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Ron Paul dedicates his most recent book, End the Fed, to a host of free-market economists. Curiously absent from this list is Milton Friedman, arguably the greatest free-market economist of the last century. A quick glance at Paul’s favorite websites reveals why: Milton Friedman is a statist, and if you disagree, so are you.
To those familiar with conservative and libertarian thought, this notion should come as a bit of a shock. Milton Friedman wrote volumes in defense of capitalism and individual rights. He was largely responsible for destroying the Keynesian consensus in the early 1970’s, and his accurate prediction of stagflation — plus his effective solutions — swung the economics profession decidedly rightward. His greatest achievement might have been A Monetary History of the United States (coauthored with Anna Schwartz), a book that convinced economists that the Federal Reserve — not the market — caused the Great Depression. An impressive resume to any liberty lover, but to Paul’s beloved Austrian school, Milton is only marginally better than Marx.
Why? The stated ground of disagreement is economic: The Austrians blame banks, and especially central banks for creating business cycles. Banks create credit, and credit creates booms and busts. Friedman, along with most modern economists, accepts a role for central banks in countering business cycles.
But the stated ground reveals a more fundamental difference in outlook than in temperament. Friedman was practical. He wanted to reform modern government, not fulminate against it. Rather than denounce public education, he devised school vouchers. He favored a guaranteed annual income because he accepted that poverty had become a public concern.
The original Austrian school shared much of Friedman’s worldliness. But the Ron Paul Austrians are much more influenced by the conspiracy-minded Murray Rothbard than the sophisticated Friedrich Hayek. Rothbard’s primary contributions to economics are defenses of the thoughts of his and Hayek’s mentor, Ludwig von Mises, and his argument that loose monetary policy during the 1920s caused the Great Depression. But he’s better known for an insistence on ideological purity, a project that led him to convert many of the modern Austrians to “pure” libertarianism: capitalist anarchy.
This makes Rothbard an opponent of Friedman and — it must be said — of Hayek, too. To an anarchist, an acceptance of even minimal government is shortsighted at best or statist at worst. This outlook allows for easy and simplistic solutions. What to do about the economy? Simple: eliminate all government programs. Education reform? Eliminate all government. Energy? Eliminate all government. Monetary policy? End the Fed! (Eliminate all government.)
All this would matter little if not for the influence of Ron Paul. No economist considers Rothbard’s ideas more authoritative than Friedman’s. In 1984, when asked to name two living economists he most admired, Hayek looked outside the Austrian tradition and cited Armen Alchian and George Stigler, two men both associated with Friedman’s Chicago School. But thanks to Paul, young conservatives read End the Fed, focus on Rothbard not Friedman, and obsess over a central bank’s proclivity to lead the nation to war instead of participating meaningfully in the public discourse.
Such participation is possible. Robert Barro, a Harvard economist, credibly argues that the Keynesian stimulus doesn’t work as well as the Paul Krugmans of the world suppose. But Barro also shows a willingness to concede TARP’s merits, and because of this, Paul’s minions will undoubtedly label him a statist and discard his ideas if they ever take hold.
Milton Friedman is a giant, and needs no defense. But conservatism desperately needs defense from an ideology that labels Friedman a statist. If we can’t muster it, the ideas of Rothbard may come to dominate conservative solutions to the nation’s problems. Americans will rightly reject those solutions, and the real statism – Washington’s policies on healthcare and the economy — will continue marching on.
Let us not forget that Rothbard also vehemently opposed the US resistance to Soviet aggression in the Cold War, and even mourned the execution of Che Guevara, saying “his enemy was our enemy.”
A lunatic.
Crazy ol’ Uncle Paul.
Ron Paul on Milton Friedman:
“The death of economist Milton Friedman last week at the age of 94 marks a great loss for advocates of freedom everywhere. He was perhaps the most successful free-market economist of the 20th century, in terms of his real-world impact on politics and policy. Many modern politicians, including Ronald Reagan, considered him a major influence in their careers.”
