Jennifer Burns: Milton Friedman, Ayn Rand, Economics, Capitalism, Freedom | Lex Fridman Podcast #457

the following is a conversation with Jennifer Burns a historian of ideas including the evolution of economic political and social ideas in the United States in the 20th century to today she wrote two biographies one on Milton fredman and the other on iron Rand both of which I highly recommend this was a super technical and super fascinating conversation at the end and I make a few comments about my previous conversation with president zalinski for those of you who may be interested this is Alex region podcast to support it please check out our sponsors in the description and now dear friends here's Jennifer Burns you have written two biographies one on Milton fredman and one on Ein Rand so if we can we will focus on each one separately but first let's talk about the ideas that two of them held in common the value of individual Freedom skepticism of collectivism and the ethics of capitalism can you talk about the big picture ideas they Converge on yeah so Milton Freedman and Ein Rand in the biggest picture they're both individualists and they're skeptical of collectivities and collectivism so their unit of analysis is the individual what's good for the individual what works for the individual and their understanding of society kind of flows from that they also both use this focus on individualism to justify and to support capitalism as a social and economic system so we can put them in a similar category we can call them individualists we could call them Libertarians of A Sort they're also really different in how they approach capitalism how they approach thinking you know irand developed her own moral and philosophical system to justify individualism and to connect the individual to capitalism and to support system fredman struggles a bit more with how to justify capitalism and he'll ultimately come down to Freedom as his core value like his God as he says and so Freedom does connect back to the individual but he's not justifying capitalism for his own sake he's justifying it for its ability to underwrite freedom in the social sense and also in the individual sense at a high level are there interesting differences between them you already mentioned a few maybe in terms of who they are personally maybe in terms of how they approach the justification for capitalism maybe other ways yeah for sure so beyond this idea that that Milton fredman takes a while to come to his justification of capitalism morzin ran kind of has it from the start she really focuses on the core quality of rationalism and rationality rationality is the defining feature of human beings and so she works from from there whereas fredman Milton fredman eventually converges on this idea of freedom so that's one part of it the other is their intellectual styles are really really different their interpersonal styles are really different so fredman has big Ideas big principles that guide him but he's also deeply empirical he spends most of his career doing historical research economic research pulling data from how people actually make economic decisions and live in the world and using them to test and refine his theories where Rand to some degree we could say she's empirical and that she lives through the Russian Revolution and takes a very big lesson from that but her style of thinking is really um first principles an axiomatic approach going from the basic uh idea of rationality and then playing that out in different spheres and so those are just very different intellectual approaches and then they lead in some ways to really different ways of thinking about how you get things done in the world irand is a purist she wants to start with the pure belief she doesn't want it to be diluted you know one of her favorite sayings was you know it's earlier than you think in other words we're still moving towards a place where we can really hold and express these ideals purely fredman although he didn't use this terminology was much more a halfa loaf guy you know like I'll take what I can get and then I'll try to move to where I really want to be but he is able to compromise espe especially when he moves from being an economist into being more of a political thinker and so that's a really different intellectual style and then it also plays out in their lives in that Ein Rand is incredibly schismatic I mean she wants her friends to believe what she believes and support what she supports and she's willing to break a relationship if it doesn't match Milton fredman he also does tend to have friends who agree with him yet he's always willing to debate his opponents and he's willing to do so with a smile on his face you know he's a kind of he's the happy warrior and he actually will win a lot of debates simply by his emotional affect and his cheerfulness and his confidence where Rand will lose debates because she gets so angry in the face of disagreement so yeah they have they have a lot of similarities and a lot of differences and and it's been really fascinating to kind of dive deep into both of them I just uh relistened to an Ran's I think last lecture or at least it's called that and just the the confrontational nature of how she answers questions or how she addresses critics and so on there is a kind of Charisma to that so I think both of them are very effective at winning over sort of uh popular support but in very different styles it seems like H Rand is is very cranky but there's I mean it's the most charismatic cranky person I think I've ever listened to yeah I mean people talked about her meeting her and coming to believe in her ideas in a similar way as I did with Marxism in that suddenly everything made sense and that when they came to believe in objectivism they felt they had this engine for understanding the entire world now after a while for most people that then became confining but yeah that certainty and and fredman had some of that as well he he clothed it differently he clothed it in happiness where ran kind of closed it as you said in crankiness or anger I mean there's also an arc to ran she gets kind of angrier and angrier and crankier and crankier over the course of her life yeah what I enjoyed about my research is I was able to get into this early moment when she was different and a little more open and then I kind of watched her her clothes and her Harden over time would it be fair to say that uh Milton fredman had a bit more intellectual humility where he would be able to sort of evolve over time and and be convinced by the reality of the World to Change sort of the nuances of policies the nuances of how he thought about economics or about the world yeah absolutely fredman believed in being able to say I was wrong and there are some things he said he was wrong about we we'll delve more into monetarism and monetary policy but he was able to talk about the ways his ideas hadn't mapped on to the world the way he thought they would he does a really interesting interview at the end of his life where he's beginning to voice some doubts about globalization you know which was he was sort of a profit of globalization a cheerleader of globalization he really thought it would lead to a better world in all respects and towards the end of his life it's about two years before he dies there's a note of doubt about how globalization unfolded and what it would mean particularly for the American worker and so you can see him still thinking and that to me I had sort of assumed he became crankier and crankier and more and more set in his way and and of course there's a phase where where he does become that way especially as he's in the public eye and there's not room for nuance but to find in the last years of him life of his life him being so reflective that was absolutely not something Rand could do I think there's a thread throughout this conversation where we should actually also say that you're kind of a historian of ideas I am a historian of ideas yes and so we're talking about today in part about two people who kind of fought for ideas for an idea like we mentioned freedom for for capitalism and they did it in very different ways and it's so interesting to see sort of the impact they both had and how the their uh elucidation explanation of those ideas like reverberated throughout society and how we together as a society figure out what works you know uh the degree to which they have influence on the the public the degree to which they have influence on individual administrations like the Reagan Administration Nixon and so on and how it might return like fade away and then come back in modern times and it's so interesting if you just see this whole world as a as a game of ideas where we were like pushing and pulling and trying to figure stuff out uh a bunch of people got real excited over 100 Years Ago by communism and then they try stuff out and then the the implementation broke down and we keep we keep playing with ideas so these are the two greats of playing with ideas I think that that's a thread that just runs through this yeah and and of kind of pushing back against that movement towards communism social democracy but but one one difference I didn't that I really should emphasize Rand is a writer of fiction she's a philosopher but she's also a writer of fiction so she is working almost in the Mythic register much more in the psychological register she's creating character that people identify with and people relate to experiences they've had and that's one of the reasons she hits so deep and she's also offering people you know I read all the fan letters to her people would say things like I read the Fountain Head and now I'm getting a divorce you know you know having just um these incredible realizations Milton Freedman didn't get such didn't get S things or um you know I'll meet someone and and they'll say to me you know Ein Rand is is the reason I went to medical school you know like like a woman a couple of woman said this to me a few years back it never even occurred to me that I could be a doctor until I read IR Rand and I said I'm going to go to medical school and so she has that really intense impact on people so she thought of herself as rational she thought of rationality as kind of what she was doing but she was actually doing a kind of mytho mythopoetic