Apparantly Friedman said that:
Nobel laureate Milton Friedman, after examining the history of business cycles in the US, concluded that “The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false.”
Anyone know why?
Who needs evidence? Misesians, unite!
Seriously, though, I would like to know, too.
http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html
Little more than handwaving by Friedman from what I understand.
So he did not substantiate it; it was just a groundless appeal to emotion?
Ah, yeah.
This conclusion of Friedman’s is based on the “plucking model” thing he developed, which is severely flawed.
Roger Garrison explains those flaws quite well in his book “Time and Money”.
Here is Garrison on the Plucking Model: http://www.auburn.edu/~garriro/fm1pluck.htm
Here are some of the relevant portions of the above text:
In a report on research in progress issued more than a quarter-century ago and again in a recent article consisting largely of excerpts from the earlier report, Milton Friedman [1969a; 1993] calls into question an entire class of business cycle theories which treat boom and subsequent bust as a logical and chronological sequence. He points to the Austrian theory of the business cycle as an example of the class of theories at odds with his own plucking model, which depicts the economy’s output as falling (or being “plucked”) below trend at random intervals and to various extents. In each episode of plucking, the return to trend mirrors the preceding fall, differing only by the underlying secular growth. Friedman [1993, 172] indicated decades ago that “If further substantiated empirically,” the lack of boom-bust correlation “would cast grave doubt on those theories that see as a source of a deep depression the excesses of the prior expansion [the Mises cycle theory is a clear example].” 1 More recently, he has claimed in an interview with Hammond [1992,102] that the “evidence [showing a zero correlation between boom and succeeding bust but a high correlation between boom and preceding bust] is decisive refutation of von Mises.”
Taking account of the differing levels of aggregation, the data described by the plucking model are wholly consistent with the Austrian theory. The Austrians—and particularly Mises—were always insistent on using the term malinvestment instead of the more conventional overinvestment. During a credit-induced boom, investment in the relatively high stages of production is excessive in that resources are drawn away (by an artificially low rate of interest) from the relatively low stages of production and from the final stage, consumption. The decrease in the amount of resources allocated to the low and final stages is forced saving; the misallocation of resources from low to high stages is malinvestment. Empirically, a credit-induced boom would be but weakly reflected in the conventional investment aggregate and hardly at all in the Monetarists’ output aggregate, which includes consumption. The boom for the Austrians refers to something going on largely within the output aggregate. It is represented in Friedman’s plucking model not by a conspicuous recovery to trend but rather by some period preceding a pluck which Friedman, operating at a higher level of aggregation, presumes to be healthy growth.
So Friedman’s critique of ABCT was based on a misunderstanding of ABCT. Friedman believed that in Austrian terminology, a “boom” required growth that was above trend. But what the plucking model shows is that “booms” are periods of normal growth and that “busts” are “plucks” that deviate this trend when output falls. Garrison argues that the plucking model is consistent with ABCT since ABCT does not require that the “boom” have above-trend output growth. Instead, Garrison argues, ABCT requires that higher order stages of production use up more resources than they otherwise would, hence malinvestment. That’s the super abbreviated version of Garrison’s plucking model argument. Just read the entire article for yourself if you want more information. It’s concise and to the point.