That statist, socialist, crank guy?
How is that Friedman was not free about money? I know what monetarism means, but I also know that Friedman didn’t favour central banking, he preferred free banking. From Wikipedia:
“In a 1995 interview in Reason magazine he said the “difference between me and people like Murray Rothbard is that, though I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction.” He said he actually would “like to abolish the Fed,” and points out that when he has written about the Fed it is simply his recommendations of how it should be run if it exists.”
Obviously, he would like free banking to have FRS in order to keep prices somewhat constant.
Interesting.
Since money is half of every market exchange, that’s a pretty big “except”.
I’m thinking he would have favored the actions for the sake of price stabilization (fighting deflation).
I’m not asking whose ideas are worse. I’m asking which set of ideas have, in practice, had the worst effects.
Both theories are inflationist. The Fisher/Friedman theory modulates inflation in order to strike a balance between upward and downward price pressures. The Keynes theory modulates inflation in order to strike a balance between unemployment and major inflation. The Fisher/Friedman doctrine has the advantage of not being susceptible to a complete empirical contradiction; an economy can’t have both a spike and a drop in the average price level at the exact same time, but it can have stagflation. However this theoretical advantage may be why price stabilization has been adopted so readily (and so destructively).
Before the 29 crash, the Fed was inflating in order to stabilize prices: this was very Fisherite. However it seems the New Deal was more Keynesian because it involved more fiscal stimulus and more of a direct concern with unemployment.
The 70s stagflation is often blamed on Keynesianism. But as I mentioned in my OP, it might have been more directly brought on by Friedmanite policy.
The governing principles of the Fed have been both price stabilization (Fisher/Friedman) and full employment (Keynes). But at least thinking back to Fed statements, it seems their finger was more on the price level pulse than on the full employment pulse when deciding interest rates.
How can you have free banking and a FRS (fractional reserve system) at the same time?
It seems Friedman was all over the place on these questions throughout his career. Tyler Cowen wrote the following in admiration of Friedman being “non-dogmatic”; I think it’s a sign of moorless, positivist, ad hoc reasoning.
The early Milton favored one hundred percent reserve banking, in part as a reaction against the bank failures and excesses of the Great Depression. I read the commodity basket piece as breaking his ties to the commodity money idea, an old (and perhaps outdated?) piece of classical liberal thought.
The mid-period Milton favored a fixed rate of monetary growth. The Milton Friedman of 1969 considered the idea of deflation – an “optimum quantity of money” – although it is not clear he ever endorsed that proposal. The Milton Friedman of 1986 Friedman and Schwartz toyed with ideas of free banking. The very late period Milton Friedman was moving toward the notion of an inflation rule, as monetary targeting had not worked.
Theoretically, it’s possible. A bank raises the supply of money so to exceed their reserve requirements set by the standard. I think that it’s practically impossible in an ancap society, as full reserve banks would attack FRS banks and cause banks runs on them.
I’m sorry, I meant to type “Federal Reserve System”, which is what I thought you meant by “FRS”. Which did you mean?
Fractional Reserve System. I know, it’s confusing… 
Here’s evidence that the Fisher/Friedman emphasis on price stability has influenced Bernanke: a speech Bernanke delivered in 2006, “The Benefits of Price Stability,” (HT Mike Rozeff’s piece today on the LRC)
In this piece, he characterizes the economic policy of the 60s as trying to balance the tradeoff between inflation and unemployment (which I contend is essentially Keynesian)…
The 1960s’ idea that greater prosperity could be achieved if only we were willing to accept higher inflation had its origins in an academic study, although the author likely did not intend that outcome. In 1958, A.W. Phillips, using British data, showed that historically inflation had tended to be high in years in which unemployment was low. Similar results were subsequently reported for the United States.4 Phillips did not draw strong policy conclusions from his findings. But that did not stop others from doing so. In the decade following the publication of his paper, his empirical finding was sometimes interpreted (including, for example, by members of the Kennedy and Johnson Administrations) as showing that policymakers could choose (permanently) lower unemployment if they were willing to accept (permanently) higher inflation in exchange. Scholars disagree somewhat about the extent to which policymakers of the time tried actively to take advantage of this supposed tradeoff, but these ideas likely provided part of the intellectual rationale that made the authorities willing to allow inflation to rise throughout the 1960s and in the early 1970s.