Would it be OK if we allow competing currencies, instead of giving the third central bank (the federal reserve) the exclusive power to inflate, deflate, and set the price of money (interest rate)?
If we are free, why do we have this monopoly that forces us to use worthless green paper?
oneMile, why don’t you mail me all your “worthless green paper”, please. And send me a check for the entire contents of your checking and savings accounts, since they are denominated in worthless fiat currency.
Friedman favored monetary central planning whereas Austrians like Hayek wanted a free market monetary system. That
http://mises.org/story/3204
Paul has introduced the Free Competition in Currency Act which repeals legal tender laws and lets gold and silver freely circulate in the economy.
When Friedman died Ron Paul had this to say about the man.
“He was perhaps the most successful free-market economist of the 20th century, in terms of his real-world impact on politics and policy. Many modern politicians, including Ronald Reagan, considered him a major influence in their careers.”
Doesn’t sound like he’s attacking the man to me.
Hayek said this: “Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance, where, in short, we deal with genuinely insurable risks, the case for the state helping to organise a comprehensive system of social insurance is very strong.” Therefore he is a socialist, a fascist, and probably a secret Muslim.
It seems a bit strange to expend all this energy attacking Ron Paul. He’s a guy with terrific grass-roots support, but little impact on the public debate (I don’t think that is at all a good thing, but I do think it’s fair to say).
If you’re trying to defend mainstream economic thought against the attacks of folks who say that TARP was wasted, or that the stimulus didn’t create a single job, you should be attacking folks like John Boehner and Scott Brown and the National Review. http://www.tnr.com/blog/jonathan-chait/what-conservatives-agree-the-stimulus-helped
Jim Rogers: Audit the Fed, Then Abolish It
http://finance.yahoo.com/tech-ticker/article/387907/Jim-Rogers-Audit-the-Fed-Then-Abolish-It?tickers=GLD,TIP,TBT,^dji,^GSPC,FNM,FRE
The dollar has lost 95 percent of its value since the Fed was created. Please don’t tell me you think it’s doing a good job.
I’m unimpressed by Ron Paul’s personal praise for Friedman because the literature, thinkers and websites he recommends often treat Friedman as some sort of apostate. The point is not that Paul personally criticized Friedman; the point is that Paul’s public support for modern “Austrianism” has created an environment among young conservatives that is often hostile to Friedman and his ideas.
Hayek did disagree with Friedman on monetary policy. That doesn’t erase his praise of Friedman as an advocate for liberty or his support of the Chicago School of Economics more generally. That attitude so obviously present in Hayek–the ability to disagree with a person on a single issue while still respecting their contributions to the larger cause of liberty–is completely absent in the Rockwell/Rothbard the modern Austrian School. That’s my problem with the modern Austrians, and because Paul is their most notable public advocate, that’s my problem with him as well.
JimBob, use TinyURL for long, unwieldy URLs, so they don’t break in posts and emails
Where the Monetarists Go Wrong
http://tinyurl.com/lsg8oa
Why should Ron Paul dedicate End the Fed to Milton Friedman? This is one point where monetarists and austrians have a very different opinion. It would make zero sense to dedicate the book to Friedman who certainly did not want to end the fed. This is hardly an attack, in fact it would be inappropriate to dedicate the book to him,
Friedman did want to end the FED. Let a computer run Monetary policy.
