Milton Friedman: A Reassessment

No, don’t get the wrong idea from the title.

Everywhere you turn these days, “capitalism” gets a bad rap.  “Free markets don’t work,” is the lesson supposedly learned from the Panic of ’08.  “Chicago School Blues: Milton Friedman’s stronghold is under siege as economists blame free-market theories and lax market regulation for the global financial crisis,” reads the opening to an article in this month’s Bloomberg Markets.

And if Friedman’s legacy is looking rather mixed from the standpoint of conventional wisdom, I think it should be mixed likewise for those of us who still believe in “free-market theories” and “lax market regulation.”  Because the mess we’re in is, to some small degree, of Friedman’s making.

His major academic contributions lay in the realm of monetary theory.  What distinguishes the “Chicago School” from other schools is its notion that the money supply can be constantly tweaked and fine-tuned by the authorities to achieve optimal results; sort of the monetary flip-side of Keynesian tweaking and fine-tuning of fiscal policy.  Not exactly the stuff of free markets.

And it’s that aspect of Chicago-school thinking behind “Helicopter Ben” Bernanke’s policies now, hence Bernanke’s famous statement at Friedman’s 90th birthday celebration, “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”  The “it” in question is failure to sufficiently inflate the money supply at the onset of the Great Depression.  For that matter, let’s not forget Bernanke’s nickname derives from an expression of Friedman’s.

So why are the “Chicago School” and “free markets” taking the blame for the present mess if what’s really to blame is what his Austrian School contemporary Friedrich von Hayek called “the fatal conceit” that the monetary authorities can push buttons and pull levers to make everything come out OK?

Ah, that’s where we get to what’s really problematic about Friedman’s legacy.  Because while his decidedly non-Austrian monetary theory was what snagged him a Nobel prize, it was all the good stuff outside the realm of monetary theory — low taxes, limited regulation, small government — that fired up the public imagination at a critical juncture in history.

Friedman’s brilliant public television series and companion book Free to Choose burst on the scene in early 1980 — just as a decade of stagflation was leading us into recession.  Even folks who didn’t read books or watch public television nonetheless read newsapaper and magazine columns by people who did see Free to Choose.  And the people who didn’t read magazines or newspapers absorbed the message from Ronald Reagan’s sound bites during that year’s presidential campaign.

Marginal tax rates did fall during the 80s, but government didn’t get any smaller, and deficits grew; but the perception was that “free-market economics” was at work.  And that perception applied across the political spectrum.  Liberals still rail about the “free-market excess” of the Reagan era, while conservatives look back on “morning in America” as an affirmation of their world view.

Fast-forward to today, we’re in a hell of a mess, and conventional wisdom says it’s the failure of a free-market paradigm that’s held sway since, well, the Reagan era.  All those banks that took those irresponsible risks?  Why it’s the free market and lax regulations that made it possible.

Of course in a genuine free market, there wouldn’t have been the implicit guarantee of government bailout if those irresponsible risks went bad as they surely would.  (This is one reason Ron Paul voted against Gramm-Leach-Bliley — the banking deregulation law ramrodded through Congress by Robert Rubin and Co. in 1999.)  The risks would never have been taken.  We wouldn’t be in this mess, certainly not to this degree.

But try explaining that to anyone now.  You run the risk of sounding like an old-line Communist when reminded of some obvious failure of the Soviet system: “But true Communism has never been tried.”

That’s an awful spot for us Austrian School adherents to be in.  And I daresay it was Friedman who put us there.