Tuesday, January 31, 2017

Bill Mitchell — Another Milton Friedman legacy bites the dust

Milton Friedman and his gang at Chicago, including the ‘boys’ that went back and put their ‘free market’ wrecking ball through Chile under the butcher Pinochet, have really left a mess of confusion and lies behind in the hallowed halls of the academy, which in the 1970s seeped out, like slime, into the central banks and the treasury departments of the world. The overall intent of the literature they developed was to force governments to abandon so-called fiscal activism (the discretionary use of government spending and taxation policy to fine-tune total spending so as to achieve full employment), and, instead, empower central banks to disregard mass unemployment and fight inflation first. Several strands of their work – the Monetarist claim that aggregate policy should be reduced to a focus on the central bank controlling the money supply to control inflation (the market would deliver the rest (high employment and economic growth, etc); the promotion of a ‘natural rate of unemployment’ such that governments who tried to reduce the unemployment rate would only accelerate inflation; and the so-called Permanent Income Hypothesis (households ignored short-term movements in income when determining consumption spending), and others – were woven together to form a anti-government phalanx. Later, absurd notions such as rational expectations and real business cycles were added to the litany of Monetarist myths, which indoctrinated graduate students (who became policy makers) even further in the cause. Over time, his damaging legacy has been eroded by researchers and empirical facts but like all tight Groupthink communities the inner sanctum remain faithful and so the research findings haven’t permeated into major shifts in the academy. It will come – but these paradigm shifts take time.

The latest research effort to wipe Friedman’s theoretical legacy off the map was presented to the ASSA Annual Meetings (in Chicago, this year) at a session on January 8, 2017 by two young Harvard economists.…
Arguably, "Friedmanism" led to the Global Financial Crisis (system failure) that is still unfolding around the world, resulting in a discrediting of conventional economics, the unwinding of the post-WWII liberal order, and the inception of a new world order that is now in the making, unfortunately led by the right since the left is absorbed in navel-gazing and blaming.

Bill Mitchell – billy blog
Another Milton Friedman legacy bites the dust
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

12 comments:

John said...

What is most interesting about Milton Friedman is that he was an academic fraud. His best known work on the monetary history of the US was shown to be made up of dubious statistics, so dubious that they could only have been faked, not too dissimilar to the way Reinhart and Rogoff did much later. The world's leading econometricians who looked into the details of what Friedman and his cowriter Anna Schwartz claimed they had uncovered realized that they were being very selective in how they used the data, using and abusing it as they saw fit. That was academia's polite way of saying the books were cooked. Yet Friedman the charlatan is still being lauded as one of the greatest economists of the twentieth century!

Bill Mitchell recounts the story here: http://bilbo.economicoutlook.net/blog/?p=20281

Bob Roddis said...

Milton Friedman and his gang at Chicago, including the ‘boys’ that went back and put their ‘free market’ wrecking ball through Chile under the butcher Pinochet, have really left a mess of confusion and lies behind in the hallowed halls of the academy, which in the 1970s seeped out, like slime, into the central banks and the treasury departments of the world. The overall intent of the literature they developed was to force governments to abandon so-called fiscal activism (the discretionary use of government spending and taxation policy to fine-tune total spending so as to achieve full employment), and, instead, empower central banks to disregard mass unemployment and fight inflation first.

Neither monetary policy nor "fiscal" policy have anything to do with the free market. They are the antithesis of the free market. It's like Minsky calling the unsustainable price and capital structure created by a government funny money regime "capitalism". It's completely dishonest and undermines the entire analysis.

John said...

Bob, fair enough. But you have to accept that terms are used by people in the conventionally accepted sense, not in ways that only libertarians and anarcho-capitalists want. Nothing useful comes about if everyone has different definitions, like Austrians have about inflation. Everybody on planet earth accepts inflation means what it currently means. The Austrian wants you to use the admittedly original definition of an increase in the money supply, not an increase in general prices.

Why should planet earth not use the terms fiscal and monetary as currently accepted? Language changes, definitions are broadened. Should I still use the English of the King James Bible or Chaucer and then sow confusion by my meanings?

Tom Hickey said...

Bill put "free market" in quotes to indicate that this is trope being used as a tool by MF and the Chicago boyz to promote a particular agenda.

Beyond that is the question that naturally arises from the desire of everyone to live in a utopia, how to get from here to there given existing conditions, not the least of which is that the world is now a smaller place and just about everything affects everything else.

There are really two questions. The first is what a utopia would look like socially, political and economically, recognizing that the social, political and economic aspects of a group are of mutual influence.

The second is the plan for getting there in the dynamic context of a complex adaptive system affected by reflexivity and emergence.

There is a lot of good analysis out there diagnosing the problems, but the potentially practical solutions are few and untested.

Bob Roddis said...

John: No Austrian EVER tries to confuse the two very distinct phenomena of a) an increase in the money supply with b) the potential for a resulting general price increase. If the term “inflation” is used, it is always clear as to which of the two phenomena it is being applied to. Further, few people use the term “inflation” these days to refer to an increase in the money supply.

