Milton Friedman’s Distortions, Part II

I have previously noted that Milton Friedman’s debating techniques and attitude towards facts were, erm, slippery to say the least. However, I focused primarily on his public face, and it seemed he could merely have adopted a more accessible narrative to get his point across, losing some nuance along the way. It could be argued that most are guilty of this, and it didn’t reflect Friedman’s stature as an academic.

Sadly, this is probably not the case. Commenter Jan quotes Edward S. Herman on Friedman’s academic record, giving us reason to believe that Friedman’s approach extended through to his academic work. It appears the man was prepared to conjure ‘facts’ from nowhere, massage data and simply lie to support his theories. With thanks to Jan, I’ll channel some of what Herman says, using it to discuss Friedman’s major academic contributions in general, and how his record seems to be rife with him torturing the facts to fit his theories.

The Permanent Income Hypothesis

The Permanent Income Hypothesis (PIH) states that a consumer’s consumption is not only a function of their current income, but of their lifetime income. Since people tend to earn more as they get older, this means that younger generations will tend to borrow and older generations will tend to save. The PIH has been a key tenet of economic theory since its inception, and Friedman won the Nobel Memorial Prize for it in 1976.

When discussing Friedman’s in-depth empirical treatment of the PIH, Paul Diesing (as quoted by Herman) found it wanting. He listed six ways Friedman manipulated the data:

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’…

It does not surprise me that Friedman had to treat the data this way to get the results he wanted. For the interesting thing about the PIH is that it displaced a model that was far more plausible and empirically relevant: the Relative Income Hypothesis (RIH). The RIH argues that individual consumption patterns are in large part determined by the consumption patterns of those around them, so people consume to “keep up with the Joneses“. It was developed by James Duesenberry in his 1949 book Income, Saving and the Theory of Consumer Behaviour.

In his discussion of this apparent scientific regression, Robert Frank lists 3 major ‘stylised facts’ any theory of consumption must be consistent with:

  • The rich save at higher rates than the poor;
  • National savings rates remain roughly constant as income grows;
  • National consumption is more stable than national income over short periods.

The PIH can easily explain the last two phenomena, as it posits that saving (and therefore consumption) is unrelated to current income. However, this same proposition required Friedman to dismiss the first phenomenon outright. He therefore suggested that the high savings rates of the rich resulted from windfall gains rather than income. A neat hypothesis, but unsubstantiated by the evidence: savings rates also rise with increases in lifetime income.

Conversely, Duesenberry’s theory is well equipped to explain all three of the listed phenomena. The RIH implies that poor consume a higher percentage of their income to keep up with the consumption of the rich. As society as a whole becomes richer, this phenomenon will not disappear, as the poor will still be relatively poor. Thus, the apparently contradictory first two points in Frank’s list are reconciled. It is also worth noting that the third point, that consumption is less volatile than income over short periods, can be explained by the RIH because people are used to their current standard of living, so they will sustain it even through hard economic times.

So why, despite fitting the facts without manipulating them, did the RIH fall out of favour? Presumably, it made economists (particularly those of Friedman’s ilk) uncomfortable because of its implications that much consumption was unnecessary and wasteful, that redistributing income might spur consumption and therefore growth, and because it did not rest on innate individual preferences but on the behavior of society as a whole. The idea of a consumer rationally making inter-temporal consumption decisions in a vacuum was just, well, it was real economics. The result is that Friedman’s poorly supported hypothesis shot to fame, while Duesenberry’s well supported hypothesis was forgotten.


NAIRU stands for ‘Non-Accelerating Inflation Rate of Unemployment’, and it implies that past a certain level of unemployment, workers will be able to demand wages so high that they will create a wage-price spiral. Hence, policy should aim for a ‘natural’ rate of unemployment, decided empirically by economists, in order to prevent the possibility of 1970s-style stagflation.

My first problem with the NAIRU is the way it is commonly seen as ‘overthrowing’ the naive post-war Keynesians who insisted on a simplistic trade off between inflation and unemployment. As I have previously noted, the originator of the curve, William Phillips, did not believe this; nor did Keynes; nor were the post-war Keynesians unaware of the possibility of a wage-price spiral. Furthermore, the NAIRU idea was really just a formalisation of a long standing conservative notion that we should keep some percentage of people unemployed for some reason. In this sense, the launch of the NAIRU was more a counter revolution of old ideas than a novel approach.

However, the real issue is whether the NAIRU is empirically relevant, and it seems it is not. First, as Jamie Galbraith has detailed, there is little evidence that unemployment has an accelerating effect on inflation at any level. Furthermore, empirical estimates of the NAIRU seem to move around so much, depending on the current rate of unemployment, that the idea has little in the way of predictive implications. The data simply do not generate a picture consistent with a clear value of unemployment at which inflation starts to accelerate;: we are far better off pursuing full employment while keeping numerous inflation-controlling mechanisms in place.

“OK” you say. “Perhaps the NAIRU does not exist. But what about this was disingenuous on Friedman’s part?” Well, the notion that the interplay between workers and employers is a key determinant of the rate of inflation flat out contradicts Friedman’s oft-repeated exclamation that “inflation is always and everywhere a monetary phenomenon”. If inflation is purely monetary, then the level of unemployment should not affect it at all! However, for whatever reason, Friedman was prepared to endorse both the NAIRU and his position on inflation simultaneously.

The Great Depression

Friedman’s Great Depression narrative was probably his biggest attempt to rehabilitate capitalism in a period where unregulated markets had fallen out of favour. He blamed the crash on the Federal Reserve for contracting the money supply in the face of a failing economy. This always struck me as strange – he was, in effect, arguing that the Great Depression was the fault of ‘the government’ because they failed to intervene sufficiently. This implies that the real source of the Great Depression came from somewhere other than the Federal Reserve, and therefore its sin was more one of omission than commission. Even if we accept the idea that the Great Depression was worsened by the action (or inaction) of central banks, Friedman is being disingenuous when he says that the Great Depression was “produced” by the government.

