Yes, I'm having a little fun in my title but then the latest post by David Glasner was a lot of fun and no doubt kept Sumner going at full tilt. Sumner can't bear the idea that Friedman was in important ways 'Keynesian'-really Hicksian, and approaching the demand for money with an IS-LM framework.
http://diaryofarepublicanhater.blogspot.com/2013/08/more-sumner-vs-glasner-on-if-freidman.html
http://diaryofarepublicanhater.blogspot.com/2013/08/was-milton-friedman-closet-keynesian.html
It's not a very kind cut for Sumner with all his contempt for Keynesianism-which he has called 'mind numbingly stupid
http://www.themoneyillusion.com/?p=12472
' and the IS-LM model which he claims leads people to overstate the importance of interest rates in assessing monetary policy.
http://www.themoneyillusion.com/?p=915
To be sure, there are Keynesians not so friendly to IS-LM as well-who consider it 'bastaderized Keynesianism'-however, such people-post Keynesians-aren't, to use Richard Rorty's terms-as Sumner claims to be a Rortian-even 'legitimate conversational partners' as far as Sumner is concerned
Clearly the discussion of Friedman's Keynesianism has been getting under his skin. What's great is that it was originally a suggestion of Krugman's but the one who has really been backing up Krugman's claim has been Sumner's fellow Market Monetarist buddy, David Glasner-you have to hand it to Glasner, he calls them like he sees them. While he is an MMer, his Monetarism owes less to Friedman-who he has always had some issues with-than to Hawtrey.
"Scott Sumner won’t let go. Scott had another post today trying to show that the Cambridge Theory of the demand for money was already in place before Keynes arrived on the scene. He quotes from Hicks’s classic article “Mr. Keynes and the Classics” to dispute the quotation from another classic article by Hicks, “A Suggestions for Simplifying the Theory of Money,” which I presented in a post last week, demonstrating that Hicks credited Keynes with an important contribution to the demand for money that went beyond what Pigou, and even Lavington, had provided in their discussions of the demand for money."
http://uneasymoney.com/2013/08/
No, of course he won't let it go. He never lets things go. Who can forget the time he was on full tilt all through January, 2012 arguing over Ricardian Equivalence and why Lucas didn't deserve Krugman's disrespect-of course Lucas never disrespects anyone not named Christina Romer.
http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-better-nobel-laureates-in-economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumner-becomes-even-more-shrill.html
So yes, it's not a surprise that he won't let it go, it's to be expected. As Glanser notes, Sumner answered his quoting Hicks in 1935 talking about the importance of Keynes' contribution to the theory of demand for money by quoting from Hick's classic Mr. Keynes and the Classics which made it sound like he was saying the opposite-that the demand for money theory was already in place prior to Keynes. Glasner seeks a way out of dueling Hicks quotes:
"In this battle of dueling quotations, I will now call upon Mark Blaug, perhaps the greatest historian of economics since Schumpeter, who in his bookEconomic Theory in Retrospect devotes an entire chapter (15) to the neoclassical theory of money, interest and prices."
"In giving explicit consideration to the yields on assets that compete with money, Keynes became one of the founders of the portfolio balance approach to monetary analysis. However, it is Hicks rather than Keynes who ought to be regarded as the founder of the view that the demand for money is simply an aspect of the problem of choosing an optimum portfolio of assets. In a remarkable paper published a year before the appearance of the General Theory, modestly entitled “A Suggestion for Simplifying the Theory of Money,” Hicks argued that money held at least partly as a store of value must be considered a type of capital asset. Hence the demand for money equation must include total wealth and expected rates of return on non-monetary assets as explanatory variables. Because individuals can choose to hold their entire wealth portfolios in the form of cash, the wealth variable represents the budget constraint on money holdings. The yield variables, on the other hand, represent both the opportunity costs of holding money and the substitutions effects of changes in relative rates of return. Individuals optimize their portfolio balances by comparing these yields with the imputed yield in terms of convenience and security of holding money. By these means, Hicks in effect treated the demand for money as a problem of balance sheet equilibrium analyzed along the same lines as those employed in ordinary demand theory."