Not so with Keynesians and MMTers. “Capitalism” is used by them to refer to a regime of a gold standard, a gold standard with factual reserve banking, a fiat money system with no bank bailouts permitted and/or a fiat money system with ubiquitous bank bailouts in the event things go off the track. Friedman was generally quite laissez faire concerning general market conditions but quite interventionist when it came to money. In each case, the analysis is quite different. The confusion sown by Mr. Mitchell in calling Friedman’s interventionist monetary policies “free market” is purposeful.

Mr. Hickey: Mitchell put "free market" in quotes for purposes of disparagement. He lacks the courage of his convictions to properly differentiate the free market from a fiat money regime when it suits his purpose.

John said...

Bill Mitchell puts scare quotes around "free market" to inform you that is isn't free and never has been. Markets came out of the state and cannot exist without the state. You can disagree with that, if you like, but that's how PKers and MMTers see "free markets". That's why Mitchell can say "interventionist" in a "free market" because his readers understand that he's poking fun at those who think there is such a thing and is also making a comic observation that the same people who think there is a "free market" either never see the never ending "interventions" of the state in the market, and if they do claim it is a one off affair, or defend "interventions" as being pro-market or any number of weird and wonderful excuses for the necessity of the state in the market.

Friedman is a charlatan because he uses terms as when he sees fit and has no objective standard. By contradistinction, Mitchell is impeccably honest and objective in the standards he sets, as well as being an unimaginably great economist.

Tom Hickey said...

Mitchell put "free market" in quotes for purposes of disparagement. He lacks the courage of his convictions to properly differentiate the free market from a fiat money regime when it suits his purpose.

My understanding of Bill Mitchell's position is that neoliberalism represents itself as "free market" classical economic liberalism, but neoliberals as distinguished from classical liberals realized that getting rid of government in the context of contemporary society is never going to happen so the next best thing is to harness government to the neoliberal agenda through monetary policy run by politically independent central banks and imposing the Washington Consensus concerning fiscal discipline that favors elite interests through sound finance and controlling inflation using monetary policy.

This is not the free market of classical economic liberalism, and neoliberals appropriated the trope of "free market" and pressed it into service as tool for elite control through government capture politically.

Tom Hickey said...

It is also necessary to distinguish liberalism from anarchism.

Liberalism advocates for limited government, where government is limited to its proper functions, in this view providing security, both external and domestic, and order through a legal system, which is necessary for contracts, for example. This is sometimes called "the nightwatchman state."

Anarchism advocates for a stateless solution based on voluntary association for mutual benefit.

There are three functions governance in descending order of importance. Security is the bottom line as the sine qua non. The next is order, which is generally conceived of as the outcome of law and enforcement. The last is welfare, which is to a group what wellbeing is to individuals.

One cohort holds that security, order and welfare arise spontaneously from natural order based on freedom to choose.

Another holds that security and order need to be imposed and in a liberal context this is accomplished by political self-determination.

Another holds that natural order that optimizes does not arise spontaneously under freedom of choice, but rather welfare needs to be cultured through distributive justice, just as individual wellbeing needs to be cultured by means in addition to "natural living."

jrbarch said...

I think we need to remind ourselves of how things happened.

The ‘Law of the Jungle’ is that big fish eat little fish. We humans decided to become civilised and leave the jungle behind, to build a CIVILisation. This means we had to build a wall between us and the jungle. The bricks in this wall are our ideals (purpose) >> ideas (planning) >> icons (systems) of our global society. The mortar that holds these bricks together is kindness.

There is no escaping this essential ‘glue’ which can only be provided by the human being. No matter which bricks we turn out – liberal, anarchic, etc. Kindness already exists within everyone. It has to be practiced. You get good at what you practice: - anger, greed, callousness, stupidity – kindness. They all have to be practiced, to take root and grow. Kindness lifts a human being, out of the jungle.

Our problem is we let the jungle in; and if you look closely at our crumbling wall, the mortar is missing. The human being is missing from the ideal and has been replaced by everything else. None of these replacements fulfil us. Being human is the greatest challenge, and peace on this earth would be mankind’s greatest achievement. Intelligence says we practice kindness because we would like to live a civilised existence; mind says something else. The cyclone swirls around the ‘I’ – the illusion of self in the mind – when it should swirl around the human heart where the true SELF resides.

Hence Socrates: ‘Know thy self’.

So there is a way out – but we haven’t tried it yet.

Noah Way said...

The problem is the value system. The only measure is money - nothing else matters.

Bob said...

I'm having trouble including Donald J. Trump as part of "we".

jrbarch said...

Think of the material world. We look through our eyes and see a tree, clouds, a river, and register and admire the individual forms. We recognise boundaries. But the atoms move from form to form under natural law. For them there is only one form; then they change into energy (another layer or form) and move up through the layers (worlds) until there is just ONE.

Same thing for consciousness. Sorry Bob, DJT and you and I are brothers. Consciousness is also a form, back and behind of which says the Ageless Wisdom, is a spark, leapt from the One Flame.

“Every day is a blank sheet of paper. Write with care”.