‘New Keynesianism’ — more Friedman than Keynes

7 Jul, 2014 at 21:30 | Posted in Economics | 2 Comments

This paper presents an old Keynesian critique of Milton Friedman’s intellectual contribution … The label of old Keynesianism is specifically invoked to distinguish from new Keynesianism. The latter is a label that has corrupted and confused the meaning of Keynesianism, making it more difficult to distinguish Keynesian economics from Friedman’s macroeconomics which now shapes modern macroeconomics.

nk-2New Keynesian economics is a genetic mutant of so-called IS/LM “bastard Keynesianism” associated with Paul Samuelson’s MIT School of Economics. New Keynesianism abandons the Keynesian vestige and jumps the intellectual threshold, becoming rational expectations new classical macroeconomics with the addition of imperfect competition and price and nominal wage rigidities.

Consequently, it is better labeled “new Pigovian” economics … as its emphasis on market imperfections represents the approach of Arthur Pigou, who was Keynes’ great intellectual rival at Cambridge in the 1930s. This means new Keynesianism has little to do with Keynes and much to do with Friedman who is the intellectual father of new classical macroeconomics.

This connection between Friedman and new Keynesianism is largely unrecognized and that lack of recognition poses a massive barrier to understanding and reopening macroeconomics. By enabling the claim that macroeconomics is fully characterized by a divide between new Keynesian and new classical macroeconomics, new Keynesianism closes the pincer that excludes old Keynesianism. As long as that pincer holds, economics will remain under Friedman’s shadow. Breaking the pincer requires surfacing the role of Friedman’s thinking in new Keynesian economics and making clear the distinction between old Keynesian and new Keynesian economics.

Thomas Palley

 

2 Comments

  1. In August 1972, a case study of the methodology of neoclassical economics by Imre Lakatos’s London School of Economics colleague Spiro Latsis published in The British Journal for the Philosophy of Science found Milton Friedman’s methodology to be ‘pseudo-scientific’ in terms of Lakatos’s evaluative philosophy of science, according to which the demarcation between scientific and pseudo-scientific theories consists of their at least predicting testable empirical novel facts or not. -in “Situational Determinism in Economics S.J Latsis The British Journal for the Philosophy of Science, 23, p 207-45.

    Three years later, in 1976, Friedman was awarded the Nobel Prize for Economics

    Milton Friedman´s whole methodology and his result was critised early by many,highly reputably economist.Not only Cambridge Keynsians as Nicholas Kaldor,Joan Robinson etc.also many americans like James Tobin,Robert Solow and Paul Samuelson was highly critical on many levels of Friedman´s work.
    Friedman argued that only the evidence, not the plausibility of the assumptions, should decide about the validity of a theory. He used to say that “assumptions don’t matter”. In fact, he preferred theories with seemingly unrealistic assumptions – an attitude that Paul Krugman describe in Peddling Prosperity, 1994 in this way: “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.” economic professor Edward Herman,writes in Triumph of the Market (1995), p. 36. that “Friedman’s methodology in attempting to prove his models have set a new standard in opportunism, manipulation, and the abuse of scientific method.”

    It seems that Friedman´s most pathbreaking innovation as an economist has been in the art of what is called “massaging the data” to arrive at preferred conclusions.
    In July 1970 Nicholas Kaldor wrote an article in the Lloyd’s Bank Review in which he questioned Friedman’s empirical assertions. Friedman replied — in the same journal in October — that:

    “Asking how Professor Kaldor would explain the existence of essentially the same relation between money and income… for the UK as for the US, Yugoslavia, Greece, Israel, India, Japan, Korea, Chile and Brazil?”
    The problem with this? Friedman just made it up. No such relation existed. went back and crunched the numbers. Kaldor responded in his ‘The Scourge of Monetarism’:

    “The simple answer to this is that Friedman’s assertions lack any factual foundation whatsoever. They have no basis in fact, and he seems to me to have invented them on the spur of the moment. I had the relevant figures extracted from the IMF statistics for 1958 and for each of the years 1968 to 1979, for every country mentioned by Friedman and a few others besides… Though there are some countries (among which the US is conspicuous) where in terms of the M3 the ratio has been fairly stable over the period of observation, this was not true of the majority of others.”Kaldor, N. 1982. The Scourge of Monetarism. Oxford University Press, Oxford and New York.

