Intro. [Recording date: October 11, 2023.]
Russ Roberts: Today is October 11th, 2023, and my guest is historian Jennifer Burns of Stanford University where she is Associate Professor of History and a research fellow at the Hoover Institution. She was first here in October of 2017 talking about Ayn Rand.
Her latest book and the topic of today's conversation is Milton Friedman: The Last Conservative. Jennifer, welcome back to EconTalk.
Jennifer Burns: Yeah, thanks for having me, Russ. It's great to be here.
Russ Roberts: This book is really quite an achievement. It is a deep intellectual biography of a famous person, but you could still argue he's underappreciated. And, I would say it's also an economic history of the 20th century. So, brava: it's an amazing achievement.
Jennifer Burns: Thank you. Thank you.
Russ Roberts: Let's start with any biases or preconceptions you came to the book with. Milton Friedman is a controversial figure in many circles. How did you approach this topic?
Jennifer Burns: Yeah, I think I came mostly with ignorance, but certainly with some biases and preconceptions. When I started I thought I was most interested in Friedman as sort of a pundit--a public figure, a public intellectual, someone who had kind of packaged ideas for mass consumption--because I had looked at Ayn Rand that way, and I'd looked at Ayn Rand as a sort of vehicle for ideas promulgated through fiction, which I thought was really interesting. So, I kind of came to Friedman that way.
So, the first thing that I was surprised by was that I found his economics so much more interesting, actually, than his pedantry, once I got going into the project. And, related to that was, I think the biggest misconception I had was about the New Deal and about economists' reactions to the New Deal.
So, in the first stage of research, I was digging through the archives of the University of Chicago, and I kept finding these memos that Friedman's professors had sent to, you know, high figures in the government. It was called the Chicago Plan, and it was what they thought should be done to address the Great Depression. And, these memos were urgent. They were sweeping. They called for massive federal intervention in the banking system, massive federal relief programs. And, I was like: Wait a second. This is the Chicago School, which is supposed to be like, 'Let markets rip. Who cares what happens? You get what's coming to you.'
That sort of shook me, to see that I had envisioned a certain set of responses--stylized responses I thought that Friedman's professors would have had, and I thought that he would have been educated in. And, that wasn't true at all. And so, that reset my clock a little bit to, like, 'Okay, what is happening here? What do I actually know as opposed to what I think I know?' And, I didn't know that much, so I taught myself, through the archive, through reading other historians of economics, through drawing on what I knew about the broader picture of American history, and to try to put together, exactly as you say, a broader history of both economics and economic thought in the 20th century with Friedman as my lens into that.
Russ Roberts: And, I want to salute you. Your first book was on Ayn Rand, another controversial figure. I have my own biases, but I felt you were extremely even-handed in this book. No, that's not the right word. Fair, thoughtful: an historian. Novel, but a crazy idea. And, I say that with sarcasm because tragically, to me, so many modern historians have written about economics and economists with, I would say, a strong bias. And, we're all biased. That's part of life. But, I thought it was a very objective, but not a hagiography at all. I mean, there's many, many criticisms of Friedman in it, many of which I was unaware of. I know a lot of them, but not all of them. So, it's an extremely interesting book.
And, you start--you're talking about the New Deal. Chicago wasn't Chicago in 1935, and Friedman wasn't Friedman. And, the other part of this book that I loved is how you try to capture the evolution of his thinking. His books for the public are mainly in the second part of his career, but there's so much more to his academic career, and your effort to integrate the two is really superb.
Jennifer Burns: Yeah. Thank you. I mean, I think what I came to realize is that, just as I thought of him as a pundit, a lot of people around today, that they kind of got the tail end of Friedman's career. They got the Friedman in the limelight, the Friedman as representative of a certain political synthesis, a certain political movement; and they got a snippet of him and not the full picture. And so, I really wanted to bring the full picture back and show how the ideas that he later became famous for promoting sort of grew and developed out of this academic matrix, out of the actual events that happened in the world, the challenge of inflation, the ins and outs of Keynesian Economics, all of that. And so, when you see Friedman in the 1980s as the exemplar of Reaganism, that's definitely part of the story, but it's the end of the story. It's not the full story.
Russ Roberts: Let's talk about the title, Milton Friedman: The Last Conservative. Why did you choose that part after the colon, The Last Conservative part, and why were you uneasy about that?
Jennifer Burns: So, there's a couple of ways in which I think of Friedman as a conservative, and I'm aware he didn't call himself a conservative. He didn't want to be labeled a conservative. I've gotten pushback with this idea that he's a conservative.
And so, there's a couple ways I mean it. One is in the transcendent meaning of somebody who does their best to preserve the inheritances or practices of the past and carry them into the future. And, I think that actually describes his economics very well. He did a great deal to preserve the kind of methods and approaches of institutional economics, even though he's not an institutional economist; but he believed in empirical research basing his theories on data from the real world, and he stuck with that, and at a time when a lot of the economics field was turning in another direction.
Similarly, he stuck with the quantity theory of money. He said, 'There's something here. Let's update it. Let's refresh it, but let's not cast it aside and say: Oh, that's an old idea that no longer matters.' So, I think intellectually speaking, in terms of the orientation of his mind, he was someone who looked to existing or past ideas and tried to find out what was still valid in them and how it could still be used. So that, to my mind, is a sort of conservative bent.
And then, the other reason really was because he was associated throughout his life with this political movement that called itself conservative. American conservatism is no different than conservatism in the broader Western tradition in that it often embraces capitalism and is linked to capitalism, and Friedman really exemplifies that. Whereas in maybe the European intellectual tradition, it's more suspicious of capitalism because the conservative tradition there is more bent on holding up different social hierarchies or formations that could be threatened by capitalism.