However, even Friedman’s own figures fail to support his hypothesis: according to Nicholas Kaldor, the figures show that the stock of high powered (base) money increased by 10% between 1929 and 1931. Peter Temin came to a similar conclusion: using the same time period as Kaldor, real money balances increased by 1-18% depending on which metric you use, and the overall money supply increased by 5%. Though base money contracted by about 2% at the onset of the crash, a contraction this small is a relatively common occurrence and not generally associated with depressions.

There is then the issue of causality. In many ways Friedman assumed what he wanted to prove: that the money supply is controlled by the central bank. Yet there are good reasons to doubt this, and believe that movements in income instead create a decrease in the money supply, which would absolve the central bank of responsibility. When economists such as Nicholas Kaldor pointed out this possibility, Friedman reached a new level of disingenuous (the first paragraph is Friedman’s comment; Kaldor responds in the second):

The reader can judge the weight of the casual empirical evidence for Britain since the second world war that Professor Kaldor offers in rebuttal by asking himself how Professor Kaldor would explain the existence of essentially the same relation between money and income for the U.K. after the second world war as before the first world war, for the U.K. as for the U.S., Yugoslavia, Greece, Israel, India, Japan, Korea, Chile and Brazil?

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.

Bottom line? Friedman had to assume his conclusion – that the money supply was in control of the Federal Reserve – in order to reach it. Yet, based on his own numbers, his conclusion was still false, as the money supply increased over the ‘crash’ period from 1929-1931. When Friedman was pushed on these matters, he simply made things up. However, lying hasn’t helped him escape the fact that his theory of the Great Depression is false.


Milton Friedman’s academic contributions do not stand up to scrutiny. Friedman seemed to be prepared to conjure up neat, ad hoc explanations for certain phenomena, simply asserting facts and leaving it for others to see if they were true or not, which they usually weren’t. He selectively interpreted his own data, exaggerating or plain misrepresenting it in order to make his point. Furthermore, his methods should be unsurprising given his incoherent methodology, which allowed him to dodge empirical evidence on the grounds of an ill-defined ‘predictive success’, something which sadly never materialised. In almost any other discipline, Friedman’s attempts at ‘science’ would have been laughed out of the room. Serious economists should distance themselves from both him and his contributions.


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  1. #1 by thehobbesian on July 12, 2013 - 6:23 pm

    Haha, what a great polemic against one of the great “false profits” (as I like to jokingly call them) of economics.

    Keep in mind in regards to the Great Depression, Friedman started off as a Keynesian, and in many ways stayed a Keynesian his entire career in regards to a number of a his views, as opposed to others in mainline economics and laissez faire. However, where he deviated course from Keynes and went towards the supply side was on his rejection of insufficient demand and supply gluts. And I think that we cant trace this back to his view of the Great Depression. Friedman studied the depression and concluded that it was essentially structural, and that between the Fed and Smoot-Hawley he had found his explanation for why it was. 1929 would have been just another business cycle if not for the meddling government. If the Fed had simply eased and regulations and tariffs lifted, everything would’ve been fine and dandy. And this really laid down the foundation for his views going forward.

    Now some of the New Keynesians like Krugman, who grew up in the shadow of Friedman, seem to believe that Friedman was simply mistaken, and had he lived to see the events of the past 5 years he would have conceded that Keynes was right, that liquidity traps do exist and that easy money and de-regulation alone aren’t enough. However, I would be willing to guess that you would probably be inclined to disagree with Krugman, and say that if Friedman were alive today that he would find some clever way to cook the data and stick to his guns, based on the portrait you painted of him here.

    • #2 by Unlearningecon on July 13, 2013 - 12:43 pm

      Do you think Krugman thought that? Have you read his obituary? He accused Friedman of intellectual dishonesty and blasted him for “claiming both that markets always work and that only markets work”.

      I simply believe Friedman’s views were formed early on and he was too clever to change them. He could invent a myriad of ways to defend his views, sometimes causing him to pluck ‘facts’ out of thin air, as is particularly obvious in the final part of my post. Sadly, for some he is a godlike figure who is immune to criticism.

      • #3 by thehobbesian on July 13, 2013 - 11:15 pm

        Krugman was certainly harsh on Friedman in the obituary, and don’t get me wrong, I’m not saying that Krugman is a Friedmanite by any measure. I was basing that on more recent comments Krugman mad arguing that Friedman would be more to the left now and that he had more in common with Keynes than he admitted ( And I think I do recall reading in one of Krugman’s recent books the argument that Friedman would be a Keynesian, though I’m too lazy to flip through my book collection to find it right now. Although now that I think about it, perhaps Krugman was saying that Friedman would be having a change of heart or if he was just making a point about how extreme the right wing has become. I don’t know, Krugman is a lot like Friedman in that he is a pundit as well as a scientist, so sometimes its hard to tell whether they are making an assertion or just making a rhetorical point. Damn celebrity economists.

      • #4 by Unlearningecon on July 15, 2013 - 12:10 pm

        I think with regards to QE, Friedman certainly would have been more activist. As for the role of the GSEs, CRA and that kind of thing? He was too clever for such shallow explanations, but I wouldn’t have been surprised if he had thought of something.

        Damn celebrity economists.


      • #5 by NicTheNZer on July 18, 2013 - 11:01 pm

        I think its worth pointing out the split between post-keynesians and neo-keynesians at this juncture. I doubt any of the post-keynesians and people such as John Galbraith would be willing to give Monetarism the benefit of the doubt. As far as we understand it however Krugman has very similar views to Friedman on how money actually functions.

      • #6 by Unlearningecon on July 19, 2013 - 8:35 pm

        Krugman has previously referenced monetarism as a failure, but when challenged by Keen he appealed to the idea that the fed controls the money supply. I just don’t think New Keynesian believe their own models.

