Milton Friedman Must Have Been Crazy

by Don Boudreaux on November 29, 2011

in Crony Capitalism, Inflation, Monetary Policy, Video

HT David Henderson

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{ 87 comments }

Greg G November 29, 2011 at 9:06 am

If we accept this appeal to Milton Friedman’s authority will we also accept his ideas on the validity of aggregate macro analysis? And on the idea that deficits are OK if they result from tax cuts?

Jon Murphy November 29, 2011 at 9:12 am

One can accept an authority figure’s idea without embracing everything he has ever said. For example, I accept many of Paul Krugman’s old arguments on international trade, but I wholeheartedly disagree with him on stimulus spending. I agree with FA Hayek on many things, but I reject his argument for universal health care. That’s what separates men from drones; our ability to think for ourselves.

Greg G November 29, 2011 at 9:22 am

Fair enough Jon.

Greg G November 29, 2011 at 9:27 am

Jon

Worth noting though that Friedman’s opinions about the Fed were the result of his aggregate macro analysis of its history, not just incidental to it.

Jon Murphy November 29, 2011 at 11:20 am

Indeed, I agree Greg

Don Boudreaux November 29, 2011 at 9:21 am

The point of this posting is simply that a widely respected, Nobel laureate scholar – one of history’s most highly regarded economists – called for the abolition of the Fed. This fact is noteworthy in light of Glenn Hubbard’s proclamation that the idea of abolishing the Fed is “just crazy.”

cthorm November 29, 2011 at 12:06 pm

Milton never lacked for good ideas. I don’t understand why Sumner’s ideas for an explicit NGDP target for monetary policy hit such resistance (at least among commenters, I don’t think I’ve heard you say much of anything on it directly Don). It seems perfectly consistent with what Milton says in the video:

“…You must understand that the fundamental problem is that you shouldn’t have an institution [the Fed] which depends on whether he is good or not. My first preference would be to abolish the Federal Reserve, stop the growth of government, bring government down and make it smaller.”

The implied second preference would be reform that makes the Fed not depend on the competence of the chairman. An explicit NGDP target accomplishes that by putting monetary policy on autopilot.

Bastiat Smith November 29, 2011 at 1:51 pm

The target NGDP is not the ONLY ‘autopilot’. A stable dollar, or at least a dollar of stable change in value is/was/should be the Fed’s first responsibility. Some would argue it to be its only responsibility. Targeting NGDP ignores the real economy. And I am so bold as to predict that it would inevitably lead to a period of shrinking GDP and rocketing Government spending. AKA cronyism and stagnation. A destructive policy IMO.

There are many rule based options and I think targeting NGDP is a poor one.

cthorm November 29, 2011 at 4:29 pm

There are plenty of explicit rules, you could use the Taylor Rule, target growth of the monetary base (as Friedman proposed), target the exchange rate, target CPI or PPI or the Big Mac Index.

The beauty of NGDP as a target is it’s simplicity, and if you pick a low target it is effectively the same as a stable value dollar. If real GDP growth is positive, which it is (though it would be much higher if government was shrunk), you can actually have a falling price level. I think you’ve got it backwards regarding NGDP and government spending, what you’d end up with is actually private spending crowding out inefficient government spending. RGDP overshooting the NGDP target? Well you’ll either need to let the price level decline, or reduce government spending.

EG November 29, 2011 at 2:23 pm

Yes but you are arguing against one sentence taken out of context, with another sentence taken out of context.

Charlie November 29, 2011 at 7:07 pm

Haha, excellent comment.

Knowing both people’s positions, I very much appreciate it. I am sad many people will not.

EG November 29, 2011 at 7:27 pm

So what else is new?

Economic Freedom November 29, 2011 at 2:26 pm

Milton Friedman was crazy and had dubious ethics and integrity. Glenn Hubbard is insane. He is the father of the Bush tax cuts for the wealthy – a repulsive supplier-sider.

Josh S November 29, 2011 at 3:20 pm

So who was the father of the Bush tax cuts for the middle class and the lower class?

Economic Freedom November 29, 2011 at 3:53 pm

More on the slime ball Hubbard from Wikipedia:

Inside Job

Hubbard was interviewed in Charles Ferguson’s Oscar-winning documentary film, Inside Job (2010), discussing his advocacy, as chief economic advisor to the Bush Administration, of deregulation, which Ferguson argues led to the 2008 international banking crisis sparked by the collapse of Lehman Brothers and the sale of Merrill Lynch. In the interview, Ferguson asks Hubbard to enumerate the firms from whom he receives outside income as an advisory board member in the context of possible conflict of interest. Hubbard, hitherto cooperative, declines to answer and threatens to end the interview.[9]

Jon Murphy November 29, 2011 at 3:58 pm

That’s not exactly how it happened. Ferguson didn’t ask Hubbard to enumerate firms as a possible conflict of interest. He asks if Hubbard was paid for his opinions. I’d get pissed if someone did the same thing to me.

brotio November 30, 2011 at 12:23 am

So who was the father of the Bush tax cuts for the middle class and the lower class?

Old Mother Hubbard.

She went to the cupboard to get her poor doggie a bone… (I hope you know the Dice version) :P

Charlie November 29, 2011 at 7:05 pm

This is cut very weird.

