark it as tenths of a point rather than most of the 9% from the latest CPI data. Reasonable people can disagree about the exact number — so I am!
Fair enough but do you have any general reason(s) or data to share so we can discuss/evaluate further?
Sure. Starting with Noah's post, it didn't have strong evidence. It mentioned a note from the San Francisco Fed suggesting that COVID relief accounted for most core CPI inflation from late 2020 onwards. But the note's methodology, while reasonable as a back-of-envelope exercise, wasn't that convincing: it assumed a particular relationship between core inflation and disposable income, which probably isn't super robust (and is circular reasoning if the note's used as evidence of the causal relationship existing in the first place). Also, the note looked at core inflation, which screens out the obvious direct impact of exploding oil prices. Also also, the note only used inflation data up to the end of 2021. Finally, Noah's post mentions another note from the same bank that estimated an impact of just 0.2–0.3 points.
That's why Noah's post didn't convince me. On a wider view, the US has similar CPI inflation to the whole OECD (https://data.oecd.org/price/inflation-cpi.htm), so good explanations for US inflation should probably be global rather than US-specific. And there are multiple plausible global-scale contributors to inflation:
• oil prices (already increasing/high before Russia re-invaded Ukraine),
• consumers shifting services spending to goods spending and then back (which disrupts the balance of the economy even if total aggregate demand doesn't change),
• a noisier and reduced supply of workers (not just from direct illness but also older workers quitting to hide from the virus),
• office workers' housing demand sloshing back and forth due to the shift to WFH and partially back,
• and now the direct impact of Russia's war on Ukraine hitting supplies of wheat, gas, and neon (neon is a key input to semiconductor manufacturing).
And Moody's Analytics's Chief Economist agrees with me, for whatever little that's worth! https://twitter.com/Markzandi/status/1536075313741971456
And to throw in a more speculative inflation driver, there's climate change as well. Remember the extreme weather from 2020 and 2021, like how half the West Coast seemed to be on fire in the summer of 2020? Well, now India's suffering a fearsome heat wave that's turned forecasts on their heads: instead of "a record wheat crop" India's resorted to banning all wheat exports (https://www.politico.eu/article/climate-change-heats-up-south-asia-global-food-crisis/).
True but Milton and people in his days thought V was more or less constant. Hence they got the wrong conclusions. MV = PY is derived from accounting identities. It's clever and I wouldn't have figured it out so by all means give Friedman a Nobel Prize but it's a tautology.
What's not tautological is the reasoning behind why this equation is true and what it implies when you want to do QE or fiscal spending etc. But here Friedman failed.
I'm skeptical of economics as a discrete branch of human thought, yet nonetheless have spent decades reading through the greats (as a lay person), from Hayek and Friedman, Adam Smith and Ricardo, Keynes and Galbraith, to Marx and neo Marxists, Lenin and Mao and MMTers.
I come to the Tolstoyian resignation that it's all so complicated, we're better off calling it God's Will, making our propitiations, keeping our heads down, and plodding on.
So I figure I should comment when I like one of your articles and say so. This analysis is more than silly spreadsheetery and humble enough to be harmless. I think grading Uncle Miltie as C-level work is fair and instructive.
Wow, fantastic analysis, thank you Noah. It is a
Pleasure to be a subscriber to your Substack
Many thanks
Thank you!!
Keynes of course rejected the quantity theory of money. And so does prof. Bill Mitchell, who observed that if more money is spent to increase supply (before increasing consumption) , or if supply is already adequate, ( eg excess food available, or sufficient housing stock for everyone) then demand inflation will be avoided
Also I think Friedman's "supply side" theory (in the 70's) failed to take account of the loss of 1st world manufacturing to low wage Asia., apart from the Arab oil-price shock.
Is there a chance the quantity theory of money will go the way of the lump of labor theory of labor?
"Plus, it's likely that big structural changes make it such that the discipline has few eternal verities - what describes the economy well in 1976 might have little to do with the events of 2016."
Right! But isn't this also true of the verities professed about economic systems at all?
E.g., if you put a Marxist and free market absolutist in a small room together, would either of them ever yield to the reality that whatever they might have argued about in 1930 looked different by 2020? Globalized capitalism and technological advance together inevitably produce economic dislocations that require government intervention to prevent or assuage political upheaval, so unless you just expect to purge a chunk of your population periodically, more capitalism eventually must lead to more socialism even if the electorate/proletariat does not rule per se, there is no brotherhood of man etc.
Well, I'm not well-read enough to know.
My comment is more of a question. It is a little off-topic but still concerns the Fed and monetary policy. With rising inflation, I read complaints about how it was hurting people; with the Fed's raising interest rates to control inflation, I heard how this response was hurting people and would lead to a recession. How long and how deep is up in the air. I hear and read about complaints, but I never see or read any suggestions on controlling inflation without raising the interest rate. Anyone, even us non-economists, can look back and say this or that action was incorrect. I feel Chairman Powell is doing as good a job as can be expected, and time will show how well he responded to the problem. My question to you is, "What would you do to combat inflation?" Please keep in mind the old military dictum - any action, even if later proven to be incorrect, is better than no action at all.
