Thursday, July 26, 2012

Richard Kahn on the Scourge of Monetarism

I saw this most interesting audio on the Post Keynesian Economics Study Group of Richard F. Kahn (1905–1989) speaking on 11 December 1987 against the macroeconomics of monetarism:
Richard Kahn on The Scourge of Monetarism (11 December 1987).
Richard F. Kahn was lecturer (1933-1951) and Professor of Economics (1951-1989) at Cambridge (UK), and one of the original five members of Keynes’s “Circus.”

Kahn delivered this talk at the time when the UK was experiencing the last years of the economic and social catastrophe of Thatcherism. For the history of the failure of monetarism in Britain and the horrors of Thatcherism generally, I highly recommend Michael Stewart’s Keynes in the 1990s: A Return to Economic Sanity (Harmondsworth, 1993).

Kahn’s voice is a bit faltering at times, but for me this is of great historical and intellectual interest.

The astute reader will know that the title of the talk is taken from a now classic monograph of Nicholas Kaldor called The Scourge of Monetarism (Oxford and New York, 1982), where Kaldor developed endogenous money theory. I think many would argue that Kaldor had a very important role in bringing endogenous money theory to the serious attention of heterodox economists in the English speaking world.

Back in the late 1970s and early 1980s the cult of monetarism was at its height, although the attempts to implement it in the real world by (1) Paul Volcker at the Fed (from 1979 to 1982) and (2) Thatcher in her early years were an unmitigated disaster. It is no secret that Thatcher essentially abandoned her version of monetarism in 1981, under the advice of Alan Walters, which proves, if nothing else, that the lady really was for turning.

Central banks do not directly control the broad money stock or its growth rate. This was the great lesson of those years.

Kahn’s talk here is very much a postmortem on Thatcherite monetarism, though with many other interesting points and observations.


Kaldor, N. 1982. The Scourge of Monetarism. Oxford University Press, Oxford and New York.

Stewart, Michael. 1993. Keynes in the 1990s: A Return to Economic Sanity. Penguin, Harmondsworth.

Williams, Hywel. 2007. “The Lady was for Turning,”, 13 June.


  1. You are really unbelievable.

    I think you are being really unfair to monetarists here. First, did the failure of the naive Phillips Curve view destroy Keynesianism? No it did not. The "New Keynesians" adapted and incorporated expectations into their updated model. There is more to monetarism than the k- percent growth rule.
    Second I find it unbelievable that you hint that central banks and monetary policy are powerless to affect the economy. Central banks may not DIRECTLY control the endogenous money stock, but they certainly influence it. Or are you going to deny, like that New Classical Casey Mulligan, that conventional monetary policy, interest rate cuts and raises, have any effect. Of course they do. QE also has limited effects, not only through the debt and borrowing channel, but also through the price that that CB pays for bonds. Theoretically a CB can pay 20,000 for a bond that has a market value of 5,000. No extra borrowing is involved here. All the spending and boost to AD comes from the creditor side, be the creditor rich poor, or middle class.
    Finally, speaking of AD, I know you hate libertarians, but most monetarists are not like Austrians. Really. I'm not talking about crypto-Austrians like Allan Meltzer posing as monetarist, but genuine neo-monetarists who want the Fed to create more AD. (Scott Sumner) Don't you even understand the concept of strategic alliances even with those you disagree with to serve a greater good?

    1. Monetary policy is mainly based on self-fulfilling expectations regarding investment in my opinion. The real effects are extremely ambiguous due to the interest income/saver channel -- as has been comprehensively shown by the Godley/Lavoie models (if you're "into" models and don't just find this intuitively obvious). Self-fulfilling expectations regarding investment have ZERO effect in a situation where there is a chronic lack of demand because people simply don't see sales so they don't invest.

      As for monetarism, it was a load of nonsense from the moment Friedman announced it. The early monetarists fudged the data regarding velocity and Friedman himself simply made up stuff in journal articles (I'm thinking of certain baseless assertions he made vis-a-vis Kaldor in a '69 article). After this monetarism became less an economic doctrine than a cult. And it continues to resemble that today.

      They fetishize the money supply in a manner that borders on primitivism. Personally, I will make no alliances, strategic or otherwise, with people who genuinely appear to me a weird cult or tribe or whatever. Also, as regards policy goes, history shows that only fanatics like Thatcher and Joseph believe in nonsense like monetarism, so if it is ever used it will only be used as a smokescreen for other policies (unemployment in inflationary times and maybe devaluation in deflationary times). I see no reason in compromising my intellectual integrity by pinning my flag to this shabby doctrine if all it offers is a smokescreen for policies that I don't think work properly.

