Vis Brad Delong’s post on CORRECT PREDICTIONS AND THE STATUS OF ECONOMISTS
Paul Krugman is certainly right that history has judged, and that the judgment of history is for James Tobin over Milton Friedman so completely that there is not even a smudge left where Friedman’s approach to a monetary theory of nominal income determination once stood.
And Robert Walmann points out, repeatedly and correctly, that there is nothing theoretically in Friedman (1967) that is not in Samuelson and Solow (1960)–that inflation above expectations might deanchor future inflation was not something Friedman (or Phelps) thought up, and that neither Friedman (nor Phelps) was thinking that high unemployment might deanchor the NAIRU.
comes Angry Bear Robert Waldmann’s reply to a comment, worth reading with care:
“the vertical long-run Phillips Curve of Friedman (and Phelps) is simply wrong at low rates of inflation” But above very low rates of inflation, say 2%, it it essentially correct and therefore a very useful first approximation. (Full Employment Hawk)
Robert Waldmann replied:
By “very correct” you mean “corresponds to post WWII US data because all the other evidence is long ago or far away and irrelevant”. The vertical long run Phillips Curve of Friedman (and Phelps) was a terrible approximation to European data from 70 something through now. Europe has not been in a liquidity trap all those decades. Now if “long run” is defined as “a milenium” then we Blanchard and Summers (1986) didn’t prove Friedman (and Phelps) wrong. This is because “long run” can be a metaphysical un falsifiable claim if the long run is longer than any time series. It is in this sense and in this sense only that Friedman hadn’t been proven wrong already by 1990.
Also Friedman’s most powerful devoted follower (and most devoted powerful follower) provided incredibly strong evidence that he was just totally full of it. In 1985 the border of the European unemployment problem was the Atlantic Ocean. The contrast between the UK and the US was extreme. Then the stock market crashed in 1987. Thatcher feared a repeat of the great inflation. This (unlike persistently hign unemployment) struck her as worse even than inflation. So she pumped up the money supply (the BOE was not indenpendent back then). This caused an inflationary boom. UK economists discussed how firms had trouble filling vancancies. There was a mystery as the Beveridge curve shifted with high vacancies and high unemployment (a total mystery to people who hadn’t heard of the matching function). Then UK unemployment fell and stayed low. Expansionary monetary policy was followed by persistently lower unemployment (and a bit of inflation which didn’t persist). There could be no stronger test of Friedman’s theory which I now consider total crap because, according to an equally valid theory, I have too high a level of green bile and too little Phlegm.
The result is that the status of monetarism increased as unemployment was low in the country of Friedman loving Thatcher compared to the country of Friedman hating Mitterand. The evidence showed Friedman and Thatcher had been totally wrong. But good things happened under Thatcher, increasing Friedman’s standing (similarly the total utter top is down wrongness about the future power of the USSR increased the status of hawks because their worldview was proven utterly totally false while Reagan was President).
And a few comments later Robert Waldmann said…
So what the hell happened between 1968 when Friedman was the highly respected pole of a serious debate and 1975 when all admitted he had been right. Well my recollection (and I’m sure yours is similar) was of a series of astonishing dramatic and almost completely unexpected events which completely changed my world view — in other word “puberty”. But there were other observers for whom the macroeconomic was not dwarfed by the hormonal. I think here the key issues were two 1) is the Phillips curve shifting and 2) so what ? I think some people (eg Robert Solow) thought that welfare is zeroeth order homongenous in prices so inflation is no big deal. They might think that a shift in expected inflation didn’t mean that people should ignore problems with e.g. poverty and focus on fighting inflation. In noted contrast, the vast majority of people think that inflation means rising prices for fixed nominal income so it is horrible. The combination of the totally conventional view that shifts in inflation are persistent because the Phillips curve depends on expected inflation and a very rare (for an economist) obsession with inflation made Friedman stand out.
The combination of his being right (as were many other economists) about inflation and obsessed (as were many other non-economists) made him a super star.