Milton Friedman’s guitar string boom-bust model

By Dr Frank Shostak

Some economists are of the view that it is possible to enhance our understanding of the facts of reality by means of a suitable metaphor. On this the leader of the monetarists school of thinking Milton Friedman is of the view that a guitar string metaphor could help to unravel the secret of business cycles. 

By this metaphor the stronger one pulls the string down the stronger the string will go up. Hence, Friedman concluded that a strong bust is followed by a strong boom. 

For Friedman what matters is to have a model that can replicate the fluctuations of the data.  He is not concerned with whether the model corresponds to the real world. According to Friedman

The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed…. The relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximation for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.  

Again, Friedman held that similarly to a guitar string, the harder the economy is plucked down the stronger it should come back. In Friedman’s plucking model, a large contraction in output is followed by a large business expansion. A mild contraction, by a mild expansion. 

Following the plucking model Friedman concluded that there appears to be no systematic connection between the magnitude of an economic expansion and the extent of the following economic contraction.  

Various studies appeared to have vindicated Friedman’s plucking model. On November 4, 2019, Bloomberg referred to a study by Tara Sinclair that employed advanced mathematical techniques that appeared to confirm Friedman’s hypothesis that in the US deep recessions are followed by strong recoveries – but not the other way around. According to Bloomberg, some other researchers obtained similar results for other countries. On this way of thinking, views as presented by Ludwig von Mises and Murray Rothbard that the size of an economic bust is related to the size of the previous boom are false. 

It is however questionable that various statistical and mathematical methods can prove or disprove a framework of thinking. These methods are another way of describing but not explaining events. These methods do not tell us what causes swings in the data, these methods only describe the fluctuations in the data. 

Boom-bust cycles and the central bank

We suggest that the Friedman’s framework lacks the definition of boom-bust cycles. 

According to Ayn Rand,

A definition is a statement that identifies the nature of the units subsumed under a concept. It is often said that definitions state the meaning of words. This is true, but not exact. A word is merely a visual- auditory symbol used to represent a concept; a word has no meaning other than that of the concept it symbolizes, and the meaning of a concept consists of its units. It is not words, but concepts that man defines – by specifying their referents. The purpose of a definition is to distinguish a concept from all other concepts and thus to keep its units differentiated from all other existents.

The purpose of a definition then is to distinguish a given group of existents from other existents. Given that a definition provides the essence of existents of a particular concept, obviously then definitions are not arbitrary.  At any stage, it is determined by the facts of reality, within the context of one’s knowledge. 

In order to ascertain the definition of boom-bust cycles one requires identifying the essence – the driving force behind these cycles.  It is helpful to go back in time when the boom-bust cycle phenomenon started. According to Murray Rothbard, 

Before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subjects; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.

It seems that the boom-bust cycle is somehow linked to the modern world. But what is the link? We hold that the source of the recurring boom-bust cycles turns out to be the alleged “protector” of the economy — the central bank itself. 

The central bank’s ongoing policies that are aimed at fixing the unintended consequences that arise from its earlier attempts at stabilizing the economy are key factors behind the recurrent boom-bust cycles. 

Fed policy makers regard themselves as being the responsible entity authorized to bring the economy onto the path of stable economic growth and stable prices. (Policy makers decide what the “right” stable growth path should be). Consequently, any deviation from the stable growth path sets the Fed’s responses in terms of either a tighter or a looser stance. 

These responses to the effects of previous policies on economic data give rise to the fluctuations in the growth rate of the money supply and in turn to the recurrent boom-bust cycles.  

Observe that loose central bank monetary policy, which results in an expansion of money supply, sets in motion an exchange of nothing for something, which amounts to a diversion of real savings from wealth-generating activities to non-wealth-generating activities. In the process, this diversion weakens wealth generators, and this in turn weakens their ability to grow the overall pool of real savings.

The emergence of activities on the back of loose monetary policy is what an economic “boom” is.   Once however, the central bank tightens its monetary stance, this slows down the diversion of real savings to non-wealth producers. Activities that sprang up on the back of the previous loose monetary policy are now getting less support; they fall into trouble — an economic bust emerges.

From this, we can derive that the essence of boom-bust cycles is the monetary policies of the central bank. 

Strength of the boom determines the strength of the slump

Observe that during an economic slump the liquidation of various activities that emerged during the previous boom is taking place. Hence, the more of such activities that were generated during the economic boom, the greater the cleansing of such activities is required – consequently the greater the economic recession is going to be.

Note again that increases in the money supply are the outcome of the easy monetary policies of the central bank. These increases give rise to various activities that cannot stand on their “own feet”. We label them bubble activities. 

Therefore, a loose central bank monetary stance, and a subsequent increase in the momentum of money supply results in the emergence of the bubble activities whilst a tighter stance leads to their demise. 

Note that without ascertaining the essence of the subject of investigation one could come up with all sorts of models, which could be “validated” by means of statistical and mathematical methods.  Observe again that without ascertaining the essence of boom-bust cycles any so-called validation i.e. the “data torturing” is going to be of a questionable nature.

Again, for Friedman anything goes as long as the model could make accurate predictions.  Given that Friedman did not establish the essence of boom-bust cycles, it is questionable that his framework can ascertain the causes behind these cycles. Consequently, Friedman’s conclusion that strong recessions precede strong booms and not the other way around is problematic.


Various studies that employ advance mathematical techniques have supposedly confirmed Milton Friedman’s hypothesis that strong economic busts pave the way for strong economic booms. However, strong economic booms do not precede strong economic busts.  On this way of thinking, views such as those presented by Ludwig von Mises and Murray Rothbard that the size of an economic bust is related to the size of the previous boom are false. Given that Friedman did not define the essence of boom-bust cycles, it is questionable whether his framework can explain the causes of boom-bust cycles. Consequently, Friedman’s conclusion that strong recessions precede strong booms and not the other way around is questionable. 

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