      • #7 by NicTheNZer on July 23, 2013 - 3:39 pm

        Agree. It appears that Paul Krugman has quite a good nose for economics, because I see no evidence that any of the models he produces produce his kinds of answers. Obviously he is using IS/LM to discuss what he wants/advocates to happen, but if you applied the same models before the crisis there is no way they would produce the crisis event.

        Its pretty clear private debt levels caused the crisis, so obviously any model which ignores private debt levels will suffer from this problem.

        So the question is how Paul determines what direction he advocates the economy to head in? In fact he seems to have made several statements recently to the effect that actually private debt does matter some how, so I guess that is basically an admission that Keen was correct all along, + if you win a Nobel prize you are immune to embarrassing retractions.

  2. #8 by BFWR on July 12, 2013 - 6:53 pm

    Friedman was a market worshiper like any other. His was a quintessential faith based economics. The reality is you have to create a psychological and temporal infrastructure that enables a market FIRST. Then you have to monitor its most basic elements (incomes and prices, i.e. exchange) and adjust them, if necessary, according to how individuals en masse react. This is not some “pointy headed bureaucrat” determining how many size 8 shoes to produce. Businesses will assess that in a profit making system. It is macro-economic attention to basic data and their relationships (incomes and prices) and making sure that THE INDIVIDUAL always macro-economically has enough of the former to liquidate the latter, that way basic functions (exchange) are actually possible. By individual income I mean actual purchasing power, not gross income.

    • #9 by Unlearningecon on July 13, 2013 - 12:45 pm

      Yeah, the 1980s idea that we could magically transition to laissez-faire capitalism has a lot of casualties, notably Latin America and the former USSR.

      Friedman actually advocated a Basic Income similar to your prescription, though he seemed all too ready to drop it for, ya know, cutting taxes on the rich.

      • #10 by thehobbesian on July 13, 2013 - 11:28 pm

        Friedman’s social dividend was meant as a way to replace the welfare state. The whole point was to cut taxes for the rich because you got rid of the bureaucratic welfare state. He proposed it more as a compromise to help the rich than any desire to actually help the poor or fulfill the functions of the welfare state. The problem with Friedman’s model is that if someone decides to spend their social dividend on crack instead of purchasing healthcare for their kids or obtain the means of subsistence, then society is still going to be burdened with the costs of poverty, except now people can afford to have more expensive drug habits. Also, there is the point that things like medical bills can vary from person to person, and socially provided health insurance will make sure those costs are covered, while Friedman’s approach wouldn’t.

        Now I’m sure Friedman’s answer would be “fuck em”, but the fact is that I find that to be a major flaw in his argument. I don’t mean to sound like a statist, but I view the welfare state as something to deal with unavoidable societal costs like mental and physical disabilities, not as something out of purely out of compassion. And if it is set up in a way that it allows it so that these costs aren’t being covered, then what’s the point? Cutting medical care to poor people doesn’t exactly erase any costs, it just transfers them in a different way, and generally its a way which hurts the poor the most. So there is some value in the bureaucracy if it actually accomplishes the task of ameliorating those costs better than completely replacing it with a social dividend. The only thing you really accomplish is cutting taxes for the rich, which is really all that Friedman cared about.

        That being said I do like the idea of basic income, its just that I’m not sure it would be wise to use it as a replacement for the welfare state, for the concerns I just described. I think it might be better just to have it compliment a welfare state.

      • #11 by Unlearningecon on July 15, 2013 - 12:29 pm

        It’s true that many, not only libertarians, can be easily seduced by the seeming simplicity and compassion of a basic income, quickly forgetting why exactly things like the modern welfare state arose in the first place. Societal problems (such as drug abuse) have tricky, bureaucratic and imperfect solutions (social work etc.) that may not seem pretty from the outside but accomplish more than a superficially simple solution (like a basic income) would.

        It’s the same deal with tax credits. People just want to wipe the slate clean and make everything simple, but sadly the world doesn’t work like that.

      • #12 by BFWR on July 15, 2013 - 6:16 pm

        With all due respect I disagree. It is how the world works. Money is basically accounting. You just have to look at and decipher the correct accounting. The problem is economics has not discovered, or rather re-discovered, its Bernoulli Principle. Everything in economics from chaos theory to ergodicity, from neo-classical DSGE to Minsky’s Ponzi finance depends upon whether or not the primary individual monetary state of production is adequacy or scarcity. The neo-classicals have already decided its adequacy. The Keynesians think blowing on the airplane from behind will make it rise off the ground because the world is round afterall, and post Keynesians are the Wright brothers who haven’t succeeded yet. Douglas so needs to be re-visited.

        I hasten to add that resolving economics’ most basic problem won’t resolve ALL problems. But actually resolving its most basic problem WILL enable it to finally fly. And that will be one titanic leap forward for humanity who spends most of its time and mental effort trying to bail out a leaky individual purchasing power boat.

      • #13 by thehobbesian on July 16, 2013 - 5:19 pm

        “It’s the same deal with tax credits. People just want to wipe the slate clean and make everything simple, but sadly the world doesn’t work like that.”

        Exactly, I’ve studied the American tax code quite well and I can say that most tax credits and loopholes are made for a reason. When dealing with taxation and regulation you will inevitably come across instances where you realize that the tax or law is actually burdening economic activity, or even worse creating perverse incentives, etc. And often times it can be remedied quite simply by changing the law slightly. Personally I have no problem with these kinds of things, economies are complex and a one size fits all rule is bound to lead to trouble, and ultimately the goal in economics is not just about some concept of fairness or justice, but on what brings about the best result. Because ultimately the most fair tax or regulation is one which brings about the best results and minimizes bad ones. And while there are certainly outdated regulations and outdated tax loopholes that no longer serve a purpose or even are causing harm, I think we should exercise extreme caution in addressing these issues, and we certainly should avoid large sweeping reforms that do away with many important rules. Tax laws and business regulations evolve with the market, much like how a firm will alter its own bylaws and practices in response to market conditions. And we should be ever cognizant that there is often a purpose behind many of these things.

