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What was Milton Friedman's Critique of the ABCT?

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Rcder posted on Wed, Oct 27 2010 5:26 PM

This is a question about the Chicago School of Economics.  What was Milton Friedman's criticism of the Austrain business cycle theory, and why was it wrong?  If there's another thread or an article answering this, I'd greatly appreciate it if it was posted.  I know he's a supporter of the Fed, but to be honest, I haven't read much of his work, only enough to know that he sharply disagreed with the Austrians on the cause of economic downturns.


Thanks again.

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Answered (Verified) Esuric replied on Wed, Oct 27 2010 6:49 PM
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Friedman's basic argument was that the Austrian theory of cycles "simply doesn't correspond to the facts." In other words, the Austrian theory of cycles, though logically consistent, partially contradicts the monetarist explanation and is therefore untenable (how convenient). Now, the facts that he refers to are (a) the rate of bank failures skyrocketed and the total supply of money contracted dramatically, leading to general price deflation, and (b) the 1920s saw only a moderate rate of general price inflation. Additionally, some think that Friedman's critique of the Keynesian framework also applies to the Austrian theory of cycles, namely the fact that inflation, in the long run, actually increases interest rates rather than reducing them.

The problem is that Milton Friedman did not entirely understand the ABCT. In fact, the Monetarist explanation fully agrees with what Hayek referred to as "secondary phenomena." In other words, the Monetarists, like the Keynesians, focus on the effects of depression rather than the causes of depression. Additionally, he has a very primitive understanding of inflation, namely as a general and uniform rate of price inflation amongst final consumer goods and services (this dogma still dominates much of the mainstream today).

And finally, the fact that monetary expansion eventually increases interest rates is entirely consistent with the Austrian theory of cycles.

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Bardock yes

I'm a big fan

In States a fresh law is looked upon as a remedy for evil. Instead of themselves altering what is bad, people begin by demanding a law to alter it. ... In short, a law everywhere and for everything!

~Peter Kropotkin

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EEmr replied on Wed, Jan 2 2013 1:44 PM

His only criticism was by changing a study from 1969, in 1993 by adding a reference to the Mises theory of the cycle.

In his study he claimed that since the fall in GDP was smaller than the preciding expansion of GDP, than that meant all theories which identify problems in the boom-phase are erroneous.

No, investigation of credit growth, leverage, savings, interest rates or even "output-input" ratios. Just bland gdp-positivism of something that has nothing to do with the case.

Sometimes, I seriously get the feeling that Friedman was just a FED disinfo-agent. I mean, how sloppy can a mans work become ?

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