Arnold Kling  

Stuck on 1968

The Joy of Econ... Majority Fools...

From my latest essay.

In 1968, Milton Friedman was on the fringe of respectability. His Presidential Address to the American Economic Association in 1967 could not have been more defiant of the conventional wisdom. At that time, economists thought that the economy could be "fine tuned" by government to achieve any desirable unemployment rate, with a "trade-off" that allegedly involved accepting higher inflation. Inflation, in turn, could be curbed by government action to control, or at least influence, the price- and wage-setting decisions of private firms...

Today, it is Milton Friedman's views that are conventional wisdom, and the 1960's Keynesians who are the jackasses.

In the essay, I quote from co-blogger Bryan Caplan's new manuscript, which he hopes will appear in book from by the end of the year. Soon, perhaps later today, I will have some more posts about this important book.

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CATEGORIES: Macroeconomics

COMMENTS (14 to date)
David Thomson writes:

“The Conventional Wisdom among well-educated liberals in 1968”

Well-educated liberals? Nope, that’s not right. It is more accurate to describe them as pseudo-educated. The liberals of 1968 were merely intellectual sluts who didn’t give a damn about obtaining a real education. They knew which side of the bread was buttered. One slutted for the leftist establishment and was amply rewarded with an affluent lifestyle. How can we ever forget John Kenneth Galbraith? He was spouting nonsense regarding the alleged wonderfulness of the Soviet Union. The leftist cultural milieu made sure that his ridiculous views became the common wisdom. Milton Friedman and Ludwig Von Mises were essentially marginalized figures during that time period.

Financial self preservation has much to do with the rage directed at President Bush. In back of their mind, many liberals know that their degrees are phonier than a three dollar bill. They are rightfully fearful of Red State consensus values which are based on rational thinking. The postmodernist left is incapable of competing in such an environment.

John P. writes:

Prof. Kling -- One of your best non-technical essays. Thank you.

I was a liberal in the 1970s and slowly evolved into a libertarian. The first crack in the liberal crust for me was the collapse of the USSR on Reagan's watch. I can still remember trying to puzzle out how someone so "wrong" as Reagan could have accomplished something so obviously good.

Randy writes:


Re; "Most people who were liberals in 1968 still are. Liberals. In 1968."

That is a great line. Hope you don't mind if I use it. I'll give you credit.

spencer writes:
I was a liberal in the 1970s and slowly evolved into a libertarian. The first crack in the liberal crust for me was the collapse of the USSR on Reagan's watch. I can still remember trying to puzzle out how someone so "wrong" as Reagan could have accomplished something so obviously good.

Reagan accomplished this good thing because he did the same thing a series of democratic and republicans had been doing since the policy of containment was established by Truman. Remember, Reagan's military budget was smaller then every other cold war presidents but one.

What Reagan did that he deserves all the credit for was recognize that the USSR was being ruled by a man who decided not to use the police power of the state to sustain the failed system.

spencer writes:

Is it very often that the President of the AEA is on the fringe of respectability?

Isn't being president of the AEA just the opposite --a sure sign that you are a widely respected member and leader of the economic establishment?

Arnold Kling writes:

Spencer, read the rest of the essay. The rest of the profession heaped scorn and derision on Friedman, notwithstanding his stint as President of the AEA.

ed writes:

I'm with Spencer. It may be accurate to say "most economists disagreed with him on issue x," but the fact that he was president of the AEA shows that he was far from "the fringe of respectability."

spencer writes:

You can disagree without having to be insulting.

I come here because I enjoy disagreeing, not because I believe everything I say.

James writes:


I agree with your observation that "The assumption is that government power will always be administered with wisdom and benevolence. I would be the first to admit that markets are not perfect. And government programs are not always failures. But liberals exaggerate market failures and overstate government successes."

I think there is more to it that that. All of the liberals I know (and for that matter most of the conservatives) seem to think that a possible course of action is to evaluate every government program of economic intervention individually and then keep what "works" and get rid of what doesn't.

To their credit, liberals smartly avoid this mistake every time when it comes to less economic issues. When the news came out about domestic wiretapping, no liberal bought into the official argument that these instances of wiretapping without a court order should be tolerated because they had good consequences. They understood that giving the government that much power is much more like a package deal, and a bad deal in light of its packaged form.

To their discredit, they seem to think that when it comes to economic regulations, some option exists to give the government the power to implement and execute only those regulations which, on balance, have the results they want.

spencer writes:

I just read your article and if the claims you made about liberals in 1968 had much of a factual basis I would agree that they were jackasses. But in fact most of your claims were not factually correct.

Anti-Communism was a greater menace than Communism.

I challenge you to support this with a single quote . In 1968 I was a liberal working for the CIA on the Viet Nam war. A war started and supported by liberals as part of the post WW II cold war campaign. This is just pure made up bull shit that has no basis in fact.

The planet could not possibly support the population increases that would take place by the end of the twentieth century

The Club of Rome was the primary advocate of this belief that predated the "green revolution"
The Club of Rome was pretty much a bipartisan
group supported by both liberals and conservatives -- one of its major researchers was J. Foresster of MIT, hardly what you would call a liberal. But it was US AID that finance the research and early development of the new miracle rice and wheat strains that played a major role in proving this view incorrect. This has been a reoccuring theme of main stream economics ever since malthus -- so don't blame liberals.

Conservatives stood in the way of progress for minorities.