psychological work as well whereas fredman on the one hand was much more rational there's a whole set of economic thinking and he provides a rational framework for understanding the world and it's the framework of you know neoc classical economics at the same time he does pull on mythologies you know of the idea of America and the Gilded Age the frontier mythology the individual immigrant the settler mythology he pulls on these but he doesn't create them and they and they are he's more kind of playing a tune he already has uh whereas I think ran really does something a little bit deeper and her ability to reach into people's psyche and then take that emotional psychological experience and fuse it to an intellectual world and a political world and that's really what makes her so powerful and so I think she comes back in to relevancy in a different way than fredman does because I think in some way she's tapped into a kind of more Universal human longing for Independence and autonomy and kind of self-creation and self-discovery nevertheless there are still pragmatic ideas that uh are still important today for Milton fredman even just on the economics level so let's dig in um let me try I took some notes let me try to summarize who Milton fredman is and then you can correct me yeah okay so he is uh widely considered to be one of the greatest and most influential economists in history not just the 20th century think ever he was a an advocate of economic freedom like we said and just individual freedom in general he strongly advocated for free market capitalism and limited government intervention in the economy though you do give I've listened to basically everything you have on the internet you give some more depth and Nuance on his views on this and in your books he uh led the famed Chicago School of economics and he won the Nobel prize in economics in 1976 he greatly influenced economic policies during the Reagan Administration and other administrations he was an influential public intellectual highly influential not just among economists he lived 1912 to 2006 so that means he lived and worked through some major world events where his ideas were really important the Great Depression with the New Deal World War II with the postwar reconstruction the rise and fall of the Breton Woods monetary system as we may talk about the Cold War and all the conflicts involved in that sort of the the tensions around communism and so on so the fall of the Soviet Union and also he has some interesting relationships to uh China's economic transformation yeah since the 1970s the stack flation of the 1970s and I'm sure there's a lot more so uh can can you uh maybe continue this thread and give a big picture overview of the ideas he is known for yeah sure and that's a great summary uh you learn you learn fast so let me start with the economics and and then I can kind of transition to how he used those economic ideas to become a real voice in the American conservative movement in the American political realm so I'll kind of highlight four ideas or contributions or episodes um one was his work with Anna Schwarz in revising our understanding of the Great Depression and that's tightly related to the second which is the school of monitorisation of stagflation and the explanation of that in the 1970s which really is one of these these sort of career making predictions and we can dig into that and then in terms of technical economics he's known for for the permanent income hypothesis which he develops with a group of female collaborators that I can talk about so those are kind of four technical pieces and up being really brought together in what becomes The Chicago School of Economics he's he's undoubtedly the head in the leader of The Chicago School of Economics there's an earlier generation that he learns from there's his Generation Um there's also a Chicago School of Law and economics that's really profoundly influential and then there'll be kind of a third generation that he's somewhat distinct from but that goes on to really shape economics but let me go back to these kind of four pieces and let me start with Great Depression so Milton Friedman actually lives through the Great Depression he's in college when it hits and he is so he's in college it's 1928 to 1932 and he's aware of the depression and he's deciding should I study mathem itics or should I study economics and he hasn't he's had some good economics teachers but it's really the context it's looking around at the slow you know dissolving of economic Prosperity so he decides to go to Chicago he decides to study economics and what's really interesting is that the Great Depression is so unexpected it's unpredicted um it's unprecedented and economists are really struggling to know how to respond to it and so he's going to arrive at the University of Chicago when the field it's is struggling to know what to do so he's in this kind of really open space where the the institutional economics of the 1920s has failed to predict which was focused on business Cycles this is the irony their big thing was charting and understanding business cycles and then we have the biggest business cycle of all time and they haven't seen it coming and they don't have a good explanation for it and um what he will get at Chicago is the remnants of the monetary understanding of the economy and so his teachers they don't know exactly what's going on but they look first to the banking crisis they look first to the the 1933 it's you know Bank runs failures of maybe it's up to a third of American Banks it's hu thousands of banks are failing per week so they are focused on that so that's the first kind of imprint he will have the Great Depression has something to do with a banking system the second imprint he will have is that all of his professors are profoundly concerned about the social crisis they want relief programs they want them now they want Bank regulation and financial reform they're very active this is not Les a fair by any stretch of the imagination so Freeman has that imprinting and then about so that's he gets there in 32 36 37 the ideas of John manard Kes from Britain which has a different explanation canes has a different explanation of the Great Depression will kind of make landfall in American economics and be very profoundly influential on most American e economists but fredman already it's too late for fredman he already has a different perspective so keynesianism unfolds I can say more about that but it basically leads to more active federal government participation in the economy and what underlies a lot of that it's at adaptation in America particularly is the idea that capitalism has failed capitalism has revealed itself to have a profound flaw in that it's two it's its cycles of boom and bust create social instability chaos it needs to be tamed it needs to be regulated and so that becomes the the kind of Baseline of politics in the United States the understanding of the New Deal the understanding of the Democratic Party even to some extent the understanding of the Republican party and fredman never quite never quite sure about that he has a hunch that there's something else going on and he does not buy that capitalism has sort of ground to a halt or the other idea is that capitalism has gone through some sort of phase transition and it worked great maybe while we had a frontier this is a very serious argument that people were making United States used to have a frontier a place where you know Europeans hadn't fully settled of course they're pushing out the native tribes that's another story but that this Frontier is the engine of economic growth and the frontier is now over it's closed and we're going to stagnate there's a theory of secular stagnation and so to deal with secular stagnation we're just going to have to have a more active state so fredman is suspicious of all these assumptions and he has this idea that is something to do with money money is somehow important and so he it joins together with Anna Schwarz who is uh an econom she doesn't at this time hold a PhD she's working for the National Bureau of economic research and they come together to do the study of money in the US economy and it takes them 12 years to write the book and and they're releasing their ideas and they're arguing and fredman is writing papers giving talks saying money is really important um and nobody's really believing him he's a crank he's at Chicago he's out you know Chicago is a well-known University but he's sort of considered a crank and then in ' 63 he and Hest Schwarz published this book and it's you know 800 Pages it's a reinterpretation of the history of the United States through money like the central character is money whether it's spec Greenback or the US currency and they have a whole chapter on the Great Depression and they what they've literally done Schwarz has done most of this they've gone Schwarz has gone to Banks and said show me your books and then she's added up column by column how much money is in your Vault how much money is on deposit how much money is circulating and so they literally have graphs you can see them in the book of how much money has been circulating in the US at various different points in time and when they get to the Great Depression they find the quantity of money available in the economy goes down by a third and in some ways this is completely obvious because so many banks um have failed and we don't have any type of B Bank Insurance um at that point so if your bank goes under your savings are there the money essentially vanishes and it's fractional Reserve banking right so you've put in they can loan up to 90% off on their deposits and so fredman and Schwarz present this argument that what really made the great depression so bad was this drop in the amount of money the 30% drop in the money they called the Great contraction and then they go further and they say well how did this happen and why and they pinpoint the Federal Reserve which is a fairly new institution at that time and they say what did the Federal Reserve do the lender of Last Resort what did it do in the face of what they're depicting is a massive unprecedented liquidity crisis and they find it's not really doing much and they really dig into the details and they find that the the the Federal Reserve has gone through a