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Monetary History and Positive Economics*

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FriedmanMilton, “The Marshallian Demand Curve,” in Essays in Positive Economics (Chicago: University of Chicago Press, 1953), p. 92

Published online by Cambridge University Press:  03 February 2011

Robert W. Clower
Robert W. Clower
Affiliation:
Northwestern University
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Extract

If successful prediction were the sole criterion of the merit of a science, economics should long since have ceased to exist as a serious intellectual pursuit. Accurate prognosis is not its forte. The real strength of the discipline lies in another direction—namely, in its apparently limitless capacity to rationalize events after they happen. This helps explain the indifference of most economic theorists to “the lessons of history”; men to whom all things are possible have little to learn from experiments conducted in the laboratory of time. It also helps explain the indifference of most economic historians to abstract theory; what have they to learn from a subject that “yields no predictions, summarizes no empirical generalizations, provides no useful framework of analysis”?

Type
Review Article
Information
The Journal of Economic History , Volume 24 , Issue 3 , September 1964 , pp. 364 - 380
Copyright
Copyright © The Economic History Association 1964

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References

1 Friedman, Milton, “The Marshallian Demand Curve,” in Essays in Positive Economics (Chicago: University of Chicago Press, 1953), p. 92Google Scholar.

2 See papers by Rostow, , Meyer, and Conrad, , and Kuznets, on “The Integration of Economic Theory and Economic History,” Journal of Economic History, XVII (Dec. 1957), 509–53CrossRefGoogle Scholar (Kuznets' “Summary of Discussion and Postscript” is especially relevant); also Davis, Lance E., Hughes, Jonathan R. T., and Reiter, Stanley, “Aspects of Quantitative Research in Economic History,” Journal of Economic History, XX (Dec. 1960), 539–47CrossRefGoogle Scholar; North, Douglass C., “Quantitative Research in American Economic History,” American Economic Review, LIII (Mar. 1963), 128–30Google Scholar; and Fogel, Robert W., “Reappraisals in American Economic History—Discussion,” American Economic Review, LIV (May 1964), 377–89Google Scholar.

3 See Miller, H. Laurence Jr., “On the ‘Chicago School of Economics,’” Journal of Political Economy, LXX, (Feb. 1962), 64–69CrossRefGoogle Scholar, and comments by M. Bronfenbrenner and George J. Stigler in the same issue; also Archibald, G. C., “Chamberlin versus Chicago,” Review of Economic Studies, XXVIII (Oct. 1961), 2–28CrossRefGoogle Scholar, and later responses by Stigler and Friedman, ibid. XXX (Feb. 1963), 63–67.

4 Friedman, “Marshallian Demand Curve.” The quoted phrases are torn out of context from pp. 12, 300, and 9, respectively. Friedman himself would never express views so extreme as these (compare his reply to Archibald [Rev. Ec. St., XXX], pp. 65 ff.)

5 I refer especially to Friedman, A Theory of the Consumption Function (Chicago: University of Chicago Press, 1957); to Friedman and Kuznets, Income from Independent Professional Practice (New York: NBER, 1945); and to Friedman and Schwartz, “Money and Business Cycles,” Review of Economics and Statistics, XLV (Feb. 1963 suppl.), 32–64. But these are just a few choice items in a long and distinguished list.

6 Reference should also be made to the thoughtful and interesting “Director's Comment’ by Albert J. Hettinger, Jr., which appears at the very end of the book (pp. 809–14).

7 I owe this phrase to my erstwhile colleague, Meyer Burstein.

8 I omit comment on the two appendices, except to say: (1) the statistical work underlying the basic tables in Appendix A and the charts and tables appearing elsewhere in the book is clearly of the highest quality (a full explanation of the estimates prepared by Friedman and Schwartz is to appear in their forthcoming study of “Trends and Cycles in the Stock of Money, another National Bureau project) and (2) the discussion of “the proximate determinants of money” in Appendix B does not add much of value to the argument in the text (most of the relevant information is already given in sec. 4 of ch. ii).

9 Compare Friedman and Schwartz, “Money and Business Cycles,” pp. 29–63.

10 At least, for all practical purposes. On this, compare Basmann, R. L., “The Causal Interpretation of Non-Triangular Systems of Economic Relations,” Econometrica, XXXI (July 1963), 442–43, 453Google Scholar.

11 See Marshall, , “The Present Position of Economics,” in Memorials of Alfred Marshall, Pigou, A. C., ed. (London: Macmillan, 1925), pp. 166–69Google Scholar; also Friedman, “Marshallian Demand Curve,” pp. 89–92.

12 These estimates are available on request from the National Bureau of Economic Research, but are not presented in the History, except in charts.

13 Defined as “the total amount of hand-to-hand currency held by the public plus vault cash plus, after 1914, deposit liabilities of the Federal Reserve System to banks” (p. 50).

14 See Friedman, and Meiselman, David, “The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897–1958,” Stabilization Policies (research study prepared for the Commission on Money and Credit [Englewood Cliffs, N. J.: Prentice-Hall, 1963]), pp. 165–268Google Scholar, especially Charts II–4 and II–6 (pp. 194 and 196). Also, Ando, Brown, Solow, and Kareken, “Lags in Fiscal and Monetary Policy,” in the same volume, pp. 14–24.

15 For a very similar symbolic presentation, however, see Friedman and Schwartz, “Money and Business Cycles,” pp. 56–58.

16 But perhaps not. On this, see Ames and Reiter's fascinating sampling experiment involving time series drawn at random from Historical Statistics of the U. S., “Distributions of Correlation Coefficients in Economic Time Series,” Journal of the American Statistical Association, LVI (Sept. 1961), 637–56.