Hayek’s appreciation for Stigler and Alchian had very little to do with Milton Friedman. Hayek agreed with Rothbard’s insistence on a Constitutional gold standard; and, as much as he respected Mises, he thought the man allowed his logic to take him to a conclusion that was impossible to sustain – namely, that the order of markets existed a priori. Hayek had no more patience with monetarism than he did with the kind of monetary fundamentalism that Rothbard and Paul fell into. In a currency system where credit and money are indistinguishable, there is no money supply; and bank reserves are the response to credit creation, not its precondition. On the other hand, if the classical, 19th century liberal gold standard of the American Constitution were revived, as he hoped it would, Hayek saw no reason why banks should not be free to create credit just as other businesses were. Rothbard and Paul’s insistence on a gold exchange official currency was sound, but their further insistence on prohibiting banks and other dealers in monetary credit from holding anything less than 100% gold reserves was a fatal misunderstanding of the differing roles that money and credit played in an open economy. Hayek would never have considered himself a “conservative” because he saw no reason to think the state had any greater wisdom than the free decisions of individuals. On the contrary, he was convinced that a central bank-controlled financial system would destroy individual liberty itself. If Hayek accepted the gold standard, it was only as a necessary compromise with the American Constitution’s having given the Federal government a monopoly authority over the currency. He would have preferred a completely open system where competing monies were allowed and where the government was required to accept as legal tender for the payment of taxes the market value of any money offered.
I never maintained that Hayek supported monetarism. I only mentioned his appreciation for Stigler and Alchian to note that the Austrians’ most brilliant thinker was not as intolerant as later Austrians. The idea that the Chicago School is a group of rabid statists is a very new idea–and a very ignorant one.
Yes, Friedman supported an overhaul of the Fed. But his belief was rooted in a fear of the concentration of power. One of Friedman’s great ideas was that a misguided Federal Reserve caused the Great Depression. He understandably didn’t want so much power vested in a single body. It would be a mistake to place him in the Ron Paul, “End the Fed!” crowd.
Do I agree with him? It doesn’t matter, at least not now. My article is not concerned with the substantive economic issues. As others have noted, monetary economics is a relatively well-understood and highly-discussed field of study. I don’t agree with a return to a 19th-Century gold standard, but ultimately the debate is meaningless: ending the Federal Reserve will not happen anytime soon, and even if it did, America has long-term financial problems that need solved on their own terms
Those problems will not be solved if too many on the right are concerned with the purity of Friedman’s economic philosophy. Advocates of the free-market system have an incredibly profound support structure in Friedman’s ideas, but the modern Austrians seem willing to dismiss him out of hand because they despise his monetary theories. What purpose does that serve? And how does that attitude takes us closer to fiscal solvency?
Says JD:
“But the Ron Paul Austrians are much more influenced by the conspiracy-minded Murray Rothbard than the sophisticated Friedrich Hayek. Rothbard’s primary contributions to economics are defenses of the thoughts of his and Hayek’s mentor, Ludwig von Mises, and his argument that loose monetary policy during the 1920s caused the Great Depression.”
First of all, before anything else is said, it would be helpful if Mr. Hamel were to come clean with his total ignorance on the topics being discussed, because it is glaring to someone who has read works by all of the mentioned economists (Friedman, Mises, Hayek, Rothbard).
No, Milton Friedman was not a “statist.” The Ron Paul crowd throws that word around because they’re mostly political neophytes without much an appreciation for history. Anyone who regards Friedman as a statist is being silly.
However, to say that Milton Friedman’s primary doctrinal contributions were not statist TO THE VERY CORE would be denialism. Friedman believed in a managed money supply, and was never able to say how it would/could be managed. Hayek quipped that such an attempt would be like trying to “catch a tiger by the tail.” Friedman’s monetary statism was really just a restatement of Irving Fisher’s work on price stability in the 1910′s and 1920′s, which were seen at the time as against grain of traditional economics.
People do not like Murray Rothbard because he was rather dismissive of statist ideas that have been trotted out throughout the course of human history. Quite to the contrary of the suggestion of Mr. Hamel, Rothbard was not a conspiracy theorist. He was a very detailed historian, who shed light on historical characters that had previously inhabited obscurity. No less than Paul Johnson wrote the forward to Rothbard’s “America’s Great Depression.” I very much doubt Mr. Hamel would caustically denounce Paul Johnson the same way he does Rothbard.
To show what a hit piece this article really is, I’d go ahead and say that in terms of strictly economics – methodology, prescriptions for government role in money, the nature and subject of the science, explanation of business cycles, adherence to a gold standard – Rothbard, von Mises, and Hayek are, without getting too granular, nearly identical. Matter of fact, all took the “extreme” position that economics was an a priori science to which positivism was inapplicable. Note, it is the methodology (methodological individualism) that truly separates the Austrians from the mainstream.
