Milton Friedman Got Another Big Idea Right

[Krugminator2]

Also Robert Murphy response.

Long ago, people thought the business cycle was akin to a natural event, like the phases of the moon. That has since been disproven, but there are a number of other competing hypotheses. Many mainstream theories hold that recessions are the result of unpredictable events — changes in the rate of technological innovation, monetary policy or asset prices — that randomly speed the economy up or slow it down. Some alternative theories hold that booms cause busts, because good times allow bad investments to build up in the financial system. According to these theories, the larger the boom, the larger the crash that follows.



Then there’s the so-called plucking model. Proposed by the legendary economist Milton Friedman, it holds that the economy is like a string on a musical instrument — recessions are negative events that pull the string down, and after that it bounces back. Just as a string snaps back faster if you pull it harder, this theory holds that the deeper the recession, the faster the recovery that follows. But you can only pluck the economy in one direction; bigger expansions don’t lead to bigger recessions.

https://www.bloomberg.com/opinion/ar...ns-looks-right



Murphy and Roger Garrison say this is consistent with Austrian Business Cycle

The data by which Noah Smith thinks Friedman's plucking model has been vindicated, are perfectly consistent with Mises' theory as to what causes recessions.

Friedman's empirical findings are broadly consistent with both Monetarist and Austrian views.

https://mises.org/wire/does-milton-f...s-cycle-theory

http://webhome.auburn.edu/~garriro/fm1pluck.htm

[Zippyjuan]

Long ago, people thought the business cycle was akin to a natural event, like the phases of the moon. That has since been disproven,

If booms and busts are not natural, we should find times when they did not occur. But they have always happened. If it is proven that they are not natural events, I invite anybody to show extended periods of time without them.

[Krugminator2]

If booms and busts are not natural, we should find times when they did not occur. But they have always happened. If it is proven that they are not natural events, I invite anybody to show extended periods of time without them.

Right now? 10 years without a recession. Australia has gone decades without recession.

The point of Friedman's idea is they are not predictable and they are temporary shocks. They aren't a predictable wavelike movement. He is also saying that booms don't lead to inevitable busts. You can have a boom that just slows down. Whereas if you have a steep bust, you will get a strong recovery as long as there isn't a major structural problem in banking.

[Zippyjuan]

Right now? 10 years without a recession. Australia has gone decades without recession.

The point of Friedman's idea is they are not predictable and they are temporary shocks. They aren't a predictable warlike movement. He is also saying that booms don't lead to inevitable busts. You can have a boom that just slows down. Whereas if you have a steep bust, you will get a strong recovery as long as there isn't a major structural problem in banking.

Australia has had booms and busts too. Those blue vertical lines? Recessions.

[Krugminator2]

Australia has had booms and busts too. Those blue vertical lines? Recessions.

Actually those blue lines aren't recessions. They haven't had a recession since 1990. https://www.theatlantic.com/ideas/ar...ssions/578482/

And the point Friedman is making isn't that recessions don't happen. They do. The point is there isn't some predictability like the sun coming up. Look at how many recession predictions Peter Schiff has made since 2009 based on Austrian Business Cycle.

The other point of this data is that sustained economic growth isn't predictive of anything. Whereas a recession IS predictive of a recovery if you have enough liquidity in the system. This matches up with how stocks behave as well. Steep declines tend to have steep bounces. That is shown in a lot of quantified data. But strength in a stock can lead to a decline but just as often begets more strength.

[tebowlives]

Actually those blue lines aren't recessions. They haven't had a recession since 1990. https://www.theatlantic.com/ideas/ar...ssions/578482/

And the point Friedman is making isn't that recessions don't happen. They do. The point is there isn't some predictability like the sun coming up. Look at how many recession predictions Peter Schiff has made since 2009 based on Austrian Business Cycle.

The other point of this data is that sustained economic growth isn't predictive of anything. Whereas a recession IS predictive of a recovery if you have enough liquidity in the system. This matches up with how stocks behave as well. Steep declines tend to have steep bounces. That is shown in a lot of quantified data. But strength in a stock can lead to a decline but just as often begets more strength.

Schiff is trying to sell gold. Stay away from those types who have another interest.
I don't understand the need to get technical about what qualifies for a recession/depression. Bad economic times/horrible economic times.

Curious was the economy during WW2 considered a recession?