Economic Policy made simple;-)
Economic Policy made simple;-)
This reminded me of Krugman's reference to this video:
More On The Disappearance Of Milton Friedman
It seems that many people misunderstood my post on Milton Friedman. It was not intended as Friedman-bashing, as a claim that MF was a bad economist; in fact, I’m on record declaring Friedman a “great economists’ economist”. His work aimed primarily at a professional audience — the permanent income theory of consumption, the case for flexible exchange rates, the natural rate (even if it does break down at low inflation), the optimum quantity of money — was often, maybe even usually, brilliant, and will live on.
What isn’t living on, however, is Friedman’s role as a guiding light for conservative economic policy.
Think about Paul Ryan, who is, like it or not, the leading economic intellectual of the modern GOP. Ryan sometimes drops Friedman’s name — but when he does, it’s to cite Capitalism and Freedom, not A Monetary History of the United States. When it comes to monetary policy, Ryan has said that his views are based on fictional characters in Atlas Shrugged. No, really.
Or think about the economics rap video of Keynes versus Hayek everyone had fun with. Never mind that back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes; the real shock should be, what happened to Friedman?
Partly this disappearance reflects real problems with Friedman’s analysis. His views on the omnipotence of monetary policy,let alone the adequacy of a simple quantity-of-money rule, haven’t withstood the test of time. As far as stabilization policy is concerned, he was indeed, as Brad DeLong archly puts it, a minor post-Hicksian.
But the bigger issue, I’d argue, is that modern conservatives can’t accept the things Friedman was right about. Take, in particular, his essay on flexible exchange rates, in which he argued that a country that finds its wages and prices out of line should devalue its currency rather than rely on unemployment to push wages down, “until the deflation has run its sorry course.” Contrast this with Ryan’s declaration that “There is nothing more insidious that a country can do to its citizens than debase its currency.”
The point is that Friedman was, when all is said and done, a pragmatist; he leaned right ideologically, but was willing to make room for awkward realities. And these days reality has a well-known liberal bias. Hence, Friedman has become an unperson.
And this Friedman quote:
Wish I’d Said That, Rand Paul Edition
Matt O’Brien follows up on Rand Paul and Milton Friedman, and finds the senator trying– in the face of all the facts — to claim that Friedman would have supported his monetary views. Again, Paul is a self-proclaimed Austrian, and Friedman was contemptuous of the Austrians:
So Paul’s denial is a sight to behold. The best point in Matt’s post, however, is his final line, which summarizes what I was trying to say in yesterday’s column perfectly:
I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.
The irony, of course, is that Milton Friedman was trying to save conservatism from people exactly like Rand Paul.
From Hayek's "Road To Serfdom"
"Why did Mao Zedong’s great ideals create such great tragedy? The answer can be found in Hayek’s writings. China’s revolutionaries built a system based on what Hayek called “the Great Utopia,” which required “central direction and organization of all our activities according to some consciously constructed ‘blueprint’” and for a “unitary end” while “refusing to recognize autonomous spheres in which the ends of the individuals are supreme.” In China’s case, this “unitary end” was the “Great Utopia” of communism. In order to bring about this Great Utopia, China’s leaders constructed an all-encompassing and omnipotent state, eliminating private ownership, the market and competition. The state controlled the vast majority of social resources and monopolized production and distribution, making every individual completely dependent on it. The government decided the type and density of crops planted in each location, and yields were taken and distributed by the state. The result was massive food shortages, as the state’s inability to ration food successfully doomed tens of millions of rural Chinese to a lingering death. "
As you know Buzz, I often repost stories from The Atlantic on Facebook. I don't expect their writers to agree with Hayek. For instance, I think the Austrians offer a more sound approach to long term stability than the false props offered by Keynes. "
From The Atlantic contributor Matt O'Brien...
"I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm."
By not letting the Free Market work its magic, we only prolong the illness and make it much worse when we finally have to deal with it. I for one don't think the days of bailing out banks are a thing of the past. If we though we faced financial Armageddon in late 2007, just wait. The next one will be too big to bail out.
