Monday, August 12, 2013

Milton Friedman's North Beach Confession

In an attempt to defend Milton Friedman from an attack by Paul Krugman, where Krugman correctly identifies Friedman as a Keynesian, Megan McArdle has, on close inspection, made matters worse for Friedman.

In Friedman's defense, she reports on a 2003 column by William Keegan, where Keegan writes:
 Like many a great scoop, this one emerged from a lunch - in this case, Lunch With the Financial Times.

At which point I have to confess that it was not my scoop, and I wasn't even at the lunch. No, this was a lunch at which Simon London, the FT's US management writer based in San Francisco, entertained the said Milton Friedman.

Friedman retired to San Francisco from Chicago in the late Seventies. He had lunch with London in a regular haunt, San Francisco's North Beach Restaurant[...]

The economic quote of the month - and probably the decade - is that Milton Friedman now admits: 'The use of quantity of money as a target has not been a success.' He added: 'I'm not sure I would as of today push it as hard as I once did.' (FT, 7 June 2003).
Based on this "evidence," a report of an FT lunch when Friedman was 91, McArdle says:
Friedman himself conceded that quantity money targeting wasn’t a success, so I think it’s pretty fair to give him a pass on it.
Yes, at a point when it was very possible Friedman was having a senior moment of speaking unguarded truth, McArdle is willing to take this North Beach confession quote and give Friedman a pass on his life-long crude monetarist theory, and give the impression that Friedman had dismissed his theory during his career, when he had only, unfortunately, done so at the age of 91. A theory, btw, that took Friedrich Hayek, in 1985, less than 5 minutes to destroy on television
.

But what is particularly damning about the Keegan column is not what McArdle quotes, but what she fails to quote. Keegan goes on to report of a 1980 incident where Friedman did move away from his crude monetarist theory but did not move toward the more sophisticated monetary theory of Hayek and Ludwig von Mises, but rather Friedman moved even closer to Keynesianism by arguing for fiscal stimulants for the British economy. Writes Keegan (my bold):
Way back in 1980, when the application of monetarism was proving an almost instant failure (which did not stop the Thatcher government from indulging in a game of 'double or quits'), I wrote to Professor JK Galbraith asking whether he would like to engage in a debate with Friedman in The Observer.

Galbraith replied that it was unlikely that Friedman would: 'We have an understanding that he's better on his feet, but I'm better in print.' But Galbraith suggested I should at least send Friedman a copy of an attack (on Friedman) that he was quite happy to write, and offer him the right of reply.

In The Observer of 31 August 1980, Galbraith observed that 'Britain has, in effect, volunteered to be the Friedmanite guinea pig. There could be no better choice. Britain's political and social institutions are solid and neither Englishmen, Scots nor even the Welsh take readily to the streets... British phlegm is a good antidote for anger; but so is an adequate system of unemployment insurance.'

Friedman did not exercise his right of reply. But he did send me an advance copy of his evidence to a House of Commons Select Committee in which he had distanced himself from Thatcher's belief that public sector borrowing should be reduced in times of recession.
Thus, in a column where McArdle attempts to make Friedman relevant,  she actually points to a column where further evidence is advanced to support Krugman's point that Friedman was a Keynesian. Indeed, a Keynesian closer in thinking to Krugman than Krugman probably even realizes. Thus, one must ask, If  Friedman is nothing but a Keynesian, why should he be relevant, since Keynes had already advanced that same bad economic theory, decades earlier?

  -RW