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Anna Schwartz is visiting us at AIER today to speak with our summer students about her experience doing research on what would become A Monetary History of the United States, and what it has been like to discuss that book’s powerful findings in a hostile intellectual and political environment (fyi – its major contribution aside from being a superbly researched work, is that it pointed to severe mismanagement of monetary policy by the Fed in the run up to and during the Great Depression).

In preparing for the talk, I ran into a critique of Milton Friedman written by Paul Krugman in the New York Review of Books. In speaking with Anna about it, I got to thinking about two things.

  1. Why is Paul Krugman choosing to write a detailed critique of Monetarism, by writing about the so-called “liquidity trap” during the Great Depression in this forum?  I am sure the NY Review of Book readers are extremely bright, but is this a better place than an economics journal or magazine to have such an intellectual debate?  Perhaps it is, particularly if your readers are not likely to check certain facts (Anna in a reply to that article makes this clear).
  2. Krugman really exposes the bias of modern day liberals – doing anything they can to bask free-market principles and to glorify the necessary powers of the state. In the piece, he argues that economic growth during the time when Milton Friedman’s ideas were deemed heretical (about 1947-1976) was much greater than the time since. In other words, when the state was heavily involved, gains in living standards were “far more robust” than they were when Milton’s free-market ideology were pervasive.

    Now, I would take severe pause at the claim that freedom is greater today in America than during the immediate post-war years, but that is not the point I want to make. The real point is, if you take Krugman’s claim to be true, that growth has slowed in the US in recent decades, and that it was state induced growth that has gotten us here, why have we observed precisely the opposite trend in developing countries over this same time period? It is widely agreed that the “Marshall Plan” for development aid has been a miserable failure, and that those countries who have experienced the fastest gains in living standards in recent decades have been those that have opened up their economies and many ways Milton Friedman recommended. Why the difference? Either governments do better or they do not, and if the argument is that some governments “get it wrong” then perhaps we should be paying more attention to the work of Buchanan and Tullock.

I hate jumping on the Krugman bashing bandwagon, but I just do not see that he can have this one both ways.

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