In 1968 the main barrier to progress for minorities was institutional racism that was supported primarily by conservatives, and that includes what were then southern democrats and are now southern republicans..
Government programs were the best way to lift people out of poverty.
Liberals wanted to use government programs to educate poor people and give them the tools they needed to succeed in the private sector. No one seriously denied then, or now that the private capitalist economy is where the poor would find greater prosperity. Liberals do not oppose the private, market driven, economy. They just want the poor to have some of the tools that will allow them to better participate in the private economy.
What underdeveloped countries needed were large capital investments, financed by foreign aid from the rich countries.

Valid point. The sucess of the Marshall Plan caused the entire economic community to go off on a false tangent and ignore the institutional
measures needed for growth. I studied economic development in grad school in the early 1960s, and this was not a "liberal view" it was mainstream economics.

Inflation was a cost-push phenomenon, requiring government intervention in wage and price setting.

In 1968 no one was seriously advocating government price controls. Even Gailbraith viewed it as strictly a war time necessity.
Remember, it was Nixon, not liberals that instituted wage-price controls in 1971, not 1968.
We still do not fully understand what causes inflation and costs-push is not inconsistent with the view that inflation is a monetary phenomena. Both views can be valid.

While you are calling the liberals of 1968 "jackasses" for not fully accepting Friedman, I can make just as valid a critism of his monetarism now. His policy prescription that central banks should just target a steady and constant growth of money supply has been proven wrong for several reasons. But the worse was that he ignored monetary velocity. Consequently, sometimes x money suuply growth will produce 1.5X gdp growth and another time x money supply growth will generate 0.5x gdp growth. It turns out that monetary velocity is a function of real long term interest rates, but Friedman completely ignored this in his work.
In some senses Friemans positon that money supply determines inflation is like saying someone is over weight because they weigh too much-- duuuuh.

But while I can accuse you of being just as overenthusiastic about Friedman as main stream economist were about Keynesian demand management
in the 1960s, I would not stoop to the level of calling you a "jackass" because I happened to give different aspects of economics different weights then you do.

Do you call people you happen to disagree with "jackasses" in your classes? Remember, your students read your blog.

Barkley Rosser writes:


You are right that Friedman's most important new idea presented in his 1968 lecture is now firmly entrenched in the textbooks, the natural rate of unemployment. However, it has been largely shown in practice to be so much nonsense, and fortunately some policymakers have figured this out, starting with Alan Greenspan back in the mid-1990s.

Spencer is also right about monetarism. From the 1930s to the 1980s, velocity of M1 and M2 was only mildly varying. But then they went haywire, and today the Fed and pretty much all central banks focus on interest rates, like all good Keynesians, and not money supply of any number. The Keynesians may be marginalized or jackasses, but they are clearly running policy.

John P.,

The USSR did not collapse on Reagan's watch, despite widesrpead fantasies and propaganda to the contrary. It fell apart during his successor's time, Bush I. Clearly Gorby was the key. To give credit to Reagan, besides his cutting deals with Gorby once he was in, would be to say that Andrei Gromyko's swing vote on the Politburo in early 1985 for Gorby in his 4-3 victory over Viktor Grishin was due to Reagan's military buildup earlier. That argument can be made, but is much less certain than many think, although more defensible than the outright false claim that the USSR broke up while Reagan was president.


I will point out that the poverty rate dropped sharply during the 1960s, but has pretty much stayed flat since. I do not think denouncing LBJ's policies for failing to combat poverty, especially in comparison to what has been done since 1980, is any more credible than the claim that the USSR broke up while Reagan was president. A little more respect for plain facts would be useful here, please.

spencer writes:

Thank You barkley.

I suggest that if you want to know the proximate cause of why communism collapsed when it did you look at the price of oil -- it had a massive negative impact on the Soviet economy while there is essentially no evidence that the Reagan increase in militry spending lead to an increase in soviet military budgets. The Reagan military build up was a great theory, but in reality it has no significant impact on the Soviet economy.

Barkley Rosser writes:


Well, it is certainly true that there was a sharp drop in the price of oil in the summer of 1986 when the Saudis got tired of the Iranians and the Iraqis cheating on their quotas to buy weapons to fight with each other and tanked the price from over $30/barrel to around $9/barrel in a short space of time, until then VP Bush Sr. ran crying to Riyadh to get the price back up into the teens so that the real estate crash in Texas with the associated S&L crash would not be too bad. That was definitely the last year that the USSR had a "good year" economically.

OTOH, while growth stagnated after 1986, in fact it was not noticeably negative until things really went blooey after 1989. The idea that the USSR "collapsed economically" is simply nonsense. It fell behind the US, but its collapse was political, with the real economic collapse coming after the political collapse.

In fact it is clear that where Reagan was more insightful than most was in understanding that the USSR was a politically fragile entity that could collapse, something that none of the leaders of the USSR, including most importantly, Gorbachev himself, understood.

Thus, when Gromyko voted for Gorby he was figuring that he would be getting a younger version of Gorby's old mentor, Andropov, the former KGB chief. Andropov engaged in modest economic reforms while carrying out hardline foreign and domestic political policies. Gromyko's line was that Gorbachev had "a nice smile but sharp teeth." Gorby began to domestically liberalize politically, "glasnost," after the Chernobyl disaster, something that Reagan had nothing to do with. Gorby simply did not realize where this would lead ultimately.
To the extent that the competition with Reagan pushed Gromyko to vote for a "junior Andropov," well then Reagan played his role.

One can also give a bit of credit to Reagan for his "tear down the wall" speech. Gorby did not himself tear down the wall. That was done by Berliners themselves. However, he did restrain then East German leader, Erich Honecker, from firing on those who were doing the tearing down. By then, of course, things had gone pretty far. AFter that, it was basically over.

spencer writes:

You should find this of interest.

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