Ron Paul has some odd views (foreign policy, Israel) but economically his views are eminently defensible.
oh, and
“If we can’t muster it, the ideas of Rothbard may come to dominate conservative solutions to the nation’s problems. Americans will rightly reject those solutions, and the real statism – Washington’s policies on healthcare and the economy — will continue marching on.”
What is this sentence supposed to mean?
That if the majority of Republicans were to adopt Rothbard’s anarchist views we’d have an advance in statist economic and healthcare measures? Clearly, this assertion is not tenable: Rothbard anarchists vociferously reject any government, period. We, as readers, can reject that interpretation.
Maybe then the only plausible way to interpret that confusing closing line is in the context of expediency? That is, Rothbard is too radical; ergo any Republican embrace of his ideas will give the Democrats the permanent upper hand by marginalizing the Republican opposition. But the sentence still fails to make sense, because, if Americans “rightly reject” these solutions, then the Republican party, made up 100% of Americans, would never adopt them to begin with.
It sounds like your way of saying “Well, I have no idea what the hell I’m exactly trying to say, or for that matter the faintest clue about the substantive issues at hand. But I like Milton Friedman, and so do a lot of Republicans, so it’ll be easier to scare them than actually explain myself.” Well, I wouldn’t vote for Ron Paul, but I also wouldn’t waste my time trying to discredit him by bolstering the case for fiat money. The “sophisticated Hayek” gave conservatives all the arguments we need.
Sloppy sloppy. Either way, however, please do muster a full-throated defense of monetarism. It will be interesting to read. I believe even Friedman gave up on trying to do this…
First I want to thank everyone who read and commented. This will be my last response on this article and then I’ll try to add a new post in the next few days.
To Willy:
I don’t know where to begin, but I’ll start saying that if you call someone ignorant, you should challenge the veracity of their claims. Never did I say that an ideological chasm existed between Rothbard and Hayek, though, as Bryan Caplan noted, Hayek’s thought does differ from that of Mises and Rothbard. I only claimed a temperamental chasm existed, and it certainly does: Hayek praises Friedman while Rothbard disparages him.
American’s will rightly reject Rothbard’s solutions because he is, quite literally, an anarchist. His answer to every problem is: “No government!” I am not an anarchist–I think government can serve a useful–albeit a limited–role in our society. And if America rejected those solutions, the Democrats would have free reign–and that’s the real statism. It seemed pretty simple to me, but let me summarize: I disagree with Rothbard’s anarchism; I think it would be rejected; and then the Democrats take over for a very long time.
Rothbard’s not a conspiracy nut? Please. This is the guy who thought that then-Secretary of War Edwin Stanton conspired to murder Abraham Lincoln. Because of that position alone, Rothbard deserves the “conspiracy theorist” moniker.
Finally, you said that, “Anyone who regards Friedman as a statist is being silly.” Well, that includes your “very detailed historian” Murray Rothbard. For that matter, it apparently also includes you, as you didn’t miss the chance to launch into the “Friedman’s a statist (at least on money)” argument that I’ve heard a thousand times.
I’ll say this once more: this article’s focus was not the substantive economics–I gave the briefest of summaries to set the stage. (If you’re really interested, Anna Schwartz recently wrote a great paper defending monetarism.) The question is whether the movement will make enough room for the ideas of the market’s greatest advocates. For the sake of all of us, I hope so.
Milton Friedman’s son David responds to Frum here:
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=522953
Milton Friedman did actually advocate abolishing the Fed. You can find a video of him doing so on youtube. He wanted to replace it with a computer that would slowly expand the money supply by a fixed rule, taking away any discretion from central bankers. I was revisiting a controversy David Henderson got into with Tyler Cowen & Bruce Bartlett recently where Henderson referenced Milton’s views on the mistakes of the Fed in the Great Depression, citing “Free to Choose”. Using Google books I looked up the passage and found that right before Henderson’s quote was the claim that the very existence of the Federal Reserve System prevented the remedy of 1907 from taking course!