So, I'm aware that American conservatism is sort of its own unique version of the creed, and I've written plenty on that. And, I'm also aware that Friedman said, 'I am not a conservative.' But, just empirically speaking, if you look at the causes he took up, the people he spent time with, the politicians he admired, they all called themselves conservatives. So, I felt like, 'Hey, I get it, but this is the case.' He was very clear in his partisan identification.
Russ Roberts: So, why is he the last conservative?
Jennifer Burns: Right. Why is he the last? I think that's a bit of a provocation or a question, but I think Friedman really exemplifies this 20th-century American conservatism synthesis, which tried to draw together an emphasis on tradition and affection for or belief in capitalism, free markets, free trade, and in opposition to communism. And, these three strands really came together in a variety of different ways, and they pushed aside a more moderate Republicanism and they mounted a very effective challenge to liberal politics and liberal governance. And, I see Friedman as really a sort of apogee of that.
And, I think that we are in a time of not seeing that synthesis holding quite the same way. I'm not completely convinced it's gone and will never come back. I don't think that's the case at all. But, I think the pressures and questions that forged that synthesis, primarily the opposition to the Soviet Bloc and the Soviet Union, those pressures are gone; and we have a different set of pressures and we have a different set of questions about globalization, and now that we've seen it in practice for 25 years where we hadn't before. So, I think the pieces are different.
The other thing that's really different from the conservatism of Friedman's time and what is called conservatism today, is I think in Friedman's time, there was a significant part of it that was driven by ideas. It really was in many ways an intellectual movement, and Friedman really exemplifies that. He based his ideas on research and on being in a discipline, an academic discipline, and really trying to think through what were some different approaches. So, I think it was a much more intellectual movement rather than being driven by personality or mood or emotion.
Russ Roberts: And it certainly--his version had none of the nationalism that is at the heart of modern conservatism around the globe, none of the populism. In that sense, I agree with you. He is, in many ways, the last conservative, and a little later we'll talk about whether that was--is it the end of an era or not? But, in some sense, certainly, you could make the case.
Russ Roberts: Now, I know quite a bit about Milton. I've read a good chunk of his work. Not as much as you, I bet, which is really impressive, because I bet you read a lot more than I did, and his other papers, which are voluminous, his correspondence and so on that are in the archive at the Hoover Institution. But, there were two things I did not know much about that your book really illuminated. One was the role of Henry Simons. So, talk briefly about that. I'm probably more interested in that than the average listener, but tell us a little bit about Henry Simons and his influence on the Chicago School as it came to be under Milton.
Jennifer Burns: Yeah. I actually was very fascinated by Henry Simons, as well. So, Friedman did the first part of his graduate training at the University of Chicago, and Henry Simons was an assistant professor who really became sort of a guru figure to Friedman and his friends. And, first of all he was an architect of those memos to the federal government, the Chicago Plan. He was really the kind of mover and shaker behind that, calling for a restructuring of the banking system. This idea he had called 100% money, which basically would have eliminated fractional reserve banking entirely. It would have radically changed the banking system. Instead, we had the Banking Act, but 100% money was something that Friedman was talking about way into the 1960s.
Simons also wrote this book called A Positive Program for Laissez Faire. And I think this was really the biggest influence on Friedman. He saw himself as a Classical Liberal. He saw liberalism as being endangered, and so he also believed that you could use the principles of Classical Liberalism to design what he called progressive social programs, so that liberalism shouldn't just be something that said, 'No, no, no,' but actually had creative potential to come up with new and different policy proposals.
Russ Roberts: And, this is the liberalism of--it's Classical Liberalism--meaning limited government, personal responsibility. And as you say, for many people that just means, 'Well, we're against too much regulation. We're against excessive taxation, or maybe any taxation, if possible,' etc., etc. And, Simons and a lot of Friedman, I think--I much more appreciated it after reading your book--was trying to square that circle of: he didn't like government, but he knew the world had to have some; but, so, how much? And, he was constantly trying to make his worldview consistent with some.
Jennifer Burns: Yeah. Let me make a few other points about Simons. He valued what he called the heart of the contract--the ability of people to freely contract--and he worried about interference in that. And also, he's writing at a time when our modern understanding of liberal--New Deal Liberalism--it's really formed in the New Deal by Franklin Roosevelt. So, that word is in flux.
So, he wanted to protect the heart of the contract--free contract--but he also worried a lot about inequality. This was important to him; it was important to Friedman's teachers; and they basically felt if capitalism generates too much inequality, it will not be able to survive.
And, inequality is bad unto itself. Simons went so far as to call equality his religion.
And so, while A Positive Program for Laissez Faire was a Classical Liberal tract, it also called for government ownership of railroads, of utilities. So, in ways that you think, 'What? This isn't conservative at all. This isn't free market at all.'
I really think of Simons, though, as coming out of a sort of late 19th-century populist context in some ways, where he was wanting to support the small producer, the independent entrepreneur. That was kind of his desideratum. I also think he was in many ways a Georgist--in the tradition of Henry George--who would basically say, 'We need one giant tax. Let's tax all land, basically, and then nothing else.' So, Simons wanted a few big interventions and then let the rest go.
And so, that was a very influential model for Friedman early in his career. What happens is that Simons dies right as Friedman comes back to Chicago. It seems, from all the evidence we have, to have been a suicide. And, what really fascinated me was, you could see the legacy of Simons continue and then eventually sort of fade out. And for me, one of the big questions is: What if Henry Simons had lived? What would be different in our understanding of economics, and what would be different with Friedman?
Russ Roberts: The part about contract--a good chunk of the early part of your book is about the almost religious devotion that free marketers like Friedman or myself or Hayek have for prices as signals, and the power of economics as thinking about prices and what their role is. And, there's this theme--and it's in the book, but you could have written more about it even--which is that: Let's give people money, but don't distort the prices. Don't distort the market for housing. Don't distort the market for health. If you're worried about poor people, give them money and let them then choose what they care about most, and let the prices then emerge from their choices that steer resources to their highest use.
