Thursday, October 16, 2008

Stereotyping Friedman's Ideas and the Chicago School of Economics

Freakonomics has a nice article by Diamond and Kashyap explaining the financial crisis. At a certain point they explain why there'll not be another Great Depression, and criticize silly stereotypes of Friedman's ideas and the Chicago School of Economics that are popular in the press:

Elevated financing costs will slow growth. In the Great Depression, one-third of the U.S. banks failed, and the unemployment rate got to 25 percent. The economy is going to be in for a rough period, but the policy actions taken over the last week are going to prevent this type of collapse.

Finally, some journalists find it strange that we and many of our colleagues at the University of Chicago have been advocating bold government action to stop the collapse of the banking industry. We suspect that some of these people would be surprised to learn that Milton Friedman blamed timid and wrong-headed government policy for causing the Great Depression. Friedman was more concerned about monetary policy actions, but he and Anna Schwartz also gave “a prominent place in the sequence during the contraction to successive waves of [bank] failures.”

The importance of preventing a banking-sector implosion has long been appreciated not only at Chicago, but also at other leading business schools and economics departments. This is why there has been such strong support for the equity injections from economists with very different political philosophies. It is too early to tell if the enthusiasm will fade once the details become known of how the administration plan is being implemented.

Boudreaux also criticizes the same uneducated stereotypes:
Milton Friedman championed not unfettered markets, but markets fettered by competition and consumer sovereignty rather than by political diktats. Friedman understood that fetters imposed by government are neither the only nor the best means of keeping markets working well. Indeed, far too often - as Friedman knew - fetters imposed by government turn in practice into crowbars that businesses use to break free of the competitive shackles that oblige them to behave prudently and fairly.

No comments: