Science of Bubbles

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Long article in Scientific American, The Science of Economic Bubbles and Busts. H/T Calculated Risk.

2 Comments

  1. The SciAm authors get Milton Friedman completely wrong. He, like other monetarists, emphatically believed in short-run money illusion, contrary to what the SciAm authors say.  
     
    Indeed, Friedman’s famous AEA Presidential Address was largely about short-run money illusion, its disappearance in the long run, and the implications for economic theory and policy. But the SciAm authors have reduced Friedman to a foil, so there’s no room for accurately summing up monetarism.  
     
    As John Gurley summed up monetarism in the 1960′s: “Money is a veil, but when the veil flutters, real output sputters.” Sounds like money illusion to me.  
     
    And the evidence emphatically supports the idea that that there is roughly zero long-run money illusion. The link in my name heads to a classic paper, “Some Monetary Facts,” that shows that money growth and inflation have roughly zero correlation with long-run output growth. So money illusion is (at best) a short-run phenomenon, as Friedman argued.  
     
    Robert Lucas’s Nobel Lecture and basically any macroeconomics text–New Keynesian or neoclassical–will tell much the same tale.  
     
    There are exceptions and caveats, but the big story is simple: Money illusion is a short-run phenomenon, and Milton Friedman preached that fact.  
     
    Guess we can’t trust SciAm for economics coverage.

  2. SciAm has been a rag for fifteen years.

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