And that--it's interesting, you capture how that grew out of an earlier tradition, really going back to Marshall and the seductive nature of market forces for most of us who study economics. It's what we fall in love with, and it's clear that Friedman fell in love with it.
And, you write about it, most people don't know--Friedman taught Price Theory at Chicago and Macro. He taught Money and Banking. But his big class was Price Theory. He was a micro-economist. I'm looking around my shelf. I've got two of them. One is over here, one is back there. Somewhere on this shelf is Price Theory, by Milton Friedman, which was a samizdat--a compendium of his notes that his students eventually turned into a book. But he cared deeply about that part of economics. Which was way ahead of his time, in a way.
Jennifer Burns: Yeah; I mean, I think what Simons' beginning insight was that Friedman carried on, or hope, was that the price mechanism itself could be used to generate social goods. So, rather than assume the price mechanism is the problem and the solution is to regulate or inhibit the price mechanism, instead why don't we structure it so that people's natural desire to barter and truck or to get a deal is actually used to create some of the social goods we want?
And so, I think Simons really sort of set that out. And Simons was also willing to write to the newspaper, willing to promote his work. There were definitely some economists who thought, 'No, I should stay in my ivory tower,' and then some who thought they should engage the world, and Simons really was a model of engaging the world.
Russ Roberts: Yeah. And, until I read your book I didn't really appreciate how many of Milton's controversies revolved around prices and price control.
So, he's got his rent control pamphlet with Stigler that we talked about in this program with Mike Munger--listeners, we'll put a link-up to that if you missed it--where they go against rent control. But, they get tangled into other stuff and they go against--the imposition of price controls in the 1970s drives Milton crazy. So, he had a thing about it. I think he was right, by the way. I don't think it was a misplaced obsession. But, he did have a thing about it.
Jennifer Burns: Yeah, for sure.
Russ Roberts: The other thing I wanted to bring out that you talk about is the role of women in his intellectual life. Fantastic job doing that, and rescuing Anna Jacobson Schwartz from some level of obscurity is certainly in modern times and maybe even her own. So, talk about the women that you write about there.
Jennifer Burns: Yeah. That was, again, something I hadn't expected to find and just came at me as I read his work. And as I looked in the archive, like, 'Wait a second. Like, why are so many of his works co-authored with women?' Like, 'That seems strange.' And, I came to think of that as kind of his secret weapon. And, I think that, more so than other male economists of his generation, Friedman had the ability to sort of look at the person in front of them and see their intellect rather than their gender. And, instead of assuming, 'This is a woman who has nothing to say because women can't do math, or women can't do economics,' to kind of see to the actual person and say, 'Well, what do they have to contribute?'
And so, I think that was this huge asset. And, I don't want to say he was a feminist or he had modern gender standards or norms, or didn't have stereotypes. All of that is there; but he also did have the ability to see beyond that.
So, Schwartz is probably the most famous example. So, I try to document the different aspects of their relationship, what she contributed to the book. I think that is honestly its own separate project, and I would love to see someone dig into that more because there's a huge archive for both of them. And, she, I think, deserves her own biography.
Russ Roberts: The book being the Monetary History of the United States.
Jennifer Burns: A Monetary History of the United States. Right.
And what's really--I found this just fascinating episode where they get to the publication of the Monetary History, and Schwartz is, like, tells Milton, 'Well, I'd really like to use this book as my doctoral dissertation.' And he's like, 'What do you mean? You don't have a doctorate?' And, she's, like, 'No. The faculty at Columbia are telling me that this book is not doctoral quality, doctoral standards.'
And so, he gets really mad. Because it's kind of an insult to him, too. Like, 'What?'
And so, he literally has to call and sort of chew out the Chair of the Columbia Department. And they're like, 'Okay, fine, we'll give her a doctorate.'
But, that just really stood out to me that the faculty in her own department--they had the evidence of her contribution before them and they just couldn't see it or wouldn't see it. Just: economics was a boys' club and they didn't want to let her in. So, that's one of the stories I tell.
Russ Roberts: Yeah, you have to remember, listeners, that this is the early 1960s and Milton Friedman is not Milton Friedman yet because that book isn't out. And, chewing out the Chair of the Columbia Economics Department is not that effective, possibly. But, it did work. That book, which I think is one of the great works of economics, you really do an excellent job in talking about how it evolved in his work with her.
Russ Roberts: But, talk about the other economists he worked with, as well as his wife, in his other research.
Jennifer Burns: Yeah. So there's another book that's less well-known except among economists, A Theory of the Consumption Function. And, this book came out of Friedman's engagement with women researchers in consumption economics, which was kind of a side field that women were shunted into because they were thought to be good at shopping so they could study shopping.
And, there was a woman that was friends with both he and Rose [Friedman's wife--Econlib Ed.], Dorothy Brady, who was the researcher in this field. And, there was Margaret Reid who went on to become his colleague at Chicago.
And, Friedman sort of picked up a letter that Dorothy had sent to Rose and said, 'Well, I have some ideas.' And they started a correspondence, and then they would all come and visit their summer home in New Hampshire.
And, basically they kind of had a mind-meld, where the women were showing him the research and they were puzzling over how to think it through, and Friedman had some ideas, and they had some ideas.
And eventually--this is the context in which it was written up, which I don't think is heretofore known--is: Friedman was trying to get Margaret Reid and Dorothy Brady hired at Chicago. He wanted them to be his colleagues. And this was part of a sort of power struggle he was going through at Chicago.
But also, what's really unique about Chicago, is they always had one woman on the faculty. Other economics departments did not have that. So, they had a one woman quota, and the woman who had held the job was retiring, and so they were looking for another one.