    2. Illusionist, you write, "Self-fulfilling expectations regarding investment have ZERO effect in a situation where there is a chronic lack of demand because people simply don't see sales so they don't invest."

      Suppose every firm increases its investment expenditure, each one believing there'll be demand for incremental output. These beliefs will be self-fulfilling because the workers hired to produce the new investment goods will spend a large portion of their incomes on the incremental flow of consumption goods.

    3. Suppose Jesus returns tomorrow and restores full employment to all advanced industrial economies.

      I'm an evidence based sort of person. And the evidence shows -- from QE programs to recent inflation targeting in Japan -- that it doesn't work.

      My point is that the effects of expectations are extremely limited. Investors only respond to these in any meaningful way in boom times. When they do actually respond to them in deflationary times the results are temporary very small rises in bond yields -- as we saw after QE2. I also believe that inflationary expectations have driven the prices of oil and other commodities. So, any effects expectations have are on financial capital and not on industrial capital.

      Frankly, I think something like his is happening all the time. In boom times interest rates fall -- and the animal spirits of investors in stocks and company bonds gets a boost. Given that demand is seen to be forthcoming by those making actual investment, they usually raise aggregate demand through expanded investment. Those are the channels through which monetary policy work -- and they are weak.

  2. Volcker didn't actually buy into monetarism. He said in an interview that he used it as a smokescreen for deflationary interest rate policies:

  3. I presume you're changing your handle-"Lord Keynes?"

    You know, your intolerance finally has shown through. You're just like Pete aka Major Freedom, You are to the Post Keynesians what MF is to the Austrians. You call monetarism a load of nonsense from the start, and say Milton Friedman made stuff up, without a shred of evidence to support yourself. This is a man who won the noble, prize, who created a historical epic of U.S. monetary history. EVEN PAUL KRUGMAN CALLED MILTON FRIEDMAN A GREAT MAN. Also read the post on the new york times today. Paul Krugman says monetary policy works, Paul Krugman, the shining light of the left and social democrats everywhere

    And as for strategic alliances I disagree with nearly everything you say, but willingly concede we have an AD problem. Shouldn't fixing that problem be top priority, not attacking monetarists?

    1. Don't be conspiratorial. I try to post under my own name here -- as I do elsewhere (a rare thing on blogs, for some reason...) -- but it is a total pain to sign in. I'm Philip Pilkington. I write for Naked Capitalism and I have nothing to do with Lord Keynes -- although I respect his work.

      Now, I've just spent the past four weeks researching monetarism for a series of pieces I wrote and I've found that the monetarists have a terrible propensity to make things up. Friedman himself was a studied fibber -- although I think he was so myopic he believed his own untruths.

      Before I give you a concrete example of Uncle Milty 'in action' I'll just say that I don't care what Krugman says. I think that Krugman has monetarism tendencies -- as do most New Keynesians -- and that they lead him into a complete dead-end. Today, worship at the altar of monetarism is required for entry into the neoclassical club. Which makes it, in my opinion, something of a cult as well.

      Now, the evidence. In July 1970 Nicholas Kaldor published an article in the Lloyd's Bank Review in which Kaldor called into question many of Friedman's baseless pseudo-empirical assertions. Friedman replied -- in the same journal in October -- that:

      "Asking how Professor Kaldor would explain the existence of essentially the same relation between money and income... for the UK as for the US, Yugoslavia, Greece, Israel, India, Japan, Korea, Chile and Brazil?"

      The problem with this? Friedman just made it up. No such relation existed. Kaldor went back and crunched the numbers. Here is his response (from 'The Scourge of Monetarism'):

      "The simple answer to this is that Friedman's assertions lack any factual foundation whatsoever. They have no basis in fact, and he seems to me to have invented them on the spur of the moment. I had the relevant figures extracted from the IMF statistics for 1958 and for each of the years 1968 to 1979, for every country mentioned by Friedman and a few others besides... Though there are some countries (among which the US is conspicuous) where in terms of the M3 the ratio has been fairly stable over the period of observation, this was not true of the majority of others."

      I will not go into the figures quoted in too much depth. But compare three that Friedman asserts had "essentially the same relation between money and income" -- namely, Chile, Israel and India.

      In 1978 the ratio between money (M3) and income was 83% for Israel -- but only 15% for Chile. While for India it was 38.7%.

