MILTON FRIEDMAN'S MONETARY FRAMEWORK a Debate with His Critics

by Robert J. ed. Gordon

In response to widespread interest in a formal complete statement analyzing aspects of the money-income relationship and clarification of his quantity theory, Milton Friedman in 1970 published "A Theoretical Framework for Monetary Analysis," and a year later "A Monetary Theory of Nominal Income," both in the Journal of Political Economy. A combined version of these essays, first published by the National Bureau of Economic Research, begins this volume. Because his statement was important and controversial both as a commentary on the history of economic thought and as a theoretical contribution in its own right, the Journal of Political Economy in 1972 presented critical reviews from noted monetary theorists, including Karl Brunner and Allan H. Meltzer, James Tobin, Paul Davidson, and Don Patinkin. Their studies, which are printed in the present volume, focus on substantive issues, covering a variety of topics. All of their major points are discussed in Friedman's reply, which clarifies and expands upon his original themes and introduces interesting new material. Thus the synthesis of his two articles, the critical comments, and his response, together with an introduction by Robert J. Gordon, are combined in one volume for the convenience of scholars and students.

Genres: Economics, Nonfiction

Paperback

First published January 1, 1974

Reviews

[Frank Stein · Rating 4 out of 5]

Despite the success of Milton Friedman’s and Anna Schwartz’s highly empirical A Monetary History of the United States, 1867-1960, many economists criticized Friedman for failing to articulate a clear, mathematical theory of how he thought money actually affected the economy. In 1970, in the Journal of Political Economy, Friedman provided his theory. His paper, the responses of four critics of varying friendliness, and his counter-response were then collected in this book. Although Friedman’s theory did not provide a coherent framework for future students of monetary policy, the debate over his ideas is a welcome look into the history of monetary thought.

Ironically, much like Keynes’s General Theory, much of Friedman’s paper is taken up by a discussion of the history of economic thought. Friedman first traces the ideas behind what he called a “crude” quantity theory of money, and then the ideas behind the basic Keynesian theory, and then tries to find a theory that addresses concerns of both, though with a leaning toward the quantity theory. He calls his ideas the “Monetary Theory of Nominal Income.” He argues that changes in total money change only total nominal income. If such changes are anticipated they affect only prices, but if such changes are unanticipated they effect mainly output (in the short-run at least).

Unfortunately, much of the debate in this book around Friedman’s theory is taken up with concerns over who exactly said what and when, and whether such statements were essential or tangential to the writer’s theory. Friedman argues that, any disavowals to the contrary, Keynesians treat things like the price level or the amount of money in the system (in a situation of “absolute liquidity preference”) as a given fact and not a subject of analysis. Keynesians like James Tobin and Paul Davidson disagree. Friedman counters, etc. etc.

There are some things they seem to agree on (even if they don’t always agree they agree). One is that wages were central in Keynes’s theory, and that a “disequilbrium” in wages relative to other prices was one of the real sources of recessions and depressions. Next they agree that while Friedman and other monetarists view new money as changing prices across the spectrum of goods, Tobin, Don Patinkin and other Keynesians see new money as operating largely through its effect on interest rates and financial products, which then affect investments and other types of production.

Ultimately, even Friedman seems uncomfortable with his own theory. He says all the magnitudes in his theory are subject to empirical verification, and that the real disagreements between different economists comes down to how large they think these different magnitudes are. In true Friedman fashion, despite making a stab at theory, he believes economics is mainly a study of real facts on the ground.

[Steven H · Rating 5 out of 5]

A WRITTEN "DEBATE" ABOUT FRIEDMAN'S MONETARIST PRINCIPLES

Milton Friedman (1912-2006) was an American economist who taught at the University of Chicago (and was the leader of the "Chicago school"); he received the Nobel Prize in Economics in 1976.

This 1974 book contains two of Friedman's essays on monetary theory, followed by critical commentaries, with Friedman's own "Comments on the Critics" at the end.

Friedman begins by stating that "the quantity theory of money takes for granted that what ultimately matters to holders of money is the real quantity rather than the nominal quantity they hold and that there is a fairly definite real quantity of money the people wish to hold under any given circumstances." (Pg. 2) He adds, "substantial changes in prices or nominal income are almost invariably the result of changes in the nominal supply of money." (Pg. 3)

He summarizes the key elements of monetary theory as: (1) a unit elasticity of the demand for money with respect to real income; (2) a nominal market interest rate equal to the anticipated real rate; (3) a difference between the anticipated real interest rate and the real secular rate of growth determined outside the system; and (4) full and instantaneous adjustment of the amount of money demanded to the amount supplied (Pg. 42-43)

He concludes his framework by asserting that the basic differences between economists are "empirical, not theoretical," and that much of the controversy reflects "different implicit or explicit answers to these empirical questions." (Pg. 61)

He rejects Keynes' 'General Theory' on the grounds that "it has been contradicted by evidence: its predictions have not been confirmed by experience." (Pg. 134) He disagrees with one of his critics, saying, "My restatement IS a restatement of that quantity theory and is not Keynsian in any meaningful sense of that term." (Pg. 158) He concedes to this same critic, however, that "my wording is ambiguous and I should have been more careful." (Pg. 161)

This book is a detailed examination of Friedman's monetarist theories, and will be of considerable interest to anyone seeking INVOLVED discussions of Friedman's ideas.