Economics Dictionary of ArgumentsHome
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| Expectations: Expectations are cognitive anticipations about future events or outcomes, influencing perception and behavior. They shape individual experiences by guiding attention, interpretation, and emotional responses. Expectations can be formed through past experiences, social influences, and cognitive processes, impacting decision-making and overall well-being. See also Experience, Perception, Behavior, Decisions._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Milton Friedman on Expectations (Economics) - Dictionary of Arguments
Landsburg I 34 Unemployment/expectations/Friedman/Landsburg: In 1958, the economist William Phillips(1) noticed a striking correlation: Times of high inflation are times oflow unemployment, and Vice versa. Over the next decade, the correlation held strong. >Phillips Curve. Inflation: The lesson most economists drew was that policymakers face a trade-off: You can have less unemployment, provided you're willing to tolerate (and even engineer) a bit more inflation. FriedmanVsPhillips: Milton Friedman, almost a Ione voice in the wilderness, begged to differ. (…) it fell to Friedman to remind the world that correlation is not the same as causation. >Causation, >Correlation. Example: a) Suppose you're a carpenter, currently unemployed because your best job offer is $ 500 a week, and you think you'd rather keep searching for something better. Of course if all prices and wages were to double, you'd be offered $ 1,000 a week, but you still wouldn't take it, because the real value of your job offer is unchanged. b) But let's tweak the story a little: Prices double overnight while you're asleep. In the morning, you're awakened by a phone call from an employer offering you $ 1,000 a week. You're delighted, because you're not yet aware that all prices have risen. You accept the job. After a few days, you visit the grocery store, discover the cruel truth that this week's $ 1,000 goes no farther than last week's $ 500, and submit your resignation. >Inflation. (…) it's not too hard to imagine a realistic version in which prices are rising, workers are not fully aware of the changes, and wage offers start to look better than they really are, fooling some people into taking jobs they don't really want, at least until they figure out they've been fooled. Employer: The same story works on the employer's side: You're a bicycle manufacturer, selling bicycles for $200 each. If all prices and all wages double, you'll go on as before, selling them for $400 each. Unless, of course, the doubling happens while you sleep, and you are awakened the next morning by the news that the price of bicycles has doubled, leading you to believe that the demand for bicycles must have mushroomed, and in turn leading you to expand your plant and hire more metalworkers, at least for a while. Eventually, of course, you'll realize that your plant expansion was ill-advised and you might not be needing those extra workers very long. (…) the morals are these: Expectations: Expected changes in inflation have no effect on employment. Unexpected Change: An unexpected increase in inflation can cause a temporary increase in employment - but not a permanent one. Landsburg I 35 Correlations: When there is a series of unexpected increases in inflation, economists (…) might notice that these increases are correlated with employment, but might fail to realize that the correlation will survive only as long as the inflation continues to be unexpected. Inflation: A policymaker who nevertheless wants to use inflation to reduce unemployment has to engineer an inflation that is higher than expected. This is hard to accomplish for very long. Expected prices: If prices rise by 10 percent in each of January, February, and March, people are going to expect them to rise by 10 percent in April as well. So if l want to keep unemployment down, I might need to engineer a 12 percent inflation rate in April, and then 14 percent in May - leading people to expect a 16 percent rate in June. Now I've got to unexpectedly go for 18 percent in June, and this way lies madness. Deception: Even the temporary reductions in unemployment caused by unexpected inflation are not good things. I do you no favour ifl reduce unemployment by fooling you into taking a job you wouldn't have wanted without the deception. >Phillips Curve. FriedmanVsPhillips/FriedmanvsPhillips Curve: Based on a story like this one, Friedman made his famous forecast that any attempt to exploit the Phillips correlation by keeping inflation high for a sustained period would surely fail - contrary to what pretty much everyone else believed at the time.* the 1970s unfolded, with inflation and unemployment both on the rise, Friedman's prediction proved to be spectacularly accurate (…). Landsburg I 40 Natural rate of unemployment/Friedman: Friedman went on to hypothesize that there is a natural rate of unemployment arising from the fact that we live in a changing and uncertain world, where there will always be some people who prefer to be temporarily unemployed in order to search for a better job or go back to school or deal with family emergencies. Any attempt to use inflation to drive unemployment below that natural rate is doomed to fail, at least in the long run, and is probably not doing anyone any favours even during the brief interval in which it appears to succeed.** This natural rate hypothesis is now one of the central tenets of macroeconomics. *One striking exception was Edmund Phelps, another Nobel-Prize-winner-to-be, who was simultaneously constructing a narrative very similar to Friedman's.(2) ** The natural rate can change, and will if someone finds a better way to match workers to jobs or if training programs become more effective. Friedman's point is that you can't change the natural rate of unemployment by changing the money supply. >Money supply/Friedman. 1. Phillips, William. 1958. The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. Economica, Nov. 1958. 2. Phelps, Edmund. (1967). Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time. Economica 1967._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
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> Counter arguments against Friedman
> Counter arguments in relation to Expectations (Economics)
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