------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (February 2005)
Robert Leeson, _Keynes, Chicago and Friedman_. London: Pickering &
Chatto, 2003. xi + 381 pp. and vii + 534 pp. $325 (cloth), ISBN:
1-85196-767-2.
Reviewed for EH.NET by Warren J. Samuels, Department of Economics,
Michigan State University.
I. The Controversy and its Possible Resolution Was there a "Chicago"
Quantity-Theory oral tradition, or not; and if so, what was it?
Robert Leeson, of Murdoch University, has collected some fifty
contributions to a narrow but intriguing topic in the history of the
Chicago School and monetary economics: whether or not, prior to
Milton Friedman's publication in 1956 of his restatement of the
quantity theory, there had been (as he claimed) an oral tradition at
the University of Chicago of the quantity theory; and, if there was,
of what did it consist? Friedman attributed to that oral tradition a
model in which the quantity theory was "in the first instance" (vol.
1, p. 1, Leeson quoting Friedman) a theory of the demand for money;
indeed, a stable demand for money. Friedman claimed that the
tradition was spawned by Henry Simons and Lloyd Mints directly and by
Frank Knight and Jacob Viner at one remove. Thirteen years later, Don
Patinkin questioned the validity of Friedman's interpretation of the
quantity theory and his "Chicago" version (vol. 1, p. 87). Patinkin
identified "The Other Chicago" version thusly: "The quantity theory
is, first and foremost, not a theory of the demand for money, but a
theory which relates the quantity of money (M) to the aggregate
demand for goods and services (MV), and thence to the price level (P)
and/or level of output (T); all this in accordance with Fisher's
MV=PT" (vol. 1, pp. 89, 91). After a further twenty-two years
Patinkin held that the disagreement was not about "whether or not
there was such an oral tradition, but what the nature of that
tradition was" (vol. 1, p. 381). Friedman also has modified his
position.
Leeson has gathered the important material pertinent to the questions
about the Chicago "oral tradition." He has mastered both that
material and the intellectual environment in which the controversy
took place, an environment dominated by Keynes's _General Theory_. Of
the two volumes' total of 915 pages, some 180-plus pages contain
Leeson's essays on the contents of his four parts: The Initial
Controversy, The Debate Widens, How Unique was the Chicago
Tradition?, and Towards a Resolution of the Dispute. What does Leeson
conclude?
Leeson places a great deal of interpretive weight on Friedman having
taken Mints's graduate course in money and banking (Economics 330)
during his first year as a graduate student at Chicago in 1932-33.
Leeson has been fortunate in having been given access by Friedman to
his notes from Mints's Economics 330. Leeson notes that "Friedman's
lecture notes are currently in his possession and have not been
processed into his archives at the Hoover Institution" (vol. 2,
p.515n.1). The next important round may well center on the notes. The
course was organized around Keynes's _Treatise_, one feature of which
was "an increased emphasis on money demand in a revised quantity
theory framework" (vol. 2, p. 486).
Additional interpretive weight is placed by Leeson on a private
seminar held by graduate students; quite a group, for they included
Friedman, Albert G. Hart, George Stigler, Allen Wallis, Kenneth
Boulding, and others, as well as a stream of visiting economists.
Leeson concludes:
It therefore seems likely that Friedman took the ideas he was exposed
to in Economics 330 and used them as an organising framework with
which to understand the 'macroeconomic' dislocation of the 1930s. If
intense student discussion is admissible as an 'oral tradition' then
Friedman's assertion has some validity. A version of the quantity
theory which was 'in the first instance a theory of the demand for
money' was apparently 'a central and vigorous part of the oral
tradition' at Chicago at least among graduate students in 1932-3 (and
possibly until the _General Theory_ made Keynes a suspect figure).
(Vol. 2, p. 488)
One difficulty with Friedman's initial position has to do with the
concept of an "oral tradition." Friedman was part of the 1932-33 (and
beyond) discussion; the "oral" part of the concept is
unobjectionable. But the "tradition" part is highly suspect, on which
more below.
A second difficulty is that many different readings were given the
_Treatise_ (not unlike the later _General Theory_), each reading
stressing different combinations of variations within a general
quantity theory framework. This meant, on the one hand, that a
variety of oral "traditions" likely co-existed throughout the
discipline and, on the other hand, that some or many of them included
significant attention to the demand for money. Leeson stresses the
latter: "Friedman's initial assertion about Chicago uniqueness in
this context must now appear unreliable. ... It is therefore
improbable that the _Treatise_ -- with its emphasis on money demand
-- informed 'macroeconomic' discussions in Chicago only. Indeed,
Friedman in the preface to these volumes has retreated from his
initial assertion about Chicago uniqueness" (vol. 2, pp. 488, 489).