There is some occasional sniping at Milton Friedman or Cato and Reason from the “Austrian” faction. But if anyone is dean of the “plumb-line” Rothbardians these days I’d say it’s Walter Block, who wrote a very respectful obituary for Milton on his passing. You can’t say the same for Buckley when Rothbard died.
Also, not all Austrians share Rothbard’s enthusiasm for 100% reserves or deny that the money supply should increase in certain situations. Larry White & George Selgin are leaders of the “free-banking” faction within Austrian economics, Steve Horwitz is another notable expositor. Horwitz has even argued that Ludwig von Mises did not clearly belong to the 100% reserves rather than “free banking” side of the argument. There are non-Austrians who advocate free banking too. Along with the aforementioned Henderson & his sometime co-author Jeffrey Rogers Hummel (who defended Greenspan against Selgin a little while back), Bill Woolsey’s blog is dedicated to the subject. Scott Sumner, something of a neo-monetarist (who accuses Schwartz of forgetting her own lessons and going “Austrian”), has said his NGDP futures proposal bears many similarities to proposals from Woolsey and Selgin.
One area where Friedman was ahead of these other folks like Hayek and certainly Rothbard, is that Friedman was grasping the notion that externalities were increasing in a world that grows smaller every day. And that government action was the only way to deal with those externalities.
As I understand it: The economics of Rothbard–perfect capitalism–assumes that transactions are atomistic. In any society where people are jammed together in cities or densely populated countries, where natural resources are exploited so vigorously that they begin to run low, that assumption breaks down. Modern game theory (such as the famous problem of the Traveler’s Dilemma) shows that when each person pursues his own self-interest in exploiting a limited common resource, the global result can actually be quite sub-optimal.
Friedman advocated an effluent tax to deal with air and water pollution, for example. For today’s problem of global warming, this would translate into a carbon tax.
So Friedman recognized there was a role for government in regulating the management of scarce resources (scarce relative to the number of players in that market). Rothbard, and his purist libertarian-anarchist, simply ignore all that’s been learned in economics and game theory in the last 100 years. Some of it has been learned the hard way (cf. Love Canal).
JD Hamel:
I apologize for the accusatory nature of my previous posts. I would also like to publicly thank you for your military service, which, apart from anything you may write, demands respect.
Having said that, unfortunately the somewhat technical debate about monetary policy has gone mainstream, and although I do like Milton Friedman, there is no way around his monetary statism. To deny this fact would be nothing less than intellectual dishonesty, even if you’re tired of hearing it. If the country were not in a major depression and under the influence of doctrines which say CUT RATES! (i.e., print money) and SPEND MONEY!, I wouldn’t be so insistent. This mindset threatens our way of life and America’s ability to remain the world’s sole superpower.
As an opinion maker of sorts, you have the ability to influence a given number of people. Obviously I don’t have one iota of say in what you choose to write and post publicly, but I do believe that journalists should do their homework before penning hit pieces. Simple association/disassociation of Rep. Paul with Rothbard/Friedman seems juvenile. In the end, this is not a battle between personalities for the purpose of vanity, but a battle of ideas.
Finally, you say “The question is whether the movement will make enough room for the ideas of the market’s greatest advocates.”
Again, after saying “Milton Friedman is a giant, and needs no defense,” I find it perplexing that you say you’re worried about closing the movement to fans of Friedman. Which is it? Are we being too pure, or is Friedman’s influence permanent? Personally, it matters little to me. I’m more concerned with the ideas than paying homage to personalities.
