Wednesday, January 21, 2015


I typed something sloppily which stimulated Nick Rowe (see his comments here)
Actually I have a challenge. Name a Friedman Solow debate which, with the benefit of hindsight, we agree was won by Friedman. I do not think this is easy to do.
The problem, I think, is the word "we". My challenge was to name a Friedman Solow debate and convince me (Robert Waldmann) that Friedman was right. Rowe interpreted "we" to refer to the main stream of the macroeconomics profession. For that set of people I use the pronoun "they" and I don't agree with them on much.

Of course, no one much cares what I think. However, I do think I have an interesting question. Let's take it as agreed that new Keynesian macroeconomics is basically Friedmanite macroeconomics and both are very different from old Keynesian macroeconomics and real business cycle theory. Now clearly new Keynesian has replaced old Keynesian in the academy and, in that sense, they have won something rather like a debate. However, I think this victory came in one of two ways.

First there was the victory over the straw man of the expectations unaugmented Phillips curve. I think the conventional recollection of that alleged debate is almost entirely fictional. Basically google James Forder Oxford or click here , here, here,here here here. But it really is better to google James Forder Oxford. I haven't read the book, but I have read a lot of his working papers.

I definitely call this one for Samuelson and Solow 1960. Yes the profession (also over here with huge persistent unemployment) believes in the natural rate hypothesis. The profession is crazy.

The permanent income hypothesis is no longer controversial or a hypothesis. It is rejected by the data and no one cares. It is now the permanent income model and it is assserted that although it isn't true it may be useful (the logic is almost that since it isn't exactly true it must be useful). I asked if there is anything useful about the permanent income model. I didn't get a definite yes from any data. here here here here

There is the idea that AD should be managed with monetary policy. I do not do not want to go there. I just note that recent experience doesn't show that good monetary policy solves AD problems. It can be argued that it is because we haven't had good monetary policy. In contrast, there is strong evidence that expansionary fiscal policy (as in China) works, that modestly expansionary fiscal policy (the ARRA in the USA) works moderately and that austerity has terrible consequences. I think the weight of evidence is very strongly against the idea that the best way to manage AD is always monetary policy. I note that part of the Friedman vs Old Keynesian debate was whether liquidity trapping was possible. Friedman argued no. I think the debate should be considered settled (of course I know it isn't considered settled).

Floating exchange rates may beat the alternative, but the idea, which I ascribe to Friedman, that they won't fluctuate widely with associated huge current account surpluses and deficits is now known to be false. Also I vaguely recall reading an Newsweek column by Samuelson about who cares about the current account deficit which we can ban permanently by floating the exchange rate (needless to say, he was wrong, the point is that I think he agreed with Friedman). This is a recollection of something written in the early 70s (when I was in my early teens) which can't be googled.

Rules v discretion in monetary policy. Has anyone noticed that the FOMC is not working according to a rule ? Here I think market monetarists argue that something should be done and would work fine.

Anyway, Rowe and I agree that Friedman dominates mainstream (non RBC) macro. But he seems to think that this is the result of some sort of inquiry which might be construed as scientific. I think it is based on almost universal almost utter contempt for the evidence.

update: I see I have gotten off topic. I should have stuck to the challenge of finding some point where Solow clearly disagreed with Friedman and subsequent data strongly support Friedman. Solow Importantly, I am not discussing Solow's (massive) original contributions -- if Friedman said something first, and Solow agreed, then they didn't debate.

I can think of two debates. One alleged and very famous debate was about the Phillips curve. However, recollections of Solow's position are inconsistent with what he actually wrote. I see two points where Solow disagreed with Friedman. First, in current terminology, Solow argued that inflation expectations were sometimes anchored (sometimes as in not in Latin America in the 60s). Here, current discussion seems to me to follow Solow almost exactly. Second, Solow discussed cyclical unemployment becoming structural. This is now called hysteresis. As far as I know, Friedman didn't consider the issue. It seems to be quite important. Anyway, on the PIH debate, I suggest the reader (if anyone is still reading go to James Forder at Oxford).

On the PIH, Solow dismissed Ricardian equivalence. Friedman didn't use the phrase, but he clearly appealed to the concept. I think the evidence on this point is very clear.

This post is a reply to Rowe comments on an older post. Also in comments to that post, Alan Marin wrote something I was groping towards above

Finally, for now at least, I think that on the crucial Rules vs. Discretion 1970s disagreement between Friedman and the Keynesians, current practice fits neither exactly, but is closer to the Keynesians. Nick Rowe overstated the Friedman "victory" by ignoring the distinction between instruments and targets. Steady inflation is now viewed as a target, but Central Banks are given full discretion over their use of the instrument. This is very different than a Friedmanite rule of a steady increase in the quantity of the monetary base [*]. Central Banks do not even commit to an explicit unvarying Taylor Rule, which would have been closer to a Friedman type of rule. Simiilarly, CB monetary policy does not take Friedman's view that the lags in the effects of policy are so long and variable as to make any response to current events undesirable.
* update: See Nick Rowe in comments again ! The Friedman rule was k% growth of money not of monetary base. This means that during the brief period they tried to follow a Friedman rule, the FOMC had to monitor the money multiplier (IIRC M2 divided by Fed liabilities) and perform open market operations.


Nick Rowe said...

Small point, on what Alan said: Friedman didn't want k% growth in *base* money; he wanted k% growth in M2, IIRC. If my memory is right on that, that would imply discretionary base control to hit a rules M2 target.

Robert said...

Yes IIRC then you recall correctly. Friedman's k% rule isn't really mechanical and required constant open market operations due to changes in the the money multiplier.

This isn't a trivial task. In fact, I think that, during the brief period when the FOMC tried to target monetary aggregates (roughly 1979-82 IIRC) they missed the target for M2 (or was it M1 ?).

Thornton Hall said...

The way this debate takes place on ever shifting sands is analogous to why Wittgenstein said there can be no such thing as a private language. Words must have a public check or they cease to be words.

Economics is a private language.