I thought so too Dr. Friedman

Whenever I have a slightly embarrassing post, like my preceding foray into philosophy, I want to get something new up as quickly as possible, in the hope that perhaps people won’t notice the previous one.  So here are few interesting Milton Friedman quotations from 1998 that a commenter named “123″ sent me.  Friedman was discussing Japan:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

I thought so too Dr. Friedman.  I don’t think he’d view current Fed policy as expansionary.

PS.  I was going to juxtapose this with the recent comments by Anna Schwartz about low interest rates and monetary ease.  But what’s the point of picking on her, thousands of other economists keep saying similar things.  Still, I feel better knowing that at least Milton Friedman agrees with me.


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64 Responses to “I thought so too Dr. Friedman”

  1. Gravatar of happyjuggler0 happyjuggler0
    2. August 2009 at 17:37

    I wonder what would happen if you called up CNBC and asked to be a guest to explain to them why they are wrong to think of low nominal interest rates as being the equivalent of a loose monetary policy.

    :o

  2. Gravatar of Joe Joe
    2. August 2009 at 17:38

    Can you explain? It’s hard to find more information on this view.

  3. Gravatar of happyjuggler0 happyjuggler0
    2. August 2009 at 17:39

    Actually, to be fair they don’t all think that. Or at least I don’t think they do. But they do think that the Fed has been expansionary….

  4. Gravatar of StatsGuy StatsGuy
    2. August 2009 at 17:41

    Here, btw, is the process by which interest rates are kept low:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aucooSmI6UQQ

    Note a few key things:

    “Bank holdings of U.S. government securities are up 15.6 percent from a year ago, almost double the average annual growth rate of about 8 percent”

    “Bond bulls are taking comfort that at the same time Treasury supply is increasing, gross issuance of corporate debt is falling.”

    “bank purchases of corporates and mortgage-backed securities will be small relative to the growth in deposits net of loans, which have been growing at a rate of roughly $29 billion per month.”

    Certainly brings to life tired old phrases like “crowding out”, and seems to reinforce the points you are making. I’m somewhat ambivalent, personally – on the one hand, federal government “investment” is often quite inefficient. But then again, having seen the corporate sector in action…

  5. Gravatar of libfree libfree
    2. August 2009 at 17:56

    Isn’t crowding out an accounting identity? Please correct me if I’m wrong.

  6. Gravatar of Greg Ransom Greg Ransom
    2. August 2009 at 18:53

    It’s not a good sign when so many economists endorse a vulgar version of Rortyism. You should be embarrassed.

    One reason economists have produced so much fake science is because they believe in a fake picture of science — and of course Rorty-relativism is just the flip side of fake science positivism.

    See the many papers and books by F. A. Hayek on this topic, esp. where Hayek explains how historicism /relativism of the German historicist economists and the American institutionalist is simply the flip side of the coin of positivism. Mises also has some good papers and books on this topic.

    Positivism of the kind you find in Friedman, Lipset, Samuelson, the econometricians ALLOWS leads to relativism — they come together as a philosophical team.

  7. Gravatar of Greg Ransom Greg Ransom
    2. August 2009 at 19:12

    Make that:

    “Positivism of the kind you find in Friedman, Lipset, Samuelson, the econometricians ALWAYS leads to relativism — they come together as a philosophical team.”

  8. Gravatar of Bill Woolsey Bill Woolsey
    3. August 2009 at 02:23

    Statsguy:

    Capital regulations give government debt a risk weight of zero, so they require no capital. No private bonds have a risk weight so slow. (AAA mortgage backed securities have ar risk weight of only 20%, whereas commercial loans have a risk weight of 100%.)

  9. Gravatar of ssumner ssumner
    3. August 2009 at 02:32

    happyjuggler0, They’d think I was a crackpot.

    Joe, The short answer is that tight money reduces the expected real GDP growth rate, and also reduces the expected inflation rate (Fisher effect.) Both of these factors cause lower nominal rates. Many of my posts have more in depth discussions.

    happyjuggler0#2, Yes, they don’t all think that, but many do think that. I think it is “thousands.”

    statsguy, Yes, and of course the low corporate debt issuance is due to the recession, which is due to . . . tight money!

    libfree, It is not an accounting identity, it is a theory that predicts more government borrowing will lead to less private borrowing (in the extreme case by exactly the same amount.)

    Greg, What does Rorty have to do with relativism and positivism? Rorty would say that good economics is useful economics, he doesn’t favor any particular methodology, or alternatively “he has no dog in that fight.” He is very clear on that point, he says it is not for philosophers to tell economists what methodology to use. Indeed I think he would be quite critical of Friedman’s dogmatic essay on methodology. Certainly Rorty’s followers in econ (like Deirdre McCloskey) are critical of that essay.

  10. Gravatar of StatsGuy StatsGuy
    3. August 2009 at 10:22

    Bill:

    Very true. (I’d thought Basel still required cap/asset ratios of 1/25 for AAA debt assets, but this is still much than other debt assets). But I do not think the latest data showed that banks were capital constrained, so I’m not sure that this factor is what’s driving the trend.

    The article notes that a key factor is the low supply of corporate debt, by which it means that corporations (at least those with good credit) are not so eager to borrow at current rates. From their perspective, then, all this “cheap” money doesn’t look so cheap. Otherwise they would be supplying the market with more debt to buy. From the bank’s perspective, however, this is GREAT! Why? Because undersupply of the product allows them to achieve economic profits (e.g. high spreads).

    Arguably, one could characterize this as a price-distortion gap. Credit prices are above the market clearing level, meaning there is underconsumption of the product (e.g. debt/credit). But the market for money is “special”, in that it sets everything else by legal contract. It does not “naturally” clear.

  11. Gravatar of Current Current
    3. August 2009 at 13:01

    Scott,

    I don’t really agree with your post on philosophy. But, I’m on vacation at present and I haven’t time to reply.

    Regarding what Greg says here…
    “What does Rorty have to do with relativism and positivism?”

    Greg is right here. A little history is perhaps needed, now, this is my understanding of history, I’m not a historian.

    In “Capital” Marx wrote his economic theory around the Ricardian Labour Theory of Value. Marx’s version is quite consistent and shows that in time profits will reach zero. Marx claimed this would lead to revolution and a new Communist world order.

    In “Capital” Marx wrote about what Adam Smith called “unproductive labour”. In Smith what unproductive labour means is something like administration. Not labour that is unproductive per se but labour which cannot be made more productive by further division. Similarly there is “productive labour” which can be made more productive through further division. Both sorts of labour have value. Marx claimed though that the value of unproductive labour depends on social position. A bourgoise views it differently to a proletarian. Unproductive labour that allocates the profits to capitalists is productive from the capitalists point of view. The capitalist believes this because it is useful for him to believe it.

    In Marx there is a whole theory of how position in society causes people to think that X or Y is true or false. These are sometimes called “Enabling Ideologies”. The study of them was sometimes called Polylogism. (I understand Marx took these ideas from Hegel).

    None of this was that important to early Communist movements. What made it important though was the Marginal Revolution in economics. Bohm-Bawerk wrote a book called “Karl Marx and the Close of his System”. This showed that Marx’s findings about Capitalism were wrong because they were based on the Labour Theory of Value. British Marginalists and followers of Walras also criticised Marxists. George Bernard Shaw was a prominent socialist at the time, he remained a socialist but was convinced by British Marginalists that the labour theory of value was incorrect.

    Marxists responded by bringing back Marx’s ideas. Marginalism was portrayed as an enabling ideology for Capitalism by Bakhunin. This began a turn towards relativism in Socialist circles.

    (Mises and Hayek criticised communism decades later. This time the emphasis was on showing that communism couldn’t work. Both worked from the basis of marginalism and gave convincing arguments. I understand though that the change in socialist circles occurred before that though.)

    So, the subjective basis of marginalism was attacked. Concepts that don’t lead directly to useful results were attacked as meaningless. Marginalism was attacked on this front.

