At Amazon: The Optimum Quantity of Money (Revised Edition) by Milton Friedman. Under Editorial Reviews for the book there are some quotes, including this one from J. R. Hicks:
Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost. It is the former question, not the latter, on which Friedman’s historical researches may well throw some light.
It's almost like an insult: Yes, Friedman is pretty good at the thing most economists are pretty good at, but he's not so good at the important stuff.
So I had a good laugh at that. But look at that first sentence again:
Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost.
What I want to ask is: What causes the equilibrium to be lost?
You'll find the answer in the same sentence: It's the "defining what should be done" during the equilibrium that causes the equilibrium to be lost.
It's the things economists do when they're not in trouble yet, that get them into trouble.
I've said as much before.
September 23, 2015, Identifying the economic environment:
Back after the end of World War Two, the government had a lot of debt and the private sector didn't. What with reduced output during the Depression and rationing during the war, after the war people were ready to spend some, even to go into debt.
And then, because people didn't already have a lot of debt, it wasn't a problem when they did accumulate a little debt. The economy wasn't dragged down by the cost of debt so much as it was buoyed by the spending of borrowed money.
The economic environment, in other words, was conducive to economic growth. And growth was good.
In that environment, you could put idiots in charge and the economy would still be good.
August 19, 2017: Agreeing with Christopher Snyder, who said "a bad economy can feed back to make beneficial policies look damaging." My thought:
Yeah, exactly, and that's very important. There is another version of the same idea: A good economy can make any policy (good or bad) look good.
Times like the "Great Moderation" and the "Golden Age" that followed World War Two are taken by economists of the time as evidence of their own ability to make great policy. In reality, such times are evidence of the economic environment and of its predominance over policy. It takes decades for policy to destroy equilibrium.
1 comment:
"Back after the end of World War Two, the government had a lot of debt and the private sector didn't. What with reduced output during the Depression and rationing during the war, after the war people were ready to spend some, even to go into debt."
This is not quite correct. There was no need to go into debt.
From a post of mine:
During the war, through a combination of rationing and the sale of war bonds, forced personal saving rose to around 25% from less than 5% before the war, so pent-up savings were high at the end of the war. But it was not that people ran down their accumulated saving during the 1945 recession. If that were the case then the saving rate would have turned negative, which it never did. It was rather that people cut their saving rate sharply though it still remained higher than the level before the war. So although output and thus personal income fell by more than 12% this loss in aggregate demand was compensated by the fall in the saving rate. Thus aggregate income fell but not consumption demand. The 1945 recession was a GDP recession, and a very severe one at that, but it was not a consumption recession. There was no pain. That is why the history books refer to it as "technically a recession".
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