Monday, March 21, 2011

DeLong on Friedman

Although it was once considered the big divide in macroeconomics, contemporary "Keynesianism" and "Monetarism" may not be so far apart (some would argue that's because modern "New Keynesians" aren't really Keynesians at all, but I digress...).  These days, they are mostly on the same side in arguing that policy can do something (other than damage) to smooth economic fluctuations and, by extension, persistent high unemployment is a policy failure.

This reveals a contradiction between how Milton Friedman is perceived and what his ideas really meant, Brad DeLong explains:
In the 1950s and 1960s and 1970s Milton Friedman faced a rhetorical problem. He was a laissez-faire libertarian. But he also believed that macroeconomic stabilization required that the central bank be always in the market, buying and selling government bonds in order to match the supply of liquid cash money to the demand, and so make Say's Law true in practice even though it was false in theory.

Such a policy of constant government intervention to continually rebalance aggregate demand is hardly a laissez-faire hands-off libertarian policy, is it?

Friedman, however, set about trying to maximize the rhetorical distance between his position--which was merely the "neutral," passive policy of maintaining the money stock growth rate at a constant--and the position of other macroeconomists, which was an "activist," interventionist policy of having the government disturb the natural workings of the free market. Something went wrong, Friedman claimed, only when a government stepped away from the "neutral" monetary policy of the constant growth rate rule and did something else.

It was, I think, that description of optimal monetary policy--not "the central bank has to be constantly intervening in order to offset shocks to cash demand by households and businesses, shocks to desired reserves on the part of banks, and shocks to the financial depth of the banking system" but "the central bank needs to keep its nose out of the economy, sit on its hands, and do nothing but maintain a constant growth rate for the money stock"--that set the stage for what was to follow in Chicago.

First, Friedman's rhetorical doctrine eliminated the cognitive dissonance between normal laissez-faire policies and optimal macro policy: both were "neutral" in the sense of the government "not interfering" with the natural equilibrium of the market. Second, Friedman's rhetorical doctrine eliminated all interesting macroeconomic questions: if the government followed the proper "neutral" policy, then there could be no macroeconomic problems. Third, generations of Chicago that had been weaned on this diet turned out to know nothing about macro and monetary issues when they became important again.

It is in this sense, I think, that I blame Milton Friedman: he sold the Chicago School an interventionist, technocratic, managerial optimal monetary policy under the pretense that it was something--laissez-faire--that it was not.


The Arthurian said...

DeLong is not among my favorite writers, but this is good:
Something went wrong, Friedman claimed, only when a government stepped away from the "neutral" monetary policy of the constant growth rate rule and did something else.

For me, it leads directly to: "that set the stage for what was to follow in Chicago."

Friedman was good, but far too political to be a great economist. So is Delong's buddy, Krugman.


Bill C said...

Thanks. Even though I disagree with Friedman's politics, I'd definitely place him among the greats of economics. But there is a tension between being an economist and playing the "public intellectual" role, especially one as totemic as Friedman. That may arise for Krugman, too.