Milton Friedman, 1912-2006
Few American economists have wielded as much influence on economic thought and policy as the late Milton Friedman.. He was an articulate and ardent advocate of free markets and personal liberty. Yet this economist has been at odds with Professor Friedman ever since he advanced his monetarist thought. It is strange that Professor Friedman and his fellow monetarists, who are such defenders of the market order, should call on politicians and bureaucrats to provide the most important economic good — money. FULL ARTICLE
Comments (25)
Tim Kern
Professor Sennholz surrounds his greatest point in clear arguments: government designs itself and all its institutions to promote, consolidate, and expand its power. Fiat money is a powerful and sweet-tasting poison issued by government. In small quantities, it makes the recipients aware and more-resistant; but unlike organic poisons, small quantities of government money are not recognized for what they are; and the sweet taste of same entices over-consumption, with predictable results.
Moreover (as I change metaphors), Professor Sennholz cites the inherent ruling-class control in a system of government-issued money, another snaplink in our imprisonment.
The only good part of all this is that government is forced to take its paper in payment of our tax debts; but it is small consolation to those of us who love this country and do not wish to see her more-quickly recognized as bankrupt.
Published: December 26, 2006 7:41 AM
Mark McGrath
Apart from the things that Professor Sennholz mentions as counter to Austrian thought, what are some of the positive, or Pro-Austrian, ideas of Milton Friedman that are worth noting, if any?
Published: December 26, 2006 7:58 AM
Dewaine
Apart from the things that Professor Sennholz mentions as counter to Austrian thought, what are some of the positive, or Pro-Austrian, ideas of Milton Friedman that are worth noting, if any?
He was against socialism, in theory if not in practice.
Published: December 26, 2006 12:01 PM
Ken MacDonald
According to Murry N. Rothbard: “One of Friedman’s most disastrous deeds was the important role he proudly played, during World War II in the Treasury Department, in foisting upon the suffering American public the system of the with-holding tax. Before World War II, when income tax rates were far lower than now, there was no withholding system; everyone paid his annual bill in one lump sum, on March 15. It is obvious that under this system, the Internal Revenue Service could never hope to extract the entire annual sum, at current confiscatory rates, from the mass of the working population. The whole ghastly system would have happily broken down long before this. Only the Friedmanite withholding tax
has permitted the government to use every employer as an unpaid tax collector, extracting the tax quietly and silently from each paycheck. In many ways, we have Milton Friedman to thank for the present mon-ster Leviathan State in America.
Journal of Libertarian Studies
Volume 16, no. 4 (Fall 2002), pp. 37–54
2002 Ludwig von Mises Institute
mises.org
37
K.MacDonald
Published: December 26, 2006 1:53 PM
paul streitz
The article describes Milton Friedman as "a famous author all the world admires." Make that minus one.
x
No economist has done more damage to the United States than Milton Friedman. His primary work on monetary theory was revelation, or so it seems, with the exception that Alexander Hamilton also asked questions about the value of money, and its real versus intrinsic value, which Keynes and other apparently forgot.
x
Using his prestige gained from his work on monetary theory, Friedman then went on to sell three distinct snake oils to the American public: Free trade, deregulation and the voucher system. I will deal with each briefly.
x
In his work on monetary history, Friedman nowhere mentions the Smoot Hawley tariff, but in capitalism and freedom, he says that others attribute the Great Depression to the SM. Yes, others did, but he knows that they are wrong, it had nothing to do with it.
x
Friedman misinterprets free trade, ignores that the USA was a protectionist country for most of existence, and became the wealthiest country in the world. Go here for further elaboration. http://magic-city-news.com/Paul_Streitz_67/Friedman_A_Great_Economist_I_Dissent.shtml
xx
xx
Free trade has destroyed American Industry, put millions out of work and will eventually destroy our economy. Marx and Engels loved free trade because they knew it destroyed developed economies. but with Friedman monetary adjustments and invisible hand would solve everything.
x
Deregulation. A scam. Americans have seen their electricity bills skyrocket. Selling a commodity over an expensive distriubtion system is not the same as selling apples. Friedman never noticed.
x
Vouchers: the finest school system in the world, the NYC public school is now the worst. Or one of. Why, because of the way it is financed, no, because the changing demographics and mass migration into the cities. Friedman never noticed.