So Friedman, in order to make the case that they should hire not one but two women, started writing up this idea they had been talking about. And that's what grew into the book, The Theory of the Consumption Function. So, now, he did succeed in getting one hired, not the other.
And the book is really interesting. I really puzzled over it because you can see over time, in his private correspondence, Friedman over time becomes more possessive of it, but in the early stages he really thinks of it as a joint project. And, he says in the book's introduction: This is a joint project. But there's only one name on the cover, and that's the name of Milton Friedman. So, yeah, there's a little bit of acknowledgement, but not what we would consider as sufficient today.
Russ Roberts: Yeah, I think part of that was, he probably thought this was an interesting side-project that might be of value, and then it turned out to be one of the cornerstones of the case against Keynesianism, and I think he probably got a little more possessive. And maybe correctly so: I don't know. He may have appreciated the impact of it more than his coworkers. But certainly he could have shared more of the credit.
Jennifer Burns: It's also interesting to me that one of the primary collaborators, Margaret Reid, she asked Friedman to write it up. She sort of pressured him to do it, and I think, 'Well, why did she do that? Why didn't she just write it up herself?' And, I think she perceived that, like, 'This is going to go further with him as the author. If I have him to cite from my research that's ultimately going to benefit my research,' where, I mean, they weren't giving her a workshop. There were so many reasons for her to think, like, 'This idea will not prosper if it is linked to me.' So, you might think of her as kind of giving her child away to the better parent given the circumstances of the time.
Russ Roberts: Yeah, fascinating. Margaret Reid was at Chicago when I was there. She was--
Jennifer Burns: Oh, interesting.
Russ Roberts: She was not a young woman. She had a ghostly presence. I would see her walking the halls, and I remember mentioning her name to some faculty member and saying, 'Who is she? Why is she here? She never talks.' And, he says something like, 'She's really smart.' So, she was something in her heyday. She was not in her heyday when I encountered her, unfortunately.
Russ Roberts: Lastly, the last thing I want to mention that I appreciate in your book is his view of econometrics. As you just mentioned a minute ago, he cared a lot about data. He was very much an empirical economist. He disdained much of the Austrian economics tradition because they were not data-driven, in his mind--I think that's a fair criticism.
But he was not a fan of macroeconomic models or even econometrics generally, and fought--I did not realize--relentlessly with the Cowles Commission, which started at Chicago and eventually ended up at Yale. But he basically pushed them out--it's the way--in your telling.
Jennifer Burns: Yeah. So, that is also really interesting to me because I just sort of thought, coming into the project, like, economics and math are kind of the same thing, and I hadn't realized how vociferously he fought not just against math, but even against modeling--like, extensive modeling. He just thought, 'You can get carried away with the beauty of your own model, and you have to always be testing, testing, testing.' So, yeah, he fought very viciously against this other group of economists who were kind of pushing it more in--not so much even modeling, but bringing in more sophisticated mathematical techniques.
And so, this had a couple of results. And, one thing I should say is, at that moment, most of the modelers and mathematicians were using the models and the math to design interventions into the economy.
So, there was a political difference with them. But there was also, I think, even more so an epistemological difference. Friedman thought we simply don't know enough and the economy is too complicated to really model it and to base a plan on the model. We have to be much simpler--sort of paradoxically--to be able to capture the complexity.
And so, I found that so fascinating. I think it's an interesting episode in the history of science or the history of the discipline. And, as a result, Friedman was really considered a crank and deeply unfashionable, and sort of the subject of ridicule, because he was doing things like trying to add up bank vault cash and figure out how much money there was in the economy, instead of creating a general equilibrium model that would predict whether we were going to go into recession or not, or how big the multiplier is, or what the budget should be. He just wasn't thinking in those terms at all.
And I think, as you noted, it was when the Monetary History [A Monetary History of the United States] landed and had this incredible and convincing, or sort of revisionist take on why the Great Depression was so bad and lasted so long, that that really arrested his colleagues and the field. And, that's really--after that he set the weather in economics, I would say, for a good 10 to 15 years after that.
Russ Roberts: Yeah. It's--in a way, you mentioned that the Rational Expectations movement/part of macro that is associated with Bob Lucas and Tom Sargent, that they grew out of his work. But of course, the Lucas Critique, which is about the challenge of intervening in the economy given that the people who are doing the acting have expectations and it's problematic to try to do that effectively--that is just--what you just said a minute ago is an old-fashioned version of the Lucas critique: that it's too complicated.
Jennifer Burns: Yeah. Although the Lucas Critique was couched in a very type of models that Friedman opposed. And so, I think--
Russ Roberts: Of course--
Jennifer Burns: It's like his bastard child, basically. And he had a lot of ambivalence about Rational Expectations, especially in private. He tended to be more supportive in public. But, yeah, they were kind of reaching his conclusions, but not with his methods. And, he actually did think the methods were really important.
And so, I'm not sure what he would make of where we are today.
The other thing I think he had trouble reconciling was that a lot of the insights of monetarism were incorporated in what became called the New Keynesian Economics. And, I think that would have bothered him, for sure--
Russ Roberts: Creep him out a little bit. Yeah--
Jennifer Burns: But, I do think that's why he's so influential a figure, because his ideas became detached from the sort of disciplinary--the heterodox disciplinary strain that they once embodied and became more conventional wisdom. I mean, the way that we pay attention to the Fed and we worry about inflation, all of this type of thing, is the long tail of Friedman.
Russ Roberts: The irony is, is that: while Lucas took that version of Friedman you gave and gussied it up with fancy math, Friedman accepted methodologically to some extent the Keynesian revolution and destroyed it from within by saying, 'Okay, you're going to play by these rules? I'll play by them, too, and I'll show you that even with those rules, a lot of your implications don't hold.' So, he--I think he would have preferred not to have done that, maybe, but Lucas did the same thing in a way.
