Friedman, Keynes, and Irving Fisher

     It is interesting that Milton Friedman once said that Fisher is the best economist in U.S. history. For the reason that he seems to not understand or be aware of much of what Fisher said. It has also been said that Fisher is finally rising from Keynes' shadow.

    http://www.economist.com/node/13104022

    Friedman may have admired Fisher as many neoclassicists today do. Yet is he aware that Fisher's position is diametrically opposed to his own on FDR's dollar devaluation of 1934 and ending the gold standard? While Friedman claims that this was a textbook case of government interfering in the market Fisher not only supported it but claims that it was the main cause of the economic recovery of 1933-36.

    Yet Friedman claims, "Though rationalized in terms of "conserving" gold for monetary use, prohibition of private ownership of gold was not enacted for any such monetary purpose, whether itself good or bad. The nationalization of gold was enacted to enable the government to reap the whole of the "paper" profit from the rise in the price of gold-or perhaps, to prevent private individuals from benefiting."

    "The abrogation of gold clauses had a similar purpose. And this too was a measure destructive of the basic principles of free enterprise. Contracts entered into in good faith and with full knowledge on the part of both parties to them were declared invalid for the benefit of one of the parties!"

     As if a contract that works out for the benefit for just one of two parties is anything unusual! Has he evern seen an insurance contract? Wonder if Friedman would be bothered by what Scott Walker has done in Wisconsin to the contracts between the state and the public unions that were "entered into in good with full knowledge on the part of the parties to them were declared invalid for the benefit of one of the parties."

    An important fallacy about the Depression to avoid is the conservative illusion that things were already coming back in March 1933 when FDR got us off the gold standard.

    For his part, Fisher provides some very interesting work that is more relevant than ever today. Most illuminating is his categorical claim that the basis of all boom-bust crises is the presence of two dominant factors: very great indebtedness and deflation.

   http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf


   The key is the presence of both these elements. With one or the other he believes it is possible to avoid a depression, that it can be averted and instead suffer just a normal business cycle downturn. But a depression he believes always has these two elements above all-other elements are derivative and dependent on these two main factors.

   This leads to a viscous circle where the more people pay off their debt the worse things get. The paradox is when you pay down your debts in the midst of a deflationary environment they only get worse, the more you pay the more you owe. Roughly it works this way. When you take a loan of say 6% you factor in the inflation rate for your real interest rate. If for example the inflation rate is 3% your real interest rate is only 3%. However if the inflation rate drops to 1% then your real rate rises by the same 2% the inflation rate drops by so you in reality now have a 5% rate.

   The article in the economist is titled "Out of Keynes' Shadow" but as the article itself acknowledges Keynes and Fisher need not be an either/or. Fisher is less renowned-unfortunately till now he is best known for his ill-fated declaration in 1929 that "the stock market is in a permanently rising plateau!"-but he has provided invaluable work for monetary policy and understanding Krugman's depression economics.

   While his strength was monetary policy he has far less to say about fiscal policy which is where Keynes comes in. In this way they are a companion read.