Tuesday, July 30, 2019

Milton Friedman

July 31st is the birthday of Milton Friedman (1912-2006), one of the giants of American Economists and called, "the Godfather of Conservative Libertarianism" - hat tip to Ammo.com who regularly sends me ideas for posts.
Milton Friedman is the Godfather of American conservative libertarianism.  He was, at a time when it was deeply unfashionable in official circles, a fierce critic of Keynesian economics. He was a leader of the second generation of libertarian economists to come out of the University of Chicago. Among the people recruited or mentored by him at the university include Thomas Sowell, Gary Becker, Robert Fogel and Robert Lucas, Jr. Friedman often used the jargon and methodology of Keynesians while rejecting their basic premises, coming to very different conclusions than his Keynesian counterparts.
I know that over the years I've devoted hundreds of articles to bashing Keynesian economics as opposed to the older ideas of money being tied to a physical standard, whether the silver or gold standards that go back the hundreds of years of paper money (before that money often was only silver or gold coins), or to something more late-20th-century like a combination of commodities.  Almost anything except for money created created out of thin air.  I just know of no historical examples where fiat money has survived long term - the world has been off even the most perfunctory gold standard for not even 50 years and the signs of economic "mess" are everywhere.  Fifty years isn't "long term."  John Maynard Keynes himself once famously said, "The long run is a misleading guide to current affairs. In the long run we are all dead", as a counter to the argument that his policies would lead to destruction in the long run. 

For those unfamiliar with the term, a fiat means "a command or act of will that creates something without ... further effort" and when used in the term "fiat money" means money declared to exist, not something that is inherently valuable to people.  We can buy things with paper dollars because people believe them to be usable for exchange, but in the future those dollars are generally worth less.  I can see why that's the case in one of the few things I disagree with Friedman about.  
One of his groundbreaking theoretical innovations is the notion of a natural rate of unemployment. Friedman believed that when the unemployment rate was too low, inflation was the result. Using this and his unique interpretation of the Phillips Curve, Friedman predicted “stagflation” long before there was even a word for such things. Friedman likewise broke with Austrian orthodoxy in advocating for small, controlled expansions of the money supply as the proper monetary policy. This became known as “monetarism” – the theory leveraged by the Federal Reserve during the 2008 financial crisis.
To be more specific, Friedman showed the Phillips Curve (which states that low unemployment tends to push wages higher, a simple example of supply and demand) was only true in the short term.  I'd argue that the appearance that it's not true in the long run can be because of Friedman's belief in “small, controlled expansions of the money supply”.  Simply, over long terms, that expansion of the money supply itself causes the number of dollars required for everything to go up masking any rise in wages.  Also known as monetary inflation.  (And anyone who thinks the Federal Reserve's expansion of the money supply after the 2008 collapse was “small and controlled” really needs some lessons in perspective).

Still, I'm being stupid as an engineer and some dood with a blog on the Interwebs to disagree with a Nobel Prize winning economist and one of the greats of American History.  It just means I'm a little more like a “classic Austrian” than Friedman was.

(from Deviant Art)


  1. Regardless of the nearly infinite control loops present in any economic system, it seems to me that the fundamental thing the currency has to do is keep up with the creation of wealth. This is a "hard" problem, because value can be (and is) created from nothing, and is very hard to measure unless it manifests as physical objects such as bridges, rather than as what someone will pay for a painting.

    Thus, we use indicators like inflation as tree rings. Too much inflation, you have too much currency and you need to stop printing until the inflation goes down, as the wealth slowly builds. Deflation or stagnation indicates that you need more currency to trade your wealth with. Everything else can come and go (employment, debt, automated monkey scripts to run your stock portfolio) but if you have a sea of wealth that isn't correctly matched to the currency, then it all falls apart as that signal struggles to find its proper path.

    What can I say. I'm an engineer, I look for root forces in systems. We have to remember that currency is a placeholder for an extremely nebulous quantity called "value". When we were tied to the gold standard, we had a good link to something we all agreed had a certain value. Now we are tied to whatever the Fed says it should be.

    Perhaps we should go back to a standard, but gold is a lousy one. We could I suppose tie the numerical value to what you have to pay your McDonald's franchise employees without going broke...

  2. [I meant to include: gold is a bad standard because the quantity of it cannot grow with the natural increase in overall wealth.]

    1. Gold will surprise you. Yes, modern deposits aren't large nuggets found just under the surface, but the cost to extract them is remarkably constant over millenia in terms of man hours because of the improvements in technology.

      The Fed is supposedly pushing for a "persistent inflation" of 2%, which invoking the standard "rule of 72" says that the price of everything will double in 36 years. One could argue that 38 years is so long that 2% isn't that high. So why is it there in the first place?

      I believe that the thought of prices going down terrifies the central planners. If prices go down, people have an incentive to save for the future but they believe they must make us consume all the time. Why buy now if things will be cheaper in the near future? You'll only buy necessities. If the prices are collapsing, you can see trucks full of merchandise that they can't deliver because the price of everything is lower than it was shipped at and buyers won't want to pay for it. I can see that's bad. I just don't see why prices exploding (as in hyperinflation) are any better.

      Remember, when you see that gold or silver are a certain price that's higher today than yesterday that the metals haven't gotten more valuable; the dollars have gotten less valuable.

      Gold has about 3000 years of history as money. They say that an ounce of gold bought 350 loaves of bread in the time of King Nebuchadnezzar, 562 BC. Depending on the type of bread you buy today, that's about the same number of loaves you can buy 2580 years later. Likewise, you'll hear that an ounce of gold would buy a good toga and sandals in pre-Christian Rome, and buys a well-tailored suit and shoes today, or you'll hear that a 1 ounce, $20 gold piece bought an 1851 Colt Single Action Army revolver, and today buys a good grade 1911.

      Basically your argument about trying to match the amount of currency to the amount of value is logical and makes sense, but in addition to "what someone will pay for a painting" think intellectual property of all kinds; software, books (electronic or paper), online and other services. Remember the law of manufacturing that says as the quantity made goes up, the unit cost goes down. The typical number used is price goes down 25 to 30% for doubling.

    2. Good thoughts. About the painting thing, though, most IP (I was a software engineer for a long, long time) involves a huge amount of skull sweat. There's real effort involved in its creation. An art work is an entirely different animal: an artist can product a 'work' in five minutes which he trades for thousands of dollars based on his reputation alone. This is the type of no-sweat value to which I was referring.

      [btw, I don't know if you did anything, but the captchas got a lot more rational sometime over the past month]