The Academic Scribblers: Third Edition

MILTON FRIEDMAN CLASSICAL LIBERAL AS ECONOMIC SCIENTIST Little manwhipa bigman everytime if thelittle man's inthe right and keeps a'comin'. Motto of the Texas Rangers The intellectual revolutions that we have been describing in this volume were spawned from what their architects took to be empirical evidence. Pigou, Veblen, and Chamberlin were convinced from their observations that the assumptions of neoclassical economics were unrealistic; thus, they attempted to develop new and more relevant theories for their own time. But itshould beclear thatnosingle eventin thehistory of theUnited States had moresweeping impacton economicthought than the Great Depression. Through the commentaries of Keynes, Hansen, and Ler­ ner, academic thinking on economic matters underwent an upheaval, whose suddenness can be compared to no prior change in the develop­ ment ofthe discipline.These mencast intodoubt thecentral coreof the monetary and employment theories of neoclassicism: the quantity theory of money andSay's Law. In retrospect, the successof these men is perhaps notsurprising. Theseeming inability of the Federal Reserve System to bring respitefrom theeconomic collapseof the 1930's threw into disrepute long­accepted propositions about the role of monetary factors ineconomic change which thequantity theoryhad propounded. Idle land and capital, coupledwith the destitution of more than twelve million unemployed people, seemed to belie the logical beauty of Say's Law. The new economics of Keynes provided a diagnosis and a remedy. The problem was to increase the flow of aggregate demand, mainly investment, which (through the Keynesian multipler, aided, perhaps, by a Hansen­Samuelson accelerator effect) would lead to a magnified [3.145.16.90] Project MUSE (2024-04-26 07:41 GMT) 224 The New Neoclassicism increase in the flow of income. The quantity theorists' belief that the level of money income and the price level were largely determined by the stock of money was held to be true, if at all, only in periods of full employment. Alvin Hansen's confident prediction that the great issue of the future was to be secular stagnation led him and his influential students to advocate easy monetary policy, but only as a means of keeping interest rates down. The point was toavoid interferingwith the increasing governmentinvestment thatalone couldoffset theslide into economic maturity. In addition, Abba Lerner's functional finance pro­ vided the set of instruments needed for government to do the fine­ tuning that would restore the economy tofull employment. Almost all agreed that the stock of money was the inert companion of the real economic force of increasing investment. At Chicago, Henry Simons demurred. Though he attacked with vitriolic fervor the notions of Keynes—and especially Keynes a la Hansen—hiswords did littletostem thetide inthe late1930'sand early 1940's. It remained for one of Simons's students to contribute the analytical depth, scientific precision, and empirical arguments that alone could effectively challenge the Keynesian orthodoxy of the new economics. This student was Milton Friedman, the son of Jewish immigrants from Ruthenia (at that time part of the Austro­Hungarian Empire). From such inauspicious beginnings, Friedman was to eventually help set theagenda forthe majoreconomic debatesof the post­World WarII era. The movement away from the monetary implications of neoclassi­ cal economics was to be brought to a standstill by the empirical research and theoretical argumentsof this brilliant economist. Noone testifying before congressional committees investigating economic affairs was listened towith more respect.Accounts of his performances before sessions of the Joint Economic Committee and the Committee on Banking and Currency make fascinating reading in the art of persuasion that would have been relished by Keynes himself. Friedman's testimony at such proceedings have the aspect of a classroom seminar, with the senators and congressmen his attentive students. After one particularly difficult session in which Friedman explained his new version of the quantity theory of money through a series of equations in the clearest possible terms to the hushed assem­ bly of senators and congressmen, the following colloquy took place: The Chairman: Mr. Friedman, the Federal Reserve Board loves to brief Senators and Congressmen on economic affairs in order to diminish our economic ignorance, and so does the Council of Economic Advisers. I wonder if we couldarrange aseminar in whichyou could briefthese gentlemen on these equations. I will be glad to invite them and have you brief them on these equations, if you would be willing to come and, of course, we will pay you an honorarium for it. 225 Milton Friedman I think an advanced course for the Federal Reserve and possibly even the Council of Economic...