The Two Economists Who Fought Over How Free the Free Market Should Be

Author:  Paul Krugman

Source: The New York Times
Date: Aug. 3, 2021
 
The Two Economists Who Fought Over How Free the Free Market Should Be
 
Nicholas Wapshott’s “Samuelson Friedman” looks at a feud that continues to define the economic direction of the United States.
 
SAMUELSON FRIEDMAN
The Battle Over the Free Market
By Nicholas Wapshott
 
The New Deal and World War II transformed the U.S. economy from a market free-for-all into a system that was still capitalist, but with many of the rough edges sanded off.
 
Profit-seeking business remained very much the norm — America never went in for significant government ownership of the means of production — but businesses and businesspeople were subject to many new constraints. Taxes were high, in some cases as high as 92 percent; a third of the nation’s workers were union members; vigilant antitrust policy tried to limit monopoly power. And the government, following the ideas developed by Britain’s John Maynard Keynes, took an active role in trying to fight recessions and maintain full employment.
 
Over the decades that followed, however, there was sustained pushback — first intellectual, then political — against these constraints, an attempt to restore the freewheeling capitalism of yore. Nicholas Wapshott’s “Samuelson Friedman: The Battle Over the Free Market” is basically an account of this pushback and its eventual fate, framed as a duel between two famous economists — Paul Samuelson of the Massachusetts Institute of Technology and Milton Friedman of the University of Chicago.
 
Maybe the first thing you need to know is that the idea that what happened was a personal duel between economic titans is best seen as a literary conceit, a way to inject some theatrical drama into potentially dry intellectual history, rather than as the way it actually happened. Certainly nobody told Paul Samuelson that he was engaged in a fight for capitalism’s soul.
 
Indeed, if I had to name someone on the center-left who actually did engage in a sustained intellectual duel with Friedman, it wouldn’t be Samuelson, it would be Yale’s James Tobin, whose stinging criticisms of Friedman’s methods retain much of their force to this day, but who oddly makes almost no appearance in Wapshott’s book.
 
Anyway, it’s true that from 1966 into the early 1980s Friedman and Samuelson wrote alternating columns in Newsweek, an unusual experiment in regular public commentary by eminent academics that has rarely been repeated. But Samuelson was an economists’ economist, who made fundamental contributions to fields ranging from international trade to the behavior of financial markets.
 
Samuelson did write a best-selling textbook that brought Keynesian economics — the idea that changes in government spending and taxes can be used to manage the economy — to American college classrooms. And his concept of the “neoclassical synthesis” — markets can work, but only with government-created guardrails — in effect provided the intellectual justification for the postwar economy. But it’s clear that for him politics was never more than a peripheral concern.
 
Friedman, on the other hand, was very much a political animal; pretty much everything he did was aimed at restoring Gilded Age-style unrestrained capitalism. Of course, political crusades make for better entertainment than quiet scholarship, so Friedman’s life story dominates Wapshott’s book.
 
And just to be clear, while I think Wapshott, the author of a previous book about Keynes and Freidrich Hayek, overpersonalizes the nature of the debate for dramatic effect, and also arguably establishes some false equivalence between Friedman the relentless advocate and Samuelson the scholar, it does make for a good story — and the appropriately cautious reader can learn a lot from this book.
 
So, about that political animal: Friedman first achieved widespread prominence in academic circles as co-author of a 1946 pamphlet denouncing rent control (somehow not mentioned in this book). He received wider notice with a 1953 essay, “The Methodology of Positive Economics,” that seems maddeningly abstract — what’s he driving at? — until he finally gets to the meat: a demand that economists ignore theories about monopoly and imperfect competition because, he claims, they don’t make any useful predictions beyond those that come from simple supply and demand. And his first best-selling book, “Capitalism and Freedom,” was more a political sermon than a work of economic analysis.
 
That said, Friedman was no mere propagandist: He was a brilliant analytical economist capable of doing pathbreaking academic work when he set his mind to it. His work on monetary policy, in particular, persuaded many economists who disagreed with him about almost everything else.
 
Yet looking at Wapshott’s timeline of Friedman’s career, it’s hard to avoid the sense that Friedman viewed his professional research, excellent though some of it was, as a sort of loss leader for his political advocacy — a way to establish his academic bona fides and hence add credibility to his free-market crusade. Even his seemingly least political major work, “A Theory of the Consumption Function” (and the first of his works to receive widespread academic acclaim), was published the year after he gave the lectures that became “Capitalism and Freedom.”
 
And his magnum opus, “A Monetary History of the United States, 1867-1960” (with Anna Schwartz), while a magisterial work of scholarship, clearly had a major political ax to grind. For its big takeaway was the claim that the Great Depression wouldn’t have happened if the Federal Reserve Board had done its job and stabilized the money supply. That is, simple technocratic measures would have been sufficient — no need for all that Keynesian stuff. So while the book was devoted to monetary economics, it was also clearly intended to strike a blow against activist government.
 
The influence of Friedman’s monetary ideas peaked around 1980, then went into steep decline. Both the United States and Britain tried to implement Friedman’s belief that the authorities could stabilize the economy by ensuring steady, slow growth in the money supply; both efforts failed dismally. Friedman didn’t help himself by making wild predictions about runaway inflation and depression, none of which came true.
 
Still, most economists continued to believe that a more flexible form of monetary policy could keep things under control — that the Federal Reserve could manage the economy without bringing Congress into the act. But a number of economists had looked closely at Friedman’s arguments about the Great Depression, and found them wanting. And the aftermath of the 2008 financial crisis vindicated the doubters. Ben Bernanke, the Fed chair and a huge Friedman admirer, did everything Friedman and Schwartz said the Fed should have done in the 1930s — and it wasn’t enough. Soon Bernanke was pleading for help from fiscal policy — that is, pleading for Keynesianism to come to the rescue.
 
What about Friedman’s broader faith in free markets? Libertarian policies reached a high-water mark in the 1990s, as industries from power generation to banking were deregulated. But all too many of these deregulatory ventures ended in grief, with incidents like the California power crisis of 2000-1 and, yes, the banking crisis of 2008.
 
And where are we now? If you look at the Biden administration’s proposals — which are for the most part very popular, although their legislative fate is uncertain — they’re pro-market, but involve substantial government spending and regulation in an attempt to tilt the arc of markets toward social justice. In other words, they sound a lot like what Paul Samuelson was saying decades ago.
 
So by all means you should read Wapshott’s history of the disputes that roiled economics over much of the second half of the 20th century. But you should also ask a question I don’t think the book answers: Was all of this just a grand, ideologically driven detour away from sensible economic theory and policy? And why did that happen