The View From 1776

Previous postings (Part One; Part Two; Part Three) discussed aspects of Paul Krugman’s essay “Who Was Milton Friedman?” in the New York Review of Books. 

Mr. Krugman is a political propaganda columnist for the New York Times, where predictably he is a strident critic of individuals’ economic and political liberties when they conflict with Federal collectivism.  As an advocate of Neo-Keynesian economic theory, he believes that only intervention by the Federal government can effectively deal with changing economic conditions to insure full employment.

Neo-Keynesian doctrine is a reaction to the massive failure of Keynesian economics in the 1970s stagflation, a prolonged period of high unemployment combined with the highest peacetime rates of inflation ever suffered in the United States.  It is a defensive effort to salvage as much as possible of New Deal Keynesian economics.

Keynesian economics, the handiwork of British economist John Maynard Keynes in the period between World War I and the middle of the Roosevelt New Deal, was a paradigm of the economy in which only government spending could counter the Depression and bring employment back up to historical levels.  In that paradigm, capitalistic business had failed in 1929 and would never again be able to employ everyone needing a job.  Thus the Federal government had to become the employer to take up the slack. 

This remains the economic creed of the Democratic Party, which explains why Democrats (along with Republican liberals) instinctively propose higher taxes on the “greedy rich” and new spending programs to provide jobs for the not-so-rich, no matter what problem arises.  Note that this is classic socialism, the materialistic religious faith that redistributing income via taxation and government spending will transform the political state and human nature, eventually creating an economic heaven-on-earth.

Collectivist economic doctrine colors Mr. Krugman’s New York Times propaganda and is evident in his criticism of Milton Friedman in the New York Review of Books essay.

In that piece, Mr. Krugman admits that Mr. Friedman, before it occurred, developed economic analytical theory that predicted the 1970s stagflation. 

Since President Franklin Roosevelt’s deliberate devaluation of the dollar and efforts to raise commodity prices (i.e., inflation), liberals have championed demand-side economics, which is the theory that businesses will increase employment only if government spending first puts money into consumers’ pockets.  This, however, imparts an inflationary bias to the economy, since money goes to people before business ramps up production of consumable goods.  The result is simply more money chasing an unchanged supply of goods, and prices rise.

Such inflation did not trouble Keynesians, who were confident that higher inflation produces higher employment, a concept known as the Phillips curve.

Milton Friedman demolished that thesis in his 1957 A Theory of the Consumption Function. He observed that the first rush of inflation might make employers think that the economy was picking up steam and thus hire more people, because businesses’ sale prices would temporarily increase faster than wages, producing more profit and inducing more employment. 

But, after 25 years of such inflation, everyone from labor unions, to government workers and retirees, had long since been granted cost-of-living adjustment clauses that almost immediately increased materials and labor costs and crimped profits.  Moreover, as businessmen and consumers became increasingly aware of the phenomenon, they built it into their expectations, making government spending ineffective in raising employment, but poisonously effective in augmenting inflation.

While Mr. Friedman did not specifically predict the 1970s stagflation, his analysis made it clear that such conditions would be the result of inflationary spending by government.

Mr. Krugman gives credit to Mr. Friedman for that insight, but merely mentions the 1970s stagflation obliquely.  He fails to admit that the United States suffered an economic catastrophe and that blame lay entirely at the feet of liberal advocates of Big-Brother economic intervention by the Federal government. 

George Santayana wrote that those who do not understand history are condemned to repeat it.  Mr Krugman is Exhibit A for that truth.

He castigates Mr. Friedman for advocating Thomas Jefferson’s view that the best government is that which governs the least.  An unrepentant liberal-Progressive, he concludes his essay by reaffirming his religious faith in socialistic collectivism:

When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it.  But what the world needs now, I’d argue, is a counter-counterreformation.

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