The Mil­ton Fried­man I knew

Financial Mirror (Cyprus) - - FRONT PAGE -

In the late 1970s, when beaver­ing away at my own lit­tle re­search firm, I re­ceived a let­ter from a “se­nior re­search an­a­lyst” at the Hoover In­sti­tu­tion, named Mil­ton Fried­man. In the let­ter Fried­man wrote that he agreed with some of what I had writ­ten in a re­cent re­port, but other sec­tions had prob­lems. He had got­ten the pa­per from one of my clients, and I’ll ad­mit it sent me just a bit over the moon. There­after, I put the world’s pre­em­i­nent mon­e­tary econ­o­mist on my re­search mail­ing list, and from time to time I re­ceived re­sponses from him, which al­ways of­fered pre­scient in­sights.

Some years af­ter this cor­re­spon­dence be­gan, I felt bold enough to ask him to write a fore­word to my first book and also re­view the draft which was writ­ten in French. Hav­ing spent a few years liv­ing in Paris, Fried­man was a flu­ent French speaker and to my de­light he ac­cepted both re­quests; his cor­rec­tions were so force­ful that I had to re­write a num­ber of chap­ters that he thought “weak” (I was a lit­tle stung by the crit­i­cism, but did as I was told and the re­sult was much bet­ter).

Fried­man had an abil­ity to ex­press the most com­plex con­cepts sim­ply, and in that way re­sem­bled the early 19th cen­tury French econ­o­mist Fred­eric Bas­tiat. My book did rather well in France—far bet­ter than other books I have pub­lished—and I doubt this was a mere co­in­ci­dence.

Some years later, at Louis’s in­sis­tence and in­sti­ga­tion, we set up a meet­ing with Fried­man and spent a won­der­ful af­ter­noon, along with his wife Rose, in pas­sion­ate dis­cus­sion over mat­ters such as the ve­loc­ity of money. I was mes­merised to watch this in­tel­lec­tual gi­ant de­bate with my son, then just out of uni­ver­sity, with­out once in­vok­ing his own author­ity. Fried­man prob­a­bly had the most So­cratic mind I have ever en­coun­tered as his only aim was to help an in­ter­locu­tor un­der­stand a topic. He had al­most no in­ter­est in whether you ac­cepted his par­tic­u­lar po­si­tion.

So why am I telling this old story? Sim­ply be­cause I read ev­ery­where that the poli­cies of most de­vel­oped market cen­tral banks have been in­spired by Mil­ton Fried­man. I must say this is quite a per­ver­sion. To be sure, Fried­man would likely have favoured some type of quan­ti­ta­tive eas­ing right af­ter the 2008 cri­sis as he al­ways said the Great De­pres­sion was ag­gra­vated by the Fed­eral Re­serve let­ting the money sup­ply mas­sively con­tract. This is prob­a­bly the main rea­son that I have never been a critic of suc­ces­sive QE pro­grammes. And yet the idea that a cen­tral bank should for years on end ma­nip­u­late prices to achieve a false cost of money, I am sure would have yielded a vi­o­lent re­ac­tion (he could be very tough when con­fronted with a clear case of bad faith).

I am pretty sure he would have said that freez­ing the price of any­thing had never cor­rected a sup­ply-de­mand im­bal­ance, and so freez­ing the price of money was un­likely to yield good re­sults. Need­less to say, the ar­ti­fi­cially low cost of money that we have had for the last ten years or more has led to a “great stag­na­tion” just as the nor­mal (and fairly high) cost of money between 1987 and 1999 led to a great mod­er­a­tion.

To my knowl­edge, us­ing an ab­nor­mally low cost of money to stim­u­late con­sump­tion has never been a Fried­man­ite idea, but rather a Key­ne­sian on—that Keynes him­self dubbed “the eu­thana­sia of the ren­tier”. Hence, I would have ex­pected Key­ne­sian economists to ac­knowl­edge their roots rather than try­ing to pin the onus (mis­take) on Fried­man. To my mind, it is clear that the largely Key­ne­sian pol­icy mix adopted over al­most twenty years is re­spon­si­ble for our cur­rent eco­nomic dis­as­ters. But rather than own­ing up to this fail­ure be­fore limp­ing back to uni­ver­sity teach­ing jobs they should never have left, the Key­ne­sians seem to be en­gaged in a pivot by blam­ing the cur­rent predica­ment on a failed “mon­e­tarist” ex­per­i­ment.

In fact, when I asked Fried­man what he thought was the proper role for cen­tral banks, he was un­equiv­o­cal that they should be re­placed by a com­puter that sim­ply in­creased the mon­e­tary base by 3% a year. He also ex­pressed no con­fi­dence in politi­cians’ abil­ity to fol­low “counter cycli­cal” poli­cies with peo­ple paid to dig, and then fill in, holes (the other great Key­ne­sian idea for creat­ing “de­mand”). I re­call him not­ing wryly that US Repub­li­cans al­ways cam­paigned on the idea that the gov­ern­ment did not work, and as soon as they were elected, went about prov­ing the point.

To my mind, the only way out of our cur­rent mess is to re­turn to a market-dic­tated cost of money and also mas­sively cut gov­ern­ment spend­ing all over the world, as most gov­ern­ments are now see­ing a neg­a­tive mar­ginal re­turn from fresh spend­ing. As such, it is sim­ple math that any rise in value-added within the sys­tem can only be achieved by lower state spend­ing. My worry is that the re­verse will hap­pen, re­sult­ing in a dip into re­ces­sion.

My only re­gret is that the Mil­ton Fried­man I knew is not here to make this ar­gu­ment. The world could do with some real Fried­man­ite think­ing.

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