Milton Friedman Wrong on Depression

Milton FriedmanWhile researching today’s birthday post, I found the video below, Milton Friedman on the Gold Standard. It’s quite interesting. Just on the surface level, listening to Friedman talk, you could predict that he was a libertarian. He comes off as so smug, I really feel the desire to punch him in the face. Even when I was a libertarian, I couldn’t take his writing. But then, his mass market book (with his wife) Free to Choose is typical of popular libertarian titles. They are always so positive, like pep rallies in book form. “And once we have a libertarian society, we’ll all be happy! Goooo team!”

But this video gets to the heart of Friedman’s academic research. It is what got him the Nobel Prize. And it is what made him an oracle of the conservative movement. And he lucked out. He died in late 2006, just before the financial crisis that showed that while he wasn’t wrong in the specifics, he was wrong on the large scale. He came up with a wonderful narrative about the Great Depression that you can see in the video. Basically, the Federal Reserve caused the Great Depression by not allowing the money supply to expand when foreign gold came into the country. The only problem is: no.

Notice: it isn’t that the Federal Reserve didn’t screw up. It did! But that wasn’t what caused the depression. It simply made the depression worse. It’s kind of like a guy with endocarditis in 1800. The doctors don’t know what that is so they just bleed him. The guy dies. Well, certainly the bleeding made things worse. But it was the endocarditis that killed him. Unfortunately, we didn’t know this for sure until the 2007-2008 crisis (or the 1990s if you were Paul Krugman). Then, the Federal Reserve did everything right. And to the surprise of conservatives everywhere, it wasn’t enough.

It turned out that Keynes was still the master. Friedman (who is more or less the conservative’s Keynes) spent his life toiling on a minor variation of Keynes’ theory. I said he was lucky to die when he did because he never got to see the scope of his work limited. But the truth is, we all missed out by not seeing him react. Because the fact is that over the course of his life, there were plenty of things that countered what he thought and it never made a difference. This is a problem with being brilliant: you can always justify things that push back against your theory.

This is really well illustrated in Naomi Klein’s The Shock Doctrine. The second chapter deals with the relationship between Friedman and Chilean despot Augusto Pinochet. Now that relationship might be enough to show what Friedman was all about. He was, after all, supposedly dedicated to freedom. But apparently the thousands tortured and murdered by Pinochet didn’t matter. Regardless, what happened was that Friedman pushed “free market” reforms. When they just made the economy worse and more unequal, Friedman recommended what conservatives always recommend in these situations, “More of the same!” It was never that the free market reforms weren’t good policy; it was that there hadn’t been enough of them. Eventually, Pinochet was forced to liberalize some of his policies, because he might have been a despot but he wasn’t an idiot.

At this point in time, Milton Friedman comes off as kind of a liberal. The conservative movement has moved so far to the right that they want to abolish the Federal Reserve and go back to the gold standard. And when the economic crisis of 2007-2008 came, what did they say? They said the same thing that Friedman would have said, had he been alive. “The reason for the crisis was government regulation!” You may remember (although the argument is still floating around) that Fannie Mae and Freddie Mac supposedly caused the financial crisis. And to top it off, they did it by giving those people loans. At least you can say one thing: Milton Friedman didn’t appear to be a racist.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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