sort of personnel change and some of the key leaders in the 1920s Benjamin strong is one of them he's now deceased and the dominance of the New York Federal Reserve which in their telling you know is Global it's interconnected it's seen a lot of financial things come and go and they believe that the New York fed had the understanding to recognize this is a liquidity crisis we should be very generous we should support all the banks their influence has diminished for the kind of uh banks that are more um they don't say like the Rubes and the Hicks but it basically is it's like the people in charge don't know what they're doing and so the FED pursues this kind of policy of masterly inactivity they don't see it as their problem they don't do much there's an enormous liquidity crisis and that's their version of what the Great Depression is all about that it's a financial system meltdown it's a liquidity crisis and that it in some ways well in many ways they they argue very strong counterfactual argument the Federal Reserve could have prevented it and it did not and so it becomes then an Institutional failure and a political failure not a failure of capitalism as a system and so this book comes out it's a blockbuster and even those economists you've been like Freedman is a crank I don't buy it are like Freedman and Schwarz are on to something Milton Freedman on a Schwarz are on to something and so that really changes the game and this is also one of his most influential contributions because Freedman and Schwarz becomes the playbook for the Federal Reserve and we have lived through this this right the financial crisis the Federal Reserve is ready to loan Co the Federal Reserve does all kinds of new things because no Federal Reserve chair wants to be in Freeman Schwarz 2.0 that somebody writes or they're the bad guy who let the economy melt down so you know the specifics of what they say to do have obviously evolved as the system has changed but this is this is a playbook for how to deal with economic crisis it's Freeman and Schwarz and so it's absolutely fundamental and that is really going to be the place he makes his Mark there's a lot of things to say here uh so first the book we're talking about is the a monetary History of the United States in part for which milon Freeman won the Nobel Prize uh you've also mentioned the influence of the Great Depression if you could even just rewind to that yes so he went to I guess College in ruter that's right and he was uh you know mathematical proclivities so he was kind of wanted to be a mathematician and so it's it's kind of a cool Crossroads um it's interesting how the right time the right person arrives right so you described this really well that so he had the choice to be a mathematician or an economist and Economist is University of Chicago mathematician is Brown University whichever and then uh this is also the beginnings as you've described of mathematical economics so he fits in nicely into this using what I think you said the number of equations started going up per paper which is a really nice way to put it so really the right person at the right time uh to try to solve this puzzle of the economy melting down it's so interesting just one human it it's just from uh just zooming in on know a single human making a decision about life and it's it's hard to know when you're in it that the world is melting down from an economics perspective and that I could do something about this to figure out what it is and also I'm going to reject the mainstream narrative about why this happened yeah so uh the other piece of the puzzle when he goes to recers he thinks he'll be an actuary so Milton freedman's family his parents are immigrants Jewish immigrants from Eastern Europe they're pretty atypical and that they don't stay in New York you know and and they move to raway New Jersey and they put together a fairly middle class life as kind of they have a shop they do some wholesale buying and selling and then his father dies when he's 16 his life becomes more precarious um but it's never as precarious as he makes it out to be he's got three older sisters they earn a good living incidentally they all have better grades in high school than he does but he's the one that goes to college and um but it's actually really important that he loses his father figure because he's then looking for other father figures and he meets two at Ruckers one is Arthur Burns who will go on to have a huge influence in his career no relation to me by the way but um Arthur Burns is like him a fellow Jewish immigrant boy on the M he's older um and he's making a career as an economist and then there's Homer Jones who has gone to the University of Chicago and is studying with Frank Knight at Chicago and says you have to go to Chicago so he has these two mentors and and burns in particular suggests oh I could be an economist that could be my career path you know the idea to be an actuary for an insurance company I'm not sure where he got that idea but he just thought that was something he could do as someone who was good at math and so the college really opens the the perspective opens the door um and then I think it's really key that again he's he doesn't get um he doesn't get an explanation that he buys for the Great Depression so then he's looking for one and the math part is really interesting aspect of his career now he actually comes to Chicago to study with the mathematical Economist Henry Schultz but he gets there and he thinks Schultz is kind of dumb he really does he's incredibly arrogant and he he just thinks this guy's not that smart and it seems that I mean Schultz did some really important work in the early stages of mathematical economics but a lot of the oral histories about him are like yeah he wasn't that bright you know so fredman's maybe so he falls into the set of students who were really enthralled with his other Professor Frank Knight and Frank Knight is against math and economics um Frank Knight is like you know a neoclassical Economist but not a mathematical Economist he's an old school liberal he's really concerned about liberal democracy um economic liberalism and and fredman is very deeply influenced by Knight and he continues to pursue mathematical economics so he'll go for part of his graduate career he goes to Columbia University where he actually gets his PhD from and he works with a mathematical Economist there and so he comes out trained in what will eventually be econometrics statistics and economics his early Publications or in statistics but it's not really where his intellectual heart and soul are and eventually he will turn very profoundly against mathematics in economics and become a sort of heterodox Str throughout 20th century economics that says simple models are better um we need to work on empirical work off empirical data not construct elegant models and um and becomes really sort of countercultural within economics in that way and the test of a good model is it should actually predict stuff that happen it should predict stuff that happen it should tie back to what's going on I'm wondering which direction to go so first actually if we could zoom out on the different schools of E economics yeah just the basics you mentioned neoc classical we mentioned kenian economics we mentioned uh what else did we mention well The Chicago School of Economics right where does uh Austrian economics fit into that pile and marxan economics and can we just even just linger and try to redefine kenian economics and Chicago School of economics and neoclassical economics and um Austrian economics because they there's some overlap and tension okay so schools of Economics so we could start with classical economics classical economics we could think of Adam Smith is kind of your classic classical Economist the founder of the discipline classical economics does not really use math is very close to political economy it's concerned um with as Smith puts it The Wealth of Nations it's concerned to some degree with distribution it's concerned to some degree with what makes a good political system and what tends to really Define classical economics when you're looking from a great distance is What's called the labor theory of value so where does value come from in classical economics it comes from the labor that a person puts into it so maybe this in some ways a comes from Lock's notion of property that you kind of mingle you know your labor with the natural world we can say labor theory of value so classical economics concerned with um Smith is arguing against mercantilism for more free trade um often goes by the name of political economy to show it's more capacious it's thinking of politics and economics um you can still read these books today the sentences are long the words are different but you can still follow along so the real big transition from classical economics and political economy to economics as it's understood today comes with the marginal Revolution and the marginal Revolution is a scientific revolution that happens in a couple different places simultaneously right this is one of these things that you see in the history of science like you know there'll be some breakthrough like Darwin has a breakthrough but like somebody else has sort of the same breakthrough at the same time you totally you know differently so there's a version of marginalism that's um Continental there you know there's a version in the German speaking lands in F in the French speaking lands and in Britain and they all kind of come together and the shift is in the theory of value so the theory of value in marginalism is on the margin so say you have one apple and you want a second one how much is getting going from one apple to two Apple worth for you probably quite a bit if you had 10 apples maybe going to 11 apples doesn't matter that much the marginal value is less so what marginalism do does though most importantly is it opens the door to math and economics because it means you can graph this now you can depict this relationship graphically and there's some really interesting work in the history of Economics that shows a lot of the people who developed marginalism were looking to physics as a model physics the queen of the sciences and so they were thinking they they imported terms from the natural world describe the social world