      • #14 by Unlearningecon on July 17, 2013 - 8:24 pm

        Agree completely, although I would ask, as somebody who has studied it, what proportion of tax credits you think are the result of business lobbying and are not really good for society?

      • #15 by thehobbesian on July 18, 2013 - 4:16 pm

        Its hard to say exactly, I think the problem is more that people abuse the tax credits in ways outside of what they were meant to do rather than simply creating them to get an unfair advantage in the first place. There are certainly some tax laws which seem to be the result of pure lobbying (like the tax credit for income earned from domestic oil and gas drilling), maybe 10-15% of our tax laws are things like that. And I would say that the rest of our suspect tax policies are simply the result of inadvertent perverse incentives that formed from a law which was made in good faith, and lobbyists are just working hard to keep congress from changing them. For example, the capital gains tax rate was created to spur investment, and give business owners a reason to build equity in a company (really an incentive make your small business sustainable and stable, rather than just a shell from which to take money from). It was applied to stocks so that we could encourage investment as well, which I think is a good thing. Also it helps reduce taxes for retired people who live off of pensions, that way Grandma pays a lower tax rate from the stock dividends that she uses to pay for her living expenses, and the company receives more capital, it should be a win win. But the problem is that corporations use stock options to get around income taxes for their officers, they will compensate a CEO with stocks instead of pay, and he pays regular income taxes for the basis of the stock’s value when it is given to him. But when he sells them off for a higher price years later he only pays a long term capital gains tax for the gains of the stock. I think that is kind of unfair, because its quite obvious that they are just using that as a way to give a CEO higher income at a lower tax rate, that’s not why capital gains rates were created, he isn’t really an investor, he’s an employee (especially when you are talking about large cap companies), he is just using the law as a way to get around income taxes.

        And if you look at the disparate tax rates between the rich and the poor, a lot of that is because rich people use capital gains rates in clever ways to get as much of their income classified as capital gains as they can, and then combined with things like tax credits and charitable contributions they end up paying effective tax rates as low as 13%. Even more egregious are the things like Mitt Romney having 100 million in his IRA(which pay extremely low taxes upon distribution after you retire) despite that you can only legally contribute a few thousand dollars a year to these accounts, this is because Bain Capital, being an investment company, would “contribute” to his account by giving him stocks at a substantial loss, for example, selling him a $5 stock for 3 cents a share, the increase is immediately counted as market gain, even though it clearly wasn’t one at all. That is just blatant abuse of a law which clearly was not designed to work like that. And the fact is that poor and middle income people are getting most of their income from things other than capital gains, and they are paying a much higher rate. Those people aren’t getting $5 stocks sold to their retirement accounts for three cents a share, only privileged people have access to opportunities like that. And I don’t think such actions were what these laws were created for, and I fail to see how such actions benefit the economy in any way. I think its perfectly possible to amend our capital gains laws so as to keep their original purpose, but cut down on the number of instances where they are used clearly as a run around for income taxes.

        And that’s really what I think about our tax loopholes, there are certainly some which are the result of lobbying and really don’t benefit the economy at all, but far more often it seems to me that much of the abuses we hear about are simply well meaning laws being used in ways which they were never intended to. Sometimes these abuses are curbed (like couples obtaining a legal divorce to classify income as alimony and thus having a tax write up while still living together, the law was amended to make the alimony write off contingent upon a couple not living together to stop this), while other abuses like Mitt Romney’s IRA shenanigans are not. And the sad fact is, that because people like Mitt Romney have far more influence over politics than your standard upper middle class married couple looking for a tax write off, chances are that the loopholes which get addressed are the ones which are being used by people lower down the totem pole, and the loopholes being abused by people higher up have a smaller chance of being stopped, simply because they have more power and influence. Of course I don’t see total overhaul as the answer either, to stop things like that we probably just need a stronger outcry from voters, and perhaps a better public understanding of economics and tax policies so they can see where good laws are being abused, rather than just proclaiming that the laws must be bad and need to be thrown out. Sometimes all it takes is the addition of a sentence or two for many of these problems to be fixed.

  3. #16 by Robert Waldmann on July 13, 2013 - 6:48 am

    Thanks for the link. I note that you also link to Forder’s Oxford WP noting that Samuelson and Solow did not at all write what Friedman claimed they wrote. In fact, in 1960 they said the Phillips curve showed a short term but *not* a long term tradeoff. They explained that it would shift for two reasons. First, they predicted that it would shift up and down with expected inflation. In other words, Friedman is guilty not only of distorting the claims of Samuelson and Solow but of presenting their clearly stated prediction as his own. Not to put to fine a point on it, he plagiarized them when pretending to critique them. But wait, there’s more.

    In the next paragraph they went on to note that the Phillips curve will shift out as cyclical unemployment becomes structural. Samuelson’s nephew (and OJ Blanchard) presented this insight as original 25 years later and called it “hysteresis”. In standard watererd down for the public histories of macro thought it is fairly common to present the progression Samuelson and Solow claimed the Phillips curve was a stable long term tradeoff. Friedman and Phelps achieved a scientific revolution by noting that the Phillips curve depended on expected inflation. Further research suggests it is even more complicated that Friedman knew as the NAIRU can shift due to hysteresis (this is still so brand new that it hasn’t been incorporated into standard macro models after an alleged 28 but actual 52 years). In fact, it is all there in Samuelson and Solow 1960.

    I quote “Aside from the usual warning that these are simply our best guesses we must give another caution. All of our discussion has been phrased in short-run terms, dealing with what might happen in hte next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price an unemployment behavior will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way.
    Thus, it is conceivable that after they ha produced a low-pressure economy, the believers in demand-pull might be disappointed in the short run; i.e., prices might continue to rise although unemployment was considerable. Nevertheless, it might be that the low-èressure demand would so act upon wage and other expectations as to shift the curve downward in the longer run — so that over a decade, the economy ight enjoy higher employment with price stability than our present day estimate would indicate.
    But also the opposite is conceivable. A low-pressure economy might build within itself over the years larger and nd larger amounts of structural unemployment (the reverseof what happene from 1941 to 1953 as a result of strong war and postwar demands). The result would be an upward shift of our menu of choice, with more and more unemployment being needed just to keep prices stable.”

