Must-read: David Glasner: “What’s Wrong with Monetarism?”

Must-Read: An excellent read from the very sharp David Glasner. I, however, disagree with the conclusion: the standard reaction of most economists to empirical failure is to save the phenomena and add another epicycle. Why not do that in this case too? Why not, as someone claimed to me that John Taylor once said, stabilize nominal GDP by passing a law mandating the Federal Reserve keep velocity-adjusted money growing at a constant rate?

David Glasner: What’s Wrong with Monetarism?: “DeLong balanced his enthusiasm for Friedman with a bow toward Keynes…

…noting the influence of Keynes on both classic and political monetarism, arguing that, unlike earlier adherents of the quantity theory, Friedman believed that a passive monetary policy was not the appropriate policy stance during the Great Depression; Friedman famously held the Fed responsible for the depth and duration of what he called the Great Contraction… in sharp contrast to hard-core laissez-faire opponents of Fed policy, who regarded even the mild and largely ineffectual steps taken by the Fed… as illegitimate interventionism to obstruct the salutary liquidation of bad investments, thereby postponing the necessary reallocation of real resources to more valuable uses…. But both agreed that there was no structural reason why stimulus would necessarily counterproductive; both rejected the idea that only if the increased output generated during the recovery was of a particular composition would recovery be sustainable. Indeed, that’s why Friedman has always been regarded with suspicion by laissez-faire dogmatists who correctly judged him to be soft in his criticism of Keynesian doctrines….

Friedman parried such attacks… [saying that] the point of a gold standard… was that it makes it costly to increase the quantity of money. That might once have been true, but advances in banking technology eventually made it easy for banks to increase the quantity of money without any increase in the quantity of gold… True, eventuaally the inflation would have to be reversed to maintain the gold standard, but that simply made alternative periods of boom and bust inevitable…. If the point of a gold standard is to prevent the quantity of money from growing excessively, then, why not just eliminate the middleman, and simply establish a monetary rule constraining the growth in the quantity of money? That was why Friedman believed that his k-percent rule… trumped the gold standard….

For at least a decade and a half after his refutation of the structural Phillips Curve, demonstrating its dangers as a guide to policy making, Friedman continued treating the money multiplier as if it were a deep structural variable, leading to the Monetarist forecasting debacle of the 1980s…. So once the k-percent rule collapsed under an avalanche of contradictory evidence, the Monetarist alternative to the gold standard that Friedman had persuasively, though fallaciously, argued was, on strictly libertarian grounds, preferable to the gold standard, the gold standard once again became the default position of laissez faire dogmatists…. So while I agree with DeLong and Krugman (and for that matter with his many laissez-faire dogmatist critics) that Friedman had Keynesian inclinations which, depending on his audience, he sometimes emphasized, and sometimes suppressed, the most important reason that he was unable to retain his hold on right-wing monetary-economics thinking is that his key monetary-policy proposal–the k-percent rule–was empirically demolished in a failure even more embarrassing than the stagflation failure of Keynesian economics. With the k-percent rule no longer available as an alternative, what’s a right-wing ideologue to do? Anyone for nominal gross domestic product level targeting (or NGDPLT for short)?

April 27, 2016


Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch