The Chicago Boys
Posted by Ivo Cerckel on June 21st, 2009
I don’t get it. Help welcome!
In their 1963 book “A Monetary History of the United States, 1867-1960″, Milton Friedman and Anna Schwartz [explained the Great Depression as follows:] After the Depression, the primary explanations of it tended to ignore the importance of money. However, in the monetarist view, the Depression was “in fact a tragic testimonial to the importance of monetary forces. In their view, the failure of the Federal Reserve to deal with the Depression was not a sign that monetary policy was impotent, but that the Federal Reserve exercised the wrong policies. They did not claim the Fed caused the depression, only that it failed to use policies that might have stopped a recession from turning into a depression.
http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression
IMO the cause of all this is Richard Nixon’s decision to break with Breton Woods in 1971, which allowed “the Chicago boys” to invade the policy vacuum, and lo, “free market capitalism” started a boom in the 80′s which led to the bust of the 90′s the tech bubble, another bust, and finally, this.
John Doh, London, UK (1)
The Friedman-Schwartz hypothesis seems to be the hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. (2)
Anna Jacobson Schwartz is most famous for her collaboration with Milton Friedman on A Monetary History of the United States, 1867-1960 which hypothesized that changes in monetary policy have large effects on the economy. In particular, they lay a large portion of the blame for the Great Depression at the door of the Federal Reserve. (3)
Ambrose Evans-Pritchard says today in The Sunday Telegraph:
Tim Congdon – a hard-money Friedmanite from International Monetary Research – says the Fed is still not easing enough,
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Personally, I backed the Brown fiscal package last autumn, but only to buy time when Western banks seized up, and to pressure G20 surplus states to play their part. That phase has passed.
Today’s danger is creditor revulsion as governments worldwide raise $6 trillion in debt this year. The solution is remarkably simple. Stop borrowing and step up the Friedman monetary blitz to stop loan collapse. Does any nation have the nerve to do it? (4)
In her introduction to “The Essence of Friedman”, (Hoover UP, 1987, Kurt R. Leube, ed.), Anna Schwartz writes p. xxii that the Keynesian doctrine assigned a negligible role to money and that Friedman’s theory was a counterrevolution to Keynes’s revolution.
Money matters? Yes, Truth matters also.
Milton and Rose Friedman, “Free to Choose”. Harcourt Brace Jovanovich, 1980, p. 88
Had the Federal System followed the rules of the gold standard, it should have reacted to the inflow of gold by increasing the quantity of money. Instead it actually led the quantity of money decline
I don’t get it. Help welcome!
Ivo Cerckel
honestmoney@maktoob.com
NOTES
(1)
REACTION UNDER
From The Times
June 15, 2009
G8 signals the end of the financial crisis, but what caused it
Anatole Kaletsky
http://business.timesonline.co.uk/tol/business/economics/article6499355.ece
(2)
http://econpapers.repec.org/paper/nbrnberwo/10255.htm
(3)
http://en.wikipedia.org/wiki/Anna_Schwartz
(4)
Don’t believe the hyperinflation hype – dare to make cuts
London asset managers 36 South are launching a “hyperinflation fund” for those convinced that money-printing by central banks around the world must lead to Weimar or Zimbabwe soon enough.
By Ambrose Evans-Pritchard
Published: 7:19PM BST 20 Jun 2009
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5586043/Dont-believe-the-hyperinflation-hype—dare-to-make-cuts.html
No related posts.
June 22nd, 2009 at 15:42
Monetary policy and public expectations/perceptions/fears are two sides of the same coin.
Monetary policy affects money supply. Expectations/perceptions/fears affect money velocity.
The two can act in harmony, or they can act in opposition to each other.
But they have equal effects.
10% rise in velocity has the same effect as a 10% rise in money supply.
Perhaps this is too simplistic, but Keynes wanted to control one, Friedman wanted to control the other.