Is he about to say that we should have a monetary policy rule like he’s always said after they cut away? That’s a lot different than what a lot of people mean when they say, “abolish the fed.”

vikingvista November 29, 2011 at 10:23 am

By “we” you must be “you”, because I don’t see anyone else here accepting an appeal to authority. To the extent MF is respected here, it is for the correct things he said, not the other way around.

And I’ve already told you what I think of his macro.

Krishnan November 29, 2011 at 9:12 am

Milton Friedman IS crazy and will always be crazy to some/many – He argues for free markets, free peoples, limited government, reminds us that people work hard for their families and so we should not punish them for working hard and acquiring wealth they want to pass on, that the Feds have done a terrible job in schooling, that the minimum wage is a job killer particularly for unskilled, unschooled minorities (or others), that inflation is a monetary phenomenon and not because people demand more – so, yea, he is crazy for trying to advance ideas that make sense. Today, the inmates are running the asylum and the inmates are out of control.

GAAPrulesIFRSdrools November 29, 2011 at 10:20 am

Crazy isn’t wrong. History is full of people whose “issue” was the source of their brilliance. John Nash and Nikola Tesla come immediately to mind.

Perhaps Hubbard needs to rethink his statement. Insanity is DOING THE SAME thing (continuing the Fed) and expecting a different result (dispassionate, unbiased protection of the currency).

For ninety years, we’ve had boom, bust, debasement. The emporer has no clothes.

SmoledMan November 29, 2011 at 3:50 pm

Whoever runs the state gets to decide who is “crazy”.

vikingvista November 29, 2011 at 10:19 am

I feel that I owe the memory of MF a partial apology. I had no idea this interview existed. Can it be that MF redeemed himself in his later years? Now I’m curious to know what else he might have written or said.

cthorm November 29, 2011 at 12:09 pm

>Can it be that MF redeemed himself in his later years?

No, Milton Friedman’s views on the Fed in 2006 were the same in the 1970s. Watch Free to Choose, he says almost exactly the same thing as he does in this 2006 interview. That the Fed is a bad institution because it relies on “the right people” being in charge.

EG November 29, 2011 at 2:22 pm

Yep. He says exactly the same thing. And his alternative, was also…the Fed. Just a different mechanism for controlling its function.

Of course, the real divergence here is between the Ron Paulisms of “abolish the Fed” for a convoluted multitude of real and made-up reasons, and replace it with an absurdity…and Milton Friedman which identified the problem rightly, and proposed a solution to deal with that problem.

dsylexic November 29, 2011 at 2:36 pm

that is nonsense. friedman appreciated ron paul and called him one of the rare politicians who understood economics.stop trying to pigeonhole ron paul into talking points on television.

ron pauls solution of competing currencies is perfectly sane

EG November 29, 2011 at 4:20 pm

I’m sorry for saying anything bad about Ron Paul. I’ll administer 40 lashes to myself.

vikingvista November 29, 2011 at 3:18 pm

cthorm,

I’ve watched the FtoC series, but do not recall in any of his criticisms of the Fed calling to abolish it. I’m not saying he didn’t, but it seems like something that would’ve stuck in my mind. If you can provide me a quote, I’d appreciate it.

cthorm November 29, 2011 at 4:31 pm

vikingvista,

I’m not sure if he explicitly says “abolish the fed” but he does say it’s a bad institution because it relies on the right people being in charge. The episode was the one with Francis Scott Piven and some socialist ‘economist’ from MIT.

vikingvista November 29, 2011 at 4:40 pm

cthorm,

Thanks. I am aware he made that criticism. But it seems a far cry from calling to abolish the Fed. He didn’t hesitate to call for abolishing entire departments of the US Federal government, so I think if he thought the Fed should be abolished, as opposed to reformed, he would’ve just said so. And I don’t think he ever did–until 2006, anyway.

Josh S November 29, 2011 at 3:21 pm

It’s not that MF redeemed himself, it’s that Murray Rothbard’s and Lew Rockwell’s vicious assaults on him were never accurate in the first place.

vikingvista November 29, 2011 at 3:35 pm

How so?

Josh S November 29, 2011 at 4:09 pm

I don’t even know where to start. Better to start with Rothbard. Rothbard saw himself as this visionary radical, sort of a libertarian Marx, and practically valued iconoclasm for its own sake. He viewed anyone who saw liberty as something to be advanced via practical means as a traitor to the cause of disestablishing government entirely, and he especially hated economists who were well-regarded by anyone professing an interest in liberty, but whose fame eclipsed his own. Hence his hatred of Smith and Friedman, and his general distaste for Hayek. The closest parallel really is in Marxism–the Marxists hated social democrats, because they believed that incrementally advancing the cause of socialism merely sustained the capitalist, statist system, when what they wanted was a collapse of the whole thing leading to a revolutionary communist utopia. Hence the especially intense hatred of the Bolsheviks for all other prerevoluationary socialist parties.

Friedman’s goal was simply to advance actually existing liberty and the freedom of actually existing markets. If he thought giving a piece of advice or supporting a policy would make a people, trade, or an economy more free than it was previously, he would do it. Rothbard regarded this as treasonous to the cause of liberty, since the only true liberty is a purist liberty that seeks the total destruction of the state.