through the lens of Economics terms like equilibrium um so the idea being that if you looked at a market uh a market would reach equilibrium um you know when everybody is bought and sold all that they want or the price will settle at an equilibrium price when it's really the demand and Supply are matching up and some of these ideas are things we would pick up at a microeconomics class oh yes ex this is still out there this sort of the basic Foundation of microeconomics marginal analysis and so in the German speaking intellectual tradition this is the root of Austrian economics and people picking up the marginal revolution in the German speaking lands are opposed to the historicists um who are thinking in a more evolutionary way about how societies kind of grow and change and they have a vision of economic ideas as applying differently to different types of social Arrangements where the marginalists remember are inspired by physics and this is a set of natural laws that applies anywhere to any sort of human society so that's this first really big fisser that we'll see again and again are you historically minded do certain traits of economic life um inhere adhere and become expressed in certain types of Societies or are there Universal economic laws that flow through any type of society so that's kind of a juncture a break and so marginalism first people start using really geometry to kind of graph things but marginalism is also opening up to the possibility of calculus and the possibility of creating models but at that point in time late 19th century a model is something like a physicist does like think of like an incline plane and how fast does the ball roll from one to the other it's a physical representation of the world and eventually economists will start to create mathematical representations of the world but we're not quite there yet so we're late 19th century we have this we have this Fisher we have this introduction of marginal analysis that marks the the juncture from classical economics to economics so let's say now we we have economics but we still have this fisser between historical thinking and let's call it you know natur natural law thinking that's not quite right but physical laws versus contingency um and then in the United States this ends up mapping onto debates about capitalism and so more historically minded economists um tend to be interested in the Progressive Movement and which is invested in taming and regulating industrial capitalism and changing its excesses you know um Factory safety laws wage laws working conditions laws um yet in general American economists all use marginal analysis just in different ways the ones who are more drawn to marginal analysis become known as neoclassical economists they're neoc classical the Neo is because they're using marginal analysis the classical is because they don't think we need to change the way the economy operates or the government operates they're not Progressive whereas the progressives are saying things like the we need to use um social control uh the the state and the people collectively and democratically need to control uh the way economics unfolds and and make sure things are fair and equal so that school of thought becomes known as institutional economics in the United States by the 20th century so it's part of the Progressive Movement late 19th century into the 20th century it really becomes institutional economics and it's quite dominant and the neoclassical economists are still there but they're very much a minority and Frank Milton freedman's teacher is one of the minority neoclassical economists and the institutionalists are much more Progressive um still is it fair to say that the neoclassical folks and even the classical folks versus the institutional economics folks it's they have a disagreement about how much government intervention that should be in the economy so neoclassical is less intervention and then institutional Economist the progressive folks as more intervention yes yes exactly right so this is the situation in the 1920s but um the other piece I should mention is the first generation of progressive economists were very radical they were took closely allied with the Socialist movement with labor radicalism and many of them lost their jobs at universities this is kind of connects to the early the dawn of academic freedom this is before academic freedom and they became they were chasing they became much more mainstream by the time we get to the 1920s we don't really have radical critiques of society coming from economus much smaller profession much less important than it is today and barely peaceful because the 1920s are a fairly peaceful decade in the United States so this is a situation when the Great Depression hits and as I mentioned before the head the kind of most important institutional Economist is Wesley Mitchell and he has said he's he's written a whole book on business Cycles but he doesn't see this business cycle coming and it hits and he doesn't have a good explanation for it now perhaps the preeminent neoclassical Economist was Irving Fischer now Irving fiser is big into the stock market and Irving fiser says sometime in late summer 1929 stocks are going ever higher and will continue to go ever higher forever and so he loses his reputation after the stock market crashed so so mil and Freedman is stepping into a field in which the greats have been discredited and there's an enormous economic crisis all around and everybody's struggling to figure out why the crisis happened yes and the other thing he stepping into is a world where in the United States there's a great deal of anger at capitalism at the system unemployed people on the street in Europe there's Rising fascist movements in Asia there's Rising fascist movements and so everyone's very concerned about this and fredman is seeing a lot of this through the lens of Frank Knight who feels like we are maybe reaching the end of what he calls liberalism he calls himself an oldfashioned liberalism we're reaching the end of Representative democratic government because representative democratic government cannot solve these social problems and it h and capitalism as it has developed Knight is very Pro capitalist but he says it's generating inequality and this is putting too many strains on the system so Knight will become one of the people who helps fredman think how do I develop a new theory of capitalism that works in an era of mass democracy where people can vote and people can express at The Ballot Box their unhappiness with what's happening economically so this this larger movement will generate of which fa hyek is a part fredman is a part becomes the very early stirrings of trying to think about a new sort of liberalism which will eventually be called neoliberalism okay so if we can just Linger on the definitions of things so we mentioned what neoclassical is and the institutional economics is what's Kenzie in economics and The Chicago School of Economics I guess is a branch of neoclassical that's a little bit more empirical versus maybe model based and kenian is very model model heavy more intervention of government yes and there's a that's so the real battle is Kian versus everybody else that is what eventually comes to pass in the United States and in the kind of overall developed the kind of developed profession of Economics the other piece of the puzzle here is the introduction of mathematics and it's been around the edges um but it will pick up speed in the 1930s like the econometrics uh Society has founded they start publishing um people start using more statistical and mathematical tools to think about economics and they're given a boost sort of inadvertently by the rise of Keynesian economics so so kees is trained in the neoclassical tradition um he's a absolutely fascinating figure he's been there in the peace negotiations at Versa he basically calls World War II he's like hey we're gonna have another War here caused by Germany because this peace treaty has been you know done in such a vindictive way and people have made such bad decisions he's there he sees it happening and so when um the Great Depression unfolds he basically comes up with a new theory for explaining what's going on and the previous neoclassical understanding is sort of things go up and things go down and when they go down there's a natural mechanism to bring them back up so when the econom is going down prices are going down wages are going down everybody's losing money but event firms are going to realize hey I can hire people cheap hey I can buy stuff cheap I don't have a lot of competition maybe I should get in the game here and then others will start to get in and then you regenerate prosperity in that way and so Kan says sure that's one Theory but something different is happening right now part of why it's happening is because we have work the working class is more empowered now they're not simply going to just take low wages and ride them down to the floor we might not hit the floor but also he says people might become too anxious to spend they might not want to invest and you know canes has these discussions of animal spirits right he's still enough of a political Economist to think not just in terms of human rationality but what are some other things going on in human beings and people might decide to sit on their money they might not invest it and so what happens then is you could get stuck in a bad equilibrium so in the neoclassical model the equilibrium kind of restarts and resets itself and he says no we could get stuck here we get stuck in the depression and in that case what has to happen he says the government stimulates investment and the government itself invests and then he argues that you know uh this is a student of his Richard Khan says you know as a government invests a dollar it has like a multiplier effect a dollar spent by the government kind of ramifies out throughout the economy so it takes the government and puts it in the center as opposed to say the banking system or the financial system which would be the more fredman analysis and for many economists of fredman's generation and he's a weird generation because it's it's the the generation that becomes dominant it's just like four years older the men who become keyy in economics but that four years is really important