Month: December 2006

How did Friedman differ from Keynes?

Brad DeLong and Greg Mankiw offer insightful comments on Friedman and Keynes.  On macroeconomics, what does the difference boil down to?  I can think of a few possibilities:

1. Keynes thought a horizontal LM curve ("the liquidity trap") was possible, but Friedman did not.  This was Friedman’s own view, at least as expressed in Milton Friedman’s Monetary Framework.  Without a horizontal LM curve, monetary policy can always pull the economy out of a downturn.

2. Keynes emphasized volatile flows, Friedman emphasized stocks of wealth; a stocks view should imply greater macro stability.

3. Keynes challenged the assumption of gross substitutability, and therefore thought that price and wage flexibility could lead to a downward spiral of falling prices and incomes.  Wage and price stickiness was not so much an assumption for him as a policy recommendation.  Friedman viewed stickiness as a necessary evil, stemming from the general imperfection of the world.

4. Friedman thought that the liquidity premium on money was unlikely to keep interest "too high"; for Friedman the interest rate is determined solely in the loanable funds market by time preference and productivity, a’la Irving Fisher.

5. For Keynes the demand for investment was inherently unstable, for "beauty contest" reasons.  Friedman viewed expectations as "adaptive," and tracking the world with a lag, rather than tracking the expectations of other people.

6. Friedman simply had more faith in the self-adjusting nature of the market, and #1-#5, and other possibilities, were mere epiphenomena of this broader philosophical difference.

The Price is Right

One of the most bizarre aspects of the organ shortage is that it is illegal to pay for cadaveric organs for use in transplants but it is legal to pay for cadavers.  That’s right, it’s illegal to pay people to donate their organs for the purpose of saving lives but medical schools can pay people to donate their bodies so that plastic surgeons can practice their nip and tuck.   

In a remarkable paper forthcoming in Cato’s Regulation and reported in the Washington Post, economists David Harrington and Edward Sayre take the argument one step further.  Medical schools regularly offer to pay funeral expenses for whole body donation.  So does the offer of payment deter altruistic donation and decrease the supply, as we have been told could occur if we were to compensate organ donors?  Of course not.  In fact, Harrington and Sayre note that the offer to pay funeral expenses is worth more in states where the funeral industry is heavily regulated and thus prices are high and, just as predicted in Econ 101, the supply of whole body donations is higher in those states.

It’s time to lift the price control on human organs, relieve the shortage and save lives.

What I’ve been reading

1. Michael Crichton, Next. Yes it is "writing-by-numbers," yes it is better than his recent work, but no, it is not nearly as good as Jurassic Park, Sphere (my favorite), Congo, or for that matter his book on Jasper Johns.  Some critics like it.  The start is OK but it falls apart as it proceeds.  By the way, here is my previous post on human-chimp hybrids

2. Robert BolaƱo, Distant Star.  A minor masterpiece.  He is another of those first-tier Latin writers, along with Asturias and Rulfo, who for mysterious reasons no one in the United States seems to read.

3. Richard Powers, The Echo Maker.  A deserving winner of a National Book Award, plus I am interested in the neurology theme.  I find many of Power’s earlier books too intellectualized, but this one held my attention throughout.  By the way, I also tried the non-fiction National Book winner, the book about the Dust Bowl years, but it didn’t hold my interest.

4. The Poor Always Pay Back: The Grameen II Story, by Asif Dowla and Dipal Barua.  A very good look at the micro-credit movement.

Addendum: The NYT picks its ten best books of the year.