The key there is “more free.” Friedman supported a lot of policies that he clearly felt were the best *politically viable* policies, but were not the absolutely most optimal policies. Rothbard regarded any such compromise as a total betrayal of liberty. According to Rothbard, you stick to your anarchist guns, by God, and if that means you lose every election and unreconstructed socialists get total control of everything, so be it.

So Rothbard frequently tells only half the story. Whenever Smith, Friedman, or anyone else says, “We currently have A. B would be best. But neither the government nor the public are willing to give B so much as a hearing, and we’ve got a realistic chance of getting C through, which would certainly be better than A, so we should support C,” Rothbard basically quotes only “I support C” and chants “Statist! Statist! Statist!” over and over. And since in Rothbard’s world, anyone who isn’t an anarchist is a statist and therefore an enemy of liberty, it makes things easy for him.

vikingvista November 29, 2011 at 4:36 pm

Kind of vague here. So you believe MR falsely accused MF of taking a position against liberty, when in fact MF was merely limiting himself to those positions for liberty that were achievable?

But if it is wrong for MR to assume MF believed one way about something MF never addressed, how is it not equally wrong for you to assume MF believed another way?

And why is it not odd that a man of MF’s prolific intellect and long life would leave as unaddressed *any* outstanding libertarian issues of his day, such as a clear statement on whether or not free money and free banking are preferable to the central banking (yes, I’m familiar with Selgin’s paper on MF)? Is it reasonable to assume MF never even contemplated them?

kyle8 November 29, 2011 at 6:12 pm

I read Rothbard early on in my education. He was brilliant, but you correctly identify a certain madness he had. He said more and more unfortunate things as he got older and alienated even those who would have been his allies.

Will November 29, 2011 at 9:24 pm

Josh S. said,

“The closest parallel really is in Marxism–the Marxists hated social democrats, because they believed that incrementally advancing the cause of socialism merely sustained the capitalist, statist system”

This is not accurate. Many of the early social democrats (Jaures, Kautsky, Hildifinger…) were Marxists.

Josh S November 29, 2011 at 10:51 pm

What I’m saying is that MR’s entire portrayal of MF as a “court economist” who betrayed and sabotaged liberty in the service of the state is slanderous. MR tended to slander anyone who wasn’t a devout Misesian…actually, a devout follower of Rothbard’s version of Mises, since Mises was a liberal, not an anarchist. You just can’t trust what Rothbard says about anyone, because he’s always got a moral/political agenda.

If you’re familiar with Selgin’s paper, then you know Friedman contemplated the issues you just mentioned, and you also know why he didn’t think there was a whole lot of point in getting much deeper into free banking, so there’s nothing I can add to that. Rothbard, of course, regarded free banking as a form of state-sanctioned theft, and anyone who disagreed with him was a wicked statist who couldn’t see the obvious morality of 100% reserve banking. Since his lifelong thesis was that fractional-reserve banking causes recessions, he really painted himself into a corner.

AFAIK, Friedman never regarded himself as a prophet to a movement. Unlike Rothbard, he wasn’t trying to build a cult of personality around himself, so whether he did or didn’t spend a lot of time on an issue that Rothbard and his disciples obsessed over isn’t really “odd” to me. He did what seemed to him to be the best use of his time, just as we all do.

vikingvista November 30, 2011 at 2:05 am

“betrayed and sabotaged liberty in the service of the state is slanderous.”

You are again being vague for some reason. Let me guess what you might be referring to. As I understand it, some of the specific accusations MR might make against MF include things like:

1. Being a major architect of Federal income tax withholding.

2. Defending FDR’s New Deal programs.

3. Practicing empirical macroeconomics, ala Keynes.

4. Advocating various Federal government monetary and fiscal interventions.

5. Hardening support for the institution of central banking.

6. Marginalizing, by way of neglect, the understanding of resource misallocations as a cause of recessions (ABCT).

Do you think any of these criticisms have merit? Is everything MF did in his career defensible from a free market standpoint?

“If you’re familiar with Selgin’s paper, then you know Friedman contemplated the issues you just mentioned, and you also know why he didn’t think there was a whole lot of point in getting much deeper into free banking, so there’s nothing I can add to that.”

I do and I don’t. I really enjoy reading Selgin, but that paper was the opposite of convincing by way of its contortions. MF was an intelligent, articulate, prolific, and even courageous man. There is no reason, particularly once established as an icon, that he couldn’t feel free to speak his mind. If he really were a free banking/free money advocate, rather than just recognizing it as one of several hypothetical possibilities, there would be no question about it, from his own words.

“Rothbard, of course, regarded free banking as a form of state-sanctioned theft”

Huh? How could Rothbard regard a banking system that is completely free of any state influence as “state-sanctioned theft”? It was my understanding that Rothbard advocated ONLY free banking (even while assuming the market would curtail fractional reserve banking). Is this not the case?

“AFAIK, Friedman never regarded himself as a prophet to a movement. Unlike Rothbard, he wasn’t trying to build a cult of personality around himself”

And yet, given all the unqualified emotional defenses of MF, you have to wonder if a cult didn’t emerge anyway.

