Friendman's ideas discredited by who?, November 8, 2003|
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Paul Krugman writes: "I think it is fair to say that up until the late 1960s Friedman and his followers, while influential, were regarded by many of their colleagues as faintly disreputable." (2) Edward Herman writes: "Friedman's methodology in attempting to prove his models have set a new standard in opportunism, manipulation, and the abuse of scientific method." (3) Paul Diesing lists six tactics Friedman
uses to support a pet hypothesis called "Permanent
Income" (or PI). These are:
What happened? Monetarism was tried in Great Britain during the 80s, under Margaret Thatcher, and it proved to be a disaster. For almost seven years, the Bank of England tried its best to make it work. According to monetarist theory, the British economy should have enjoyed low inflation and high stability. But in fact, it went berserk. The economy sank into a deep recession, while lead economic indicators zigged and zagged. Although inflation came down, this was at the price of rising unemployment, which soared from 5.4 to 11.8 percent. Between 1979 and 1984, manufacturing output fell 10 percent, and manufacturing investment fell 30 percent. (5) Eventually production recovered to a respectable 2.8 percent growth, but it became clear that high unemployment was a permanent feature of the British economy. Eventually, the Bank of England came under overwhelming pressure to abandon monetarism, which it did in 1986. The experiment was such a failure that not even conservatives abroad wish to repeat it. In step with Great Britain, the U.S. Federal Reserve announced in 1979 that it, too, would follow a monetarist policy. Many people blamed the double-digit inflation of the late 70s on Keynesian theory, on too much expansion of the money supply trying to achieve "full employment." Many critics thought that monetarism would restore some responsibility and stability at the Fed. Chairman Paul Volcker apparently agreed, and under the name of monetarism contracted the money supply down to a steady level. This produced a deep recession, but it did cure double-digit inflation. In 1982, when inflation looked defeated, the Fed suddenly abandoned monetarism and reverted to a Keynesian policy. In that summer it sharply increased the money supply, and a few months later the economy roared to life, in a recovery that would last seven years. Milton Friedman was furious at the betrayal, but he got little sympathy from his fellow economists, who were witnessing a monetarist disaster unfold in Great Britain. Why did the Fed abandon monetarism? Because it was never really monetarist in the first place. Volcker's strategy to defeat double-digit inflation had been classically Keynesian: reign in the money supply, and accept a deep recession in the process. The "monetarist" label was simply political cover, to mollify the Fed's growing number of critics. Such criticism was not renewed after monetarism failed in Britain, and Keynesian policies produced a seven-year boom in the U.S. The contrasting experience of those two nations was responsible for the demise of Friedman's theory. Endnotes: 1. Except where otherwise noted, this review is primarily based on Paul Krugman, Peddling Prosperity (New York: W.W. Norton & Company, 1994), pp. 34-40, 172-178. 2. Krugman, p. 40. 3. Edward Herman, Triumph of the Market (Boston: South End Press, 1995), p. 36. 4. Paul Diesing, "Hypothesis Testing and Data Interpretation: The Case of Milton Friedman," Research in the History of Economic Thought and Methodology, vol. 3, pp. 61-69. 5. Peter Pugh and Chris Garratt, Introducing
Keynes (Cambridge, UK: Icon Books Ltd., 1994), p.
152. |
Skepticism, January 24, 2002