It is a cruel irony of fate that 2012, the year that celebrates the centennial of Milton Friedman’s birth, is the year that marks the end of his preeminence as an influence over economic policy. Since the emergence in the early 1970s of stagflation – a corrosive combination of lack of growth matched by inflation in double figures – Friedman’s dictums on the causes and cures of rising prices have been the mood music behind management of many leading economies. Since the Great Recession took hold, however, the priorities of government economists have evolved, and once more growth and employment are emerging as the prime goals of public policy.
In the 33 years since Paul Volcker was made Federal Reserve chairman by President Jimmy Carter in 1979, Friedman’s idea that inflation is the economy’s greatest danger has ruled the roost. So long as inflation is kept at around 2 percent, unemployment has been allowed to find its own level. But times have changed. At the first meeting of the Federal Reserve since Barack Obama’s re-election, Federal Reserve Chairman Ben Bernanke has made the creation of jobs a principal aim alongside keeping inflation in check.
In practice, this means interest rates will not be raised so long as unemployment remains above 6.5 percent and inflation is forecast to remain below 2.5 percent. With this tap on the tiller, Bernanke has quietly dispatched the Age of Friedman, replacing it with a policy that harks back to the Keynesian days when “full employment” was the sole target. (Technical note: In economics, “full employment” does not mean when everyone is employed; to allow for the churn as workers move among employers and other adjustments to the labor force, “full employment” is usually deemed to be when 94 percent to 97 percent of those seeking jobs are employed.)
This significant but surreptitious shift in economic policy did not make headlines in the popular press or on the nightly TV newscasts. Rupert Murdoch’s Wall Street Journal, however, which is fighting a rearguard action on behalf of “classical,” or Hayekian, economics, spotted the importance of the change. “It’s striking to see a central bank in the post-Paul Volcker era say overtly that it wants more inflation,” it wrote, before warning that “sooner or later the bill for open-ended monetary stimulus will arrive.”
Economics in the modern age, since John Maynard Keynes transformed the discipline with his “General Theory of Employment, Interest and Money” in 1936, has been a tussle among those, like Keynes, who believed unemployment to be society’s greatest scourge, and those, like Friedrich Hayek, who saw inflation as a nation’s undoing. The division can be traced to the two men’s personal experiences, with the patrician Keynes indignant that the British should suffer mass unemployment through the 1920s and 1930s and Hayek traumatized by the social decay that overtook his native Austria during the years of rampant inflation after World War One.