      These figures were the same as those available for Friedman at the time of the 'debate'. (They may have changed since, I don't know -- but that's irrelevant). The only conclusion that can be made is that Friedman made them up to 'prove' a relatively constant velocity of money across different countries.

      Kaldor summed this up well in a speech to the House of Lords regarding this little 'blunder' on the 16th April 1980. There he said:

      "Professor Friedman, as on some other WELL-KNOWN OCCASIONS, invented the facts to clinch the argument, and relied on his reputation as an expert for being taken on trust without anyone bothering to check the figures."

      There's your 'Great Man'. He was a huckster. He relied on a cult of personality that he built up around himself in the economics profession to silence any and all critique. End of story. His descendents aren't quite as bad. But they continue to use the muddled arguments that he invented on the fly with fudged data to try to understand the world. They live in the shadow of Friedman's cult of personality and take everything he said on trust. And just like Friedman, when they are proved wrong over and over again they continue to stick to their guns as a madman clings to his delusion.

    2. Krugman is a neo-classical economists. He's very fond of 'Wizard of Oz' policy techniques as that is what he has based his career on.

      Much like Friedman he relies on his status as a 'Nobel prize winner' to push an angle without anybody checking the facts underneath him.

      Krugman is a Neville Chamberlain character. Very fond of appeasement.

  4. Edward@July 26, 2012 7:45 PM


    "TheIllusionist" is not me, thank you very much.

    For your information,

    (1) I do not deny that the central banks control interest rates, have power over monetary power, and that they do influence AD, to the extent that interest rates affect business expectations and business and consumers' ability to borrow.

    (2) Nor do I deny the influence of QE, certainly on bond yields.

    (3) I do not in fact think monetarists are anywhere near as bad as Austrians.

    (4) yes, old style monetarism's failure does not necessarily discredit the new monetarism, though the latter too has problems.

    1. Correction:

      "have power over monetary policy,"

  5. Jan said: Thank´s for the Richard Kahn talk!
    Your find real good stuff!Have a real nice summer LK!

  6. LK I owe you an apology.
    You're not nearly as bad as "Pete" aka major Freedom" :-)

    And as for you, "Philip" Pilkington, you are a real piece of work.The evidence you showed doesn't mean Friedman lied. All it shows is that he made a mistake. Big deal, GET OVER IT! Keynes made mistakes, so did Samuelson when he predicted a return to depression after the war. Does that invalidate Keynesianism. Of course it doesn't. S extend the same courtesy to Friedman, please. Personally, I'm baffled as to why Friedman thought constant velocity monetarism was a good idea. His best work, the monetary history of the U.S. showed that demand matters. THe Friedman in the 40s, 50s and 60s was a much better person, and a much more rigorous economist, than the Friedman in the eighties, nineties and oughts. Krugman says this too.
    P.S. Lord Keynes, have you thoroughly examined new monetarism? It has fixed the problems with the old. the new monetarist focus on MV or NGDP, not M0, M1, M2, or M3, They realize that demand matters. Also does it really matter where the recovery in AD comes from, the fiscal or monetary side? comes from? If Mervyn King, bought billions in private bonds across the UK, and held them to maturity without demanding payment from debtors, wouldn't this have an effect on AD?

    1. Still on the conspiracy stuff there, Edward? Think I'm hiding behind the sock puppet "Philip"? Fine.

      Anyway, Friedman did lie. It wasn't a mistake. It was a lie. He had obviously never seen the data before. Friedman was a well-known fibber. He consistently made stuff up. And he never re-evaluated his claims after the experiment was over -- instead projecting his failures onto the "in-competencies" of others.

      But I'll never convince you or any other monetarist. Because its a cult. It's like trying to have a debate with a Scientologist or a moonie. All you get is projected blame, evasions and conspiracy weirdness.

  7. The new monetarism is flawed by its focus on monetarism policy.

    If monetary policy were really all that is needed to stabilise GDP or prevent price deflation, then why did Japan’s zero interest rate policy (ZIRP) in the 1990s and quantitative easing in the 2000s not prevent the descent into price deflation in 1999, or there recession 1997-1998?

    And why did price deflation persist in Japan for years after the beginning of quantitative easing in 2001?

    If we take the income quantity theory of money equation, as follows:

    Equation 2: MV = PY

    M = quantity of money;
    V = velocity of circulation of money;
    P = average price of the transactions, and
    Y = the volume of all transactions that
    enter into the value of national income (goods and services),

    then the only really effective way to stabilise M (conceived as the broad money stock) and V is fiscal policy, not merely monetary policy.