I've also been critical of Paul Ryan's proposed plan as it does little to address the core problems. It doesn't rein in Medicare or Medicaid nearly enough. What I do like about Rand is that he is the only one willing to drastically cut the size of the Fed Gov, audit the Fed and get the gov more inline for which it was originally intended. However, he is not the visionary his dad is and Rand's policy on social issues means he will never spend a night in the White House. But I give him credit for trying to stop Obama at every opportunity.
I've owned this copy of "Wealth of Nations" by Adam Smith, some prof from the U of Glasgow for years, written prior to & released in 1776. The book has been moved so many times it's a little dog-eared & the pages are a little yellow with age, but never read :). It's 900 pages long & so far not a fast read, but I'm beginning early on to wonder why there are even jobs for economics majors. What I've read to date, while quite simple, seems to explain just about everything about free trade & it's good points :cool:.Quote:
And this Friedman quote:
You can find it here:
You'll see also that Friedman felt the same about Keynes as he did Hayek.
As to his monetary policy, simply put, he believed in a CONSTANT growth of the money supply consistent with a healthy growing economy. He is right in saying Friedman also believed in flexible exchange rates. Why would he not? He believed in flexible exchange of goods and services. For him to say that Friedman advocated devaluation of our currency to fight unemployment is absurd at best and an outright lie at worst. It is true that a a constant growth of the money supply consistant with a healthy growing economy may well create a devaluation of the currency but NEVER did he say to take any independent action to devalue currency to reduce unemployment, something Krugman tries to imply.
I believe but I'm not positive that this is the comment that you take issue with:Quote:
The following quotes are from "The Case for Flexible Exchange Rates" by Milton Friedman, published in Friedman's Essays in Positive Economics, University of Chicago Press, 1953.From page 165:
If internal prices were as flexible as exchange rates, it would make little economic difference whether adjustments were brought about by changes in exchange rates or equivalent changes in internal prices. But this condition is clearly not fulfilled. The exchange rate is potentially flexible in the absence of administrative action to freeze it. At least in the modern world, internal prices are highly inflexible. They are more flexible upward than downward, but even on the upswing all prices are not equally flexible. The inflexibility of prices, or different degrees of flexibility, means a distortion of adjustments in response to changes in external conditions. The adjustment takes the form primarily of price changes in some sectors, primarily of output changes in others.
Wage rates tend to be among the less flexible prices. In consequence, an incipient deficit that is countered by a policy of permitting or forcing prices to decline is likely to produce unemployment rather than, or in addition to, wage decreases. The consequent decline in real income reduces domestic demand for foreign goods and thus demand for foreign currency with which to purchase these goods. In this way it offsets the incipient deficit. But this is clearly a highly efficient method of adjusting to external changes. If the external changes are deep-seated and persistent, the unemployment produces steady downward pressure on prices and wages, and the adjustment will not have been completed until the deflation has run its sorry course.
From page 173:
The argument for a flexible exchange rate is, strange to say, very nearly identical with the argument for daylight savings time. Isn't it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual separately change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.
The interesting thing is that allowing if allowing the money supply to grow at a constant rated that ends up debasing the currency, and you purposely allow that to continue, then in effect you have certainly taken the independent action of allowing that to occur. So clearly Ryan and Friedman would disagree. Based on the above excerpts, I think it would be a stretch to accuse Krugman of an outright lie. He seems to be saying that it is preferable to reset the clock than it is to reset all the schedules.Quote:
But the bigger issue, I’d argue, is that modern conservatives can’t accept the things Friedman was right about. Take, in particular, his essay on flexible exchange rates, in which he argued that a country that finds its wages and prices out of line should devalue its currency rather than rely on unemployment to push wages down, “until the deflation has run its sorry course.” Contrast this with Ryan’s declaration that “There is nothing more insidious that a country can do to its citizens than debase its currency.