because they come in to gradate school in economics and they get exposed to the new ideas of John May AR kanes and they you know I think it's PA Samson calls it like it was like a south sea virus that that attacked all of the young all of the younger economists immedately succumbed and like no one under 50 ever got the disease right because their their thinking is already set and so um keynesianism KES himself is very suspicious of math and economics and and he and fredman is fascinating one of the first books by Yan tingman a Dutch Economist to use math and economics these huge volumes volume one um KES pans it volume two fredman pans it so they're they're in the same page but what happens is as keynesianism arrives in the United States Franklin Roosevelt is not really a Keynesian he's kind of an an accidental or experimental Keynesian Keynesian and there's a bunch of different ideas in the United States that that are very similar to keynesianism they're not theorized but there similar ideas that the government has to do something so this all comes together and and American economists realize that you can construct models in the Keynesian perspective and if you can use numbers in these models you can go to Washington DC with numbers and you seem like you have a you have a lot more Authority and so math becomes really twinned into Keynesian economics so numbers are used as a kind of uh um a symbol of expertise we we really know what the hell is going on because we have some numbers right right and we can create a model and so we can say okay in the model the interest rate is here and taxes are here so let's play with government spending let's make it up let's make it down and then we can get an estimation it'll spit out here's predicted GDP so the other piece of the Keynesian Revolution is it really gets people thinking kind of holistically about the economy as a one conceptual unit and you then have what Paul Samuelson will end up calling the neoclassical synthesis and this still in economics today if you take micro you're going to get supply and demand scarcity marginal analysis if you take macro you're going to get a very different approach and that's more Keynesian based and so the idea is that and this makes sense I mean you can think of this from statistics right the way things act individually versus when they're all added together can be very different so so there's this kind of uneasy piece where economists are using kind of neoclassical tools to analyze individual behavior and individual Market behavior and they're shifting to a different Paradigm when they think about the economy as a whole and in this Paradigm of the economy as a whole the federal budget the taxing and spending power of the federal government become Paramount and that is called the fiscal Revolution and that's really the essence of keynesianism but the key thing to remember is that keynesianism and Canes are different and there's this famous episode where John manard kees comes to DC and he goes to dinner and he comes back and he says to one of his friends in London he oh yeah it was really interesting I was the only non-c in there yeah you know uh so keynesianism is more government intervention fiscal policy so put the government at the center of influencing the economy and then the different flavors of whether it's Austrian economics or Chicago School of Economics is saying no we have to put less government intervention and Trust the market more and and the formulation of that from Milton Friedman is trust the money more the the not trust but the money supply is the thing that should be focused on yes so so the austrians and the Chicago schools see economic prosperity and growth comes from Individual initiative individual entrepreneurship kind of private sources the private Market is what drives economic growth not the public sector and so for fredman then the question is what is a government's role and because he's lived through the Great Depression he's not Les a fair and he won't ever be Les a fair now interestingly hyek living through the Great Depression at first is Les a fair and he's like sure like let it rip and things get so bad that Hayek's like okay that's not going to work can we actually define l a fair so what what do we mean like what's the free market what's Le Fair what's what's the extreme version here so yeah Le fair means leave a be in France it's more often used as an insult than as an actual um very few people are completely and totally Le a fair that would be like the pure Le Fair would be the sort of pure maybe pure Anarchist position like the state does nothing or the state isn't even there um but it tends to if I could maybe make it more precise it would be focused on freedom of contract would be essential and that means um like the the buyer of Labor and the seller of Labor must have absolute freedom to contract so that means no minimum wage law no working hours law um no employment law things like that that that was and this is all pre- Progressive movement a lot of things are that way right you you know imagine you're in 19th century America and you have a farm and you hire someone to help you on the farm you offer the money they take it if they fall off a ladder and break their back maybe you help them out maybe you don't right but there's not a whole apparatus of legal liability and safety and things like that um so that would be one piece another piece of Le Fair would be free trade amongst Nations um so no regulation of who can invest in a nation or who can take money out of a Nation so nepon steel could come and invest in US steel and there would be no grounds in which to reject that um or you could as a billionaire in the United States relocate you and all your money to another country and the United States couldn't try to keep you and and nobody else could stop you from coming in um and so and then in the context of economic crisis Le Fair would would not Encompass centrally provided relief because in the pure Theory again very seldom applied purely but in the pure Theory the wages need to come down far enough and people need to be desperate enough to start taking work and to start the machine again so the theory would be if you give people relief they might not go back to work now almost nobody says that in the Great Depression because the situation is so bad and it's it's you know people are starving on the street and feel for humanitarian ethical reasons it's not okay to say that the austrians though at first Hayak and Lionel Robbins are like this is a business cycle and it needs to run its course and it will be detrimental if we intervene and then pretty soon Hayek has to change his tune so the austrians are the most hardcore in terms of Li Fair absolutely and so Hayek will make the turn towards accepting more of a state and then we'll come to talk about how the state needs to support what he calls a competitive order but his mentor lud vanon mises Still Remains very hardcore and is not um really open to things like unemployment insurance or um other other state-based interventions what does vona say about like human suffering that's witnessed in the Great Depression for example like what are we supposed to as economists as humans that Define policy see what are we supposed to see when people are like suffering at scale yeah I wish I knew an answer that question I don't know enough about Von misus and and his reaction in the Great Depression I think I would Hazard that he would look more to the down the road and say well if you start here you're going to go places that are are bad but I I don't I don't factually know what he said in response I do know that hak's position doesn't last very long it's not it it's not a position you can hold to maybe you could hold to it in other Cycles the other thing that was interesting is I found very few Americans um saying this it most who were were kind of small town electeds or the most famous is Andrew melon quoted by Herbert Hoover so so not directly we don't have him on record saying this but apparently Hoover records in his Memoirs that melan said something like liquidate real estate liquidate stocks you know Purge the rotness out of the system people will live a healthier life and certainly there were members of the Federal Reserve who felt like it would create they didn't say moral hazard but it would create what we now call moral hazard bad habits were we to intervene and to save failing Banks because failing Banks need to be taught a lesson they need to be taught discipline and so a lot of people I think saw it in the context of discipline this is discipline and if you remove the discipline um you'll be taking away something fundamental in society so Milton Friedman never quite went all the way to L Fair no no he didn't see that and what's really interesting is the number of incredibly radical proposals that he and his teachers were floating so I've mentioned Frank Knight another really important influence on fredman was Henry Simons who was a junior professor Chicago and Simons had this idea for what he called 100% money which would be a law that says banks have to hold 100% of the deposits they receive they can't loan them out on the margin this would completely and totally have overhauled the US banking system and he would have said there's a category of things called Banks where you get deposits and then there's going to be a category of sort of he didn't say investment Banks but investment vehicles that will invest so similar to what did happen in in some ways in the banking reforms in that in the 1930s the the investment Banks were split from the deposit banks and the banks that took deposits were much more highly regulated and they were supported by the FDIC but the point being The Chicago School had these very radical proposals for reform go off the gold standard um you know restrict the currency you know change the banks um immediately relief payments now what is important to note though is that they thought all of those as emergency measures to get through the emergency not as permanent alterations in the state of of what had to be and not permanent alterations between State and Market where the Keynesian assumption is things have changed times have changed we're in a new dispensation and we need a new relationship so fredman is very uh Milton fredman is