Me and the permanent income hypothesis

Michael Duffy liked my most recent column for the Fin and invited me onto his Counterpoint program where we had a bit of a chat about various things – including Oscar Wilde  – though the topic was the permanent income hypothesis and what will happen to the handouts.

In any event, I thought I’d mention this here because I made a claim on the program that I didn’t get time to develop, so I thought I’d just provide you with some evidence. I said something like “Milton Friedman was a kind of Keynesian”. I was thinking particularly of this passage from something Friedman wrote in 1974.

One reward from writing this reply has been the necessity of rereading earlier work, in particular [Keynes’s] . . . General Theory. The General Theory is a great book, at once more naive and more profound than the ‘Keynesian economics’ that Leijonhufvud contrasts with the ‘economics of Keynes.’ . . .

I believe that Keynes’s theory is the right kind of theory in its simplicity, its concentration on a few key magnitudes, its potential fruitfulness. I have been led to reject it, not on these grounds, but because I believe that it has been contradicted by evidence: its predictions have not been confirmed by experience. This failure suggests that it has not isolated what are ‘really’ the key factors in short-run economic change.

The General Theory is profound in the wide range of problems to which Keynes applies his hypothesis, in the interpretations of the operation of modern economies and, particularly, of capital markets that are strewn throughout the book, and in the shrewd and incisive comments on the theories of his predecessors. These clothe the bare bones of his theory with an economic understanding that is the true mark of his greatness.

Rereading the General Theory has . . . reminded me what a great economist Keynes was and how much more I sympathize with his approach and aims than with those of many of his followers.

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