Friday, July 22, 2011

"Missing Milton Friedman"

Will Wilkinson writes a post that repeats sentiments I've been posting here for years (and I've just been echoing several conservative & neoliberal economists' sentiments):

Milton Friedman, classical liberal, champion of libertarian movements everywhere, would blame our current malaise on incompetent Fed policy (just as he blamed Japan's central bank for their malaise). Not that the Fed printed too much money, but that it didn't print enough. Ben Bernanke knows this, agrees with it, but now feels politically constrained to do anything about it.
Because conservatives and libertarians are screaming bloody murder about the Fed "debasing the currency!"

Wilkinson correctly identifies that this is the result of the influence of Rothbardian Austrian economics:

"The influence of this kind of talk has been augmented powerfully by a certain moralising strand of Austrian economics, which is hostile to the very idea of fiat money, and encourages the idea that its entire purpose is to expropriate savings and monetise government debt. This strand of Austrianism also encourages scepticism about the existence of distinctively macro-level economic phenomena...Although sophisticated Austrian-school monetary economists such as George Selgin and Larry White defend rule-based inflation-targeting policies not all that different from Mr Sumner's neo-monetarist nominal GDP-targeting rule, the ghost of Murray Rothbard looms much larger on the free-market right."

What Wilkinson misses in his piece: During the late 1970s, Friedman's University of Chicago pioneered what is now "saltwater" economics, where there is no such thing as aggregate demand and money doesn't matter. A macroeconomic framework that Friedman didn't agree with and that doesn't line up with the data very well. But it (or a politicized version) became the darling of the Right in the 1980s. (Krugman chronicles this in a couple chapters. ) So, when Friedman died, there were very few trained conservative economists who saw the world as he did.

Wilkinson concludes (his quotes are from Rothbard):
I do believe elements of Ron Paul's Rothbardian monetary philosophy enjoy a great deal of currency on the grassroots right, and I believe this exerts a considerable gravitational force on the institutional right, such that arguments for zero or very low inflation are accorded more weight than they would were Milton Friedman still (alive).

If only the free-market right still had such a powerfully persuasive "technician advising the state how to be more efficient", our economy might now be slightly less screwed. Maybe it would help were "advising the state to be more efficient" less widely considered "evil work".

Friedman believed that a gold standard, which Rothbard and Mises promoted, where the government arbitrarily fixes the price of something, was incompatible with liberty. Friedman, like Hayek, instead believed the Fed should follow a simple rule and never depart from it. He varied over the years on what the rule should be. His preferred candidates included growing the monetary base by k% every year, to target expected inflation via TIPS spreads, or (as I've heard, but have never read a piece by him on it) a nominal GDP level target. Friedman (and Hayek) believed such a policy would best promote the free market. (He had other recommendations for monetary policy--like a 100% reserve requirement-- which went hand-in-hand here, I admit.) Such a policy rule-- an explicit target-- would be far superior to the feckless discretionary policy we have now.

Bryan Caplan, an Austrian sympathizer at George Mason puts it:
"In sum, Milton Friedman spoke wisely when he declared that 'there is no Austrian economics - only good economics, and bad economics,' to which I would append: 'Austrians do some good economics, but most good economics is not Austrian.'"

No comments: