Friedman fried, Bernanke burned

Somehow James K. Galbraith, son of John K. Galbraith, got invited to deliver this year’s Annual Milton Friedman Distinguished Lecture at Marietta College, Marietta, Ohio. [Cheers Limited, Inc.] And boy did he rise to the occasion, scorching monetarism and the present Fed regime:

…Chairman Ben Bernanke faces an intellectual dilemma. He can stick with Milton, in which case he must admit that the only possible cause of the present financial crisis and evolving recession is the tightening action of the Federal Reserve… Or he can stick with the so-called ‘new monetary consensus’, which holds that the Fed should now return to its inflation targets, pursue a much tighter policy, and that no recession will result. If Bernanke chooses the first, he must of course assume responsibility for the unfolding disaster. He cannot, logically, stay with Friedman without admitting the error of the late Greenspan years and his own first months in office. If he chooses the second, he must repudiate Friedman, and hope for the best. The two courses are absolutely in conflict.

When Friedman died a couple of years back, most obituaries skirted around the hammering reality gave monetarism in theory and practice. This is only occasionally mentioned in the scholarly literature, which has generally preferred to politely ignore the monetary side of Friedman’s work and carry on where Keynesianism left off in the early 1970s. For example, see this 1999 paper by Reserve Bank of Australia economists David Gruen, Adrian Pagan and Christopher Thompson:

From the mid 1970s to the mid 1980s, money growth remained at centre-stage, both as an intermediate target for monetary policy, and in the modelling of the inflationary process in the Reserve Bank. With the end of money-growth targeting, a transition period followed, in which the framework for monetary policy gradually evolved.

By the 1990s, however, the intellectual framework for analysing inflation had come full circle. The framework of the 1990s had much in common with the one enunciated in the 1971 ‘Inflation’ paper. The intervening years had led to some refinement of the analysis, but the expectations-augmented Phillips curve had returned and once again was at centre-stage. [p. 40]

Of course, the ‘expectations-augmented Phillips curve’ is itself a Friedman baby, though he shares parenthood with Edmund Phelps. It can be analytically separated from Friedman’s monetary ideas and has survived much better. But the more I wade around in the 1960s literature, I am discovering that the idea pre-Friedman economists had no conception of inflationary expectations or momentum is also a myth.

In his talk, Jamie Galbraith unfortunately repeats the idea that the Phillips Curve was the universal basis for Keynesian thought and policy on inflation in the post-war period. This is so only to a limited extent: limited, in particular, to a few years in the 1960s and to American policy in the Kennedy and LBJ White House in particular. I think this is well-demonstrated by Robert Leeson (who is, ironically, a Friedmanite and draws different conclusions than I do!)

More soon. Still snowed under with thesis and other work but luckily this kind of is my thesis work.

Published in: on 2 May, 2008 at 12:42 pm  Leave a Comment