"It was Milton Friedman who carried this Hicksian analysis of money as a capital asset to its logical conclusion. In a 1956 essay, he set out a precise and complete specification of the relevant constraints and opportunity cost variable entering a household’s money demand function. His independent variable included wealth or permanent income – the present value of expected future receipts from all sources, whether personal earning or the income from real property and financial assets – the ratio of human to non-human wealth, expected rates of return on stocks, bonds and real assets, the nominal interest rate, the actual price level, and, finally, the expected percentage change in the price level. Like Hicks, Friedman specified wealth as the appropriate budget constraint but his concept of wealth was much broader than that adopted by Hicks. Whereas Keynes had viewed bonds as the only asset competing with cash, Friedman regarded all types of wealth as potential substitutes for cash holdings in an individual’s balance sheet; thus, instead of a single interest variable in the Keynesian liquidity preference equation, we get a whole list of relative yield variables in Friedman. An additional novel feature, entirely original with Friedman, is the inclusion of the expected rate of change in P as a measure of the anticipated rate of depreciation in the purchasing power of cash balances."
"This formulation of the money demand function was offered in a paper entitled “The Quantity Theory of Money: A Restatement.” Friedman claimed not only that the quantity theory of money had always been a theory about the demand for money but also that his reformulation corresponded closely to what some of the great Chicago monetary economists, such as H.C. Simons and L. W. Mints, had always meant by the quantity theory. It is clear, however, from our earlier discussion that the quantity theory of money, while embodying an implicit conception of the demand for money, had always stood first and foremost for a theory of the determination of prices and nominal income; it contained much more than a particular theory of the demand for money."
Finally, Mr. Blaug disposes of Friedman's 'oral tradition' for Chicago with the QTM:
"In an influential essay, “The Quantity Theory of Money – A Restatement,” . . . M. Friedman claimed that his restatement was nothing more than the University of Chicago “oral” tradition. That claim was effectively destroyed by D. Patinkin, “The Chicago Tradition, the Quantity Theory, and Friedman, JMCB, 1969 ."
Sumner huffs in a comment at Glasner's:
"Well if Hicks is really that incompetent of a writer, then why should we believe anything he wrote in 1935? Hicks (1937) says the pre-Keynesian economists had all the pieces of the IS-LM model except the liquidity trap."
Yep. You can always tell when he's frustrated-he's real frustrated now which is why he got so peevish and blatantly puts words in Glasner's mouth. Who said that Hicks is incompetent a writer? Maybe the problem is Sumner as a reader.In truth, Sumner takes his 1937 comments out of context as Glasner suggests:
"Scott, I didn’t say Hicks was incompetent. I said that he was writing with different objectives in the two papers. In 1935 he was focusing on the demand for money, in 1937 on the overall macro-model. I agree that there is an inconsistency in saying that Keynes held that in the Tract Keynes held that the demand for money was not responsive to the rate of interest but did acknowledge that the demand for money would be reduced as a result of expected inflation. However, Friedman was guilty of the same inconsistency in his 1956 Restatement paper because he introduced the expected rate of the change in the price level as a separate argument in the demand for money function even thought he already had included the nominal rate of interest. Learning is sometimes a very slow process."
Incidentally, I notice that Glasner softened the blow by writing this post prior to this one. Here he takes Krugman to task for suggesting that Friedman may end up being just a footnote in history. This is what got Sumner going anyway so Glasner wins points here:
"http://uneasymoney.com/2013/08/11/krugman-predicts-the-future-history-of-economic-thought/
"I suspect that Krugman is correct that the small-minded political right-wing of our time is no longer as willing to accept Milton Friedman as their pre-eminent economic authority figure as were earlier generations of political right-wingers in the last three or four decades of the twentieth century. But to extrapolate from that sociological factoid how future historians of economic thought will evaluate the contributions of Milton Friedman seems to me to be a bit of a stretch."
