Thursday, November 23, 2006

Getting it Wrong

Following up links to a recent post of mine, I came across an article on my father in the Washington Post. It was an interesting piece not for what it got right but for what it got wrong.

The author starts with a simple and interesting puzzle. Most of the articles published on Milton Friedman after his death agree that he was a great economist. Many compare him to John Maynard Keynes, another great economist. But Friedman and Keynes held different, indeed inconsistent, views; an important part of Friedman’s accomplishment was to undo the effect of Keynes' accomplishment. If Keynes was right, how can Friedman be a great economist? If Friedman was right, how can Keynes be?

It is an interesting question, but the author gets the answer wrong. He concludes that both Keynes and Friedman were right. Keynes' version of economics was correct for the forties and fifties, Friedman’s for the seventies and eighties, when the Keynesian model "had played itself out."

That is a claim that neither Keynes nor Friedman would have taken seriously. Keynes titled his magnum opus “The General Theory of Employment, Interest and Money” not “The Theory of How Employment, Interest and Money Will Work from 1930 to 1960.” Part of the work that earned Friedman his Nobel was A Monetary History of the United States (coauthored with Anna Schwartz), in which he demonstrated that the Keynesian analysis of the Great Depression, the centerpiece of the Keynesian view of economics, was based on a historically mistaken account of what actually happened. It is an odd view of science in which the historical facts about the 1930’s changed between 1940 and 1970.

The author starts his discussion by claiming that economics is somehow less of a science than physics, hence its truths more temporary. Yet the history of physics offers precisely the same puzzle. Newton was a great physicist. Einstein was a great physicist. Part of Einstein’s accomplishment was to show that Newtonian physics was, in certain fundamental ways, wrong.

Newton was wrong, wrong not only now but then, but Newtonian physics provided the foundation of ideas on which later generations of physicists, including Einstein, built. Keynes was wrong, but his attempt to make sense of what he believed happened during the Great Depression provided a theoretical foundation on which later theorists, including Friedman, could build. Hence Friedman’s comment on Keynes: “In one sense, we are all Keynesians now; in another, no one is a Keynesian any longer"—misquoted by Time Magazine as “We are all Keynesians now.”


Anonymous said...

It says in Steven Pearlstein's article:

"And after the success of the Greenspan era at the Federal Reserve, Friedman was forced to acknowledge that maybe humans could do a better job managing monetary policy than the computer he once recommended."

However, in an interview he had with Russ Roberts at EconTalk just before his death, I distinctly remember that he expressed his support for abolishing the Federal Reserve and replacing it with a computer that would increase the money supply at a steady rate.

Am I missing something here?

Also, speaking of newspaper articles, there seems to be quite a bit of hatchet jobs coming out on Miton Friedman. Might be worth a look (read: laugh).

Anonymous said...

Also, speaking of newspaper articles, there seems to be quite a bit of hatchet jobs coming out on Miton Friedman. Might be worth a look (read: laugh).

I read a few. The ones I saw were all from the Guardian Unlimited UK. I thought it likely they were fairly socialist in viewpoint. :)

Gabriel M said...

Didn't your father say that the way science works is by people publishing bold and daring hypotheses that turn out to be wrong and which continually get improved (or something like that) and that in this sense Keynes was a great theoretician?

You can be a great economist and contribute a lot of the debate, the literature, education, etc. and still have your major hypotheses turn out wrong.

Anyway, monetarism is, as I see it, a special case of Keynesianism, in that it emphasizes the power of monetary policy over more orthodox Keynesian prescriptions. They were all the same extended family so this is why they managed to debate so fiercely and productively. Plus, didn't Milton Friedman, when first building a large/complete model, introduce his insights into a modified from form of the IS-LM?

A better way of putting it is, I think, that by the mid-'60s, early '70s, men like your father had completely changed macroeconomics thinking, Keynesian thinking, in a way completely incompatible with the vision of Keynes.

Today's New Keynesians are much closer to monetarism and Friedman than to Lord Keynes; in the type of monetary policy they advocate and in the way they consider imperfections.

Mike Huben said...

I did a quick search of guardian and friedman, and this is all I saw that was negative:

Milton Friedman: a study in failure

Personally, I'd prefer to read something more honest than unbalanced hagiography (which is what we're getting from the right.) Perhaps this counterbalances: I'd be interested to know how accurate it is in each accusation.

David, could you point us to some place with your father's assessments of his own successes and failures? Or provide a brief overview yourself?

Anonymous said...

Personally, I'd prefer to read something more honest than unbalanced hagiography (which is what we're getting from the right.)

