Whilst Keynes’ could clip a crisp 1-iron off a tight lie with cheroot in chops, he was not immune to doubt. Not one to think that he had it nailed. Shortly before his death, whilst sitting on the patio sipping pink gin with Henry Clay, the esteemed social economist and whisperer of good things to the Bank of England, he sighed and muttered: “I find myself more and more relying for solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago“. The context was the economic swamp that the country found itself in post WWII. The invisible hand was in reference to the metaphor used by the bearded Scottish moral philosopher Adam Smith, to explain the unintended benefits to the greater good brought about by those acting in their own self-interests. Or something along those lines. And yet, it was the stagflationary hoolie of the 1970s that did for Keynes’ theories, and ‘shift the narrative’ amongst those doing the policymaking.
Whilst the British Government officially jettisoned Keynesian economics in 1979, the currents of high-brow economic thinking had been shifting for some time. And it was the old stoat Friedrich Hayek who was ringmaster. Fed up with the way politicians had embraced the wet-lipped largesse expounded by Keynes, he founded the Mont Pelerin Society in 1947. This was essentially a society, or club, for economists, philosophers, historians, and neo-liberal intellectuals of every flavour. In smoky pubs they’d lean in close and talk about markets, freedom of expression, and an open society and finish huddled around the piano singing songs. ‘She’ll be coming round the mountain she comes…” And so on.
Whilst the society had little immediate impact on the wider world, it was a young, fresh-faced Milton Friedman whose eyes shined brightest and by the time flares were in and economies were lurching towards stagflation – a sticky set up of low growth and high inflation – his ideas started to feel the meaty breath of politicians and policy makers who didn’t know what to do. Given that he had written a paper in 1968 forecasting that such a situation would ensue, he got the sails tight and went for it, with regular appearances on TV and the ever popular wireless.
Friedman was born in Brooklyn in 1912. Given the trend for parents to christen their children on the district in which they were conceived had yet to sweep society, Friedman was christened Milton, not Brooklyn. Born to hard working Jewish immigrants young Milton cut his own path and was the first in his family to go to university, ending up with a scholarship to do graduate work at the University of Chicago where he was exposed to the work of Jacob Viner, Frank Knight and Henry Simons, names that will be familiar to all. Or names that will, perhaps, mean nothing to the wide-eyed Panini collector. Viner, Knight and Simons were heavyweights in the Chicago School of Economics, a body of thought that also hummed and hawed at Keynesism policies, muttering under its breath, preferring a tighter line off the tee, a line that would be embraced by Friedman, a line that became known as monetarism.
Monetarism basically emphasises the role of governments in controlling the amount of money that whizzes around the economy. Money in the tills of local grocery stores, money in purses and wallets and piggy banks. Money in bank accounts. Money in all forms. The theory, so say said monetarists like Friedman, was that the variations in money supply will have an impact on what a country can produce, as in its output, in the short term; and influence prices – what you pay for a ham roll and sticky bun per say – in the long run. So, what the policy makers need to do, is focus on the supply of money. Easy peasy.
Come the 1970s the pie was ready to come out of the oven. Stagflation had set in, courtesy of a host of factor such as the Nixon Shock in 1971- a series of measures that the rubbery President Richard Nixon put in play – and the oil brouhaha of 1973. On the one hand the rising unemployment seem to argue for policies that would stimulate the economy, put some zizz into things; and yet the hot inflation would suggest that policies needed to tighten up. To cool everyone off. It was the perfect storm for those looking to stick a pitchfork into the post-war economic status quo. As with bubble gum and pop music, it was America that moved first.
In 1979 an ashen faced President Carter got the number off a friend of a man called Paul Volcker and rang him up and asked him if he would like to get a grip of the Federal Reserved. The line crackled, Carter clenched his buttocks and held his breath, before Volcker said yes, he would. What Volcker did was go for inflation. And go like a greyhound after a Wimbledon hare. What happened was interest rates went up. And went up a lot. And not just in the US, but all over the world. In the UK, Maggie Thatcher had just rolled Labour’s James Callaghan and after putting up new curtains in No.10 and banning slip on shoes, she too took it to inflation with teeth bared. A few sticky years later, and inflation was seemingly tamed.
Viewed through the lens of monetarism, the Great Depression of the 1930s was caused not by a lack of investment, but by a massive contraction of the money supply. Similarly, the post-war inflation was caused by the taps being too loose, there was simply too much moula sloshing around the casino. In a sober whisper – perhaps relevant today given the all-in approach of the money men – monetarists argue that Central Banks are often to blame, and their actions can have negative consequences. Given all the money printing of recent years, the trillions and trillions of debt that is now sweating under ever rising rates, the cat calls from the cheap seats could well get louder.
Friedman lived to the ripe old age of 94. He worked his whole life. Indeed, his last article for the Wall Street Journal was published the day after his death. He should have won a Nobel Prize you mutter. Well, he did. In 1976. JK Galbraith the Canadian American economist and all round intellectual and a man not without some sharp words for Friedman’s approach to economic life, observed that “the age of John Maynard Keynes, gave way to the age of Milton Friedman”.
It turns out that Milton Friedman could also clip a crisp 1-iron off a tight lie. One imagines an afternoon foursomes partner, par excellence.
Hepburnsays 