Johnson’s Conversion from Keynesianism at Chicago

Abstract

“Johnson’s Conversion from Keynesianism at Chicago,” Russell S. Boyer.

Johnson arrived at Chicago in 1959 identifying himself as a Keynesian, but during his period there he began to speak in derogatory terms about Keynes and about Keynesians. This paper analyzes the role that Friedman and Mundell played in this conversion. Our argument is that Johnson moved towards “the monetarist position,” but he denied that this was due to Friedman’s influence. Mundell’s thinking followed a similar path, both in his economics and in his assertion of independence from their distinguished colleague. The effect of these claims is to hide the fact that Friedman’s impact on their work was much greater than has generally been recognized.

The author would like to thank David Laidler for correspondence during the course of writing this paper, and Dave Burgess and Bob Solow for conversations about this topic. Comments from Dror Goldberg led to substantial revisions to a very preliminary first draft. Editing suggestions by Warren Young improved the exposition significantly. None of these individuals is responsible for the point of view expressed in this paper.

Appendices

Appendix

A Comment on Russell S. Boyer’s

“Johnson’s Conversion from Keynesianism at Chicago”

Dror Goldberg

Department of Economics

Bar Ilan University

To put it provocatively, Professor Boyer’s paper can be viewed as a conspiracy theory: Two Canadian Keynesians came to Chicago, stole Milton Friedman’s open economy ideas and jointly covered it up. One of them, Johnson, literally added insult to injury.

I usually don’t like conspiracy theories because most of them blame the Jews for everything that is wrong in our world. However, this is a different kind of conspiracy theory, because here the Jew is the victim rather than the evil perpetrator. Presenting this paper in Israel is a very wise choice indeed!

I am grateful that the organizers let me comment on this paper because it was a rare opportunity for me to take a break from my usual research and look at my own intellectual roots. Although I’ve never been to the Department of Economics at the University of Chicago, no place has influenced my education, research, and career like that department. Chicago graduates taught me at Tel Aviv University (Leonardo Leiderman, Assaf Razin, and Jacob Frenkel) and at the University of Rochester (Alan Stockman). My work in monetary theory was most influenced by Neil Wallace (mostly through his student Per Krusell – my Ph.D advisor). My idea of working on both monetary theory and monetary history was obviously inspired by Wallace, who seems to have taken the idea from Friedman. Perhaps because I was taught to think like a Chicago graduate, I’ve been hired as an economist only by Chicago graduates (Leonardo Leiderman at the Bank of Israel, Leonardo Auernheimer at Texas A&M University, and Avi Weiss at Bar Ilan University). Perhaps many economists can tell a similar story.

Given the great importance and influence of Chicago, Professor Boyer’s contribution – if true – is very big indeed for the intellectual history of our profession. Nobody that I know of has made these claims before, at least not so forcefully. I found on Jstor real-time reviews of those Johnson and Mundell books that Professor Boyer refers to. None of the reviewers mentioned Friedman. Is it really the case that in international economics “it’s all in Friedman?”

Professor Boyer made a meticulous and impressive research of primary sources, including talk transcripts, obscure references, drafts, personal letters, and editorial correspondence. He has a great advantage in personally knowing the people he is writing about. My situation is quite different. I never met any of them, I am new to (economic) history, and this is my very first attempt at history of economic thought. However, I am trained in law. I shall therefore play the attorney for Mundell and Johnson in an imaginary plagiarism lawsuit brought by Friedman and his attorney Boyer, and let the readers be the jury. As is the case with most lawyers, I do not necessarily believe some of the points I make below.

My defense starts with an acknowledgment that Mundell’s and Johnson’s ideas did appear in Friedman’s 1953 chapter. The defense argues that Mundell and Johnson were merely negligent and sloppy with regard to the citation. There was no malice or intent: They did not plagiarize intentionally and did not cover it up. To make my point it is sufficient to consider as an example Professor Boyer’s allegations regarding optimum currency areas:

• 1. Mundell misrepresents Friedman on the cause for sticky prices and wages.

• 2. Mundell mentions the sterling area for motivation, like Friedman, but without citing Friedman. He doesn’t cite Friedman in the actual analysis.

• 3. Johnson covered it up by removing Friedman’s contribution from Caves and Johnson’s Reading in International Economics.

Let us examine these issues closely.

Sticky Prices and Wages

Friedman writes in p. 165: “internal prices are highly inflexible … Wage rates tend to be among the less flexible prices.” Friedman also writes in p. 202 about “institutional rigidities in internal price structures.” Mundell, referring to Friedman’s argument, writes: “The argument is based on money illusion”³⁵ and, in more detail, “money illusion in the bargaining process between unions and management (or frictions and lags having the same effects).”³⁶ I don’t see how Mundell misrepresents Friedman. One could argue that whenever I sign a nominal contract without effective indexation I display money illusion.