I myself probably wouldn't go out on this limb about what history will say about Friedman. The real difference is that today's GOP has no room for Monetarism-at least while Obama is President. Still, Monetarism under Sumner's Market Monetarist brand has enjoyed a revival of sorts. I think it's real tough to predict where economic theory goes in the future. We've had a good deal of heterodox theories come to the fore as the New Keynesian, Taylor Rule consensus of the Great Moderation has been punctured. You have the MMers. You also have the MMTers. The Austrians have also been in the mix.
Within the mainstream Macro itself, what you see is the younger economists coming up are more interested in empirical studies and natural experiments. My guess is that all these heterodox schools will have some impact, though it's impossible to say which part of each and in what proportion. Krugman for his part seems to have had something of a Damacus moment these last 4 years. Well, that may be a little too strong. Still, it's clear that he feels disillusioned by the slowness of the recovery and the way policy has failed to implement all we know about Macro.
"First of all, the liquidity trap is real; conventional monetary policy, it turns out, can’t deal with really large negative shocks to demand. We can argue endlessly about whether unconventional monetary policy could do the trick, if only the Fed did it on a truly huge scale; but the fact is that the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment."
http://diaryofarepublicanhater.blogspot.com/2013/08/more-sumner-vs-glasner-on-if-freidman.html
http://diaryofarepublicanhater.blogspot.com/2013/08/was-milton-friedman-closet-keynesian.html
It's not a very kind cut for Sumner with all his contempt for Keynesianism-which he has called 'mind numbingly stupid
http://www.themoneyillusion.com/?p=12472
' and the IS-LM model which he claims leads people to overstate the importance of interest rates in assessing monetary policy.
http://www.themoneyillusion.com/?p=915
To be sure, there are Keynesians not so friendly to IS-LM as well-who consider it 'bastaderized Keynesianism'-however, such people-post Keynesians-aren't, to use Richard Rorty's terms-as Sumner claims to be a Rortian-even 'legitimate conversational partners' as far as Sumner is concerned
Clearly the discussion of Friedman's Keynesianism has been getting under his skin. What's great is that it was originally a suggestion of Krugman's but the one who has really been backing up Krugman's claim has been Sumner's fellow Market Monetarist buddy, David Glasner-you have to hand it to Glasner, he calls them like he sees them. While he is an MMer, his Monetarism owes less to Friedman-who he has always had some issues with-than to Hawtrey.
"Scott Sumner won’t let go. Scott had another post today trying to show that the Cambridge Theory of the demand for money was already in place before Keynes arrived on the scene. He quotes from Hicks’s classic article “Mr. Keynes and the Classics” to dispute the quotation from another classic article by Hicks, “A Suggestions for Simplifying the Theory of Money,” which I presented in a post last week, demonstrating that Hicks credited Keynes with an important contribution to the demand for money that went beyond what Pigou, and even Lavington, had provided in their discussions of the demand for money."
http://uneasymoney.com/2013/08/
No, of course he won't let it go. He never lets things go. Who can forget the time he was on full tilt all through January, 2012 arguing over Ricardian Equivalence and why Lucas didn't deserve Krugman's disrespect-of course Lucas never disrespects anyone not named Christina Romer.
http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-better-nobel-laureates-in-economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumner-becomes-even-more-shrill.html
So yes, it's not a surprise that he won't let it go, it's to be expected. As Glanser notes, Sumner answered his quoting Hicks in 1935 talking about the importance of Keynes' contribution to the theory of demand for money by quoting from Hick's classic Mr. Keynes and the Classics which made it sound like he was saying the opposite-that the demand for money theory was already in place prior to Keynes. Glasner seeks a way out of dueling Hicks quotes:
"In this battle of dueling quotations, I will now call upon Mark Blaug, perhaps the greatest historian of economics since Schumpeter, who in his bookEconomic Theory in Retrospect devotes an entire chapter (15) to the neoclassical theory of money, interest and prices."
