How Important Was Benjamin Strong?

Megan McArdle asked recently whether the rape charges against IMF head Dominique Strauss-Kahn could have a negative impact on attempts to deal with the current economic crisis within the Eurozone.  In the process, she notes that an argument could be made that the absence of Benjamin Strong in the 1930′s contributed to the inability of authorities to prevent the Depression:

 

Having a power-vacuum at the major multi-lateral institution charged with assisting its resolution will make things much more difficult. There’s a plausible argument to be made that the untimely death of 1920s fed chief Benjamin Strong left a weakness at the center of the Federal Reserve that considerably frustrated both domestic and international attempts to cope with the monetary collapse of the early 1930s. Could this be a similar incident?

 

This argument echoes the views of economic greats Irving Fisher and Milton Friedman (in his classic with Anna Schwartz, A Monetary History of the United States)  For example, Fisher told Congress in 1935 that “Governor Strong had died and his policies died with him. . . . I have always believed, if he had lived we would have had a different situation (quoted in Wheelock 1992).  Likewise, Friedman and Schwartz claim that:

If Strong had still been alive and head of the New York Bank in the fall of 1930, he would likely have recognized the oncoming liquidity crisis for what it was, would have been prepared by experience and conviction to take strenuous and appropriate measures to head it off, and would have had the standing to carry the System with him (412-413).

But are individual actors really that important in this type of realm, especially macroeconomics?  And how important was Strong’s absence in this particular case?

Well, I’m not sure I’m all that qualified to answer either that meta question or the particular one.  However, it is important to note that Friedman ultimately concluded that individuals were not all that important in this area (indeed, he seems on the verge of walking back his argument about Strong in A Monetary History though he doesn’t go that far).  In his 1984 piece “Monetary Policy for the 1980′s,” Friedman argued that ”The experience of the past two decades has led me to alter my views in one respect only – about the importance of personalities.  They have on occasion made a great deal of difference, but additional experience and study has impressed me with the continuity of Fed policy, despite the wide differences in the personalities and backgrounds of the persons supposedly in charge.”  

 

This follows what a number of other economists have found regarding Strong’s particular impact.  As economist David Wheelock explains, Peter Temin, Gerald Epstein and Thomas Ferguson, and Karl Brunner and Allan Meltzer (among others) did not think Strong’s absence was that important (see page 13).

 

Therefore, it seems as if we probably should not get too worked up about the policy impact of the demise of DSK’s career at the IMF.  Bigger forces are at play and will ultimately constrain policymakers and shift policy in certain directions (even if individuals are able to steer within the bounds of that course).       

 

Note: one bit on individuals tweaked slightly.

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Conscious Capitalism

Threat to or savior of capitalism?  John Mackey explains “Conscious Capitalism” on CNN Money.

If you are interested in this question, a good place to start is the epic throwdown on corporate social responsibility between Mackey and Milton Friedman (and T.J. Rodgers) in Reason.

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Yglesias on Friedman: Duty to Rent-Seek?

Matt Yglesias argues that Friedman’s contention that a corporation’s only duty is to maximize profits, not to pursue “social responsibility” projects, logically entails that businesses should also rent-seek: lobby government for special privileges to hamper their competitors, suppress wages, or augment their profits with subsidies. Certainly, if Friedman believed that literally the only moral duty corporate management has is to maximize shareholder return, this position logically entails that they should rent-seek or, for that matter, engage in theft, fraud, and abuse whenever doing so has a net positive expected return.

But this was not Friedman’s position. Friedman argued that businesses should maximize profit subject to the constraints of ordinary morality. The whole rationale behind Friedman’s position is that in a competitive, capitalistic economy profit maximization drives innovation and growth. Social responsibility projects, meanwhile, are beyond the scope of businesses’ expertise in most cases, and it is unlikely that they will do them effectively. His rationale is essentially utilitarian. But rent-seeking (and defrauding customers and so on) has net costs to society. Therefore, Friedman would argue that businesses should not rent-seek, even to maximize profits.

HT: Peter Suderman.

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Milton Friedman on JFK’s Speech

Many may have forgotten that Milton Friedman begins Capitalism and Freedom with a critique of President Kennedy’s inaugural speech.  It is well-worth another look – so dig out your dusty and yellowed copy and read the introduction again.  The key line is this one:

The free man will ask neither what his country can do for him nor what he can do for his country.

Given the context, Friedman clearly (mis)uses the term country as a stand-in for government or state.  Understanding this makes his critique even more powerful, otherwise it would sound a lot closer to Rand than the Friedman who believed in private charity and wouldn’t have a problem with sacrificing for the good of others in the community as long it was voluntary.