  12. Gravatar of calieconomist calieconomist
    3. August 2009 at 16:41

    “Isn’t crowding out an accounting identity? Please correct me if I’m wrong.”

    Only if you assume that private savings is fixed. S=I+(T-G) If S increase by the same amount as the deficit, there is no crowding out. Reality is probably somewhere in the middle.

  13. Gravatar of ssumner ssumner
    4. August 2009 at 03:39

    Current,

    You said:

    “So, the subjective basis of marginalism was attacked. Concepts that don’t lead directly to useful results were attacked as meaningless. Marginalism was attacked on this front.”

    I am sure that Rorty would have no trouble with concepts that led indirectly to useful results, after all he is a pragmatist. So I can’t agree with what you said here. Besides, if you want to find out whether Rorty was a socialist, read what he said about politics, don’t look to people who grossly misapplied pragmatism. Marginal analysis is perfectly consistent with pragmatism, Rorty and I can hardly be blamed for those who misapply pragmatism.

    Calieconomist,

    That’s right,

  14. Gravatar of Mesa Mesa
    4. August 2009 at 06:40

    I think the last two posts are not unrelated. One of the problems with macroeconomics as a “science” is the inability to perform repeated, controlled experiments to test the usefulness of the models. In particle physics, for example, we can at least perform experiments in the laboratory many thousands of times to see how the results match up with predictions of a particular theory. I would argue that the theory has no particular use or meaning except to describe probable outcomes of these experiments within some confidence interval.

    “Science” based on limited historical data (macroeconomics, cosmology, climate science) and an inability to perform repeated, controlled experiments is always a difficult enterprise. Because of the lack of feedback between theory and experiment, these enterprises are highly prone to many types of pathologies: group-think, political bias, cherry-picking data, cults of personality, etc, etc.

    So, its quite possible that many of the most important and interesting questions are too complex to model given our inability to test our theories in any way that could be called scientific.

  15. Gravatar of Current Current
    4. August 2009 at 06:41

    Scott: “Marginal analysis is perfectly consistent with pragmatism, Rorty and I can hardly be blamed for those who misapply pragmatism.”

    I see your point. I’m not criticising Rorty per se, I know very little about him. I’m talking about how relativist ideas relate to economics. Rorty may be better than other relativists.

    I think I’ll leave this bit of debate to Greg Ransom I expect he know a lot more about it than me.

  16. Gravatar of ssumner ssumner
    4. August 2009 at 07:28

    Mesa, I agree with much of what you say. My only reservation is the question of whether economics is a science. This is a completely sterile debate. It is exactly equivalent to debating whether Mt. Washington is a big mountain. It depends you you define “big” and it depends how you define “science.” Actually experiments are done in economics, climate, and cosmology, just not very often. As you say, it is very difficult in those fields. Many people have a broad definition of science that goes beyond controlled experiments, others don’t. It is a sterile debate over semantics.

    But otherwise everything you say is true.

    BTW, you didn’t say this, but many people wrongly believe science is “better” than a non-science. I never bother trying to defend economics as a science, as it is unimportant. It’s like asking whether chemistry is “better” than law. Apples and oranges.

    Current, Again, I am pretty sure Rorty is not a relativist, he’s a pragmatist. I’m no relativist.

  17. Gravatar of Mesa Mesa
    4. August 2009 at 07:47

    Yes, I agree that the semantic point should be unimportant. I think somehow attaching the word “science” to an enterprise brings expectations of precision and predictability to its conclusions, which may or may not be justified in practice – cf Climate Science. Typically if the conclusions or predictions are subject to large uncertainties, the pathologies I described above take over.

    I don’t mean to imply that because an area of investigation is difficult or complex it should not be undertaken – just that there is some awareness of the likely range of usefulness of the conclusions.

    However, there are certainly many insights derived from micro-economics that can and should guide policy. It would be silly to say that because we can’t run a full-economy experiment that we don’t believe that incentives can drive behavior, or that competition can increase efficiency, or that unborne costs can lead to mis-allocation of resources, etc.

    With macro-economic policy things get trickier, in that even very general principles seem to be up for grabs, or at least hotly debated across political lines, even by professional economists. This is probably because inevitably the implementation of any real experiment has political consequences and generates winners and losers. However, given this behavior by the most esteemed practitioners, it seems unlikely that the word science should be attached to the enterprise, however loosely. Political philosophy sounds about right.

  18. Gravatar of Mesa Mesa
    4. August 2009 at 07:51

    Or to clarify, the type of macroeconomics that is being presented to the public by most professional practitioners is best categorized as a type of political philosophy, which may not reflect the full reality of the discipline.

  19. Gravatar of John Papola John Papola
    4. August 2009 at 11:52

    I hate to pick on Milton, because he is a genuine and unique hero of liberty on so many fronts, and because I’m clearly unqualified to have an opinion. That said, his view regarding the state of the economy in 2006 was that it was in the best shape he’d ever seen.

    By his own estimation, the value of a theory is measured by it’s predictive capability. Given that benchmark, the Austrian perspective on business cycles and monetary economics seems to hold up well and his own framework seems to collapse.

    Or am I misstating things? That’s certainly possible. Again, nothing but love for Milton Friedman. He is a personal hero. I just happen to think his hyper-aggregated monetarism suffers from the same flaws as Keynesianism. Capital isn’t simply K. Output isn’t simply Q.

  20. Gravatar of Current Current
    4. August 2009 at 12:40

    Scott: “Again, I am pretty sure Rorty is not a relativist, he’s a pragmatist. I’m no relativist.”

    David N remarks: “Useful is a loaded word anyway. Useful to who?”

    David N makes my point quite well. I agree that for some sciences the utility of a theory is a good question. It’s rather more difficult in social sciences though.

  21. Gravatar of ssumner ssumner
    5. August 2009 at 05:04

    Mesa, You said:

    “With macro-economic policy things get trickier, in that even very general principles seem to be up for grabs, or at least hotly debated across political lines, even by professional economists. This is probably because inevitably the implementation of any real experiment has political consequences and generates winners and losers. However, given this behavior by the most esteemed practitioners, it seems unlikely that the word science should be attached to the enterprise, however loosely. Political philosophy sounds about right.”

    I think there is more consensus than you do. There is a tendency to look at continuing debates, and forget about the issues that are no longer widely debated. In the 1920s almost all respectable opinion believed the gold standard was essential. If you took the top 100 macroeconomists in the US (say by publications, or by residency in top schools) you’d be lucky to find 1 or 2 who supported the gold standard. That is a big deal.

    I also think “precision” is a very bad way of thinking about whether something is a science–it is sort of the “man on the street” approach. But I could imagine other fields capable of precision, that aren’t sciences at all. Think of a field that simply organizes data. Many of the real world examples (the census, accounting, etc), do have imprecision, but the point is they need not have so in a simple case. Yet those are not viewed as science. I think a better frame of reference than precision is to ask what are you trying to do. If you are trying to build models that can help us undertand reality by making conditional forecasts, then economics is a sort of science. Better to say it is not a “hard” science.

    Slightly off topic, but many scientists overestimate the importance of science, thinking it produced our modern world. That’s only half right. North and South Korea have access to books with exactly the same theories of Newton, etc, but they differ greatly nonetheless. Why? Because of different economic models. Interestingly neither reflect old Korean culture, rather both reflect social science ideas imported from the West. Korea is a wonderful example of how the insights of the hard sciences fall on stony soil unless fertilized by the insights of the social sciences. I’m not implying you disagree with any of this (you mentioned the value of microeconomics) just throwing this idea out for other readers.)

    Mesa#2, I view political science as a bit “softer” than macro (but that doesn’t mean inferior), but I do see that there is some relationship.

    John, You raise an interesting question. I don’t think economists should be in the business of making unconditional forecasts. An example of an unconditional forecast would be a prediction of a stock market collapse. To me, that is just superstition. So I don’t hold it against him that Friedman failed to predict the current recession or the sub-prime fiasco. Very, very few economists did.