I don’t think you really know either. I think your primary point in writing this article was to tow-the-line for Frum’s “big tent” party motif. Well, that’s all fine and good, but you seem to have sacrificed coherency.
sinz54, you are thinking of the “Prisoner’s Dilemna”. And Rothbard was actually more radically anti-pollution than Friedman. He wanted to treat them all as torts.
http://econlog.econlib.org/archives/2009/04/econlog_book_cl_15.html
WillyP, I’d like to recommend you read Scott Sumner’s “The Money Illusion” blog. The Fed has been sterilizing injections and paying interest on reserves, which Jim Hamilton dubbed “a confession of deflationary intent”. It has given up on the interest rate as a policy target.
“As others have noted, monetary economics is a relatively well-understood and highly-discussed field of study.” It is certainly highly discussed, but “well-understood”? Hardly. As Hayek noted, under our present credit currency system, “money” itself lacks any precise definition.
http://www.libertyandeconomics.com/2010/02/hayek-on-milton-friedman-and-monetary.html
Hayek shared many of Friedman’s opinions, but he found Friedman’s methodology hopelessly flawed. As he notes in the interview at the above link, Friedman was a “macroeconomist”. That was not, for Hayek, a term of endearment. Hayek had the same criticism for “conservatives”, “Austrians”, “monetarists” and “monetary fundamentalists” like Rothbard and Paul and for anyone else who shared the presumption that society could avoid or at least moderate credit booms and busts through government regulation of the money supply. Hayek considered all such solutions “statist” because they were – they shared with the Keynesians the assumption is that credit should be under political control.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – Friedrich Hayek
tggp,
What is that supposed to mean? To prevent rampant inflation, the Fed is paying a higher yield to not loan than to loan?
Clearly, this defeats the stated purpose of keeping credit “flowing.” It is also inflationary.
No, the Fed has no “big plan.” Bernanke is a disciple of Friedman in the worst way possible: he fervently believes in the Friedman thesis put forward in “Monetary History of the United States;” that it was the death of Benjamin Strong, a strong proponent of low interest rates and easy money, that caused the depression.
One would ask Scott Sumners what the plan is to drain the “excess” reserves created by a) TARP and b) paying interest on reserves to prevent them from being loaned. There is no question that the Fed has stunted the recovery, and poisoned whatever is to follow.
Although Mr. Hamel has a very strong distaste for Rothbard, the social commentator using economics to analyze the state of society need not refer to Murray Rothbard. The commentator may refer to Adam Smith and Frederic Bastiat, Thomas Jefferson or Turgot. These more familiar names are surely less irascible to intelligentsia.
Never in history has erasing debt and papering over it with printed money led to prosperity. Our hubris today is astounding, to think we can trump economic law. There is no such way. I’m baffled that such a brilliant mind as Friedman’s would be duped into believing, nay promoting, such balderdash. It’s an incredible yet incontestable fact, but Friedman seemed to lack an appreciation for tragic human history regarding monetary experimentation.
For the life of me, I cannot understand why this is such a tough pill to swallow. The story is not so complicated!!! We inflated the money supply to drive down interest rats, therefore skewing net present value calculations, facilitated by the equations developed in the field of finance, on the margin. What was previously forecast as unprofitable was made “profitable” by artificial means. In other words, the actions of the Fed distorted the entrepreneurial exercise of forecasting. As prices caught up to reality, which is inevitable, the errors of the calculations were revealed. Instead of admitting this perfectly logical chain of events, and accepting that many provisions made during the boom are in fact a poor use of resources (i.e., they have a prohibitively high opportunity cost), we seem intent on believing that some monetary authority we call the Fed has the ability to trump the reality created by consumer demand.
It is worth stating that this reality is entirely subjective (i.e., comes from the minds of individual humans) and therefore unalterable by any legislative action. And in doing so, we seem intent on punishing ourselves further. Sorry to say, but this grand experiment ain’t gonna work… tried this approach in the 1930s, and we can see where it led.
The natural state of a market economy’s productive structure is to mirror consumer demand. When left to work alone, unshackled by external forces – price fixing, inflation, taxes – markets move constantly towards equilibrium. They self-adjust, readjust, create, destroy, and incessantly work to provide the most for the least cost. What doesn’t work goes bankrupt, and what does work is continually funded through economic democracy, facilitated by the medium of exchange, money.
