Milton Friedman - Dead at 94

[jbg]

One of the Friedman's central tenets was money supply. I simply said it was tried but didn't work in any practical sense. It is why many people said that Friedman was half right in his theory.

From the Globe article:

"Mr. Friedman's theory -- that a central bank can dampen inflation by limiting the supply of money in the economy -- was appealing. The money supply, however, turned out to be far too dynamic for any central bank to contain. The Bank of Canada tied itself in knots trying to define and keep track of the ever-expanding supply of money, Mr. Crow said.

That's not quite an accurate rendition of what happened. What happened was when Milton Friednman started his work during the mid-1960's-early 1970's, when people kept their money in checking and savings accounts. The ceilings on savings account interest rates, and for a while prohibition on interest on checking, spurred the development of alternative financial markets. The growth of computers spurred the development of even more complex financial devices.

As a result, his theories had to be brouight in line with people's financial practices. The intention, to gear money growth to productivity growth, remained successful. Though I have no inside information, I believe that the Fed targets commodity prices, loosening when they drop, tightening when they rise. Oil and gold, in my humble opinion, may be among the commodities being watched. The escalation of oil and gold prices from early 1999 on, I believe, drew Fed attention during the 2000-1 wave of tightening. The Fed's decision to stray from this after 911, in my opinion, was what led to the spike in oil and gold prices since then.

By the way, the old fashioned way of enforcing this kind of monetarism had a simple name; the gold standard. Fiat money is far more complex to manage, and requires an extraordinary degree of confidence by the people and business.

[jdobbin]

That's not quite an accurate rendition of what happened. What happened was when Milton Friednman started his work during the mid-1960's-early 1970's, when people kept their money in checking and savings accounts. The ceilings on savings account interest rates, and for a while prohibition on interest on checking, spurred the development of alternative financial markets. The growth of computers spurred the development of even more complex financial devices.

As a result, his theories had to be brouight in line with people's financial practices. The intention, to gear money growth to productivity growth, remained successful. Though I have no inside information, I believe that the Fed targets commodity prices, loosening when they drop, tightening when they rise. Oil and gold, in my humble opinion, may be among the commodities being watched. The escalation of oil and gold prices from early 1999 on, I believe, drew Fed attention during the 2000-1 wave of tightening. The Fed's decision to stray from this after 911, in my opinion, was what led to the spike in oil and gold prices since then.

By the way, the old fashioned way of enforcing this kind of monetarism had a simple name; the gold standard. Fiat money is far more complex to manage, and requires an extraordinary degree of confidence by the people and business.

The link I showed says that they Federal Banks tried to put Friedman's full theory into practice but had to stay with the interest rates. Friedman himself said it wasn't as deft a tool because it required lots of forecasting and interest rates often influenced by what has happened rather than what will happen.

As I said, I am not knocking Friedman.

Friedman and others though always said that monetary policy had to be in concert with government spending. This is where Galbraith's theory came in. In the battle of economic, Galbraith's theory won out with Nixon. Freidman's won out with Reagan.

You need both to control inflation though. Federal banks and governments have to work together. Alan Greenspan was made nuts over the last few years because of the deficit in the U.S. He said it was ultimately going to be inflationary.

[Charles Anthony]

For governments, the inflationary controls remain with spending and cutting. This comes from the Galbraith school of thought. Most governments in the 1970s and early 1980s used some form of price and wage controls. This is good for countries dominated by certain industries and and having a large government workforce. It is not so good for the nimble economy.

Are you serious??? Price and wage controls are good???

Do you have a link for that?

Thankfully the internet was not around in the 1970s and early 1980s otherwise I would have to say "Do you have a recent link for that?" instead!

[jdobbin]

Are you serious??? Price and wage controls are good???

Do you have a link for that?

Thankfully the internet was not around in the 1970s and early 1980s otherwise I would have to say "Do you have a recent link for that?" instead!

Price and wage controls were the only mechanism that Roosevelt was able to use during World War 2 to control inflation.

http://en.wikipedia.org/wiki/Wage_and_price_controls

As I said, they stopped after the Nixon years.

The principle now that Galbraith and others advocate is to control spending.

[Charles Anthony]

The principle now that Galbraith and others advocate is to control spending.

Are you still serious??? Government spending is a drop in the bucket.

[jbg]

Are you serious??? Price and wage controls are good???

Do you have a link for that?