    In my view, the test of an economic theory is the sort of conditional forecasts that it makes. I believe, for instance, that a monetary policy that stabilized NGDP growth expectations would lead to a more stable economy. I did not predict the initial crisis, but when the Fed allowed NGDP to fall sharply last October, I predicted 2009 would be a very bad year, worse than the Fed was predicting. Yes, I know, you are thinking “big deal.” That’s my point, I don’t expect economists to be able to predict things that would allow them to become rich.

    The second point is that a single prediction tells us very little about the relevance of the model. The period from 1982-2007 is now viewed as the Great Moderation. Did Austrians predict this? I don’t follow them closely, but many seem very negative, very apolcalyptic. I am almost sure that they issued lots of pessimistic predictions during this long Golden Age that didn’t come true. Did they predict low and stable inflation for 25 years? I doubt it. How about only two mild recessions? If so, then I would be more impressed by the fact that they did correctly predict the housing bubble would blow up.

    BTW, I also disagree with Friedman’s focus on the money supply, which led him to make some bad predictions that I would have avoided. So he’s far from perfect.

    When people have a relentlessly negative orientation, every time things go wrong they will crow “I told you so.” In in economics, you can be sure that lots of things will go wrong.

    Current, I don’t see your point. If the social sciences aren’t useful, what good are they? I think social science theories are being tested all the time. I regard the Cold War splitting of countries as a good test of how useful Adam Smith’s invisible hand model is. After viewing East and West Germany, Mainland China and Taiwan, North and South Korea, I’d say we got some pretty robust results in our test of markets vs central planning. What do you think?

  22. Gravatar of Jeremy Goodridge Jeremy Goodridge
    5. August 2009 at 12:31

    Hi Scott:

    This is a little off the topic of this particular, but it’s something I think is interesting. My claim is that if the Fed were to successfully match a nominal-aggregate-demand target (like 5% growth year, as you propose), real business cycle theory would become true! If the fed managed to ensure that AD never deviated from its 5% growth path, then the only things that could move REAL output around would be REAL things — like supply shocks, or sudden changes in the mix of items people demanded (requiring temporary unemployment as businesses shift priorities). And furthermore, as I believe you (and Selgin) have pointed out, periods of slow growth would be characterized by HIGH inflation and periods of high growth LOW inflation — which is contradictory to what we see now. The philips curve would be inverted, even in the short-term. So, in a way, the removal of nominal factors would dramatically change what we think of as a recession.

    What do you think?

    Jeremy

  23. Gravatar of Jeremy Goodridge Jeremy Goodridge
    5. August 2009 at 12:39

    Hi Scott:

    Another point: Tyler Cowen, in his NY times piece emphasized an inflation target. But what you really support is a nominal demand target not an inflation target. Related to this, European countries have an inflation target and they have been even LESS stimulative than we have. Why do you think that is? Is that because they are looking through the rear-view mirror? Do they have an equivalent of TIPS bonds?

    Jeremy

  24. Gravatar of JimP JimP
    5. August 2009 at 15:04

    Another supporter of penalty rates on reserves:

    http://blogs.telegraph.co.uk/finance/edmundconway/100000433/what-britain-needs-now-negative-interest-rates/

  25. Gravatar of ssumner ssumner
    6. August 2009 at 05:20

    Jeremy, That is exactly right. I suppose it might be worth a post to discuss all this, as it may not be obvious to everyone.

    Jeremy#2, I think it is a mixture of things:

    1. Inflation rate targeting rather than level targeting.
    2. Inflation rather than NGDP targets
    3. Backward-looking
    4. Excessive fear of long and variable lags, combined with ignoring financial market indicators.
    5. Conservative (anti-inflation) bias.

    JimP, Thanks. It’s good to know my idea is gradually spreading around.

  26. Gravatar of Current Current
    6. August 2009 at 07:53

    Scott: “I don’t see your point. If the social sciences aren’t useful, what good are they? I think social science theories are being tested all the time. I regard the Cold War splitting of countries as a good test of how useful Adam Smith’s invisible hand model is. After viewing East and West Germany, Mainland China and Taiwan, North and South Korea, I’d say we got some pretty robust results in our test of markets vs central planning. What do you think?”

    There are two meanings of usefulness here. Usefulness to scientific description and usefulness in the more general sense.

    We shouldn’t dismiss parts of social science that are of no specific utility. If a particular element of economics is studied in isolation that may produce results that are superficially useful in the scientific sense. Perhaps that may be used as an indicator for some form of social policy change. But, any policy has many other consequences than those intended. Only by having a wide-ranging consideration of economics (and maybe other social sciences) can a particular policy be assessed, if then.

    As Hayek wrote in the article Greg mentioned earlier: “The reason why we cannot achieve a coherent whole by just fitting together any elements we like is that the appropriateness of any particular arrangement within a spontaneous order will depend on all the rest of it, and that any particular change we make in it will influence the effects of any further steps. Experience with a particular arrangement in one institutional setting will tell us little about how it would operate in a different setting.”

    Perhaps Rorty would agree with this, I don’t know because I don’t know about his ideas. But from your description I expect not.

    Regarding usefulness, I’m not impressed by epistemologists who say that scientists should do what they are already doing. How is that addiing usefully to the debate?

  27. Gravatar of John Papola John Papola
    6. August 2009 at 15:36

    @ssumner,
    First, let me say that I am an enthusiastic hobbyist who took interest in economics because of the clear failure of most of the mainstream to explain this crisis and the appearance of a solid theory in the Austrian view. I may get some things (or most things) wrong here, but I’ll try:

    The Austrian economists did clearly see this collapse coming (google “Peter Schiff was right”), as did Mises and Hayek in the 1920s. The reason isn’t that they are broken clocks that are right twice a day. It’s because, I believe, they have an understanding of the level of aggregation at which economic theory becomes untethered from reality or usefulness. Modern “macroeconomics” aggregates to the point of uselessness. Less than uselessness, actually. Outright destructiveness.

    Unlike Keynesians or Monetarists, Austrians understand that physical and human capital is specific in its use, that it’s structure in the economy is composed of stages in series and is costly to change (you could even say “sticky”). Capital isn’t “k” that’s purchased with “I”. The COMPOSITION, or structure, of these aggregates makes all the difference.

    To steal from Pete Boettke: GDP is like weight. Saying a guy is 250lbs doesn’t tell you if he’s healthy. He could be 250lbs of muscle or 250lbs of pure fat.

    An auto factory is expensive to retool if it’s construction turns out to have been in vain because auto demand was artificially high driven by Fed credit expansion.

    Monetary expansion beyond the demand for money (monetary equilibrium), leads to artificially loose credit conditions (a surplus). Why are they artificial? Because they misrepresent the degree of real savings available. So interest rate sensitive projects get started that are out of step with consumption preferences of consumer, who are likely saving even LESS as the Fed pushes rates down. The low rates are a broken price signal, that leads investment to flow into capital goods production.

    Worse, new money enters in specific channels (Cantillon Effects), usually driven by other real factors (like pro-home ownership policies, or a tech breakthrough like the internet) and magnifies the apparent demand, skewing relative prices and breaking crucial price signals. Dot com companies or housing prices start to rise and attract new investment powered by cheap credit.

    When these projects find themselves competing for resources with the other firms receiving new credit and existing firms serving current consumers… production costs rise.

    Think about it. Microsoft saw the cost of programmers skyrocket as the monetary expansion that inflated the dot-com bubble lead new firms like pets.com to bid up programming talent. The same goes for construction projects competing for workers.

    As the factors of production in these capital goods markets rise and consumer savings fall, firms must go back to the credit markets for additional lending in order to finance the unanticipated costs. But the interest rates eventually rise due to inevitable inflationary forces like currency weakness ($1.55 per Euro, $4 gas) and reveal the unprofitability of these capital expansions. They reveal them to be mal-investments out of step with consumer’s demands (and abilities to pay).