“so whether he did or didn’t spend a lot of time on an issue that Rothbard and his disciples obsessed over isn’t really “odd” to me. He did what seemed to him to be the best use of his time, just as we all do.”

He lived a long time, gave many speeches, did many interviews, and probably received countless letters. You think he never received questions or formed opinions about ABCT, free money, free banking, the pretense of knowledge? Maybe you are right. Why would a life-long free market economist take any interest in such things. He probably just wasn’t curious.

anthonyl November 30, 2011 at 7:34 am

Ah… Thanks Josh S?

Josh S November 30, 2011 at 10:45 am

vikingvista, your telling of Friedman’s career sounds like it came from reading Rothbard, not from reading Friedman, since it’s always half the story. Or, in one case, not the story at all.

1. Being a major architect of Federal income tax withholding. (Which he later wished could be abolished.)

2. Defending FDR’s New Deal programs. (When he was a young man. Not as he matured as an economist.)

3. Practicing empirical macroeconomics, ala Keynes. (So what? This is a methodological question, not a liberty issue. Treating academic disagreements as heresies or moral failings is precisely Rothbard is such a marginal figure.)

4. Advocating various Federal government monetary and fiscal interventions. (As an alternative to much worse interventions that caused high inflation and crippling depressions, since the government is dead set on intervening anyway.)

5. Hardening support for the institution of central banking. (No, he didn’t…central banking was taken for granted before Friedman was an important name)

6. Marginalizing, by way of neglect, the understanding of resource misallocations as a cause of recessions (ABCT). (ABCT is a theoretical issue, not a liberty issue, and Friedman believed the evidence did not support ABCT. Why would he promote a theory he thought was incorrect? See my earlier comment about treating theoretical disagreements as moral failings or heresies.)

“How could Rothbard regard a banking system that is completely free of any state influence as “state-sanctioned theft”? It was my understanding that Rothbard advocated ONLY free banking (even while assuming the market would curtail fractional reserve banking). Is this not the case?”

It is indeed not the case. Free banking is always and everywhere fractional reserve banking, because fractional reserve banks competitively destroy 100% reserve banks. Rothbard imagined that a stateless society would regard fractional banking as fraud and deal with non-100%-reserve banks as criminal enterprises, I guess by ostracizing them from the business community or whatever. IIRC, he claims that fractional reserve banking only emerged because states legitimized the practice back in the late middle ages (which is false). The more research is done into the history of banking, especially Scottish free banking, the more Rothbard’s narrative is shown to be false.

vikingvista November 30, 2011 at 4:56 pm

“your telling of Friedman’s career sounds like it came from reading Rothbard, not from reading Friedman”

Uhh…I’ve never in my life, to my recollection, attempted a telling of MF’s career. I did, in my last post, attempt to specifically come up with some of those MR criticisms of MF that you for some reason refused in two vague postings to mention. I mean, is that not what I wrote I was doing?

“1. Being a major architect of Federal income tax withholding. (Which he later wished could be abolished.)”

MF in 1995 said, “I have no apologies for it, but I really wish we hadn’t found it necessary and I wish there were some way of abolishing withholding now.”

So you can’t bring yourself to criticise him for this? Perhaps you agree with him about the necessity of tax withholding in wartime. Interestingly, according to MF, the IRS at the time disagreed with him. He was wrong in 1943 and he was wrong in 1995. Why should it pain you to say so?

“2. Defending FDR’s New Deal programs. (When he was a young man. Not as he matured as an economist.)”

Young man? I’m not aware that he ever stopped supporting what he calls FDR’s “emergency” New Deal programs, like the WPA and PWA.
tinyurl.com/7lk6xbf
tinyurl.com/d7jeusy 8:38

“3. Practicing empirical macroeconomics, ala Keynes. (So what? This is a methodological question, not a liberty issue. Treating academic disagreements as heresies or moral failings is precisely Rothbard is such a marginal figure.)”

So you believe the extensive criticims on this blog and elsewhere of keynesians for practicing scientism are “treating academic disagreements as heresies or moral failings”? I guess that would make you one of this blog’s leading critics. Or does the scientism criticism get a pass when applied to someone you wish to remain unsullied by imperfection?

“4. Advocating various Federal government monetary and fiscal interventions. (As an alternative to much worse interventions that caused high inflation and crippling depressions, since the government is dead set on intervening anyway.)”

So, he advocates pie-in-the-sky actions like abolishing entire Federal government departments, and implementing a negative income tax welfare program, but he can’t bring himself to express his disapproval of government central planning of the nation’s money and banking? Seems more likely instead that he approved of it conceptually, even if he would change how it was done. He has even said that the Great Depression would not have happened if there had not been a Federal Reserve system. But not until 2006 do we find any hint that he wanted to end the Fed?

“5. Hardening support for the institution of central banking. (No, he didn’t…central banking was taken for granted before Friedman was an important name)”

Central banking was not then, and is not now, taken for granted by everyone. But once taken for granted by the great MF, those numbers surely dwindled, perhaps forever. Why defend a dying truth when you can snuff it out under your heel to popular bipartisan acclaim? Or perhaps you think MF only advocted for things that were taken for granted–you know, like negative income tax, abolishing Federal departments, …

“6. Marginalizing, by way of neglect, the understanding of resource misallocations as a cause of recessions (ABCT). (ABCT is a theoretical issue, not a liberty issue, and Friedman believed the evidence did not support ABCT. Why would he promote a theory he thought was incorrect? See my earlier comment about treating theoretical disagreements as moral failings or heresies.)”