    “Analytical Aspects of Anti-Inflation Policy” Paul H. Samuelson; Robert M. Solow American Economic Reivew Vol. 50, No. 2, Papers and Procedings of the Seventy-second Annual Meeting of the American Economic Association (May, 1960), 177-194.

    I don’t think that Milton Friedman had anything useful to add. I don’t intend to be hard on him personally. I don’t think that macroeconomists have added any useful insights since then.

    • #17 by Unlearningecon on July 13, 2013 - 12:50 pm

      Thanks for your comment.

      Not to put to fine a point on it, he plagiarized them when pretending to critique them.

      The rabbit hole just seems to get deeper and deeper with Friedman!

      I don’t think that Milton Friedman had anything useful to add. I don’t intend to be hard on him personally. I don’t think that macroeconomists have added any useful insights since then.

      I completely agree – the ‘General Theory Challenge’ on Angry Bear once was spot on. If you expand that to ‘the collected writings of Keynes’, then there’s absolutely no contest.

  4. #18 by Jan on July 13, 2013 - 9:46 am

    Thank you for this excellent essay Unlearning!I am glad if i made you aware of some the many flaws in Milton Friedman´s work,that i think had been rather sweeped away under
    the rug,for so many years now,and has surpriced me since most of this critique by a lot
    economists and others was rised for so many years now and not at all unknown at least to economist dealing with theory and methodology. As you pointed out in an other great piece about Friedman´s methodology on should be causes already by Friedmans starting assumptions,to regard a theory as all the better for its shortcomings, the empirical invalidity of theorems deduced from counter-factual hypotheses and is a in my view a monstrous perversion of science. Paul Samuelson crititised Friedmans “Positive economics” in the “F-Twist”and drew attention to the empirical invalidity of theorems deduced from counter-factual hypotheses very early in the 1960s.In an way Samuelson acted rather,polite in his dispute with Friedman,i guess maybee it has something to do with the facts that Samuelson and Friedman was although differences old friends since early years at Chicago Uni.But what is to me rather stunning is that
    Milton F still is that kind of iconoclastic Guru ,although there is so many dubouis
    thing about Friedman from methodology, to all failures of all his application of monetarism etc.
    And as a Swede i am sincerely sorry that the “Riksbank Commity”,gave their “Nobel Prize”
    to such figure as Friedman,instead of a real great economist of the first order as Nicholas Kaldor!
    I found Rayacks book online,not so much new there but a rather good early overview of
    Friedmans work.!
    Not So Free to Choose: The Political Economy of Milton Friedman and Ronald Reagan
    Professor Elton Rayack University of Rhode Island
    Have a great week Unlearning!

    • #19 by Unlearningecon on July 13, 2013 - 12:52 pm

      Yeah, Samuelson’s critique of the F-twist was quite reminiscent of the Lucas Critique, though of course it came far sooner.

      And thanks for that link, great to see that book is available online.

  5. #20 by Magpie on July 13, 2013 - 9:03 pm

    Economics attracts charlatans just like crap attracts flies.

    But to be entirely fair, although mainstreamers certainly do much more damage, they are not the only flies attracted to the crap.

    Check Glenn Stehle’s critique and the non-answer he received.

    To the point that I am wondering if this guy is not a second Alan Sokal.

    • #21 by Unlearningecon on July 15, 2013 - 7:27 pm

      Yes, we must beware of false prophets on both sides.

      I am always enthused by Pilkington’s titles, then, as the piece goes on and I get nowhere, the enthusiasm turns to sorrow.

      • #22 by pilkingtonphil on July 15, 2013 - 8:22 pm

        Hey, Magpie! Still keeping up those rather vague critiques? Good stuff, brother!

      • #23 by pilkingtonphil on July 15, 2013 - 8:27 pm

        Oh, that wasn’t Magpie. Sorry about that dude.

        Cheers Unlearningecon. I patiently await your debunking of the piece which I’m sure is in the pipeline…

      • #24 by Unlearningecon on July 24, 2013 - 3:36 pm

        Well, I wasn’t looking to rebut any particular article, but Glenn Stehle seems to have done that in that particular case.

        I was more commenting on your somewhat verboise style, which I think could use tuning as there are some worthwhile points beneath it.

  6. #25 by Leonida on July 13, 2013 - 10:26 pm

    Friedman was a third-rate ideologist but his tricks(begging the question,cooking the data,sophism,assuming a spherical cow etc)are still very common among modern economists from all political spectrum .

    This is more a problem of economics than of Friedman,ok all scientific field tend to attract their dose of charlatans and wackos,but economics is the only field(if you exclude BS like psy ev,sociobiology or theology)where no matter how much a moronic wacko you are,you can still make a brilliant career by being a ideological cheerleader

    • #26 by thehobbesian on July 13, 2013 - 11:33 pm

      Economics is always closely related to public policy, governments generally don’t have psychological experts or geologists advising them on crafting public policy, or at least not to the extent that economists have their ear. As a result, economists have an element to them that is almost like a lawyer or a politician rather than just a scholar, and they don’t just make arguments, they litigate them. And when you are litigating something there is always an incentive to distort perception in your favor. Because the economist who wins is the one who gets his policies implemented, not necessarily the one who is vindicated by empiricism. And so even though Friedman was a loser in some sense, he was a winner in another sense.

  7. #27 by PeterP on July 13, 2013 - 10:34 pm

    Scott Sumner uses the same technique – say cool sounding soundbites and simply make stuff up.

    • #28 by Unlearningecon on July 15, 2013 - 12:13 pm

      “All serious economists believe [thing Sumner believes]” is a favourite of mine.