    Getting back to the capital structure… the bloat of capital, including human capital for people who spent years specializing in the wrong fields, must retool and retrain and go in search of what consumers actually want. Pets.com must go away and Nevada McMansions must be liquidated. Hence the period of unemployment, or the hangover after the binge.

    All Keynesian efforts to prop up demand with more monetary and fiscal stimulus for existing goods is like offering a drug addict more drugs to relieve his withdrawal. Cash for Clunkers is just delaying the inevitable. Keynesian aggregates like GDP = C+I+G are meaningless ex post accounting stories. A drop in aggregate demand can be necessary and healthy while the economy retools.

    The recession IS the recovery as the capital structure is retooled and repaired and relative prices can (hopefully) return to a real representation of consumer demand.

    Here’s the mile-high prescription in macro speak of what Fed policy should be doing:
    nothing. Freeze the monetary base and allow a free banking system to address the demand for money.

    In lieu of ending the Fed, the solution ISN’T inflation targeting or a stable price level.

    Viewed in terms of the equation of exchange (MV = PQ), the target should be to stabilize national income, or MV. In so doing, productivity gains would drive the price level DOWN. That’s good. That’s what we want. Productivity driven deflation would make us all better off.

    The price level didn’t rise during Greenspan’s epic expansion of credit because of major improvements in productivity he himself repeatedly quoted both in the late nineties and the early 2000s. Google it. Greenspan stole our purchasing power than those productivity gains were set to deliver and funneled it into a double-bubble disaster of malinvestment.

    Sources: Lawrence H. White, George Selgin, Roger Garrison

  28. Gravatar of ssumner ssumner
    7. August 2009 at 06:21

    Current, You said,

    “As Hayek wrote in the article Greg mentioned earlier: “The reason why we cannot achieve a coherent whole by just fitting together any elements we like is that the appropriateness of any particular arrangement within a spontaneous order will depend on all the rest of it, and that any particular change we make in it will influence the effects of any further steps. Experience with a particular arrangement in one institutional setting will tell us little about how it would operate in a different setting.”

    Perhaps Rorty would agree with this, I don’t know because I don’t know about his ideas. But from your description I expect not.

    Regarding usefulness, I’m not impressed by epistemologists who say that scientists should do what they are already doing. How is that addiing usefully to the debate?”

    I think you must have misunderstood Rorty. There is absolutely nothing in pragmatism that would oppose what Hayek is saying here. It is just common sense. Why do you assume Rorty would disagree with Hayek?

    Regarding epistomologiests contributing to the debate, I have no problem if the know what they are doing. Suppose an epistomologists says “be careful with OLS when there is serial correlation–do a Cochrane-Orcutt correction.” That’s fine, but how often do we get that sort of advice out of a philosophy department? If an epistomologist says “correlation doesn’t prove causation,” that would also be helpful, except that I expect that most economists already know this. So the problem is that we already know the general rules of logic, whereas specific methodological advice from philosophers would have little use, especially if it is very dogmatic:
    “This is how you economists should do things.”

    John You said;

    “he reason isn’t that they are broken clocks that are right twice a day. It’s because, I believe, they have an understanding of the level of aggregation at which economic theory becomes untethered from reality or usefulness.”

    How do you know they aren’t like broken clocks right twice a day? What were the Austrian predictions during the long Golden Age of 1982-2007?

    You said;

    “To steal from Pete Boettke: GDP is like weight. Saying a guy is 250lbs doesn’t tell you if he’s healthy. He could be 250lbs of muscle or 250lbs of pure fat.”

    I think all economists agree with this. The question is what can we do about it, and how do we identify the fat? Hayek and I have similar views, we believe the best way to avoid destructive business cycles is to target NGDP.

    You said:

    “An auto factory is expensive to retool if it’s construction turns out to have been in vain because auto demand was artificially high driven by Fed credit expansion.”

    I see very little evidence that mis-allocation plays a significant role in business cycles. Labor and capital was re-allocated out of residential construction during the long decline from mid-2006 to mid-2008, and there was little impact on unemployment because other sectors picked up the slack. Only when what Austrians call the “secondary depression” (which occurred in late 2008) happens does the unemployment rate rise sharply. And that secondary depression can be prevented by a more expansionary monetary policy according to Hayek.

    There is too much in your comment to address all of your points. If you are interested you might want to scroll back to the comment section to my Austrian post a few months back. In the comment section I respond to your argument. I don’t agree with the Cantillon effects or freezing the monetary base (which could have caused a Great Depression last fall), and would certainly have been opposed by the greatest of the Austrians, Hayek.

  29. Gravatar of Current Current
    7. August 2009 at 08:30

    John Papola,

    For what it’s worth I mostly agree with you.

    I don’t think though that freezing the monetary base can provide the necessary stabilization in the current sort of monetary regime.

  30. Gravatar of Current Current
    7. August 2009 at 08:43

    Scott: “I think you must have misunderstood Rorty. There is absolutely nothing in pragmatism that would oppose what Hayek is saying here. It is just common sense. Why do you assume Rorty would disagree with Hayek?”

    For one thing because as you have said previously he considers the best scientific attempts at truth to be “truth is what your colleagues let you get away with.”

    Which means that if you can persuade others who are ignorant of the full facts what you convince them remains the “truth”.

    Scott: “If an epistomologist says “correlation doesn’t prove causation,” that would also be helpful, except that I expect that most economists already know this. So the problem is that we already know the general rules of logic, whereas specific methodological advice from philosophers would have little use, especially if it is very dogmatic:
    “This is how you economists should do things.””

    I see what you mean. My point is though, why should epistemologists be useless in principle?

    It seems to me that an epistemologist pointing out that epistemologists are generally useless is a sort of bad joke.

  31. Gravatar of ssumner ssumner
    8. August 2009 at 05:18

    Current, You said;

    “For one thing because as you have said previously he considers the best scientific attempts at truth to be “truth is what your colleagues let you get away with.”

    Which means that if you can persuade others who are ignorant of the full facts what you convince them remains the “truth”.”

    You misunderstood Rorty. He is not recommending that you try to trick you colleagues into believing something that is not true. Rather he is merely describing what society regards as true. And who can deny that society tends to regard things as true, when they believe them to be true. No you might say “but what society believes to be true is not always really true.” But Rorty would say them statement means nothing, or else it means that you predict that a future society will have a different view of what is true.

    Most people, without even realizing it, assume that there is some sort of “God-like” view of what is “really true” which is separate from what we believe is true, and or will believe in the future to be true. Rorty is an atheist. He believes that what society’s experts believe is the best we can do, the closest we can come to describing reality. Rorty would suggest to Hayek “if you want to convince other economists, use persuasive arguments.” I think that is very reasonable advice. It is what I try to do on this blog.

    You said:

    “It seems to me that an epistemologist pointing out that epistemologists are generally useless is a sort of bad joke.”

    Sort of like an economist (Hayek) criticizing other economists who presume to know how to plan, regulate, and manage an economy.

  32. Gravatar of John Papola John Papola
    8. August 2009 at 09:13

    Scott,

    I love your blog. I’m absolutely interested in understanding, not treating ABCT or any other theory as some kind of religion, so I’ll check out your other posts.

    My note about freezing the monetary base wasn’t as an anti-bust policy, but as a new normal for the Fed. I think it’d be interesting to see if the Fed could create a proximate of the stable reserves that a commodity money enable. Have the stop with the open market operations, regulation and “lender of last resort” and allow a free, national-branch banking system to handle peaks and troughs in the demand for money.

    Though again, I’m only half-understanding even what I just wrote. I have some understanding of the ideas of loanable funds and monetary equilibrium theory, but only a spot surface understanding at best.

  33. Gravatar of Current Current
    8. August 2009 at 10:46

    Scott, what you seem to be arguing for here is relativism.

    Scott: “He is not recommending that you try to trick you colleagues into believing something that is not true. Rather he is merely describing what society regards as true. And who can deny that society tends to regard things as true, when they believe them to be true. No you might say ‘but what society believes to be true is not always really true.’ But Rorty would say them statement means nothing, or else it means that you predict that a future society will have a different view of what is true.”

