Milton’s Paradise Lost
Brad DeLong has a nice piece about the failure of Friedmanism. I thought I might add a bit on monetary policy and the Fed.
When wearing his professional economist hat, what Friedman really argued was that the Fed could easily have prevented the Great Depression with policy activism; if only it had acted to prevent a big fall in broad monetary aggregates all would have been well. Since the big decline in M2 took place despite rising monetary base, however, this would have required that the Fed “print” lots of money.
This claim now looks wrong. Even big expansions in the monetary base, whether in Japan after 2000 or here after 2008, do little if the economy is up against the zero lower bound. The Fed could and should do more — but it’s a much harder job than Friedman and Schwartz suggested.
Beyond that, however, Friedman in his role as political advocate committed a serious sin; heconsistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression.
And this debased and misleading version is what has filtered down to the likes of Ron Paul, who then use it to argue against the very activism Friedman was really advocating.
Bad Milton, bad.
- Thoughts on the Paul-Krugman Debate (notesandobservations.me)
- Paul Krugman & Ron Paul Face Off on Spending, Inflation, and The Fed (wallstreetpit.com)
- Ron Paul Just Went To Battle Against Paul Krugman – Here’s What You Missed (businessinsider.com)
- Defending Milton Friedman’s Monetary Policy Prescriptions (Again) (wallstreetpit.com)