A few weeks ago I attended the annual American Economic Association meetings, where two famous economists were honored: the diminutive Milton Friedman and the tall John Kenneth Galbraith. Both these titans in economics had died in the past year following exceptionally long and influential careers.
Yet there was a stark contrast in the two sessions. The Friedman room was expansive and held more than a thousand enthusiasts, while Galbraith’s session attracted no more than 50 people. Some of the difference can be explained by the fact that the AEA meetings were held in Chicago, where Friedman taught for 30 years, and because two of the speakers were Nobel laureates, Gary Becker and Bob Lucas.
However, there is little doubt that if these two economists were honored 50 years ago at an AEA meeting, their fortunes would have been reversed. In the late 1950s, Friedman was a relatively unknown professor at Chicago who was regarded as a “reactionary” monetarist devoted to extreme laissez faire. Galbraith was hailed as the “progressive” Keynesian from Harvard who eloquently understood “American Capitalism,” and articulated the “countervailing powers” of Big Business, Big Labor, and Big Government. In 1958, his bestseller, “The Affluent Society,” made a convincing case for redistributing wealth and progressive taxation as the only legitimate solution to the widening gap between “private opulence” and “public squalor.” Galbraith went on to become a member of the “new economics” team of the Kennedy Administration and ambassador to India. In 1967, Galbraith completed his trilogy with “The New Industrial State” at time when America’s financial institutions were flexing their muscles around the globe. Galbraith reflected this hubris: The “technostructure” of big business could control markets and manipulate consumers through planning and advertising, and was no longer beholden to shareholders, consumer sovereignty, or supply and demand. The Sixties were the high tide of Keynesian economics and fine-tuning the economy.
But a series of unpredicted crisis and trends in the late 1960s and early 1970s opened the door for Milton Friedman and the growing band of free-market economists. The West suffered a sharp rise in inflation and economic crises, and American manufacturing lost its dominance in the world economy. It was time for a counter-revolution to the Keynesian-Galbraithian monolith.
At Chicago Friedman’s rigorous analysis of the business cycle and free-market solutions started paying dividends. His mammoth “Monetary History of the United States,” published in 1963 and co-authored with Anna J. Schwartz, gradually convinced the economics profession that the Great Depression was not a result of “bad” distribution of income, “bad” corporate structure, and a “bad” banking system, as emphasized by Galbraith in his book “The Great Crash,” but largely because of “bad” government policy by the Federal Reserve, which allowed the money supply to collapse by more than one third. Friedman’s achievement was a triumph of empirical economics that Galbraith could never match.
Friedman and other market economists also countered Galbraith’s “social imbalance” thesis in “The Affluent Society.” The Keynesian “tax and spend” solution had failed miserably to redress the gap between private affluence and public poverty because government often lacks the market incentives to cut costs and meet the needs of its customers, the taxpayers, in an efficient way. In his 1962 book, “Capitalism and Freedom,” Friedman argued that the solution to this social dilemma was to expand the market (supply side economics) and apply market principles to public enterprise where feasible. This led to the privatization movement around the world, where country after country systematically denationalized, deregulated, and privatized public enterprises and services, especially after the collapse of the Soviet centralized planning model in the early 1990s.
Unfortunately, Galbraith seemed to be oblivious to these dramatic changes. In the 40th anniversary edition of “The Affluent Society,” Galbraith had a chance to revise his thesis in light of the worldwide movement toward freer markets. Yet the privatization solution completely eluded Galbraith’s mind. He chose not to even mention it.
In sum, one gets the impression that Friedman and other the free-market schools are today’s “progressives,” offer new bold solutions to public issues in education, welfare, and fiscal policy, while Galbraith and the old-style Keynesians are the “reactionaries,” unwilling to entertain the new market solutions to public problems. Over the past 30 years, Friedman’s star has risen while Galbraith’s has fallen. Well did George Stigler conclude, “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.”
for The Markets and Money Australia
Editor’s Note: Dr. Mark Skousen is is a professional economist, financial advisor, university professor and author of more than 20 books. Dr. Skousen has taught economics and finance at Columbia Business School, Barnard College at Columbia University and Rollins College in Winter Park, Florida. He has appeared on ABC News, CNBC Power Lunch, CNN, Fox News, and C-SPAN Book TV.