    Kaldor summed this up well in a speech to the House of Lords regarding this little ‘blunder’ on the 16th April 1980. There he said:

    “Professor Friedman, as on some other WELL-KNOWN OCCASIONS, invented the facts to clinch the argument, and relied on his reputation as an expert for being taken on trust without anyone bothering to check the figures.”
    source: The UK Forum for Post Keynesian Economics
    Keynes Seminar in Cambridge
    Professor Richard Kahn on The Scourge of Monetarism (11 December 1987).

    Professor Paul Diesing a Economist.and Philosopher of Science that worked closely with Friedman at University of Chicago,points out in his valuable article ‘Hypothesis Testing and Data Interpretation: The Case of Milton Friedman,” Research in the History of Economic Thought and Methodology, vol. 3, pp. 61-69.: that Friedman “tests” hypotheses by methods that never allow their refutation.
    Diesing lists six “tactics” of adjustment employed by Friedman in connection with testing the permanent income (PI) hypothesis:

    “1. If raw or adjusted data are consistent with PI, he reports them as confirmation of PI
    2. If the fit with expectations is moderate, he exaggerates the fit.
    3. If particular data points or groups differ from the predicted regression, he invents ad hoc explanations for the divergence.
    4. If a whole set of data disagree with predictions, adjust them until they do agree.
    5. If no plausible adjustment suggests itself, reject the data as unreliable.
    6. If data adjustment or rejection are not feasible, express puzzlement. ‘I have not been able to construct any plausible explanation for the discrepancy’…”

    In a proposed Op Ed column written in 1990,Professor Elton Rayack (Not So Free To Choose, New York: Praeger, 1987) pointed out the interesting fact that while Friedman’s models did well in retrospective fitting to historic data, where the Friedman testing methods could be employed, they were abysmal in forecasts, where “adjustments” could not be made. Rayack reviewed eleven forecasts of price, interest rate, and output changes made by Friedman during the 1980s, as reported in the press. Only one of the eleven was on the mark, a not-so-great batting average of .092;
    “not enough to earn a plaque in baseball’s Hall of Fame, but evidently quite adequate to qualify [Friedman] as an economic guru.” The guru was, however, protected by the mainstream media; Rayack’s piece was rejected by both the New York Times and Wall Street Journal.

    We may conclude says Elton Rayak that Friedman’s truly pathbreaking innovation as an economist has been in the art of what is called “massaging the data” to arrive at preferred conclusions. This innovation has been extended further by other members of the Chicago School.”

    Professor Edward S. Herman writes further in Triumph of the Market, Boston: South End Press, 1995, p. 34-37 : about Milton Friedman:

    “Friedman was considered an extremist and something of a nut in the early postwar years. As Friedman has not changed, and is now comfortably ensconced at the conservative Hoover Institution, his rise to eminence (including receipt of a Nobel prize in economics), like that of the Dartmouth Review’s Dinesh D’Souza, testifies to a major change in the general intellectual-political climate.
    Friedman was an ideologue of the right, whose intellectual opportunism in pursuit of his political agenda has often been heavy-handed and sometimes even laughable. The numerous errors and rewritings of history in Friedman’s large collection of popular writings are spelled out in admirable detail in Elton Rayack’s Not So Free To Choose. His “minimal government” ideology has never extended to attacking the military-industrial complex and imperialist policies; in parallel with Reaganism and the demands of the corporate community, his assault on government “pyramid building” was confined to civil functions of government. As with the other Chicago boys, totalitarianism in Chile did not upset Friedman-its triumphs in dismantling the welfare state and disempowering mass organizations, even if by the use of torture and murder, made it a positive achiever for him.
    Friedman’s reputation as a professional economist rests on his monetarist ideas and historical studies, his analysis of inflation and the “natural rate of unemployment,” and his theory of the consumption – income relationship (the so-called “permanent-income” hypothesis). These are modest achievements at best. His monetarist forecasts have proven to be as wrong as forecasts can be, and the popularity of monetarism has ebbed in the wake of its failures…

