Classic Milton Friedman Video from 1977
In this classic video from 1977, Milton Friedman delivers a 52-minute lecture at Utah State University titled "Myths That Conceal Reality" including: 1) the Robber Baron Myth, 2) the Great Depression Myth, 3) the Demand for Government Service Myth, 4) the Free Lunch Myth, and 5) the Robin Hood Myth.
Here's how Milton Friedman introduces his lecture:
"As you are all aware, there has been a drastic shift in public attitudes public opinion in the past fifty years or so, with respect to the role of the individual on the one hand and the role of government and collective institutions on the other."
"There has been a shift in the philosophy and attitudes of the public from a belief in individual responsibility, from a belief in a society in which the role of government was as an umpire, to a belief in a society in which the emphasis is on social responsibility and the role of government as Big Brother and protector of the individual. As always when such shifts arise in public opinion, they are largely produced and reinforced by the development of myths about prior experience."
"Somebody wrote that a myth is like an air mattress: there’s nothing in it, but it’s wonderfully comfortable, and deflation causes an uncomfortable jolt. My purpose today is to give you that jolt."
HT: Newsalert
21 Comments:
It seems, a major factor in the slow recovery is rising regulatory costs:
The Regulation Tax Keeps Growing
September 27, 2010
"The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008...new policies enacted in 2010 for health care and financial services will increase this burden."
Hey pt thanks for the The Regulation Tax Keeps Growing (WSJ) reminder...
Re: Friedman's talk, apparently we as a nation haven't learned a thing since he made it...
Dr. Friedman's book "A Monetary History of the USA etc." is a great read and probably the best historical examination of monetary effects ever written. But it is lacking in probably the most salient aspect of why the Great Depression appeared to be inescapable until FDR was elected; the USA was on the gold standard.
Once the USA went into deflation while on the gold standard people and companies had incentives to hoard money (and gold) rather than spend or invest it. The real economy then started a process of ratcheting downward. Yes, the Federal Reserve of the time reinforced those processes (Friedman's theme), but keeping the gold standard with a deflating economy means the real economy will decline, the money supply will shrink and those effects will feed on themselves. Whether the Fed could have reversed those negative trends while maintaining the gold standard is not as obvious as Dr. Friedman would have us believe.
Not bad except for the Great Depression explanation. While he was right that it was government that was responsible it was the huge increase in liquidity to save Britain after it overvalued the Pound that created the malinvestments. FDR's adoption of Hoover's big government programs made things worse and there was no true recovery until after FDR died.
Other than that Friedman was great. Ironic how he was so good on so many subjects but terrible in the one for which he was given the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Ed R:
"Once the USA went into deflation while on the gold standard people and companies had incentives to hoard money (and gold) rather than spend or invest it. The real economy then started a process of ratcheting downward. Yes, the Federal Reserve of the time reinforced those processes (Friedman's theme), but keeping the gold standard with a deflating economy means the real economy will decline, the money supply will shrink and those effects will feed on themselves. Whether the Fed could have reversed those negative trends while maintaining the gold standard is not as obvious as Dr. Friedman would have us believe."
Interesting. Do you have a source that explains those views further?
It's not clear what connection you are making between the gold standard and the Fed policy of shrinking the money supply - the deflation you mention.
Obviously a gold standard limits Fed actions, but the money supply was and is controlled by the Fed.
Interesting. Do you have a source that explains those views further?
When it comes to the Great Depression there is a much better source that Friedman.
Vangel IV: " . . . .there was no true recovery until after FDR died."
Really ???
In early 1933 (when FDR took office) the unemployment rate was about 24%. In 1944 (the last full year of his life) it was 1.2%.
Likewise the GDP in 1932 was $58.7 BN; while the GDP in 1944 was $219.8 BN (in current dollars). Or in constant (2005) dollars the numbers are 1932 = $725.2 BN and 1944 = $2,033.5 BN. Those are annual growth rates for the 12 year period of over 10% and 9% respectively.
But maybe that was not a 'true' recovery.
Vangel IV: " a better source than Friedman [is Murray Rothbard]??"
For about three years Hoover followed the advice of his Treasury Secretary (Andrew Mellon) which was to: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
As you can see that is pretty much the Rothbard formula. We saw how those policies worked out in the real world from 1929 through 1932.
