Samuelson Friedman: The Battle for the Free Market
Author: Nicholas Wapshott
Editor: WW Norton
Price: $ 28.95
The New Deal and World War II transformed the US economy from a free market for all to a system that was still capitalist, but many of the rough edges of which have been polished.
For-profit enterprises remained the norm – America never acquired significant government ownership of the means of production – but corporations and businessmen were subject to many new constraints. Taxes were high, in some cases up to 92 percent; a third of the country’s workers were unionized; a vigilant antitrust policy attempted to limit monopoly power.
And the government, following the ideas developed by Briton John Maynard Keynes, has played an active role in fighting recessions and maintaining full employment.
In the decades that followed, however, there was a sustained retreat – first intellectual, then political – against these constraints, an attempt to restore the free capitalism of yesteryear. Samuelson Friedman: The Battle Over the Free Market by Nicholas Wapshott is essentially an account of this setback and its eventual fate, presented as a duel between two famous economists – Paul Samuelson of the Massachusetts Institute of Technology and Milton Friedman of the University of Chicago.
Perhaps the first thing you need to know is that the idea that what happened was a personal duel between economic titans is best viewed as literary vanity. Certainly, no one told Paul Samuelson that he was engaged in a fight for the soul of capitalism.
Samuelson wrote a successful textbook that brought Keynesian economics – the idea that changes in government spending and taxes can be used to manage the economy – into American college classrooms. And his concept of “neoclassical synthesis” – markets can work, but only with government-created safeguards – in fact provided the intellectual rationale for the postwar economy. But politics has never been more than a peripheral concern.
Friedman, on the other hand, was a very political animal. Of course, political crusades are better entertainment than quiet scholarship, so Friedman’s life story dominates Wapshott’s book.
So, on this political animal: Friedman first rose to prominence in academic circles as the co-author of a 1946 pamphlet denouncing rent control (not mentioned in this book). He received wider notoriety with a 1953 essay, “The Methodology of Positive Economics,” which seemed incredibly abstract until it finally got to the meat: a claim that economists ignore theories on. monopoly and imperfect competition because, he claims, they don’t make any useful predictions beyond those that come from simple supply and demand. And his first bestseller, Capitalism and Freedom, was more of a political sermon than a book of economic analysis.
That said, Friedman was not a mere propagandist: he was a brilliant analytical economist capable of doing ground-breaking academic work when he decided to do so. His work on monetary policy, in particular, convinced many economists who disagreed with him on almost everything else.
And his magnum opus, A Monetary History of the United States, 1867-1960 (with Anna Schwartz), although a masterful work of scholarship, clearly had a major political focus to grind. For his main conclusion was the claim that the Great Depression would not have happened if the Federal Reserve had done its job and stabilized the money supply. That is, simple technocratic measures would have been sufficient – no need for all that Keynesian stuff.
The United States and Britain tried to implement Friedman’s belief that the authorities could stabilize the economy by ensuring steady and slow growth in the money supply; both efforts have failed miserably. Friedman didn’t help himself by making crazy predictions about soaring inflation and depression, none of which came true.
A number of economists had closely examined Friedman’s arguments about the Great Depression and found them insufficient. And the consequences of the 2008 financial crisis proved the skeptics right. Ben Bernanke, the chairman of the Fed and a great admirer of Friedman, did everything Friedman and Schwartz said the Fed should have done in the 1930s – and it wasn’t enough. Soon Bernanke begged for help from fiscal policy, that is, pleading for Keynesianism to come to the rescue.
Libertarian politics peaked in the 1990s, when the sectors of power generation to banks were deregulated. But too many of these deregulation ventures have failed, with incidents like the California electricity crisis of 2000-1 and, yes, the banking crisis of 2008.
If you look at the Biden administration’s proposals – which are for the most part very popular, although their legislative fate is uncertain – they are pro-market, but involve substantial government spending and regulations in an attempt to tilt the arc. markets towards social justice. In other words, they are a lot like what Paul Samuelson said decades ago.
So by all means, you should read the story of Wapshott. But you should also ask a question that I don’t think the book answers: Was it all just a big detour ideologically motivated by sound economic theory and policy? And why did this happen?