In his preface, Friedman begins his defense saying that he early "was
baffled ... at what all the fuss was about. ... very little was at
stake." He then takes, correctly but irrelevantly, the position that
if he has been "confused about the origin of the ideas ... it would
not affect by an iota the validity or usefulness of those ideas." He
concludes that he remains "persuaded that I was the beneficiary of a
Chicago oral tradition, but this evidence convinces me that I gave
Chicago more credit for uniqueness than was justified. "The issue,"
he repeats, "is entirely about the origin of ideas, not about the
validity of content" (vol. 1, p. x). Friedman seems to have taken too
much for granted; Chicago was no more homogeneous than was the
discipline as a whole on the quantity theory.
Leeson is claiming, therefore, only that Friedman's assertion had
"some" validity -- in the sense that much "macroeconomic" discussion
at Chicago and elsewhere in the early 1930s resembled his 1956
restatement, that "tradition" is too strong, and the uniqueness claim
is wrong and must be dropped.
II. Historiographical Considerations
The collection bears on several historiographical considerations.
1. The historical record is uneven. Political history leaves many
documents. Social and economic history, until relatively recently,
left few lasting markers, but often sufficient indirect evidence to
enable imaginative scholars to intuit larger patterns. With only
sparse materials bearing on an interpretive problem, historians of
thought and others may well find it easy to leap to conclusions. But
where one has a vast body of evidence, such leaps seem presumptuous.
With sparseness, the world may seem simpler than it actually was;
with plentitude, the big, bloomin' confusion is amply evident. So it
is with the problem of the Chicago "oral tradition."
The existence and content of an "oral tradition" plus our ability to
discern them are highly problematical. Until very recently, as
historical time goes, the technology to record oral communication did
not exist. Even now, absent mechanical recording, the oral, once
uttered, no longer endures (_vide_ Adam Smith on unproductive labor).
One result is false and/or biased memory.
Clarence E. Ayres, a long-time friend of Frank Knight, was like
Knight an imposing and convincing lecturer. It turns out that
institutionalists trained by Ayres had different views of
institutionalist doctrine (such as the so-called Veblen-Ayres
dichotomy) depending on when they sat in Ayres's classes. There was
an oral tradition at Texas centering on Ayres, but for that reason it
registered important variations over time. I would expect the same at
Chicago, the notable difference being that Friedman, Stigler et alia
were more successful.
2. Schools of thought, one surmises, once were loosely and partly
non-deliberately and partly deliberately formed. As schools became
obvious vehicles for promoting ideas and reputations, they became
more highly, if still loosely, organized. Friedman and Stigler, as
part of their professional activity, engaged in the role of
cheerleader for "Chicago." Friedman's claim may well have been an
example of the Chicago propensity to promote itself by
self-publicizing its beliefs. Stigler was the premier practitioner
but rare is the public presentation -- e.g., papers given at
professional meetings -- by a Chicagoan that does not make some claim
for the unique brilliance of the Chicago point of view. Leeson aptly
quotes Stigler "that it was both 'true, and necessary to their
survival' that 'learned bodies are each run by a self-perpetuating
inner clique'" (Leeson, vol. 1, p. 296). The twin objectives were the
promotion of ideas, a certain definition of reality with which to
influence policy; and the quest for power in both the economics
profession and the larger world. Such constitutes the deliberate
invention of tradition, and the members of the Chicago School have
much company, in the world of academic public relations, in
constructing suitable advertisements for themselves and their ideas.
With the Chicago School on the cutting edge of theoretical
development, such promotion is to be expected.
When it comes, therefore, to "Friedman's motives" -- I would prefer
"style" -- Leeson opines that "If his 'Restatement' [of the quantity
theory] exaggerated the degree of continuity with respect to earlier
Chicago versions of the quantity theory this may have been a
rhetorical flourish designed to provide an additional motivational
stimulus to his students" (vol. 2, p. 490). True enough, as far as it
goes; Leeson has gone further (Leeson 2000a and 2003, both dealing
with Friedman's and Stigler's struggle for influence). The
Stigler-Friedman strategy was directed not only to motivate students
but to influence the discipline of economics and its world of policy.
That Keynes and others also practiced this strategy (vol. 2, p. 491),
enables us to identify and put it into perspective.
Moreover, Friedman's methodological position served the purpose of
erecting his economic theory, here his monetary theory, as the
maintained hypothesis under the guise of "predictive power."
In any event, the quantity theory in any form is no substitute for a
comprehensive macroeconomics. There is more to history of the
quantity theory than the price level as a function of either the
supply of money or the demand for money. There also are several
different "monetary theories of production." There is less to the
quantity theory than its devotees often would have us believe. The
quantity theory is not alone in deriving its attractiveness from its
utility for mobilizing political psychology.
