RIP Milton Friedman - the PT Barnum of economics
Friedman's foundational work, A Monetary History of the United States, attempted to show how the Great Depression was purely a function of misguided Fed policy, and that inflation is always and everywhere a result of the quantity of money available. The government prints money, prices go up. Thus, the answer to inflation is to cut back on the money supply.
Unfortunately, Friedman was wrong, demonstrably wrong, repeatedly wrong, and when his theories were incorporated into policy, as they were in the late 1970s and early 1980s, disastrously wrong.
Inflation then was caused by oil price shocks. When the Fed listened to Friedman and squeezed the quantity of money, we developed near money -- the credit card. Also the price of money, the interest rate, went through the roof, creating another upward cost and fueling the fire. And millions of people were thrown into the unemployment lines, "an army of inflation fighters," one observer put it.
The country entered the worst recession since the Great Depression. The Fed finally blinked and abandoned that program. Oil prices also stabilized. And in spite of massive federal deficits under Reagan, inflation moderated. The supposedly "painless" process of using the money supply had been very painful indeed.
Too much disparagement on the occasion of a person's death is not good form, I suppose. But the casual reader who may not follow economics closely might waste too much effort exploring the cul-de-sac of Friedman's simplistic notions looking for a way out. There is none.
The quantity theory of money upon which his work was based had been debunked even prior to his adoption of it. It was only by dint of tireless self-promotion that he acquired influence, particularly among bankers.
In Sweden, the "Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel," the stepchild Nobel prize invented for economics, was awarded to Friedman in 1976, prior to his being exposed by history. This says more about the prize than it does about Friedman.
As I've noted before, this prize has lost any legitimacy for never having been awarded to John Kenneth Galbraith, one of the acknowledged giants of the discipline. It is too late for them to recoup that blunder. Galbraith died earlier this year. The prize is awarded only to the living.
The limitations of the prize were exposed again this year the Bank of Sweden awarded it to Edmund S. Phelps, and left to the Nobel Peace Prize committee to reward the micro-lending work of Muhammad Yunus. Phelps' notion that expectation of inflation produced inflation was refuted by the experience of the late 1990s.
Yunus' work disproved the conventional thinking of banks and has been a boon in the lives of many of the poorest of the poor.
PS: A troubling quote turned up in my web survey for this piece:"Regarding the Great Depression. You're [Friedman] right, we did it. We're very sorry."Yikes. Bernanke is current Fed chairman. I hope the remark was a joke.
- Ben Bernanke, 2002