Humanity will never cease its futile search for magic numbers. The latest example of this quixotic quest is to be found in the saga of Harvard professors Kenneth Rogoff and Carmen Reinhart, who suggested that a debt to gross domestic product ratio above 90 per cent was bad for economic growth. Those conservative politicians and their counsellors who based their advocacy of strict fiscal policy on this magic ratio have retreated with egg on their faces.
This episode has lessons well beyond the immediate fiscal debate. Generations of economists worried that their subject was not regarded as a hard science, a syndrome labelled as “physics envy”. Milton Friedman complained that it had not unearthed key numbers or ratios that could be regarded as constants. He claimed to have discovered one in his statement of the relationship between inflation and the money supply (“inflation is always and everywhere a monetary phenomenon?.?.?.). But without denying the connection, Friedman’s rule does not work in the way that key natural science constants do. Even if one has decided how to measure both the quantity of money and the price level, there is no stable ratio between the two. Friedman’s own work showed that the ratio not only varies in the short term but over several generations.
This is a long way from the physics constant “g”, the acceleration the Earth imparts due to gravity, although even it has to be treated carefully. A stone thrown in a vacuum will fall at an acceleration of 32ft per second every second. But a stone thrown from your window will not fall as fast because of the friction of the air.