I realize that he disagreed with ABCT (or else wasn’t aware of it, which is unlikely). So instead he promoted the much more rational “plucking theory” whereby recession simply pop in out of the blue without causation. And we are to thank MF for displacing ABCT with the plucking theory? Seriously?

“See my earlier comment about treating theoretical disagreements as moral failings or heresies.”

Odd how you want to make this distinction. Most of us have no trouble identifying both the motives behind, and the moral repurcussions of, scientistic macroeconomic, and other theoretical, claims. In fact, you are probably the only one I know, of any viewpoint, who doesn’t. Or perhaps MF is just a special exception because…he was a nice guy? I don’t know.

ME: “How could Rothbard regard a banking system that is completely free of any state influence as “state-sanctioned theft”? It was my understanding that Rothbard advocated ONLY free banking (even while assuming the market would curtail fractional reserve banking). Is this not the case?”
DU: “It is indeed not the case. Free banking is always and everywhere fractional reserve banking, because fractional reserve banks competitively destroy 100% reserve banks. Rothbard imagined that a stateless society would regard fractional banking as fraud and deal with non-100%-reserve banks as criminal enterprises, I guess by ostracizing them from the business community or whatever.”

So…how again did MR, as you claim, possibly regard free banking as “state-sanctioned theft” when, as you also claim, MR imagined a stateless society? How do you imaging that something which doesn’t exist, can sanction anything? You should reconsider your contradiction.

“IIRC, he claims that fractional reserve banking only emerged because states legitimized the practice”

It is not clear to me that you realize that “free banking” is not synonymous with “fractional reserve banking”, just as you seem to think statelessness is somehow compatible with a state. There is no doubt the MR supported free banking and only free banking. Whether free banking would, in reality, appear as he imagined is another issue. His statelessness and dedication to individual liberty was more fundamental than his banking theory, and there is no way he would advocate for state intervention in anything, let alone banking. MF, was not hardly so clear. So if you believe in free banking, fractional reserve or not, MR is your ally. MF? That’s a tough sell. It is an easier sell that MF was agreeable to, and even participated in, central planning.

W.E. Heasley November 29, 2011 at 10:39 am

“Everybody loves to argue with Milton, particularly when he isn’t there“. – George Shultz

caveat bettor November 29, 2011 at 12:12 pm

I tend to think the world is better with the Fed than without. Sort of like democracy. But John Adams could have been right as well, when he said there has never been a democracy that didn’t commit suicide. Basically, it’s too early to call.

vikingvista November 29, 2011 at 3:23 pm

It depends what you mean by “suicide”. The continent is not going to depopulate, after all. It seems to me that if Adams’s wish was for constitutionally-limited government, and the constitution has either changed to radically decrease its restraints, or to become vestigial, then suicide has already occurred.

caveat bettor November 30, 2011 at 8:12 am

Yes, maybe suicide occurred with the successful completion of the Louisiana Purchase, a breach of constitutional limitations.

vikingvista November 30, 2011 at 5:07 pm

So many fatal wounds. Of course, the Civil War, Federal Reserve Act, 16th Amendment, the New Deal, the Great Society, and perhaps ObamaCare are others. I’m not sure if we are talking about death by a thousand cuts, or kicking a dead horse. Probably the latter.

Mark November 29, 2011 at 1:49 pm

Unfortunately, abolishing the Fed and having the U.S. Government issue it’s own currency may no longer be acceptable means of payment with respect to international trade now that Boudreaux’s theory of Comparative Advantage has resulted in incalculable trade deficits that would not otherwise exist but for the investment opportunity to invest in US government debt.

Darren November 29, 2011 at 2:25 pm

Boudreaux’s theory of Comparative Advantage

What might this be? I had the understanding that the principle of Comparative Advantage existed long before Don Boudreaux was even born.

Jon Murphy November 29, 2011 at 2:31 pm

Yes, it was David Ricardo who first postulated it.

vikingvista November 29, 2011 at 3:11 pm

It’s *your* theories that I’m interested in, and you’ve packed a lot of assumptions into one sentence. Perhaps you can explain how:

1. foreign exporters care whether US currency is Federal Reserve-issued or Treasury-issued;

2. foreign exporters simultaneously increase and decrease demand for US currency when US government debt increases;

3. US government debt, rather than US fiat money creation, devalues US currency;

4. foreign, but not domestic, ownership of US government debt devalues US currency;

5. US government debt issuance competes with US exports rather than US private investment;

6. increased demand for US government debt increases the quantity of that debt, rather than merely decreasing the interest paid on it (i.e. why the government debt supply curve is not essentially inelastic);

7. Boudreaux’s theory of CA differs from the theory of CA that was well known before Boudreaux was born;

8. the theory of CA “resulted in” rather than merely explained something; and

9. price changes in US imports, exports, and government debt do not autoregulate these transactions.

