Milton Friedman: a long, productive life as a public intellectual


We have said that perhaps the biggest unreported story of the last decade is that a Great Depression did not occur after the Great Stock Market Crash that began in the year 2000. As you can see in the chart above, when the Internet Bubble burst, the NASDAQ plummeted from its high of 5100 to a low of 1100.

And nothing happened. When a very similar Crash happened in 1929 to the NYSE, the country suffered the worst economic calamity in its history, GDP fell precipitously, unemployment hit 25%, and the stock market didn’t recover for a quarter century — until 1954. We thought that the non-Depression in the US following the bursting of the Internet Bubble was a huge story. In our view, the non-Depression was caused by Alan Greenspan’s adoption of a expansive monetary policy, so significantly at odds with the awful performance of the Fed in the 1929-1933 time frame (and other structural issues such as the lack of deposit insurance). However, we never saw that story in print until yesterday.

Yesterday we read a piece in the WSJ called Why Money Matters, which included the following chart and analysis:


The prosperous ’20s in the U.S. were followed by the most severe economic contraction in its history. In our “Monetary History” (1963), Anna Schwartz and I attributed the severity of the contraction to a monetary policy that permitted the quantity of money to decline by one-third from 1929 to 1933. Since 1963, two episodes have occurred that are almost mirror images of the U.S. economy in the ’20s: the ’80s in Japan, and the ’90s in the U.S. All three episodes were marked by a long period of rapid economic growth, sparked by rapid technological change and the emergence of new industries, and accompanied by a stock market boom that terminated in a crash. Monetary policy played a role in these booms, but only a supporting role. Technological change appears to have been the major player.

These three episodes provide the equivalent of a controlled experiment to test our hypothesis about what we termed the Great Contraction. In this experiment, the quantity of money is the counterpart of the experimenter’s input. The performance of the economy and the level of the stock market are the counterpart of the experimenter’s output, i.e., the variables whose relation to input the experimenter is seeking to determine. The three boom episodes all occurred in developed private enterprise market economies, involved in international finance and trade, and with similar monetary systems, including a central bank with power to control the quantity of money. This is the counterpart of the controlled conditions of the experimenter’s laboratory…

The results of this natural experiment are clear, at least for major ups and downs: What happens to the quantity of money has a determinative effect on what happens to national income and to stock prices. The results strongly support Anna Schwartz’s and my 1963 conjecture about the role of monetary policy in the Great Contraction. They also support the view that monetary policy deserves much credit for the mildness of the recession that followed the collapse of the U.S. boom in late 2000.

It was good to finally read this story that it was monetary policy that indeed had made much of the difference in the outcomes of the Great Crash of 1929 and the Great Crash of 2000. It took a while, but it was worth the wait. It struck us as well that the author was following up on analysis that he had done 43 years earlier — that in itself is a pretty unusual bit of follow-up, after such a long period of time. But what was perhaps most amazing was that the same day that the author’s article appeared in the Wall Street Journal on the op-ed page, his obituary was the WSJ’s lead editorial.

Milton Friedman has received no shortage of tributes after dying at age 94 this week. However, it is hard for us to imagine many blessings in life greater than being actively engaged in work and the world of ideas into one’s tenth decade. The WSJ obituary of Professor Friedman included this comment of his on the role of the public intellectual:

“We do not influence the course of events by persuading people that we are right when we make what they regard as radical proposals. Rather, we exert influence by keeping options available when something has to be done at a time of crisis.”

Crises of course recur with some regularity. The hard part to achieve is the long, engaged life of a Milton Friedman. It is just one of many ways in which he stands as an inspiration.

2 Responses to “Milton Friedman: a long, productive life as a public intellectual”

  1. Han Says:

    Your articles have been truly informative. I was in the CIS of Russia right after the break-up of the Soviet Union. Now I have the opportunity to be in China to watch the rapid growth of their ecomony. It is my hope that this is not just a bubble. The implications for the world’s economy are staggering as China is becoming the manufacturing center for Europe, Asia and USA. If China’s economy staggers, what will happen to the economy of Europe or USA? My intuition tells me it will not be good for the world’s economy.

    When I took this assignment my wife and I talked about the manufacturing implications for America. My adult life has been dedicated to value-added manufacturing. Europe is quickly becoming a service oriented society with questionable true revenue generation to support the socialistic lifestyles they insist upon. Is the USA that much behind Europe? Our economy is far more “free-market” than Europe, but we are becoming a society of people seeking to make money in the service sector. This is a trend which is not good for the USA.

    We live in interesting times.


  2. gs Says:

    Milton Friedman fully deserves the eulogies he is receiving.

    I am strongly inclined to agree that some deft footwork behind the scenes prevented the popping of the Internet bubble from becoming a severe economic downturn. (Not to mention the 1987 crash and the Bush-Mitchell recession around 1990.) However, it’s my understanding that favorable conditions for the Internet bubble were facilitated by the easy-money policies designed to avert the possible systemic collapse arising from the Y2K problem.
    Han’s question about China–is it a bubble economy?–is implied in Jack’s earlier posts about that country. They have yet to weather a couple of business cycles.

    Han: Is the USA that much behind Europe? I used to wince at the chest-beating triumphalism on some conservative sites before the problems with Iraq became evident. IMO what ails us is a disease of Western civilization, or perhaps a disease of postindustrial democracy. We may or may not fare better than Europe, but we certainly are not immune. (For example, not only are we undermining the rule of law by welcoming cheap illegal labor, but also we are declining to pursue the technology which will make those menial jobs unnecessary. Someone else will develop it if we don’t.)

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