Saturday 18 Aug 2018 | 20:56 | SYDNEY
Saturday 18 Aug 2018 | 20:56 | SYDNEY

After the age of Friedman


Mark Thirlwell

2 May 2008 10:43

One of the many consequences of the US sub-prime crisis and the associated collateral damage is likely to be a re-evaluation of the role of monetary policy – something I touched on last year.  James Galbraith takes a longer view in this speech on the ‘collapse of monetarism and the irrelevance of the new monetary consensus’  (hat tip to the excellent Economist’s View). After announcing early on that he comes to bury Milton Friedman, not to praise him, Galbraith provides a short, opinionated and entertaining critique first of monetarism and then of the ‘new monetary consensus’.  His thesis is that not only is monetarism dead (which is hardly news), but so – in the aftermath of our latest financial calamity – is the inflation targeting regime that replaced it. 

In my view, what is now up for grabs will turn out to be much bigger than the theoretical framework for monetary policy.

Milton Friedman and John Maynard Keynes are often bracketed together as the two leading economists of the twentieth century, and there is much debate as to who was the most important (as a Cambridge, UK graduate, I have very firm views on this). The debate was reignited by Friedman’s death in 2006. His passing produced many tributes for the champion of monetarism, some more critical than others.

Perhaps more interestingly, however, the widespread international adoption of many of the kinds of free market policies that Friedman had advocated, along with the strong global economic growth that followed, have prompted the proposition that the most recent period of economic history should be described as the Age of Friedman. Such claims are open to criticism on several grounds – see for example this column by Brad DeLong. But even if they were to hold up, one major consequence of the sub-prime crisis looks set to be a broad rethink of the role of markets and regulation. 

If the Age of Friedman is now over (assuming it ever began), an important question is, what will replace it?  In his speech, Galbraith reckons that the ‘relevant economics’ for today is not that of Friedman, nor is it the new holy grail of inflation targeting. Instead, Galbraith looks backwards, to the economics of Keynes, of Hyman Minsky, and of his father, John Kenneth Galbraith. I’m not sure that this will turn out to be the right answer, but it is the right question.