x
But the best is (does anyone actually read Capitalism and Freedom, or just praise it?), when Friedman says that yes, one country such as China might end up producing all the steel in the world. but never worry. We can just buy steel from them and stockpile it. Absurd.
x
At his heart, Friedman was globalist, just the flip side of communism. All problems would be solve when we reached the utopian free market, free trade society.
x
Someday, the vast majority of Friedman's nonsense will be rejected. It cannot be soon enough.
x
pfs
Published: December 26, 2006 4:42 PM
olmedo
Mises was: "socialism cant calculate".
can anyone tell me what was Friedman main criticism of socialism??
olmedo
Published: December 26, 2006 4:58 PM
Jacob Steelman
Friedman's main argument against socialism was the limitation on market choices resulting from government intervention in the marketplace. For many his writings helped to educate them on the free market and its advantages. For that we Austrians and libertarians should be thankful. Unfortunately, Friedman was not consistent in his argument for had he been he would have extended this same argument to money and argued for its privatization. Market participants should select the medium of exchange (money) for use in the marketplace not the government. But of course corporations who thrive on debt and their financiers and bankers have no interest in sound money.
Published: December 26, 2006 5:51 PM
Todd Marshall
The equation governing media of exchange, fiat or otherwise, is DEFAULTS = INTEREST + INFLATION.
I don't think anyone gets it.
Statistics on INTEREST rates and INFLATION rates are readily available.
Statistics on DEFAULTS are not readily available. In fact, they're not available at all! How can anyone, regardless of their economic perversion, propose to manage a medium of exchange without knowing DEFAULTS?
Todd Marshall
Plantersville, TX
Published: December 26, 2006 6:17 PM
Eric
Both Mises and Rothbard have written that once the central bank slows the amount of money inflation, then the bust will occur as the marginal businesses that only existed on the money injection will fail when that money is taken away
I wish to play devil’s advacte and would like to hear what was wrong with Friedmans so called "replace the FED with a computer" idea:
Both Mises and Rothbard have written that once the central bank slows the amount of money inflation, then the bust will occur as the marginal businesses that only existed on the money injection will fail when that money is taken away.
But suppose that money keeps coming at a steady (percentage money created) clip. Wouldn’t these marginal players continue in business, provided their "subsidies" aren’t removed, as Friedman has written?
If instead of panicking at the start of price inflation, and slowing down the rate of monetary inflation – leading to a slump, the FED instead kept it at a constant pace, then why would we have to keeping spiraling up the money inflation as Mises and Rothbard predict? And why will this lead to a hyperinflation in "all" cases, as predicted by Mises.
I can’t find a logical proof for that prediction. Since Mises and Rothbard both claim that economics should be a science of only pure logical thought – similar to a geometry proof – then there should be a step by step analysis with definitions, postulates and theorems. Not one with numbers, but just logic as is done in advanced math theorem proof constructions.
But unlike math proofs, economic proofs have so many possible variables (like humans) that can make such a proof intractable without a great number of simplifying assumptions. I am just not convinced that Mises and Rothbard have made the sort of pure thought proof that they claim to have made. And if all their definitions and givens don’t exactly map to the real world, then all they would have proven is that their results work when their assumptions are true. And that might be about a non-existent world.
So, the only way to verify logic when our subject matter is zillions of times more complex than geometry is by evidence. The only alternative to evidence is faith. Right triangles on the earth don’t obey the Pythagorean theorem since the earth is not a plane, as assumed by plane geometry.
And the evidence for hyperinflation in all cases is just not there. Maybe other things must occur before it kicks in. Maybe there’s a bit of "chaos" that is working here. We’ve had steady money inflation in the U.S. since the Fed was created, but no hyperinflation. Even when we’ve had slow downs (and later up turns) the amount has always been above zero. Friedman suggests that people would get used to the (money and price) inflation(s) and it would simply be like a 4% tax on keeping cash or their equivalents.
I’m not saying this is a good thing, nor was Friedman. He just believed that no libertarian group was ever going to get strong enough to do away with the FED or to go back to Gold, and so he was looking for a way that the FED would cause the least amount of harm.
Ok, maybe I’m reading more into what he said. But nothing I’ve seen in 40 years says any government program or bank is going to be shrunk - no matter how many times Ron Paul introduces a dissolve the FED bill - because the government likes getting it’s taxes through inflation. It’s low risk for their political careers because so few understand why they are being ripped off by inflation. Most blame business or unions for price increases from inflation.
