Who Was Milton Friedman? - Brian Safran

         In Who Was Milton Friedman?, Paul Krugman sets out to define the legacy of contemporary American economist Milton Friedman. In his writing, Krugman identifies some of the salient features of the historical context within which Freidman developed his ideas and which subsequently led to their ascendance in status to become a respected alternative to the Keynesian economic doctrine of the mid-twentieth century. Krugman examines Friedman’s view of human behavior and how it led him to the economic principles which formed the foundation of Monetarism. He concludes by arguing that while the intellectual climate and public opinion were ripe for the acceptance of Monetarism in the late twentieth century, certain economic occurrences in recent years can demonstrate the limitations of Friedman’s theory and can lead one to conclude that a “counter-counterreformation” against Monetarism is in order (Krugman 2007: 13). Two years after the article was written one can see that Krugman’s recommendations have largely come into fruition as evidenced by the measures taken by the United States and countries across the globe in response to the ongoing worldwide economic crisis.

Krugman begins his article by examining the socio-political zeitgeist within which Milton Friedman lived, thought and wrote. Although the early part of the twentieth century had been dominated by classical, free-market economics, by the middle of the century, Keynesianism had risen to prominence for its offering of both a salient explanation of and pragmatic solution to the Great Depression. (Krugman 2007: 1) However, by the later part of the century, classical economics was able to regain much of its lost esteem thanks in large part to the influence of Friedman and his assertions. (Krugman 2007: 1) Friedman’s influence was founded on his articulateness and ability to “correctly identif[y] Keynesianism’s weak points” (Krugman 2007: 2).

Whereas Keynesianism had sought to distance economic analysis from the rationalism of a hypothetical “economic man” and move towards attributing economic behavior to psychological considerations, Friedman instead believed that an “economic man” can in fact be identified irrespective of individual or group psychology (Krugman 2007: 3). Although economic models such as the Phillips Curve had previously lent support to the Keynesian notion of inflation as a necessary consequence of efforts to reduce unemployment, having presented inflation and unemployment as trade-offs, Friedman instead argued that this perceived trade-off was only temporary. (Krugman 2007: 3) In making his case, Friedman attributed the role of the “economic man” in arguing that in the long run, both inflation and unemployment can rise concomitantly (Krugman 2007: 4). He argued that while in the short-run, employers may perceive an increase in wages in response to rising inflation which may encourage the hiring of additional workers, with time, those workers will come to demand higher wages even before the full effect of inflation has been borne out by prices in the marketplace (Krugman 2007: 4). Therefore, even in a situation of rising inflation, in the long-run, employer’s expectations of rational employee and consumer behavior may actually serve to encourage reductions in the workforce. (Krugman 2007: 4). Thus, in effect, Friedman made the case that Keynesian advocacy of government spending, which encourages inflation and a temporary improvement to employment statistics, is not in the long-run the best mechanism for solving economic crises and for putting people back to work.

A major divergence between Friedman’s ideas and Keynesianism was with regards to the role of the money supply. Keynes had argued that an increase in the money supply had a negligible effect on improving an economy ravaged by a depression as interest rates in such an economy are already very low. (Krugman 2007: 5) In a situation where cheap loans are readily available, a further increase in the money supply was not believed to have a sufficiently beneficial effect on the economy, and as such, fiscal policy was advocated as the most effective means to reinvigorate an ailing economy. (Krugman 2007: 5) However, Friedman took issue with this assertion. As proof, he and his fellow Monetarists went on to argue that it was flawed monetary policy which caused the Great Depression. If the overall money supply had been increased and the government had stepped in to aid failing banks, the banks would have continued to loan and individuals would have been encouraged to hold onto bank deposits rather than seeking to convert their deposits into cash. (Krugman 2007: 6)