Josh S November 29, 2011 at 3:25 pm

Government-issued currency is even more inflationary than central banking. Some of you people hate the Fed so much that you forget there exist worse things than central banks…sorta like people who hated the Tsar so much they assumed the Bolsheviks had to be better.

vikingvista November 29, 2011 at 3:44 pm

“Government-issued currency is even more inflationary than central banking.”

How is government-issued currency incompatible with central banking?

Are you saying central banks are never owed by governments (e.g. the Bank of England, even post 1998)? Or are you saying that government-owned central banks don’t issue currency?

Or are you saying the problem isn’t with central banking per se, but with the fact that central banks issue currency? If the latter, then how do you imagine central banking would exist *without* the ability to issue money/currency?

vikingvista November 29, 2011 at 3:48 pm

owned, not owed.

Jon Murphy November 29, 2011 at 3:49 pm

Remember, VV, our central bank is quasi-independent. Congress need not be consulted on monetary policy. That’s the difference here. In a government controlled central bank, the government can determine the monetary policy. In our system (at least in theory) monetary policy is divorced from politicking.

vikingvista November 29, 2011 at 4:16 pm

I’m well aware of the claim of Fed independence, and believe it to be essentially nonsense. What it really translates to, is a loss of transparency. And anyway, monetary policy was not ostensibly divorced from the British government until 1998, and it isn’t clear to me that it has made any significant difference there.

When you look at how he so-called “independent” Federal Reserve system has operated throughout its history, fears of loss of Fed “independence”, it seems to me, are greatly exaggerated. The problems are not due to dependence versus independence, but rather to central banking, not due to, but only compounded by the use of fiat money.

BTW, I was curious about Josh’s contrasting of central banking with government money issue as an either-or.

Josh S November 29, 2011 at 4:26 pm

Let me clarify that–the more direct control the legislative and/or executive authorities have over currency issuance, the more inflationary the environment. It is not simply a matter of who technically owns the central bank. It is a matter of what influences central bank policy.

Of course the Fed is not independent. But it is a matter of degrees. Replacing the central bank with direct Treasury issuance of money does not make the money supply less dependent on politics–it makes it *more* dependent on politics. You think the money-printing is bad now? Bernanke’s printing is nothing compared to what a fully empowered executive branch would do if it could print money every time it wanted to fund a new entitlement or new war and didn’t want to deal with the political fallout from debt or taxes.

vikingvista November 29, 2011 at 4:54 pm

“You think the money-printing is bad now? Bernanke’s printing is nothing compared to what a fully empowered executive branch would do”

Of course, it is a claim without appeal to experience. What we do know, is that the Fed DOES appear to be printing however much money the Treasury wants, including funding any and all wars, and quite a bit more that the Treasury politically would be hesitant to do, like bailout foreign banks and countries. The Treasury may not restrain itself if it had the power, but I fail to see how the Fed has restrained itself either.

However, one advantage to moving the central bank to direct Treasury control is that there would be more public awareness of the Treasury’s misdeeds which may serve as a measure of political restraint that is currently lacking at the Fed.

I think the more likely scenario here is that the Congress and Treasury don’t *want* control of monetary policy. With the status quo, they get everything they want, get to keep the dealings secret from the public, and get to defer any blame to an allegedly independent agency.

BTW, I know it hasn’t been that long, but do you think the Bank of England has been more restrained since 1998?

kyle8 November 29, 2011 at 6:17 pm

You make some good points V V, but altogether I think it would be worse if an administration had a direct hand into all monetary policy. How much worse, I cannot say.

vikingvista November 29, 2011 at 8:35 pm

Well, outside of colonial times, the only long term example we have of the Treasury controlling the money was when there was a gold/silver standard. The consensus seems to be growing that those were more stable financial times than under the reign of the Fed.

That doesn’t mean it would still have been the case with a fiat money, but I fail to see how, theoretically, a government empowered monopoly with less transparency and more autonomy (the Fed) is safer than a monopoly with more transparency and more checks-and-balances (the Federal government proper).

Josh S November 30, 2011 at 11:03 am

“Well, outside of colonial times, the only long term example we have of the Treasury controlling the money was when there was a gold/silver standard.”

We have lots and lots of examples where the political authorities had direct control over the money supply. Argentina. Zimbabwe. Yugoslavia. Hungary. Russia. Mexico. In just about any hyperinflationary event in history, you’re going to find currency issue directly under political control. If there’s one thing we know from history, it’s that when politicians can issue all the paper money they want, they do just exactly that. Currently, the fact that the government has to formally account for inflation as debt, and the interest rate on its debt is nonzero, acts as a bit of a political brake on the deficit. Note how the $1.5T deficit is a big political issue these days. Now imagine expunging the word “deficit” from the government’s language and replacing it with the more harmless-sounding “currency issue.”

Your theory that the President (to whom SecTreas directly answers) would be more responsible in issuing fresh fiat every year is the one without any experience behind it whatsoever.

vikingvista November 30, 2011 at 5:27 pm

“Your theory that the President (to whom SecTreas directly answers) would be more responsible in issuing fresh fiat every year is the one without any experience behind it whatsoever.”

I’m not sure whose theory that is, but certainly not mine. It probably comes from someone who also thinks the President currently has total autocratic control over all the Executive agencies–someone who never heard of a little known institution called “Congress”. That wouldn’t be you, so I’m sure this peculiar theory isn’t your presumption.

