By Eamonn Butler. 2011. Great Britain: Harriman House, Ltd., Pp. 163, $19.99, paperback.
Toward the end of his life, John Kenneth Galbraith summed it up nicely. "The age of Keynes," he wrote, "has given way to the age of Milton Friedman." What exactly does that mean? Eamonn Butler writes a lucid account of why the most influential economist of our time is so important.
It is hard for economic students today to even imagine what the profession was like a half century ago. The prevailing thinking very much reflected Keynesian orthodoxy, including the beliefs that:
* Capitalist economies are inherently unstable, given to cycles of booms and busts.
* Government can offset these events and smooth out the cycles with carefully timed counter-cyclical policies.
* Monetary policy, however, is largely impotent because (a) people are willing to hold any quantity of money the government creates and (b) in any event, the demand for money is unstable.
* Fiscal policy, by contrast, is a potent counter-cyclical tool, with changes in government spending being a more powerful weapon than changes in taxation.
* As economies get wealthier, the natural tendency is to save too much and consume too little, causing national output to fall well short of its potential; this shortfall can be avoided, however, by increased government spending.
* Government can also exploit the Phillips curve tradeoff between inflation and unemployment to permanently reduce the level of unemployment by increasing aggregate demand.
In the early years, Friedman believed many of these ideas himself. In fact, in 1943 he wrote a paper titled, "Taxing to Prevent Inflation." But--and this is surprising for a discipline that prides itself on being a "science"--at the time when Keynesian theory was in its heyday, not one of these propositions had been seriously tested against plausible alternative hypotheses.
Above all, Friedman was an economist's economist. He was the quintessential scientist, always seeking to confirm or rebut the conventional wisdom. When he set out to verify the Keynesian orthodoxy, in every case he found the prevailing belief was wrong.
When Friedman and his colleagues turned to the evidence, they found that unwise government policies were a far greater source of instability than private sector maladies. For that reason, it is better to stabilize what government is doing than to engage in counter cyclical polices that could actually make things worse. There is a stable demand for money and monetary policy is far more powerful than fiscal policy in affecting the economy. There is no tendency for underperformance because economies save more as they get …