Friday, August 9, 2013

Wethinks the gent doth project too much

Or, is he whistlin' in the dark as he passes the graveyard--where the giant on whose shoulders he tries to stand, lies now--at midnight;
[Milton] 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.
Like academic economics and popularizations of the discipline in major news media?
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.
Speaking of someone who has seemingly abandoned disciplined thinking; professional economists are usually more careful than to claim something that no one, of any stature in economics, believes. Look at any textbook, say Mankiw or Gwartney and Stroup, and you'll find a discussion of market failure.
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.
Aka, he told the truth.
 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.
A conclusion he came to from studying the evidence. Maybe Herr Krugman should do the same; maybe re-reading A Monetary History of the United States.
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?
Not inconsistent at all. One can, for instance, believe that a polity is incapable of relying on markets for its military or police forces--which Friedman did so think--at the same time recognize the superiority of markets for most everything else.
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.
That would be quite a footnote, as it would have to include his work as a Treasury economist who came up with the idea of income tax withholding from paychecks (to pay for WW II), his work for the Statistical Research Group during WWII -- army officers were taken out of the field during the Battle of the Bulge and flown back to the United States to be briefed by Friedman on the use of the proximity fuse, The Theory of the Consumption Function. We pause to quote from a review;
"Friedman argued that the best way to make sense of saving and spending was not, as Keynes had done, to resort to loose psychological theorizing, but rather to think of individuals as making rational plans about how to spend their wealth over their lifetimes. This wasn't necessarily an anti-Keynesian idea--in fact, the great Keynesian economist Franco Modigliani simultaneously and independently made a similar case, with even more care in thinking about rational behavior, in work with Albert Ando. But it did mark a return to classical ways of thinking--and it worked. The details are a bit technical, but Friedman's 'permanent income hypothesis' and the Ando-Modigliani 'life cycle model' resolved several apparent paradoxes about the relationship between income and spending, and remain the foundations of how economists think about spending and saving to this day."--Paul Krugman, New York Times
 Memories can be short, can't they Professor?

And we haven't even got to Friedman's almost single handed destruction of the neo-Keynesian idea that money doesn't matter, the change from Bretton Woods fixed exchange rates to floating rates, nor of his leadership in convincing Richard Nixon to end military conscription, his championing of school vouchers, drug legalization, his influence on both Margaret Thatcher and Ronald Reagan (and numerous intellectuals who became leaders in Eastern Europe after the Soviet Union's implosion.. His advice on monetary policy for such diverse countries as post-Mao China, Pinochet's Chile, Yugoslavia and India (and recently, indirectly, ending the hyper-inflation in Zimbabwe in 2009).

Oh yeah, he had a role in the drastic lowering of marginal income tax rates too. In the U.S. and elsewhere.

He even outweighs Professor Krugman on You Tube.

...historians of economic thought will regard him as little more than an extended footnote.

You wish.

1 comment:

  1. Hi Patrick.

    First of let me say that I like your blog!

    It is nice to see someone defending Friedman. I don't know why but it seems to me that a lot of people are criticising him these days. I will however say that, though I do not agree with Krugman, I think he is being much more classy than many other critics that I've read. Often it becomes downright nasty, see for instance Michael Hudson.

    Anyways great blog, keep the posts coming! By the way, I hope you don't mind me asking, but what is your background? Economics?

    Have a great day!