Monday, 23 May 2016
Milton Friedman was sort of right. Lefties in floods of tears.
Lefties, or a least a significant portion of the political left, do treasure their pet hate figures: that’s people they love to hate. And Milton Friedman certainly comes into that category. Plus dangling the word “monetarism” in front of a leftie is even more dangerous than dangling a red rag in front of a bull.
So what exactly was wrong with monetarism? Well don’t bother asking a leftie. Lefties will tell you that monetarism is responsible for half the problems of the world, including AIDS and numerous other diseases, global warming, airliner crashes and much else besides.
This all reminds me of a passage from William Hazlitt: “Defoe says that there were a hundred thousand country fellows in his time ready to fight to the death against popery, without knowing whether popery was a man or a horse.”
In fact Friedman’s monetarism had various elements. One element was simply the idea that the quantity of money (base money in particular) influences demand and hence inflation. And that idea is a bit hard to deny: I mean when someone’s stock of money rises, e.g. when they win a lottery, their weekly spending rises (surprise surprise). And at the macroeconomic level, when the Robert Mugabe’s of this world print far too much money, hyper-inflation ensues (something that is doubtless intuitively obvious to the average ten year old).
The latter idea, namely that the stock of base money is of relevance is shared (shock horror) by numerous economists and groups of economists, e.g. advocates of Modern Monetary Theory.
A second element of Friedman’s monetarism was the idea that governments are so incompetent that they might as well have no discretion at all when it comes to stimulus. Instead, said Friedman, we should just have a fixed and small annual increase in the money supply.
Well there’s a wealth evidence from the recent crisis that governments are indeed incompetent. George Osborne, the UK’s finance minister, came to power with the promise to cut the national debt. In practice he DOUBLED it!! How’s that for a cock up?
Governments failed to regulate banks properly ten years ago, which cause the crisis. They then spent far longer recovering from the crisis than we spent fighting World War II. How do you rate that for a cock up?
Simon Wren-Lewis (Oxford professor of economics) has written numerous articles detailing government’s incompetence during the crisis, e.g. here.
All in all, Milton Friedman’s claim that governments are incompetent isn't far out. Hence his claim that due to that incompetence, governments should have no discretion when it comes to stimulus is not 100% wrong either.
Conclusion: his ideas on monetarism were doubtless not 100% right, but they certainly weren’t 100% wrong either.