The American Economic Association Honours Milton Friedman and John Kenneth Galbraith

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A few weeks ago I attended the annual American Economic Association meetings, where two famous economists were honored: the diminutive Milton Friedman and the tall John Kenneth Galbraith. Both these titans in economics had died in the past year following exceptionally long and influential careers.

Yet there was a stark contrast in the two sessions. The Friedman room was expansive and held more than a thousand enthusiasts, while Galbraith’s session attracted no more than 50 people. Some of the difference can be explained by the fact that the AEA meetings were held in Chicago, where Friedman taught for 30 years, and because two of the speakers were Nobel laureates, Gary Becker and Bob Lucas.

However, there is little doubt that if these two economists were honored 50 years ago at an AEA meeting, their fortunes would have been reversed. In the late 1950s, Friedman was a relatively unknown professor at Chicago who was regarded as a “reactionary” monetarist devoted to extreme laissez faire. Galbraith was hailed as the “progressive” Keynesian from Harvard who eloquently understood “American Capitalism,” and articulated the “countervailing powers” of Big Business, Big Labor, and Big Government. In 1958, his bestseller, “The Affluent Society,” made a convincing case for redistributing wealth and progressive taxation as the only legitimate solution to the widening gap between “private opulence” and “public squalor.” Galbraith went on to become a member of the “new economics” team of the Kennedy Administration and ambassador to India. In 1967, Galbraith completed his trilogy with “The New Industrial State” at time when America’s financial institutions were flexing their muscles around the globe. Galbraith reflected this hubris: The “technostructure” of big business could control markets and manipulate consumers through planning and advertising, and was no longer beholden to shareholders, consumer sovereignty, or supply and demand. The Sixties were the high tide of Keynesian economics and fine-tuning the economy.

But a series of unpredicted crisis and trends in the late 1960s and early 1970s opened the door for Milton Friedman and the growing band of free-market economists. The West suffered a sharp rise in inflation and economic crises, and American manufacturing lost its dominance in the world economy. It was time for a counter-revolution to the Keynesian-Galbraithian monolith.

At Chicago Friedman’s rigorous analysis of the business cycle and free-market solutions started paying dividends. His mammoth “Monetary History of the United States,” published in 1963 and co-authored with Anna J. Schwartz, gradually convinced the economics profession that the Great Depression was not a result of “bad” distribution of income, “bad” corporate structure, and a “bad” banking system, as emphasized by Galbraith in his book “The Great Crash,” but largely because of “bad” government policy by the Federal Reserve, which allowed the money supply to collapse by more than one third. Friedman’s achievement was a triumph of empirical economics that Galbraith could never match.

Friedman and other market economists also countered Galbraith’s “social imbalance” thesis in “The Affluent Society.” The Keynesian “tax and spend” solution had failed miserably to redress the gap between private affluence and public poverty because government often lacks the market incentives to cut costs and meet the needs of its customers, the taxpayers, in an efficient way. In his 1962 book, “Capitalism and Freedom,” Friedman argued that the solution to this social dilemma was to expand the market (supply side economics) and apply market principles to public enterprise where feasible. This led to the privatization movement around the world, where country after country systematically denationalized, deregulated, and privatized public enterprises and services, especially after the collapse of the Soviet centralized planning model in the early 1990s.

Unfortunately, Galbraith seemed to be oblivious to these dramatic changes. In the 40th anniversary edition of “The Affluent Society,” Galbraith had a chance to revise his thesis in light of the worldwide movement toward freer markets. Yet the privatization solution completely eluded Galbraith’s mind. He chose not to even mention it.

In sum, one gets the impression that Friedman and other the free-market schools are today’s “progressives,” offer new bold solutions to public issues in education, welfare, and fiscal policy, while Galbraith and the old-style Keynesians are the “reactionaries,” unwilling to entertain the new market solutions to public problems. Over the past 30 years, Friedman’s star has risen while Galbraith’s has fallen. Well did George Stigler conclude, “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.”

Regards,

Mark Skousen
for The Daily Reckoning Australia

Editor’s Note: Dr. Mark Skousen is is a professional economist, financial advisor, university professor and author of more than 20 books. Dr. Skousen has taught economics and finance at Columbia Business School, Barnard College at Columbia University and Rollins College in Winter Park, Florida. He has appeared on ABC News, CNBC Power Lunch, CNN, Fox News, and C-SPAN Book TV.