Hi Mike! Long time no see. Still love the rug you sold us, and we've added a tiger rug on our wall that comes from Nepal.

Anyway, yes, that's absolutely correct. When I read a couple of those Guardian articles, I thought to myself that this is how the libertarian obits must look like to a socialist, and it would be great to have something from a knowledgeable dispassionate observer.

Anonymous said...

Well it could have been worse. In France, one of the main radio station broadcasted for a few hours that MF was a great defender of Keyne's idea.

Anonymous said...

the html broke... so they broadcasted it was a great defender of Keyne's ideas. (sic)

Mike Huben said...


You might be more convincing if you explained exactly how Keynes and Friedman fit these two archetypes. Considering Milton Friedman's involvement in the income tax, it might be easy to make the opposite case than you intend. And of course the real truth will be that if these archetypes have any validity, then each man will only partly match each archetype. Your manichean pretension that they are so completely opposite is just laughable.

Mike Huben said...

Ah, here's a more balanced summation by one of my long-time favorite economics popularizers, David Warsh.

The Man Who Became Keynes was written about 3 years ago, and sums things up better than any of the obituaries I've read.

Anonymous said...

Mike Huben: Whatever you say, avowed enemy of libertarianism. Somehow I don't think most people here are going to consider you as a valid judge of anything.

Mike Huben said...

Francois, I can see you are a master of the content-free denunciation. Let me know when you actually have a coherent idea.

zoiprof: "I see your point that the two men had virtually identical economic outlooks."

Did I really make that point? Wow, do you also have those preternatural libertarian powers to alter the very reality we experience? Or do you have the more mundane power to create strawmen?

And for all their differences in opinion, they both served as public intellectuals in much the same way. Your Smithian categorization of them as opposites is nonsense.

"I should be so wise as you some day when I stop reading the authors' original works and rely on secondary sources and wikipedia as you seem to prefer."

Ah, you believe in the invisible hand of original works to guide you to correct interpretations. Sorry, your riff on Smith shows your faith is misplaced. I think that fervid miscategorization of Keynes is the product of your own imagination.

Anonymous said...

"[commenting on] Mike Huben: Whatever you say, avowed enemy of libertarianism. Somehow I don't think most people here are going to consider you as a valid judge of anything."

Fortunately, there's no need - Mike thoughtfully provided a link to the article he liked. I disagreed with the author's opinion that Milton didn't affect economists very much, but that is because I have some notion of the number of articles he wrote, and I'm a bit prejudiced from being a friend of a few of his offspring.

But one can think Mike can be a vigorous opponent for the other side and still find his choice of articles interesting. I've always found it important to look at people who think my world view is wrong - I catch a lot of mistakes that way.

Anonymous said...

You might be more convincing if you explained exactly how Keynes and Friedman fit these two archetypes.

I don't think this was a lie of omission, but rather, an assumption of prior knowledge. This is David D. Friedman's blog, after all. For the filling of rudimentary blanks, might I direct you to one Mr. Google. Wise is he.

David Friedman said...

Two points:

I thought the article Mike pointed at was a pretty good one, although like Tom I think it understated my father's theoretical contributions; he was, after all, already a prominent figure in the profession before he became a public figure.

Everyone in these discussions seems to take it for granted that Keynes was a prototypical left winger, in favor of increased government power in general. I'm not an expert on Keynes, but I don't think it is true. His theoretical work implied an important role for the government in avoiding the trap of underemployment equilibrium—I think a mistake, but a reasonable one under the circumstances—but I do not believe he was a consistent supporter of big government elsewhere.

I used to have a copy of Hayek's Road to Serfdom with, on the back, a glowing endorsement by Keynes.

Mike Huben said...

Ah: the Keynes endorsement is on the back of my copy.

"In my opinion it is a grand book.... Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement."

This is an illustration of a frequent mistake by ideologues (including many libertarians): thinking that their opponents must be their irrational opposites, rather than having sensible and defensible views. I get a fair amount of hate mail from libertarians making that mistake.

Anonymous said...

1) It is perhaps an exaggeration to say that Einstein proved that Newton was wrong; better to say that Einstein, using the same method as Newton, created a theory that better fit the observations (and some of those observations Newton was simply not in a position to make). It's not as if Einstein proved that gravity doesn't exist, he simply gave a deeper explanation of it. I assume that Keynes and Friedman were working in broadly (or perhaps even narrowly) within the same tradition.

2) It would not surprise me if economic theories were not true for all time: an industrial societ behaves differently than an agrarian society. Is monetarism a correct theory of caveman society, whatever it was? This doesn't make economics less "scientific", but it does mean that its predictions are less general. There may be some level of description that fits all societies in all ages, but such a general description would hardly be sutiable for policy reccommendations.

oliver kimberley said...

