Milton Friedman is wrong

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Bloomberg's Noah Smith takes aim at Milton Friedman's cherished theory, noting that "Friedman was wrong about the permanent income hypothesis:"

But unlike with the first two examples [Einstein on quantum mechanics and Linus Pauling on DNA], where scientists quickly realized the mistake, economists haven't yet come to grips with the reality.

"This idea is important," Smith continues, "because it meant that we shouldn't expect fiscal stimulus to have much of an effect"--which it clearly does. Smith cites this study (PDF) by Peter Ganong and Pascal Noel showing that "consumer behavior is more short term than almost any mainstream model predicts." His conclusion is that "it's likely that decades of believing in Friedman's idea have caused us to underrate the potential power of fiscal stimulus and other policies that boost short-term income:"

Even the greatest scientists can be wrong. The measure of a science is how quickly it comes to grips with the mistakes its heroes make.

I suspect that, particularly on the conservative side, economics will fail that measure.

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This page contains a single entry by cognitivedissident published on January 13, 2017 4:44 PM.

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