Milton Friedman and His Legacy

The late, great economist Milton Friedman would have been 100 years old if he died today. About a year ago, I was in Chicago to record an episode of a retroactive look back at his influential Free to Choose TV series so I got to spend some time scrutinizing his ideas and pondering their legacy.

But I think it’s noteworthy that even though today everyone will be talking about how influential he’s been, probably his most historically important argument has never had less influence today. This was a combined analytic argument about the Great Depression and monetary policy, and a kind of canny rhetorical move. The way it went was that after the Great Depression a  conventional wisdom was put in place holding that the Depression was a crisis of unregulated capitalism and that it showed that a prosperous market economy required active management by the government. This was both a rhetorical crisis for proponents of free markets, and a philosophical crisis for opponents of income redistribution. After all, if prosperity relies on active macroeconomic management then it’s difficult to see market incomes as reflecting deep pre-political moral entitlements.

Friedman had a two-part counterattack. Part one was to argue—fairly persuasively—that monetary policy rather than fiscal policy was the key to recovery from the Great Depression.

Part two has a more complicated legacy. The straightforward reading of Friedman’s point about monetary policy and the Depression is that, yes, a propserous market economy does require active public sector management of the demand side of the economy. But Friedman wanted it to be read a different way, as an example of the damage done by the government doing bad things. These characterizations are basically equivalent, but Friedman’s way better suited his ideological proclivities regarding income redistribution. But faced with a new depression, Friedman’s way of putting this has created two problems. One is that on the right a lot of folks view calls for central banks to adopt appropriate monetary policy as just another form of government activism. Meanwhile on the left thanks to co-branding between a monetary focused view of macroeconomic policy and Friedman’s views on other matters, many view it as a kind of sellout to argue that business cycle problems can be cured with monetary policy.

So we’re left with a world in which Friedman is an iconic figure, and yet no major political movement in any of the developed world’s major countries is calling for a Friedmanite solution to the dominant policy problem of the moment.