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Monday, February 12, 2007

Monetarism as an Oral Tradition?

I was thinking about the recent debate over whether the New Deal helped to end the Great Depression, and I decided to see if I could find anything Paul Samuelson had written on the issue.

I didn't find anything in particular, but that is because I got distracted right away with this interview Samuelson did in 2003. Here's one section of the interview (the article is 24 pages long). This part is about Milton Friedman's claim that "his 1950 monetarism was an outgrowth of a forgotten subtle 'oral tradition' at Chicago." Samuelson says Friedman is wrong about this.

An Interview with Paul A. Samuelson, Interviewed by William A. Barnett, University of Kansas, December 23, 2003, Macroeconomic Dynamics: ...Barnett: What is your take on Friedman’s controversial view that his 1950 monetarism was an outgrowth of a forgotten subtle “oral tradition” at Chicago?

Samuelson: Briefly, I was there, knew all the players well, and kept class notes. And beyond Fisher–Marshall MV =PQ, there was little else in Cook County macro. ...

Before comparing views with me on Friedman’s disputed topic (and after having done so), Don Patinkin denied that in his Chicago period of the 1940’s any trace of such a specified oral tradition could be found in his class notes (on Mints, Knight, Viner), or could be found in his distinct memory. My Chicago years predated Friedman’s autumn 1932 arrival and postdated his departure for Columbia and the government’s survey of incomes and expenditures. I took all the macroeconomic courses on offer by Chicago teachers: Mints, Simons, Director, and Douglas. Also in that period, I attended lectures and discussions on the Great Depression, involving Knight, Viner, Yntema, Mints, and Gideonse. Nothing beyond the sophisticated account by Dennis Robertson, in his famous Cambridge Handbook on Money, of the Fisher–Marshall–Pigou MV =PQ paradigm can be found in my class notes and memories.

More importantly, as a star upper-class undergraduate, I talked a lot with the hotshot graduate students—Stigler, Wallis, Bronfenbenner, Hart—and rubbed elbows with Friedman and Homer Jones. Since no whisper reached my ears, and no cogent publications have ever been cited, I believe that this nominated myth should not be elevated to the rank of plausible history of ideas. ...

I thought his remarks at the end on rational expectations and RBC models were interesting - since international trade is mentioned I'll note that it comes right after discussion of the Stolper– Samuelson model:

Barnett: Do you have views and reactions to the “rational expectations” approach and real-business-cycle theory? In his dialogue with Robert Shiller in Macroeconomic Dynamics (vol. 3, March 1999), Tobin stated that real-business cycle theory is “the enemy.” In contrast, as is seen in much of the published research appearing in this journal, the use of rational expectations theory (sometimes weakened to include learning) and stochastic dynamic general equilibrium theory is common within the profession among macroeconomists of many political views.

Samuelson: Yes, but a lot of different things are loosely related to the words “rational expectations.” One extreme meaning relates to “the new Classical doctrine,” which alleges in effect that Say’s law does obtain even in the short run. I do happen to believe that the U.S. economy (1980–2003) behaves nearer to Say’s law’s quasi full-employment than did the 1929–1960 U.S. economy, or than does say the modern French and German economies. But this belief of mine does not necessarily require a new Lucas–Sargent methodology. Sufficient for it is two things:

(1) The new 1950–2003 freer global trade has effectively intensified competition with U.S. labor from newly trainable, low-wage Pacific Rim labor—competition strong enough effectively to emasculate the powers of American trade unions (except in public service and some untradeable goods industries). Nowadays every short-term victory by a union only speeds up the day that its industry moves abroad.

(2) There has been a 1980–2003 swing to the right among voters, whose swing away from “altruism” is somewhat proportional to the time elapsed since the Great Depression and since the U.S. government’s effective organization for World War II’s “good” war. As a result, trade unions no longer benefit from government’s help.

A “cowed” labor force runs scared under the newly evolved form of ruthless corporate governance. In contrast to Japan, when a U.S. CEO fires redundant workers quickly, Wall Street bids up the price of the firm’s shares.

Another weak form of “rational expectations” I agree with. “Fool me once. Shame on you. Fool me twice. Shame on me.” Economic historian Earl Hamilton used to agree with the view that, when New World gold raised 1500–1900 price levels, nominal wages tended systematically to lag behind. Kessel and Alchian had a point in suspecting that people would at least in part learn to anticipate what has long been going on. I concur to a considerable but limited degree.

Some rational expectationists overshoot, in my judgment, when they exaggerate the “neutrality of money” and the “impotence of government to alter real variables.” Friedman’s overly simple monetarism `a la 1950, was criticized from his left for its gross empirical errors. What must have cut him more personally would come from any Lucas follower who accused Friedman of fallaciously predicting that mismanagement of M in MV =PQ was capable of deep real damage rather than of mere nominal price-level gyration.

Modern statistical methodology, I think, benefits much from Lucas, Sargent, Hansen, Brock, Prescott, Sims, Granger, Engle, and Stock-Watson explorations and innovations. But still much more needs to be analyzed. Strangely, theory free vectoral autoregressions do almost as well. Also, variables that pass Granger causality tests can seem to perform as badly in future samples as those that fail Granger tests. And, still the nonstationaryness of economic history confounds actual behavior and necessarily weakens our confidence in inferences from past samples.

This does not lead me to nihilism; but hopefully, only to realism, and, `a la Oliver Twist, to urge for more research.

At many a Federal Reserve meeting with academic consultants, there used to be about one rational expectationist. So unuseful seemed their contributions and judgments that the next meeting entailed a new rational expectationist. And each year’s mail would bring to my desk a few dozen yellow-jacket manuscripts from the National Bureau, purporting to test some version of rational expectationism. Many were nominated for testing; few passed with flying colors the proposed tests. I continue to live in both hope and doubt.

In some quarters, it is a popular belief that macroeconomics is less scientific than micro and less to be admired. That is not my view. I think macroeconomics is very challenging, and at this stage of the game it calls for wiser judgments. A lively science thrives on challenges, and that is why I transfer a good deal of my time and energy from micro to macro research. ...

    Posted by on Monday, February 12, 2007 at 08:53 PM in Economics, Macroeconomics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)


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