"The
modern conservative is engaged in one of man's oldest exercises in moral
philosophy: that is the search for a superior moral justification for
selfishness."
John Kenneth Galbraith
"The
Great Depression [1929-39], like most other
periods of severe unemployment, was produced by government mismanagement rather
than by any inherent instability of the private economy."
Milton Friedman
"Economic
freedom is... an indispensable means toward the achievement of political
freedom."
Milton Friedman
"People of privilege will always risk their complete destruction
rather than surrender any material part of their advantage."
John Kenneth Galbraith
Economist John Kenneth Galbraith
(1908-2006) died on April 26, 2006 at the age of 97. Economist Milton Friedman
(1912-2006) died on November 16, 2006 at the age of 94. Along with the great John Maynard Keynes
(1883-1946), these two economists dominated the field of economics during the
second half of the 20th Century. There existed such an intellectual competition
between the two economists—not unlike the rivalry that prevailed between
President Thomas Jefferson (1743-1826) and President John Adams (1735-1826), who
both died on the same day— that
Galbraith's death may have influenced the time of Friedman's death.
Both were influential in framing the general economic
debate and in steering general economic policies within their own country, but
also abroad. For one, Galbraith was an advisor to Franklin D. Roosevelt, Harry S. Truman, John F. Kennedy and Lyndon B. Johnson. Similarly, Friedman's
ideas strongly influenced the economic policies of, among others, British Prime
Minister Margaret Thatcher, American
President Ronald Reagan and Chilean President
Antonio Pinochet. He also persuaded the Nixon administration
to abolish military conscription.
John K. Galbraith's most influential book
was The Affluent Society
(1958), in which he proposed the idea that
post-war private expenditures were generating marginal social benefits that
were lower than would be derived from increased public expenditures on needed
economic infrastructures and social programs. The general principle here is
that public expenditures should be increased until one marginal dollar spent
publicly generates the same marginal social benefit as one marginal dollar
spent on private goods and services. This is still a fundamental precept of
modern economic welfare theory.
Milton Friedman, for his part, espoused the
18th Century French physiocrats' economic philosophy that government should
interfere as little as possible with the efficient functioning of free markets,
according to the fundamental law of supply and demand. He advocated laissez-faire capitalism
and free market economics. In his most important
work, Capitalism and Freedom (1962), Friedman became
the universal champion of all those who advocate low taxation and small
government.
Both economists, just as Keynes previously, were
influenced by the pressing economic problems requiring solutions at specific
times. During the immediate post-war years, after the onslaught of the Great Depression,
and after the war-time price controls and rationing, private wealth was
increasing at a fast pace (new houses, new cars, etc.) while schools, hospitals
and roads were not catching up with the new demand for economic infrastructure.
The international environment was also characterized by fixed exchanges rates,
a high level of trade protectionism, and controls on
international capital movements. In
such a context, fiscal policy was deemed to be
more potent and useful than monetary policy. Thus
Galbraith's fiscal approach to solving society's problems of resource
allocation and economic stabilization.
In the 1970's and 1980's, after two damaging,
successive oil supply shocks, and the rise of inflation,
the need was to isolate the economy from these external shocks, through the
adoption of flexible exchange rates and through a more predictable monetary
policy. Thus Friedman's emphasis on flexible exchange rates and on a more
responsible management of the money supply. To a
large extent, Galbraith's more Keynesian approach to economic management and
Friedman's more monetarist approach to economic stabilization were a reflection
of the different economic environments in which they applied their theories.
As far as economic stabilization
is concerned, for example, that remains an empirical appreciation if, for a
given economy, at a specific time, fluctuations in government surpluses and
deficits are more or less efficient than fluctuations in interest rates in
influencing private investment and private consumption. There are situations
where private expenditures are very responsive to movements in real interest rates, i.e.
to nominal interest rates minus inflation expectations. In such normal times,
monetary policy alone can be relied upon to stabilize the overall economy,
while public budgets remain balanced.
However, there arise situations of market failures when
excessive market power by a few large corporations or excessive herd-like
speculation by the many create destabilizing bubbles in crucial sectors of the
economy. Economic psychology could become so universally depressed that no
amount of monetary stimulus could jump start the economy. Japan is
an economy that found itself in such a predicament during the 1990's. At that
time, nominal interest rates were pushed to near zero, their absolute low, but
real interest rates remained high due to a generalized deflation and high deflationary
expectations. When an economy falls in such a 'liquidity trap',
fiscal policy may become the only avenue left to stimulate the economy, with increased
public deficits. It becomes a matter of political ideology if such deficits
should be generated through tax reductions or through increased public
expenditures, or both.
Philosophically, 'liberal' Galbraith would be more
inclined to favor enlarged public expenditures, while 'conservative' Friedman
would prefer to keep as much money as possible in private hands. Both would
agree, however, that the government is the last arbiter when economic
conditions in the private economy deteriorate, either through destructive
inflation, imported or domestically produced, or through an economic slump,
that generate widespread unemployment of both workers
and machines. It should be no surprise if Friedman's prescriptions are more
welcomed in times of prosperity, while those of Galbraith and Keynes would be
readily adopted in times of economic crisis. This has been a pattern often
observed in the past. For example, before the Great Depression, 'Laissez-faire' capitalism was politically dominant. However,
the role of government was rediscovered when poverty, income inequalities and
unemployment became widespread. This is to be expected in a democracy, where
the wishes of the median voter normally carry the day. The same ambivalence toward
economic policies will no doubt prevail in the future, as people ride the
consequences of economic cycles. Thus,
there will surely be future Galbraiths and future Friedmans in the economics
profession.
Posted,
December 4, 2006, at 5:30 am
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