Keynes and the Quantity Theory: A Comment on The Friedman-Meiselman CMC Paper

TLDR: In this article, the authors employ a more conventional representation of the autonomous expenditure theory and demonstrate why Friedman and Meiselman's tests are misleading, using this conventional model and some of their data, little empirical evidence is found which favors the quantity theory.

Abstract: PROFESSORS Friedman and Meiselman' recently have reported that a simple quantity theory model describes aggregate consumption more accurately than a simple autonomous expenditure model. They believe this result is evidence that the "quantity" theory is a better description of the American economy than the autonomous expenditure or "Keynesian" theory.2 If their interpretation were correct, the Friedman-Meiselman paper would be one of the most significant economic studies in many years. But it is not correct. Friedman and Meiselman have represented the autonomous expenditure theory in a very unorthodox form. Their statistical comparisons are extremely sensitive to how the autonomous expenditure theory is represented. Below, I employ a more conventional representation of the autonomous expenditure theory and demonstrate why Friedman and Meiselman's tests are misleading. Further, using this conventional model and some of their data, little empirical evidence is found which favors the quantity theory. Finally some other conceptual weaknesses of the Friedman-Meiselman tests are illustrated. Briefly, Friedman and Meiselman compare simple, partial, and multiple correlation coefficients obtained from the following equations, estimated from annual (1897-1958) and quarterly (1945-1958) data for the United States: C=al+8(A (1) C=a2 +82M (2) C = a3+/33A +13P (3) C = a4 +84M+y4P (4) C = a5 + 35A + 85M (5) C = a6 + 86A + 86M + Y6P (6)