Thankfully the internet was not around in the 1970s and early 1980s otherwise I would have to say "Do you have a recent link for that?" instead!

Price and wage controls were the only mechanism that Roosevelt was able to use during World War 2 to control inflation.

http://en.wikipedia.org/wiki/Wage_and_price_controls

As I said, they stopped after the Nixon years.

The principle now that Galbraith and others advocate is to control spending.

Galbraith actually continued to advocate wage + price controls. In WWII the controls worked for two reasons that did not apply in 1971-74; 1) Slack in the economy left over from the Depression; and 2) rationing.

The economy did have some slack in August 1971, but not nearly as much as at the beginning of WW II. In August 1971, while the published unemployment rates were in the 6.5% area, much of the unemployment was from stikes (strikers count as unemployed in many states) and from the unrecorded underground economy. This economy grew prodigiously during the 1950's on, aided by continued high official tax rates and growing regulation. Even with stimulative fiscal and monetary policy, unemployment was driven to a low of 4.7%, a rate that lasted one month, October 1973. Thus, the economy was close to full employment, and the stimulative monetary policies, plus the disastrous grain sales to the USSR created widespread shortages that blew up the controls.

The failure to employ rationing then created shortages. I personally remember spot heating oil shortages during the falls of 1971 and 1972, (pre-oil embargo), gasoline shortages during the summers of 1972 and 1973 (again pre-oil embargo), extensive beef shortages during the summer of 1973, sugar shortages during fall 1974, and even a brief "toilet paper" shortage inspired by a TV comedian during the fall of 1974. Without rationing, price controls were not viable. Of course, the extensive gasoline shortages of December 1973 to February 1974 were not met with rationing, resulting in sharply higher prices, despite controls. Gasoline in my area lept from $0.39/US Gallon to $0.65 per US gallon, for leaded regular. While the prices eased back to around $0.55 per US gallon these large price increases, in conjunction with terrible mileage typical of that era cars, did extensive damage.

Additionally, there was all the difference in the world politically between the extreme unity and patriotism inspired by WW II and the horrific tensiions and division typical of the early 1970's, the "long-hair" era.

[jdobbin]

Are you still serious??? Government spending is a drop in the bucket.

Greenspan has repeatedly said that the Fed is being hampered in controlling inflation by large deficits.

[Charles Anthony]

Where to start!?!

I do not think I was clear enough when I asked for an internet link and alluded to the fact that the internet was not around in the 1970s.

You describe some economic commotion from the Second World War and events from over 30 years ago that lasted a month or two in duration.

Greenspan has repeatedly said that the Fed is being hampered in controlling inflation by large deficits.

Greenspan can say what he wants.

Do you really believe that The Fed has always acted independently of political influence???

[jdobbin]

Galbraith actually continued to advocate wage + price controls. In WWII the controls worked for two reasons that did not apply in 1971-74; 1) Slack in the economy left over from the Depression; and 2) rationing.

The economy did have some slack in August 1971, but not nearly as much as at the beginning of WW II. In August 1971, while the published unemployment rates were in the 6.5% area, much of the unemployment was from stikes (strikers count as unemployed in many states) and from the unrecorded underground economy. This economy grew prodigiously during the 1950's on, aided by continued high official tax rates and growing regulation. Even with stimulative fiscal and monetary policy, unemployment was driven to a low of 4.7%, a rate that lasted one month, October 1973. Thus, the economy was close to full employment, and the stimulative monetary policies, plus the disastrous grain sales to the USSR created widespread shortages that blew up the controls.

The failure to employ rationing then created shortages. I personally remember spot heating oil shortages during the falls of 1971 and 1972, (pre-oil embargo), gasoline shortages during the summers of 1972 and 1973 (again pre-oil embargo), extensive beef shortages during the summer of 1973, sugar shortages during fall 1974, and even a brief "toilet paper" shortage inspired by a TV comedian during the fall of 1974. Without rationing, price controls were not viable. Of course, the extensive gasoline shortages of December 1973 to February 1974 were not met with rationing, resulting in sharply higher prices, despite controls. Gasoline in my area lept from $0.39/US Gallon to $0.65 per US gallon, for leaded regular. While the prices eased back to around $0.55 per US gallon these large price increases, in conjunction with terrible mileage typical of that era cars, did extensive damage.

Additionally, there was all the difference in the world politically between the extreme unity and patriotism inspired by WW II and the horrific tensiions and division typical of the early 1970's, the "long-hair" era.