3. Significant differences existed over what is "absolute truth" in
monetary economics, whether such existed, and if it did, what it was;
over the relative weight to be given to inflation and unemployment as
policy goals; over what is "sound" or "proper" monetary policy; and
the evaluation of current policies and current events.
Some authors treated the quantity theory as a matter of causal
relation and explanation, often differing as to the content and
direction of explanation, whereas others saw it as a truism, identity
or tautology.
The epistemological nature of much discussion of the quantity theory
was mixed. Some of it was theory as hypothesis. Some was comprised of
declarative statements without supporting evidence or with carefully
constructed evidence. Who is to say which version of the quantity
theory is correct? Is there one correct version? What are the
criteria of correctness -- and the meta-criteria by which to chose
from among the criteria, et seq.?
These questions are difficult to answer, for two reasons. First,
consider W. H. Hutt's distinctions between "rational-thought,"
"custom-thought," and "power-thought." "Rational-thought" is
disinterested objective inquiry leading to the accumulation of
undisputed social-science knowledge (once class-driven ideology has
been removed). "Custom-thought" is modes of thinking infused with
implicit premises derived from tradition and customary ways of doing
and looking at things. "Power-thought" is modes of thought and
expression that are constructed to influence power, politics, and
policy, through their service in psycho-political mobilization (Hutt
1990, p. 3 and passim). All three types of thought, especially the
latter two, are found in the literature collected by Leeson. Second,
inasmuch as no theory, or no version of a theory, can cover all
pertinent variables and answer all our questions, correctness by any
definition is elusive -- especially when various versions of the
quantity theory have been adopted to weaken if not destroy the
targeted opponent, Keynesian economics. Here, power and persuasion
rank well above scientificity (amply developed in Leeson 2000a and
2003).
Economic arguments are used to manipulate political psychology and
political psychology is used to manipulate economic policy. Ideology
and wishful thinking have relatively easy entry, especially for
economists and politicians who favor creation of a certain felicitous
picture in the public's mind as part of the process of
creating/manipulating public opinion.
Monetary theory and policy (like many other fields in economics) were
characterized by over-intellectualization and economic politics,
treated as if conducted cognitively and in sterile environments,
whereas they existed in a real world of power play, selective
perception, psychology, uncertainty, the quest for wealth and
prestige, and efforts to influence the economic role of government.
Monetary policy is a function of power, ideology, tradeoffs, power
play over the distributions of opportunity, income and wealth. Each
model of monetary theory was more or less attractive to particular
ideologies and invoked as a weapon in support of policies based on
ideology, practical politics, etc.
III. How Different Versions of the Quantity Theory Could Exist
The question of the existence of a Chicago oral tradition and its
possible content must confront the variety of forms given the
quantity theory. Many individual quantity theorists had their own
positions to advance; they had different perspectives, and monetary
theory comprised many different considerations on which their
different, and changing, perspectives could be brought to bear.
Quantity-theory formulations could vary among theorists and each was
nested in a larger and variegated model of the money economy. It is
impossible to cover all this in a short review but at least the
following can be said in abbreviated form.
Sophisticated versions of the quantity theory were possible but
because of the vast number of possible complications, advocates were
often interested in simple versions easily discussed and taught. The
quest for singular explanations of macroeconomic phenomena -- real
balance effects, sticky or inflexible prices, etc. -- was also
relevant. Notice the phrases "in the first instance" (Friedman) and
"first and foremost" (Patinkin). What, if anything, comes afterward?
The problem is, in part, that economists tend to adopt the simplest
and most highly stylized versions of their theories, often
caricatures of the sophisticated versions held by at least some
leading theorists. Advocates were either unaware of the magnitude of
possible complications or had their perception thereof narrowed
and/or finessed by ideologically driven a priori beliefs, and so on.
The quantity theory exhibited highly variegated content. The quantity
theory was ubiquitous. One formulation or another constituted the
core of what most individual economists seem to have understood as
monetary theory. While the quantity theory was its most conspicuous
component, monetary theory included more than the quantity theory.
Disagreements centered in part on different versions of the quantity
theory using different elements of monetary theory. Ralph Hawtrey's
pure monetary theory of the business cycle had widespread impact for
many years. Dennis Robertson, Irving Fisher, John H. Williams, Alfred
Marshall, and pre-_General Theory_ John Maynard Keynes, among others,
were more conspicuous than any Chicagoan -- with the exception of
James Laurence Laughlin, who opposed the quantity theory.
It took centuries for the Fisherian and Cambridge versions of the
quantity theory to become increasingly the analytical norm. Neither
version emerged fully grown. When velocity of circulation (V) is
used, attention is drawn to such technical matters as the facility
with which the banking system transfers balances between accounts.
