The End of the Age of Milton Friedman

There is a direct line from Milton Friedman's ascendancy in the 1970s to the debacle on Wall Street today.
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The Bush administration has thrown in the towel on the long battle begun in the 1970s to minimize government oversight of the economy. In light of the credit crisis, it now wants to regulate Wall Street. Treasury Secretary Paulson has put to together broad set of reforms, not truly effectual, but a serious start.

This marks, at last, the end of the Age of Friedman. And not too soon.

There is a direct line from Milton Friedman's ascendancy in the 1970s to the debacle on Wall Street today. Friedman had been working his brand of economic ideology roughly since the late 1940s and early 1950s, but he did not strike gold with mainstream economists and the public until the hyper-inflation of the 1970s.

He had a double-barreled approach. He was a respected scholar who ingeniously sought to prove his views with empirical and statistical research. These views were largely anti-Keynesian. John Maynard Keynes preached that government spending could ward off recession or at least ameliorate their impact. Friedman argued there was little to do but maintain a regularly growing money supply.

But Friedman's monetarism was discarded long ago -- officially by the Federal Reserve in 1984. They worry about interest rates now, not money, which was always a Keynesian principle, if initially of lesser concern. And, in fact, traditional Keynesian stimulus has made a big comeback. The conservative Bush clambered to get aboard a Keynesian fiscal stimulus package initiated by the House Democrats in December.

The second barrel was Friedman's articulate popular policy writings. What did remain of Friedman's philosophy (aside from one academic contribution, the overstated natural rate of unemployment philosophy) was his deeply held, well-articulated and simplistic view that government regulation was almost always bad for us.

Competition was the great disciplinarian of market excess, wrote Friedman, obeying such predecessors as Friedrich van Hayek, author of The Road to Serfdom. By 1999, even Bill Clinton and many a Congressional Democrat fully supported the elimination of key financial regulations established in the New Deal.

As night follows day, what happened was a return of the excesses of the 1920s. Competition is not enough to ward off excesses. Free floating prices do not automatically stabilize economies. Financial markets in particular encourage excess naturally, a point made by the more profound economist, Hyman Minsky.

Friedman's followers will seldom admit that much of his public policy was not supported by genuine empirical research, unlike his monetarism. At least, because Friedman did the homework, one could debate with him on the groundwork of his views in these areas. In my view, the empirics never supported the stronger propositions he made.

But in the area of public policy, it was largely ideology. It was mostly an exaggerated application of Adam Smith's invisible hand: we would all be better off if we just maximize our profits.

Why did Friedman's views become popular? As he himself conceded, crisis in the 1970s demanded a new set of ideas.

Crisis in the 2000s is now demanding a return to greater realism. Will the nation overshoot, as it did with Friedman's ideological deregulation? Not likely. The powerful vested interests are around to keep government regulators in check. The Bush administration proposals reflect that; they are weak. And though the Democrats are on the case, it is most likely the nation will not do enough.

But if the demise of simplistic Friedmanite ideology is now upon us, at least this crisis has had one silver lining. And perhaps we can begin to discuss more openly, and better deal with, why this economy has served most Americans so poorly since the 1970s.

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