    How is that not relativism?

    What you are saying is that science is just a game. We can convince each other of anything, it doesn’t really matter. This is the post-modern argument.

    Is that what you mean?

    Current: “It seems to me that an epistemologist pointing out that epistemologists are generally useless is a sort of bad joke.”

    Scott: “Sort of like an economist (Hayek) criticizing other economists who presume to know how to plan, regulate, and manage an economy.”

    Economics isn’t economic engineering. I fail to see though why epistemology doesn’t impact on the activities of science.

  34. Gravatar of ssumner ssumner
    9. August 2009 at 07:06

    John, I also want to greatly reduce the size and scope of the Fed. But I don’t think you can simply freeze the base. Under free banking there is no guarantee that banks might not hoard reserves during a financial crisis, and this could be deflationary. I prefer to let the market determine the monetary base, and I have proposed a NGDP futures targeting regime where the market would set the monetary base most likely to insure 5% NGDP growth. Bill Woolsey favors a similar plan but with 3% nominal growth, i.e roughly stable prices in the long run.

    Current; You said;

    “How is that not relativism?

    What you are saying is that science is just a game. We can convince each other of anything, it doesn’t really matter. This is the post-modern argument.

    Is that what you mean?”

    No it is not what I said or what I meant. And that is why I keep resisting this “relativism” tag. I think it matters a lot what we believe, because I am a pragmatist not a relativist. Some theories offer very sound predictions, others do not. I think it is very important that we adopt sound economic theories so we don’t make the same mistakes the Fed just made last year. But at the same time I don’t think there is any criteria that we can use to establish truth beyond the usefulness of the theories. And usefulness is always in the eye of the beholder. But I will continue trying to convince people to look at things the way I do, I won’t say “your entitled to your opinion” and who am I to say you are wrong.” As you’ve noticed, I will tell people when I think they are wrong, it’s just that I don’t think there is any objective side of a debate, there are just sides with persuasive and non-persuasive arguments. I acknowledge that society regards it as “true” that the financial crisis caused the recession. I don’t agree, and I am trying to change society’s view, but for the time being that view is regarded as established truth. Mine is seen as just an improbable hypothesis.

    You said:

    “Economics isn’t economic engineering. I fail to see though why epistemology doesn’t impact on the activities of science.”

    I believe that economics can occasionally offer useful policy advice, and so can epistemology. Again, “correlation doesn’t prove causation” is a useful insight that probably came originally from epistemology. What epistemology cannot do is show us what sort of methodologies are best for each science. Some sciences should probably rely on experimentation, others should rely on natural experiments. It is not for epistemologists to give each science advice on how to do things, and it is especially unwise to assume that things should be done the same way in every science. It would be like telling Latvia that since the US has a floating exchange rate, they should too,

  35. Gravatar of Current Current
    11. August 2009 at 12:49

    Firstly, what we agree on…
    Scott: “I believe that economics can occasionally offer useful policy advice, and so can epistemology. Again, ‘correlation doesn’t prove causation’ is a useful insight that probably came originally from epistemology.”

    I agree entirely. Hayek would too, he had plenty to say about policy in “The Constitution of Liberty”. The point about correlation and causation comes from David Hume.

    Fundamentally though there is nothing to stop someone who studies something from having nothing to say about changing it. Ancient anatomists studied eyes for centuries and learnt a lot. They did so long before they were able to surgically operate on them successfully.

    Scott: “I believe that economics can occasionally offer useful policy advice, and so can epistemology. Again, “correlation doesn’t prove causation” is a useful insight that probably came originally from epistemology.”

    I agree too that things are different in different fields. However I don’t think that this means that epistemologists necessarily have nothing to say. Scientists have plenty of opinions on epistemology. So I think epistemologists should engage with some of those opinions. If epistemologists don’t think that what scientists are doing is approaching knowledge problems correctly then they should say so.

    Regarding persuasive and non-persuasive argument, I agree…. Mises once wrote:

    “Facts per se can neither prove nor disprove; everything depends upon the significance that can be given to the facts. So long as a theory is not thought out and worked up in an absolutely inadequate manner, then it is not a matter of supreme difficulty to expound it so as to explain the ‘facts’ – even if only superficially and in a way that can by no means satisfy truly intelligent criticism. It is not true, as the naive scientific doctrine of the empirico-realistic school has it, that one can save oneself the trouble of thinking if one will only allow the facts to speak. Facts do not speak; they need to be spoken about by a theory.”

    Secondly, what we don’t…

    Scott: “No it is not what I said or what I meant. And that is why I keep resisting this “relativism” tag. I think it matters a lot what we believe, because I am a pragmatist not a relativist. Some theories offer very sound predictions, others do not. I think it is very important that we adopt sound economic theories so we don’t make the same mistakes the Fed just made last year. But at the same time I don’t think there is any criteria that we can use to establish truth beyond the usefulness of the theories. And usefulness is always in the eye of the beholder. But I will continue trying to convince people to look at things the way I do, I won’t say “your entitled to your opinion” and who am I to say you are wrong.” As you’ve noticed, I will tell people when I think they are wrong, it’s just that I don’t think there is any objective side of a debate, there are just sides with persuasive and non-persuasive arguments. I acknowledge that society regards it as “true” that the financial crisis caused the recession. I don’t agree, and I am trying to change society’s view, but for the time being that view is regarded as established truth. Mine is seen as just an improbable hypothesis.”

    Earlier you said: “He is not recommending that you try to trick you colleagues into believing something that is not true. Rather he is merely describing what society regards as true. And who can deny that society tends to regard things as true, when they believe them to be true. No you might say ‘but what society believes to be true is not always really true.’ But Rorty would say them statement means nothing, or else it means that you predict that a future society will have a different view of what is true.”

    Think about the second section I quote. I quite agree with Rorty that it is reasonable to call the prevailing opinion of science “what society believes is true”. But the opinion of a person is something quite different from what society believes. The opinion of a person is also not a prediction.

    When I say “I think X theory is correct” I don’t mean that I predict that in the future prevailing science will believe theory X. What I mean is that I think that if a fair minded investigator looked into the problem then they would find that theory X is consistent with the known facts. Though, of course, theory X could never be the final word. It is an exercise in concieving of what you can’t percieve. A counter-factual, not a prediction. So, it is quite consistent to say “I think that X theory is correct but scientists will never agree with me”.

    Regarding “usefulness”… As we have said earlier, what we mean by useful is that a theory concurs with the known facts. In that case “usefulness” is something that is not completely subjective because we can discuss what the relevant known facts are. If we agree about what the relevant facts are. If the purported facts concerned are not all the same then there things are very different I agree. However, apart from this saying that the truth is what society considers true is very different from saying that it’s what’s useful.

  36. Gravatar of ssumner ssumner
    12. August 2009 at 09:25

    Current, You said;

    “When I say “I think X theory is correct” I don’t mean that I predict that in the future prevailing science will believe theory X. What I mean is that I think that if a fair minded investigator looked into the problem then they would find that theory X is consistent with the known facts. Though, of course, theory X could never be the final word. It is an exercise in conceiving of what you can’t perceive. A counter-factual, not a prediction. So, it is quite consistent to say “I think that X theory is correct but scientists will never agree with me”.”

    That’s not how I think of things. I think if I explained my view that the Fed caused the crash to a fair-minded viewer he or she wouldn’t agree. Rather I think that it will take a lot of time for my theory to sink in, and other developments in other areas of macro (such as futures targeting) will eventually make people more receptive to my ideas.

    You said:

    “Think about the second section I quote. I quite agree with Rorty that it is reasonable to call the prevailing opinion of science “what society believes is true”. But the opinion of a person is something quite different from what society believes. The opinion of a person is also not a prediction.”

