Samuelson vs. Friedman

I quite enjoyed Samuelson Friedman: The Battle over the Free market and now went back and read my highlights. It balances personal biography style of content with a recap of the macroeconomic discourse of the second half of the 20th century. There are plenty of amusing anecdotes and witty remarks. I was actually laughing quite a bit. For instance, from Samuelson:

I have often done though experiments in place of counting sheep, asking myself, what if I were Professor Friedman? [..] Would a 7 percent open rate of inflation cause me to come out in favour of an incomes policy? And in my first pass at this problem, my answer is always no. Then I try 8 percent and I still get to no. By this time, I fall asleep at night.

Here are a few notes and some takeaways.

In a way, economics seems more interesting in the period between, say, the 1930s and the 1970s. Economists grappled with the “big questions” trying to develop models that could reliably be used to predict and control the macro economy. Samuelson pioneered the mathematization of economics and made it look more like natural science. Friedman tried to devise an algorithm for regulating money supply to manage inflation properly. Clean and simple. Today’s economics papers (such as this one) are way less ambitious and often boil down to sophisticated methods of performing regression analysis. On the other hand, relying on grand economic theories which are wrong, or at least incomplete, can have some dramatic consequences.

Samuelson’s Keynesianism (and neoclassical synthesis) clashed with reality in the 1970s period of stagflation. Likewise, Friedman’s theory of “monetarism” - the idea that central banks should only regulate the money supply (using some measure like M1, M2 or M3) - faired poorly when tested in production. Both the Fed under Volcker and the Bank of England had to retract their attempts. Furthermore, Friedman’s predictions of resulting inflation under the new policy in the U.S was a total failure.

The book is not called “Hayek Friedman,” but this theme comes up a few times:

The difference between Friedman and Hayek over economics became evident in 1950, when Hayek applied to join Chicago’s economics department. Hayek imagined his Austrian School dimension would be a natural fit with the rest of the conservatives in the Chicago School. But the logic of Austrian economics was as far from the Chicago Schools’s reasoning as the Chigaco School was from Keynesianism.

Hayek also criticised Friedman’s methodological approach to economics:

He always complained that Friedman was closer to Keynes than Hayek was to either of them. “In one respect Milton Friedman is still a Keynsian, not on monetary theory, but on methodology. By accepting the premise of macroeconomics [..] Friedman had made a serious intellectual error.

Moreover, he warned him (to no avail) from getting involved with politics. On the contrary, the Chicago school economists did not hold Hayek’s work as an economist in high regard. It seem that their alliances were mostly political. Overall the intermingling of economics and politics was stronger than it is today. I believe many economists regret that economics became a battlefield between the Left and the Right and are now trying harder to appear a little more scholarly and dispassionate.

Paul Samuelson and Milton Friedman debated each other in their weekly columns in Newsweek for about twenty years, starting in 1966. Both received Nobel prices in economics, and when it was Friedman’s turn, he stated to NBC’s Meet the Press that:

The jury I would like to have judge my work is the economics profession not today, primarily, but twenty-five or fifty years from now

That was 1976, and we’re actually closing in on the 50-year mark. So who was mostly right? Unfortunately, I don’t think there’s an agreed-upon answer. Samuelson favored fiscal interventions ala Keynes, and his economics made a big comeback post-2008 financial crisis, and not least with the pandemic. I mentioned above that Friedman’s “monetarism” was abandoned after some attempts in the U.S. and the U.K. Still, you could argue that the modern central bank’s focus on interest rates is pretty close to what Friedman had in mind (at least he seemed to think so himself). The fundamental idea that inflation is kept in check, primarily by monetary and not fiscal policy, is now accepted across the board.

It will be very interesting to see what sort of economic lessons will be drawn from the recent return to a high-inflation world!

But perhaps worth bearing in mind this observation by Samuelson:

Economists are said to disagree too much, but in ways that are too much alike: If eight sleep in the same bed, you can be sure that, like Eskimos, when they turn over, they’ll all turn over together.