The great Milton Friedman on 'spread the wealth mentality'

[DSGE]

actually there are many definitions that make the dictionary

That's the one that everybody in the economics community uses.

No it isn't. Maybe in the economic community you follow, but it is simply not true to say that is what everyone uses.

Everybody in the non-Austrian economics community.

If a good rises in price, other goods must fall in price unless there is inflation caused by an expansion of the money supply to fuel the higher prices. If you have $100 to spend, and you spend $25 on four different items, if one of the items increases in price you will not be able to afford all of the items as before, so you will have to buy less of another item, thus reducing demand for that item and lowering its price.

I know. But not all goods and services are included in the CPI. So it's possible for the price of a CPI good to rise and the rise of a non-CPI good to fall.

The CPI just happens to factor out the sectors in the economy that are most heavily affected by inflation to hide the negative effects of monetary policy.

The great thing about a nominal GDP target is that you don't have to choose a price index. There's only one NGDP.

 

[ShackledNation]

That's the one that everybody in the economics community uses.

No it isn't. Maybe in the economic community you follow, but it is simply not true to say that is what everyone uses.

Everybody in the non-Austrian economics community.

Not quite, but this point is largely irrelevant.

If a good rises in price, other goods must fall in price unless there is inflation caused by an expansion of the money supply to fuel the higher prices. If you have $100 to spend, and you spend $25 on four different items, if one of the items increases in price you will not be able to afford all of the items as before, so you will have to buy less of another item, thus reducing demand for that item and lowering its price.

I know. But not all goods and services are included in the CPI. So it's possible for the price of a CPI good to rise and the rise of a non-CPI good to fall.

And that is one of the major flaws in CPI. It attempts to measure the general price level, but excludes many prices that have a tendency to inflate. You would have a better picture of a rise in the general price level if you included all of those goods.

The CPI just happens to factor out the sectors in the economy that are most heavily affected by inflation to hide the negative effects of monetary policy.

The great thing about a nominal GDP target is that you don't have to choose a price index. There's only one NGDP.

I agree. Nominal GDP is quite a good measure of inflation.

 

[expat_panama]

...Nominal GDP is quite a good measure of inflation.

Nominal GDP is a good measure of the current dollar price of production. What's actually produced is added up in dollars adjusted for inflation using the GDP deflator. Inflation by the deflator is similar to the cpi.

fwiw, when the fed works on monetary policy it prefers to watch the PCE (personal consumption expenditure) price index.

 

[EdwardBaiamonte]

I know. But not all goods and services are included in the CPI. So it's possible for the price of a CPI good to rise and the rise of a non-CPI good to fall.

yes if housing prices had been included we would not be in this recession

 

[EdwardBaiamonte]

That's the definition of inflation. It's not technically true, it's just plain regular old true.

actually there are many definitions that make the dictionary

That's the one that everybody in the economics community uses.

What do you understand by "inflation"?

I like the general price level definition. The CPI would have showed huge inflation if the housing bubble had been included.

The CPI can increase even if it's just relative prices changing. That's why you'll often hear the Fed talking about "core" CPI or "weighted median" or "trimmed mean". That's stuff that they do to the aggregate so that they can strip away relative price changes. So what the CPI is showing you isn't necessarily inflation.

most importantly a monkey or Fed chairman could have seen housing prices inflating badly and concluded it was a significant enough sector of the economy to matter. If that was the last big lesson to learn about monetary policy we may be home free, assuming we can get out of this mess.

 

[Sallow]

Milt is a great apologist for BIG CAPITAL, that is true.

How's his economic theories working out in real life?

For about 1% of the American people?

Very nicely.

 

[EdwardBaiamonte]

Milt is a great apologist for BIG CAPITAL, that is true.

How's his economic theories working out in real life?

For about 1% of the American people?

Very nicely.

goofy dumb liberal slogan!! Americans are the richest people in human history. The French have the per capita income of Arkansas. 44 million Americans flew in jet planes for the holidays. We spent $500 billion on Christmas!

 

[Toddsterpatriot]

Friedman had some reasonable insights into the inefficiencies of government.

However he made a number of unforgivable errors, which ironically endeared him to the Establishment and enhanced his reputation.

First, he trashed Austrian Business Cycle Theory.

Second, he was a fiat money guy, supporting fiat money over gold (up until the end, when he started having doubts – too late in my view).

Third, he supported central banking. How he could be a “free market guy” and support monopoly fiat and monopoly price fixing of interest rates is beyond me.

Fourth, he destroyed Chile by implementing policies which systematically removed social investment and safety nets that (arguably) govts should provide, whilst keeping monopoly fiat in place. He should have advocated the elimination of monopoly fiat and allowed the continuation of social safety nets. He was clearly a tool of the major US banks in Latin America.

Fifth, his policies destroyed New Zealand, partially destroyed Australia, and partially destroyed many other countries including the UK and the US.

Antal E. Fekete does a wonderful job of destroying Friedman’s theories here, in a speech he delivered in late 2006, just after Friedman’s death. He also wrote a brilliant piece critiquing both Keynesianism and monetarism here, entitled (tellingly) Götterdämmerung.

If you are shocked by the title of my post, please read these two pieces immediately.

I will never forget Friedman sitting on the edge of Victoria Harbour in the late 1970s openly admiring the “free market” of Hong Kong. Hong Kong has the highest number of billionaires in Asia but 18% of the population live below the poverty line. Pollution problems are very serious. If you ask the average Hong Konger are they happy I guarantee they’ll say no. Housing is hideously expensive and is a huge tax on the working people (despite the supposedly low rates of tax there). Social services for the aged are extremely poor. Worst of all no one can buy and sell in gold – the monopoly HK dollar is pegged to the US dollar. So the economy is subject to the same mad monetary swings as the US.

It is not so much a “Free Market” as one “Trapped in a Monopoly Money Hell”. If they could be allowed to trade in any currency they liked, I’d be more sanguine about HK. Until that fundamental issue is addressed, the Hong Kong people will never be free.

Milton Friedman was an idiot « Karma is King

Fekete? Seriously? He's a clown.

Home prices drop 17 percent [Florida]

Can the Second Coming of Paul Volcker Save the Dollar? (China's hand on the switch)