While during the post-war period Keynesianism had become the doctrine of the day and Friedman’s Monetarist approach had been regarded with disdain, the 1970s saw the emergence of sustained inflation unlike that of the past, and this afforded Friedman and his followers a breeding ground in which to test their hypotheses. (Krugman 2007: 4, 5) For the first time in recent history, inflation and unemployment seemed to share a direct correlation during this period. In addition to double-digit inflation, this period saw unemployment figures that were the most devastating since the Great Depression. (Krugman 2007: 4) Thus, the emergence of stagflation, as it came to be called, had its roots in the theoretical propositions set forth by Friedman and his followers and which stood in contradistinction to that which would have been predicted by the Keynesian philosophy of the day. (Krugman 2007: 4) Having demonstrated that its theoretical tenants could withstand empirical testing, in the 1970s the Monetarist perspective advanced by Friedman saw a windfall of newfound credibility. (Krugman 2007: 4)

Although many came to prescribe to Monetarist thought, Paul Krugman makes several points in his article arguing that much of this support was founded on unexamined misconceptions. For example, he criticized Friedman for his having fueled the widespread public misperception that Monetarism advocated a withdrawal of government from individual affairs. (Krugman 2007: 7) Rather, Krugman argues that Friedman and his followers were actually advocating an increase in government intervention- only in a different form than that with which the public had become accustomed. (Krugman 2007: 7) Another such criticism surrounds the assertion of Monetarists that the validity of their perspective can be demonstrated by considering their explanation of the Great Depression. Monetarists assert that a fall in the money supply was responsible for the Great Depression, and that its consequences could have been averted had the U.S. government increased its money supply and had the Federal Reserve acted quickly to lend money to failing banks. (Krugman 2007: 6, 7) Krugman notes that the flaw in this explanation reveals itself when one differentiates between the “monetary base,” which the Fed directly controls and the supply of which was actually increasing during the Great Depression, and the “money supply,” which includes deposits over which the government has no control (Krugman 2007: 6, 7). Furthermore, the idea that because the government “could have” taken measures which would have reduced the overall consequences of the Great Depression, this statement does not inevitably lead to the heavily promoted and often Monetarist-attributed conclusion that because such measures were not taken, the U.S. government necessarily “caused” the crisis itself (Krugman 2007: 6).

Krugman also argues that empirical evidence can demonstrate that Monetarism is ineffectual in bringing about its desired ends. For example, despite efforts in both the United States and Great Britain to increase the money supply at the end of the 1970s and start of the 1980s, these efforts did not serve to thwart deep recessions. (Krugman 2007: 7) The same is true with respect to Japan, wherein efforts to introduce Monetarist policy during the Asian Financial Crisis were proven ineffectual in restoring consumer confidence. (Krugman 2007: 8) Additionally, despite Friedman’s criticism that central banks should refrain from micromanaging the economy, since the 1980s, their contributions have actually served to soften recessions and reduce inflation. (Krugman 2007: 7) In the United States, Krugman attributes the relatively smaller gains in living standards after the introduction of Monetarist policy in the mid-1970s to increasing income inequality, a prospect which stands in contradiction to Friedman’s belief that no special protections would be necessary to ensure income equality under a Monetarist framework. (Krugman 2007: 9) Finally, a similar claim can be made with respect to Latin America, where Friedman-esque neoliberal policies have largely failed to spurn the economic growth and income equality that Monetarists promise. (Krugman 2007: 10) While the promotion of laissez-faire economics may in certain circumstances be appropriate, Krugman argues that Friedman’s greatest theoretical flaw is his unbridled, absolutist advocacy of deregulation. (Krugman 2007: 11) He ultimately concludes that just as a shift in public discourse led to a “counterreformation” against Keynesianism, perhaps what is needed now is yet another “counter-counterrevolution” against Monetarism (Krugman 2007: 12).