very open to doing things differently in a state of emergency he will have different IDE is during World War II than any other time and that's why I argue I think he would have been supportive of at least the first rounds of coronavirus relief because I think he would have put his emergency thinking hat on so in that way he was definitely more flexible you mentioned Hayek who is this guy what's his relationship to Milton fredman in the space of ideas and in the context of the Great Depression can we talk about that a little bit sure so fa Hayek is an Austrian Economist who takes up a posting in London and you know he's he's in a mentor of a mentee rather of lud Guan mises he's writing about business Cycles um Austrian Capital Theory and the depression hits and he's one of the few you know economists who in the beginning really is not calling for much intervention although as he realizes how politically unpalatable that is he will develop more softened version of Austrian economics that has room for a whole range of Social Services What's significant about Hayek is that he is also watching what's happening in Austria what's happening in Germany and he's really worried the same thing is going to happen to the Western democracies and he sees the root cause of this is socialism the shift towards an expanded role for government which we've been talking about it's happening in the United States it's also happening in Britain and so he writes this book that becomes is incredibly famous the road to serfdom basically saying taking these steps towards a a planned economy or an economy that's a modified form of capitalism is going to could he's very clear that this is not an inevitability but if the same steps are taken and people follow the same line of thinking we may end up in a sort of coercive um totalitarian state so this becomes enormously popular in the United States first of all he's in good touch with fredman's teachers even before this book comes out they see them as Kindred Spirits Frank Knight is in touch with him Henry Simons is in touch with him they all see themselves as liberals they call themselves old-fashioned unreconstructed liberals and so even before he becomes famous Hayek will be trying to kind of organize thinkers and intellectuals who he believed shares his values of what we would call today Classical liberalism and to kind of create a counter consensus to the one that's Gathering now Hayek also chooses not to argue against canes and he feels that this is a huge missed opportunity that he should have staked out the case against canes and that because he did not people come to believe there is no case against Caines canes is literally unanswerable so Hayek will have this great regret he will Channel some of his regrets into sort of community building specifically developing The Mont Pellerin Society um and it will fall to fredman to really make that case against canes but Hayek will end up at Chicago and Hayek really influences fredman to think about what hay calls the competitive order and how the state can and must maintain the competitive order that is the system of laws of norms of practices that makes it possible for markets to function and this is one of these key differentiators between the older philosophy of Le far and the newer reconceptualization of liberalism which says yes we need a state we need a state that's not intervening in markets under Social Democratic aaces but is structuring and supporting markets so that they can function with maximum Freedom keeping in mind that if there aren't basic social supports needed the market is apt to generate the type of either inequality or social instability that will the whole system into question so Hayek is really key in promoting this modified liberalism but from being a very prominent Economist in the 1920s and 1930s as mathematics becomes the language of eon economics hyek is completely left out in the cold now fredman to some degree is left out in the cold but fredman at least has proved the mathematical Economist that he knows what they're up to and he's rejecting it from a position of expertise and knowledge and he literally drives the mathematical economists out of Chicago they're clustered in a group called The Kohl's commission and he makes their life hell they they they have to they flee they flee the fredman ons slot but then when Hayak arrives at the University of Chicago he would like to be considered for a position in the economics department and fredman Milton Freedman says no way you're not really an economist because you're not empirical because you just develop these theories so so he has an appreciation for hyek as a social thinker but not as an economist so what fredman decides to do his answer to KES will be deeply empirical but it will also be theoretical and it will create an alternative intellectual world and approach for economists who aren't satisfied with keynesianism and almost singlehandedly Freeman will introduce sort of political and ideological diversity into the field of economics because from his Beach head in Chicago he will develop the theory of monetarism so what is monetarism the easy way to summarize it is this famous dictum of of Milton fredman's inflation is always and everywhere a monetary phenomena and it's fascinating that he becomes an expert in inflation because the first research and the first major research product of monitormusicpatternphotographyproductssci of the Great Depression in a monetary History of the United States and that is a theory of a deflation all prices going down and he will go back to an idea that Irving fiser had popularized but a very old idea almost a truism the quantity theory of money which says the level of the price level is related to the amount of money circulating in an economy so if you have more money prices go up if you have less money prices go down now this seems like very basic and almost almost too basic to bear repeating but fredman is saying this air basic relationship holds true even in an advanced industrial economy and that is what people have started to doubt and if you think about money you think about Banks you don't think necessarily about the federal budget spending and Taxation and what you see happens in American economics the textbooks previous to the Keynesian Revolution they spent a lot of time on money they spent a lot of time on interest rates you can C you can do word counts and and other Scholars have done the word counts and then word count for money after World War II just plummets and you start seeing things like taxation budget those things go up so that the what happens is the the economics profession shifts its attention it just looks away from money to other things and fredman is one of the few who's saying no money still matters money still counts and it's a very counter intuitive argument to make it's a very historical argument to make and this is absolutely fascinating to me with Anna Schwarz he develops this 150e time frame he also has students working on episodes of hyperinflation in different periods of time he's also looking back to like ancient history inflationary episodes there and he's saying this is a this is a law of Economics this is something that recurs throughout time it's not historical right it's not contingent it's to law of economics and you know his keyy and counter points are saying no that's not relevant any longer maybe once it was relevant but it's not relevant today now in some ways they have a point because the in order to pay for World War II the federal government sells a lot of bonds IT issues a lot of debt and it wants to pay this debt back at a low interest rate and it wants people to keep buying it it wants the low interest rate to be competitive with other interest rates so it wants in general low interest rates throughout the economy and the Federal Reserve has been so discredited by the Great Depression that the treasury basically runs the Federal Reserve and says keep interest rates low and so that's what it's doing and so the Federal Reserve has stopped being an independent entity it's it's just a sub sort of Department of the treasury but in 1951 they negotiate What's called the treasur fed Accord and the Federal Reserve gets its independence but it doesn't really use it but statutorily it now has it and so most economists are just observing a regime in which the Federal Reserve has no power a regime in which there is really little inflation the inflation that is seen is post a little burst of inflation in the Korean War um and there're saying inflation's not really important it's not really relevant and money's not really relevant and important and so to break through and to make the argument that's why fredman and Schwarz go to history and they're able to make that argument for history so then fredman is coming out with a variety of papers that are saying you know when I look at economic fluctuations he Maps them side by side to fluctuations in the money supply and says look they fit and other economists remember they're building complicated mathematical models and Freeman's doing extremely simple stuff and they just think it's dumb it's not interesting it's not true they just they don't buy it at all and so um but after a monetary History of the United States they have to pay attention so it's really in those years Freeman is hammering this idea of monitorisation you're heading towards a monitor position now at the same time Freeman comes out very publicly in 1964 is a supporter of Barry Goldwater and keyy and economics has found a home in the Democratic party its probably brightest moment in the sun is the administration of John F Kennedy who brings in a lot of Harvard and Yale professors to the Council of economic advisors he proposes a series of spending programs that are really guided by the Keynesian philosophy and iberry Goldwater is tremendously controversial part for his votes against civil rights which fredman really supports in part because he's a hardcore libertarian in an age when that's not in the political mainstream or not discussed in the political mainstream and I mean he's just tremendously unpopular particularly in all the educated precincts where fredman lives so fredman is like an outcast on a pariah for his support of Goldwater and so that actually really affects mon ISM because people feel