Krugman writes of economist Milton Friedman that a convincing case is made that “Friedman was indeed more or less a Keynesian”, then goes on to write:
What I think is really interesting is the way Friedman has virtually vanished from policy discourse. Keynes is very much back, even if that fact drives some economists crazy; Hayek is back in some sense, even if one has the suspicion that many self-proclaimed Austrians bring little to the table but the notion that fiat money is the root of all evil — a deeply anti-Friedmanian position. But Friedman is pretty much absent.
Let’s turn that little attack on Hayek around, shall we? To wit: Keynes is very much still around, even if many self-proclaimed Keynesians bring little to the table but the notion that wealth can come from a printing press.
True, the Austrian thinking is very “anti-Friedmanian”. Friedman believed in the Federal Reserve. He thought it should exist and that it should print money out of thin air in order to keep prices “stable”. Further down, Krugman continues:
Friedman was an avid free-market advocate, who insisted that the market, left to itself, could solve almost any problem. Yet he was also a macroeconomic realist, who recognized that the market definitely did not solve the problem of recessions and depressions. So he tried to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities as possible. Yes, he in effect admitted, we do need stabilization policy — but we can minimize the government’s role by relying only on monetary policy, none of that nasty fiscal stuff, and then not even allowing the monetary authority any discretion.
Krugman is oblivious to his self-contradictions here. Which was it? Friedman was an avid free market advocate who insisted that the market could solve its own problems, or Friedman was anti-free market and believed that government should legislate the existence of a monopoly power over the supply of currency and credit that should determine interest rates rather than letting this price be determined by the market? He couldn’t possibly have been both. Of course, the answer is Friedman was the latter.
Krugman also writes:
Ben Bernanke concluded a speech praising Friedman with the famous line,
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Best wishes for your next ninety years.
Krugman doesn’t deny that the Fed caused the Great Depression, but then writes,
Friedman’s claim that the Fed could easily have prevented the Great Depression now looks highly dubious.
Well, how could the Fed not have easily prevented the Great Depression simply by not doing what it did that caused it?
Keep that in mind, as Krugman continues:
So he tried to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities as possible. Yes, he in effect admitted, we do need stabilization policy — but we can minimize the government’s role by relying only on monetary policy, none of that nasty fiscal stuff, and then not even allowing the monetary authority any discretion.
At a fundamental level, however, this was an inconsistent position: if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro?
Say, wait a minute, there, Krugmeister! I thought you just pointed out how Friedman thought the Fed caused the Great Depression. So why do you begin your question with the premise that the free market somehow caused it?
Friedman was right, of course, that the Fed caused it, not the free market. But he was wrong about how. His argument was that the Fed didn’t do enough and should have printed even more money. Which was, of course, what caused the Great Depression.
So let’s turn Krugman’s question around, shall we? To wit: If the Fed can go so wrong that it causes Great Depressions, how can you be a believer in government central economic planning?
Update, 8/16/13: Krugman repeats this theme from his blog in his regular column. My comments remain the same.