So, like those that say we can’t stop global warming and should instead make plans to live with it, so the same goes with Friedman’s ideas on the FED.
I’m not arguing his other ideas, like vouchers etc. just his FED plan. (But I do like his capitalism and freedom’s discussion on free market medical non-licensing.)
What have I missed here?
Published: December 27, 2006 12:13 AM
Paul Marks
As a student (in the old sense of the word) of the Austrian school I oppose the late Milton Friedman on many things.
However, the comment by pfs should remind us that Milton Friedman was far closer to us than many other people are.
There are still many people out there who think that taxes on imports can "protect manufacturing" - so that they can have their pro union laws, their taxes and "entitlement programs" and have all the "antitrust" and other regualtions they want - and still have robust manufacturing.
There was even something that might have been from the German "Historical School" - the argument that because the United States had taxes on imports at the time of its economic advance, this advance must have been caused by (or at least not harmed by) these taxes - a simple denial of economic law. As for the historical point - it is quite correct that the 1931 increase in taxes on imports did not cause the bust (that was caused by the Federal Reserve Board supported credit money boom of the late 1920's) but the trade tax increase (and the tax increases on American exports that other nations introduced in reply) were one of the factors that turned the bust of 1929 into the Great Depression.
On deregulation - we have seen a situation dominated by price controls and "antitrust" (and many other) regulations called "deregulation".
On vouchers - there we see how the compromise offered by Milton Friedman (taking an idea from Thomas Paine) sadly leads nowhere.
Convinced collectivists are not interested in such compromises as "the government will still pay for education, but it will do so by handing out vouchers to parents". What such collectivists are interested in is total control (no doubt to teach everyone's children what a great man Hamilton was and so on).
The old "Barnburner" faction of the Democratic party in New York State were correct - if you reach out your hand in compromise to the supporters of government intervention (which is what Milton Friedman did, a century later, with his vouchers plan) they will cut it off.
Published: December 27, 2006 12:42 PM
Paul Marks
Eric has asked an interesting question. I would not consider myself an Austrian economist (I am an old history and political philosphy man who happens also to be a student of the Austrian school), but I will venture into this area - others will, hopefully, correct my mistakes.
What is the purpose of this "increase in the money supply" (whether it is achieved via the printing press or by credit money expansion)?
As Erik rightily points out, the new money is not just kept in a box somewhere - it is lent out.
In short (as Mises never tired of pointing out) the whole point of the scheme is to finance some borrowing by other means than real savings (i.e. income that people choose not to spend).
This violates one of the basic rules of the game (in the broad sense of the word "game"), i.e. that borrowing must be financed by real savings (not a shell game).
Normally at this point it is customary to make the distinction between "overinvestment" (what Austrians are accused of believing happens) and "malinvestment" (what Austrians actually believe happens) - please consider that distinction made (otherwise the comment will be of very great length).
However, there is another debate. What if the borrowing (the borrowing that is financed by the credit money expansion) is not for investment (i.e. capital goods) but is for consumer goods (as it seems to be in the United States now) - does this also lead to a boom-bust cycle? My position is that it does (although someone else might point that there is still a credit money expansion financed investment boom going on - in China).
"But what about my point about the steady X per cent a year credit money expansion"?
My point that this expansion is not just "maintaining" the business enterprises called into existance by the first credit money expansion - it is making the distortion of the capital structure worse each year.
For example there was no increase in "prices in the shops" in the late 1920's United States, but having the late 20's credit money expansion burst in 1929 was worse than having it burst in (say) 1927 - as there was a bigger credit money bubble to burst.
"But why have it burst at all?"
There are really two questions here. There is the idea of the late Lord Keynes to reduce unemployment by increasing "demand" (the credit money supply) - which really (although he did not say this) depends on constantly INCREASING the amount of credit money expansion (as workers are not stupid and notice that prices are rising in an effort to cut real wage rates) so one gets the classic price-wage catch up game going off into hyper inflation (all an effort to avoid restoring a real market by getting rid of such things as pro union laws).
But there is also a second question (which I think is Eric's question).
"Assume we have a free market, wages determined by freedom of contract and so on - why can not government introduce say 5% more credit money every year without there ever being a crash?"
Firstly it would do no good (even Milton Friedman, I believe, would not have argued that real incomes would be higher because of such a policy) and yes it would do harm - in that the captial structure would be distorted (some resources would be diverted from the places the market [i.e. the choices of millions of people] would send them, to where the credit expansion was sending them).
