Death of a Giant

Most of the readers of this blog know Milton Friedman as a political intellectual. I know him (not personally) for his achievements as an academic economist and as the professor of several of my professors. He won the Nobel prize for economics in (I think) 1976 for his achievements as an academic economist, not for anything most of the public has ever heard of him for. Further, there are Nobel winners and then there are Nobel winners. We all take the list of economics winners and divide them into categories of "well, I guess you could make a case for that guy" and "of course." Friedman is hailed by all to be the latter. In fact, Friedman is even bigger than that. He is fairly considered to be among economists to be one of the, say, five most important economists of the 20th century. As public intellectuals go, that makes the guy a colossus, straddling real academic achievement and the public square. In fact, I can't think of any public intellectual who had the stature among his peers that Friedman did. (A colleague just pointed out to me that Noam Chomsky probably qualifies.)

What Friedman actually did was lay the foundation for the complete destruction of Keynesianism as a scientific theory (as opposed to a set of policies). His first major work
was known simply as the theory of consumption. A big part of Keynesianism was the idea that households have a "marginal propensity to consume" of about .8 (due to the fact that on average households tend to consume 80% of the income and save 20%.) An incorrect inference from this was that if you give households some extra money, they will save 20% of it and spend 80% leading to what Keynesians called the multiplier. (You give people money, they spend 80% of it, that money is income to someone else, they spend 80% of it, and so on). To correct this, Friedman had to develop an entire theory of how households choose how much to save and how much to consume today, and from this came the idea that the answer depends crucially on whether you expect the money to continue (if you think the extra money is one time you will save more of it than if you think it will keep coming). The upshot was that the "marginal propensity to consume" simply didn't exist. Keynesianism was simply not coherent as a scientific theory. His other major contribution, on the relationship between unemployment and inflation, was similar: it cut out another leg from the table that was Keynesianism. All of this incorporated into our thinking that what people expect to happen in the future is key to determining what will happen today. Keynesianism allowed for none of this and for this reason it died a well deserved death. Friedman's work foreshadowed how academic economics would be conducted for (at least) the next fifty years.