that this is now becoming a package deal and so there's a great reluctance to embrace freedman's ideas because it seems like you would then have to embrace his politics uh so it's associated with with conservatism so this is the years when conservatism there is a movement that calls itself conservatism and fredman is very tightly allied with this movement from the beginning partly through his friendship with William F Buckley and a lot of people say to me yeah but fredman's not conservative and this is like a bigger we have a whole separate podcast on this but for now I'll just say that conservative in the United States becomes a political brand that contains elements of conservatism that are recognizable across time and space Embrace of tradition or comfort with hierarchy Etc and it also has something new and different which is fredman's ideas is about Milton fredman's advocacy of more free markets less government regulation and the benefits of capitalism and the benefits of freedom and that gets folded into American conservatism in part because Milton Friedman is such a powerful intellectual figure and after his advocacy of Goldwater the media realizes this guy's really smart he has really interesting things to say he makes great copy he makes a great guest and he starts writing a column for Newsweek magazine which is very big deal in a much more Consolidated media environment and he's quoted in all the newspapers and so his public profile really starts to rise right as he's pushing [Music] sell stuff and there's this fascinating complex dynamical system of people um Contracting with each other in this beautiful way I mean there's so many pothead questions I want to ask here about the nature of money I mean money is fascinating in that way and for I think for for Milton fredman uh trusting the the flow of money is really important yeah and the signals that pricing and money in general provides is uh really important so yeah and some of this uh I could take some of this back again to Frank Knight so one thing Frank Knight said to all his students was the market is the best allocation mechanism we have the market is what allocates resources in a situation of scarcity the market allocates them the best and Hayek will add to that by saying prices are information signals and a price sends information to buyers and sellers about how they should act act and these are the two of the strongest Arguments for why the government should not intervene in the price system because it will blur information or because it will allocate less efficiently than Market allocation will and so what Freedman is really going to add to that is maybe going up a level and thinking in the macro about the whole economy and how money circulates through that economy as a whole and so what he and hna Schwarz do is they construct what are called monetary Aggregates this is adding together say all the money that's on deposit in Banks and all the money that's believed to be circulating in people's wallets and you also have to really go back in time you know we don't have credit cards um there is a stock market but it's tiny in terms of the number of people who invest there aren't mutual funds uh you know like when Travelers check checks are introduced this is like a big deal um so we have a much a very simple monetary system and so um shorts and and Milton Freeman start measuring what they call the monetary Aggregates they focus on M1 and M2 and their favorite aggregate is M2 which I believe is encompassing sort of deposits and circulating medium the other thing to recall it there's some fine distinctions between um uh money in savings accounts and money in checkings accounts and money in savings accounts can earn interest and is generally believed not to circulate or money in checking accounts does not at that time bear interest and cannot legally bear interest and so is thought of is circulating and then there's different institutional architectures of postal Savings Banks and Credit Unions so but fredman is one taking the focus to these aggregate amounts of money and saying um these really have a lot to do with economic booms and busts when we have an expansion in the amount of available money we see an expansion in economic activity when we have a contraction in available money we have a contraction and so he says at this stage the government through the mechanism of the Federal Reserve and its influence on interest rates can either make money more cheaply available and more freely available in the economy or can make money more expensive and slow things down but the the central core idea of monetarism is this is potentially very bad if the government can hit the gas and then hit the break and hit the gas and hit the break based on say what a politician wants or what somebody the Federal Reserve wants you have a lot of instability in the system and so one of the core policy proposals of monetarism is let's grow the money supply at a steady rate and in the beginning fredman just says K percent he doesn't even put a number on it because he says the number doesn't matter what matters is the steadiness in the growth rate because if it's a steady growth rate it will fade away and then people will make economic decisions based on the fundamentals not based on what they think is going to happen not based on hedging against inflation or hedging against deflation they'll just be able to function so this is sort of the Paradox of monetary policy when it's happening right you don't see it you don't notice it when it's happening wrong fredman argues it can just fundamentally destabilize everything it can cause a Great Depression can cause an artificial boom and so he's taking monetary policy at a time when most economists think it's completely irrelevant and saying this is the central game of the economy now we live in a world where we believe this and the Federal Reserve chair can't open their mouth without headlines being generated m fredman is saying this at a time when the Federal Reserve is like a mysterious and secretive organization it's not welln it's not deeply appreciated some of the only people who appreciate the fed's power are like hardcore rural populace um who have constituents you know who think the banks and money power are the problem who are like you know Throwbacks from the frontier days so fredman in the beginning has no constituency for this policy he has no constituency for this analysis and so just going back to summarize monetarism it's looking it's using the quantity theory of money to analyze the macroeconomy it's proposing a policy of slow and steady growth in the money supply and then it is arguing that inflationary episodes when they emerge are profoundly driven by changes in the money supply not by anything else I mean and going even up a level as we started how epic is it to uh develop this idea to hold this idea and then to convince the United States of this idea that money matters uh that today we believe is mostly correct uh for now yeah and so like just this idea that goes against the experts and then eventually wins out and drives so much of the economy the biggest the most powerful economy in the world so fascinating yeah so I mean that's a fascinating story and so what happens is fredman has advanced all these ideas he's Royal the economics profession he's built a political profile and and then he becomes the head of the American economics Association and he is asked in that role to give a presidential address and so he gives his presidential address December 1967 and he says um I'm going to talk about inflation and I'm going to talk about the tradeoff between inflation and unemployment and this is what's generally known as the Phillips curve and the Philips curve in its original form is derived of post World War II data so it's derived of about 12 years of data and it shows that when inflation goes up unemployment goes down and the idea you know would make sense that as the economy is heating up and lots of things are happening more and more people are getting hired and so this relationship has led policy makers to think that sometimes inflation is good and if you want to lower unemployment you could let inflation kind of go a little bit and in the crude forms it becomes to seem like a menu like you could take your model and you could plug in I want this much unemployment and it would say well great this is how much inflation you should do and so then you would Target that inflation rate so Freeman gets up and he says this is wrong this might work in the short term but it's not going to work in the long term because in the long term inflation has first of all it has a momentum of its own once it gets going it tends to build on itself the accelerationist thesis it accelerates and once inflation gets going it and the reason it gets going is because um you know workers go to the store and they see the price level is gone up things have cost more they asked for the wages to go up then um you know people eventually the wages will go up too high and they will no longer be hirable or companies will decide at these high wages I can't high as many workers I'd better lay off so if inflation keeps going eventually over the long term it will result in high unemployment so he says theoretically you could end up in a situation where you have high inflation and high unemployment this hasn't been seen but he says theoretically this could happen and then he goes and he says and the government has started expanding the money supply started expanding the money supply in 1966 so we're going to get a bunch of inflation and then we're going to get a bunch of unemployment and he he estimates about how long it will take and then he says once this all happens it will take about 20 years to get back to normal and and he predicts the stagflation of the 1970s stagflation of the gangster is that for an economist do that again against the the mainstream belief represented by the Philips curve yeah and what's really what really makes it happen is that many of the economists who most deeply dislike fredman and most deeply dislike his politics in the 1970s as as they're running their models they start to say fredman's right they start to see in the data that he's right and a very parallel process happens in Britain Britain is going through a very similar of burst of