"In giving explicit consideration to the yields on assets that compete with money, Keynes became one of the founders of the portfolio balance approach to monetary analysis. However, it is Hicks rather than Keynes who ought to be regarded as the founder of the view that the demand for money is simply an aspect of the problem of choosing an optimum portfolio of assets. In a remarkable paper published a year before the appearance of the General Theory, modestly entitled “A Suggestion for Simplifying the Theory of Money,” Hicks argued that money held at least partly as a store of value must be considered a type of capital asset. Hence the demand for money equation must include total wealth and expected rates of return on non-monetary assets as explanatory variables. Because individuals can choose to hold their entire wealth portfolios in the form of cash, the wealth variable represents the budget constraint on money holdings. The yield variables, on the other hand, represent both the opportunity costs of holding money and the substitutions effects of changes in relative rates of return. Individuals optimize their portfolio balances by comparing these yields with the imputed yield in terms of convenience and security of holding money. By these means, Hicks in effect treated the demand for money as a problem of balance sheet equilibrium analyzed along the same lines as those employed in ordinary demand theory."
"It was Milton Friedman who carried this Hicksian analysis of money as a capital asset to its logical conclusion. In a 1956 essay, he set out a precise and complete specification of the relevant constraints and opportunity cost variable entering a household’s money demand function. His independent variable included wealth or permanent income – the present value of expected future receipts from all sources, whether personal earning or the income from real property and financial assets – the ratio of human to non-human wealth, expected rates of return on stocks, bonds and real assets, the nominal interest rate, the actual price level, and, finally, the expected percentage change in the price level. Like Hicks, Friedman specified wealth as the appropriate budget constraint but his concept of wealth was much broader than that adopted by Hicks. Whereas Keynes had viewed bonds as the only asset competing with cash, Friedman regarded all types of wealth as potential substitutes for cash holdings in an individual’s balance sheet; thus, instead of a single interest variable in the Keynesian liquidity preference equation, we get a whole list of relative yield variables in Friedman. An additional novel feature, entirely original with Friedman, is the inclusion of the expected rate of change in P as a measure of the anticipated rate of depreciation in the purchasing power of cash balances."
"This formulation of the money demand function was offered in a paper entitled “The Quantity Theory of Money: A Restatement.” Friedman claimed not only that the quantity theory of money had always been a theory about the demand for money but also that his reformulation corresponded closely to what some of the great Chicago monetary economists, such as H.C. Simons and L. W. Mints, had always meant by the quantity theory. It is clear, however, from our earlier discussion that the quantity theory of money, while embodying an implicit conception of the demand for money, had always stood first and foremost for a theory of the determination of prices and nominal income; it contained much more than a particular theory of the demand for money."
Finally, Mr. Blaug disposes of Friedman's 'oral tradition' for Chicago with the QTM:
"In an influential essay, “The Quantity Theory of Money – A Restatement,” . . . M. Friedman claimed that his restatement was nothing more than the University of Chicago “oral” tradition. That claim was effectively destroyed by D. Patinkin, “The Chicago Tradition, the Quantity Theory, and Friedman, JMCB, 1969 ."
Sumner huffs in a comment at Glasner's:
"Well if Hicks is really that incompetent of a writer, then why should we believe anything he wrote in 1935? Hicks (1937) says the pre-Keynesian economists had all the pieces of the IS-LM model except the liquidity trap."
"In an earlier post you were dismissive of Friedman’s view that the liquidity trap was the main new theoretical insight of the GT. Now we have Hicks saying the same thing. Why be so critical when Friedman seems to unfairly minimize the importance of Keynes (in your view), but not at all when Hicks makes exactly the same mistake (if it was a mistake?)"
