TrendMacro conversation with Jennifer Burns, author of Milton Friedman: The Last Conservative

Milton Friedman stood for a scientific approach to economics in which theories would be tested in the real world for their ability to predict. His greatest experiment was monetarism and the inflation of the 1970s, and its remediation in the 1980s. His academic mentor Arthur Burns was Fed chair for most of the 1970s, and quickly abandoned monetarism for wage and price controls and continued easy policy, resulting in a decade of high inflation, slow growth and poor labor markets. That was experimental evidence of Friedman’s theory that the Philips Curve could not operate long-term. When Paul Volcker became chair in 1979, he adopted monetarism explicitly – though he did not associate himself with Friedman publicly. Volcker found monetary aggregates were hard to measure and influence. Two years and two recessions later, inflation was conquered – but it was unclear whether or not that related to changes in the money supply. Friedman argued that deregulation of bank interest rates distorted the numbers, but for decades the relationship between money supply and inflation was noticeable but weak. In the pandemic, the money supply grew more rapidly than ever before, and inflation followed with a brief lag; as the money supply stopped growing and began contracting, inflation as fallen – all exactly as Friedman would have predicted. Friedman’s monetary legacy lives on in efforts to find simple policy frameworks that remove discretion from the Fed, such as the Taylor Rule. In other domains, Friedman’s libertarian legacy can be seen in the all-volunteer army and the school-choice movement.