The problem we now face is readjustment; that is to say, the bust is the corrective measure for the boom. If, instead of interfering in the most damaging way imaginable (bailing out bankrupt banks and subsidizing mortgage payments for homeowners), the government simply cut spending and taxes, this depression would have been over months ago, and Barry Hussein Obama would have a 60% approval rating. But no – we’ve prolonged it, ensuring that when the worst is felt, it’ll be deeper and more painful than otherwise would have been. Either the malinvestments are cleansed, or we continue to wallow in stagnation. See Japan for a case study.
Who knows what will happen? A global currency crisis is the likely result from the debt load. If it doesn’t go this far, it will be because there is some political will to stop the insanity. I haven’t seen the faintest sign of this sanity. We have a Fed Chairman who seems to lack an ability for self-reflection, a communist sympathizer inhabiting the oval office, and a hedonistic Congress reminiscent of the last years of the Roman Senate – packed with liars and criminals.
I should have linked to Henderson’s post discussing the difference between Friedman & Bernanke:
http://econlog.econlib.org/archives/2009/09/friedman_vs_ber.html
To sum up, Bernanke is focused on banks as important in the flow of credit. His policy of inflating the reserves of banks while discouraging them from lending cannot be justified (“defeats the stated purpose”) on Friedmanite grounds of ensuring the money supply expands to counteract the drop in velocity (a misleading term that really just means “demand for money” http://econlog.econlib.org/archives/2009/11/what_is_money_v.html ). Rather, Arnold Kling suggests it is focused on increasing profits for banks and preventing any of those “too big” or “too connected” (economically, I’m not talking politics) to fail.
Many Austrians claim that the 2001 tech crash was not permitted to fully liquidate the bad investments. They claim Greenspan papered over the crash through monetary expansion. Friedman (and Sumner) thought that Strong had similarly managed to deal with prior crashes when he was alive. Both the monetarists and Austrians seem to have some level of agreement on what the Fed can accomplish in reaction to a recession (Arnold Kling doesn’t even believe that, which I suppose puts him closer to Real Business Cycle theory). The Austrians just think that by not taking their lumps now they will just inevitably suffer worse later. I’ll lay my cards on the table and say that I’m not convinced (though I come at the argument sympathetic to Austrians politically I’ve always been annoyed by their epistemology). Booms are more correlated with the prior than the subsequent bust. Just as prices can sever any connection to what anti-EMH folks deem “fundamentals”, an avoided recession can be avoided indefinitely. Australia for example has managed this for a long time. If we add the concept of the “secondary recession”, as Hayek put it, there might be more agreement. I might agree that housing & tech had to confront some bad investments, but the scale of the economic loss was much greater than those sectors. I think that “secondary recession” is unnecessary and can be avoided.
You seem well versed and offer a reason for your answers. This is far superior to the ad hoc/one-offs one usually gets. I’ll take the time to explain why I disagree, but will here first acknowledge that it’s very rare to find another whose has such intellectual depth. That’s meant as a compliment, in case there is any doubt.
You say:
“The Austrians just think that by not taking their lumps now they will just inevitably suffer worse later. I’ll lay my cards on the table and say that I’m not convinced (though I come at the argument sympathetic to Austrians politically I’ve always been annoyed by their epistemology).”
This is emotionalizing the issue. I don’t view the issue as justified by emotion: I do not think people have to learn to “take their lumps” and side with the Austrians. While I do happen to think that is morally correct for people to “take their lumps,” if by that its roughly meant that one must accept his prior actions and move forward – rather than avoid reality by one way or another – this does not figure into my economic reasoning.
The reason is that one cannot possibly solve depressions by extending credit. We reach this conclusions from the lessons of business cycle theory – a theory whose truthfulness is so forthcoming throughout history, it seems ridiculous not to acknowledge, even if you do not appreciate the methodology. (Witness the United States in 1929, 1999, and 2006, and the list of previous bubbles to be found here:
http://en.wikipedia.org/wiki/Economic_bubble#Examples_of_bubbles_and_purported_bubbles
It states thus: extending credit to businesses under the natural rate of interest causes the chain of production to be lengthened more than it would have been otherwise, driving up the prices of capital goods in general, and leading to a paucity of more common consumer goods.