  8. #29 by Min on July 14, 2013 - 6:12 am

    “NAIRU stands for ‘Non-Accelerating Inflation Rate of Unemployment’, and it implies that past a certain level of unemployment, workers will be able to demand wages so high that they will create a wage-price spiral.”

    It is obvious that that rests upon the assumption that employers bear no responsibility for any wage/price spiral. They could accept a smaller share of the pie by raising prices less than wages have increased. Also, as you point out, if inflation is a monetary phenomenon, the central bank is also complicit in any wage/price spiral.

    Also, the use of the word “natural” is PR or propaganda. It provides a psychological justification for whatever is being called natural. The economy is man-made.

    • #30 by Leonida on July 14, 2013 - 2:43 pm

      >Also, the use of the word “natural” is PR or propaganda. It provides a psychological justification for whatever is being called natural. The economy is man-made.

      exactly…market economics are basically a new phenomenon just like capitalist social relationship and the obsession with individualism and individual choices are basically mainly a western things,there is nothing “natural” about that.

      I have noticed that biotruth are expecially common among internet libertarians and Richard Dawkins himself complained about how right-wingers used to missread his “the selfish gene” in order to push for a modern version of social darwinism

    • #31 by Unlearningecon on July 15, 2013 - 12:13 pm

      Absolutely, the wage price spiral point was made by Galbraith senior I believe.

  9. #32 by pilkingtonphil on July 14, 2013 - 11:55 am

    Abba Lerner invented NAIRU:

    Like most of his “inventions” Friedman took it from elsewhere and then gave it a free market spin.

  10. #33 by Dallas Wood (@dedubyadubya) on July 14, 2013 - 9:03 pm

    I think it bears repeating. This entire critique seems to be restating *other* people’s critiques as fact (Herman, Kaldor, etc).

    It would probably convince someone already inclined to dislike Friedman, but not anyone else.

    • #34 by Unlearningecon on July 14, 2013 - 9:51 pm

      I don’t really make any claim to originality – as I say at the beginning, I’m mostly channelling jan’s comment.

      However, what really matters is the substance, and on that I think the matter is clear:

      Did friedman make up a fact when challenged about his GD theory, one which on inspection was false? Yes

      Did he misrepresent and plagiarise Samuelson etc when coming up with the NAIRU? Yes

      Did his position on the NAIRU contradict his position on inflation? Yes

      Did his statistics reflect his rhetoric and assertions with regards to the cause of the GD? No

      Did he generally seem to conjure up ad hoc explanations and pluck ‘facts’ out of the air to support an ideological position? Definitely yes, based on this post and my previous post on the matter

      If he hadn’t been on the side of the powerful (or ‘with history’ or what have you), he simply would have been called out long ago, and his work would have been dismissed. But he persists as a guru for some, so sadly somebody needs to point this stuff out.

      • #35 by pilkingtonphil on July 14, 2013 - 10:01 pm

        Unlearningecon is correct. Friedman made stuff up regularly. And he selectively used data in a way that was completely unforgivable — as Kaldor went to great lengths to show in his “The Scourge of Monetarism”.

        The perverse thing about Friedman is that he engaged in activities that would get a student an F and cast serious doubt on the competence of an employee. Yet he persists as a guru, as Unlearningecon says.

        It doesn’t just say something about Friedman. It says something about the profession.

      • #36 by BFWR on July 14, 2013 - 10:15 pm

        The present paradigm of monetarism is the problem, not monetarism itself.

      • #37 by pilkingtonphil on July 14, 2013 - 10:20 pm

        I assume you mean the NGDP stuff?

        No, the monetarist doctrine itself is the poison. It is a complete regression in economic thinking that was sold based on lies.

      • #38 by Dallas Wood (@dedubyadubya) on July 14, 2013 - 10:30 pm

        UE, This isn’t about originality it is about the “evidence” you present in favor of your claim. And by “evidence”, I mean repeating the opinions of others as fact.

        I mean, your entire critique of Friedman’s scholarly work never actually tackles of any of Friedman’s scholarly work directly. Here is what I’m reading…

        Herman says that Diesing says that Friedman manipulated data. You repeat this assertion as fact. Kaldor claims that Friedman made things up. You repeat this assertion as fact.

        I’m sure Friedman would disagree on both counts. Yet you have provided NO supporting discussion for why we should believe these other economists over Friedman. Do you see what I’m saying? Do you see why someone might not be convinced by that type of argument?

        Now I’m having to get back to work so I will just drop my end of the discussion here. I just wanted to make it clear that if you want to take-on Friedman, you need to actually engage his work and not just his critics.

        I’m not convinced you’ve done that since #1 you never actually quote or cite any of Friedman’s scholarly work, and #2 you seem to get basic aspects of Friedman’s work wrong. For example, you say both in this post and on twitter that the PIH implies that savings are not related to current income. This is simply not true (see the textbook chapter I tweeted to you yesterday). Maybe it does a poor job of explaining why the rich save more. But that is a totally different question.

        Anyways, that’s my two cents.

      • #39 by Unlearningecon on July 14, 2013 - 11:27 pm

        I agree that if I were to present this as an essay for anywhere other than my own blog, it would go more in depth. But then, it’s a blog and I’m just exploring an idea a commenter brought up.

        It would also be easy to turn this around and ask exactly why Friedman felt he could assert so many facts without substantiating them. I find it incredibly easy to believe that, given Friedman plucked his facts from nowhere without referencing evidence, they turned out to be wrong.

        As for the PIH: it says that savings aren’t related to level of overall income, which required Friedman to assert that the savings of the rich result from windfall gains.

      • #40 by Dallas Wood (@dedubyadubya) on July 15, 2013 - 5:54 pm

        That’s still not right. The reason PIH says that a windfall will be mostly saved because a windfall only increases transitory income, but not your permanent income. If you consumed all of the windfall this period, your consumption would jump up this period and then crash back to its original level the next period (which would be inconsistent with intertemporal utility maximization / consumption smoothing behavior).