    The Chicago School intellectual tradition traces back to University of Chicago professors Frank Knight and Henry Simon, who flourished in the 1920s and 1930s. These men were conservative, but principled and iconoclasticSimon’s 1934 pamphlet, “A Positive Program for Laissez Faire,” actually called for nationalization of monopolies that were based on incontrovertible economies of scale, on the grounds of the evil of private monopoly and the inefficiency and corruptibility of regulation of monopoly.

    The post-World War II Chicago School, led by Milton Friedman and George Stigler, has been more political, right-wing, and intellectually opportunistic. On the monopoly issue, for example, in contrast with Simon’s 1932 position, the post-World War II School’s preoccupation was to dispute the importance and damaging effects of monopoly and to blame its existence on government policy. The postwar school is also linked to U.S. and IMF policies toward the Third World, in its pioneering service, through the “Chicago boys,” as advisers to the Pinochet regime of Chile from 1973 onward. This alliance points up the School’s notion of “freedom,” which has little or nothing to do with political or economic democracy, but is confined to a special kind of market freedom. As it accepts inequality of initial economic position, and the privilege and political influence built into corrupt states like Pinochet’s (or Reagan’s), its economic freedom is narrow and class-biased.

    The Chicago boys have always claimed that economic freedom is a necessary condition of political freedom, but their tolerance of political non-freedom and state terror in the interest of “economic freedom” makes their own priorities all too clear. The Chicago School’s attitude toward labor was displayed in the Chicago boys’ complacence over Pinochet’s use of state terror to crush the Chilean labor movement. The School’s general tolerance of monopoly on the producers’ side has never been paralleled by softness toward labor organization and “labor monopoly.”

    Henry Simon himself developed a pathological fear of labor power in his later years, as evidenced in a famous diatribe “Reflections on Syndicalism,” which may have contributed to his committing suicide in 1944. Subsequently, the labor specialists of the postwar Chicago School, most notably Albert Rees and H. Gregg Lewis, dedicated lifetimes to showing that wages were determined by marginal productivity and that labor unions’ pursuit of higher wages was futile. (Rees, however, did acknowledge the non-economic benefits of labor organization in his class lectures.) Chicago School analyses stressed the wage-employment tradeoff and the employment costs of wage increases based on bargaining power (as opposed to those negotiated individually and reflecting marginal productivity). They linked collective bargaining to inflation, viewing “excessive” wage increases as the pernicious engine of inflationary spirals.

    Milton Friedman’s concept of a “natural rate of unemployment” was a valuable tool in the arsenal of corporate and political warfare against trade unions-a mystical concept, unprovable, but putting the ultimate onus of price level increases on the exercise of labor bargaining power….”

    Comment by Jan Milch— 15 Oct, 2014 #

  2. If you want to read a Keynes criticism of Milton Friedman’s analysis I suggest you read the book entitled MILTON FRIEDMAN’S MONETARY FRAMEWORK: A DEBATE WITH HIS CRITICS edited by R. J. Gordon

    . I am one of the critics and my article entitled “A Keynesian View of Friedman’s Theoretical Framework For Monetary Analysis” appears on pages 90- 110 with Friedman’s response to my criticisms on pages148-157.. You may be especially interested in Friedman’s response to my criticism that there is no uncertainty in Friedman’s analysis.
    Also his response to my criticism that he ignores what Keynes called the essential properties of interest and money by claiming that “Keynes never says the two properties Davidson refers to are essential properties of an asset money”. This Friedman says said despite the fact I quote these properties directly from the chapter in the General Theory entitled “The Essential Properties of Interest and Money”.

    I think you will learn more about Keynes and Friedman reading this than reading Palley.

    Comment by paul davidson— 8 Jul, 2014 #


Sorry, the comment form is closed at this time.

Blog at WordPress.com.
Entries and Comments feeds.