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Sunday Morning Quotation – Happy Birthday Milton Friedman

Yesterday was Milton Friedman’s birthday – something celebrated around the country on Friday as organizations in approximately 43 states (and 5 other countries) held MF Day events.   In that spirit, here is Friedman in Playboy discussing the conundrum of what to do in the area of welfare given what the state has already done (I was going to find and link to the entire interview but I am not sure my employer would believe me that I was honestly looking for one of the articles!  It can, though, be found in his book Bright Promises, Dismal Performance: An Economist’s Protest):

If we were starting with a clean slate – if we had no government welfare programs, no Social Security, etc. – I’m not sure I would be in favor of a negative income tax.  But, unfortunately, we don’t have a tabula rasa.  Instead we have this extraordinary mess of welfare arrangements, and the problem is: how do you get out of them?  You can’t simply abolish them, because when we enacted these programs, we assumed an obligation to those who are now being helped by them.  In fact, we have induced people to come under the protection of these programs. (Playboy Interview 1973) 

Wondering if any of our readers went to one of the celebrations.   Is so, anything interesting to report?

Friedman is not my favorite libertarian thinker.  But he was certainly an important libertarian voice and a great economist.  Wouldn’t it be nice to have him around right now to comment on the financial crisis and the government’s foolish fiscal policies?  Does anyone today come close as a spokesperson for free markets?

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Policy Differences Among Economists and “Disinterested Citizens”

Milton Friedman argued in 1953 (and again in 1967) that economic policy differences are rooted primarily in different views about the consequences of those policies — and that these disagreements could largely be eliminated by better positive economics (!).  Specifically, he wrote:

I venture the judgment, however, that currently in the Western world, and especially in the United States, differences about economic policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action – differences that in principle can be eliminated by the progress of positive economics – rather than from fundamental differences in basic values, differences about which men can ultimately only fight.  (1953)

I have been much impressed, in the course of much controversy about issues of economic policy, that most differences in economic policy in the United States do not reflect differences in value judgments, but differences in positive economic analysis.  I have found time and again that in mixed company – that is, a company of economists and noneconomists such as is here today – the economists present, although initially one would tend to regard them as covering a wide range of political views, tend to form a coalition vis-a-vis the noneconomists, and, often much to their surprise, to find themselves on the same side.  (1967)

This is a highly problematic contention and something that not even his wife Rose was willing to accept.  Indeed, she thought nearly the opposite: “I have always been impressed by the ability to predict an economist’s positive views from my knowledge of his political orientation” (1998).*  

My view is that values and interests, not scientific understanding, are at the root of most political differences – and this holds for economists as much as for the rest of us.  Indeed, even when economists are in agreement on policy despite different political views, this is often because of a commonly shared fundamental agreement on values, namely a generally consequentialist – even utilitarian – ethical framework that itself is exogenous to economics as a science.  

It is worth nothing that Milton wavered later in life in his confidence in this earlier view, noting “I am much less confident now that I am right and she [Rose] is wrong than I was more than four decades ago when I wrote the methodology article…” (1998).    

* Rose’s view is very, very troubling since it would make scholarship merely an adjunct to politics rather than a neutral scientific enterprise that might or might not have policy implications. (It is worth explicitly pointing out that she implies the causal arrow is going from political orientation to economic view, rather than the other way around).

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Krugman on Friedman on the Depression

I just recently came across this profile of Milton Friedman by Paul Krugman in the February 15, 2007 New York Review of Books. Krugman pays homage to Friedman’s research as a macroeconomist, including his and Schwartz’s Monetary History of the United States, best known for its explanation of the Great Depression as a monetary phenomenon. However, Krugman castigates Friedman for “intellectual dishonesty” in his popularizations.

On the Great Depression, the core of Krugman’s accusation is that Friedman claimed to have found that the Federal Reserve “caused” the Great Depression when the money supply collapsed by a third during 1931-33 due to bank failures. But, says Krugman, the fault in the Fed was not reducing the monetary base (they increased it), but instead failure to act. So it’s dishonest to claim that the Fed caused the Depression, when Friedman’s research actually demonstrates the case for more government intervention, not less.

I take the point, but it’s an unfair stretch to characterize Friedman’s interpretation as intellectually dishonest. After all, when public choice economists criticize government regulation on the grounds that such agencies are often “captured” by the interests they’re supposed to be regulating, no one would say it’s intellectually dishonest to oppose certain government regulations on those grounds. Similarly, one can legitimately oppose monetary discretion on the grounds that central banks will sometimes make catastrophic mistakes on the side of acting too hesitantly or timidly.

Second, as I recall Friedman and Schwartz’s original argument, they also argued that an alternative to rescuing the banks would be either deposit insurance or allowing solvent but illiquid banks to suspend payments to depositors, as had been the case prior to 1913. It was the combination of no deposit insurance, no bailouts, and the prohibition on suspension of payments that caused the catastrophe. Had that last government regulation not been in place, the U.S. Depression might not have turned out to be the worst slump in the industrialized world in the 1930s.

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