Unlearning Economics has written a very nice post on Milton Friedman’s distortions.

It is unbelievable that people still believe in the quantity theory of money and the distortion appears to have been permanent. When Milton Friedman was rising in popularity, Nicholas Kaldor took him to task and while conceding to Kaldor that the stock of money is endogenous, Friedman still maintained the direction of causality from money to income.

One of Nicholas Kaldor’s best papers is The New Monetarism written in 1970 [1] in which he shows why the stock of money should be taken as endogenous and that Friedman’s causality is entirely incorrect. In that he also had a nice description of how Friedman’s influence was growing at the time:

… However, we now have a “monetary” counter-revolution whose message is that during this time we have been wrong and our forbears largely, or not perhaps entirely right: anyhow, on the right track, whereas we have been shunted on to the wrong track. This new doctrine is assiduously propagated from across the Atlantic by a growing band of enthusiasts, combining the fervour of early Christians with the suavity and selling power of a Madison Avenue executive. And it is very largely the product of one economist with exceptional powers of persuasion and propagation: Professor Milton Friedman of Chicago. The “new monetarism” is a “Friedman Revolution” more truly than Keynes was the sole fount of the “Keynesian Revolution”, Keynes’s General Theory was the culmination of a great deal of earlier work by large numbers of people: chiefly Wicksell and his followers, Myrdal and Lindahl in Sweden, Kalecki in Poland, not to speak of Keynes’s colleagues in Cambridge and of many others.

The new school, the Friedmanites (I do not use this term in any pejorative sense, the more respectful expression “Friedmanians” sounds worse) can record very considerable success, both in terms of the numbers of distinguished converts and of some rather glittering evidence in terms of “scientific proofs”, obtained through empirical investigations summarised in time-series regression equations. Indeed, the characteristic feature of the new school is “positivism” and “scientism”; some would say “pseudo-scientism”, using science as a selling appeal. They certainly use time-series regressions as if they provided the same kind of “proofs” as controlled experiments in the natural sciences. And one hears of new stories of conversions almost every day, one old bastion of old-fashioned Keynesian orthodoxy being captured after another:  first, the Federal Reserve Bank of St. Louis, then another Federal Reserve Bank, then the research staff of the I.M.F., or at least the majority of them, are “secret”, if not open, Friedmanites. Even the “Fed” in Washington is said to be tottering, not to speak of the spread of the new doctrines in many universities in the United States. In this country, also, there are some distinguished and lively protagonists, like Professor Harry Johnson and Professor Walters, though, in comparison to America, they write in muted tones and make more modest claims, which makes it more difficult to discover just what it is they believe in, just where the new doctrine ceases to be a matter of semantics and becomes a revelation with operational significance.

Also read Lunch With FT: Milton Friedman and William Keegan’s article written for The Observer: So Now Friedman Says He Was Wrong referring to the Financial Times article on Friedman finally conceding in 2003 that he was wrong all along.

[1]  Kaldor, N., 1970,  The New Monetarism, Lloyds Bank Review 97, pp. 1-18, also published in Kaldor, N., Further Essays in Applied Economics, London: Duckworth, 1978, pp. 1-21.

Thanks to Philippe for pointing out some spelling errors (mine) in the quote in the previous version of this post.