        Check out page 82-83 of the chapter I sent you the other day. You will see that even under the simplest model, savings are function of current income relative to permanent income.

        BTW, this is the exact same rationale for why we would expect temporary tax cuts work poorly as short-run stimulus–consumers save most of their tax cut instead of spending it because it is essentially a one-time windfall.

        Now I really will leave you alone about this, since I don’t want to come off as pedantic. 😛 Please, just read up on this stuff. Hopefully when you get more time to do so, you will be able to write a better piece that will be more interesting to read. Have a good one!


      • #41 by Unlearningecon on July 17, 2013 - 8:22 pm

        Honesty I don’t see the problem with my characterisation of the PIH, poorly worded twitter spats aside.

        I too have studied it, and it just seems to me that it gives no reason that, absent windfall gains, the savings rate of the rich will be higher. This seems to be a major empirical point, yet friedman dismissed it.

  11. #42 by Luis Enrique on July 15, 2013 - 12:05 pm

    I don’t have a dog in this race, but you might be interested to know that the relative consumption idea certainly has not been forgotten

    and neither has the rich saving more than the poor (JPE paper why to rich save more

    and this essay by Chris Carroll who is probably the world authority on savings decision theory, suggests that the rich save because they value savings for its own sake and because wealth delivers power and status

    • #43 by Unlearningecon on July 15, 2013 - 12:25 pm

      Well, I’m sure economists are bothered about relative income but that link just seems to contain a few isolated papers that suggest evidence/a model for relative income, rather than rehabilitating the already existing RIH, which IMO outperforms the dominant PIH.

      I linked to that JPE paper. I also find the explanation in the nber paper is unsatisfying when compared to the RIH: the rich may pursue wealth and profit for those reasons, but what they do with it is another matter. Just my 2 cents.

      • #44 by Luis Enrique on July 15, 2013 - 1:02 pm

        oh, sorry missed you’d linked to it already

        well I don’t know how else to demonstrate to you that the relative consumption idea is alive and well, other than by showing you a bunch of papers about it in top journals. I’ve seen seminars where economists present relative consumption models and nobody in the audience balked at it. I suppose you could say it hasn’t made it into the core text book curriculum, but whilst I think it’s an idea with merit, for some questions more than others, that’s not the same thing as saying it should supplant consumption smoothing (i.e. life cycle and buffer stock models that are in the core text book curriculum)

        I don’t understand your “what they do with it is another matter” comment, the nber paper is about saving behaviour i.e what they do with it, isn’t it?

      • #45 by Unlearningecon on July 17, 2013 - 8:28 pm

        It just seems to me that there is little need for the PIH at all – the RIH explains consumption smoothing as ‘status quo bias’.

        And what I meant was that I see the reason the rich pursue wealth as that they love doing it; however, the reason they save it does not have the same psychological connotations (drive, chasing the high etc).

  12. #46 by Blue Aurora on July 15, 2013 - 1:25 pm

    With regard to the dominance of the Permanent Income Hypothesis in economics education…IIRC, it wasn’t just Milton Friedman. I believe Franco Modigliani also came out with something similar by coincidence, so that undoubtedly contributed to its widespread presence in economics education.

    (Incidentally, one university professor I met once had a student of the late James S. Duesenberry as his doctoral thesis adviser. If you would like me to be specific – the professor I’m talking about is Mark A. Setterfield of Trinity College in Hartford, Connecticut, and his doctoral thesis adviser was the late John L. Cornwall, who in turn was a student of the late James S. Duesenberry.)

    The Relative Income Hypothesis is examined to a certain extent by conventional economists in the academic literature however, even if it isn’t so widely taught. Also, as an aside, James S. Duesenberry’s doctoral thesis is cited in Daniel Ellsberg’s 1962 doctoral thesis, Risk, Ambiguity and Decision.

    BTW – Unlearningecon, were you aware of what Paul A. Samuelson once said of Milton Friedman?

    • #47 by Unlearningecon on July 17, 2013 - 8:30 pm

      I know he’s said a few things! To which one are you referring?

      • #48 by Blue Aurora on July 18, 2013 - 6:46 am

        Well, I don’t remember the exact source for this statement by Paul Samuelson on Milton Friedman. But if my memory serves me correctly, after a number of debates he had with Milton Friedman, Paul Samuelson eventually said he felt like what would happen would be that he would “win the argument” and “lose the debate”.

      • #49 by Unlearningecon on July 19, 2013 - 8:46 pm

        Ah yes, I have heard that one before. Sounds about right.

  13. #50 by Dinero on July 15, 2013 - 5:20 pm

    Maybe there was a popular socialist zeitgeist prevelant in the USA at the time, and Freidman’s chippy TV comments were in the context of a foil to that at the time. He has something useful to say about currencies and trade here.

    • #51 by Unlearningecon on July 15, 2013 - 5:28 pm

      Maybe there was a popular socialist zeitgeist prevelant in the USA at the time

      An imagined one!

      That video is just wrong, though – since the collapse of BW, BoPs have been persistently…unbalanced. The west has bought more than it has sold and the east has done the opposite.

      Mattias Vernengo goes into this here, explaining why with free capital movement, absolute advantage is more important than comparative advantage and so trade inbalances may persist.

      • #52 by Jan on July 16, 2013 - 4:02 pm

        Richard Kahn on The Scourge of Monetarism (11 December 1987).
        The UK Forum for Post Keynesian Economics
        Keynes Seminar in Cambridge
        [audio src="" /]

  14. #53 by Dinero on July 15, 2013 - 5:43 pm

    I will have a look a t the Vernengo Link. But do you not see that Greece has suffered a economic mess without an exchange rate to limit imports

    • #54 by Unlearningecon on July 21, 2013 - 3:26 pm

      Absolutely, but that’s a result of not having autonomy over monetary policy, rather than not having floating exchange rates. It could also opt for other exchange-rate regimes if it had its own currency.