    I’m not sure what to make of this. I agree that my opinion that the Fed caused the crash is different from the conventional view that the banking crisis caused the crash. But “something quite different?” What does that mean? Is it inferior? Well I suppose when one individual disagrees with society then society is usually later regarded as being right, and the individual wrong. But not always. So I don’t quite see your point here. Both the individual and society have beliefs. Society’s beliefs are a sort of weighted average of the individuals that comprise society, with perhaps more weight given to expert opinion.

    You said;

    “Regarding “usefulness”… As we have said earlier, what we mean by useful is that a theory concurs with the known facts. In that case “usefulness” is something that is not completely subjective because we can discuss what the relevant known facts are. If we agree about what the relevant facts are. If the purported facts concerned are not all the same then there things are very different I agree. However, apart from this saying that the truth is what society considers true is very different from saying that it’s what’s useful.”

    Which facts? The world is full of facts. There is no general agreements as to which facts might support my view that the Fed caused the crash, as we can’t even agree on what the proper indicator is for the stance of Fed policy. Rather than matching facts, I prefer to think of theories as being persuasive, because they help us make better sense of a complex picture. From that perspective the best theory is not generally the one that gives you the best “R=squared” in a regression.

    Your last sentence is right, I suppose the “true” part is descriptive and the “useful” part is prescriptive.

    The Mises quotation is very good, and of course is very close to Rorty’s view.

  37. Gravatar of Current Current
    12. August 2009 at 11:09

    Scott: “I think if I explained my view that the Fed caused the crash to a fair-minded viewer he or she wouldn’t agree. Rather I think that it will take a lot of time for my theory to sink in”

    I certainly agree with you there, these things take time.

    Scott: “I’m not sure what to make of this. I agree that my opinion that the Fed caused the crash is different from the conventional view that the banking crisis caused the crash. But ‘something quite different?’ What does that mean? Is it inferior?”

    All I meant was different, as in “we should distinguish this from something else”. Just thinking something is true doesn’t mean you necessarily think that others will agree. Or that you agree only because others say so.

    Scott: “Well I suppose when one individual disagrees with society then society is usually later regarded as being right, and the individual wrong. But not always. So I don’t quite see your point here. Both the individual and society have beliefs. Society’s beliefs are a sort of weighted average of the individuals that comprise society, with perhaps more weight given to expert opinion.”

    Yes. I agree with you there.

    Does all this mean though that it is says nothing to say that some theory is “true”?

    Scott: “Which facts? The world is full of facts. There is no general agreements as to which facts might support my view that the Fed caused the crash, as we can’t even agree on what the proper indicator is for the stance of Fed policy. Rather than matching facts, I prefer to think of theories as being persuasive, because they help us make better sense of a complex picture. From that perspective the best theory is not generally the one that gives you the best “R=squared” in a regression.”

    I agree with you there, that’s why I quoted the bit from Mises. Though I have not read Kant I understand this is a version of Kant’s point that “Concepts without precepts are empty; precepts without concepts are blind.” Mises was very big on Kant.

    However all this isn’t as subjective as it seems. In some situations, such as a lot of social science what Jeffrey Friedman says is true: “In the profusion of data about the social world, then, we are apt to be able to find endless quantities of ‘evidence’ for whatever our imaginations incline us to believe, simply as a function of how much
    evidence is out there, and how hard it is (for us) to interpret it correctly”.

    But this isn’t always the case. In some cases we have two theories that attempt to explain the same facts. In that case there is quite an objective competition.

    This is the case for Newton’s theories of mechanics and Aristotles. The “laws” of those two theories can’t be separated from the rest. But, the two competing overall theories treat the same scope, so they can be compared.

    What we should do is to look for these sorts of situations within larger social theories. We can certainly do this an use it as a tool to make progress.

    This bring me back to relativism. Earlier you wrote “He is not recommending that you try to trick you colleagues into believing something that is not true. Rather he is merely describing what society regards as true. And who can deny that society tends to regard things as true, when they believe them to be true. No you might say ‘but what society believes to be true is not always really true.’ But Rorty would say them statement means nothing, or else it means that you predict that a future society will have a different view of what is true.”

    Now, the problem with the word true is that it can mean “true always and everywhere, for all time” or “better than other currently available theories”. I’m sure Rorty would prefer the latter and so would I (it’s Popper’s view).

    The sentence you mention “but what society believes to be true is not always really true.” Does make sense if we use “true” to mean “true for all time”. As I’m sure you and Rorty would agree though it isn’t very useful because we don’t know anything that’s true in this sense.

    But, I don’t think you and Rorty mean it in that sense. You mean that even accepting the other definition of truth it is meaningless. You are saying that it is meaningless to say “Society thinks X is the best theory we have but Y is the best theory we have”.

    When I say something like the above sentence I’m invoking a hypothetical. I’m saying if people looked hard enough at problem and looked in a balanced way then I think they would come to view Y. I don’t necessarily think that those things will happen. But, what I’m saying is not meaningless.

    It’s not meaningless because everything that is said about science involves hypotheticals and thought experiments. That is where that quote from Kant comes in. If it is invalid to speak of such things it is just as invalid to talk about society at all since society is an abstraction.

  38. Gravatar of ssumner ssumner
    13. August 2009 at 06:56

    Current, You said;

    “Does all this mean though that it is says nothing to say that some theory is “true”?”

    I can’t speak for others. But when I was younger I looked at truth from a childlike perspective. Children think adults can answer all their questions. Some adults think God can answer all their questions. I now think there is no one to answer our questions. We have to decide on our own what constitutes truth. There is no ultimate authority. So we use different techniques; appeal to authority, coherence, predictive ability, etc. The point is that these tests are all HUMAN IDEAS. We don’t know what the right way to test for truth is, it is a question epistemologists can answer. I’m not saying that the term “truth” has no meaning, but rather that “objective truth” is a meaningless distinction, as it implies some extra-human referee, which we don’t have. Obviously you can distinguish between what Joe Schmo thinks is true, and what the consensus of scientists think it true, and those distinctions are often useful.

    I certainly agree that we can compare Newton’s theories with Aristotle’s, and that Newton’s theories will prove more useful.

    You said:

    “Now, the problem with the word true is that it can mean “true always and everywhere, for all time” or “better than other currently available theories”. I’m sure Rorty would prefer the latter and so would I (it’s Popper’s view).”

    I think everyone should prefer the latter, as we have zero access to the former, which is Rorty’s point. But I know realist philosophers who think truth is the former. But then how could we know anything is true?

    You said:

    “When I say something like the above sentence I’m invoking a hypothetical. I’m saying if people looked hard enough at problem and looked in a balanced way then I think they would come to view Y. I don’t necessarily think that those things will happen. But, what I’m saying is not meaningless.”

    I don’t know if people consciously think this way, but I think they sort of mean an implied prediction in the situation you describe, whether they think so or not. They are implicitly saying “I think society is wrong, and I predict people will eventually come to see it that way.”

    The beauty of Rorty’s perspective is that it applies equally well to ethics and aesthetics. Consider someone who in the 19th century said:

    “Southerners may think slavery is OK, but I think it actually is wrong.”

    or

    “People may think Van Gogh is a bad painter, but I think he is actually a genius.”

    The objective theory of scientific truth has little to say about morals and art, often suggesting the views are mere opinions. But notice that both examples I just gave could also be viewed as implied predictions, and if so they were right. So Rorty’s perspective can unify the way we think about truth in seemingly disparate fields.

    When people debate animal rights I think they are really debating how future societies will see the issue. And although I am not an animal rights fanatic, I think it very possible that they will be proved “right” in the distant future, when our current treatment of animals will be viewed as barbaric by almost everyone.

  39. Gravatar of Current Current
    14. August 2009 at 01:29

    Scott: “I now think there is no one to answer our questions. We have to decide on our own what constitutes truth. There is no ultimate authority.”

    Certainly. It is not only pragmatists who hold this view though. The very first words of Mises book “Theory and History” are “Mortal man does not know how the universe and all that it contains may appear to a superhuman intelligence.” This is agreed by practically everyone.