Neither viewed the whole picture.
To control one is to lie. To control the other is to cheat.
Ambrose wants to cheat more because the lies aren’t working.
June 23rd, 2009 at 10:46
“Keynes wanted to control one, Friedman wanted to control the other.”
Socrates said that we must first discover the essential nature of a thing – its “ti estin” or “what it is” -, before we can attempt to determine what other features it might possess. (J.H. Lesher, “Early interest in knowledge”, in: A.A. Long, ed., “The Cambridge Companion to Early Greek Philosophy”, Cambridge UP, 1999, 225, p. 244)
In book Mu, chapter 4 (column 1078 B), of His “Metaphysics”, Aristotle said, according to the Hugh Lawson-Tancred translation (Penguin Books, 1998, reprinted with updated bibliography in 2004), inter alia that:
Socrates was concerned with the moral virtues and sought for the first time to provide general definitions of them.
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It is not surprising that Socrates sought essences. His project was to establish formal logic of whose syllogisms essences are the foundations.
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It is in fact Socrates who can fairly be credited with two innovations, inductive arguments and also general definitions which are both concerned with the foundations of science.
Crucially, however, whereas Socrates never made his universals (or definitions) “separable”, that is precisely what his followers did, and it is just such entities they called forms.
END OF QUOTE
Antony Flew’s Dictionary of Philosophy defines “induction” as a method of reasoning by which a general law or principle is derived from particular instances.
Another dictionary defines “stealth” as a secret or surreptitious procedure or action.
ECB set for record ‘stimulus by stealth’
By Ralph Atkins in Frankfurt and David Oakley in London
Published: June 22 2009 18:27 | Last updated: June 22 2009 18:27
http://www.ft.com/cms/s/0/c1e03e28-5f4e-11de-93d1-00144feabdc0.html
SNIP
The European Central Bank is on track to deliver a record-breaking “stimulus by stealth” to the eurozone economy on Tuesday, as the first-ever offer of unlimited one-year funds could see demand running into several hundred billion euros.
The size of the ECB’s emergency liquidity-boosting operation, which was announced last month, is expected to be bolstered dramatically by the belief in financial markets that eurozone official interest rates will not fall – and the opportunity to borrow on such favourable conditions will not be repeated.
“This could be a big final easing – by stealth,” said Erik Nielsen, European economist at Goldman Sachs. UNSNIP
SOURCE UNKNOWN:
“It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
”Suddenly, a rich tourist comes to town.
”He enters the only hotel, lays a 100-euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
”The hotel proprietor takes the 100-euro note and runs to pay his debt to the butcher.
”The butcher takes the 100-euro note and runs to pay what he owes the pig farmer.
”The pig farmer takes the 100-euro note and runs to pay his debt to his supplier of feed and fuel.
”The supplier of feed and fuel takes the 100-euro note and runs to pay his debt to the town’s prostitute that, in these hard times, proffered her ’services’ on credit.
”The prostitute take the 100-euro note and runs to the hotel to pay for the rooms she rented when she brought her clients there.
”The hotel proprietor then lays the 100-euro note back on the counter so that the rich tourist will not suspect anything.
”At that moment, the rich tourist comes down after inspecting the rooms, takes the 100-euro note off the desk, tucks it back into his wallet, and explains that he did not like any of the rooms. He then leaves town.
”No one earned a penny. However, the whole town is now without debt and looks to the future with great optimism.
”And that, ladies and gentlemen, is how the United States Government is doing business.”
June 23rd, 2009 at 12:56
Deductive Logic/Reasoning versus Inductive Logic/Reasoning
Deductive – http://en.wikipedia.org/wiki/Deductive_reasoning
“A deductive argument is valid if and only if the truth of the conclusion actually does follow necessarily (or is indeed a logical consequence of) the premises and (consequently) its corresponding conditional is a necessary truth.”