Russ Roberts: Let's talk about his legacy. Let's do it in two parts. First, as an academic economist, and then as what we might call a public intellectual policy political economist, as you call him at one point. Let's start with the academic part. You've hinted at it already, but what do you see as his most important legacy?
Jennifer Burns: I think probably the single most important is that reinterpretation with Schwartz of the Great Depression of focusing on the role of the Central Bank and the banking system in that crisis. I think that's become the playbook that we still live with today. There's a financial crisis: the Central Bank must take responsibility and must flood the economy with money quickly and not let it get too bad. And, I think the first place you really see that is Greenspan after the 1987 crash. He's like, 'The Federal Reserve stands by.' You see it in the GFC [global financial crisis], you see it in the Corona Crisis. So, Friedman deserves some of the credit, not all, for the fact that we haven't had another Great Depression.
I think, obviously, there were regulations that stabilized the banking system, but also the sense that the Federal Reserve has a role to play, or that it is a liquidity crisis and we know what to do in that crisis. I think that's probably the biggest one.
I think the second one is related: the understanding of the centrality of the Central Bank and the price level in the paradoxical way that Friedman belabored and belabored, which is, when it's doing its job, you shouldn't notice at all. And so, basically, it's this incredibly important institution, this incredibly important aspect of economic life that can't really make things better, but can make them a lot worse.
And so, there's sort of a passivity to when things are going well that it fades into the background, and I think honestly, that has been our experience in the past 25 years or so. And nobody has been really interested in inflation. No one's talked about it. We've had a fairly steady price level. We sort of forgot it was an issue. Then suddenly it's an issue and you kind of come roaring back and say, like, 'Oh, a few mistakes by a few people in this key institution can really have broad ramifications.' So, I think those are parts of it.
I think other economists might point to the permanent income hypothesis, which is part of the consumption function, as still being a kind of live idea that economists work with.
I do think in terms of the monetary policy and influence, people aren't looking at the money supply. It seems like maybe they should be, a little bit more, but they're not using all his technical tools. But, I think of him as having diffused into the water of central bankers around the world the importance of their role, what it means. And, I also think we could see this kind of 2% inflation target. Inflation targeting is not the same thing as a monetary growth rule, but they're genetically related.
And, the monetary growth rule set out this idea of rules over discretion, which again--I didn't bring this up in Simons, but let me go back to Simons. What Simons really emphasized was rules and a framework within which competition should be allowed to play. And, he had this famous article, "Rules Versus Discretion in Monetary Policy," and he said: The monetary authorities ought to follow rules that are transparent, that are set out, that we can know about, that aren't hidden behind some cloak, and then that will be better for the economy--versus this kind of discretionary piece.
Now, we have a discretionary monetary policy today, but we also have things like the Taylor Rule or Taylor Rules, which are these incredibly powerful heuristics that are kind of used to judge and evaluate how the discretionary policy is going. And so, the Taylor Rule really goes straight back to Friedman and Simons--just goes right through that lineage.
I think those are some of the ways he's left his mark, not just on academic economists, but on policymakers and the kind of giant apparatus--financial apparatus--that surrounds central banking today.
Russ Roberts: The only thing I would add to that is the role of expectations. We mentioned rational expectations a minute ago, but I guess--and I might even add the distinction between real and nominal variables: that corrected for an interest rate that looks high could be actually low because inflation is high. And, I'm sure other people wrote about it and talked about it, but he destroyed, in the academic world, in my view, or forced a radical revisionism of Keynesianism through the permanent income hypothesis. We're not going to go into why and how. You can look that up, folks.
But also, the Phillips Curve, which was seen as an incredibly reliable policy relationship between unemployment and inflation. And, he said--and this is one of the most, I think, rare moments where economists made a prediction that had a deep theoretical basis that turned out to be true--he said, 'It's not going to stay this way, this trade-off, because expectations will adjust.'
And yes, eventually, Edmund Phelps wrote about it in a similar way with a more theoretical underpinning, but he basically got it right--Friedman did--at that point.
Now Keynesism, of course--you have to have a very big wooden stake or a lot of garlic to put that vampire to rest. It's very appealing. But, in my lifetime it was the status quo, and then it was--'Well, of course, it's dead,' and then it's, 'Well, there's no alternative.' So, we've gone on this--incredibly, I think, embarrassing for my profession--rollercoaster about that. But, he played the central role in that in so many ways.
Jennifer Burns: Yeah. I mean, I'm realizing--yeah, to answer the question of what is his contribution, this is probably like 10 points.
But I would say, what I try to emphasize in the book is, sometimes there's an impression that these economists cooked up these ideas and got the politicians to go along and changed everything for the worse. And then, what I really try to show is, these ideas interacted very powerfully with what actually happened.
So, Friedman had a theoretical take on the fact that the Phillips Curve was a short-run trade-off, not a long-run trade-off; and that wasn't enough to change people's minds. It took the next five to 10 years for people's minds to change.
So, it's not the ideas. It's how the ideas help people understand the reality that they're experiencing. You know, and I would say--so, yeah, that is something I really want to emphasize, and I try to show in the book by kind of moving between his ideas and the actual events as they unfold in the world.
And as you said, the distinction between real and nominal interest rates, which is still not really well understood, especially if you read, kind of, top-line[?] media coverage of what's going on--you know, 'Monetary policy is super tight.' I'm, like, 'Is it really tight? I actually think we still have negative interest rates.' You know? Like, so but people aren't really talking about that.
But, again, it took the 1970s when you had incredibly high inflation and incredibly high interest rates for people to understand, like, 'Oh, this is exactly what Friedman said could happen: that interest rates behave differently in an inflationary environment.'
And, it's been so interesting to watch. I think the financial sector in particular has just a very short memory and little knowledge of history, and the fact that so many people have been proceeding as if the low interest rates of the past 15, 20 years are this state of play, when historically they are extraordinarily low and there's no reason to expect they would stay that way forever. But so many bankers and financial institutions made decisions as if they would.