    Since the broad money stock is endogenous, its expansion and contraction is largely driven by the dynamics of private debt issued by banks. If M is contracted by deleveraging, and if the private sector is already overloaded with debt (as in the 1930s, Japan in the 1990s, or America and other nations in the 2010s), businesses will not take on significantly new levels of debt, and consumers are unlikely to either.

    If one increases the excess reserves of banks to a great extent, these reserves will not get injected into the economy in significant flows to increase investment or spending.
    The new monetarism has a flawed understanding of money supply, and relies on the money multiplier myth.

    It is government spending that will be the only reliable way of stabilising GDP.

    "If Mervyn King, bought billions in private bonds across the UK, and held them to maturity without demanding payment from debtors, wouldn't this have an effect on AD?"

    No doubt it would affect AD. But correct if I am wrong, but QE in the UK has merely bought government bonds, not private sector financial assets.

    The UK government bond buying program saved the financial system and added liquidity, but has not stimulated AD to anywhere near the extent imagined by New Monetarists.

    QE is simply an weak way of stimulating AD.

    The case of Japan's QE proved this.

    1. Correction:

      "The new monetarism is flawed by its focus on monetary policy alone."

    2. Uk has bought private bonds. But it is a tiny market in the uk, and the central bank has been unable to purchase any quantity without seriously affecting the price.

      If you continue at that level then all you are doing is making fiscal distributions to people who want to sell various assets.

      That then begs the question whether that is a fair way to spend the governments money.

    3. "Uk has bought private bonds. "

      I stand corrected - thank you, Neil.

      But what was the extent of this program: what types of private sector financial assets were bought and in what quantities?

    4. LK,

      The eligibility criteria is here:

      Corporate bond purchase results are here:

      The amounts though are tiny as you can see from the summary

  8. Jan said: Milton Friedman´s whole methodology and his result was critised early by many,highly reputably economist.Not only Cambridge keynsians as Nicholas Kaldor,Joan Robinson also many americans like James Tobin,Robert Solow and Paul Samuelson was critical on many levels of Friedman´s work.
    Friedman argued that only the evidence, not the plausibility of the assumptions, should decide about the validity of a theory. He used to say that "assumptions don't matter". In fact, he preferred theories with seemingly unrealistic assumptions - an attitude that Paul Krugman desribe in Peddling Prosperity in this way: "I think it is fair to say that up until the late 1960s Friedman and his followers, while influential, were regarded by many of their colleagues as faintly disreputable." economics professor Edward Herman,writes in Triumph of the Market (1995), p. 36. that "Friedman's methodology in attempting to prove his models have set a new standard in opportunism, manipulation, and the abuse of scientific method."

    Paul Diesing points out in his valuable article 'Hypothesis Testing and Data InterpretationHypothesis Testing and Data Interpretation: The Case of Milton Friedman," Research in the History of Economic Thought and Methodology, vol. 3, pp. 61-69.: The Case of Milton Friedman that Friedman "tests" hypotheses by methods that never allow their refutation.
    Diesing lists six "tactics" of adjustment employed by Friedman in connection with testing the permanent income (PI) hypothesis:
    1. If raw or adjusted data are consistent with PI, he reports them as confirmation of PI
    2. If the fit with expectations is moderate, he exaggerates the fit.
    3. If particular data points or groups differ from the predicted regression, he invents ad hoc explanations for the divergence.
    4. If a whole set of data disagree with predictions, adjust them until they do agree.
    5. If no plausible adjustment suggests itself, reject the data as unreliable.
    6. If data adjustment or rejection are not feasible, express puzzlement. 'I have not been able to construct any plausible explanation for the discrepancy'..."
    In a proposed Op Ed column written in 1990, Elton Rayack pointed out the interesting fact that while Friedman's models did well in retrospective fitting to historic data, where the Friedman testing methods could be employed, they were abysmal in forecasts, where "adjustments" could not be made. Rayack reviewed eleven forecasts of price, interest rate, and output changes made by Friedman during the 1980s, as reported in the press. Only one of the eleven was on the mark, a not-so-great batting average of .092; "not enough to earn a plaque in baseball's Hall of Fame, but evidently quite adequate to qualify [Friedman] as an economic guru." The guru was, however, protected by the mainstream media; Rayack's piece was rejected by both the New York Times and Wall Street Journal. We may conclude that Friedman's truly pathbreaking innovation as an economist has been in the art of what is called "massaging the data" to arrive at preferred conclusions. This innovation has been extended further by other members of the Chicago School.