When 1/K is substituted for V in Fisher's version, it both resulted
from and reinforced attention to the reasons for holding money. What
looked to some to involve only a mathematical change, for others now
meant that attention was directed to the reasons why people might
want to hold money. What we now call real balances (or real balance
effect) or liquidity preference was long appreciated and treated as
hoarding.
The money economy could be examined in pure abstract terms,
independent of monetary, banking and other financial institutions, or
with an emphasis on the institutions that helped form and operated
through the money economy. Significant disagreements existed as to
the nature and substance of fundamental monetary and other
macroeconomic processes, the nature and origin of actual monetary and
macroeconomic problems, and the solutions to those problems.
Considerable confusion results from some economists' claims that
their agenda for government monetary/macroeconomic policy constitutes
non-interventionism whereas all other agendas are interventionist.
Major controversies were waged over what is money, the monetary
standard, the role of reserves, what commercial banks do, the nature
and role of a central bank; fractional reserves and the money
multiplier; the Cambridge cash-balance approach, Wicksell's monetary
theory, and so on.
Some work postulated the economy to be fundamentally stable (e.g.,
through great weight given to Say's Law); others postulated
particular combinations of quantity-theory and business-cycle models.
Changes in M could be deemed to affect only changes in P and nominal
Y (i.e., T). Changes in Y (or T) could be seen as leading to changes
in M and thence in P; or changes in Y (or T) could be seen as leading
to changes in P and thence in M. Different supplementary assumptions
might lead to changes in the direction of flows of causation or
influence. Especially critical was whether an increase in Y (or T)
was possible: whereas an increase in M and thence P could lead to an
increase in Y (or T) at less than full employment, at full employment
an engineered increase in M could not lead to an increase in real Y
(or real T).
Much work seemed directly or indirectly influenced by monetary and
banking arrangements existing within some form of gold standard. A
monetary system predicated upon gold meant that changes in either
gold or money meant a change in the other and in the price level.
Currency and credit could be treated differently (as was done by
Fisher, for example), influenced by differences in view of specie,
paper and bank balances.
The relation of reserves to M could vary, as could the money
multiplier, reasons for holding money or spending on consumer and/or
capital goods, the respective roles of commercial banks and central
banks (including targets), the relation of interest rates to the
quantity theory variables, neutral versus non-neutral money, and so
on.
Friedmanian monetarism -- to the extent it can be meaningfully
generalized -- proposed that the private sector is stable, or would
be stable in the absence of monetary and fiscal policy; that changes
in the supply of money, vis-a-vis a stable demand for money
(expectable in a stable economy) lead to changes in the interest rate
and, especially, the price level; that changes in the supply of money
generate changes in spending; that prices are generally flexible; and
that vis-a-vis all other factors only money matters or money matters
most (hard versus soft monetarism). The Keynesian fiscalist
alternative -- to the extent it too can be meaningfully generalized
-- proposes that the private sector is unstable, and that government
can reinforce this instability, introduce its own instability, or
counter instability; that changes in spending are governed by more
than changes in the supply of money; that changes in the supply of
money are the consequence, not the cause, of changes in spending --
in part, the supply of money is a function of the demand for money;
prices are generally inflexible; inflation is largely or typically a
function of aggregate demand increasing beyond the full employment
level; that increases in the supply of money can generate inflation
but changes in the supply of money are not the critical factor
governing changes in spending; that price-level instability is not
the only monetary/macroeconomic problem, because full employment is
not guaranteed and the supply of money is key to neither the price
level nor the level of real income.
In addition, the two schools -- monetarism and fiscalism -- identify
different transmission processes applicable to changes in the supply
of money leading to increased spending. The fiscalist argues that
increases in the supply of money are endogenous, resulting from
increases in the demand for money by borrowers in order to spend
more, and that the increases in the supply of money limit increases
in interest rates (generated by the increased demand for money) and
thereby increases investment and income. The monetarist argues that
increases in the supply of money are exogenous (generated by the
central bank), leading to excess money balances which leads to
greater spending, to return monetary balances to desired levels. The
differences turn on whether the increases in the supply of money are
endogenous or exogenous, whether the increased supply of money is
felt through the lowering of the interest rate or the creation of
excess balances, and whether a stable economy and a stable demand for
money is a suitable or a utopian premise.
Furthermore, modeling the demand for money is no simple matter. Even
putting aside (and there is no conclusive reason to do so) the
fiscalist-Keynesian model of transaction, speculative and
precautionary motives, the monetarist demand for money has been
modeled differently by different people and even by Friedman himself.
The demand for money most generally is said to be a function of
permanent income, wealth, price level, expected rate of inflation,
and liquidity preference; more narrowing, it is a function of
permanent income, wealth, and price level, all felt by Friedman to be
relatively stable in the short run (i.e., if the economy is left to
run well on its own), plus the interest rate.