spending burst of inflation and so Freedman is Vindicated in this very profound way in the way that he himself said would be the ultimate Vindication which is my theory should predict so that prediction of stagflation is really the sort of final breakthrough of his ideas and also you know their importance to policy um and to thinking about how we should intervene or not in the economy and what the role of the Federal Reserve is because he's saying the Federal Reserve is incredibly powerful and finally people start to believe him and I don't know if we said but to to make clear stack infation means high unemployment and high inflation which is a thing like you mentioned has not was not seen before and he predicted accurately and it also disproves the sort of the the relationship the inverse relationship between um unemployment and inflation yeah now I should say the Philips curve is still out there it's been expectations augmented and it is relevant in the short term but fredman's warning is still very much apt that if you get too focused on unemployment you can let inflation out of the bag and so until very recently the Federal Reserve tradition has been focusing on inflation believing that's fundamental and that will keep unemployment low rather than trying to lower unemployment at the cost of raising inflation can we go back to uh Frank Knight and the big picture thing we started with which is the justification of capitalism yes so as you mentioned Milton Freedom search for a moral justification of capitalism Frank Knight was um a big influence on Milton Friedman and including on this topic of understanding the moral justification of capitalism I I think you spoke about ni's case for capitalism was grounded in the idea that the ability to act in the face of uncertainty creates profit and it should because taking risks should be rewarded so like this idea that taking risks in the face of uncertainty should create profit and that becomes a justification that it the the ethic of capitalism can you just speak to that yeah so Knight is talking about where does profit come from and to his mind it comes from the entrepreneurial function and the risk-taking function and so he kind of weaves that into why you know capitalism works works best and why it's the most effective allocation machine and why it it assigns responsibility in a way he believes that a socialist system never could now night though is not a booster of capitalism he could be in part because he's just a Darkly pessimistic kind of depressive guy and so he's afraid capitalism is going to collapse and Socialism or fascism is going to take over or communism and so he kind of descends Into Darkness there fredman as as the more Optimist believes with Hayek that you can develop a different approach to capitalism that would preserve the price system preserve allocation but build in Social supports build in a social minimum things like this but there's a moment in his career where he's really struggling to figure out like how do I make this case for capitalism and basically uh the whole sort of conservative movement or people who we later call the conservative movement are struggling to make this case and he starts thinking about what makes capitalism work is that if you put forth effort you get a reward so then you could say well people get what they deserve under capitalism but then he kind of stops and he says that's not really true because we're born with such different endowments and there's a huge quotient of luck right so some people are just in the right position and some people aren't so if I say capitalism is moral because people get what they deserve that's not really true and he also kind of has like a an ethical reaction which he ends up calling like an aesthetic reaction he's he's kind of like it just doesn't feel right to say that and so he struggles for a while with like what do I say and then he basically says capitalism it can't be the core discipline the market can't be the core to your ethics it has to be something else so that's when he will decide it's Freedom it's individual Freedom that's really the ethical core and capitalism makes individual Freedom possible because capitalism is dedicated to maximizing that and so the defense of capitalism comes through freedom and at his stage in history he's able to set aside nice worry about inequality and say when I look at the data and this is true for the macro data Century incomes are actually converging right and it also if you look historically if a country goes from say a more feudal agrarian society to a more market-based Society incomes will converge now then they might start to diverge but fredman's in the moment when he's seeing the convergence and so that's what he's really focused on so he believes he can justify capitalism through the ethic of freedom and he also believes that inequality um is a problem that can be addressed through specific policies and it's not a fundamental feature of capitalism in other words he doesn't see capitalism as an engine of inequality the way that Frank Knight did and the way that you know maybe some Critics on the left would how did he conceive a freedom so individual Freedom economic freedom political Freedom civil Freedom what was the tension the dynamic between those different freedoms for him so he really begins focusing on economic freedom and he says it's really important to focus on economic freedom because in the United States we don't value it enough so by economic freedom he means the ability to um keep what you've earned um the ability to make decisions about your business the the ability to make decisions about the work that you do so this will translate into things like um there shouldn't be a minimum wage he believes the minimum wage has bad social effects but he also believes you should be free to accept a job at a wage that you yourself have determined is acceptable to you um and there should be very minimal regulation questions around safety and other things because the market will ultimately if you create an unsafe product it won't sell and that will be that's sort of your incentive so so he he really centers economic freedom because he thinks especially and he's really speaking from his vantage point in the universities and speaking to the kind of liberal consensus of the 50s and 60s he thinks economic freedom has been undervalued in the American context so he really wants to push that forward he's really kind of taking political freedom for granted now later in his career when he becomes famous he's traveling the world he spends time in Chile and this country is now being ruled by a dictator uh gustu P who starts introducing economic freedom but there's no political freedom and Milton Freedman believes eventually these two things are going to go together he tells P you've got economic freedom and eventually it's going to bring it's going to mean political Freedom p is like okay fine not really interested in that I want to know what I should do about inflation but then when Milton Freeman leaves Chile he is attacked and vilified for having been a supporter he's is interpreted that he's a supporter of the regime which he's not but he realizes he has talked too much about economic freedom and he hasn't talked enough about political freedom and he's kind of assumed political freedom because he's come from the American context so then he starts recalibrating them and saying you know what if you don't have political Freedom you're never going to be able to hold on to economic freedom so he sees that they need to go together and they don't naturally go together and so he starts to become more clear in talking about political Freedom now let's fast forward to the end of his life and he's witnessing the emergence of what we call the Asian tigers so capitalist economies that are doing very well but they don't have political freedom but then he observes they don't have political freedom and that you can't vote in a free and fair election but they also don't have a statti they don't have a KGB they're not you know hauling people off for their wrong opinions so then he says they have something called Civic freedom and so he kind of defines this third sphere Civic freedom of you know debate discussion interpersonal relations but you can't be political so this is a late in life addition I don't think it's fully theorized I think what it shows is that during the Cold War he very much believed economic and political Freedom you know capitalism and freedom democracy the United States capitalism this all went together and he starts to see at the end of his life the emergence of different social systems that are using market trading and allocation but aren't giving people similar freedoms and he's kind of puzzling over that now he always believes that China will democratize and he thinks China's on the path to democratization in part because Chile does democratize eventually p is voted out and it's become a democratic capitalist and very prosperous country and he thinks that's exactly what's happening in China he sees tenanan and he doesn't live long enough to get to where we are now in which doesn't look like political or Civic freedom is coming to China anytime soon and he did oppose the Dual track system of China meaning like the market is bottom up the government in China is top down and you can't have both he thought you couldn't have both yeah he thought eventually the market would Triumph well it's a really powerful idea say okay maybe there's not political freedom but just hold on to the economic freedom and eventually that's going to give political freedom is that is that correct to say like start to work on the economic freedom and the political Freedom peace will take care of itself that's what he believed that's what he believed yeah I think it's it's more complicated than that right the the people who gain out of a system of economic freedom could decide to collude in a system where there isn't political Freedom um that's certainly a scenario so but but that that was again that's that core idea of freedom right and that core belief that people want freedom uh and that people are drawn to Freedom just to go back to Frank Knight a little bit he wrote an essay called the ethics of competition the metaphor that…

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