So people would be poorer than they otherwise would be, but would there be a formal crash?
I would say "yes" as such a financial system is an "accident waiting to happen" there is bound eventually to be some event that will knock the system into crash. As the "financial system" is not really the 5% (or whatever) extra credit money the Fed is producing at the macro level - it is all the individual banks and other financial institutions at the micro level and how they interact with both the central banking system, their client and each other (indeed to talk in terms of X per cent increase in the money supply overall is really missing what is going on). F.A. Hayek once wrote an essay (which is in his "New Studies" 1978 - I seem to remember that the essay title was something like "Three Elucidations of the Ricardo Effect") which compared the flow of credit money expansion to "not water but treacle" it tends to pile up in certain places (or rather in certain connected people's pockets) and it distorts and corrupts the whole structure. The RELATIVE distortions would keep getting worse - without any increase in the percentage growth of the money supply (however measured) each year.
However, that is far from the clear logical proof that Eric is looking for.
Published: December 27, 2006 1:26 PM
RogerM
Eric: "Assume we have a free market, wages determined by freedom of contract and so on - why can not government introduce say 5% more credit money every year without there ever being a crash?"
Reisman, in his book "Capitalism," describes how an economy on a pure gold standard would see the money supply grow by about 3% annually due to increased investment in mining for gold and advances in mining technology. His conclusion is that a constant 3% increase in the money supply would do nothing more than keep prices from falling on average. Reisman's analysis isn't too far from Friedman's recommendation and answers Eric's question.
The real problem seems to be that the Fed can't actually control the money supply. We older guys can remember when the Fed responded to Friedman by targeting money supply growth in the early 1980's and they failed miserably. So have the Europeans. So they gave up.
I believe the Fed can't control the money supply because a change in reserves in fractional reserve banking produces nonlinear changes in the money supply. With 20% reserves, a $1 in new deposits can create $5 in new money. Lower reserve amounts create even more money; higher reserves less. Defaults on loans have a similar nonlinear effect. This makes controlling money like herding cats.
The goal should be to get rid of fractional reserve banking, first. That would end the boom-bust business cycle. Then the Fed might actually have control over the money supply and Freidman's computer might actually work.
Of course, a gold standard would be better, but even under a gold standard the money supply would increase, as Reisman points out. But if the money supply increased at a low, steady rate, much of the malinvestment would be eliminated because entrepreneurs would know what to expect and how to plan. It's the sudden, unexpected burst of new money that destroys the plans of entrepreneurs and causes malinvestment.
Published: December 27, 2006 2:18 PM
RogerM
In Friedman's defense, we might view him as the necessary bridge between Keynes and Austrian economics. Keynes had taken economics so far afield and created such a gulf between his economics and Austrian econ that the two would never have met had Friedman not introduced his monetary theories. Thanks to Friedman, Austrian econ became respectable again in mainstream econ. It's encouraging to see more and more economists, especially Fed economists, coming over to Austrian thinking. But I don't think that would have happened without Friedman.
Published: December 27, 2006 2:22 PM
Björn Lundahl
The Emperor's New Clothes
People are led to believe that trade restrictions between regions or countries “create jobs at home”, which they certainly do not. If people had the opposite belief that “free trade” between regions or countries “creates jobs at home”, that would also be an incorrect belief. Trade restrictions or free trade does not cause unemployment or cause employment in a region or country. Trade restrictions only lower the standard of living, hamper competition and restrict liberty. If for instance, the EU imposes tariffs on Chinese textiles, the Euro will appreciate against the Chinese Yuan (the value of the Euro will increase relatively to the Chinese Yuan). This depreciation (decrease in value) of the Chinese Yuan against the Euro, in this example, is caused by a smaller demand for Chinese textiles and therefore a smaller demand for Europeans to buy the Chinese Yuan. Because of this change in exchange rates, prices of goods from the EU to China will be generally higher and prices of goods from China will be generally lower (apart from textiles). As you can imagine, this will increase employment in the European textile sector, but decrease employment in other sectors. At the whole, unemployment will not change but trade between the regions will be lower. Specialization, competition and living standards in the EU region will be hampered. The tariffs will only serve special interest that is the textile manufacturers and their employees. Surely, we want our representatives to serve the common good and the common man and not special interests!