So, that's my plug for understanding more history.
Russ Roberts: Hey, hey! It's great that you say that, because when I interviewed Milton in 2006--and listeners can go back to those two episodes. They were in the early, early days of EconTalk, and I wish I could interview him again. I'd do a better job. But, anyway, I asked him how proud he must be of his book with Anna Jacobson Schwartz, The Monetary History of the United States, because it forced people to confront that inflation was everywhere and always a monetary phenomenon. And he laughed at me and he said, 'Oh, no, my book didn't do that.' He said, 'It was when New Zealand's central banker cut the money supply,'--I think Don Brash is his name--he said, 'and then inflation disappeared, and they went, like: 'Oh, I guess that's what does it.'
And, he said that about--when I asked him why there was no taste for price controls on energy at the time, there had been some run-up, I guess, and I was asking about it. I said, 'Well, that's a [inaudible 00:40:26] contribution of economics.' He said, 'No, it's not.' He said, 'That's because people had experienced the price controls in the 1970s and they hated it. And, when those people die off, it's going to come back into fashion again.'
So, he very much agreed that experience was a powerful contributor to understanding.
Jennifer Burns: Yeah. I mean, that said, you have to have interpretations of experience and arguments about it. So, I think they interact--
Russ Roberts: Fair enough--
Jennifer Burns: I think he was perhaps being too modest. He was trying to be very modest and very generous, especially in the later years of his life, which I appreciate, although sometimes dulled his memory of what exactly had happened.
Russ Roberts: And, the other thing I want to mention about The Monetary History of the United States: you said he was seen as a crank because he rejected, say, mathematical theory and econometrics. He was mainly seen as a crank for a long time because he thought money was important. No one--it wasn't just that that book made people understand inflation. They just thought money wasn't important, and they thought something was literally wrong with him because he was obsessed with it. So, we have to give him credit for that. It's really important.
Jennifer Burns: Yeah. I mean, I think that--yeah--so, there's a moment when he's testifying before Congress and Paul Samuelson is testifying before Congress, and Paul Samuelson is, like, really making fun of him. He's, like, 'Well, some people think you can measure this and that and call it M2 [Money-2, a measure of the money supply that includes cash, checking deposits, and a few other cash-like assets] and say you understand everything. That's just foolish.' It's, like, Friedman is in the same room with him. And so, he was willing to put up with that.
And so, I think that's something I came to appreciate later in the book, and amid our own debates about intellectual diversity is that, like: Wow, within the context of the economics world, he kept this sort of heterodox set of thinking alive, and he was willing to be completely unpopular. He was willing to be laughed at. He was willing to really fight with other people and have them just mock him because he had the belief in his own ideas.
So I think, to me, it's a case study in why we need to think about things in lots of different ways, not just one uniform way, and why disciplinary orthodoxy can be really stifling and really crippling. So, I would say, yeah, he stuck with money.
The other thing I do try to say is, I agree that economists missed the story on money for a large part. The other thing, I traced the history of the Federal Reserve in some detail. For a long time, the Federal Reserve basically followed the Treasury, and it really wasn't independent, and it really was--they used to say--'Money is a veil': it just mirrors other things. And, in some ways, for much of its history in the 20th century, the Fed was kind of mirroring what other actors did, and it was trying to support the Treasury. So, it really wasn't until the Johnson era when there was a divergence between what different parts of the federal government wanted and needed, and Johnson was exerting political pressure, that that became problematic.
And so, I think what Friedman and Schwartz did, by using history, is they were able to step out of this unique period of time. So, the Treasury-Fed Accord is, like, 1951, which is when the Fed becomes more independent from the Treasury Department, but it takes a while for that to take. But, as these economists were coming up, say, from the outbreak of war--the 1940s to the 1950s, that pivotal decade--the Fed is basically neutered and it's basically passive and it's sort of secretive and no one is paying attention to it.
So, Friedman and Schwartz used history to say, 'Let's step out of where we are now. Let's go back. Let's go all the way back to the post-Civil War era. Let's march through the Progressive era. Let's see what the Fed did in 1920--the Crisis 1920-1921. Let's see what they did in the 1930s.' And then you see different things when you get out of your immediate time-space bubbles.
So, I think they used history to give themselves new perspectives on what was happening in the present, and that is what enabled Friedman to see forward, and to say, 'Yeah, here we are today, but based on what happened yesterday, I can tell you; and here's what's going to happen tomorrow.' And, he was absolutely right.
Russ Roberts: Let's move on to his political economy, which, you know, you can make either the half-full or half-empty case I think pretty well. But I want to hear you make it. What did he achieve?
Jennifer Burns: So, you're talking about--
Russ Roberts: In terms of public policy and what he would have called philosophy about the role of government in the economy and in our lives?
Jennifer Burns: Gosh, I've got, like, another list of policy things that I can tick off that have Friedman's traces, from the fact that income tax is withheld from our paycheck; and if there's not a draft, or the draft is sort of on ice, a volunteer paid armed forces; the negative income tax and EITC [Earned Income Tax Credit], which I think we still see as a really important policy model in today's discussions of kind of relief and poverty alleviation--
Russ Roberts: That's the Earned Income Tax Credit, EITC--
Jennifer Burns: Right. And then, the idea of using vouchers for education. He was also in favor of drug legalization, which we're increasingly seeing. So, there's a lot of really specific proposals.
Even the idea of competition in the mail services. There was limited competition in his day, but there's much more now.
So, a lot of these actually come right out of Capitalism and Freedom, and a lot of them have the same logic of prices: Let's let prices do some of the work that we previously have assigned to agencies or regulators or laws. Or, let's strip back to more of a framework and let prices run within that framework. So, I think he had an enormous impact.
