Friday, August 9, 2013

Milton Friedman as Nothing But An Extended Footnote

Okay, I have already posted on Milton Friedman as an Intellectual Bully and  Friedman as a Pussy Cat. Now comes along Paul Krugman branding Milton Friedman an Unperson

Krugman, in his turn at bat, has some important observations on  Friedman in his post, and as a byproduct also makes a decent point about Friedrich Hayek vs Friedman. Krugman, a Keynesian, has always been good in recognizing the Keynesian streak in Friedman.

Here are key points from Krugman's post. Milton Friedman, Unperson. Note, I don't agree with every technical point  Krugman makes in the post but I believe he is correct in his general overview of Friedman :
For what it’s worth, I think [David] Glasner makes a good case that Friedman was indeed more or less a Keynesian, or maybe Hicksian — certainly that was the message everyone took from his Monetary Framework, which was disappointingly conventional. And Friedman’s attempts to claim that Keynes added little that wasn’t already in a Chicago oral tradition don’t hold up well either.

But never mind. What I think is really interesting is the way Friedman has virtually vanished from policy discourse. Keynes is very much back, even if that fact drives some economists crazy. Hayek is back in some sense[...] But Friedman is pretty much absent.

This is hardly what you would have expected not that long ago, when Friedman’s reputation bestrode the economic world like a colossus, when Greg Mankiw declared Friedman, not Keynes, the greatest economist of the 20th century, when Ben Bernanke concluded a speech praising Friedman with the famous line,

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Best wishes for your next ninety years.
So what happened to Milton Friedman?

Part of the answer is that at this point both of Friedman’s key contributions to macroeconomics look hard to defend.

First, on monetary policy: Even if you give him a pass on the 3 percent growth in M2 thing, which was abandoned by almost everyone long ago, Friedman was still very much associated with the notion that the Fed can control the money supply, and controlling the money supply is all you need to stabilize the economy. In the wake of the 2008 crisis, this looks wrong from soup to nuts: the Fed can’t even control broad money, because it can add to bank reserves and they just sit there; and money in turn bears little relationship to GDP. And in retrospect the same was true in the 1930s, so that Friedman’s claim that the Fed could easily have prevented the Great Depression now looks highly dubious. [...]

Second, on inflation and unemployment: Friedman’s success, with Phelps, in predicting stagflation was what really pushed his influence over the top; his notion of a natural rate of unemployment, of a vertical Phillips curve in the long run, became part of every textbook exposition. But it’s now very clear that at low rates of inflation the Phillips curve isn’t vertical at all[...]

Friedman’s larger problem, I’d argue, is that he was, when all is said and done, a man trying to straddle two competing world views — and our political environment no longer has room for that kind of straddle.

Think of it this way: Friedman was an avid free-market advocate, who insisted that the market, left to itself, could solve almost any problem. Yet he was also a macroeconomic realist, who recognized that the market definitely did not solve the problem of recessions and depressions. So he tried to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities as possible. Yes, he in effect admitted, we do need stabilization policy — but we can minimize the government’s role by relying only on monetary policy, none of that nasty fiscal stuff, and then not even allowing the monetary authority any discretion.

At a fundamental level, however, this was an inconsistent position: if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro? And as American conservatism moved ever further right, it had no room for any kind of interventionism, not even the sterilized, clean-room interventionism of Friedman’s monetarism.

So Friedman has vanished from the policy scene — so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.
For a more detailed and Austrian critique of Friedman see  Milton Friedman Unraveled by Murray Rothbard.

3 comments:

  1. Milton Friedman was God’s point man, that is God’s appointed one from eternity past, who called forth the Free to Choose, floating currency Banker Regime of democratic nation states; this economic genius encouraged President Nixon to go off the gold standard, and through inflationism create the US Dollar Hegemonic Empire that now rules the world. Milton Friedman’s contribution to liberalism was that bankers, corporations, government, entrepreneurs, and citizens of democracies have become the legislators of economic value and the legislators of economic life. Milton Friedman was the Father of liberalism policy of investment choice, as well as the father of its schemes of currency carry trade investing and debt trade investing. Without Milton Friedman, investors could never have profited from Nation Investment, EFA, and Small Cap Nation Investment, IFSM, such the US VTI, IWM, its banks, BAC, and RF, Ireland, EIRL, and its bank IRE, or the UK, EWU, EWUS, and its banks, LYG, and RBS. Perhaps Mr. Wenzel’s criticism stems from liberalism’s moral hazard based prosperity and clientelism, which is devoid of genuine meritocracy and full of taxation of every type on personal property.

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  2. This really says it all:

    Think of it this way: Friedman was an avid free-market advocate, who insisted that the market, left to itself, could solve almost any problem. Yet he was also a macroeconomic realist, who recognized that the market definitely did not solve the problem of recessions and depressions. So he tried to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities as possible. Yes, he in effect admitted, we do need stabilization policy — but we can minimize the government’s role by relying only on monetary policy, none of that nasty fiscal stuff, and then not even allowing the monetary authority any discretion.

    However, where’s the evidence that “the market definitely did not solve the problem of recessions and depressions”? Where is the evidence that the market fails or failed?

    Daniel Kuehn in his paper “A Critique of the Austrian School Interpretation of the 1920-21 Depression” conclusively demonstrates that the distortions which led to the 1920 depression were caused by the Fed subsidizing the US war effort in WWI:

    http://bobroddis.blogspot.com/2012/08/daniel-kuehn-provides-factual-basis-for.html

    Kuehn has conceded that his paper is consistent with the Rothbardian narrative on the subject.

    In 1977, Hayek explained that Keynes’ purpose in writing the very ad hoc “The General Theory” was to lower British wages in the mid 1930s which were much too high because of a British government decision to go back on a “gold standard” at too high of a par back in the 1920s. None of that has anything to do with “market failure”.

    http://www.youtube.com/watch?v=gaQcbGoW2C0

    BTW,Kuehn’s paper has Krugman’s seal of approval:

    http://krugman.blogs.nytimes.com/2012/01/23/more-than-you-want-to-know-about-warren-harding/?_r=0

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  3. Krugman published my comment which is essentially identical to the above comment here:

    http://krugman.blogs.nytimes.com/2013/08/08/milton-friedman-unperson/?comments#permid=87

    It includes my inadvertently omitted link to D. Kuehn's concession that his description of the Fed's funding of WWI is consistent with the Rothbardian narrative.

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