The Legacy Of Milton Friedman II
In dueling columns in the Washington Post, Michael Kinsley and Robert J. Samuelson take differing views on the legacy of Milton Friedman and what his ideas mean for us today.
First up, Kinsley claims that, Friedman’s legacy notwithstanding, there are some things capitalism just can’t do:
Capitalism is brilliant at setting the price of potatoes. But how good is it at setting the price of a large company? To all appearances, the stock market is capitalism operating under near-laboratory conditions. Financial markets deal almost entirely in electronic blips. Supply and demand can chase each other around the world with no actual goods to get in the way, and prices can adjust constantly and instantaneously. Yet the prices set in financial markets are patently wrong.
That is not my opinion. Well, yes, it is my opinion. But it is not only my opinion. It is held by America’s financial leaders, though they don’t put it quite that way. Actually, it is close to a provable fact. The free market cannot be setting the right price for financial assets such as shares of stock because often there are different prices with equal claims to be the product of free-market capitalism. They can’t all be right.
Here’s the problem with Kinsley’s argument right off the bat, and it’s one that Friedman would surely picked up on himself; how, exactly, do you determine what the “right” price for a share of stock is ? How can you say that the closing price of, say, General Motors on the AMEX yesterday was somehow wrong ? Quite clearly, you can’t unless you claim that you have knowledge to that of the combined knowledge of buyers and sellers in a free market, which is precisely what anti-market liberals like Kinsley believe.
On a better note, Samuelson takes a look at what Milton Friedman has contributed to the world:
[Friedman] belongs on any list of the 100 most important people since World War II. In some ways, the conversion of China to a market economy, the conquest of double-digit inflation in the United States and elsewhere, the decisions of countless governments to sell (aka “privatize”) nationalized industries — these developments and many more could be traced to him. There was no more ardent or articulate advocate of free markets and personal liberty than Friedman.
And Friedman’s legacy goes beyond politics to the very science of economics itself:
Friedman, winner of the 1976 Nobel Prize in economics, made three huge scholarly contributions. First, he helped explain the Great Depression. Until the publication in 1963 of “A Monetary History of the United States, 1867-1960,” co-written with Anna Schwartz, the Depression was cast as an extreme example of capitalism’s instability. Not so, Friedman and Schwartz said. The Federal Reserve caused the Depression through mistakenly tight money policies that led 40 percent of U.S. banks to fail. Though this story has been amended and extended, it remains the central explanation for the Depression.
The second contribution, made in 1967, was to show that there was no convenient “trade-off” between inflation and unemployment: Governments could not, as many economists then believed, choose a slightly higher inflation rate (say, 5 percent) for a slightly lower jobless rate (say, 3 percent). Trying to hold unemployment at unrealistically low levels would produce ever-higher inflation, he argued. That’s what happened. Inflation went from 1 percent in 1960 to 13 percent in 1979. Finally, Friedman debunked the theory that as nations got wealthier, people would spend less and less of their incomes; that was once thought to doom affluent societies to stagnation.
Perhaps Mr. Kinsley needs to be speaking with his fellow columnist.