And, one reason I had some doubts towards the end of the time of publication of calling him the Last Conservative is that I think his policy ideas and his orientation and outlook became influential far beyond conservatives. It became a sort of way to think about policy and how it would work: to ask, what would it look like if we let the market decide? Or, what would it look like if we injected some market incentives into this world?
And, this was not something that just Republicans or Conservatives did. This was something that Democrats started to do. Some of the biggest deregulatory moves came in the Carter Administration. For instance, deregulating transportation, airlines, trucking, all of that.
And, that is sometimes uncomfortable for people to remember, because they'd prefer this black-and-white, one-side-thinks-this/the other-thinks-this; I can pick my side. But, the fact is that lots of people came to conclusions similar to Friedman over the course of the late 20th century--that, the first-pass attempt to regulate and structure various economic markets by the federal government was not really working. It was having big efficiency costs.
And so, Friedman really helped articulate that and convince people of it.
I actually think that really his academic work was more convincing. I think in some ways the fact that he became such a political figure might have created some reluctance to take seriously what he was saying.
So, I think his actual power did come from his academic work and from the way that he left an imprint on people who studied economics, and then came up into positions of power in the political system and had this different way of thinking that he had helped seed in academic institutions.
And, we haven't touched on Law and Economics, but that's another piece of the book that I unpack. And so, there was another vector of his influence, which was in legal thinking and in encouraging lawyers to think about incentives and use the tools of economic analysis. And so, Friedman really helped popularize this approach, not just within economics, but within lots of academic fields.
So, I mean, when I start thinking about it, there's so many places that you see traces of him. And of course it's not all Friedman, but he became a convenient entry point for people to have these different ways of thinking about what should the government do or how should policy be designed.
Russ Roberts: So, I made my list. It's basically the same. I added, he made free market beliefs a little more intellectually acceptable.
But, what I think is fascinating, and maybe you disagree, is that in 2023, he's a punching bag, more than anything else. His name is invoked--it actually started with the Financial Crisis of 2008, which many--Paul Samuelson laid it at his door, implying, I think grossly incorrectly, that the Financial Crisis was due to deregulation--Friedmanian laissez-faire. Which is absurd in my view. And, Friedman was dead at that point, so it was an unfortunate thing. But he gets blamed for that.
He's called a Neoliberal. He's blamed for what's called Neoliberalism now--which is smaller government, less regulation, lower taxes, austerity, you name it. And, the irony is, is that he didn't achieve any of those things. When I interviewed him in 2006, he was very depressed about--not depressed, but what he would call realistic--about his intellectual legacy, saying that so many things he cared deeply about, he had no impact on. The size of government, the size of taxes, the size of regulation. And, all those things you're talking about--the intellectual legacy of his impact in so many disparate ways and so many disparate areas--I think it's interesting that nobody invokes him.
You're right: he's in the air. But Hayek, for example, has done better. People go back now and read Hayek who didn't read him before. I don't think people read Friedman so much. They're certainly not reading his Newsweek columns. They would profit from reading Capitalism and Freedom. It's still a great book in my view, and a fascinating book, written 60 years ago, roughly. But, I find it shocking how little his explicit intellectual influence is on policy today. Do you agree or not?
Jennifer Burns: I don't agree, but I think some of what you said is worth unpacking a little bit.
So, let me start with this: blaming him for the GFC [Great Financial Crisis, Financial Crisis of 2008]. I think this goes back to the earlier point that people want a easy story with a hero and a villain, and they want to say, 'It's Friedman and his bad ideas that created this problem.'
So, another way to look at the rise of deregulation is to trace back like, 'Well, when did deregulation really start, especially in the financial sector?'
And, actually it started during the inflationary episode of the 1970s when banks successfully argued they needed to be free of regulation in order to deal with this very volatile economic climate. Well, guess who spent their whole life trying to say, 'We shouldn't have inflation because all sorts of bad things can happen,' right? Friedman. So, I wouldn't trace it to his ideas. I would trace it to the actions of banks trying to navigate an uncertain economic climate. And, I go into that in some detail in the book.
Russ Roberts: Yeah, but I would just add that, when we started bailing out banks--which was also in the 1970s and goes through, relentlessly, each decade--Milton Friedman opposed all those things; explained that we were a profit and loss system, not a profit system. And, if you take out the losses, you're going to have reckless search for profits. To say that that had nothing to do with the Crisis is blind. You can debate how much it had to do with it, but just saying it's deregulation and that's Milton's fault is not thoughtful.
Jennifer Burns: Right.
And then I would say, also, a lot of times the story we get in the mainstream media about what is happening is still a sort of Keynesian fiscal story. And so, another story is: 'We had really low interest rates. They were artificially low, unwisely low, and it created a bubble, and then the bubble popped.' Right? So, that's a totally different set of explanations that you simply won't hear in most quarters.
So, I think that one of the things I'm trying to do in the book is just sort of lay out these different narratives and say, 'Let's be careful of thinking we know what we know, because there's a completely different way to look at it.'
In terms of today, I actually do think--I think he is more relevant than ever, and I think he is being discussed, but in a couple of unexpected ways.
One is, I think he has become a figure in debates within the Democratic Party and on the Left, in that Friedman has come to symbolize a sort of Centrist Democratic approach--which is more market-friendly--that a segment of the more Progressive Left would like to do away with. So, you'll see there's been a whole raft of attacks on Friedman lately. And, at first I thought these were sort of misplaced, because I'm, like, 'Friedman is not driving the action among National Conservatives,' you know? And then the new currents of thought on the Right. But, I think this reflects that he has become, or he became, very important also to the Democratic Party and to Centrist Liberalism. So, you see attacks on him. I mean, Joe Biden has attacked him. There's been a whole raft of articles in the New Republic, all these different magazines attacking him.
