Milton Friedman, Monetarist: the jury is still out on his reputation as scientist

John Maynard Keynes died in 1946, still in the boost phase of a career as a cultural entrepreneur that began, in 1919, with The Economic Consequences of the Peace. The work of articulating what came to be known as the “Keynesian revolution” was taken over by others.

They included theorists on both sides of the Atlantic who mapped The General Theory into textbook economics; Congressional sponsors of the 1946 Employment Act, which established the three-member Council of Economic Advisers to the president; and Paul Samuelson, of the Massachusetts Institute of Technology, author of the paradigmatic introductory textbook, Economics, of 1948

Samuelson described the emergence of a “modern mixed economy,” its stability considerably enhanced by “automatic stabilizers,” mainly welfare spending and income taxes. Gradually, Keynesian economics merged with the fiscal stimulus of World War II and the reforms of Franklin Roosevelt’s New Deal until the three strands were nearly indistinguishable. (The Federal Reserve Board’s dual mandate – to pursue both price stability and full employment – was established by Congress only in 1977.)

Seventy-five years after his death, Keynes is still revered by many as a cultural entrepreneur, admired as a polymath of a high order, but the reputation as an economic genius that helped him achieve iconic status has undergone several revisions, including theorist-turned-historian Jürg Niehans’s harsh assessment in 1990:

“Keynes added a solid and useful brick to the building of economic theory. A brilliant writer, he offered this brick packed in a glittering gift wrap. sparkling with hints, allusions, suggestions, and quotable obiter dicta. Half a century later, The General Theory still glitters, but economic science has learned to distinguish the wrapping from the brick.”

Does the same fate await Milton Friedman? His significance as a cultural entrepreneur is beyond doubt. There were the twenty years he spent as an influential Newsweek columnist, his two books – Capitalism and Freedom and Free to Choose (and the television series, with Rose Friedman, that preceded it); his close association with candidates and presidents:  Barry Goldwater, Richard Nixon, and Ronald Reagan; his outsize influence abroad, especially in Britain. Chile, and China.

Then, too, there were the practical reforms he advocated: flexible exchange rates, to replace the broken Bretton Woods system; futures and options in currency markets, to augment the old Chicago Butter and Egg Board; the market-based volunteer army; charter schools; the attempted privatization of the social security and medical insurance systems. The desirability of some of the innovations he advocated remain far from settled among the public, but his unrelenting pursuit of market-based solutions to what previously had been considered public problems made him the avatar of a body of thought now often called “neoliberalism.”

It is impossible not to learn much from reading, even a little, here and there, the two volumes of Milton Friedman & Economic Debate in the United States 1932-1972 (Chicago, 2016), by Edward Nelson, a senior adviser on monetary affairs in the program direction section of the Federal Reserve Board. Yet it is possible to end a week spent with its 1,324 pages and still not have formed an opinion about the meaning of “monetarism.”  That Friedman had a profound influence on economic policy debate is inarguable, but what was its essence?

The author, a monetary economist with a 1998 PhD from Carnegie Mellon University, set out to “reassemble, interpret, and reconcile Friedman’s scattered writings and statements, using them to lay out Friedman’s theory and place his work in the context of both other economists’ work and historical developments.” It doesn’t take more than a glance at the research listed on Nelson’s vita to see the extent to which he, a debater himself, has immersed himself in the various controversies that occurred at every stage in Friedman’s long career.

I enjoyed Jennifer Burns biography, Milton Friedman: the Last Conservative (Farrar Straus, 2023), but Nelson offers a very different kind of a history, an encyclopedic account of Friedman evolution as an economist, from his early day at the University of Chicago, to the eve of his open-heart surgery in 1972. The emphasis is on untangling the key economic debates which Friedman, for the most part, started. Nelson writes in his introduction:

“It is true that historians of economic thought would seem to be the most natural authors on the topic of Milton Friedman and economic debate. It is also true that valuable work has indeed been done about Friedman by historians of economic thought. At the same time it is fair to say that, on balance, the state of the existing literature prompts the same question regarding Friedman’s contribution that [Roy] Harrod asked in connection with Keynes’ work: ‘But can historians of thought be relied on to get things straight?’”

Thus, in the course of constructing his account, Nelson conducted nearly 300 interviews of economists who had been involved in Friedman’s story, one way or another. Monetary economist George Tavlas,  in his enthusiastic review of the book for History of Political Economy, counted 3,331 footnotes arrayed over 279 pages at the ends of the two volumes.  I wanted to read the book; I read as much of it as I could and filed the rest away for future reference.

Friedman’s relationships with other major figures are examined: with fellow monetary theorists Irving Fisher, Jacob Viner, Henry Simons, Lloyd Mints, and Clark Warburton; with Fed chairmen Marriner Eccles, William McChesney Martin, and, especially, Arthur Burns; with other economists to whom he is sometimes compared, Paul Samuelson, Kenneth Arrow, and John Kenneth Galbraith.  (As historian Joel Mokyr says, a successful cultural entrepreneur must be a coordinator of existing views at least as much as an innovator himself.)

The problem is that Nelson’s project is a work in progress. A third volume is planned to cover the period from the beginning of 1973 to Friedman’s death in November 2006.  That would include the years of Federal Reserve Chair Paul Volcker’s campaigns to subdue rising inflation. I seldom covered monetary policy over those years, but my impression is that “monetarist” policy came up short in that test of it, in the judgment of central bankers and most macroeconomists.  Attempts to manage “the money supply” gave way to the approach described as inflation targeting. A fourth volume on floating exchange rates, from perspective of the British debate, is planned as well.

Milton Friedman altered the structure of introductory textbooks, probably for all time. There can be no doubt about it. But what was his main contribution?  What, exactly, was “monetarism” all about? You won’t find the answer in Nelson’s study – at least not yet. As with Keynes, it may take another thirty years for seasoned appraisals to begin to appear. You won’t have to wait that long for EP’s opinion. This is journalism, not history or economics.  First, though, there are some other aspects of neoliberalism to consider.

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