    Scott: “So we use different techniques; appeal to authority, coherence, predictive ability, etc. The point is that these tests are all HUMAN IDEAS. We don’t know what the right way to test for truth is, it is a question epistemologists can answer.”

    I think you mean “can’t answer.”

    Scott: “I’m not saying that the term “truth” has no meaning, but rather that “objective truth” is a meaningless distinction, as it implies some extra-human referee, which we don’t have. Obviously you can distinguish between what Joe Schmo thinks is true, and what the consensus of scientists think it true, and those distinctions are often useful.”

    All you are objecting to here is final truth. You haven’t given any reason why one idea may not be more true than another, in fact you support that idea.

    Scott: “I don’t know if people consciously think this way, but I think they sort of mean an implied prediction in the situation you describe, whether they think so or not. They are implicitly saying ‘I think society is wrong, and I predict people will eventually come to see it that way.’”

    I don’t agree. When I say “I think X is true” it isn’t a prediction of any sort.

    I don’t understand why you think saying something is true is an “implied prediction” surely you are supposing something about the psychology of others.

    Since you have admitted that it is possible for one theory to be more true than another theory why must truth be an “implied prediction”?

    Scott: “but notice that both examples I just gave could also be viewed as implied predictions, and if so they were right. So Rorty’s perspective can unify the way we think about truth in seemingly disparate fields.”

    I don’t understand that view at all. Certainly speaking for myself my perspectives on ethics of aesthetics are not in any way “implied predictions”.

  40. Gravatar of ssumner ssumner
    14. August 2009 at 04:51

    Current, Yes, there was a type where I said “can” instead of “can’t.”

    You said;

    “I don’t agree. When I say “I think X is true” it isn’t a prediction of any sort.

    I don’t understand why you think saying something is true is an “implied prediction” surely you are supposing something about the psychology of others.”

    I suppose you are right. People might mean many different things by “true.” When you say X is true I suppose you might also mean that you believe X.

    You said:

    “Since you have admitted that it is possible for one theory to be more true than another theory why must truth be an “implied prediction”?”

    I had thought it was the realists who thought that it made no sense to say one theory was truer than another. I thought realists said the Ptolemaic system of astronomy was false, not less true. I have no trouble with people using terms like truer, I just assume they mean more useful. But I think life would be simpler if they simply said “more useful.” Indeed, isn’t there always a better term than ‘true?’ If you say something, and I respond “how true,” the meaning is vague. I should say, “I agree” or “yes, that is generally regarded as true.” Which are two very different meanings.

    You said:

    “I don’t understand that view at all. Certainly speaking for myself my perspectives on ethics of aesthetics are not in any way “implied predictions”.”

    I didn’t say your perspective on art was an implied prediction. Obviously if one says “I like Van Gogh”, then that is not an implied prediction. But if in 1890 someone had said “Despite the fact that Van Gogh is little known, he is actually a great painter” I really think they do mean that as an implied prediction, even if only subconsciously. Otherwise why not just say “I like Van Gogh?” Doesn’t the term ‘actually’ imply something more? To me it does.

  41. Gravatar of Current Current
    14. August 2009 at 07:03

    Scott: “I suppose you are right. People might mean many different things by “true.” When you say X is true I suppose you might also mean that you believe X.”

    Yes. A lot of this comes down to the ambiguity of language.

    When religious people tell me that I believe things I say “Yes, I believe I’ll have another cup of tea”. English is especially bad for this sort of ambiguity.

    Scott: “I had thought it was the realists who thought that it made no sense to say one theory was truer than another.”

    Well, I don’t support realism in that sense.

    The problem here is that there are a great many different views on these problems. There isn’t just realism and pragmatism or forms of them. There are all sorts of other ideas. I haven’t really classified where I am myself.

    There are differences between what people think about theories and reality. Many believe that an external, real, world exists and that they perceive it only imperfectly as do others. But they believe that theories are similarly always deficient. You may say that the debate over the existence of the world is non-sensical, perhaps it is, but the difference in treatment of theories isn’t so great.

    Scott: “I thought realists said the Ptolemaic system of astronomy was false, not less true.”

    Well, again it depends on what you mean by true or false. When we say it’s false what we mean is that we now know better.

    We must be careful here to distinguish between the Ptolemaic view and the Ptolemaic model. The view of the earth as being in the centre of the solar system was never useful for astronomical investigations. It never helped to provide an understanding of the situation. The mathematical Ptolemaic model however was quite useful.

    Scott: “I have no trouble with people using terms like truer, I just assume they mean more useful. But I think life would be simpler if they simply said “more useful.” Indeed, isn’t there always a better term than ‘true?’”

    No it’s not because the question “useful to whom” must be asked. For all it’s vagueness I think “true” is better in many circumstances. Because the person who says it is clearly claiming that they are talking about useful explanations, not what it is useful to say.

    Scott: “If you say something, and I respond “how true,” the meaning is vague. I should say, “I agree” or “yes, that is generally regarded as true.” Which are two very different meanings.”
    I don’t know anyone who when they say “true” means “other people think this is true”. That said many of my friends are quite egotistical people.

    That said, I think a lot of discussions about “epistemology” are more about terms than about disagreements over substance.

    Scott: “Doesn’t the term ‘actually’ imply something more? To me it does.”

    I see what you mean there. For what it’s worth I avoid saying things like. I’ve always thought it just a way of expressing an aesthetic opinion using forceful words from another field that don’t really belong in aesthetics.

  42. Gravatar of ssumner ssumner
    17. August 2009 at 00:18

    Current, You said,

    “I don’t know anyone who when they say “true” means “other people think this is true”. That said many of my friends are quite egotistical people.”

    Don’t you think if someone says “X is a great TV show.” And someone replies “That’s true” they are really just indicating that they like it. But if someone says “I’m pretty sure Albany is the capital of New York state” and the other person says “that’s true” they are saying everyone regards Albany as the capital? I think there is a distinction in how its used.

    I agree with much of what you say in your reply, but I have to admit that Rorty made me rethink your last point. That was originally my view. But the way experts reach a consensus about artists like Van Gopgh is weirdly similar to how a new view of the solar system gets accepted by the consensus of experts. Some artistic reputations once established are never lost, others are lost over time. That’s also true for scientific theories. I agree with you that art and science seem very different. But when you try to pin down exactly why, it’s harder than you think. In some sciences it’s not even easy to do experiments.

  43. Gravatar of Current Current
    17. August 2009 at 04:28

    Scott: “Don’t you think if someone says “X is a great TV show.” And someone replies “That’s true” they are really just indicating that they like it. But if someone says “I’m pretty sure Albany is the capital of New York state” and the other person says “that’s true” they are saying everyone regards Albany as the capital? I think there is a distinction in how its used.”

    Isn’t that a difference between knowledge of definitions and that of other things.

    Consider fried breakfasts for example. There is a lot of controversy about them in Britain. The food critic of the Telegraph once said that no English breakfast can include hash browns. He was saying this in order to condemn hash browns as a vile Americanism. I think his view is that a Full English breakfast should contain fried eggs (or scrambled), fried bacon, fried mushrooms, sausages, baked beans and toast.

    His statement is a rhetorical one. He is talking about how a Full English Breakfast should be defined. However I expect that if he were asked the more careful question “what do you think English people define a Full English breakfast to be” he would include hash browns.

    This is a definitional problem. We talk about “true” definitions, when really we should talk about social used definitions.

    In Science there is a lot of loose talk and muddling up of this sort of stuff. But, I don’t think that should be taken too seriously. If I say Quantum Electro-Dynamics is true what I mean is that I think that it is the best attempt to understand the phenomena involved. That view corresponds with the physics communities’ view. But, those two types of truth are quite separate.

    Scott: “I agree with much of what you say in your reply, but I have to admit that Rorty made me rethink your last point. That was originally my view. But the way experts reach a consensus about artists like Van Gopgh is weirdly similar to how a new view of the solar system gets accepted by the consensus of experts. Some artistic reputations once established are never lost, others are lost over time. That’s also true for scientific theories. I agree with you that art and science seem very different. But when you try to pin down exactly why, it’s harder than you think. In some sciences it’s not even easy to do experiments.”