I think that's really an intramural dispute on the Left, which to me says volumes about Friedman's influence: that he's traveled so far across the political spectrum that he's now kind of a punching bag in that place.
I would say, one of the reasons Hayek comes up more--and I think that there hasn't been as much information about Friedman, which hopefully has been changed--but it's easier to talk about Hayek because he has less immediate baggage in the United States. And so, it's interesting: like, towards the end of his life, Samuelson kind of said something along the lines of, 'Well, Hayek was right after all,' and blah, blah, blah, blah, blah. And then, he summarized what Hayek said; and I'm like, 'This is really Friedman,' but Samuelson doesn't want to say Friedman because, like, he knows Friedman. Whereas Hayek is, like, the man from outer space who you can safely invoke.
So, I think that's a lot of it: that Hayek in some ways is a proxy for Friedman because he doesn't have the same pieces.
And then, I will say, the big hit to Friedman's reputation really was the expansive monetary policy and the low interest rates post-GFC and the lack of inflation appearing. That led to a lot of people saying, 'These insights no longer hold. This is no longer accurate. Friedman is no longer relevant. He no longer has anything to say.' And then, I think that can be counterposed.
Then we saw this enormous surge in M2 in the pandemic, and you had Jay Powell saying, 'Oh, a million years ago, that used to matter, but it doesn't really matter anymore.' And then, lo and behold, you had the bulge of inflation come that would have been predicted.
So, I think the story is a lot more complicated. I go into this just a little bit in the conclusion, and there's places your listeners can go to unpack this, but there's some arguments that in the wake of the GFC, this expansionary monetary policy came along with increased reserve requirements, and banks were really sitting on that money, so it wasn't really circulating.
So, I think you always have to pay attention to the institutional context. And I think that's one thing that Friedman did say and admit later, that he didn't pay enough attention to the ways that things could change. And, by this I mean whether you're getting an interest rate on your checking account or not, or where you're moving money.
And so, it's always more complicated than just the money supply, especially today, because we have so much diversity in the financial system. But, stepping back to that 30,000 foot view--what, like a 25% annual increase in M2, the Friedman theory would be, like, 'You can't have that and not have inflation. There's no way.' So, lo and behold, we see that.
So, I think there's plenty of grist for the mill to unpack what happens next. And, I don't know where we are next. I don't know if we're going to eventually end up with Volcker Shock Part Two, or we're going to get that great soft landing. We'll see. It's still in process.
Russ Roberts: That's all very well said. I want to add: I've interviewed him and we have two episodes. We broke that into two interviews, talked to a number of people about him over the years, and I want to add one thing and share some things that I miss about Milton, even though I was part of the--I was surprised at how little I turned to him in the last 15 years. And, your book forces me to remind myself that there's a lot of underlying influence that he had on me. One of the things that we haven't talked about is, he was an extraordinary communicator and teacher of abstract ideas. There's so many brilliant phrases and things that he conveyed that stick with us.
I'll pick just a few that we haven't talked about, I don't think. 'People spend their own money on themselves more carefully than they spend other people's money on other people.' That's a whole world of political economy in one sentence that he was able to capture.
He would say, 'The secret to good policy isn't to get the right people in power. It's to get the wrong people to do the right thing because their incentives are such.'
He would say that an increase in spending is a tax increase, whether it's borrowed or taxed.
He said that being pro-business is not pro-market and that most people in business don't like markets.
You mention in the book, he argued that you should try to maximize profits without fraud and not be socially responsible, and let that profit--it's an example of his price respect, in a way.
And, the last thing I would add though, and I think--I'd love to get your reaction to it is: He's one of the last people--the two politicians he influenced probably the most are Reagan and Thatcher. They, along with him, could expound eloquently on the power of freedom. That is kind of, in and of itself, and you write beautifully about the clash potentially between freedom and equality, but that's kind of dying. I don't see that in our discourse. I think people who defend freedom on its own for its own sake have lost the moral high ground. He held it in his day, he said it well, and it seems to be on the wane.
Jennifer Burns: Yeah. I mean, I think that eventually became kind of the core value for him. There's a moment in the 1950s when he's really struggling with this understanding that came from Simons and that came from his other teacher, Frank Knight, that capitalism can generate inequality and that's to be feared. And so, then how much do you have in freedom to trade off against inequality?
And so, he struggled with that for a while and eventually decided that this core value was freedom, and that that was what enabled you to set your North Star and orient yourself, and that it was an ethical value unto itself because it allowed people to make their own choices.
So, I think that was very compelling in the Cold War era when we had an example of what the lack of freedom looked like.
I think Friedman's Achilles heel and something that I was really never able to figure out was how he would talk so much about freedom and didn't really apply that to this really glaring case of unfreedom, which was the segregated South in his own country. And he just did not--that did not resonate with him as an example of a lack of freedom, I think, because he interpreted it as not just a government thing, but as what private citizens were doing. And so, that, I think, is one of the reasons why his ideas of freedom don't resonate in our current moment, because you sort of look and say, like, 'If you care so much about freedom, why weren't you more committed to this cause that was really based about people not having freedom to vote, to go to school, to have their own livelihoods, to be free from violence? Why didn't you care about that?'
So, I think it rings hollow today, and I think that's too bad because there are still elements that I think have ethical power of letting people guide and design their own lives. And, the question always, within this type of discussion, is: 'Where does your freedom begin and my freedom end? And, how do we deal with those conflicts and those edges?' And I think he hoped there weren't those conflicts. So, in some ways he doesn't provide a resource for us because he tended not to engage those most deepest and difficult questions.
Russ Roberts: My guest today has been Jennifer Burns. Her book is, Milton Friedman: The Last Conservative. Jennifer, thanks for being part of EconTalk.
Jennifer Burns: Thanks so much for having me. Really enjoyed our conversation.