I’m aware of hyperinflation in other countries. Are you aware that those countries state institutions differed from the USA? You apparently don’t think it matters, but then you would have to explain why, for instance, Great Britain’s government had direct control over its fiat money and monetary policy, but even after many decades, never turned into Zimbabwe.

The confounders between say, the USA and Zimbabwe, are too significant to even vaguely make your comparison. Even comparison to the Continental is a stretch, but a superior one than to Zimbabwe dollar.

“Note how the $1.5T deficit is a big political issue these days. Now imagine expunging the word “deficit” from the government’s language and replacing it with the more harmless-sounding “currency issue.””

That’s what I *wish* would happen. Instead, thanks to so-called Federal Reserve independence, “currency issue” is exactly what we get, but without any political discussion or even, to a great degree, any awareness of it. There are, of course, fewer political brakes on money creation, when the money creators have full autonomy and full secrecy. “Currency issue” is not a big political issue today, because it has been removed, by the Federal Reserve Act, from politics. The FRA didn’t apply political restraints, as you oddly believe, it almost completely stripped them.

EG November 29, 2011 at 2:19 pm

Now now, taking words out of context ?

Milton Friedman has been pretty clear on his stance on the Fed, and what to do about it. His problem with the Fed was specifically the control the government could exert on it to finance its spending. And rightly so. That’s the issue here.

He didn’t say this for the first time in 2006. He’d been saying it for decades prior. You just chose the 2006 interview because he says, somewhere out of context, to abolish the Fed.

Yes but replace it with…what? Milton’s alternative was…the Fed. He wanted to change the mechanism of control. He wasn’t calling for anything remotely similar to what other people out there who are screaming to abolish the Fed, today, are proposing.

Why don’t you post the entire discussion he had on this topic in his 1980 Free to Chose episode? Or is “abolish the Fed” sufficient…discussion…on the topic? You can ‘abolish the Fed” as it stands today for many reasons…majority of which are NOT valid in my and many others opinion, and replace it with a lot of other alternatives, majority of which are also not valid in my and other people’s opinion.

The Ron Paulism “abolish the Fed” is worlds apart in scope and means from what Milton Friedman is saying there.

vikingvista November 29, 2011 at 3:15 pm

So your belief is that in this 2006 interview MF did not want to, as he said, “abolish the Fed”, but merely change the Fed. How do you know? Had he before used the word “abolish” to mean “change”, is this yet another creation of the voices in your head?

EG November 29, 2011 at 4:21 pm

You can read the last sentence for a response.

vikingvista November 29, 2011 at 4:57 pm

I’m sorry, where in your last sentence is there anything about MF using “abolish” to mean “change”? This voices-in-your-head problem is really getting out of control.

EG November 29, 2011 at 7:25 pm

Again, the Ron Paulisms have a problem with everything the Fed does, the very existence of a fractional reserve system etc. Milton’s issue with the Fed is that it is susceptible to political pressure.

Again…you can be for the “abolition” of something for different reasons, with different replacements in mind. Ron Paul’s criticisms (or any number of people like him), are unrelated to Milton’s criticism.

And this was the point behind the one sentence that Don took out of context and that he decided to have a problem with: the criticisms of the Fed…TODAY…and those calling for its abolition, TODAY, are not serious.

That’s because…today…the voice of Milton Friedman is not the one heard. Its the voice of human waste at OWS holding “Abolish the Fed” signs. (I’m sure, they’re voting for Ron Paul this election)

Methinks1776 November 29, 2011 at 8:05 pm

Bravo, EG.

You have managed to mangle beyond recognition what Don Boudreaux , Milton Friedman and Glenn Hubbard said. You have a truly remarkable talent for that.

vikingvista November 29, 2011 at 8:21 pm

EG,

Do you possess the full context? A transcript of the interview perhaps?

Josh S November 29, 2011 at 4:29 pm

Ron Paul’s version of “abolish the Fed,” unfortunately, is to replace the Fed with Rudolf von Havenstein.

Sam Grove November 29, 2011 at 2:45 pm

Milton Freidman:

“Most of my own work dealing with public policy has had the same character of proceeding as if I were addressing governmental officials selflessly dedicated to the public interestŠ. I have attempted to persuade the Federal Reserve System that it was doing the wrong thing and it ought to adopt a different policy. This time was ill-spent Š because the public-interest characterization of government is basically flawed…. We do not regard a businessman as selflessly devoted to the public interest. We think of a businessman as in business to improve his own welfare, to serve his own interest…. Why should we regard government officials differently? They too aim to serve their own interest, and in government as in business we must try to set up institutions under which individuals who intend only their own gain are led by an invisible hand to serve the public interestŠ. The Federal Reserve System puts a great deal of power in the hands of a few people and it is so constructed that it has been in their self-interest to pursue a policy which, I believe, has been very harmful for the public rather than helpful…. Clearly, it was not in the self-interest of the Federal Reserve hierarchy to follow the hypothetical policy [of a monetary rule]. It was therefore a waste of time to try to persuade them to do so.

and:
Also in 1986, Friedman coauthored an article with Anna Schwartz in the Journal of Monetary Economics that asked the question, “Has Government Any Role in Money?” They concluded that in principle it did not need to have one and historically sometimes had none. They argued:

“The apparently great value to the economy of having a single unit of account linked with an (ultimate) medium of exchange does not mean that government must play any role, or that there need be a single producer of the medium of exchange. And indeed, historically, governments have entered the picture after the event, after the community had settled on a unit of account and private producers had produced media of exchange…. Historically, producers of money have established confidence by promising convertibility into some dominant money, generally specie [e.g., gold or silver]. Many examples can be cited of fairly long-continued and successful producers of private moneys convertible into specie. We do not know, however, of any example of the private production of purely inconvertible fiduciary moneys.”

