Editing Friedman's Thermostat (section)

== Origin ==

The origin appears to be a blog post by Nick Rowe on the Worthwhile Canadian Initiative economics blog<ref name=nr-0/><ref name=nr/> where he names it that while referencing an Op-Ed post in the WSJ by Milton Friedman where he argues about the mechanism that the Fed has available to be a good thermostat<ref name=mf/>. Friedman in his article is not arguing for the point that will come to be named after him: he is merely likening the Fed's good performance on inflation-control post the '80s to being akin to that of a good thermostat controlling the temperature. Introducing the mistaken cause-effect relationship as the interesting part is an invention of Nick Rowe.

{{Quote
|text=If a house has a good thermostat, we should observe a strong negative correlation between the amount of oil burned in the furnace (M), and the outside temperature (V). But we should observe no correlation between the amount of oil burned in the furnace (M) and the inside temperature (P). And we should observe no correlation between the outside temperature (V) and the inside temperature (P).

An econometrician, observing the data, concludes that the amount of oil burned had no effect on the inside temperature. Neither did the outside temperature. The only effect of burning oil seemed to be that it reduced the outside temperature. An increase in M will cause a decline in V, and have no effect on P.

A second econometrician, observing the same data, concludes that causality runs in the opposite direction. The only effect of an increase in outside temperature is to reduce the amount of oil burned. An increase in V will cause a decline in M, and have no effect on P.

But both agree that M and V are irrelevant for P. They switch off the furnace, and stop wasting their money on oil.
|source=Nick Rowe, Worthwhile Canadian Initiative<ref name=nr-0/>
}}

Rowe is aware that this concept was not invented by Friedman.

{{Quote
|text=Yeah. The really neat thing about this actually, is that it’s not Milton Friedman's at all. It’s an old idea. Actually I found it, an old Keynesian Maurice Peston used very much the same argument. He was talking about fiscal policy, rather than monetary policy and real GDP not the price level. But the idea's pretty simple. What's the easiest way to explain it? If you've got a house with a good thermostat, in a climate like Canada and you've got the thermostat set on a steady 20 degrees Celsius and the house stays at 20 degrees Celsius, what do you see? You see the outside temperature going up and down all over the place, you see it burned in a furnace going up and down all over the place. But you don't see any effect at all on the inside temperature of the house. It just stays the same.
|source=Nick Rowe on Monetary Basics, Milton Friedman’s Thermostat, and More<ref name=nr-aware/>
}}

He then goes on to explain the idea, while relating it to Friedman's metaphor:

{{Quote
|text=That was basically Milton Friedman's metaphor. If you've got a good Central Bank, you'll see the money supply varying, that's the amount of oil being burned in the furnace, you'll see all sorts of other shocks in the economy, that's the outside temperature, but you don't see any effect on inflation, that's the inside temperature, or on the price level. So if you want to look and try and find where, is there an effect of money on inflation? You're not going to see it if you've got a house with a good thermostat, or a country with a good Central Bank. It’s trying to make sure that you can't see any such relation. That's the idea behind it. And it’s a really, really simple point. It seems to get missed a bit.
|source=Nick Rowe on Monetary Basics, Milton Friedman’s Thermostat, and More<ref name=nr-aware/>
}}

This seems to exaggerate the degree to which Milton Friedman was exercising the metaphor, particularly because his article seems primarily to focus on the fact that:

{{Quote
|text=The MV=Py key to a good thermostat was there all along.
|source=Milton Friedman, The Fed's Thermostat<ref name=mf/>
}}

I can find no earlier reference to it, so we must conclude that Friedman's Thermostat as terminology and succinct expression of this error is due to Nick Rowe.