Remember the economic anti-christ

Milton Friedman (1912-2006)

Milton Friedman is no more among the living. A loss to all those that value the truth, no matter how inconvenient, above the doctrines, the beliefs that we cherish make the world acceptable to us. To many Friedman was the economic anti-christ. Wasn't he the man behind heartless Reagan - government is not the solution, but the problem - and Thatcher - there is no such thing as society ? He was not. At least not the man that advocated some of the more strident policies of those transatlantic Cold War buddies. He was the staunchly free-market propagandising economist that once wrote 'the only business of business is business', to maximime profits? Well. He was. But, he should really be seen as a rebel. A man that did not just accept the dominant doctrine of his time, but actively tried to poke holes in that theory. And succeeded. He was vilified for his 'monetarist doctrine'... but it is my firm believe that his doctrine will in the end prevail. Contrary to what many people think, the central role of central banks in our economies - at least in the eyes of the professional beholders.. the many professional analysts and commentators that follow the musings of central bankers like Bernanke and Trichet like the "Kremlin Watchers" of old - is not a testament to Friedman's monetarist doctrine. For Milton Friedman did not like activist central banks... central banks that tried to steer the economy by frequently adjusting their (interest rate) policy. His idea was simple: let the amount of money grow by a fixed amount every year and the economy will become more stable and inflation will never become out of control if the growth of money is limited. No frequent small adjustments after long deliberations anxiously watched by hordes of analysts. Just a simple rule that will take out all the second guessing by all those 'professional' economists that spend so much time trying to find out what central bankers consider to be the state of the economy, instead of just trying to find out what the demand for money at the moment really is. Of course central bankers don't like this simple rule. It would give them little to do. It would make them quite jobless. But let us be honest: wouldn't the world be better of with a few more doctors or gardeners and a few less game-playing economists? After all, the rate of unemployment in an economy cannot be permanently lowered by just manipulating the rate of growth of money. That mr Friedman and his followers have proven quite decisively by now. And one can add: Keynes would probably have agreed.
Another great insight we can derive from Friedman (and from Bernanke, the successor to Alan Greenspan, a demi-god in the eyes of many financial market participants... but blower of bubbles according to this economist who thinks we will come to be very sorry for Greenspans' last several years of policy-making...) is that central banks may actually not have succeeded in stabilising economies, but in the case of the (American) Federal Reserve actually have greatly contributed to the Great Depression of the 1930's (and the recession of 1921). In "A Monetary History of the United States 1867-1960" Friedman demonstrated (as did later papers by Bernanke) that it was the concious decision by the Federal Reserve to let the banking system shrink - because the Fed considered there to be too many weak banks - that actually caused the Depression and a later decision to restric the money supply nipped an incipient recovery in the bud. In the many crises that preceded the founding of the Federal Reserve (previous central banks were disbanded) the economy never sank as deep, because co-operating commercial banks ensured that the banking system never really collapsed... something the Fed actually willingly engineered. So much for the stabilising role of the US Federal Reserve...