Milton’s Paradise Lost

May 1, 2012

Milton’s Paradise Lost

by Paul Krugman

Brad DeLong has a nice piece about the failure of Friedmanism. I thought I might add a bit on monetary policy and the Fed.

When wearing his professional economist hat, what Friedman really argued was that the Fed could easily have prevented the Great Depression with policy activism; if only it had acted to prevent a big fall in broad monetary aggregates all would have been well. Since the big decline in M2 took place despite rising monetary base, however, this would have required that the Fed “print” lots of money.

This claim now looks wrong. Even big expansions in the monetary base, whether in Japan after 2000 or here after 2008, do little if the economy is up against the zero lower bound. The Fed could and should do more — but it’s a much harder job than Friedman and Schwartz suggested.

Beyond that, however, Friedman in his role as political advocate committed a serious sin; heconsistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression.

And this debased and misleading version is what has filtered down to the likes of Ron Paul, who then use it to argue against the very activism Friedman was really advocating.

Bad Milton, bad.

9 thoughts on “Milton’s Paradise Lost

  1. Economists among you, care to comment. We have had too much of the BERSIH3.0 stuff and Krugman’s Milton’s Paradise Lost can provide us with some relief. Managing monetary policy is a complicated exercise by any means. M1, M2, M3…etc. The economy does not operate according to simple rules. Why? Human behaviour is just unpredictable. Black swans can occur, making life difficult for central bank and Treasury officials.–Din Merican

  2. The US is in a shit hole which it has dug for itself and which it cannot seem climb out. The US has a lot of smart people but that doesn’t guarantee it would be successful in everything it does. On the contrary, being a divisive and litigious society the US has slowly slid precipitously into irrelevance. Today it has too many problems which had been accumulated throughout the years and which it has not have the determination and political courage to solve them.

    Too much of anything is bad. Too much food is bad for the body, too much junk on the Internet is bad and too much clever and smart people at cross purposes is bad for society. And the US has an excess of everything that is bad for its survival in the long run. The US seems to embrace excesses just like flies are attracted to excreta. In the short term it seem things are working fine but excesses will unravel everything in the long run.

    Excesses are very difficult to wean away from. Just ask the drug addicts, the alcoholics, the food bingers and the serial smokers. In the short run, to these people the vices they got into seems to be heavenly but in the long run they are trapped. Withdraw the vices from them and they will fight tooth and nail to keep it. And this is the situation in which the US is finding itself in.

  3. The American elite intellectualise too much while their politicians are too rhetorical, lacking in the political will to deal with practical issues. The politicians like Ron Paul are caught in a whirlpool of gibberish and wishful thinking. Their policy makers who seek quick fixes are influenced by some defunct philosophers and economic theoreticians who see the world in simplistic reductionist terms. What do you think, CLF and Frank. Have a nice day.

  4. Mancur Olson’s classic book “The Logic of Collective Action” still applies.

    The USA is a plutocracy and DC is a city full of very effective professional lobbyists and lawyers working against progressive laws.

    In the area of healthcare reform for example, the armies of professional lobbyists working for the insurance and pharmaceutical industries track every piece of legislation proposed and train their guns to nip any “single payer” bill in the bud. Thus for example, Obama did not even consider the “single payer” option (such as “Medicare for All”) in his disastrous healthcare reform bill. Instead, all American were required by law to purchase private health insurance (if they are not already covered by group insurance such as employer-provided insurance),. This is plainly incredible in a highly individualistic, “suspicious of govt” society such as USA.

  5. Woman of conscience protests against policies of sweet-talking President of USA

    The lesson here is never be deceived by sweet-talking politicians (including our own here in Malaysia). Look at what they actually do over and over again. And not what they say in staged “photo opportunities” – including visits to hospitals to “express regrets”.

  6. Among the things Ron Paul says is that the US should stop interfering in the affairs of other nations (or to put it in another way, stop being the policeman to the world).

    I cannot see how this is wishful thinking. If I were an American citizen, he would have my vote.

    VSP has said his piece well.

    Managing ANYTHING is complicated if you lose sight of basic facts. Too many people who are too clever do not make for sound judgements. The state of the world economy is testimony to this. There is a Mr.Lim who has been our grocer for the best part of forty years. He and his wife run a small store and I am convinced that if Mr.Lim were to be made head of the IMF AND World Bank, he would do a darnn sight better job than all those grand names (many with Nobel prizes) put together.

  7. Maybe this will add to the relief from BERSIH as craved for by the bloghost…

    The American Medical Association has weighed in on Obama’s new health
    care package. The Allergists were in favor of scratching it, but the
    Dermatologists advised not to make any rash moves. The
    Gastroenterologists had sort of a gut feeling about it, but the
    Neurologists thought the Administration had a lot of nerve.

    Meanwhile, Obstetricians felt certain everyone was laboring under a
    misconception, while the Ophthalmologists considered the idea
    shortsighted. Pathologists yelled, “Over my dead body!” while the
    Pediatricians said, “Oh, grow up!”

    The Psychiatrists thought the whole idea was madness, while the
    Radiologists could see right through it. Surgeons decided to wash
    their hands of the whole thing and the Internists claimed it would
    indeed be a bitter pill to swallow.

    The Plastic Surgeons opined that this proposal would “put
    a whole new face on the matter”. The Podiatrists thought it was a
    step forward, but the Urologists were pissed off at the whole idea.
    Anesthesiologists thought the whole idea was a gas, and those lofty
    Cardiologists didn’t have the heart to say no.

    In the end, the Proctologists won out, leaving the entire decision up
    to the assholes in Washington.

    BTW, the usual suspects in BUMNO have upped the ante and are trying to satisfy the cravings of Malaysians for all things sordid, seamy and squalid with an expose on the new porn star.

  8. “Excesses are very difficult to wean away from. Just ask the drug addicts, the alcoholics, the food bingers and the serial smokers. In the short run, to these people the vices they got into seems to be heavenly but in the long run they are trapped. ” vsp

    But then the U.S. is the Great Satan. It is only living up to its name.

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