Someone might complain that the Chinese are intervening in the exchange markets to keep their currency artificially low and that they are not letting market forces to appreciate their currency, and therefore my statement about free trade, in this case, is not applicable. Free trade, someone might think, is presupposed by freely fluctuating currencies with no Government intervention (also called clean floating exchange rates). Certainly I do not want Governments to intervene in exchange markets, but actually it is the Chinese that are in this case the losers and we are the winners. We should be glad that China is suppressing the rise of its currency, and the Chinese people should be mad about it. When market prices indicate that, for example, a project is unprofitable; investors naturally stop investing in such a project. Otherwise, factors of production such as land, capital, and labour would be wasted. Every government manipulation of market prices is a step toward economic breakdown and chaos. Land, capital, and labour that are invested in the exporting business in China because of a suppressed currency, have changed the economic structure in China and are mal investments, unprofitable for the nation to undertake, and we are getting something free. We don't need to export anything to pay for this "extra importation of Chinese products”. To make my statement more obvious, we could consider that if the Chinese currency would be suppressed to no value at all (which would not be possible to realize), the Chinese would be working for nothing and we would get goods and services from China for free (which is, naturally unprofitable for China to undertake), then the market forces in the EU (if market forces would not be hindered by Governments) would reallocate land, capital and labour for other uses and to those fields which the Chinese are not able to compete (even if the Chinese were working and exporting to full capacity, that will not, by far, be enough to satisfy all our wants, in other words, their GNP is by far, too small). The increases in production which mentioned reallocation of recourses leads to are our extra bonus. We should applaud this and the Chinese people should revolt!
If you want to know more about floating exchange rates, go to;
http://www.hooverdigest.org/974/friedman.html
Productivity and trade will flourish more intensively with one currency* than with several different currencies, and even with one currency, market forces will smoothen out any imbalances between regions, cities or countries. We do not worry, for example, about the balance of payments between London and Manchester, Berlin and Munich, Paris and Bordeaux or Stockholm and Göteborg etc. If, for example, London exports more to Manchester than Manchester exports to London, the demand for goods and services will be greater in London relatively to their supply, and also relatively to the situation in Manchester. Because of this, prices will go up in London and therefore will exports from London to Manchester contract, as well as, imports from Manchester to London will expand. This happens all the time and we do not even know about it and therefore do not worry about it. Governments do create problems all the time.
If we really want increased competition, why not adopt free trade between nations. Why does the EU and the USA not follow that path? The reason is that they do not want increased competition.
For an example, I quote from answers.com;
“In the United States, the decade from the mid-1980s to the mid-1990s saw import quotas placed on textiles, agricultural products, automobiles, sugar, beef, bananas, and even underwear—among other things. In a single session of Congress in 1985, more than three hundred protectionist bills were introduced as U.S. industries began voicing concern over foreign competition”.
Go to;
http://www.answers.com/import+quotas?gwp=11&ver=2.0.1.458&method=3
Only Governments can be so silly to reject great offers and bargains. Individuals doing the same thing would be considered mad.
The essence with above statement is that Governments hinders competition, lower our standard of living, promote special interests and they make excuses for this with faulty theories and propaganda.
Björn Lundahl
Göteborg Sweden
* A gold standard. See also “What Has Government Done to Our Money?” by Murray N. Rothbard.
http://mises.org/money.asp
Published: December 27, 2006 3:21 PM
Björn Lundahl
Friedman believed that it was a need to increase the money supply as fast as the average output of goods and services in an economy. This was based on faulty empirical observations; when economies did not expand the supply of money, recessions occurred and after a while also deflations. Conclusion: Increase the money supply as much as output, then recessions and deflations will not occur or, at least, not very severe ones.
We, believers in Austrian economics reject empiricism as a methodological way of finding out causations in social sciences such as economics. We do believe that the use of empiricism will lead to wrong conclusions, for example, as the one I have stated above. We believe in rationalism.
Well, we know that an increase of the money supply caused by fractional reserve banking and by the central bank will inevitably lead to a recession or a depression.
An increase of the gold supply in a 100% gold reserve money standard will not cause a business cycle.
If the gold supply will, on the average, increase as much as total output in a 100% gold reserve money standard or not, is not a praxeological fact but a speculation. It might be a relatively good speculation, but it still is a speculation. Technological advancements have, of course, been going on since the beginning of the industrial revolution.
Historically, prices have on the average fallen when economies were on a gold standard and those economies were not even based on a 100% gold reserve money standard.
