Memorializing Milton Friedman: a review of his major works, 1912-2006

American Economist, Spring, 2008 by Lall Ramrattan, Michael Szenberg

Objections to Friedman's Monetary Positions

From the MIT perspective, the "Chicago view" was somewhat shallow. According to Paul Samuelson, "Dennis Robertson's Cambridge handbook on Money, and Alfred Marshall's unitary-elasticity demand for money were the alpha and omega of that allegedly subtle oral tradition. At the London School of Economics (LSE) and Harvard, the same macro economics prevailed" (Samuelson 1986, 263). The framework did not measure up: "when at long last Milton Friedman came to write down in the 1970 Journal of Political Economy what his monetarism was analytically, it turned out to be one specification of the general Keynesian identities and behavior functions and not a very plausible one at that" (Samuelson 1986, 262).

In a recent interview, Paul Samuelson, who studied the "Chicago view," put it under historical scrutiny. He underscored that Irving Fisher (1867-1947) was influenced by his financial losses during the Great Depression to lose faith in the belief that velocity was quasi constant. Similarly, he underscored that Arthur Cecil Pigou (1877-1959) had retracted his criticisms of the Keynesian system. Samuelson then made a blanket attack on Friedman's monetary view as follows: "what those gods were modifying was much that Milton Friedman was renominating.... It is paradoxical that a keen intellect jumped on that old bandwagon just when technical changes in money and money substitutes ... were realistically replacing the scalar M by a vector ... the pity of it increases for one who adopts a simple theory of positivism.... Particularly venerable is a scholar who tries to test competing theories by submitting them to simplistic linear regressions with no sophisticated calculations of Granger causality, cointegration, collinearities and ill-conditioning, or a dozen other safeguard econometric mythologies" (Samuelson 2007, 146).

Samuelson's objection does not negate the influence Friedman has had on monetary matters. Every student of economics has heard of his monetary policy rule, his natural rate hypothesis, that inflation is a monetary phenomenon, which is of paramount importance to modern policy makers. Friedman's monetarist appeal may be due to his appealing logic. This is how he explained that inflation is a monetary phenomenon: "Suppose the nominal quantity that people hold happens to correspond at current prices to a real quantity larger than that which they wish to hold. Individuals will then seek to dispose of what they regard as their excess money balances; they will try to pay out a larger sum of the purchase of securities, goods, and services, for the repayment of debts, as gifts than they are receiving from the corresponding sources. However, one man's expenditures are another's receipts. One man can reduce his nominal money balances only by persuading someone else to increase his. The community as a whole cannot in general spend more that it receives.... If prices and income are free to change, the attempt to spend more will raise the nominal volume of expenditures and receipts, which will lead to a bidding up of prices and perhaps also to increase in output. If prices are fixed ... the attempt to spend more either will be matched by an increase in goods and services or will produce 'shortages' and 'queues'" (Friedman 1968, 434).