  15. #55 by Dinero on July 16, 2013 - 9:48 am

    Some The Vernengo paper seems to incoreectly concirns itself with capital as if it was a finite supply actually the paper never mentions the forex market role in establishing the exchange rate,Yes capital flows complicate the trade flows , but it is well known that borrowing foreign currency has hazard. The basic exchange rate moderation principal is that if a country has nothing to sell then there is no demand for its currency and so the exchange rate is low and imports are prohibatively expensive.

    • #56 by Unlearningecon on July 16, 2013 - 12:28 pm

      But this isn’t what has happened. The UK exchange rate, for example, has depreciated and exports have not risen at all.

      • #57 by metatone on July 17, 2013 - 6:44 pm

        Lots of theories around this, there’s some evidence that manufacturing in the UK is all mid-tier, they take in half-finished goods from elsewhere and apply some extra work. Problem being that means that every export comes with an associated import of high-ish value. Thus exchange rates don’t do much for the balance of trade?

  16. #58 by metatone on July 17, 2013 - 6:42 pm

    Only sort of on topic, but if you haven’t read this, you really should:

    • #59 by Unlearningecon on July 17, 2013 - 8:23 pm

      Yeah, I have read that post, and the book is added to the list.

  17. #60 by Chris Evans on July 18, 2013 - 6:51 pm

    Many monetarists sought to resurrect the pre-Keynesian view that market economies are inherently stable in the absence of major unexpected fluctuations in the money supply. Because of this belief in the stability of free-market economies they asserted that active demand management (e.g. by the means of increasing government spending) is unnecessary and indeed likely to be harmful. The basis of this argument is an equilibrium between “stimulus” fiscal spending and future interest rates. In effect, Friedman’s model argues that current fiscal spending creates as much of a drag on the economy by increased interest rates as it creates present consumption: that it has no real effect on total demand, merely that of shifting demand from the investment sector (I) to the consumer sector (C).

  18. #61 by sahriskmanager on July 20, 2013 - 6:43 pm

    More Money Supply is required to restore confidence ? well that’s what all developed economies are doing as result of QE – Quantitative Easing Programs! but is that helping the UK, USA etc ? NO! Reflation never helps in the very Long-run.
    The Chicago boys destroyed one country back in the 70s i.e. ( Allende’s Chile). I hope other wont blindly follow their illogical advises any more.

    • #62 by Unlearningecon on August 5, 2013 - 12:41 pm

      Sadly, that doesn’t seem to be the case with austerity stronger than ever 😦

      • #63 by sahriskmanager on August 5, 2013 - 12:49 pm

        Austerity sir?
        Federal Reserve/BOE/BOJ are following an austerity program ? I think you are talking in fiscal terms. In Monetary terms hardly any austerity exist….??

      • #64 by Unlearningecon on August 5, 2013 - 8:25 pm

        I don’t know that ‘austerity’ can refer to monetary policy, although it can be expansionary or contractionary. In any case, whether you think monetary policy is expansionary or contractionary depends on your view of how monetary policy works. I do not agree with NGDPTers, and do not think it can be classified as ‘contractionary’ without circularly defining monetary policy’s stance by outcomes.

  19. #65 by Mick Brown on July 20, 2013 - 8:15 pm

    I hereby swear that after more than 40 years of thinking on this subject that your final paragraph is correct.

    • #66 by sahriskmanager on August 5, 2013 - 10:17 am

      Good to hear this sir ! …thank you

  20. #67 by Unlearningecon on July 21, 2013 - 3:30 pm


    I have warned you about your relentless discussion of your own esoteric views on cost accounting. If you really feel that passionately about it, why not start your own blog? In any case, do not flood my comment threads and make sure you are on topic instead of repeating the same subject, regardless of its relevance.

  21. #68 by D.R. Baker on August 4, 2013 - 4:01 am

    Good article and analysis,

    Your point about Friedman assuming his solution is a strong one and one that generally goes unnoticed. The Permanent Income Hypothesis assumes that simple weighting over time can occur if only the proper weighting can be found. That is a tremendous assumption that builds into itself the type of methods an economists would use. Whether the exact specifications of the Permanent Income Hypothesis are correct is much less important than assuming this type of analysis is possible.

    I have recently written a similar article about the assumptions of Greg Mankiw, specifically relating them to the assumptions of Friedman as his intellectual predecessor. I think that you might be interested in it:

    I wonder whether anyone will notice that Milton Friedman has been completely refuted by new evidence. His claim was that the Federal Reserve could have pulled the US economy out of the Great Depression using strong enough monetary policy can no longer be honestly believed. Bernanke went beyond the normal bounds of the Fed, pushing on the string of monetary policy without any ability to pull the economy out of its hole. If Friedman’s claim ever had an intellectual leg to stand on, it does not now.

    In regards to the weakness of the NAIRU, there was an excellent recent book, “Macroeconomics Beyond the NAIRU” by Servaas Storn and CWM Naastepad. It is worth a glance.

    Thanks for your article.

    • #69 by Unlearningecon on August 7, 2013 - 12:45 pm

      Thanks for your comment.

      Yeah, I wrote a similar article ridiculing Mankiw’s views, which sounded like those of a teenager who had just read Ayn Rand.

      The Permanent Income Hypothesis assumes that simple weighting over time can occur if only the proper weighting can be found. That is a tremendous assumption that builds into itself the type of methods an economists would use.

      Yeah, it seems to me this type of thinking isn’t uncommon. Most behaviour can be fitted, post hoc, into a utility function, or game theory can be adjusted for a degree of ‘altruism’ after it is falsified. It just has me thinking the whole framework is a dead end that lacks true predictive power.

      Re: the Great Depression, monetarists sadly do not believe that events refute Friedman’s hypothesis; in fact, if anything they seem to believe it confirms it. See, for example, ‘market monetarist’ Scott Sumner defending this view.

      Thanks for the reading recommendation. I am, however, forced to ask (in the nicest possible way) how an entire book could be filled with one idea and still be interesting?