Inductive – http://en.wikipedia.org/wiki/Inductive_reasoning
The premises of an inductive argument indicate some degree of support (inductive probability) for the conclusion but do not entail it; i.e. they do not ensure its truth. Induction is used to ascribe properties or relations to types based on an observation instance (i.e., on a number of observations or experiences); or to formulate laws based on limited observations of recurring phenomenal patterns. Induction is employed, for example, in using specific propositions such as:
This ice is cold.
This billiard ball moves when struck with a cue.
…to infer general propositions such as:
All ice is cold.
All billiard balls move when struck with a cue.
Another example would be:
3+5=8 and eight is an even number. Therefore, an odd number added to another odd number will result in an even number.
Inductive reasoning has been attacked several times. Historically, David Hume denied its logical admissibility. Sextus Empiricus questioned how the truth of the Universals can be established by examining some of the particulars. Examining all the particulars is difficult as they are infinite in number.[2] During the twentieth century, thinkers such as Karl Popper and David Miller have disputed the existence, necessity and validity of any inductive reasoning, including probabilistic (Bayesian) reasoning.[3] Some say scientists still rely on induction[citation needed] but Popper and Miller dispute this: Scientists cannot rely on induction simply because it does not exist.
Websters:
To Induce – To arouse by indirect stimulation
To Deduce – To infer from a general principle; To trace the course of; To determine by deduction
Monetarism and Keynesianism are the result of Inductive Logic
FreeGold is the result of DEDUCTIVE logic
June 23rd, 2009 at 14:13
Anonymous,
It’s interesting you bring up Karl Raimund Popper.
In am reading
George Soros, “The Crash of 2008 and what it means – The New Paradigm for Financial Markets”, New York, Public Affairs, 2009
Before Descartes (1596-1650), we could say that reality is there
and then man comes along and gets to know it. Since Descartes, human thought is the first reality. (Joseph M. de Torre, “Christian Philosophy”, Manila, Sinag-Tala, 1980, 3rd ed., p.131)
Before Kant (1724-1804), the human being was a mere spectator discovering external norms> With Kant, he became an active agent in the creation of science and morality. (Paul Guyer, “Introduction: The starry heavens and the moral law”, in: Paul Guyer, ed., “The Cambridge Companion to Kant”, Cambridge University Press, 1992, 1, p. 3)
Before Descartes, Thomas Aquinas defined truth as ad-equation between the thing and the intellect (adaequatio rei et intellectus).
REPEAT: Before Descartes reality was out there. Then man came along to know it.
Descartes then says, no, truth is not out there, it is in here, truth is in my cogito.
I think (cogito), therefore I am (cogito ergo sum).
For Soros, it is with Descartes that reality was out there. Then Descartes declared “cogito ergo sum”, and thus science became possible.
For Soros, the history of philosophy consists only of Aristotle, Descartes, Wittgenstein, Russell and Popper. Soros has never heard of Saint Thomas.
Soros says, p. 35, that Popper was a non-card carrying member of the Vienna Circle which, the latter, advocated logical positivism. (Etienne Gilson says that this is a philosophical approach which arbitrarily reduces philosophical issues to some partial aspects as do Descartes, Kant and Husserl). I, Ivo, am not sure about Popper’s membership.
Popper’s falsification principle says that a theory is part of empirical science if and only if it conflicts with possible experiences and is therefore in principle falsifiable by experience. (Popper, “All life is problem solving”, Routledge, 1999, p. 16)
Soros agrees with Popper’s falsification principle, but disagrees with Popper on the method of the social versus the natural sciences. Soros says they have two different methods. This is what allows Soros to introduce the Cartesian cogito and the Keynesian intuitions. Popper says there is only one method.
(I am in my second reading. My first reading of Soros noted:
p. 170
We have the experience of 1930s and the prescriptions of John Maynard Keynes to draw on. His “The General Theory of Employment, Interest and Money” was published only in 1936; we have it at our disposal from the outset.)
