Gary North

July 28, 2011

The Economist is the most respected economics magazine in the English-speaking world. It is influential. When an idea is expressed in its pages by an always anonymous author, it has been vetted by an anonymous editor.

Here is a recent post. Free-marketeers and inflation: Missing Milton Friedman.

TIM LEE asks an important question: why are conservatives and libertarians so uniformly hawkish about inflation? Mr Lee (a friend and former colleague) notes that this regularity is far from inevitable. Milton Friedman, a revered figure in right-of-centre circles, famously pinned the severity of the Great Depression on contractionary monetary policy.

Establishment economists all cheer for this -- and only this -- in Friedman's career. He argued that the FED did not inflate enough in 1930-33. He wrote this in A Monetary History of the United States (Princeton University Press, 1963).

In that same year, across town (Princeton), another publisher released Murray Rothbard's America's Great Depression, which argued that the FED indeed caused the depression . . . by its expansionist policies, 1926-29. The battle on this issue began in 1963. It still goes on. Establishment economists blame too little government, too little monetary inflation. Rothbard blamed too much of both.

Scott Sumner, a professor of economics at Bentley University who identifies himself as a "neo-monetarist", has argued that Friedman would have supported monetary stimulus.

He may be right. I suspect that he is right. Friedman would have broken with his 3% to 5% annual M1 increase recommendation. When push came to shove, he was a fiat money advocate.

We can see what happened to M1. I have this posted at all times in my site's free department, Federal Reserve Charts.

And he has argued, on neo-Friedmanite grounds, that tight monetary policy both precipitated and exacerbated our recent recession.

Tight money. Yes. The chart reveals it to anyone who looks hard enough.

The FED pumped up the monetary base from $800 billion in August 2008 to $2.7 trillion today. It was just plain strangulation, according to Dr. Sumner.

I happen to think Mr Sumner is correct, but his expansionary prescription remains anathema on the right. Why? Mr Lee writes:

I can think of two possible explanations. One is that we're still having the monetary policy debates of the 1970s, when right-of-center thinkers, following Milton Friedman, argued that the era's persistently high inflation was the fault of unduly expansionary monetary policy. They were right about this, and a whole generation of free-market intellectuals has been on guard against the threat of inflation ever since. And this is obviously reinforced by the reciprocal trend on the left: because most of the inflation doves are on the left, people who are in the habit of disagreeing with left-wingers are discouraged from adopting their arguments on this issue.

Another likely factor is that American conservatism is a fundamentally populist movement, and the inflation hawks' position has a simplicity that makes it intuitively appealing, especially to a movement that tends to see all policy issues in terms of virtue. Rhetoric about "printing money," "debasing the currency," and so forth are not only intuitively appealing, they also dovetail nicely with broader conservative themes of thrift and self-control. The arguments of inflation doves are more subtle and lack the same kind intuitive appeal.

I think both these factors play a role. I would emphasise the latter, though I think Mr Lee makes too much of the intuitive appeal of common-sense moralising rhetoric about thrift and "debasing the currency". The influence of this kind of talk has been augmented powerfully by a certain moralising strand of Austrian economics, which is hostile to the very idea of fiat money, and encourages the idea that its entire purpose is to expropriate savings and monetise government debt. This strand of Austrianism also encourages scepticism about the existence of distinctively macro-level economic phenomena. Accordingly, macroeconomics as a discipline is often seen as pseudo-science that exists mainly to justify technocratic social control. Conventional counter-cyclical policy proposals, meant to address putatively macroeconomic phenomena, are thus routinely met with a combination of suspicion and animosity.

There it is: Austrianism! Even worse, that brand of Austrianism promoted by Murray Rothbard.

Although sophisticated Austrian-school monetary economists such as George Selgin and Larry White defend rule-based inflation-targeting policies not all that different from Mr Sumner's neo-monetarist nominal GDP-targeting rule, the ghost of Murray Rothbard looms much larger on the free-market right.

The ghost did something considered intolerable, 40 years ago. He said that Milton Friedman on the money question was just another promoter of fiat money.

To some, even to play the game of identifying optimal rules for the centralised state monetary authority is to give away the game to the Keynesian social planners. Here's Rothbard on Friedman:

In common with their Keynesian colleagues, the Friedmanites wish to give to the central government absolute control over these macro areas, in order to manipulate the economy for social ends, while maintaining that the micro world can still remain free. In short, Friedmanites as well as Keynesians concede the vital macro sphere to statism as the supposedly necessary framework for the micro-freedom of the free market.

In reality, the macro and micro spheres are integrated and intertwined, as the Austrians have shown. It is impossible to concede the macro sphere to the State while attempting to retain freedom on the micro level. Any sort of tax, and the income tax not least of all, injects systematic robbery and confiscation into the micro sphere of the individual, and has unfortunate and distortive effects on the entire economic system.