Ron H.: " . . . .the money supply was and is controlled by the Fed."
The Fed was limited in the creation of money because it was required to keep a vault reserve ('cover')of 40% of physical gold of the value of its currency outstanding. As more and more US banks failed and Britain went off the gold standard (reinflated) many people and businesses made entirely rational decisions to hold onto cash and gold rather than spend it or invest in the real economy. So currency and gold were in greater demand and were increasing in value relative to real assets. However the value of gold (and obviously currency) had a legally fixed value. This meant the value of real assets (measured in units of gold/currency) had to decline -- i. e. deflation and greatly reduced investment.
Friedman overlooked (or misunderstood) these effects. How do we know this? Because while he has extensive numbers and charts of currency, deposits and bank reserve ratios he does not differentiate 'currencies' between paper currency and gold.
In early 1933 (when FDR took office) the unemployment rate was about 24%. In 1944 (the last full year of his life) it was 1.2%.
Around 22% of the prewar labour force was shipped abroad to fight a war. Those who were left behind were making hardware for that war. That is not exactly an 'improvement,' particularly when you look at the scarcity of consumer goods in the domestic economy.
Likewise the GDP in 1932 was $58.7 BN; while the GDP in 1944 was $219.8 BN (in current dollars). Or in constant (2005) dollars the numbers are 1932 = $725.2 BN and 1944 = $2,033.5 BN. Those are annual growth rates for the 12 year period of over 10% and 9% respectively.
As Bob Higgs point out, the GDP numbers did not come from market activities where prices were set by consumer demand but by government. There was little meat to eat, and most goods were rationed because the economy could not make the things that consumers wanted. The standard of living fell for those at home and the poor slobs who were sent abroad.
But maybe that was not a 'true' recovery.
It obviously ins't. When you have to line up and use ration coupons to buy meat and when 22% of the labour force is sent abroad there is no 'recovery.'
Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity
Against Leviathan: Government Power and a Free Society
For about three years Hoover followed the advice of his Treasury Secretary (Andrew Mellon) which was to: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
As you can see that is pretty much the Rothbard formula. We saw how those policies worked out in the real world from 1929 through 1932.
Hoover listened to Mellon? When did that happen?
Certainly FDR did not believe the crap you wrote above. In a September 1932 speech in Iowa FDR argued, "I accuse the present Administration of being the greatest spending Administration in peace times in all our history. It is an Administration that has piled bureau on bureau, commission on commission, and has failed to anticipate the dire needs and the reduced earning power of the people. Bureaus and bureaucrats, commissions and commissioners have been retained at the expense of the taxpayer."
Now if FDR did not believe that Hoover was fiscally prudent and listened to Mellon who are you trying to fool?
The president that followed Mellon's advice was Harding. When the economy contracted Harding stood aside and let the liquidation happen. Not only did he cut spending, he lowered taxes substantially. And the country did see a major contraction. For a few months. But after the lousy businesses were liquidated the country boomed.
" Around 22% of the prewar labour force was shipped abroad to fight a war."
OK, the same GDP numbers for 1940 (before the US went to war)are:
$101.4 BN current dollars; and $1165.9 BN in 2005 dollars. Still about a 7% (current) or 6% (constant) annual growth rates.
" . . In a September 1932 speech in Iowa FDR argued . . . "
You are indeed correct. FDR did campaign in 1932 on a platform of fiscal rectitude and smaller govt. And once elected he did a 180 policy reversal.
We have seen a few other recent similar examples:
Lyndon Johnson in 1964: "I will not send American boys 10,000 miles to fight a war Asian boys should be fighting for themselves."
Or Ronald Reagan in 1980 promising to cut Fedl Govt spending and balance the budget. (or for that matter, G. W. Bush in 2000)
V: "When it comes to the Great Depression there is a much better source that Friedman."
Yes, that would be my 1st choice also. I was attempting to be polite - something I'm not good at, and something you're not used to seeing. :-)
However the value of gold (and obviously currency) had a legally fixed value. This meant the value of real assets (measured in units of gold/currency) had to decline -- i. e. deflation and greatly reduced investment.
