Inflation Binary

Blame Milton Friedman for this one, too. The economist made many significant contributions to the advancement of economic understanding, but perhaps an equal number of extreme errors. For one thing, that whole bout with bank reserves and “high powered money” (what became QE) recommended in the late nineties to cure Japan of its obvious monetary illness. This followed from the conceit that monetary policy and central banking would always offer positive, meaningful contributions.

The biggest blunder of them all, however, was Positive Economics. Begun long before Friedman, there had always been this idea that as a discipline Economics could fashion itself in a way more familiar to the hard sciences like physics. An economy can be precisely clocked, standardized, and then studied. This has been believed from before the time of Irving Fisher, going all the way back to Simon Newcomb and even John Keynes – Neville (father), not Maynard (son).

Once all the relevant factors are chosen and dissected, these could be watched regularly and then manipulated in order to transform economic aggregates in a predictable fashion. Powerful mathematical equations then designed to govern both the choosing and predicting, taking the “artwork” out of this often-tortured study.

Friedman merely took things a step (or five) further in the fifties.

In 1953, Friedman published perhaps his most scholarly book, Essays in Positive Economics. While including other authors, the lead essay was Friedman’s The Methodology of Positive Economics which remains his most cited academic piece of inside baseball. The first sentence of the essay quotes John Neville Keynes’ 1890 Scope and Method, recognizing the substantial “confusion” between positive science, normative science, and art that has been “the source of many mischievous errors.”

Buoyed by further “advancements” in the sixties and seventies, particularly Robert Lucas’ rational expectations equations, the result was neo-Keynesian (Maynard) econometrics – that which today governs all mainstream opinions on any topic even remotely associated with economy or finance.

And it did not take very long for some quite astute observers to recognize how it had all gone very wrong. Positive Economics had intended to be the set of guiding principles to lead the transformation into a true science but instead had gotten itself entangled in other matters only tangential to what was supposed to have been the focus of the whole damn effort.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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