In am still trying to understand what is Soros’s definition of truth.
For Thomas it is thinking which ad-equates itself to reality.
Soros seems to be saying, p. 32 or so, that there is dualism between thinking and reality, but p. 34 he says that the separation of thinking and reality is a (fertile) fallacy. We are, of course, he says, capable of acquiring knowledge, but if that knowledge proves useful, we are liable to overexploit it and extend it to areas where it no longer applies.
Ivo: Soros does thus deny that logic can expand or extend knowledge.
Contrast this to my “the scientific method – Say No to Keynes”
Posted by Ivo Cerckel on June 19th, 2009
http://bphouse.com/honest_money/say-no-to-keynes/
(If the link does not work, try to copy it and to paste it in your browser)
Still reading, trying to understand …
Yes, as you say
FreeGold is the result of DEDUCTIVE logic
and in such a logic,
(Keynesian or … Friedmanian) intuitions have no place.
Ivo
Gilson
la philosophie cartesienne sera avant tout
un effort pour etendre au corps entier des connaissances humaines
la methode mathematique qui n’est elle-même que l’usage normal de la raison
Gilson
On appelle METHODE = l’ORDRE que la pensee doit suivre pour parvenir a la sagesse
et conformement auquel elle pense une fois qu’elle y est parvenue.
June 23rd, 2009 at 16:25
I would have to agree that the study of economics is MUCH different than the study of gravity.
In the study of gravity, reality is there, then we come to know it.
In the study of economics, we are part of the reality. We must study ourselves to understand.
It sounds like I at first would agree with Soros, then I would not.
When I study a particle of light, I must realize that my very presence alters the wave/particle. Therefore, I must discount the effect of my presence in any conclusion I draw.
June 23rd, 2009 at 16:58
Yes, when you are studying a particle of light, here are two of your problems:
In quantum physics, the Heisenberg UNCERTAINTY PRINCIPLE states that certain pairs of physical properties, like position and momentum, cannot both be known to arbitrary precision. That is, the more precisely one property is known, the less precisely the other can be known.
http://en.wikipedia.org/wiki/Uncertainty_principle
In physics and chemistry, WAVE–PARTICLE DUALITY is the concept that all matter and energy exhibits both wave-like and particle-like properties. A central concept of quantum mechanics, duality addresses the inadequacy of classical concepts like “particle” and “wave” in fully describing the behaviour of small-scale objects. Various interpretations of quantum mechanics attempt to explain this ostensible paradox.
http://en.wikipedia.org/wiki/Wave-particle_duality
June 23rd, 2009 at 17:08
And if you really think about it, both of those problems could be applicable to Keynes and Friedman.
Can they really draw a broad conclusion about how the economy works when in the process of study they are applying a very specific stimulus to a very specific economic state?
This is inductive reasoning.
I mean theirs is inductive, mine is deductive.
June 30th, 2009 at 19:45
I erred when I said above
June 23rd, 2009 at 2:13 pm e
Soros says, p. 35, that Popper was a non-card carrying member of the Vienna Circle which, the latter, advocated logical positivism. (Etienne Gilson says that this is a philosophical approach which arbitrarily reduces philosophical issues to some partial aspects as do Descartes, Kant and Husserl). I, Ivo, am not sure about Popper’s membership.
Soros is right on this.
How an Open Society can be reconciled with logical positivism remains a mystery to me …
I continue to thinking,
thinking in accordance with reality …
see my comment here
UNDER
Saudi bars market manipulators
http://www.zawya.com/Story.cfm/sidZAWYA20090630035537/Saudi%20bars%20market%20manipulators%20%20
the science and art of correct thinking
by Ivo Cerckel, writer, Honest Money – 2 hours and 28 minutes ago
It is true that access to information may not [be] as efficient as desired.
The question which arises is whether it is logically possible to deter insider trading significantly.