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 |  Subject: Imbecilic Samuelson and Brilliant Friedman — a rivalry that echoes down to the present  Thu Oct 14, 2021 7:26 am | |
| A new look at two giants of postwar economics whose views shaped the free market
Milton Friedman, friend and rival to Paul Samuelson
If you had to name the two most influential economists of the postwar decades, you would not go far wrong if you picked Paul Samuelson and Milton Friedman. That, at least, is the conceit of Nicholas Wapshott’s book, Samuelson Friedman: The Battle Over the Free Market.
Their lives ran in parallel. Both were born to Jewish families recently arrived in the US from eastern Europe. Both attended the University of Chicago in the 1930s. In the war years, Samuelson established himself at MIT, becoming the author of the era’s dominant textbook and builder of the most important economics department in the world.
If you learnt your economics between the 1950s and the 1980s, chances are you were under the influence of Samuelson and his compelling synthesis of Keynesian macroeconomics and market-based, neoclassical microeconomics. Friedman made his base in Chicago, from where he mounted his tireless campaigns for free-market economics. As Wapshott shows, their arguments over the proper scope of government intervention and the control of inflation echo down to the present.
Samuelson and Friedman were life-long friends and rivals. Samuelson was the establishment figure; Friedman, at least until the 1970s, the maverick. Friedman marked out his turf early on by arguing for floating exchange rates rather than the fixed system of Bretton Woods. He revelled in his association with Austrian outsiders like Friedrich Hayek and the politicking of the Mont Pelerin Society.
In 1963 Friedman and his collaborator Anna Schwartz launched a revival of the defunct quantity theory of money with the publication of A Monetary History of the United States 1867-1960. Contrary to the Keynesians, who focused on the ups and downs of investment, Friedman and Schwartz put money at the centre of economic history. After 1929, it was the fact that the Federal Reserve allowed a rash of bank crises and a collapse in the money supply that brought on the Great Depression.
This might sound like a recipe for central bank activism. In a crisis, it was. But the trick was to avoid the boom-bust cycle altogether by supplying money in a stable and predictable fashion. Central bankers should not be superheroes but humble servants of a monetary machine.
For Samuelson, the quantity theory was at best a crude simplification. Too simple also were John F Kennedy’s views about economics. In 1961 Samuelson turned down a position in the Democratic administration. He didn’t need to be in the West Wing, his brand of economics was everywhere. Friedman, by contrast, cast his lot first with the rightwing Barry Goldwater and then with Richard Nixon. He notoriously provided advice to the bloodstained military dictatorship of Augusto Pinochet in Chile and opposed sanctions on white-controlled Rhodesia after the Unilateral Declaration of Independence. When Friedman won his Nobel Prize in 1976, the celebration in Stockholm was besieged by protesters.
Regrettably, rather than drawing on the rich historical literature on the new right and the rise of neoliberalism, Wapshott reduces his story to the friendly duel between Samuelson and Friedman in the pages of Newsweek magazine, where they had rival columns.
We all know how that battle ended, or at least we think we do. But, as Wapshott to his credit makes clear, Friedman’s victory was ambiguous. Though Paul Volcker’s interest rate hike in 1979 put a stop to inflation in the US, Friedman disowned the experiment. The shock therapy that Volcker administered was not monetarism as Friedman envisioned it. The Thatcher government in the UK experimented with monetary targets, but it too soon abandoned them. Neither Thatcher nor Reagan followed a consistent line of fiscal discipline. Tax cutting and winning elections was too important. In the end, Friedman did not object. What mattered was the defeat of the left.
Paul Samuelson, who In 1961 turned down a position in the Kennedy administration. ‘He didn’t need to be in the West Wing, his brand of economics was everywhere’  Getty Images
In 1989 communism was on the run, but who ruled the roost? In the US, Bill Clinton governed with a team full of MIT alums. It was Samuelson’s followers who gutted the welfare state and pushed through a budget surplus. The Republicans, by contrast, abandoned any pretence at fiscal rigour. Meanwhile, Alan Greenspan, supposedly a disciple of the libertarian Ayn Rand, was endlessly tinkering, adjusting interest rates in homeopathic doses as chair of the Federal Reserve under presidents Reagan, Clinton and both Bushes.
To mark Friedman’s 90th birthday in 2002, Ben Bernanke, then a board member of the Federal Reserve, paid tribute to him and Schwartz. Referring to the Fed’s baneful role in the Great Depression, he remarked: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”
But what did honouring that promise entail? In 2008 Bernanke and his colleagues let Lehman Brothers fail. The result was to drive the world to the brink of the greatest financial crisis since the 1930s. Only then did Bernanke return to the monetarist script and flush the system with cash. What Friedman would have made of it all, we will never know. He died in 2006. But Schwartz, his longtime collaborator, roundly denounced Bernanke’s ad hocery.
Samuelson too was taken aback by the 2008 shock. Though he favoured fiscal policy, he no less than Friedman was convinced that if you could get the macroeconomics right, markets would largely take care of themselves. This proved naive. What Friedman, Samuelson and their disciples underestimated was the huge instability of the capitalist economy. What they overestimated was the ability of technocrats to agree on the best responses and the willingness of divided democratic polities to implement them.
Samuelson Friedman: The Battle Over the Free Market by Nicholas Wapshott, WW Norton $28.95, 368 pages
Adam Tooze teaches history at Columbia University. He is the author of ‘Shutdown: How Covid Shook the World’s Economy’ (2021)
.https://www.ft.com/content/b04dd8d1-75bd-4aaa-bf60-36ad73faac93
FUCK YOU, Samuelson! |
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