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Thursday, December 28, 2006

Friedman and Galbraith

These two commentaries from the Christian Science Monitor discuss the work of John Kenneth Galbraith and Milton Friedman. First, Joseph Stiglitz compares their receptions within the economics profession and their influence in the world more generally:

John Kenneth Galbraith understood capitalism as lived - not as theorized, by Joseph E. Stiglitz, Commentary, CSMonitor: Economists John Kenneth Galbraith and Milton Friedman believed that ideas mattered. ... As public intellectuals who didn't shy from taking political stances, they each gave heft to ideological causes - Mr. Friedman to free-market conservative ideology, Mr. Galbraith to the progressive tradition. ...

But the two had a very different reception within the profession. Friedman was a Nobel laureate whose works were taught in every graduate course in the world; Galbraith was never accepted into the "fraternity." Friedman was seen as a scientist; Galbraith as a social commentator. The contrast between their physical and historical stature is ironic and unfair. In many ways, Galbraith was a more critical observer of economic reality.

Galbraith's vivid depictions of ... American capitalism remain a sorely needed reminder that all is not quite as perfect as the perfect market models - with their perfect competition, perfect information, and perfectly rational consumers - upon which so much of Friedman's analysis depended. Galbraith ... strove to understand the world as it was, with all the problems of unemployment and market power that simplistic models of competitive markets ignore. ...

Both lived through the Great Depression, but they gleaned different lessons. Galbraith saw that the labor market did not work as well as the standard model had predicted; he embraced Keynesian economics, and its call for government action, at a time when the US economics establishment rejected these ideas...

What Galbraith understood, and what later researchers (including this author) have proved, is that Adam Smith's "invisible hand" - the notion that the individual pursuit of maximum profit guides capitalist markets to efficiency - is so invisible because, quite often, it's just not there. Unfettered markets often produce too much of some things, such as pollution, and too little of other things, such as basic research. As Bruce Greenwald and I have shown, whenever information is imperfect - that is, always - markets are inefficient; hence the need for government action.

Galbraith reminded us that what made the economy work so well was not an invisible hand but countervailing powers. He had the misfortune of articulating these ideas before the mathematical models of game theory were sufficiently developed... The good news is that today, more attention is being devoted to developing models of these bargaining relationships, and to complex, dynamic models of economic fluctuations in which speculation may play a central role.

While Friedman never really appreciated the limitations of the market, he was a forceful critic of government. Yet history shows that in every successful country, the government had played an important role. Yes, governments sometimes fail, but unfettered markets are a certain prescription for failure. Galbraith made this case better than most. ...

Galbraith's penetrating insights into the nature of capitalism - as it is lived, not as it is theorized in simplistic models - has enhanced our understanding of the market economy. ... [His passing] has left a gap in our intellectual life: Who will stand up against the economics establishment to articulate an economic vision that is both in touch with reality and comprehensible to ordinary citizens?

There is a second commentary by Mark Skousen focusing on Milton Friedman:

Milton Friedman: Objective scientist first, free-market promoter second, by Mark Skousen, Commentary, CS Monitor: Above all, economist Milton Friedman was an independent, objective thinker who systematically applied the scientific method to economic problems... He was without peer in achieving this intellectual imperialism, and his fame and accomplishments result from his scientific prowess rather than mere ideology.

As founder of the famous (University of) Chicago "school" of economics, Friedman was a thoroughgoing empiricist and utilitarian, believing that all theories must be subjected to rigorous testing. He was taught that the only worthwhile theory was a simple one that could be validated or rejected with empirical evidence. To test a theory, he developed sophisticated statistical methods and econometric models.

In the 1950s, Friedman was one of the first to apply this methodology consistently. Today, it is a universal technique among economists and social scientists. ... Friedman felt that biases could be overcome by objective examination. He discouraged labels. "I am not a supply-side economist," he insisted. "I am not a monetarist economist. I am an economist."

Ironically, it was his painstaking, objective analysis in the landmark work, "A Monetary History of the United States, 1867-1960," that gave him such labels. In that work, he and coauthor Anna J. Schwartz asserted that the Great Depression was not a failure of market capitalism, but of government policy. They showed that the Federal Reserve acted ineptly ..., converting a garden-variety recession into the worst economic catastrophe of the 20th century. ...

His empirical studies at Chicago convinced him that "money mattered" more than fiscal policy... Friedman also discovered that "long and variable lags" in Federal Reserve policy would confound Keynesian efforts to fine tune the economy. Instead, he advocated a steady monetary rule...

Through his books, ... Milton Friedman reinvigorated the world's faith in capitalism. He discovered, through rigorous science, that markets work, and that we as individuals are better suited to making our own decisions than our government leaders or technocrats (the very opposite view of John Kenneth Galbraith, who preferred centralized planning). He favored the invisible hand of laissez faire over the heavy hand of government. ...

FriedmangalbraithYet Friedman's empiricism also led him into disagreements with his free-market supporters. He dismissed the conservative view that deficit spending was necessarily bad, or that tax cuts stimulated the economy in the short run.

Friedman used the same strategy of "testing the evidence" when it came to Mr. Galbraith's criticisms. For example, the evidence failed to support Galbraith's contention that big business can manipulate customers at will or ignore stockholders because of its size and power.

Well did Chicago colleague George J. Stigler say of these two economists: "All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman."

Not sure why the author chose to end with Stigler's dig at Galbraith. Not all of Friedman's predictions withstood empirical testing either. The composite picture of Galbraith and Friedman explains Stigler's (only half-correct) statement.

[Update: From comments, this this puts the photo in context and makes it clear Stigler intended the comment in a light-hearted fashion.]

    Posted by on Thursday, December 28, 2006 at 12:33 AM in Economics | Permalink  TrackBack (0)  Comments (29)

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