Friedman’s century

Milton Friedman would have been 100 later this month. As well as being one of the great economists, if not the greatest economist, of the 20th century, he was also what the Americans call a public intellectual. He was a regular on PBS, the American equivalent of the BBC, writing and presenting Free To Choose, a ten-part series that aired in the late 1970s. He also wrote a column for Newsweek for an astonishing 18 years. Among today’s public intellectuals, it is extremely fashionable today to say that the financial crisis has proved Friedman wrong. You can read that on an almost weekly basis in the New York Times or the Guardian: that deregulation was the problem. But it is extremely hazardous to say in public that anything has proved Milton Friedman wrong.

An illustration of this point was made  before the financial crisis by Paul Krugman, who argued in a long piece for the New York Review of Books that monetarism had been comprehensively disproven by the fact that the Federal Reserve and other central banks had stopped targeting the growth of broad money. The authorities, he said, had abandoned Friedman and instead embraced the discretionary monetary policy that he had been so against. The great success which Sir Alan Greenspan’s Federal Reserve had enjoyed with this discretionary monetary policy, said Krugman, had clearly falsified Friedman’s theory. Subsequent events did not treat this article kindly. If one wanted to point to a single cause of the great bubble that ultimately triggered the financial crisis, one would point to the easy-money policy of the Federal Reserve, after discretionary policy replaced a monetary target.

When I was trying to explain to my students at Harvard what the Fed was likely to do when the financial crisis got going in late 2008, I said the simplest thing to do is read Friedman and Anna Schwartz’s chapter ‘The Great Contraction’ in their book The Monetary History of the United States and assume that the Fed will do the exact opposite.