Paul Krugman posted a really good article yesterday, Milton Friedman, Unperson. Mostly it is about how Friedman is absent from the current debate about the financial crisis and our continuing economic doldrums. Krugman thinks this is because Friedman tried to straddle two worlds with his essentially Keynesian economic views and his extremist libertarian political views. I think Krugman is mostly right. However, if you look at what Friedman means to people today, it has little to do with his economic theories. It is his extreme views about government always being bad that prevail and we continue to hear echos of that.
But let’s talk about Friedman’s economic ideas. Krugman quotes a very famous speech by Ben Bernanke where he says that the Federal Reserve caused the Great Depression and that thanks to Friedman, we now know it and won’t let it happen again. That is Friedman’s great economic legacy. And I don’t question that Friedman was a brilliant economist and that he provided great insight into the Great Depression and stagflation and many other economic issues. But when it comes to this one major point, the crisis of 2008 and its results show that Friedman was wrong.
It is doubtless true that if the Federal Reserve had acted differently during the Great Depression, things would have gone better. It is also true, however, that Keynes is the man who got the fundamental nature of the 1930s rights and Friedman was working the weeds. And we’ve seen this since 2008. We are still greatly suffering from that crisis 5 years later despite the fact that Bernanke had learned from Friedman and did everything right at the Federal Reserve.
Now, some would say, but 2008 isn’t nearly as bad as 1929. That’s true. But it isn’t because of the work of the Federal Reserve. In 2008, we had automatic—Keynesian!—stimulus in the form of Social Security, unemployment, and various poverty programs. They are the reason that 2008 didn’t bring on the Great Depression II. And I still find it shocking that so many conservative economists don’t see that.
There is no doubt that Milton Friedman added greatly to our understanding of how the Federal Reserve can and should be used to stabilize the economy. But his work has been greatly overstated. And as much as it is still part of the debate, it is used by those who only want to enrich the wealthy by doing nothing. Uncle Miltie told us that all we had to do was use the Federal Reserve, and so the only acceptable tool for an economic problem is the Federal Reserve. This is now the “centrist” position. On the right are those who say that the Federal Reserve itself steals money from True Americans. So the centrist position is based on Friedman’s economic work. And the conservative position is based on his political work. In both fields, he was demonstrably wrong. But it doesn’t matter, because his theories always told the wealthy what they wanted to hear. And the wealthy control our nation.