Legally fixed value? Value can't be fixed because it is subjective.
The regulations simply specified how many grains of gold would back each dollar, not the purchasing value of that dollar. After a bubble bursts it is natural to see prices fall. That is as it should be and necessary if the economy is to find a sound base from which it could grow. The stock market bubble in the late 1920s was created by a Fed that inflated too much to save Britain when it did not devalue the Pound as it should have.
Ed R:
"For about three years Hoover followed the advice of his Treasury Secretary (Andrew Mellon) which was to: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
His advice was to take no action and allow malinvestments to liquidate. That would be the Rothbard solution.
Instead, the Fed, rather than increasing liquidity in a recession, pursued a contractionary monetary policy, raising interest rates, further choking a stumbling economy, while hoover and Congress enacted the Smoot-Hawley tariff and raised taxes.
What would YOU expect to happen? Of course when you make a commodity artificially scarce, the price of it goes up, thus people hoarded money. Simple supply and demand.
OK, the same GDP numbers for 1940 (before the US went to war)are:
$101.4 BN current dollars; and $1165.9 BN in 2005 dollars. Still about a 7% (current) or 6% (constant) annual growth rates.
But Higgs' point is valid. When much of the economic spending is by government and there is no market price it is hard to take the GDP numbers seriously. A better measure is to look at the standard of living of individuals and the availability and affordability of consumer goods, housing, and essential services. On that front FDR was an absolute failure. As FDR's, the Secretary of the Treasury, Henry Morgenthau told the Ways and Means Committee in 1939, "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…I say after eight years of this administration we have just as much unemployment as when we started…And an enormous debt to boot!"
You are indeed correct. FDR did campaign in 1932 on a platform of fiscal rectitude and smaller govt. And once elected he did a 180 policy reversal.
If we all know that Hoover did not let the economy liquidate the malivestments then why did you imply that he did? The stock market crash was sparked by the Fed's excessive money printing in the late 1920s but the Great Depression was the creation of a meddling federal government that would not allow liquidation to take place. Harding had it worse as GDP contracted more and unemployment rose faster but he took care of the problem by cutting spending, cutting taxes, and letting the market revalue assets. While the contraction was much sharper and very deep it was over rather quickly and American families and American businesses moved on.
"If we all know that Hoover did not let the economy liquidate the malivestments then why did you imply that he did?"
You can read Hoover's own autobiography. He relates how he was receiving the 'liquidationist' balance the budget, inviolability of the gold standard, etc., etc. advice from Mellon (and others in his own party) so he tried all that along with generous doses of positive rhetoric.
Of course it did not work for Hoover, so he desperately tried some feeble spending and financial support policies in late '31 -- '32, but they were far too little and too late.
You can read Hoover's own autobiography. He relates how he was receiving the 'liquidationist' balance the budget, inviolability of the gold standard, etc., etc. advice from Mellon (and others in his own party) so he tried all that along with generous doses of positive rhetoric.
But he did not let the liquidation take place. In fact, he was the person who was advising Harding to meddle in the economy when Harding was facing a very similar situation. The facts on this are clear. Hoover meddled and did all he could to stop the market from working as it should. FDR ran against him as a Classical Liberal but when elected claimed that the word Liberal had changed in meaning. Not only did he continue to meddle as Hoover did but increased the level of government involvement. As a result the economy broke and there was no recovery until after FDR was dead.
Of course it did not work for Hoover, so he desperately tried some feeble spending and financial support policies in late '31 -- '32, but they were far too little and too late.
This is not what happened. Hoover was working on stopping the liquidation from the first day. The man was a meddler and about as far from an advocate of free market capitalism as was possible for a Republican in those days. The meddling did not work just as it has not worked in Japan or the US today.
Ed R: "You can read Hoover's own autobiography. He relates how he was receiving the 'liquidationist' balance the budget, inviolability of the gold standard, etc., etc. advice from Mellon (and others in his own party) so he tried all that along with generous doses of positive rhetoric."
I wouldn't generally rely on what someone wrote about themselves. Hoover remembered a different history than the clearly documented real one.
"Trying all that" would have included lowering taxes, reducing spending, and generally getting government out of the way so the "invisible hand" could do its work.
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