Friday, January 26, 2007

A Counter-Counter Revolution

In the New York review of Books Paul Krugman has a very interesting run over the life, economics and politics of Milton Friedman.

To Krugman, Friedman's real achievements were as a technical apolitical economist. In particular, his permanent income hypothesis and the Non Accelerating Inflation Rate of Unemployment.

Much less successful in Krugman's eyes was the doctrine with which Friedman is most strongly associated: Monetarism

"Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper," wrote MIT's Robert Solow in 1966. For decades, Milton Friedman's public image and fame were defined largely by his pronouncements on monetary policy and his creation of the doctrine known as monetarism. It's somewhat surprising to realize, then, that monetarism is now widely regarded as a failure, and that some of the things Friedman said about "money" and monetary policy—unlike what he said about consumption and inflation— appear to have been misleading, and perhaps deliberately so.

And practical application of Friedman's theory has been far from successful.

First, when the United States and the United Kingdom tried to put monetarism into practice at the end of the 1970s, both experienced dismal results: in each country steady growth in the money supply failed to prevent severe recessions. The Federal Reserve officially adopted Friedman-type monetary targets in 1979, but effectively abandoned them in 1982 when the unemployment rate went into double digits. This abandonment was made official in 1984, and ever since then the Fed has engaged in precisely the sort of discretionary fine-tuning that Friedman decried. For example, the Fed responded to the 2001 recession by slashing interest rates and allowing the money supply to grow at rates that sometimes exceeded 10 percent per year. Once the Fed was satisfied that the recovery was solid, it reversed course, raising interest rates and allowing growth in the money supply to drop to zero.

Even Friedman himself appeared to eventually accept this. Stating, when interviewed by the Financial Times in 2003, that:

"The use of quantity of money as a target has not been a success," ... "I'm not sure I would as of today push it as hard as I once did." (ref here: scroll down to Monetarism)

On Friedman's role as an anti-government activist, Krugman has this to say:

Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.

Krugman start's his essay with a metaphor: Classical economics as the Catholic Church, Keynes as Martin Luther, and Friedman as Ignatius of Loyola, founder of the Jesuits.

So he concludes:

In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I'd argue, is a counter-counterreformation.

Those, in my opinion, are pretty strong words for a mainstream academic economist of this day and age. And what struck me reading them was just how much Krugman appears to have traveled left as an economist in recent years. Krugman the younger, was always slightly left of centre (liberal in American parlance) , but key word was slightly. If you read a book like the Accidental Theorist you'll find that Krugman spends far more time clubbing the left than he does the right. This includes attacking members of the Clinton administration for being too interventionist. Krugman would probably argue that he's always attacked bad economics and that now his guns are turned mostly to the right because that's where the errors are coming from. However, I'm not so sure: now days you can read the Krugman who once ridiculed the Seattle protesters admitting to feeling conflicted about globalisation; you can read the Krugman who used to see red at the mere sight of the Surname Galbraith (James or John it didn't matter) quoting John Kenneth Galbraith approvingly; you can see Krugman as an unqualified supporter of public health care; you can read Krugman saying that the Democrats shouldn't worry about balancing the budget in the short term; and you can read Krugman again and again on inequality (which, to be fair he has always been concerned about).

So, if you were to ask me, has the world changed or has Krugman, I'd say the latter.

Perhaps we have a contender for our head contra-contra?

[update: put the word mainstream in front of academic in my third to last paragraph as that seems more accurate]

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