Anyone not permanently wedded to either monetarism or fiscalism
likely might consider a much more complex interplay of monetary and
spending variables and relationships, including structural and
expectational factors. Keynesian fiscalism is likely more capable of
encompassing a wider range of variables than is the quantity theory.
A major point, however, is that there are a multitude of possible
complex interplays of all such variables, relationships and factors.
An even more important general point is that all of the foregoing
constitutes the social construction of economic theory. The argument
over the content of the Chicago oral tradition is part of that
process. Only in part is the argument a controversy about the actual
economy. It is primarily, albeit not solely, a quest for a theory
with which to successfully challenge Keynes and fiscalist economics
and its policies. In very large part, the argument is about the
control of government policy. It is the quest to define and then to
enlist a Huttian custom-thought in the service of a Huttian
power-thought. The quest for power and control over policy thus
drives economic theory (a quest that pervades Friedman's work; see
Samuels 2000; Leeson 2000a and 2003).
The question thus arises as to whether the quantity theory -- in
whatever form -- is itself (1) a definition of economic reality, (2)
a tool of analysis with which to investigate economic reality or (3)
an instrument of rhetoric with which to mobilize and manipulate
political psychology. For example, Leeson says that James W. Angell
(who taught Friedman monetary theory at Columbia) "used the quantity
theory to advance the proposition that the principal cause of
unemployment was 'excessive variations in the volume of bank credit.'
Angell also prefaced his analysis with a statement about his
preference for 'planned economies ...'" (vol. 1, p. 290). Economists
of my generation will recall how Samuelson and Friedman, in their
televised debates in the 1960s, each invoked aggregate demand and the
supply of money; but Samuelson had changes in aggregate spending
drive changes in the supply of money, whereas Friedman had changes in
the supply of money drive changes in aggregate spending. More is at
stake than a conflict about direction of causal flow, just as when
advocates of both under-consumption and over-investment theories of
the business cycle pointed to the same data to prove their case:
unsold goods.
Perusal of several standard reference works confirms the foregoing
argument that the quantity theory is not something given but a matter
of social construction, a work in progress, and thus characterized by
multiple specifications and interpretations. The entry in the _Elgar
Companion to Classical Economics_ indeed opens with the caution
One of the conclusions drawn by Hugo Hegeland ... from his
thoroughgoing study of the historical development and interpretation
of the quantity theory of money was that "the interpretation of the
quantity theory shows almost as many variations as the number of its
interpreters." This assertion is hardly an exaggeration and even
after half a century of further intensive research in this field it
is probably as valid now as then. ... the theory is like a chameleon.
From the outset writers on the subject have understood [the] quantity
theory of money to mean sometimes very different things ..." (Rieter
1998, p. 230)
Why should the Chicago tradition, oral or otherwise, be different?
The opening of the entry in the _Penguin Dictionary of Economics_
asserts that the theory states the relationship between the quantity
of money and the price level. The entry goes on to mark the
importance of what is or is not assumed, and says of Friedman that
the theories of the demand for money, "based on a quantity theory of
money approach, do not differ a great deal from the theories based on
the Keynesian framework" (Bannock, Baxter and Rees 1972, p. 339). Is
the Chicago tradition, a la Friedman, different (from Keynesian
treatments)?
The _Routledge Dictionary of Economics_ has Friedman reviving
"interest in the [quantity] theory by expounding it as a theory of
demand for real balances" (Rutherford 1995, p. 379). The _MIT
Dictionary of Modern Economics_ has the theory be one of the demand
for money, saying that it "formed the most important component of
macroeconomic analysis before Keynes' _General Theory_ ..." (Pearce
1992, p. 356).
A careful reading of all the cited reference works will reveal
different positions on whether full employment is an assumption or a
conclusion, what else has to be assumed, and so on.
At least one reference work indicates how far the rationality
assumption has come in monetary theory: "The underlying premise of
the basic quantity theory is that no rational person holds money
idle, for it produces nothing and yields no satisfaction," adding
some pages later, "that is, people demand money only for transaction
purposes" (Johnson, Ley and Cate 1997, pp. 518, 525). These authors
also write that "In the area of policy it would be easy to exaggerate
the differences between the Keynesian and monetarist positions. ...
However, in general, the notion of policy ineffectiveness as
elaborated and expanded over the past 30 years by Friedman and others
may represent the monetarists' greatest challenge to the Keynesian
heritage. For good or ill, it is an opinion which has come to enjoy
considerable support. Moreover, whether monetarism and the modified
quantity theory represents a theory of money at all, or a monetary
theory of trade and the business cycle, is an open question, one that
in part depends on one's macroeconomic perspective, of which they are
certainly a number in fashion" (idem, p. 525). The Chicago tradition,
oral or otherwise, is not alone in its attitude of pushing its
perspective.
