No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eleven: Money, Money, Money! 270 GREAT ECONOMISTS IN HISTORY MILTON FRIEDMAN 1912-2006 University of Chicago economist Milton Friedman was like a “voice crying in the wilderness,” in economic terms. This diminutive man (only around 5’ tall) was an economics giant and towering figure in Libertarian principles. Throughout the second half of the 20th century, Friedman was at the forefront of defending individual liberty. It wasn’t always that way; Friedman began his career as an economist enamored with the Keynesian “new economics” of government management of the economy. But experience of history didn’t seem consistent with Keynesianism, and by the 1950s, Friedman was writing highly regarded works on consumption that directly confronted Keynesian logic. Co-written with Anna Schwartz, Mr. Friedman’s A Monetary History of the United States revolutionized economic thinking about the Great Depression and was considered his greatest work. Prior to his work, economists (with some free market exceptions such as the Austrians) had almost completely bought the Keynesian story that the Great Depression was a market failure caused by “animal spirits.” These animal spirits would alternate between “bullishness” (where optimism of the future would cause a boom) and “bearishness” (where pessimism of the future would cause business investment to plummet, leading to a bust). This caused a collapse of what Keynes labeled “effective demand.” Keynes said that monetary policy was ineffective because of a “liquidity trap,” where lowering interest rates was ineffective because you couldn’t go lower than zero. Thus, government spending as a fiscal policy was the solution to inevitable market failure. Friedman showed almost the opposite; monetary policy was incredibly potent. He demonstrated that the collapse in effective demand noted by Keynes was in fact caused by the failure of the Federal Reserve to stabilize the money supply (which decreased by one-third during 1929-1932, and almost 50% in real purchasing power due to the deflation). Today his explanation is accepted by almost all economists as (at least) one of the largest factors contributing to the severity of the Great Depression. Friedman took his significant technical reputation into the political/libertarian field in 1962 with his book, Capitalism and Freedom . He became one of the greatest public debaters of his era, and soon was advisor to presidents. He was hated by the Left for advising Chilean dictator Pinochet on how to improve Chile’s economy, but his advice was mostly followed and Chile (unlike the rest of Latin America) grew robustly thereafter. In 1976, Friedman was awarded the Nobel Prize in economics, and in 1988, President Reagan awarded him the Presidential Medal of Freedom. His PBS series Free to Choose became a best-selling book and inspiration to millions of free market proponents. Photograph of Milton Friedman 2