|
 |
|
There is also greatness in further developing a doctrine
Karm Farrugia
Let me first state categorically that I am not a monetarist. Never have been one, and will only possibly convert in the unlikely event of becoming a central banker. Call me a Keynesian and I am pleased, even though I am not entirely convinced that Keynesianism possesses all the answers to the multifarious economic problems besetting most countries and the world in general.
Friedmanism as a doctrine never really appealed much to me, probably a legacy of my formative years in the mid-fifties to mid-sixties. And yet I would be the last one to denigrate Milton Friedman as a colossal contributor to monetary economic analysis. That he was awarded the Nobel Prize thirty years ago only nags me when I consider how many previous others equally deserved it, possibly even more so, but never received it.
Fifty years ago I was grappling to understand what the ‘Quantity Theory of Money’ was all about. Keynes’s ‘Treatise on Money’ with its aggregative analysis, so ably explained by Pigou and Haberler, was already hard to stomach. Worse when it was criticised for overlooking the possibility of micro-economic ‘distribution effects’. I had to cope with headaches as I went along the path to understanding it.
Whereas Keynes’s analytical apparatus was still extolled by most prominent economists of the fifties, many then felt that Keynesianism needed updating once the world economic problems had veered from depression with under-consumption and under-investment to high inflation caused by over-consumption and savings-starved investment.
Milton Friedman’s writings were practically all anti-Keynesian in their approach – something which irritated me when I considered how Keynes had revolutionised economic thinking, steering it away from the classical heritage whilst ensuring that never again would the world allow to happen a depression akin to that of 1929-32. Diminishing governmental intervention to me was not yet relevant to procuring a sensible economic management aiming for real growth.
However, in a 1956 encyclopaedia article on this phenomenon, entitled ‘The Quantity Theory of Money – A Restatement’, Milton Friedman wrote elegantly and sophisticatedly on ‘modernising’ Keynesian monetary theory. He acknowledged the validity of the widespread criticism of his earlier expositions, recognised his intellectual indebtedness to his critics and even admitted that his ‘reformulation’ efforts were strongly influenced by the Keynesian analysis of liquidity preference. I began to like him.
Many considered that Friedman’s persistence that his exposition of the demand function for money was a ‘reformulation’ of the ‘Quantity Theory of Money’ as bombastic. I didn’t mind his boasting so long as it improved on the theory. The matter remains debatable even today.
Friedman never succeeded in debunking what Keynes had described as ‘Gibson’s paradox’ no matter how much he tried. The ‘paradox’ referred to the observation that historically, interest rates and the general price level moved up and down in sympathy. Keynes had himself seen it as somehow inconsistent with his ‘General Theory’, but that explains its revolutionary character. Ask yourself now in Malta’s context: if nothing else were to change, will the recent hike of 25 points in our Cental Bank’s intervention rate result in a corresponding inflationary increase?
Friedman wrote copiously on the consequences of monetary changes on economic growth, or, rather, on ensuring that this is real, not just inflationary. His ‘high-powered money’ theory is possibly one of the landmarks in his repertoire. He perceived the actual or potential reserves of the banking system as the basis of a possible multiple expansion of the money supply. Others saw it differently: they perceived it as ‘outside money’, highlighting the property that it in fact represented a net asset of the private sector. With whom to side? I don’t know.
My appreciation of Friedman’s legacy does not diminish simply because of my conviction that his modern portfolio approach to the demand for money is only a continuation of Keynes’s theory of liquidity preference. There is also greatness in further developing a doctrine. And Friedman deserves it. |