They stated: “Our own conclusion … is that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement.” However, they did not argue for a return to a gold standard. In his article on irredeemable paper money, Friedman made this point very clear:… see article

and:

“A real gold standard is thoroughly consistent with [classical] liberal principles and I, for one, am entirely in favor of measures promoting its development.”

http://www.fff.org/freedom/0399b.asp

vikingvista November 29, 2011 at 3:32 pm

Thanks for the quotes. Perhaps these count as an evolution in thought, or maybe only an ability to recognize possibilities. But none of it is a call to abolish the Fed. If, prior to 2006, MF had wanted to abolish the Fed, it was an issue he certainly would’ve been aware of in marginalized libertarian circles. If he took the idea of abolishing the Fed seriously, it seems to me he would’ve addressed it directly and plainly. Unless he feared doing so for some reason.

Dan J November 29, 2011 at 3:58 pm

Fear of a Bullet to the head, JFK style.

SmoledMan November 29, 2011 at 4:04 pm

That’s what happens to wreckers, saboteurs comrade!

vikingvista November 29, 2011 at 4:18 pm

Or perhaps loss of prestige. Or, maybe he simply did not think that the Fed should be abolished.

Sam Grove November 29, 2011 at 5:44 pm

He was concerned about a loss of influence.

vikingvista November 29, 2011 at 5:53 pm

I can buy that. But it leaves his real views regarding some significant issues up to speculation, unless some diary or other secret writings somehow materialize. It is a shame to be forever deprived of MF’s opinions on such matters. Such silence reveals a myopic view of posterity.

Josh S November 29, 2011 at 4:35 pm

MF tended to give policy advice, and he tended to try to formulate policy advice that had a non-zero probability of being listened to. “Abolish the Fed” wasn’t in that category, not in the 70s or 80s, anyway. Giving people second-best advice because they ignore the first-best advice is not a wicked thing.

Even Peter Schiff doesn’t unconditionally support ending the Fed, because he recognizes that Congress would likely replace it with something even worse.

vikingvista November 29, 2011 at 5:01 pm

What reason do you have for presuming to know MF’s unstated “first-best advice”?

The thing is, Peter Schiff, and other people who discuss incremental changes, are still not hesitant to say in no uncertain terms that the desirable ultimate target is to abolish the Fed and/or central banking.

anthonyl November 30, 2011 at 8:01 am

But they did say leaving it up to markets. To me this implies no role for a fed since a central bank is not useful in a free-market system.
I like the line about how government comes in after a currency is already established. In passing he identifies the root of the problem!

SmoledMan November 29, 2011 at 3:54 pm

In Stalin’s Russia, Milton Friedman would have been given a show trial and a bullet in the head.

kyle8 November 29, 2011 at 6:21 pm

That would be exactly the same thing in this country if the left wing had their way. I have, in fact, never seen them more intolerant than they are now.

brotio November 30, 2011 at 12:33 am

I agree that they’re showing their intolerance more than ever, but the Statists have always been so.

Bill Stepp November 29, 2011 at 5:46 pm

I had forgotten that he was hoodwinked by the criminal bin-Ben Bernanke.

miltonf November 29, 2011 at 7:12 pm

Milton Friedman has probably done more, on balance, to enhance the standard of living in the world than any other economist or politician in the 20th or 21st century( to date.)

EG November 29, 2011 at 7:18 pm

Yeah, but he wasn’t as awesome of an economist as Rothbard. :P j/k

Vangel November 30, 2011 at 3:15 pm

He is crazy. He thought that Bernanke was pretty good? On what basis could that have been true? Friedman is also the guy who wants the money supply to automatically increase by a give percent per year, which requires that government create money out of thin air. You can have Friedman. Give me the discipline of the Classical Gold Standard any day.

Paul Marks December 1, 2011 at 8:23 am

Not the gold “standard” – the word “standard” implies the gold is not the money, that is a “standard” for something else which is the money.

The gold “standard” of the late 1920s did not prevent Ben Strong (head of the New York Fed and a hero of Milton Friedman’s) creating a vast credit money bubble that led to the crash of 1929 (basic rule – every credit money bust is caused by a credit money boom).

But the key point is as follows….

Milton Friedman was not a Austrian school person (I have just shown that above), but even he was against the Federal Reserve (he many times pointed out that the United States, and the world, would have been better off if the Fed had never been created – or if it were abolished).

So the “crazy” people are the SUPPORTERS of the Federal Reserve Central Bank system.

The Fed that has increased the monetary base by some 300% just since 2007 – and is engaging in antics with the other Central Banks even as a I type this.

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