The comments about Newton and Einstein are interesting. Keynes was fascinated by Einstein and it was because of him that he (Keynes)entitled his book the General Theory, explaining that just as Einstein had made Newton's physics a special case of a wider general truth so the General Theory of Employment... made what Keynes called classical economics a special case of the general theory that he had discovered. Keynes's General Theory has some new ideas and labels in it that have been useful, but I think Milton Friedman was quite right in saying that it was badly written when compared with other books by Keynes and it taken as a whole it did not provide a complete system.

Anonymous said...

My Finance professor, an economist at Portuguese Central Bank (also works for European Central Bank) said once that, for him, the best economist ever was Sir J. M. Keynes, although the one who "created" the theories he works with and praises was Milton Friedman.

How come is it possible?

Anonymous said...

I don’t see that Lord Keynes and Milton Friedman can both be totally right but it is, of course, perfectly possible for them each to be right about some things and wrong about others. In addition you need to distinguish Keynes himself from the people who surrounded him, some of whom to paraphrase Joan Robinson, a member of his “Circus” “had difficulty getting Maynard to see what the point of his revolution really was”.

Keynes’s General Theory contains many innovations, some of them just in labelling, but critical nevertheless. The clear distinction between saving and investment, which had previously been almost assumed to be the same thing, is perhaps the most notable of these. In many ways it is a first shot at macroeconomics and an attempt to show that while each individual market may reach an equilibrium taken as a whole there may not be an equilibrium at full employment.

In this area Milton Friedman took the Keynesian tools, wiped them down, and came to very different conclusions. If, for example, you have a “permanent income” consumption function then the economy will tend to be far more stable than Keynes had envisaged with his “multiplier”.

I doubt that Keynes would have disagreed with Milton Friedman in the way or to the extent that some of his disciples did. In effect his school came to believe not just that the money supply was an unimportant factor but that it didn’t really matter at all and that any correlation between the price level and the money supply was because prices determined the volume of money, not the other way round. That may seem difficult to believe today but it was a widely held belief in the UK in the 1970s. The restoration (not discovery) of the quantity theory of money seems to me a major contribution by Milton Friedman.

Patrick Sullivan said...

When even former Clinton Administration officials such as Larry Summers and Brad DeLong have to admit Milton's influence, I'd say the argument is over:

So what has happened to the ideas and the current of thought that developed out of the original insights of Irving Fisher and his peers?

The short answer is that much of this current of thought is still there, but its insights are there under another name. All five of the planks of the New Keynesian research program listed above had much of their development inside the twentieth-century monetarist tradition, and all are associated with the name of Milton Friedman. It is hard to find prominent Keynesian analysts in the 1950s, 1960s, or early 1970s who gave these five planks as much prominence in their work as Milton Friedman did in his.

The importance of analyzing policy in an explicit, stochastic context and the limits on stabilization policy that result comes from Friedman (1953a). The importance of thinking not just about what policy would be best in response to this particular shock but what policy rule would be best in general--and would be robust to economists' errors in understanding the structure of the economy and policy makers' errors in implementing policy--comes from Friedman (1960). The proposition that the most policy can aim for is stabilization rather than gap-closing was the principal message of Friedman (1968). We recognize the power of monetary policy as a result of the lines of research that developed from Friedman and Schwartz (1963) and Friedman and Meiselman (1963). And a large chunk of the way that New Keynesians think about aggregate supply saw its development in Friedman's discussions of the "missing equation" in Gordon (1974).

Thus a look back at the intellectual battle lines between "Keynesians" and "Monetarists" in the 1960s cannot help but be followed by the recognition that perhaps New Keynesian economics is misnamed. We may not all be Keynesians now, but the influence of Monetarism on how we all think about macroeconomics today has been deep, pervasive, and subtle.

Max said...

I don't think the comparison to the physics is right, because while Friedman and Keynes indeed had opposite views on many topics, Einstein never proved Newton wrong. Indeed, even today most engineers work with Newton's basic principles, because if you neglect terms of higher order, which are crucial to Einstein's point of view, you suddenly have back Newtonian physics.

So, Einstein enhanced Newton, rather than invalidating the fundamentals in his theory. Keynes and Friedman, however, fought for supremacy of definition, because both theories couldn't be right at the same time...

Anonymous said...

Can you please comment/write a new post on this article about Milton, your father.

It also talks about economics, and posits it as an engineering data-driven science over theory.