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Milton Friedman: 2005 Interview with Charlie Rose

Watch it HERE

Milton Friedman is arguably the most important thinkers of the 20th century. In spite of this, or perhaps because of, he is hated and misunderstood by a great many people. I think a lot of the hatred is misplaced. Any of the (questionable) connections he has to some of the more ill-conceived policies of the Pinochet regime or the IMF/World Bank are greatly overshadowed by the paradigm shifting contributions he made to monetary policy and political economy. The world is undeniably a better place because of him, and if you don’t believe me, ask your parents or grandparents what the 1970’s were like.

A lot of the vitriol directed at Friedman is his “support” of Augustus Pinochet. I don’t know the extent of his actual advising duties while he was in Chile. What I do know, is that after Pinochet left, and as the country continued to follow the free market policies advocated by Friedman, Chile’s economy went from janky to swanky in just about ten years.

A lot more negative attention was given to Friedman after Naomi Klein’s Shock Doctrine became a best seller. In Klein’s book, she paints a picture of Friedman that makes him sound like a mad scientist, bent on using his sinister and cruel economic experiments to achieve his aims of… winning a Nobel Prize? Or maybe helping Ronald Reagan justify tax cuts for the rich… I am not sure. In any case, you are doing yourself a disservice if everything you know about Friedman is from The Shock Doctrine and/or Zeitgeist and/or the Principles of Macroeconomics course you took at the community college (take it from someone who has once identified as such).

Monetarism, the movement that Friedman is associated with and considered to have founded, understands money as just another good for which there is a demand and supply. Before this, no one really thought of money this way. A lot of economic problems could be understood as being caused by a disequilibrium between the supply of money and demand for it. It might seem strange to think of there being a “demand” for money, but imagine a situation where there is an economic recession. Investors are unsure of the future cash flows that will be generated by their assets. Accordingly, many investor’s decide that they would rather hold onto cash instead of the assets they have, because they know that the cash (or treasuries) have less risk than whatever else they could put their money into. The effect of everyone wanting to get liquid creates a demand for cash, a demand that outstrips the supply, and ultimately causes asset prices to plummet as investors sell at fire-sale prices (if they do finally decide to sell at all, or if they can).

In the past (Keynesian era), the government could step in and start writing checks, using its own cash to jump start the economy (hopefully) and also increasing the amount of money being supplied (except Keynes didn’t really think about this; he thought that the demand for money naturally reached an equilibrium with supply within the asset and forex markets).  Keynes didn’t believe you should just fire up the printing press: it debases the currency (duh!) and ultimately doesn’t have a “real” effect on the economy. He basically said: “It doesn’t make a difference if you have $1 or $10, if the $10 has been debased and each one of those dollars is only worth a dime.”

Friedman came around and said: “Keynes, you are mostly right, but the money supply doesn’t instantly reach equilibrium with demand. There are all kinds of signalling effects and inefficiencies that can create situations where demand doesn’t equal supply, and such a disequilibrium can be maintained for quite some time, especially so with help from the economic illiterates that are usually in charge.” The whole “economic illiterate” thing is why Friedman is so often associated with “free market ideology”: like hundreds of prominent economists before him, Friedman noticed (correctly) that most of the government’s economic policy (interference) actually hindered the absolute growth of the economy.

In my mind, Friedman is mostly responsible for most of the economic prosperity that the entire world has enjoyed since 1980. Neoliberalism has been a winning strategy, not just for America, but for everybody (except North Korea, which plays by its own rules, to tragic effect). It is true that the gains from global trade haven’t been distributed “evenly” between the rich and poor nations of the world, but they have been gains none the less.

The success or failure of the economic policies advocated by the World Bank or IMF have little reflection on Friedman himself.

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