Mundell Not Citing Friedman

Mundell does cite a line from Friedman’s p. 165. Friedman’s optimum currency area discussion is in p. 193 in Section IV.D, and most of it is in an 18-line long footnote. That discussion is almost entirely about the sterling area, with a little generalization at the end of the footnote. In contrast, Mundell’s discussion is general and he only gives the sterling as a one-line example. Also note that Mundell does cite later work by Meade and Scitovski and does not claim to be original on everything. I argue that Mundell probably read the content of Friedman’s footnote but forgot where he read it. Alternatively, Mundell forgot that he ever read it anywhere. These things happen. You read something, it gets buried in the back of your head, and it reappears in your head much later as a new, original idea.

Johnson Editing Friedman

Johnson kept almost word for word Sections I and II of Friedman’s chapter but deleted Sections III and IV almost entirely. There are exceptions: One paragraph in Section I was deleted, and one subsection of Section IV was absorbed in Section II.

I argue that this is easily justified by considering the titles of these sections (my emphasis):

• I. Alternative methods of adjusting to changes affecting international payments.

• II. Objections to flexible exchange rates.

• III. Special problems in the establishment and operation of a flexible exchange rate system.

• IV. Some examples of the importance of a system of flexible exchange rates.

Those “Special problems” include the role of the European Payments Union, the IMF, gold, and the sterling area. These issues were not necessarily that important when Johnson edited the chapter in 1968. Those “Some examples” include the 1950s rearmament, also not interesting by 1968.

The subsection of Section IV which was included by Johnson and absorbed in Section II is part of Friedman’s Monetary Approach to the Balance of Payments. This does not seem like a cover-up! Finally, it should be noted that even after deleting these sections Friedman’s chapter is still longer than the average chapter in that volume. Johnson’s editing seems entirely reasonable and is consistent with a non-conspiratorial interpretation of the facts.

I would like to make three more comments.

General Tributes

Johnson titles his paper “The case for flexible exchange rates, 1969.” I see this as the greatest tribute possible, far more important than giving page numbers and detailed references. This is just like we use the terms “Keynesian,” “Walrasian,” and “Cobb–Douglas”.

Similarly, Mundell writes in the preface to his 1968 book: “I had the good fortune in the three years from 1954 to 1957 to benefit from personal association with …” and here he cites nine people, including Friedman.³⁷ He adds: “Their influence on my work will, it is hoped, not have escaped detection.” Such a general tribute especially makes sense, instead of exact references, when it comes to someone in your own department with which you have interacted on a daily basis for a long time. This has been done by others. In his famous The Historian’s Craft, Marc Bloch (1954) dedicates the book to his closest colleague Lucien Febvre. He writes that he cannot determine about many of the ideas in the book whether they came from himself or Febvre or both.³⁸ Similarly, in discussing his latest book, economic historian Russell Menard made a similar comment when he was asked to clarify a general tribute he gave to a colleague at the beginning of the book. He honestly did not know who was responsible for the ideas in the book.³⁹

Friedman Not Citing Others

Friedman himself is sloppy when it comes to citations. He does not come (to this imaginary lawsuit) with clean hands. The 1953 chapter has only two references to others, even though the entire chapter is composed of claims and counter-claims, which are surely not all his own. Maybe Friedman himself instituted a sloppy standard in the profession or in his department. Johnson later claimed that Friedman’s quantity theory merely reformulated Keynes’ liquidity preference with different and confusing names and red herrings.⁴⁰

Personal Interest?

Professor Boyer was a student at Chicago in those years. It might help the reader to know the nature of his relationship with them during his graduate studies and perhaps afterwards as well. Was any of them his advisor, for example?

The defense rests.

References

Bloch, M. (1954). The historian’s craft. Translated by Peter Putnam. Manchester: Manchester University Press.

Johnson, H. G. (1971). The Keynesian revolution and the monetarist counter-revolution. American Economic Review, 61(2), 1–14

Menard, R. R. (2006). Sweet negotiations: Sugar, slavery, and plantation agriculture in Early Barbados. Charlottesville: University of Virginia Press.

Mundell, R. A. (1960). The monetary dynamics of international adjustment under fixed and flexible exchange rates. Quarterly Journal of Economics, 74(2), 227–257.

Mundell, R. A. (1961). A theory of optimum currency areas. American Economic Review, 51(4), 657–665.

Mundell, R. A. (1968). International economics. New York: Macmillan.