Krugman’s criticisms of Friedman and of his Monetarist perspective have continuing validity with respect to the modern financial crisis. Perhaps most striking is the fact that the 2008 arguably Monetarist-inspired large-scale “Troubled Asset Relief Program” aimed at rescuing failing banks has largely failed in its efforts to stimulate the underlying economy (FRB 2009: 1).  Despite government efforts to pump hundreds of billions of dollars into the ailing financial sector, unemployment rates in the United States rose from 6.0 percent in October, 2008 to 10.2 percent in October, 2009. (BLS 2009: 1) As a result of these failings, it can be argued that the United States has moved in a Keynesian direction against the backdrop of the previously-dominant Monetarist perspective. The 2009 Obama Stimulus Plan evidences a shift in thinking among political leaders, as its ultimate aims are not targeted at questions of monetary policy, but rather are aimed at direct fiscal spending to spurn the creation of jobs. Although certain economic indicators have shown signs of improvement, it is unclear whether they are signaling a rebound of the economy. (Flood 2009: 1) Similar measures are being taken abroad, such as China’s decision 2008 decision to authorize a five-hundred eighty-six billion dollar stimulus package aimed at providing direct government funding for infrastructure, agriculture, health care and other social welfare objectives. (Batson 2008: 1) While an end to the crisis will not prove the validity of one theory over the other, it certainly appears as though the current situation is providing a framework for policy-makers to carefully examine the consequences of Keynesian and Monetarist philosophy.

In conclusion, Milton Friedman was an influential modern economist who founded the so-called Monetarist school of thought, a perspective which gained traction in the late 1970s and early 1980s as an alternative to the previously-dominant Keynesian economic perspective of the day.  By disputing the theoretical proposition advanced by Keynes that inflation, brought about by fiscal spending, is a necessary evil in efforts to reduce unemployment and by focusing on the ability of policy-makers to increase the money supply during times of recession and depression, Friedman was able to create an intellectual movement in opposition to the Keynesian tax-and-spend model. Despite initial evidence from the 1970s suggesting that Friedman’s assertions had a degree of validity with respect to his assertions surrounding stagflation, in Who Was Milton Friedman?, Paul Krugman details a number of occurrences which demonstrate that Monetarist-inspired policies have not been shown to achieve their desired ends, and he advances the idea that a counter-revolution against Monetarism is in order. By analyzing the policy responses to the current global economic crisis, one can see that such a counter-revolution seems to be forming. If and when the economy rebounds, those on either side of the debate will inevitably argue that the policies in line with their perspective were the cause of the improvement, and as such, it is unclear which side will emerge as dominant in the coming years. However, what cannot be doubted is that the modern economic crisis is reinvigorating the debate between Keynesianism and Monetarism.

Works Cited:

Batson, Andrew. "China Sets Big Stimulus Plan In Bid to Jump-Start Growth." The Wall Street Journal. The Wall Street Journal, 10 Nov. 2008. Web. 25 Nov. 2009. <http://online.wsj.com/article/SB122623724868611327.html>.

Flood, Chris. "Economic outlook: Fed likely to upgrade its growth projections." Financial Times. The Financial Times Limited, 22 Nov. 2009. Web. 25 Nov. 2009. <http://www.ft.com/cms/s/0/b1d5eb9e-d623-11de-b80f-00144feabdc0.html>.

Krugman, Paul. "Who Was Milton Friedman?” The New York Review of Books Vol. 54, No. 2. (2007): 1-13. Who Was Milton Friedman? The New York Times, 15 Feb. 2007. Web. 25 Nov. 2009. <http://www.nybooks.com/articles/19857>.

United States. United States Department of Labor. Bureau of Labor Statistics. Table A-1. Employment status of the civilian population by sex and age. United States Department of Labor, 6 Nov. 2009. Web. 25 Nov. 2009. <http://www.bls.gov/news.release/empsit.t01.htm>. [cited in text as BLS].

United States. Federal Reserve. Board of Governors of the Federal Reserve. Troubled Asset Relief Program (TARP) Information. Federal Reserve, 6 Nov. 2009. Web. 25 Nov. 2009. <http://www.federalreserve.gov/bankinforeg/tarpinfo.htm>. [cited in text as Federal Reserve].