You could apply classical economics and let the prices rise and demand fall. The current practice is to drastically reduce demand to crush rather than slow demand. Some call it supply side economics, but its actual mechanism requires managing demand in as crude and punitive way as possible.
That is absolutely correct. On the other hand, there has never been a growing economy or one with rising living standards without a wage-price spiral.
You're right. Economists have a specific definition for wage price spirals. They are different from rising wages putting pressure on supplies which drives up prices as the rising demand for labor raises wages. In a wage price spiral, the wages and prices rise but the quantity of goods doesn't change much. In the latter, more goods come available and are sold though at higher prices.
And then there's Milton Friedman's innovation of the Shapiro-Crowder technique of visiting college campuses to rattle off right-wing talking points (while controlling the mic) faster than the undergrads can improvise comebacks. Like that time Friedman inspired Nick Fuentes to write off Africa's colonization on the grounds that some Africans hadn't discovered the wheel: https://www.youtube.com/watch?v=ry2cRP73h9s&t=189s
MF sure comes across as enormously arrogant in every video I have seen.
I guess that doesn't affect his grade as an economist.
However people who are stating theories with such certainty almost always are wrong.
The Friedman test isn't very relevant either, being purely a statistical device rather than an economic idea, but Noah included it in his list anyway. So clearly Friedman's non-economic innovations are in scope.
I don't claim to be clever, merely correct. As to the actual substantive disagreement: if a non-economic innovation is rendered relevant when applied to economic ends, I can just point out that Friedman applied his film-oneself-trolling-campus-teenagers-with-right-wing-talking-points shtick to promulgating his economic ideology, rendering that shtick relevant to this conversation.
I recognize the distinction made in your first sentence. It just doesn't "obviously" follow that the distinction's material and relevant. If Friedman had popularized the use of RCTs in economic research and the use of the printing press to promulgate economic research, I'd call them as relevant here as the PIH and the Friedman test.
What Friedman theories were actually based on published research or books. Or did he obtain guru like status and in interviews he made a brief, often succint, answer to a question, which was taken up by his followers as the way forward. With Keynes you have a published work easily examined and marked. Friedman, perhaps not so easily done.
You indicate more is to come on inflation, monetary policy, etc. In these times again very topical.
Your second paragraph mentions things that caused the ferment of the 60s and 70s. Are you to posit solutions to these specific things. Bit of history would go down well.
Likely many modern academics spend too much time on social media to be able to have time to write research.
Hi Noah, I am a big fan of you. Can you write a post on why much of the entire consulting industry is a scam? I saw your twitter today and got interested.
I think Friedman did a lot of harm both as the results of his specific policies and with his focus on money supply. I think it was Samuelson who said, roughly, Friedman's problem is that he thinks about money supply all the time. I think about sex all the time but that isn't good economics either.
We've seen that the adoption of Friedman's way of economic thinking has slowed economic growth for the last four decades. We are still paying for the triumph of Friedman's ideas around 1980, most recently with the up and coming Federal Reserve induced recession we are about to enter. It has been easy to predict recessions since 1980. Every time economic growth starts showing up as wage growth for the bottom 20%, the Fed will slam on the brakes and return wages (inflation adjustment) to their original level. It's almost as if the Federal Reserves policy is that people are born to their station in life and it is defying the gods to expect more.
Worse in some ways, is the fixation on money supply which has encouraged the financialization of the economy at the cost of economic health and growth. Economics is supposed to be about how people get goods and services. In any useful and effective study of economics, money is seen as something that works in service of that end. Treating money as an end, an economic entity in and of itself, as Friedman does, gets one a sterile economics and sterile economy. Through a fixation on inflation, growth becomes the enemy rather than a goal.
The world would have been a better place if Friedman had never lived.
I made a plot of the income of the top 5% versus that of the bottom 20% since the 1960s using census data. Income is adjusted for inflation. You can see income rising through the inflationary 1960s and 1970s but then reaching a baseline. (See: http://www.kaleberg.com/wagesandshare/top5-vs-bot20.jpg). Economic growth, when allowed, raises bottom 20% incomes, but every time, including now, a recession comes and moves everyone back to the baseline. If I were doctrinaire, I would simply attribute this to an iron law of economics and call that vertical line the Kaleberg Kurve. Rather, I think it is simply a matter of policy. Providing more goods and services for the bottom 20% requires more inflation than the powers that be will accept. They want growth but not so much growth that everyone benefits.