This book must be read, therefore, with cognizance of its elusive
background. If a reader is tempted to agree with some statement made
by an author included in Leeson's collection, that reader must ask,
on what narrowing premise(s) does this statement rest? The
hermeneutic circle is involved between orienting perspective and
conclusionary position. However, I am also convinced that my
stricture about the hermeneutic circle is and must be
self-referential.
IV. A Contribution to the Resolution of the Dispute
Mints was not the only instructor in Economics 330. In volume 23-C
(2005) of _Research in the History of Economic Thought and
Methodology_, I am publishing F. Taylor Ostrander's notes from
Charles O. Hardy's course in Economics 330 given in 1933-34, the next
academic year following Friedman's enrollment in Mints's course. The
notes indicate that Hardy discussed the work of Hawtrey, Frederic
Benham, Fisher, Keynes and Laughlin and suggest that the demand for
money was part of the course but by no means as central as the notion
of an oral tradition centering on the demand for money would have it
be.
At the time Hardy taught the course taken by Ostrander during
1933-34, Friedman was a fellow student, and monetary economics was
represented by Melchior Palyi and Lloyd Mints as well as Simon, Viner
and Knight, in addition to Hardy. Hardy was clearly a leading student
of monetary policy. Though apparently not regarded as a leading
monetary theorist, he evidently knew his theory, as he easily
grounded policy in theory and was respected for his contributions to
policy analysis.[1] Each of the Chicago economists specializing, at
least in part, in monetary economics went his own way, concentrating
on some combination of what interested them and what they considered
important. Peering over all their shoulders was the well-known
anti-quantity theory orientation of the long-time chair of the
Department of Economics, Laughlin.
Among Ostrander's notes are the following statements:
* The quantity theory is a truism ...
* For Fisher -- V was fixed, any change in M forces a corresponding
change in P.
* T being unchanged -- the habits of the people with respect to the
money they will hold being unchanged -- the Keynes formula is
convertible into the Fisher formula.
* Hardy has a preference for a commodity standard, but can not find a
suitable commodity. - Even such a commodity theory would not
invalidate the Quantity Theory. - Laughlin's doctrine is essentially
that of the 19th century English "Banking School;" the Quantity
Theory is that of the "Currency School."
The following are Ostrander's notes bearing on the demand for money:
Problem of the Value of Money
* Money defined by means of its functions
- Classical theory emphasized _medium of exchange_ -- brings up
_turnover_. But if exchange were always instantaneous, there would
not be much need for money -- it is not instantaneous.
* Thus the function of money as a _store of value_.
- _Suspended purchasing power_.
- Where the real _demand for money_ comes from.
* The classical approach does not allow of any good connection
between _value theory_ and _monetary theory_.
- Distinction between this use of money and _hoarding_ is only one of
degree. [In margin: "?"]
...
Big changes in prices over short periods are _never_ the result of
changes in the supply of money or the supply of goods -- but of
changes in the _demand_ for money (or goods).
The _prospect_ of a _decline_ in _value_ of money does not of itself
overcome the desirability of money as a _liquid_ factor in unsettled
conditions.
* Liquidity attained by holding goods -- expecting price rise --
attained by holding money -- expecting price fall.
- Why is it that people are still speculating on a price fall? The
issue is whether the strongest government in the world is strong
enough to devaluate its own currency.
* Governments can raise prices by issuing _greenbacks_ or by issuing _bonds_.
- [Greenbacks] may be held as an investment -- hoarded - no change in prices.
- Bonds may be held as investment-no change in prices.
- I.e., both bonds or money may be spent, and may be held as
investment -- only difference between gold and bonds is one of degree.
...
- Keynes assumes hoards to be unchanged if the _demand schedule_ for
hoarding remains unchanged. (Hardy, Hayek, Robertson had assumed the
_quantity_ of hoards to be unchanged.)
- Thus there is a change in velocity.
...
This is Wicksell's theory. Keynes enlarges it, saying it would be
true only in a barter economy. In a monetary economy, there are 3
variables. The willingness to save, the willingness to borrow to
produce new capital, the relative attractiveness, as a store of
value, of monetary funds and of other investments.
* Savings made by purchase of new securities, or hoarding.
* Investment made by borrowing from investors, or drawing on investors' hoards.
- Equilibrium requires I = S, also -- demand for cash balances to be
in equilibrium to [sic: with] demand for securities.
Economics 330 was not the only monetary course given at Chicago.
Taylor Ostrander also took Economics 332, Monetary Theory, from
Melchior Palyi during his year in residence at Chicago. His notes
from the class are published in Archival Supplement 23-B (2005).
