DeLong remembers Friedman

Berkeley economist Brad DeLong (born 1960) recalls conversations with Chicago economist Milton Friedman (1912-2006), a giant of 20th century economics.

In my rare coffees and phone calls with Milton Friedman, I found I could distract him whenever I was losing an argument by saying: “Why is it that the government needs to intervene and keep the flow of liquidity services provided to the economy growing along a smooth path? Why must there be a quantitative target achieved by government for the path of the liquidity services industry–commercial banking–when there must not be a quantitative target for kilowatt hours or freight-car loadings?”

He would chuckle and say it was a hard problem, but that he was confident that someday he or somebody else–maybe even me–would find a good, concise, convincing way of proving the point that a modern economy needed very heavy-handed government intervention in regulating the commercial banking industry but nowhere else. It was, he thought, something about the social waste of unnecessary bankruptcy, the catastrophic consequences of bank failures, debt deflation, and the fact that the price of liquidity services was intimately tied up with the units of account that we used to denominate our web of debt.

Brad DeLong, “Why Did Milton Friedman Think a Modern Economy Needed Heavy-Handed Government Regulation in the Liquidity Services Industry and Nowhere Else?” Brad DeLong’s Semi-Daily Journal, 12 August 2013.

DeLong’s post was prompted by the following comment of Princeton economist Paul Krugman in his newspaper column:

One way to think about [Milton] Friedman is that he was the man who tried to save free-market ideology from itself, by offering an answer to the obvious question: “If free markets are so great, how come we have depressions?” Until he came along, the answer of most conservative economists was basically that depressions served a necessary function and should simply be endured…. Such dismal answers drove many economists into the arms of John Maynard Keynes.

Friedman, however… was willing to… admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve. In particular, he argued that the Fed could have prevented the Great Depression — with no need for new government programs — if only it had acted to save failing banks and pumped enough reserves into the banking system to prevent a sharp decline in the money supply.

Paul Krugman, “Milton Friedman, Unperson“, New York Times, 12 August 2013.

It is a sign of our times that conservative economist Milton Friedman is regarded as too interventionist by today’s austerians, who oppose fiscal and monetary stimulus.

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