This upset our anonymous author years ago. He is just as upset today.

As a veteran of the "free-market movement", I can attest to the remarkable influence of this line of thinking. Now, Milton Friedman was one of the 20th century's great economists as well as one of its most formidable debaters. This made him a powerful check on the influence of anarcho-capitalist Austrians, obviously much to the chagrin of Rothbard. "As in many other spheres," Rothbard wrote, "[Friedman] has functioned not as an opponent of statism and advocate of the free market, but as a technician advising the State on how to be more efficient in going about its evil work." Rothbard's fulminations notwithstanding, Mr Friedman died a beloved figure of the free-market right. Yet it does seem that his influence on the subject of his greatest technical competence, monetary theory, immediately and significantly waned after his death. This suggests to me that Friedman's monetary views were more tolerated than embraced by the free-market rank and file, and that his departure from the scene gave the longstanding suspicion that central banking is an essentially illegitimate criminal enterprise freer rein. When a significant portion of a political movement's activists believe that the whole point of central banking is "systematic robbery", and that inflation is the means by which this robbery takes place, widespread, reflexive opposition to inflation is not surprising.

I'll say his influence waned. Why? Because he was a self-conscious disciple of Irving Fisher, the self-professed socialist (if push ever came to shove) and incomparably bad forecaster who announced in September 1929 that the stock market had reached a permanent plateau. He went on to lose his personal fortune (he invented the Rolodex) and his sister-in-law's fortune in the Great Depression. He became a laughing stock among economists, a great embarrassment to the profession. Yet he invented the index number, which is basic to the ideal of targeting inflation by the Federal Reserve System. It was Friedman who almost single-handedly resurrected Fisher's reputation in the 1950s from the grave that it so rightly deserved. Friedman called him the greatest American economist in history.

Ever since late 2008, Ron Paul has reminded the public, in effect, "we Austrians told you so, and we also told you why -- the Federal Reserve's policies under Greenspan and Bernanke." The Federal Reserve caused the crisis of 2008. To expect it to be able to cure it safely is naive.

The Friedmanites, who did not see the crisis coming in 2007 -- but a lot of Austrians did, and said so in print -- were caught flat-footed. They are now enraged at Ron Paul and the Austrian economists. So, there is no hue and cry from Fiedmanites over the massive expansion of the monetary base. One of them, as we have seen, said we needed lots more monetary inflation.

Now, I don't claim that the right, loosely defined, is chock full of Murray Rothbard fanatics. And whatever it is that is keeping Ben Bernanke's Fed from loosening up, it's not the enduring intellectual legacy of Murray Rothbard. At least, not directly. But I do believe elements of Ron Paul's Rothbardian monetary philosophy enjoy a great deal of currency on the grassroots right, and I believe this exerts a considerable gravitational force on the institutional right, such that arguments for zero or very low inflation are accorded more weight than they would were Milton Friedman still in full effect.

"Elements of Ron Paul's Rothbardian monetary philosophy enjoy a great deal of currency on the grassroots right." Currency! I get it! Say, this guy is a laugh riot.

If only the free-market right still had such a powerfully persuasive "technician advising the state how to be more efficient", our economy might now be slightly less screwed. Maybe it would help were "advising the state to be more efficient" less widely considered "evil work".

This guy has nailed Friedman exactly. Friedman spent his career devising strategies to make the government more efficient. He was a technician who, as a Treasury Department staff economist, advised the U.S. Treasury on how to be more efficient, beginning in 1943, with his technical support for New York Federal Reserve Chairman Beardsley Ruml's plan to impose withholding taxes on the American people. The government got more efficient, fast. Revenues from income taxes (personal and corporate) quadrupled from $8 billion to $34 billion, 1942-1944.

We need less efficient government. Friedman never grasped this. Rothbard did. The few Establishment economists and columnists who have read Rothbard have never forgiven him for this.

At the heart of every high division-of-labor economy is money. The Austrians argue that monetary policy should be decentralized by means of the use of precious metals coins. All other schools of economics, invoking Keynes and Fisher, believe that monetary policy should be centralized in a committee of university-screened graduates of state-accredited universities. These people must be given the power of the state to enforce their policies. Without state-licensed fiat money, the public would be in control. The Establishment will not tolerate this.

Friedman was the main apologist for fiat money in the free market camp. He believed in free market liberty, but not where it is really important: education (vouchers based on state-confiscated money) and money itself (central banking based on a grant of state power: a monopoly). Murray Rothbard challenged both ideas. He therefore remains a pariah to the Establishment.