Tuesday, January 31, 2006

Bearish for theory

The Greenspan farewells are interesting, most of all (in my view) Milton Friedman's, as in his WSJ op-ed today:

"Over the course of a long friendship, Alan Greenspan and I have generally found ourselves in accord on monetary theory and policy, with one major exception. I have long favored the use of strict rules to control the amount of money created. Alan says I am wrong and that discretion is preferable, indeed essential. Now that his 18-year stint as chairman of the Fed is finished, I must confess that his performance has persuaded me that he is right -- in his own case."

Computer algorithms cannot translate languages because they cannot capture context and nuance. Can algorithm's (programmed by whom?) guide money growth? The original Friedman view was that rules are better than the hash that previous FRBs served up. Faint praise for rules. But a really good governor can beat simple algorithms.

The WSJ front-page adds: "Greenspan's Legacy Rests on Results, Not Theories ... Fed Chief's Biggest Idea Was to Avoid Having One: Embracing Ambiguity".

Can this wisdom be bottled -- and served to the new Chairman? The whole story is bearish for economic theory.