January 25, 2007

Milton Friedman.

This is a pretty nice article by Paul Krugman on the Nobel prize winning economist Milton Friedman who died recently. Calling him the "best spokesman for the virtues of free markets since Adam Smith" Krugman looks at three aspects of Friedman's career: the theoretical economist, the policy entrepreneur and the ideologue.

Krugman has no hesitation in saying that as a theoretical economist Friedman was great, with seminal contributions to the theory of consumer behavior and the relation between inflation and unemployment. He particularly singles out for praise Friedman's bringing back of the "Economic Man" into economics after Keynes's recourse to "psychological theorizing". A major success story of this approach of Friedman was the discrediting of A.W. Phillips's theory on the trade-offs resulting from "historical correlation between unemployment and inflation, with high inflation associated with low unemployment and vice versa". Friedman argued that no valid trade-offs existed and his argument was borne out by the American experiences in the 1970s.

But while discussing the second two avatars of Friedman Krugman is lot more circumspect. There are questions raised about how effective his policy recommendations really were and suggestions that Friedman seemed "intellectually dishonest" in his role as a popularizer of free market doctrine.

The one major policy suggestion of Friedman is the theory of "monetarism". Friedman had grave doubts about the ability of a body of men (usually those in charge of monetary policy via the central banks) to correctly maintain the money supply in the system. According to him the worst effects of the Great Depression were due to the inability of Federal Reserve to maintain sufficient money supply. So he suggested that money supply be increased every year at a low rate (around 3%), irrespective of what really is happening in the economy. This policy was tried both in America and Britain briefly around 1980 with not so nice results. It was discarded soon after that and even many conservative economists in the Bush administration are openly against it.

In the post World War 2 era the dominant doctrine guiding economic policy was developed by Keynes. He went against the conventional wisdom by talking about the importance of fiscal policy as opposed to monetary policy in shaping economy. This naturally gave governments, with all their proclivities for follies, a far larger say in the matter than what many classical economists would have found comfortable. But such was the power and appeal of Keynes's revolutionary ideas that soon they became the conventional wisdom. It was in this context that Friedman took up the mantle to bring "laissez-faire" back into prominence. Krugman attributes this to Friedman's "intellectual courage".

However, Krugman chides Friedman for taking things too far: going from "markets can too work" to "markets always work and that only markets work". In his stubbornness to deliver the essentially political message expected by the audience, he forsake the very qualities of intellectual honesty and thoroughness which made him a great economist. So "the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy".


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