Milton Friedman Collection

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Milton Friedman on Freedom

Rothbard on Friedman

Classic Friedman Teaches a Liberal an Economic Lesson

Capitalism and Freedom

Is Milton Friedman a Statist

The Minimum Wage Myth

Inflation vs. Deflation

Inflation or deflation, which is better?  The answer can vary depending on who you ask.  Consider the question from the position of a worker as an importer or exporter.  If we have inflation, our dollar is weaker compared to other currencies so exporters will be able to sell more while importers will be able to buy less.  From this perspective it is easy to see that each profession, whether an importer or an exporter, will view inflation differently.  The same can be said for deflation.  In addition to the importer/exporter scenario the same principle holds when considering this question from the position of a borrower vs. a lender.

Let me first point out that no economist would argue that mild deflation or inflation is troubling.

Now let's consider some of the things Austrians say about deflation.  They claim it is not something to be feared and it is as silly to fear deflation as it is to think wars are good for the economy.  In a video with Tom Woods and Jeff Herbener they approach the discussion in a very frustrating way.  Tom Woods begins by saying that there are various definitions of deflation and when most economist are talking about deflation they are not referring to a drop in a money supply but rather a decrease in prices.  They go on to talk about the implications of falling prices (you can watch the video here).  One of the implications they falsely represent is that people will delay making purchases indefinitely because of the falling prices.  They laugh at the prospect of people waiting to buy coffee 10 days later because it will be five cents cheaper.  I want to address some of these arguments because they are not handled properly.

First of all, when other economists talk about deflation as a negative for the economy, they are speaking in terms of deflationary policies being implemented by the Federal Reserve.  They are not arguing that an increase in production that causes deflation is bad for the economy.  What is meant by Federal Reserve deflationary policies is exactly what Tom Woods says most economists are not referring to, which is a decrease in the money supply.  So right off the bat this video is misleading the viewer.

The next question you should be asking yourself is, why are deflationary policies unfavorable?  Consider a drastic decrease in the supply of money, say 20% (during the great depression the money supply dropped 33% over three years).  The problem is not that prices will fall eventually, the problem is that inflation/deflation takes around 9-15 months before the economy will start to feel these effects.  With this being considered, within the minimum of 9 months we would have only 80% of the the previous money supply while prices have yet to drop.  This has various implications, but clearly with less money to go around there will be less investment by businesses, less consumption by the consumer, less lending by banks etc.  The economy will slow down because of this.

I want to address the coffee argument because this is an egregious oversimplification of deflation.  First and foremost, no decent economist will ever tell you people will wait to buy coffee ten days because of falling prices nor will they say that people will postpone buying a computer because the prices will fall.  This is a straw man argument.  What needs to be considered when thinking about the economic effects of deflation is whether a businessman wanting to invest $100 million into his company would wait a few months if prices are projected to fall?  Any rational business man would consider waiting because if they were to take out a $100 million loan and prices are falling by 2% each year for 30 years how much extra would they have to pay back?  My investment will have be able to generate more profit than what I am paying back in interest to the bank in addition to having to pay back the amount the dollar has deflated.  This scenario doesn't seem quite so laughable now does it?  A business man with thinking like an economist will not think it is laughable either.

Woods and Herbener do address this issue at around the 7 minute mark but the manner in which they address it is improperly handled.  In America we cannot simply switch money, which is Herbener's solution to this problem.  He claims that in times of mild deflation, historically, this did not happen but I addressed this in argument in previous paragraphs.

What might the monetarist say?

In Milton Friedman's view, he would want a slight increase in a targeted money supply.  He usually argued somewhere between 3-5% with 3% being his best recommendation.  This itself, according to Friedman, would keep inflation or deflation mild.  This is what good economists argue for.  A stable money supply leads to a stable economy.  He argued this because of the evidence Herbener points out.  During the times of great expansion there were small increases in the gold supply.  Friedman wanted to emulate this with the Federal Reserve if our economy is to operate with a Federal Reserve.

