The Milton Friedman I knew
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.