And then, according to Bernanke, Friedmanite theory comes in to save the day to disprove the inflation/unemployment tradeoff theory…
The idea of the permanent tradeoff did not go unchallenged, however. In 1967, economists Milton Friedman and Edmund Phelps independently produced influential critiques of this view. Their key contribution was to observe that, if inflation expectations react to changes in actual inflation in an economically reasonable way, then any tradeoff between inflation and unemployment would be short-lived at best.
and
Milton Friedman once again was in the vanguard on this issue. In his 1977 Nobel Prize address, Friedman laid out the modern argument–that, because it harms the efficient operation of markets, high inflation is more likely to raise unemployment than to lower it–and he used the experience of the 1970s to illustrate his point.6 Indeed, by the late 1970s, even economists who were not part of Friedman’s monetarist circle were beginning to study and acknowledge the costs to the economy associated with high inflation.7
Bernanke hails how Fed Chairman Paul Volker, “drew on Friedman’s monetarist approach” and how, “Like Volcker, Greenspan was ahead of academic thinking in recognizing the potential benefits of increased price stability.”
Bernanke believes there is a “modern consensus, that price stability supports both strong growth and stability in output and employment,” which as he characterizes it stems directly from Friedman’s work.
I suspect that Keynesian policy creates acute problems that are readily recognized as a problem of inflation. In contrast the Fisherite bubble of the 20s wasn’t recognized as an inflationary problem because prices were stable. In the same way, I think we have had a Friedmanite bubble under Greenspan and Bernanke that also isn’t recognized as an inflationary problem, again because prices were stable. Ultimately these stable-price bubbles are politically more difficult to deal with, because it is harder to convince policy-makers that the remedy for them is to halt monetary expansion.
It could only be cranky maths-and-ad-hoc-rationalising-masquearading-as-economics that could delude people into imagining that government intervention with the intent of artifically stagnating the price system itself could be a “good thing”. it surely can’t be anything approaching ‘good economics’.
It should also be noted that he still wanted government-controlled perpetual inflation. He just didn’t want the Fed to be the agency doing it. In a letter to Mankiw, he wrote (emphasis added):
Nothing that I have observed in recent decades has led me to change my mind about the desirability of a monetary rule which simply increased the quantity of money at a fixed rate month after month, year after year. That rule would get rid of the mistakes and that is probably about all you could expect to get from a monetary system.
Even better would be to abolish the Fed and mandate the Treasury to keep highpowered money at a constant numerical level.
I would say Friedman did more damage on his waffling of policy than he did on theory. In many ways, he did the heavy lifting that Hayek wasn’t interested in doing in response to Keynes. In this case, Friedman used the same framework of Keynes and his supporters against them, toppling their own obscene ideas. Sadly, what is replaced with Keynesian theory isn’t much better, but I suspect that in such an intellectual tundra as economics, hardier thinkers will strive and thrive.
I’m debating an ardent Friedmanite regarding this on Reddit in Friedman’s “Happy Birthday” thread.
I hate the “pragmatic” types. If something is wrong, it’s wrong; don’t try to make it better, instead, eliminate it. Why is it that no one ever mentions Friedman’s positions regarding freely floating international exchange rates amongst different currencies? That was his biggest failure in my opinion.
That sure is a good target for your hate. Instead everyone should talk about how great it would be if we could go instantaneously to anarcho-capitalism.
Yes, it’s much better to support criminal activities AND even justify them on ‘theoretical’ grounds by dismissing sound reasoning as ‘too radical’.
Yes, that’s Milton Friedman’s legacy, supporting criminal activities. With that view, you could be Naomi Klein’s spokesperson.
I think you should have some appreciation for the intellectual division of labor. Was pushing for the elimination of the draft evil because it did not also involve dismantling the military? Is calling for tax and spending cuts evil because you are not also calling for the elimination of government?
And of course should we extend our hatred to Mises for not being radical enough?
Rooster,
I think the problem is when people like Friedman advocate allegedly lesser evils to allegedly obviate worse ones, as opposed to when people fail to denounce all evils while denouncing some. Friedman’s errors were errors of commission, not omission. For example, Friedman’s negative position of calling for tax cuts, though not necessarily the abolition of the IRS, was not wrong. His positive position of calling for a negative income tax was.