Among conclusions stated in my introductory comments are these:
One facet of the lectures is Palyi's general attitude toward the
quantity theory, indeed substantially all monetary theory, as a
theory of control. The aspect of quantity theory discussion that
loomed so large, namely, automaticity, especially after World War
Two, when the quantity theory (properly applied) was lauded as the
non-interventionist alternative to Keynesian fiscal and monetary
policy, is subdued, but not altogether absent.
Another is the evident variety of ways in which the quantity theory
was operationalized, i.e., how M, V, and T were conceptualized and
handled. This also contrasts somewhat with post-War usage, when the
policy choices, hence exercise of control, latent in the different
versions would have been conspicuous -- though eclipsed by the lauded
automaticity, even though conservatives like Frank Knight pointed out
the inevitable non-automatic, non-rule, elements of administering the
quantity theory.
Among other things we read that the quantity theory was
* A form of approach to supply such as set forth by Bodin and Davenant.
* Value of money not a function of demand, but of factors such as
velocity, interest rate, or, if ruled by demand, then demand is ruled
by something else.
More recently came
* Marshall, Fisher [indecipherable words]
- Renewed the old control approach, and united it with the
Neo-Nominalist approach.
- Then came in Keynes, Robertson, Pigou, Fisher.
* Velocity stressed -- (l'enfant terrible of previous monetary
theory) becomes center of interest.
- Reformulation of quantity theory in light of Velocity.
- Dozens of reformulations due to differ concepts of velocity.
- Changes in it, measurement, causes.
* Does velocity have a life of its own -- or is it a function of
other things, or a constant.
* Most difficult to approach from statistical, descriptive or
theoretical points of view.
Earlier
* The old quantity theory approach looked to money and goods (asked
or assumed which is variable which is independent).
* The new quantity theory looks to the ratio of savings and investment.
- First appeared in a paper of Jevons, in [18]70's.
Generally,
Two types of Quantity Theory:
(1) Mere functional relationship; algebraic
* A formal expression for the demand for money (Pigou).
* On one side is money, on the other side is the physical aspect --
no causal explanation. [Single vertical line alongside in margin from
(1) to here]
- Banking School -- there can not be an excess or deficiency of
money. Price level is influenced by physical side only.
(2) An explanation of the cause of exchange.
On the demand for money, we find the following:
_The demand for money_.
* The "Banking School" of Thought -- but underlies the "Currency
School" too -- the difference between them is on another line.
* The _velocity_ of circulation is a _passive_ factor, or a
non-changing factor.
* Cost of production theory of value of metals, and of money generally.
* In case of paper money, it substitutes some _psychological_ factor
for quantity -- or considers quantitative changes a result of
psychology.
* Policy of this approach is "sound banking based on commercial
paper" --"automatic control."
This approach is more developed by businessmen than by scientists.
* Men of _not-systematic_ methods, bankers.
- _Tooke_ -- descriptive, not abstract.
- _Adolph Wagner_ (Germany)
- _Laughlin_ (U.S.) -- never _tried_ to be systematic. ["!" to left of name]
This approach became that of the 19th century up to the War.
* In spite of Marshall and others.
* Bankers and Central Bankers wouldn't listen to any others.
* Keynes (Indian Monetary Policy -- 1912)
* Robertson (Industrial Fluctuation, 1915) [Bracket connects the two
lines, Keynes and Robertson, with arrow pointing to next line.]
- Both, at this early date, had tendencies more to the
anti-quantitative than to quantitative approach. - Mill -- could
approach the transfer problem from an entirely different point of
view from his approach to bank credit -- foolish.
Writing about the Banking School,
* Money a matter of quantity which can be regulated by control of its
quantity by issue.
- By affecting demand for money by:
- Discount rate
- Open market operations
- Public works (governments).
As for Adam Smith,
* Implies (by not discussing it) a constant elasticity of demand for money.
We also read
* In the single country, value of money is based on interaction of
supply of and demand for money.
There is more but altogether what is shown (1) indicates more or less
conventional attention to the quantity theory as the core of monetary
theory and (2) does not indicate a distinctive Chicago approach
centering on the demand for money, a claim no one now seems to be
making. The earlier negative position of Laughlin has fallen prey to
the selective memory of any oral tradition (Friedman wrote the entry
on Laughlin for _The New Palgrave_). Laughlin, who opposed the
quantity theory, was chair of the Department of Economics for many
years and was a conspicuous person in the profession. Any complete
rendition of Chicago "tradition" presumably would have to include his
anti-quantity theory position. Perhaps he was an embarrassment
treated largely in silence. Mints may or may not deal with his view;
Palyi seems to deal with it only in passing. And Friedman seems not
to, as well. He is too busy inventing what he wants that tradition to
be.