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Comments

  1. Not to respond on a sour note, but my father had his own take on Stigler, who once lamented that so many people were reading Galbraith and so few were reading Adam Smith. Dad’s riposte was that Stigler’s real complaint was not that many read Galbraith and few Smith, but that no one read Stigler at all.

    James Galbraith
    February 1, 2007
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  2. As a man who believes that Galbraith was one of the most conspicuously civilized thinkers of the 20th century, as well as one of the most articulate, I would argue that Dr. Skousen’s final sentence is invalid. The implication is surely that JKG was not a great economist, but the question whether he was or wasn’t has no logical connection with the assertion that all great economists are tall.

    tradalexander@yahoo.es

    Ivor Alexander
    November 28, 2008
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  3. I think that US has a great history and culture, but its leaders have failed its people and a nation, unless of course I have missed something in the last three months. Tallness a factor? Hmm I guess we might be waiting a while for a great Chinese economist who instead may be directed to playing basketball for his/HER country. Oh dear what a waste. LOL

    Charles Norville
    November 29, 2008
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  4. i am from the uk,we had the misfortune to have friedman economics forced on us,every thing has been privatised,we now get ripped of by banks,utility companies,pay the most for housing,the highest cost of living,the lowest wages in Europe thanks to friedman
    contrary to friedman economic theory the market has not given us the best of everything,quite the opposite,i now believe in the guided,controlled freemarket
    friedman was a fundementalist who did not understand how the real world works,he was a theory man,whose complex economic models reflected his view of the world,not the real world,galbraith was a pragmaist he only was interested in what realy worked,galbraith wins
    the american business is flawed,china and india and europe are the future not he us,there finished

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  5. Mr. Yousaf, I am also from the UK, and would absolutely love to hear your further justification of the points you make. What one might call ‘Friedmanist’ policy started to be brought in by the Thatcher government, on the back of the country literally grinding to a halt, more than partly due to Keynesian economic systems and massive government control (and therefore public subsidy) of industry.

    “Everything has been privatised”. No it hasn’t, Milton Friedman would be disgusted by the so-called privatisation that has occurred in the UK. Maybe a better word is ‘corporatised’: leaching companies worm their way into huge centrally-alloted contracts, usually with no competition at all to speak of. For example, the ‘privatised’ rail network allows one operator alone to run direct trains between Newcastle and london. Some privatisation Mr. Yousaf.

    “We get ripped off by banks”. I certainly don’t, I bank with First Direct and they are utterly superb. Incidentally they refused me a small extension to my overdraft a few years ago when I was in the process of setting up a business and didn’t have much money. No coincidence, then, that they didn’t need a bailout. My friend, an artist who earns about six thousand pounds a year, was approved three credit cards with five grand limits, all by salespeople in airport lobbies. She certainly hasn’t been ripped off by the banks, because she’s not stupid enough to think that she can afford to have access to that much credit. Personal responsibility my boy! The prevailing mentality in the UK—I believe due to our socialist past—is that we somehow have a ‘right’ to these services, and trust that these business are looked after for us by the government. Hence people not checking who they are depositing money with (IceSave?), or taking on huge mortgages with the view that ‘it must be okay if they say so’.

    “Pay the most for housing” Perhaps, but fuelled by what? Milton Friedman was a monetarist, and he’d have said that the interest rate has been too low for years, overheating the housing market. His philosophies are actually backed up by your point here, I’m afraid. Which makes me wonder why I’m even writing to you come to think of it. Did you know that our good friend Gordon Brown removed the housing market from the government’s measurements of inflation? We may well be in a completely different place if he hadn’t, and we certainly would if Friedman had been in charge of the interest rate.

    “I know believe in a controlled, guided market” a controlled, guided market in most things (absolutely in banking) is what we have had for the last 30 years, Krugman’s proposal that ‘free markets have failed’ is irresponsible guff, and I actually believe nasty propaganda for his rather dodgy cause. We have not had free markets in the financial sector. We have framework of (seemingly useless) regulation, and a promise to bail out anyone that screws up. Would you take risks if you knew you were ‘too important to fail’? Of course you would.

    One last point: Glabraith was certainly not interested in ‘what works’. Glabraith famously said ‘there is not a single problem in New York that could not be solved if the city’s budget was doubled’. As Friedman pointed out, the budget trebled and all the problems got worse. Galbraith’s response? As mentioned above, he had a tendency to just ‘stop talking’ about certain things…

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