    That sounds interesting I’ll read him some time. My reading list is a bit long at present though.

  44. Gravatar of Current Current
    17. August 2009 at 04:39

    Actually, I think the Breakfast discussion is a good one for demonstrating the problems of epistemology….

    http://www.timesonline.co.uk/tol/life_and_style/food_and_drink/article3758517.ece

    http://www.telegraph.co.uk/foodanddrink/foodanddrinknews/5383354/Little-Chefs-Heston-Blumenthal-menu-to-go-nationwide.html

    In these articles there is a whole mix of assertions. Some about what a person thinks the world is like. Some about what a person thinks society is like. Some about what a person thinks other members of society should think. There very funny too.

  45. Gravatar of ssumner ssumner
    19. August 2009 at 03:01

    Current, Speaking of definitions, I’m told that the Taiwan constitution claims that Taiwan is a part of China. I suppose it is, but I’m not sure it is by “definition.” I just mention this half-jokingly because i think you implied that issues like state capitals are just definitions. Maybe.

    The is a split in American betweeen low-brow and high-brow diets, it seems the UK is the same.

  46. Gravatar of Current Current
    21. August 2009 at 09:00

    Scott: “Speaking of definitions, I’m told that the Taiwan constitution claims that Taiwan is a part of China.”

    Yes, the country is named “The Republic of China on Taiwan”.

    Mainland China similarly defines Taiwan as part of China and calls it a “rogue province”.

    Scott: “I just mention this half-jokingly because i think you implied that issues like state capitals are just definitions. Maybe.”

    That wasn’t what I meant to imply.

    When discussing a state-capital there are two different questions. Firstly, is the machinery of government associated with a state-capital in that city? Secondly, what do you call such a city? The first isn’t a question of definitions, the second is.

    If you gave Heston Blumenthal Egg, Bacon, Sausage, toast and a hash brown on a plate he would tell you that this is not an English breakfast. But he would not deny that it is Egg, Bacon, Sausage, etc.

  47. Gravatar of TheMoneyIllusion » The mindset that led to the crisis TheMoneyIllusion » The mindset that led to the crisis
    9. June 2010 at 07:33

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  48. Gravatar of TheMoneyIllusion » Raghu Rajan’s intuition about aggregate demand TheMoneyIllusion » Raghu Rajan’s intuition about aggregate demand
    6. July 2010 at 05:34

    [...] maddening it is to read this sort of thing.  Let’s start with the San Francisco Fed.  As Milton Friedman pointed out back in 1998, persistently low interest rates are evidence of tight money, not an [...]

  49. Gravatar of TheMoneyIllusion » Why I am so repetitious TheMoneyIllusion » Why I am so repetitious
    30. August 2010 at 09:04

    [...] first did a post on that Friedman quotation back more than a year ago, and have done a dozen since using the exact same quotation.  But only in the past few weeks has [...]

  50. Gravatar of Zum Durchdenken 7 « Aus dem Hollerbusch Zum Durchdenken 7 « Aus dem Hollerbusch
    31. August 2010 at 07:17

    [...] — Ökonom Scott Sumner in einem Kommentar auf seinem eigenen Blog „The MoneyIllusion“. Übrigens ein insgesamt interessanter Blog, allerdings mit sehr langen Einträgen, für die man sich Zeit nehmen muss. [...]

  51. Gravatar of TheMoneyIllusion » Milton Friedman, Ben Bernanke and me TheMoneyIllusion » Milton Friedman, Ben Bernanke and me
    10. November 2010 at 19:35

    [...] August 2, 2009 [...]

  52. Gravatar of TheMoneyIllusion » Good news: lower interest rates. . . . Even better news: higher interest rates. TheMoneyIllusion » Good news: lower interest rates. . . . Even better news: higher interest rates.
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    [...] to QE critics (and proponents); stop focusing on interest rates.  Here’s what Milton Friedman had to say in 1997: After the U.S. experience during the Great Depression, and after inflation and [...]

  53. Gravatar of Is MV=PY useful? | Matt Rognlie Is MV=PY useful? | Matt Rognlie
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  54. Gravatar of TheMoneyIllusion » Raghuram Rajan doesn’t want the Fed to “do something” TheMoneyIllusion » Raghuram Rajan doesn’t want the Fed to “do something”
    23. July 2011 at 07:07

    [...] a University of Chicago economist!  Milton Friedman must be rolling over in his grave.  Friedman pointed out that low rates in Japan were a sign that money had been very tight.  Funny how extremely [...]

  55. Gravatar of TheMoneyIllusion » The sad end of monetarism TheMoneyIllusion » The sad end of monetarism
    13. August 2011 at 08:22

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  56. Gravatar of TheMoneyIllusion » David Stockman doesn’t know the difference between easy money and tight money TheMoneyIllusion » David Stockman doesn’t know the difference between easy money and tight money
    17. August 2011 at 10:33

    [...] course low interest rates are actually a sign that money has been tight, as Milton Friedman told us in 1997: Low interest rates are generally a sign that money has been tight, as in Japan; [...]

  57. Gravatar of スコット・サムナーのマネー観、マクロ観 by Scott Sumner – 道草 スコット・サムナーのマネー観、マクロ観 by Scott Sumner – 道草
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    [...] これら三素材をつなげて見よう。ウッドフォードは、流動性の罠の下では長期間に渡って金利を低いままにしておくことを約束しなければならないと論じる。この提案には問題があって、低金利と金融緩和を混同している。流動性の罠の下では長期間に渡って金融緩和を続けなければならないという意味なら、ウッドフォードは正しい。しかし日本で見られるように金融の緩和でなく、低い名目金利だけによっては弱いNGDP成長期待をほとんど変えることができない。ミルトン・フリードマンはゼロに近い金利は金融緩和よりも金融引き締めを反映している可能性が高いと1997年に指摘している(訳注:himaginary氏のまとめ)。従って、ウッドフォードが流動性の罠の下では信任され持続性のある金融緩和政策を提案するのは正しいが、その政策のための方法では金利ではないのだ。(実際、想像できる最もタイトな金融政策は永遠のゼロ金利をもたらすだろう)。金利ではなく、物価水準かNGDPの将来経路を目標とした、信任される政策が必要なのだ。水準目標がより適切な理由は後に説明する。   [...]

  58. Gravatar of TheMoneyIllusion » Never reason from an interest rate change TheMoneyIllusion » Never reason from an interest rate change
    28. February 2012 at 08:04

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  59. Gravatar of TheMoneyIllusion » The Fed doesn’t have the luxury of waiting for the perfect DSGE model; they must do policy right now TheMoneyIllusion » The Fed doesn’t have the luxury of waiting for the perfect DSGE model; they must do policy right now
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  60. Gravatar of TheMoneyIllusion » John Taylor on the BIS critique of current monetary policy TheMoneyIllusion » John Taylor on the BIS critique of current monetary policy
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  61. Gravatar of TheMoneyIllusion » The connection between DeLong’s lament and Friedman’s lament TheMoneyIllusion » The connection between DeLong’s lament and Friedman’s lament
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  62. Gravatar of TheMoneyIllusion » Your mission, should you decide to accept it … TheMoneyIllusion » Your mission, should you decide to accept it …
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  63. Gravatar of TheMoneyIllusion » Posner’s peculiar essay on Milton Friedman TheMoneyIllusion » Posner’s peculiar essay on Milton Friedman
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  64. Gravatar of TheMoneyIllusion » Glasner, Keynes, and the Fisher effect TheMoneyIllusion » Glasner, Keynes, and the Fisher effect
    28. July 2013 at 07:49

    [...] market, as a function of interest rates and real output, for almost any model.  But does this sound like a guy who “believed in” the IS-LM model as a useful way of thinking about macro [...]

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