The Monetarism Man: Milton Friedman
Posted on:
18
Feb
2012
by James Farmer
Born 1912 in New York. Died 2006 in San Francisco
Another of those intellectual giants who you never quite got around to reading. Relax, you’re among friends.
Milton without the Keynes It’s coincidental, but ironic, that Britain’s most famous new town should have combined the two big names of the monetary debate. Although Milton Friedman never denied the early influence of John Maynard Keynes (who favoured government using spending programmes for creating economic growth in difficult times), the two fell out quite early in Friedman’s career as he accused Keynes of getting his economic principles completely upside down. Keynesian subsidies didn’t create proper growth, said Friedman – instead, they were doomed to fuel inflation without any lasting effect.
Cometh the hour, cometh the man As the free-spending 1960s and 1970s ended, Friedman was to become the voice of the libertarian right wing, working for Presidents Richard Nixon and later Ronald Reagan (1980-88) – and also influencing Britain’s own Margaret Thatcher, who was fighting her own monetarist battles against free-spenders in Europe. Friedman’s political star still waxes and wanes, but today’s small-government movement within the Republican Party reads a lot of Friedman.
Credit where it’s due It would be wrong to give Friedman all the credit for inventing monetarism. That honour properly belongs to the Austrian Friedrich Hayek (1899-1992), whose fiendishly intellectual fusion of economics and philosophy would have baffled most ordinary mortals. Suffice it to say that Hayek got his richly-deserved Nobel Prize for Economics in 1974, and Friedman followed in 1976.
The basics? Both Keynes and Friedman cut their teeth on Franklin D Roosevelt’s New Deal – Keynes as an influential economist, Friedman as a bright but struggling student. Unsurprisingly, their experiences differed. Keynes was sure that printing money had helped to generate growth, because if you gave people cash they’d always spend it. But Friedman said that handouts had made no difference to spending patterns, because people would always judge their consumption according to what they expected to earn (their “permanent income”) – not what they were currently earning.
Either way, Friedman was desperate to disprove the theory that price inflation could be caused by a rise in the oil price, or by increases in wages. That would come as a surprise to many modern economists – but hey, it was the corner he chose to fight. And he rejected the view that governments should get involved, because he said that ultimately there wasn’t that much they could do anyway. (The Quantity Theory of Money, 1956).
So what? Bear with us. Printing money is doubly evil, Friedman insisted– not just because it increases prices without having any long-term effect on output. Worse, he claimed, the increases in money supply growth caused employment and output to rise in the short term – and that decreases in money supply growth would have the opposite effect.
You mean lower unemployment is a bad thing? Yes, in a way. Friedman insisted that there was such a thing as a “natural” rate of unemployment, and he argued that governments could only increase employment above this rate if they were prepared to risk letting inflation rip.
So that’s why Margaret Thatcher was a monetarist? Absolutely. Having hauled Britain out of the 20% inflation of the 1970s, she was prepared to sacrifice job creation in the UK for demand stability in the 1980s. They sniggered at her in France and Italy, where Keynesian expansion was rampant, and where growth was much faster than in Britain. But in these days of euro debt crisis she’s probably having the last laugh.
“Inflation is taxation without legislation”
Tags: Milton Friedman
