James Buchanan (1997): Has Economics Lost Its Way?: Hoisted from the Archives

Hoisted from the Archives: This serves as a good index of how much Milton Friedman’s redefinition of “neutral monetary policy” to mean “whatever monetary policy keeps nominal GDP on its trend growth path” led people prone to motivated reasoning in a laissez-faire direction completely and horribly astray. It also serves as an example of an astonishing failure to mark one’s beliefs to market. Never mind that the rough constant of M2 velocity before 1980 had been an obvious example of Goodhart’s Law, and never mind that even before 1980 forecasts of the state of the economy one and two years out based on M2 were inferior to other forecasts, by 1997 James Buchanan had just seen a remarkable five-year 30% runup in M2 velocity. and the complete ditching of monetary aggregates not just as targets but even as indicators by Alan Greenspan in favor of a neo-Wicksellian “neutral interest rate” approach that had nothing whatsoever to do with an “effective monetary constitution” of any type:

FRED Graph FRED St Louis Fed

James Buchanan: Has Economics Lost Its Way?: “IV. The Keynesian Aberration….. The Keynesian enterprise can be interpreted as an ultimately failed attempt to jury-rig improvements on a structure of institutional constraints that were nonsustainable… an aberration… grounded in rather elementary misunderstanding of… the classical vision…. Who could expect that ‘the market’ could adjust quickly to a dramatic reduction in the politically-influenced and unpredictable supply of money? It must remain forever mysterious as to why Keynes and the Keynesians were willing to neglect prospects for institutional reforms in the effective monetary constitution, while, at the same time, proposing radical changes along other more specific dimensions of policy… politicized controls over particular choice vectors (employment, investment)…

James Buchanan (1997): Has Economics Lost Its Way? https://delong.typepad.com/buch_econlostway.pdf


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