Deflation defined as increases of the purchasing power of money is not, at all, harmful for the society and the economy.
Rothbard saw falling prices as a natural condition of a market economy, For a New Liberty:
“Thus, falling prices are apparently the normal functioning of a growing market economy.”
http://mises.org/rothbard/newliberty9.asp
Björn Lundahl
Göteborg, Sweden
Published: December 27, 2006 5:11 PM
Eric
(Mises.org: please consider a simple "newline" means paragraph, possibly a selectable formating checkbox. I don't think many make use of much html formatting, and the gymnastics I need to compose and spell check lead to no end of mistakes.)
RogerM: Thank you. Your point about gold increasing was something I hadn't considered. Your explanation seems quite logical to me.
I think the Austrian school comes the closest to a logical explanation of economic principles, but I doubt it is 100% correct. The insistence on using logic only, i.e. no math, and sometimes no evidence, is the area where I think they lose the most support from outsiders. I’m still wondering why we haven’t seen the hyperinflation predicted by Mises, and if theory can’t predict events based on actions, then I’m not sure what good the explanation of the past is. A one time only theory won’t help us much with the future.
I was never comfortable with Friedman’s explanation of the Depression, though I’m not able to fully understand Mises or Rothbard, since at the time there was still a gold standard. I get lost as to how there could be this great increase in the money supply during the 20’s (Rothbards “cause” of the Depression) when one could still demand gold from the treasury for paper money. The FED now can create money at will in the FOMC by simply writing a check on “thin air”. But what was it able to do in the 20’s?
But I fully appreciate that Friedman’s plan would be up against the whims of politics, and that unless he was a complete dictator, his ideas would get turned on their head as the politicians simply found a way to morph his ideas to their own use.
Published: December 27, 2006 6:50 PM
rtr
Eric,
You also have to keep in mind "the money supply" is not being increased by government. The "fake coerced fiat money supply" is being increased by government. Every dollar bill may as well be a monopoly money dollar bill with the words "legal tender" imprinted upon them.
1.) What restraint is there upon the printing of fake paper money? There is absolutely none. If you were to look at the expansion of US money supply from the early 1900s to now is it anywhere near a constant steady increase? I'll bet less than 1% know how much the money supply has increased and has been increasing. Hell, in March of 2006 the Fed no longer publishes M3. And I can't find any data on the federal reserve site pre-1959 like I used to be able to (guess it was too inefficient to take up those extra couple hundred lines of text).
At the beginning of 2000, M3 was 6630.9. In Feb '06 M3 was 10276.1, up 55% in a mere six years. Hmmm, kinda like the price of houses.
At the beginning of 1959, M3 stood at 292.0, by the beginning of 1969 M3 stood at 612.1, up 110% in that decade. The data used to be easy to find for the early 1900s to the present so you could say look at the decade of the 1920s, but I can't find it searching right now.
But a 55% absurd surge in the money supply in six years isn't starting to border on an absurd hyperinflation?
2.) People malinvest on expectations. Mortgages were made by calculating what, 10% annual increases in the prices of homes? What happens if prices remain flat or decline and interest rates rise? Crash.
3.) People speculate on expectations. See #2.
But you answered your question with an assumption:
'But suppose that money keeps coming at a steady (percentage money created) clip. Wouldn’t these marginal players continue in business, provided their "subsidies" aren’t removed, as Friedman has written?"
Suppose it doesn't. My monopoly money is good to buy your labor and goods right? Even if I can't force you to accept it? I got my xerox machine all ready to go to pay you for your stuff and labor.
Proved.
Increasing fake money doesn't increase real goods or real wealth or real productivity in the slightest. All you have to do is use your mind to follow that flow of exchange of real goods and real services from each new fake dollar introduced. By definition, it's a hot potato nobody wants to be holding when the music stops. It didn't come into existence by the voluntary free market. If the Mafia Don dies and the organization no longer has the power to collect their 10% protection money from you, are you going to keep sending a 10% cut of your production to his kids?
Published: December 27, 2006 7:16 PM
Eric
rtr: hyperinflation, as I normally think of it is like in Germany in the 20's. 55% in 5-6 years is only 10% a year. I would think that numbers like 100% a week, or month, or maybe a year is what Mises meant by hyperinflation.
My point, and I don't know if it's Friedman's as well, is that history has shown that governments don't often reverse course and anything that could even pause them for a while or in the (probably) best case stagnate them for decades is all we can hope for.