17 An account of sorts is given in Friedman and Schwartz, “Money and Business Cycles,” and criticized in the same issue by Hyman P. Minsky and Arthur Okun (pp. 68–72, 74).

18 See also Friedman and Schwartz, “Money and Business Cycles”; Friedman, Milton, “The Quantity Theory of Money: A Restatement,” Studies in the Quantity Theory of Money (ed. Friedman, Milton; Chicago: University of Chicago Press, 1956), pp. 3–21Google Scholar; Friedman and Meiselman, “Relative Stability,” pp. 166–70.

19 The term “neo-Walrasian” refers to the general point of view underlying such modern classics as Hicks' Value and Capital and Samuelson's Foundations of Economic Analysis. The distinctive characteristic of this point of view as contrasted with that of Marshall, the neo-Classics, and Friedman and Schwartz, is that market demand and supply relations are explicitly defined in terms of underlying microeconomic decision processes. This aspect of the neo-Walrasian literature stands out with particular clarity in recent contributions to the general equilibrium theory of money. See, for example, Don Patinkin, Money, Interest and Prices (Evanston: Row Peterson, 1956); G. C. Archibald and R. G. Lipsey, “Monetary and Value Theory: A Critique of Lange and Patinkin,” Review of Economic Studies, XXVI (Oct. 1958), 1–22.

20 See Burstein, M. L., Money (Cambridge: Schenkman Publishing Co., 1963), pp. 749 ff.Google Scholar; P. A. Samuelson, “Reflections on Central Banking,” National Banking Review, I (Sept. 1963), 15–28.

21 For a clear statement of representative views, see H. G. Johnson, “Monetary Theory and Policy,” American Economic Review, LII (June 1962), 335–84; also, R. G. Lipsey and F. P. R. Brechling, “Trade Credit and Monetary Policy,” Economic Journal, LXXIII (Dec. 1963), 618–41.

22 The time qualification is important; for example, in times of prosperity practically any asset may be regarded as “money,” whereas in times of “panic” even demand deposits may sell at a discount (compare History, p. 161). What constitutes “legal tender” is also a problem: greenbacks were “‘lawful money’ and legal tender for all debts, public and private, except customs duties and interest on the public debt, both of which were to be payable in coin,” to quote Hepburn, Alonzo Barton, A History of Currency in the United States (New York: Macmillan Co., 1915), p. 185Google Scholar.

23 For an elaborate discussion of “causality” and its various behavior manifestations, see Nagel, Ernest, The Structure of Science (New York: Harcourt, Brace and World, 1961), ch. xGoogle Scholar.

24 See Friedman, “The Methodology of Positive Economics,” Essays, pp. 16–23; and more significantly, Consumption Function, p. 231. I should remark explicitly that my interpretation of Friedman and Schwartz's methodological position is based not so much on what they say, here or elsewhere, jointly or singly, as on what they do— and similarly for the neo-Walrasians.

25 This is an important reason for attaching significance to so-called scientific paradoxes; see my “Permanent Income and Transitory Balances,” Oxford Economic Papers, XV (July 1963), 177 ffGoogle Scholar.

26 I should emphasize once more the inherent ambiguity of the “prediction” criterion (see last paragraph of preceding section). For a concise but exceptionally lucid discussion of the problems involved, see Theil, H., Economic Forecasts and Policy (Amsterdam: North-Holland Publishing Company, 1958), pp. 204–7Google Scholar.

27 On this, see Popper, Karl R., Conjectures and Refutations (London: Routledge and Kegan Paul, 1963), ch. iGoogle Scholar; also Klappholz, K. and Agassi, J., “Methodological Prescriptions in Economics,” Economica, N. S. XXVI (Feb. 1959), pp. 60–74CrossRefGoogle Scholar.

28 Samuelson, , Foundations of Economic Analysis (Cambridge: Harvard University Press, 1947), p. 4Google Scholar.

29 Friedman, “Lange on Price Flexibility and Employment: A Methodological Criticism,” Essays, p. 300.

30 For details, see Polya, G., Patterns of Plausible Inference (Princeton: Princeton University Press, 1954)Google Scholar.

31 However, see Friedman, “Methodology,” n. 11, pp. 12–13. For some interesting observations on a related topic, see Polya, Plausible Inference, pp. 40–41.

32 For example, a recent analysis by George Horwich casts serious doubt on the correctness of Friedman and Schwartz's explanation of the persistence of “excess reserves” during the period 1933–39 (History, pp. 534 ff.); also on their interpretation of the 1937 contraction (ibid. pp. 543–45). See Horwich, George, “Effective Reserves, Credit, and Causality in the Banking System of the Thirties,” in Banking and Monetary Studies, Carson, D., ed. (Homewood, Ill.: D. Irwin, 1963)Google Scholar.

In a more general vein, Ando and Modigliani have shown (in a forthcoming paper) that changes in autonomous expenditure, suitably defined, are as closely correlated with changes in income and consumption as are changes in the stock of money, thus casting doubt on the causal significance of the money-income relation on which Friedman and Schwartz place so much emphasis. For background on this, see Friedman and Meiselman, “Monetary Velocity,” and Modigliani, Franco, “The Monetary Mechanism and Its Interaction with Real Phenomena,” Review of Economics and Statistics, XLV (Feb. 1963 suppl.), 79–107CrossRefGoogle Scholar (esp. pp. 102 ff.).

33 Collingwood, R. G., The Idea of History (New York: Oxford University Press, 1956), pp. 231 ffGoogle Scholar.