4 thoughts on “Friedman as a hero”

  1. Posted 01/08/2012 at 02:59 | Permalink

    A very interesting article here, Philip. I enjoyed reading it. But I have to strongly diagree with your claim that ‘he [Friedman] would make opponents of free markets look distinctly second division’. I recall reading an article a year or so back, by the Keynesian high-priest Paul Krugman, in which he utterly demolishies Friedmanism. Anna Schwartz tried to defend her deceased colleague, in a letter to some newspaper, but I have to say it was rather pale. Krugman’s technical wizardry in economics really would take Friedman to pieces, I think. Also, didn’t Friedman and Paul Samuelson have some pretty heated debates back in the day, with Milton struggling to ever land any serious blows against him? With regard to the Friedman doctrine in general though, I would make a couple of points: Back during the 70s/80s the Friedmans made three central claims about how the economy works – claims that perhaps seemed true at the time (to some at least), but now seem to be clearly false. Their case for small-government libertarianism depended massively on those claims, and has now pretty much fallen to bits because of the way things panned-out. The first claim is that macroeconomic malaise is caused by government intervention and not the instability of the private sector. Quite amusingly though, when you probe the Friedmanite argument, what it really suggests is government producing economic recovery by purchasing enough bonds for cash to pump liquidity into the economy. Friedmanism implicity required government to manage a steady rate of money supply growth. Ben Bernanke aptly executed the Friedmanite playbook to perfection during the global financial crisis, but lets face it, it hasn’t been enough to rapidly restore full employment in the US. The second claim, that externalities were relatively small and were better resolved through contracts and tort rather than govt. regulation, since the disadvantages of said regulation outweighed the marginal public cost of the externalities. Yet again the reality of it is significantly different than the fantasy conjured up in ‘Free to Choose’. One need only look at the Frankinstein horrors whipped up in Wall Street in the prelude to the Financial Crisis, to realise that effective government regulation is needed, since quite simply, the sheer complexity of establishing libility in a court case pertaining to finance, would be mind boggling in complexity- nigh on impossible. The third claim, and by far the most amusing, is that the free market would magically produce an egalitarian distribution of income. The notion that a minimal safety net for those down on their luck, would lead to the most equitible outcomes, and that profit seeking employers through the use and promotion of human talents would lead us all to the economic nirvana. Well I hate to break it to you, but despite the IEA’s glory days of Raeganism free-marketeering and Clinton cutting the proportion of state expenditure, the US is now more than ever, a winner-take-all information-age economy. There’s an extraordinary unequal pre tax distribution of income. A stark contrast to the age of the American Dream at the height of the Keynesian era.

  2. Posted 01/08/2012 at 12:15 | Permalink

    Jason – interesting comments. Friedman’s views on central banking did evolve (and, to be honest, I don’t know what his latest position was). Regarding the other things, though, I think he would be strongly against the fiscal stimulus, very, very distorting tax policies, the huge increase in regulation and government spending under Bush (and continued under Obama) and the huge increase in statutory regulation of the financial sector. I think he would argue that Bush/Obama made much the same mistakes as FDR in the 1930s and that this has delayed recovery. Regarding Krugman – a brilliant technical economist, yes, but seriously wanting in the areas he now seems most keen to speak about. On the Wall Street issue, it is possible that his later views on banking would have proposed structural reform that would have dealt with that – I am not sure. However, I don’t think that one can ignore the role that regulators and moral hazard played in the run up to the crash.

  3. Posted 02/08/2012 at 09:50 | Permalink

    Friedman is on the dividing line, and that’s too bad, because I don’t know how you could dismiss his legacy. But on the other side, he probably went too far himself, which makes the criticisms against him only the more relevant (for example DeLong :http://www.project-syndicate.org/commentary/re-capturing-the-friedmans).
    What’s not clear (at least to me), is how he differentiated his analyses and policy recommendations according to the economic situation. In my understanding, he admitted there was a demand failure during the Great Depression, and considered it should have been fought with a more aggressive monetary policy. He only took the conservative approach for normal times.
    Would he believe that times are normal now, or that demand is depressed?

  4. Posted 02/08/2012 at 11:04 | Permalink

    Zorblog – that is a good question. I believe (though I do not know the details) that his views on free banking/central banking/narrow banking evolved over his life. John Blundell says in his article in the Telegraph that he would have been against QE. I do not think that is right – though he may have named it differently. He would have been against fiscal policy measures and the increased regulation and government spending in the US we have seen recently – we can say that for sure. His argument on QE, I think, would have been that he was not being inconsistent, that the Depression was not a special case, and that money growth should simply be kept at a constant rate. The failure was to allow money growth to collapse (though modern free marketeers also point to the problems in the real economy caused by policy uncertainty etc).

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