True measure of monetary man

Inside Thatcher's Monetarist Revolution - People
October 23, 1998

Milton Friedman is one of the most controversial and influential economists of the 20th century. This long volume is his own account of his ideas and his experiences, from his early years in Brooklyn, the fourth child of poor immigrants from eastern Europe, to his current eminence.

His wife and co-author, Rose, features strongly in the first half of the book. A substantial scholar in her own right as a young woman, in keeping with the values of the times, she subsequently devoted most of her energies to her husband and family. The strength and affection of their 65-year relationship runs as a charming Mills and Boon-like sub-theme throughout.

The book flows like a well-structured conversation interspersed by flashes of Friedman's dry humour. Particularly towards the end, it reads almost like the accounts of the travels of two elderly Americans, except in the case of the Friedmans their days are filled with visits to the governor of the central bank or the president of the country.

This book deserves to be read by a much wider audience than just economists. It provides fascinating insights into how innovative ideas emerge, into how the mind of an original thinker operates. It is qualities such as this rather than the specific economic details that are of interest to the more general reader.

But above all, for academics of any discipline, the book is a testimony to the importance of ideas themselves and of the requirement on scholars to take a stand on the basis of their scientific judgements regardless of the prevailing orthodoxy. A fervent belief in monetarism and free markets is now de rigueur among the policymakers of the world. But for much of Friedman's life, he was usually in a small minority.Friedman's views may be disliked or even hated by many, but as a person he is witty and amusing, albeit in a rather caustic way. One anecdote will suffice. In his early years, through no fault of his own, he became embroiled in faculty politics. This led him to observe: "Let a member of an academic department win a prize of millions of dollars in a lottery, and his colleagues will clap him on the shoulder. Their reaction will be less generous if the new-found wealth comes from a best-selling book, but it will not compare to the reaction of his getting a better raise than they, or being assigned a better office."

It will come as a surprise, even perhaps to some economists, that Friedman's scientific work has embraced far more areas and concepts than that of monetarism, the idea with which he is indelibly linked in the public mind. But even here, his earlier academic work is serious and substantial. One of his crucial arguments is of direct relevance to the world today, as the global economy teeters on the brink of a serious recession. John Maynard Keynes argued in the 1930s that the Great Depression - far more devastating in the US than in Britain, with output falling by 30 per cent - demonstrated the limits of monetary policy. Friedman's A Monetary History of the United States, 1867-1960 expressed the then deeply unfashionable view that the recession was mainly due to a failure of monetary policy by the US Federal Reserve. During the 1929 to 1933 period, the US authorities reduced the money supply by one-third, causing a devastating squeeze on the economy. Friedman argues that they should have increased the money supply instead.

In practice during recent decades, the Federal Reserve has followed Friedman's precept, whereas in contrast the new European Central Bank appears determined to repeat the mistakes of the 1930s.

As early as 1954, Friedman argued that a recognition of the essentially monetary nature of the Great Depression meant that catastrophic slumps could in future be avoided. The key reason for this was, as he puts it, "the shift in the intellectual atmosphere from a fear of inflation to a fear of, and determination to avoid, true depression at any cost".

In popular perception, Friedman is associated with prescriptions to cut the money supply, yet his scientific work shows that he himself does not always take that view. Once the economy is moving into a serious recession, drastic monetary expansion is needed.

For many years, Friedman has argued that short-term forecasting is inherently too inaccurate to provide a basis for policy interventions designed to fine-tune the economy. Keynes's position on this was much closer to that of Friedman than to that of many of his subsequent disciples. And in recent years, developments in the signal processing of noisy data have enabled strong formal evidence to be provided for this proposition.

The failure of short-term forecasting is the underlying theme of Gordon Pepper's book on economic policy in the United Kingdom over the past 20 years. This is much more a book for the specialist, consisting as it does largely of details of the various short-term economic forecasts over this period and the substantial errors that have been made. As such it is an invaluable source of reference and a useful antidote to anyone who might be tempted to attach importance to the pontifications of forecasters in the media.

Pepper confirms that in terms of forecasting accuracy over a period of years, no single school of economics has a better record than the others: all make large mistakes. Paradoxically, his conclusions reinforce the serious and known weaknesses of the theory that inflation is purely a monetary phenomenon. Not least of the problems that Pepper documents is that different measures of the money supply often give quite contradictory readings about what is actually happening. During a major "event", as Pepper terms it, such as a deep slump or massive boom, there is no problem. But most of the time, monetary data do not give a clear-cut picture of the path of the economy.

Friedman's Nobel prize was not awarded for his more populist and somewhat evasive pronouncements on monetarism. He has made substantial contributions to a wide range of problems, including statistics, in which he specialised as a young man. One of the most fascinating chapters of his memoirs discusses the Statistical Research Group in Washington DC during the war, where a team of brilliant statisticians made recommendations that made a real difference to the war effort. Fighter planes entered combat with guns loaded according to their recommendations on mixing ammunition types; rockets were launched whose propellants were checked by innovative sampling inspection techniques; optimal settings on proximity fuses for air bursts of artillery shells against ground troops were calculated - to give just a few examples.

It was there that Friedman acquired a life-long scepticism about the value of multiple regression, a lesson that the current hordes of publicly funded econometric number crunchers would do well to learn. The performance of alloys was crucial to high-speed aircraft performance, and the young Friedman assembled a mass of data expressing the time to fracture under heat of alloys as a function of a number of physical characteristics. It would have taken a skilled operator at least three months to calculate the regression, but Friedman obtained access to the then most powerful computer in the country, and 40 hours later the result emerged. It fitted the data extremely well on every test then known. Excitedly, he specified the components for two super-strength alloys, which were immediately tested in an MIT lab. Despite the equation's prediction of a life of several hundred hours, they broke in less than four.

His views on the role of mathematics in economic theory are also instructive to today's calculus-obsessed scribblers. Friedman's judgement coincides not just with that of Friedrich Hayek, which might be expected, but also with that of Keynes. In his early years, he learned to "question the assumption, which is made a priori by economists, that no economic series or distribution ever has a discontinuity in the first derivative - or probably any other derivative either". As a teacher - a role to which he attached great importance throughout his working life - Friedman consciously worked by the precept of Alfred Marshall: economics is "an engine for the discovery of concrete truth" and not a branch of mathematics. Friedman regards price theory, for example, as "a powerful weapon in the understanding of economic behaviour, not simply a set of elegant theoretical exercises suitable for instruction and the demonstration of one's mental agility".

Friedman has attracted a great deal of controversy, but his views are often unexpected. For example, he was a strong opponent of the Vietnam draft, and he has argued vigorously for the legalisation of drugs. Even when his policy prescriptions cause liberal hackles to rise, such as privatising schools with vouchers, his ends if not his means would be met with approval at even the most "third wayish" of Islington dinner tables. He argues that the increasing stratification between skilled and unskilled is so serious as to "threaten the social stability of our society", and better education is the only effective solution.

Overall, Friedman's memoirs give a fascinating insight into an unusually gifted thinker. His association with the policies of monetarism distorts his scientific achievements. And ironically, Pepper's book provides useful evidence as to why monetarism as such is flawed.

Paul Ormerod is chairman, Post-Orthodox Economics.

Inside Thatcher's Monetarist Revolution

Author - Gordon Pepper
ISBN - 0 333 71839 9 and 72012 9
Publisher - Macmillan
Price - £15.99
Pages - 215

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