Milton Friedman's Monetary Framework: A Debate with His Critics [Hardcover]

Milton Friedman (1912-2006) was an American economist who taught at the University of Chicago (and was the leader of the "Chicago school"); he received the Nobel Prize in Economics in 1976, and wrote/cowrote books such as A Monetary History of the United States, 1867-1960, Money Mischief: Episodes in Monetary History, Bright Promises, Dismal Performance: An Economist's Protest, Tyranny of the Status Quo, Free to Choose, Capitalism & Freedom: A Leading Economist's View of the Proper Role of Competitive Capitalism, etc.

This 1974 book contains two of Friedman's essays on monetary theory, followed by critical commentaries, with Friedman's own "Comments on the Critics" at the end.

Friedman begins by stating that "the quantity theory of money takes for granted that what ultimately matters to holders of money is the real quantity rather than the nominal quantity they hold and that there is a fairly definite real quantity of money the people wish to hold under any given circumstances." (Pg. 2) He adds, "substantial changes in prices or nominal income are almost invariably the result of changes in the nominal supply of money." (Pg. 3)

He summarizes the key elements of monetary theory as: (1) a unit elasticity of the demand for money with respect to real income; (2) a nominal market interest rate equal to the anticipated real rate; (3) a difference between the anticipated real interest rate and the real secular rate of growth determined outside the system; and (4) full and instantaneous adjustment of the amount of money demanded to the amount supplied (Pg. 42-43)

He concludes his framework by asserting that the basic differences between economists are "empirical, not theoretical," and that much of the controversy reflects "different implicit or explicit answers to these empirical questions." (Pg. 61)

He rejects Keynes' 'General Theory' on the grounds that "it has been contradicted by evidence: its predictions have not been confirmed by experience." (Pg. 134) He disagrees with one of his critics, saying, "My restatement IS a restatement of that quantity theory and is not Keynsian in any meaningful sense of that term." (Pg. 158) He concedes to this same critic, however, that "my wording is ambiguous and I should have been more careful." (Pg. 161)

This book is a detailed examination of Friedman's monetarist theories, and will be of considerable interest to anyone seeking INVOLVED discussions of Friedman's ideas.

Meltzer edited this collection of essays containing Friedman's most up to date exposition of his macro model and a series of comments from other macroeconomists such as James Tobin,Paul Davidson,Don Patinkin and Meltzer himself in the 1972-74 time period.The major problem in these essays is the failure of all the above mentioned economists(Davidson mentions the distinction frequently,but unfortunately adopted a misinterpretation of Keynes's approach to uncertainty based on the views of G L S Shackle,which are in fact a very special case of Keynes's own approach as originally specified in chapter 26 of Keynes's 1921 classic, A Treatise on Probability) to grasp the central theoretical role played in Keynes's General Theory of the clearcut distinction between risk and uncertainty.This is surprising since Friedman was certainly familiar with Knight's classic Risk,Uncertainty and Profit.Nevertheless,Friedman appears to have rejected the distinction maintained by both Knight and Keynes in favor of the subjectivist approach of Leonard J Savage,who,although discussing the problem of uncertainty(which Savage called vagueness),rejected any operational role for it in his theory of decision making under risk. The confusions of Friedman,Tobin, and Davidson all show up simultaneously in their attempted discussion of the technical details of Keynes's Theory of Effective Demand as modeled by Keynes in chapter 20 of the General Theory.Chapter 20,and the additional analysis contained in chapter 21 of the General Theory,contains the analytic core of Keynes's major innovation in the General Theory,his incorporation of expectations and uncertainty into the microfoundations of entreprenuerial decision making and the subsequent aggregation of this micro model into the macroscopic D-Z model,which Keynes had briefly introduced in a beginning chapter of the General Theory,titled"The Principle of Effective Demand".It is clear from a reading of pages 143-157 that Tobin,Friedman,and Davidson do not understand how to derive Keynes's original D-Z model.Simple integration of Keynes's derivatives ,either on pp.55-56,ft.2 or on pp.282-285 of the General Theory ,would reveal that D=pO and that Z=P+wN.Friedman fails to realize that the p in D=pO IS DEFINED BY KEYNES AS AN EXPECTED PRICE. Another error committed by Friedman is his failure to recognize that the mathematical expression p=[D/W.W]/O IS EQUAL TO EXPECTED MARGINAL COST.Practically all of Friedman's footnote 15 on pp.156-157 of this book is erroneous.None of these erroneous results were challenged by either Tobin or Davidson.Keynes's Z FUNCTION IS COMPLETELY ELIMINATED IN FRIEDMAN'S ANALYSIS.Despite the large number of errors,this reviewer recommends that this book be purchased.A study of these errors is very instructive.