If you see any way to stop the FED (Ron Paul is our only politician that even wants to) then go for it. I'm getting older and I've stopped even thinking it could happen short of a total economic collapse. And then, we'd probably get another FDR to just make things worse.
Published: December 27, 2006 7:29 PM
rtr
Well we could probably also look at other examples besides 1920s Germany I would think, like the several South American examples. They were "legal tender" currencies too that failed. People stopped accepting the currency in trade. There's historical examples galore of precisely that. I think that's enough to show total collapse, let alone boom and bust business cycles.
It's simple economics of trade. Why does trade occur? Because what you receive is valued more than what you give away in exchange. That's always at every point in time a universal law of economics. Every new dollar is in a marginal way busting everyone else who did not also get an extra free dollar at that same time. And it's a boom for everybody who gets those extra free dollars first. But (one of) the wrong assumption Friedman made is that voluntary acceptance of fake paper fiat currency is a guaranteed continuity. As soon as it is not voluntarily accepted or cannot any longer be forced, massive systemic collapse of trade occurs. You're back at barter. Savings in the currency are worthless. Etc.
I'd love more research on micro actions (like hoarding, transferring to other countries, etc.) regarding curency collapses rather than "macro" numbers like how much new fake money was being printed per unit of time. Why do things like panics and crashes occur at the precise moment they occur and say not 5% or 1% sooner? We don't know. Information doesn't flow evenly and simultaneous, like the fiat money. But at some point it becomes obvious I'm trying to buy your stuff and labor by running a xerox machine that's churning out monopoly money.
Published: December 27, 2006 7:57 PM
rtr
What do you do if you can't stop the Fed? How about buying 2 houses instead of 1 and booking extra "profits" on the second house? Buy a few condos too before they even break ground on the construction. Boom. Bust.
Published: December 27, 2006 8:03 PM
Gilles P.
Well, I have always been fond of economists who tell us to beware of so-called intellectuals saying government can solve all our problems. Milton Friedman has always believed "freedom to choose" is always the best solution ( maybe it is due to asymetrical information). At university I was very fond of him and his many theories even though sometimes I found them a bit too simple (eg. increase money supply at a fixed rate whatever the economic conditions, I think central bank monopoly is the problem as it creates or contributes mostly to business cycles i.e booms and recessions a kind of artificial phenomenon).
His greatest contribution I think is to make many people think that there are other valid economic schools of thought apart from Keynesians, Neo-keynesians etc..
Preventing governments from getting too big and inefficient ( or more inefficient) is going to be a never ending battle, we must all stay vigilant.
Published: December 28, 2006 9:52 AM
Björn Lundahl
I believe that it is only the Austrian School of Economics that actually do deliver true propositions. For instance “Human Action” and “Man, Economy & State” are utterly full of economic facts. Those books are really amazing. Propositions made in them are quantitatively and qualitatively superior to those economics books that are, typically, used in the universities.
The Austrian school won’t use maths as a tool as maths cannot deliver anything more than pure verbal logics. Actually, it will only mess things up and make economic inquiries look more complicated than what they are.
In other words:
“Occam's razor states that the explanation of any phenomenon should make as few assumptions as possible, eliminating, or "shaving off," those that make no difference in the observable predictions of the explanatory hypothesis or theory. In short, when given two equally valid explanations for a phenomenon, one should embrace the less complicated formulation. The principle is often expressed in Latin as the lex parsimoniae (law of succinctness).“
http://www.answers.com/Occam's+Razor?gwp=11&ver=2.0.1.458&method=3
Empirical inquiry will not either be of any help, as this tool will only deliver hypothesis.
The entire lifetime work of Friedman including his book “A Monetary History of the United States, 1867-1960”, can be easily and praxeologically refuted and supported in only a few chapters by Austrian economists such as Mises, Rothbard and Hoppe.
Friedman suggested, for example, that increases of the supply of money that are larger than total output will after a lag of about 18 months increase inflation as much as the initial net increases of the supply of money (i.e. the total increase of the supply of money minus the total increase of output), is easily refuted by an Austrian economist. An Austrian economist will, with the help of verbal logics grounded in a few self evident axioms, support the view that another factor also influences inflation and this is that the demand for money might change and need not, logically, be the same as it has been observed to be empirically and that predictions like that are not, therefore, really scientific.