Is this not what the “bust” reflects? A price surge in capital: namely, real estate (which for businesses is viewed in the same way as a factor of production ), and the stock market, as stock prices reflect the title of capital goods. Does this not actually reflect what happened?
Following from that understanding, interest rates need to increase, riskier business activity must contract, and we need to re-orient the economy to one driven more towards directly serving consumers.
You say:
“I might agree that housing & tech had to confront some bad investments, but the scale of the economic loss was much greater than those sectors. I think that “secondary recession” is unnecessary and can be avoided.”
Housing and tech did need to confront bad investments. Unfortunately, we drove the tech bubble into the real estate bubble. We are not letting the liquidation process happen smoothly. We are bailing out failed firms, propping up the price of real estate, increasing spending (which means higher future taxes), and printing more money. The economy has not been given a chance to recover.
Eventually, when your monetary policy is tantamount to encouraging the consumption of savings, you run out of savings. I believe we’re reaching the point where dropping the rate further will not have any beneficial short term effects. I think this is reflected in the fact that banks, despite sitting on huge reserves, are still not lending at “normal” levels. The capital savings pool must be allowed to recover. The low rates are preventing this, and still encouraging uneconomic business loans (if far fewer). So not only are we delaying recovery, but poisoning it. It’s not a matter if whether we’ll have a second recession or not, but when it will begin in 2010 or 2011.
The main difference between the Austrians and Friedman was that the latter had to take courses in microeconomics which would enumerate quite a few specific instances where markets fail and some sort of collective decision making mechanism would be required. The Austrians never did and could therefore philosophise themselves into a dream world where universal human rights, unconstrained free markets and absence of government could coexist. Of course, the Austrians have the type of ideological purity and exclusiveness desired by the well-meaning but credulous. It is quite interesting how Austrian ideas and conservative religious values are able to manifest themselves in the Tea Party movement without any visible friction. I fear the result will be a monster.
And by the way. Anyone who is a fan of Rothbard should read his “Keynes, the Man”. That guy Rothbard was one sick puppy.
ericna,
Nice try, but you’re going to have to do a little better than that…
Friedman’s influential and original contributions were Monetarism, which has nothing to do with “failed markets.” It came from, in my opinion and in the opinion of Austrians (as well as free marketers generally nowadays) his mis-analysis of monetary policy during the Great Depression. He saw Monetarism implemented and he saw it fail, and I believe he even admitted this.
There is nothing “dream world” about the Austrian analysis system. It accurately describes the decision making process of individuals, and therefore is the only realistic, and truly scientific, school of economic analysis. Aggregates, as F.A. Hayek showed again and again, belie personal motives, and therefore present a misleading picture of the economy. As von Mises explained, it is only by understanding motives can we understand economics; the empiricist at Grand Central Terminal could not make any sense of the actions of commuters if he did not understand their intentions. There is no rhyme or reason to humans if you fail to take into account their goals, aspirations, proclivities, etc.
As for your “sick puppy” comment… I would simply say that if after reading “Keynes, the Man,” you determine that ROTHBARD was the sick puppy, and NOT Keynes, perhaps you aren’t well yourself.
You guys are actually mistaken about Ron Paul and Friedman:
Paul has a picture of Milton Friedman hanging on the wall of his Congressional office. He recognizes that Friedman is one of the most important heroes of liberty in the 20th century.
Moreover, if you take a look at Ron’s article http://www.lewrockwell.com/paul/paul352.html you would see, he considered Milton as his friend.
In spite of this, I cannot resist to say that Milton Friedman’s ideas are way more rational and practical than radical solutions from Ron. This is in spite of my total support of Ron Paul. However, I would choose somebody with a real practical experience like Gary Johnson. Anyway, these are all just dreams.