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Milton Friedman’s Views on Method and Money Reconsidered in Light of the Housing Bubble

In: The Emergence of a Tradition: Essays in Honor of Jesús Huerta de Soto, Volume I

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  • Joseph T. Salerno

    (Mises Institute)

Abstract

This paper argues that Milton Friedman failed to recognize the asset bubbles leading up to the financial crisis of 2007–2008. It attributes this failure to the inductivist method that Friedman and Anna Schwartz used to formulate the quantity theory at the heart of the doctrine of monetarism. The “clinical method” used by Friedman and Schwartz was derived from Wesley C. Mitchell’s work on business cycles and was not the method that Friedman propounded in his famous essay on positive economics. The clinical method of theory construction, because it relies heavily on statistical correlations between the money supply and other aggregate variables, led to a simplistic and truncated theory of the monetary transmission mechanism which completely neglected its complex “microeconomic” network of channels and pathways, particularly as they relate to the financial markets and the structure of capital and production.

Suggested Citation

  • Joseph T. Salerno, 2023. "Milton Friedman’s Views on Method and Money Reconsidered in Light of the Housing Bubble," Springer Books, in: David Howden & Philipp Bagus (ed.), The Emergence of a Tradition: Essays in Honor of Jesús Huerta de Soto, Volume I, pages 263-291, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-17414-8_22
    DOI: 10.1007/978-3-031-17414-8_22
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    References listed on IDEAS

    as
    1. Taylor, John B., 2001. "An Interview With Milton Friedman," Macroeconomic Dynamics, Cambridge University Press, vol. 5(1), pages 101-131, February.
    2. Robert L. Hetzel, 2007. "The contributions of Milton Friedman to economics," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 93(Win), pages 1-30.
    3. James Lothian, 2011. "Why Money Matters: A Fourth Natural Experiment," Open Economies Review, Springer, vol. 22(2), pages 179-187, April.
    4. Kevin Hoover, 2004. "Milton Friedman?s Stance: The Methodology of Causal Realism," Working Papers 222, University of California, Davis, Department of Economics.
    5. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1.
    6. Lothian, James R., 2009. "Milton Friedman's monetary economics and the quantity-theory tradition," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1086-1096, November.
    7. Hugh Rockoff, 2010. "On the Origins of A Monetary History," Chapters, in: Ross B. Emmett (ed.), The Elgar Companion to the Chicago School of Economics, chapter 7, Edward Elgar Publishing.
    8. Edward Nelson, 2007. "Milton Friedman and U.S. monetary history: 1961-2006," Review, Federal Reserve Bank of St. Louis, vol. 89(May), pages 153-182.
    9. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    10. Kevin Hoover, 2004. "Milton Friedman?s Stance: The Methodology of Causal Realism," Working Papers 66, University of California, Davis, Department of Economics.
    11. Milton Friedman, 2004. "Reflections on A Monetary History," Cato Journal, Cato Journal, Cato Institute, vol. 23(3), pages 349-351, Winter.
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