Björn Lundahl
Göteborg, Sweden
Published: December 28, 2006 2:53 PM
Björn Lundahl
The purchasing power of money, the gold standard and fiat money
I quote from the book “Democracy The God That Failed”, by Hans-Hermann Hoppe, page 58:
“During the monarchical age with commodity money largely outside of government control, the “level” of prices had generally fallen and the purchasing power of money increased, except during times of war or new gold discoveries. Various prices indices for Britain, for instance, indicate that prices were substantially lower in 1760 than they had been hundred years earlier, and in 1860 they were lower than they had been in 1760. Connected by an international gold standard, the development in other countries was similar. In sharp contrast, during the democratic-republican age, with the world financial center shifted from Britain to the U.S. and the latter in the role of international monetary trend setter, a very different pattern emerged. Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800. In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971 it was 255, by 1981 it reached 658 and in 1991 it was near 1,000. During only two decades of irredeemable fiat money, the consumer price index in the U.S. rose from 40 in 1971 to 136 in 1991, in the United Kingdom it climbed from 24 to 157, in France from 30 to 137, and in Germany from 56 to 116.
Similarly, during more than seventy years, from 1845 until the end of World War I in1918, the British money supply had increased about six-fold. In distinct contrast, during the seventy-three years from 1918 until 1991, the U.S. money supply increased more than sixty-four-fold.”
Björn Lundahl
Göteborg, Sweden
Published: December 29, 2006 6:05 PM
Björn Lundahl
“I wish to play devil’s advacte and would like to hear what was wrong with Friedmans so called "replace the FED with a computer" idea:
But suppose that money keeps coming at a steady (percentage money created) clip. Wouldn’t these marginal players continue in business, provided their "subsidies" aren’t removed, as Friedman has written?
If instead of panicking at the start of price inflation, and slowing down the rate of monetary inflation – leading to a slump, the FED instead kept it at a constant pace, then why would we have to keeping spiraling up the money inflation as Mises and Rothbard predict? And why will this lead to a hyperinflation in "all" cases, as predicted by Mises.”
Björn If the money supply increases at a constant rate the “positive” effects will, to a certain degree, cease to exist. Rothbard assumes, but not as a fact, that politicians and central banks do want to preserve the “positive” effects. If that is so, they will continue to accelerate the growth of money and then you will, eventually, have hyperinflation. Naturally, Rothbard was very aware of the fact that you cannot know in advance what anyone will, as a fact, do.
I think the following will illustrate Rothbard’s thoughts about “constant increases of the money supply”, from the book America’s Great Depression:
“Since it clearly takes very little time for the new money to filter down from business to factors of production, why don't all booms come quickly to an end? The reason is that the banks come to the rescue. Seeing factors bid away from them by consumer goods industries, finding their costs rising and themselves short of funds, the borrowing firms turn once again to the banks. If the banks expand credit further, they can again keep the borrowers afloat. The new money again pours into business, and they can again bid factors away from the consumer goods industries. In short, continually expanded bank credit can keep the borrowers one step ahead of consumer retribution.”
http://mises.org/rothbard/agd/chapter1.asp#boom_and_depression
As I have above stated, Friedman erroneously thought that the economy “needed” increases of the supply of money. If he did not believe so, his prescription would, probably, been very different.
Because of this fact, Friedman never wanted to go back to gold:
“Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.”
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm
Why should we have central banks and fractional reserve banks that mess things up in the first place? Why should we have malinvestments just for the sake to please some perversive lust for power and fraudulent money? Do we really want to have malinvestments? What is the justification?
Björn Lundahl
Göteborg, Sweden
Published: December 30, 2006 5:47 AM
Björn Lundahl
Increase of gold supplies does not either cause business cycles in a 100% gold reserve money standard.
America’s Great Depression:
“The potential range of such cyclical effects in practice, of course, is severely limited: the gold supply is limited by the fortunes of gold mining, and only a fraction of new gold enters the loan market before influencing prices and wage rates.”
Read the rest “Gold Changes and the Cycle”:
http://mises.org/rothbard/agd/chapter1.asp#problems_in_the_austrian_theory
An Animated Introduction to the Philosophy of Liberty:
http://www.isil.org/resources/introduction.html
The animation in full-sized window:
http://www.isil.org/resources/introduction.swf
Björn Lundahl
Göteborg, Sweden
Published: January 1, 2007 5:22 PM