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Friedman and the free market debate

A number of economists had looked closely at Friedman's arguments about the Great Depression, and found them wanting

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BOOK REVIEW | Literature

Paul Krugman | NYT 

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(Book Cover) Samuelson Friedman: The Battle Over the Free Market

Samuelson Friedman: The Battle Over the Free Market

Author: Nicholas Wapshott

Publisher: W W Norton
Price: $28.95

Pages: 352

The New Deal and World War II transformed the US economy from a market free-for-all into a system that was still capitalist, but with many of the rough edges sanded off.

Profit-seeking business remained very much the norm — America never went in for significant government ownership of the means of production — but businesses and businesspeople were subject to many new constraints. Taxes were high, in some cases as high as 92 per cent; a third of the nation’s workers were union members; vigilant antitrust policy tried to limit monopoly power.

And the government, following the ideas developed by Britain’s John Maynard Keynes, took an active role in trying to fight recessions and maintain full employment.

Over the decades that followed, however, there was sustained pushback — first intellectual, then political — against these constraints, an attempt to restore the freewheeling capitalism of yore. Nicholas Wapshott’s Samuelson Friedman: The Battle Over the Free Market is basically an account of this pushback and its eventual fate, framed as a duel between two famous economists — Paul Samuelson of the Massachusetts Institute of Technology and Milton Friedman of the University of Chicago.

Maybe the first thing you need to know is that the idea that what happened was a personal duel between economic titans is best seen as a literary conceit. Certainly nobody told Paul Samuelson that he was engaged in a fight for capitalism’s soul.

Samuelson did write a best-selling textbook that brought Keynesian economics — the idea that changes in government spending and taxes can be used to manage the economy — to American college classrooms. And his concept of the “neoclassical synthesis” — markets can work, but only with government-created guardrails — in effect provided the intellectual justification for the post-war economy. But politics was never more than a peripheral concern.

Friedman, on the other hand, was very much a political animal. Of course, political crusades make for better entertainment than quiet scholarship, so Friedman’s life story dominates Wapshott’s book.

So, about that political animal: Friedman first achieved prominence in academic circles as co-author of a 1946 pamphlet denouncing rent control (not mentioned in this book). He received wider notice with a 1953 essay, “The Methodology of Positive Economics,” that seems maddeningly abstract until he finally gets to the meat: A demand that economists ignore theories about monopoly and imperfect competition because, he claims, they don’t make any useful predictions beyond those that come from simple supply and demand. And his first best-selling book, Capitalism and Freedom, was more a political sermon than a work of economic analysis.

That said, Friedman was no mere propagandist: He was a brilliant analytical economist capable of doing path-breaking academic work when he set his mind to it. His work on monetary policy, in particular, persuaded many economists who disagreed with him about almost everything else.

And his magnum opus, A Monetary History of the United States, 1867-1960 (with Anna Schwartz), while a magisterial work of scholarship, clearly had a major political axe to grind. For its big takeaway was the claim that the Great Depression wouldn’t have happened if the Federal Reserve Board had done its job and stabilised the money supply. That is, simple technocratic measures would have been sufficient — no need for all that Keynesian stuff.

Both the United States and Britain tried to implement Friedman’s belief that the authorities could stabilise the economy by ensuring steady, slow growth in the money supply; both efforts failed dismally. Friedman didn’t help himself by making wild predictions about runaway inflation and depression, none of which came true.

A number of economists had looked closely at Friedman’s arguments about the Great Depression, and found them wanting. And the aftermath of the 2008 financial crisis vindicated the doubters. Ben Bernanke, the Fed chair and a huge Friedman admirer, did everything Friedman and Schwartz said the Fed should have done in the 1930s — and it wasn’t enough. Soon Bernanke was pleading for help from fiscal policy — that is, pleading for Keynesianism to come to the rescue.

Libertarian policies reached a high-water mark in the 1990s, as industries from power generation to banking were deregulated. But all too many of these deregulatory ventures ended in grief, with incidents like the California power crisis of 2000-1 and, yes, the banking crisis of 2008.

If you look at the Biden administration’s proposals — which are for the most part very popular, although their legislative fate is uncertain — they’re pro-market, but involve substantial government spending and regulation in an attempt to tilt the arc of markets toward social justice. In other words, they sound a lot like what Paul Samuelson was saying decades ago.

So by all means you should read Wapshott’s history. But you should also ask a question I don’t think the book answers: Was all of this just a grand, ideologically driven detour away from sensible economic theory and policy? And why did that happen?


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First Published: Sun, August 08 2021. 22:53 IST
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