The next time you hear an Austrian argue that it is silly to fear deflation you can argue that no economist fears mild deflation.

Thoughts

"There is no Austrian Economics- only good economics and bad economics". - Milton Friedman

This seemingly obvious statement actually has profound implications if it is considered carefully.

With Ron Paul becoming more popular more average citizens are becoming aware of economics, in particular Austrian economics.  This is a good thing for many reasons, for example, people are becoming aware of economic law, they are interested in the subject, they are reading solid arguments against government etc etc.  However, there are also some negative side effects to being exposed to Austrian economics as your first school of thought.  The main one is Austrian economists denounce all other schools of thought even if that school has made a large contribution to the field of economics.

One thing that exemplifies this situation is the housing crash in 2007.  Many Austrian economists predicted there was a housing bubble, Austrian economists weren't the only school of thought to predict this however.  That is because good economists practicing good economics can see these types of things.  However, if we look at what happened after the housing bubble popped, there were Austrian economists predicting hyperinflation, some even predicted it as early as 2010.  This was a prediction that, at least from my reading, was exclusive to the Austrian school of thought.  The reason they were wrong about this is not because they are bad economists, but rather they will not accept any theory outside of their own.  If they did accept other theory they likely would not have made this prediction.  This, in general, is why I do not consider myself an adherent of Austrian economics anymore.  Because good economists have absorbed the proper Austrian theory into their own and have advanced it using other methods the Austrians reject, such as mathematical economics.

Not only do they denounce other schools of thought, they lump the people practicing those schools of thought into a single category of statists.  This is not a good thing if we want to advance the liberty movement.  I make this claim because instead of Chicago schoolers, monetarists and Austrian schoolers working together to promote freedom and liberty the Austrians are calling all the others statists.  This creates a battle amongst people that should not be battling.  Think of all the time Austrian's have spent bashing Milton Friedman, and for what cause?  Most arm-chair economists aren't going to read his academic papers on the theory of money.  They are going to read Capitalism and Freedom or Free to Choose. Both of which give tremendous arguments against the state.  These may go unread because of an article that called him a statist (if you want to see why Friedman is not a statist check out this post here).  Furthermore, all the time spent bashing him could have been time spent bashing our real "enemies" of liberty.

So in conclusion, it is good people are being exposed to economics, especially a school of thought which denounces the state.  However, one should always read outside the school of thought they adhere to further their understanding.

Is Milton Friedman a Statist?

No.

This claim that Milton Friedman is a statist mostly belongs to Austrian Economists.  They think because Milton Friedman "supported" the federal reserve this makes him a statist.  This could not be further from the truth.

Let me be clear:  Milton Friedman DID NOT support the federal reserve.  Lets look at a quote:

"Any system which gives so much power and so much discretion to a few men, [so] that mistakes -- excusable or not-- can have far reaching effects is a bad system.  It is a bad system to believers in freedom just because it gives a few men such power without and effective check by the body politic --  this is the key political argument against any independent central bank...  To paraphrase Clemenceau:  money is much too serious a matter to be left to the Central Bankers"

This quote does not seem to support the Austrian hypothesis that Friedman was a statist in support of the federal reserve.  If you read enough Friedman or watch enough of his videos you will find him saying he is in favor of abolishing the federal reserve.  He also mentions many times that when he writes or talks about the federal reserve, he is theorizing given that it exists.  Furthermore, in his 1968 paper entitled "The Role of Monetary Policy" published in The American Economic Review he points out the proper way to conduct monetary policy is a "steady rate of growth in a specified monetary total".  This is exactly what we were doing with the gold standard by mining gold in other countries and bringing it to America.  His argument for this is that historically countries with a steady rate of monetary growth have had steady economic activity while countries with wild swings of growth have had wild swings of economic activity.

One other thing to point out is that if you want to learn about basic economic issues from a capitalistic point of view youtube Milton Friedman on whatever subject you wish to see and you will more than likely find plenty of videos all of which will be denouncing the government involvement in markets.