I also think understanding this gives some insight into the so called middle income trap. Nations that have managed to get out of this trap managed to develop broad based prosperity usually through social revolution as in 19th and 20th century Europe, the US and Japan. Economists, and American economists especially, rarely talk about the Congress of Vienna, 1848 or 1870. The necessary kind of redistribution changes power relationships leaving the less well off feeling almost as entitled as the wealthy, so it is resisted politically, violently when necessary. In England, the benefits of industrialization required the violent Chartists movement and intervention by the king. In the US, there was a violent labor movement, a depression and a world war. This is playing out in China now. We saw rising wealth developing alternate centers of power, and now we see a wave of repression, and we aren't just talking about rising interest rates.
To the extent that economics ever exists as a "science" capable of explaining and predicting things, it will be as a branch of psychology -- a discipline that itself isn't really capable of explaining or predicting anything, and may never be able to do so to any useful degree.
And even if psychologists could make reasonably accurate predictions about how we are likely to think and behave, we'd need philosophers and ethicists to tell us whether we ought to think and behave as we do. And those people have never agreed on anything, and never will.
I'm going back to tend my garden. Which is probably just a simulacrum of a garden that exists only as bits of data in the quantum computing devices of some far more advanced civilization running an n-dimensional game for their own amusement.
Not not true:
https://evonomics.com/economists-stop-defending-milton-friedmans-pseudo-science/
Would Friedman be for or against a grading curve?
What if the vigorous and enthusiastic application of Friedman's more political ideas - that corporations have no responsibility but to maximize returns to shareholders and that government shouldn't interfere with their doing so - has led to a concentration of wealth and power so extreme that it threatens the basic functioning of our political system and the existence of our democracy? I'd give that an F.
I’m not sure that’s had much impact in real life because in real life nobody actually believes it - at least the CEOs and shareholders don’t. Online people believe this because it’s a rational argument using logic, which is considered valuable when posting, but nothing actually makes the real world operate logically.
What we do have is CEOs like Jack Welch manipulating their stock prices, but rather than following a rational principle he was kind of just cheating.
Didn't realise he had so many!
I do think you're a little harsh on some of these (especially floating exchange rates vs pegs and capital controls).
Ultimately, I don't think the best way to understand theories like PIH is as eternal standalone laws, but as improvements or counters to existing ideas that expect to be improved upon further. - i.e. you wouldn't give Isaac Newton an 'F' because all of his ideas have been overturned.
Newton's ideas haven't been overturned. They've been subsumed. The new theories are valid across a broader range of parameters, higher speeds, smaller objects, but Newton's ideas still work very nicely and are still taught and used every day.
In fact, Newton’s theory is more useful in most situations - QFT is of course impossible to calculate in all kinds of reasonable situations, but quantum mechanics isn’t quite sure about some real situations that classical theory is fine with.
https://youtu.be/LJzKLTavk-w
Empirically, the likeliest outcome is that industrial policy is that it is the only way to industrialize a nation. Friedrich List was forced into exile for his ideas, but eventually, after the German states used his ideas to industrialize, he was allowed back and rewarded. England had an industrial policy backed by imperial expansion. The US had an industrial policy and fought a Civil War over its application. Every nation in Europe relied on industrial policy. Japan, Korea and the Asian "tigers" all relied on industrial policy. China has had some success with its industrial policy as has Vietnam. I can't think of a nation that managed to industrialize without an industrial policy. Perhaps someone can provide an example.
That's interesting.
I do not deny that. It is possible for industrial policy to fail, but it is impossible for industrialization to succeed without government policy.
The reign of quantity theory extended beyond the time frame you mention for the Feds devotion to it. For my sins, I became a regular reader of the Wall Street Journal in the early 1980s. At that point, the Fed was reporting weekly money supply figures. When those figures got released they moved markets. I.e. Traders still believed Friedman's Quantity Theory.
A "B" for the quantity theory of money? That's nuts!
Of course in very high inflation economies, growth of money supply is closely related to inflation. Such high inflation rates are as a rule driven by some kind of rapid expansion of fiscal or quasi-fiscal spending funded by money issuance. Usually it's simply central government spending, but it can be any kind of spending as long as the group doing the spending de facto controls the central bank and has exclusive access to its money issuance.
But the relationship between money supply and inflation is not a rule that normally holds except in a few countries. It's a rule that holds only in high inflation countries and does not hold in normal, developed countries.
The fundamental error behind the quantity theory of money is that it wrongly imagines that currency is equivalent to a stake in the country's real wealth, and therefore wrongly assumes that the value of a currency is equal to a country's real wealth divided by its quantity of money, plus or minus sentiment.
But currency is a monetization of future national output, in the same sense that a debt instrument is a monetization of an income-producing asset's future income. The value of money doesn't depend on its quantity any more than the value of individual debt instruments depends on total debt issuance volumes.
In a closed economy, currency value would depend on relative volumes of nominal spending and real output. In a globalized economy it's much more complicated.
Yes, money issuance likely impacts nominal spending, but the relationship is anything but 1:1, and can be 1:0, if the money issuance is all saved.
The quantity theory of money is first and foremost a failure of logic, but it is also a failure in practice. Give it the F it deserves.