I mentioned earlier that wage and prices don't work on economies that are more nimble and less centralized.

Galbraith in recent years has said that governments need to control inflation by not running deficits. Greenspan and the present Federal Reserve agree.

[jdobbin]

Where to start!?!

I do not think I was clear enough when I asked for an internet link and alluded to the fact that the internet was not around in the 1970s.

You describe some economic commotion from the Second World War and events from over 30 years ago that lasted a month or two in duration.

Greenspan can say what he wants.

Do you really believe that The Fed has always acted independently of political influence???

I think I was making the point that Friedman's ideas on inflation control weren't around in in World War II. Wage and price controls were the chosen route to fight off inflation at the time. Galbraith's thinking was adopted by Nixon partly because he knew that it worked in World War II. As has been pointed out though, it worked in World War II partly because the government controlled things through rationing. It really wasn't an option in the 1970s.

Quite a structure was built around price control in World War II.

http://en.wikipedia.org/wiki/Office_of_Price_Administration

Galbraith in recent years didn't suggest wage and price controls as a policy for modern day governments.

Do you really think that deficits are not inflationary.

[August1991]

"Thatcher herself wrote in The Downing Street Years, “The only effective way to control inflation is by using interest rates to control the money supply.”

If interest rates were not a problem, why does Alberta and Ontario makes an issue of it every time they go up or down?

I read that National Review. Look, if you want to believe that a green light makes cars go, then fine. I'll insist that pressing on the gas pedal makes cars go. (It just happens that every time there's a green light, cars go.)

When the central bank raises interest rates, it signals that it's going to reduce the rate of growth of high-powered money and eventually this will lower the inflation rate. (This is a devil to do when inflation is in double digits.)

It has always been a source of amazement to me that people believe governments capable of exercising Godlike power. Leftists reject Intelligent Design in the Universe and yet believe it when they speak of government.

Government cannot simply announce the market Interest Rate anymore than it can announce the market price of milk.

Do you really think that deficits are not inflationary.

In short, no, they are not. I'll add the caveat that deficits are not inflationary in the long run if they are financed by public borrowing and not by printing money.

[Mimas]

Milton Friedman tried to convince us that letting our companies dump us for cheaper overseas labour (like China) was the greatest idea of all. It was a great idea for the companies but Western economies have stagnated as a result. IMO, a lot of his ideas had nothing to do with economic reality, most of them were born purely by ideological reasons. I am not impressed by his work. Sorry, Milton, won't miss ya. RIP.

[Charles Anthony]

Milton Friedman tried to convince us that letting our companies dump us for cheaper overseas labour (like China) was the greatest idea of all.

That is a ridiculous and untrue statement. You are not being serious.

IMO, a lot of his ideas had nothing to do with economic reality, most of them were born purely by ideological reasons.

Actually, that is completely wrong.

He was at the forefront of presenting his ideology of modern life in real economic terms.

You are just fear-mongering.

[August1991]

Milton Friedman tried to convince us that letting our companies dump us for cheaper overseas labour (like China) was the greatest idea of all. It was a great idea for the companies but Western economies have stagnated as a result.

Then I guess, Mimas, you are against sunlight. The sun provides us with light and energy at a cost far below even slave labour. The sun is the ultimate example of 'cheap labour'. It works for nothing.

Mimas, by your reasoning, sunlight (dumped for free into Canada) impoverishes Canadian workers.

[jdobbin]

I read that National Review. Look, if you want to believe that a green light makes cars go, then fine. I'll insist that pressing on the gas pedal makes cars go. (It just happens that every time there's a green light, cars go.)

When the central bank raises interest rates, it signals that it's going to reduce the rate of growth of high-powered money and eventually this will lower the inflation rate. (This is a devil to do when inflation is in double digits.)

It has always been a source of amazement to me that people believe governments capable of exercising Godlike power. Leftists reject Intelligent Design in the Universe and yet believe it when they speak of government.

Government cannot simply announce the market Interest Rate anymore than it can announce the market price of milk.

In short, no, they are not. I'll add the caveat that deficits are not inflationary in the long run if they are financed by public borrowing and not by printing money.

Monetization of deficits is inflationary. This is what Friedman wrote about.

http://en.wikipedia.org/wiki/Quantity_theory_of_money

http://en.wikipedia.org/wiki/Monetization

I hope you are not telling me as a right winger that you believe Intelligent Design.