My friend and the best French econoblogger Alexandre Delaigue wrote this about Milton Friedman after his death. On his 100th birthday, I am translating and reposting it here, with permission. It’s the best, most fair-minded evaluation I’ve seen of his legacy for a popular audience.
Friedman the Economist
A good way to realize how much influence Friedman has had on the economy and society is to compare him with Keynes. Like Keynes, he was called the most influential economist of the century. Like Keynes, he owes his fame to his capacity, at a specific moment, to see the contradictions embedded in the conventional wisdom of his fellow economists, and to draw from that a radically new perspective on the economy. Like Keynes, he owes his immense fame to a coincidence: the meeting of a new problem and new ideas. For Keynes, it was the Great Depression of the 1930s; for Friedman, it was the Stagflation of the 70s.
And lastly, they both have a similar stature in economics: they are Patron Saints, who inspired a great number of successors, and were turned into idols, with much of their insight jettisoned in the process.
Today, we can say in all honesty that we’re all keynesians. But at the same time, we’re all friedmanites. And this is despite the false opposition between “Monetarists” and “Keynesians” that generations of economics undergrads were hammered with, before realizing that what sets the two perspectives apart is much smaller than what they have in common.
So what is it that Friedman brought to the world? In the 1950s, the consensus of economists was to build a synthesis between Keynesianism and neoclassical economics. The idea was that fiscal action and the arbitrage between inflation and unemployment allowed a perfect regulation of the business cycle.
Friedman made two devastating critiques of this consensus. The first was his study of what actually caused the Great Depression in the 1930s. He showed that the real problem was not a lack of overall demand (which fiscal policy could straighten out), but the actions of the Federal reserve which, responding to a normal shock (a stock market crash) led an extremely restrictive monetary policy which led to the devastation of the banking system. This move was imitated in most countries, exacerbating the recession everywhere. Backing his insight with data, Friedman changed the entire perspective on the causes of depressions: they happened because central banks couldn’t usefully adjust the money supply. The solution, according to Friedman, was to make sure that, whatever happens, the money supply increases progressively.
If the prescription is disregarded nowadays, the basic principle remains: fundamentally, what causes a recession is too little money chasing too many assets. Therefore, in a recession, the central bank must increase the money supply. It may seem abstract when you put it like that (Krugman’s example of the baby-sitting coop can help, here) but it’s one of the most important ideas of the 20th century.
Why did the Crash of 1987, which was steeper than that of 1929, not cause a global recession? It’s because in the meantime, we had Milton Friedman. Unlike in the 1930s, the Fed massively injected money into the US economy.
Friedman’s second critique of the 1950s Keynesian consensus was his forecast that using the Philips curve to regulate economic activity (if there’s too much unemployment, there needs to be a little more inflation, and vice versa) would lead to an increase in inflation, since the inflation you needed to “buy” a drop in unemployment would increase continuously. The Stagflation of the 1970s eventually proved him right, and the success of the disinflation policies pursued after him was directly inspired by his work.
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