"And it’s been a long time since I read the Tract, but surely Keynes did not assume a fixed k during the hyperinflation episodes he examined? Or did he? (Maybe my memory is off.) K fell by close to 99% in Germany. Perhaps another commenter can fill us in on this point. If interwar economists didn’t know that velocity sped up during hyperinflation then that’s a pretty serious oversight. The workers were paid twice a day and went shopping during their lunch break."Yep. You can always tell when he's frustrated-he's real frustrated now which is why he got so peevish and blatantly puts words in Glasner's mouth. Who said that Hicks is incompetent a writer? Maybe the problem is Sumner as a reader.In truth, Sumner takes his 1937 comments out of context as Glasner suggests:
"Scott, I didn’t say Hicks was incompetent. I said that he was writing with different objectives in the two papers. In 1935 he was focusing on the demand for money, in 1937 on the overall macro-model. I agree that there is an inconsistency in saying that Keynes held that in the Tract Keynes held that the demand for money was not responsive to the rate of interest but did acknowledge that the demand for money would be reduced as a result of expected inflation. However, Friedman was guilty of the same inconsistency in his 1956 Restatement paper because he introduced the expected rate of the change in the price level as a separate argument in the demand for money function even thought he already had included the nominal rate of interest. Learning is sometimes a very slow process."
Incidentally, I notice that Glasner softened the blow by writing this post prior to this one. Here he takes Krugman to task for suggesting that Friedman may end up being just a footnote in history. This is what got Sumner going anyway so Glasner wins points here:
"http://uneasymoney.com/2013/08/11/krugman-predicts-the-future-history-of-economic-thought/
"I suspect that Krugman is correct that the small-minded political right-wing of our time is no longer as willing to accept Milton Friedman as their pre-eminent economic authority figure as were earlier generations of political right-wingers in the last three or four decades of the twentieth century. But to extrapolate from that sociological factoid how future historians of economic thought will evaluate the contributions of Milton Friedman seems to me to be a bit of a stretch."
I myself probably wouldn't go out on this limb about what history will say about Friedman. The real difference is that today's GOP has no room for Monetarism-at least while Obama is President. Still, Monetarism under Sumner's Market Monetarist brand has enjoyed a revival of sorts. I think it's real tough to predict where economic theory goes in the future. We've had a good deal of heterodox theories come to the fore as the New Keynesian, Taylor Rule consensus of the Great Moderation has been punctured. You have the MMers. You also have the MMTers. The Austrians have also been in the mix.
Within the mainstream Macro itself, what you see is the younger economists coming up are more interested in empirical studies and natural experiments. My guess is that all these heterodox schools will have some impact, though it's impossible to say which part of each and in what proportion. Krugman for his part seems to have had something of a Damacus moment these last 4 years. Well, that may be a little too strong. Still, it's clear that he feels disillusioned by the slowness of the recovery and the way policy has failed to implement all we know about Macro.
"First of all, the liquidity trap is real; conventional monetary policy, it turns out, can’t deal with really large negative shocks to demand. We can argue endlessly about whether unconventional monetary policy could do the trick, if only the Fed did it on a truly huge scale; but the fact is that the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment."
"Second, while the evidence from austerity programs strongly suggests that fiscal policy does in fact work, with multipliers well above one, the political economy of policy turns out to make an effective fiscal response to depression very difficult."
"So the neoclassical synthesis — the idea that we can use monetary and fiscal policy to make the world safe for laissez-faire everywhere else — has failed the test. What does this mean?"
"At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. And I don’t just mean banking regulation; as the authors of the linked paper say, the logic of this argument calls for policies that discourage leverage in general, capital controls to limit foreign borrowing, and more."
"What’s more, you have to ask why, if markets are imperfect enough to generate the massive waste we’ve seen since 2008, we should believe that they get everything else right. I’ve always considered myself a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But I’m far less sure of that position than I used to be."
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