In partial summary, therefore, Leeson is correct that no oral
tradition existed at Chicago by 1932-33 with the substance initially
identified by Friedman. If one clearly existed (and it is not certain
that one did), it likely was different from and more complex, and
likely more ambiguous, than what Friedman proposed. And surely the
conversation of one year's graduate students, by itself, is no "oral
tradition." As Leeson shows, they most certainly did not all agree on
issues, though this was the framework that they, and Mints,
apparently employed to inform their arguments. Graduate students
discussed "macroeconomic" issues using a framework that was in some
ways similar to Friedman's 1956 restatement. Friedman's assertion
only has "some validity" if "intense student discussion is admissible
as an 'oral tradition'..." Friedman's assertion has more validity
than Patinkin gave it credit for, but calling it a "tradition" vastly
overstates the case (see Leeson 2000b). Both Friedman and Patinkin
exaggerated their case. Friedman was a polemicist who sought
influence; Patinkin was an historian whose framework was losing
influence. There was an element of justification for Friedman's
assertion -- he had not invented it in the 1950s, as some detractors
suggested. "Traditions" are potent rhetorical devices, and Friedman
sought to make the most of this rhetorical device to serve his
counter-revolution.
Note:
1. Robert Dimand comments in re Hardy as follows: "With regard to F.
Taylor Ostrander's notes on Charles O. Hardy's lectures in Economics
330 (graduate money and banking) in 1933-34, I suspect that Hardy
(whose maintained a Chicago connection even though he was primarily
at Brookings) was central to bringing Keynes's _Treatise on Money_
into Chicago monetary economics. Hardy reviewed the first volume of
Keynes (1930) in _AER_ (1931) and wrote a review-article in _JPE_
(1931) about the second volume. Hardy was a particularly enthusiastic
and perceptive reviewer of _TM_ (perceptive enough that his
enthusiasm did not extend to the "fundamental equations"), so if
demand for money entered Chicago monetary economics from _TM_,
Hardy's lectures may well have been the conduit. In addition, Keynes
had expounded the central message of _TM_ at the University of
Chicago in three Harris Foundation Lectures on "Economic Analysis of
Unemployment" in May and June 1931.Chicago was not isolated from such
British developments: Sir William Beveridge presented what became
Part II of his _Unemployment: A Problem of Industry, 1909 and 1930_
(1930) as a series of lectures at the University of Chicago in autumn
1929."
Dimand continues, saying, "Another stimulus at that time would have
been Irving Fisher's _Theory of Interest_ (1930). Hardy's review of
_TM_ chided Keynes for misunderstanding Fisher's real/nominal
interest distinction, and Frank Knight's 1931 _JPE_ review-article
shows that Fisher (1930) received attention at Chicago (although
Knight concentrated on Fisher's real rate analysis). McCallum and
Goodfriend, in their _New Palgrave_ article on money demand, identify
(as Patinkin did) Fisher (1930, p. 216) as the first unambiguously
correct statement of the marginal opportunity cost of holding money."
(Dimand to Samuels, January 13, 2005)
References:
Graham Bannock, R. E. Baxter, and R. Rees, 1972. _The Penguin
Dictionary of Economics_, Hamondsworth, pp. 338-9.
L.E. Johnson, Robert D. Ley, and Tom Cate, 1997. "Quantity Theory of
Money," in Thomas Cate, Geoff Harcourt, and David C. Colander,
editors, _An Encyclopedia of Keynesian Economics_, Cheltenham, UK:
Edward Elgar, pp. 517-526.
Robert Leeson, 2000a. _The Eclipse of Keynesianism: The Political
Economy of the Chicago Counter-Revolution_, New York: Palgrave.
Robert Leeson, 2000b. "Patinkin, Johnson, and the Shadow of
Friedman," _History of Political Economy_ 32, no. 4, pp. 733-763.
Robert Leeson, 2003. _Ideology and the International Economy: The
Decline and Fall of Bretton Woods_, Basingstoke: Palgrave Macmillan.
David W. Pearce, editor, 1992. _The MIT Dictionary of Modern
Economics_, Cambridge, MA: MIT Press, pp. 356-7.
Heinz Rieter, 1998. "Quantity Theory of Money," in Heinz D. Kurz and
Neri Salvadori, editors, _The Elgar Companion to Classical
Economics_, Cheltenham, UK: Edward Elgar. Volume 2, pp. 239-248.
Donald Rutherford, 1995. _Routledge Dictionary of Economics_, London:
Routledge, p. 379.
Warren J. Samuels, 2000. Review of Milton and Rose D. Friedman, _Two
Lucky People: Memoirs_. Chicago: University of Chicago Press, 1998.
_Research in the History of Economic Thought and Methodology_ 18A,
2000, pp. 241-252.
Warren J. Samuels is Professor Emeritus at Michigan State University.
He is working on the use of the concept of the Invisible Hand in
economics. He acknowledges with thanks comments on an earlier draft
by Robert Dimand and Robert Leeson.
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