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If you had the choice to name the two most influential postwar economists, you wouldn’t go wrong if you chose Milton Friedman and Paul Samuelson. That, at least, is the conceit of Nicholas Wapshott’s book, Samuelson Friedman: The Battle Over the Free Market. Their lives were closely interrelated. Both were born to Jewish immigrants from Eastern Europe. Both were educated at the University of Chicago in 1930s. In the war years, Samuelson established himself at MIT, becoming the author of the era’s dominant textbook and builder of the most important economics department in the world. Samuelson was a key figure in economics education between the 1950s to the 1980s. His compelling synthesis, Keynesian macroeconomics, and market-based, Neoclassical microeconomics made it possible that you learned your economics during this period. Friedman set up his base in Chicago and continued his tireless efforts for free-market economy. Wapshott illustrates how their arguments over the limits of government intervention and control of inflation echo through the present. Samuelson was a lifelong friend, while Friedman was a rival. Samuelson was the establishment figure. Friedman was, at least up until the 1970s. Friedman was the first to stake his claim by advocating for floating exchange rates instead of the Bretton Woods fixed system. He enjoyed his association to Austrian outsiders, Friedrich Hayek, as well as the politicking of Mont Pelerin Society.

Friedman and Anna Schwartz, his collaborator, launched a revival of the old quantity theory of money in 1963 with the publication of A Monetary History of the United States 1867-1960. Friedman and Schwartz placed money at the center of economic history, contrary to Keynesians who focused on investment’s ups and downs. After 1929, it was the Federal Reserve’s allowing a rash bank crises and a collapse of the money supply that caused the Great Depression. This sounds like central bank activism. It was true in a crisis. It was possible to avoid the boom and bust cycle entirely by supplying money consistently and predictably. They should not be considered superhumans, but humble servants of the monetary machine.

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After 2008 Bernanke went back to the monetarist style and flushed out the system with cash. We will never know what Friedman thought of it all.

Samuelson believed that the quantity theory was only a crude simplification. Too simple also were John F Kennedy’s views about economics. Samuelson declined a position in the Democratic government in 1961. He didn’t need to be in the West Wing, his brand of economics was everywhere. Friedman, however, was first with Barry Goldwater, then with Richard Nixon. He was well-known for his advice to Augusto Pinochet’s bloody military dictatorship in Chile. He also opposed sanctions on Rhodesia controlled by whites after the Unilateral Declaratory of Independence. Protesters blocked Stockholm’s celebration of Friedman’s 1976 Nobel Prize victory. Regrettably Wapshott doesn’t draw on the rich historical literature regarding the new right or the rise of Neoliberalism. Instead, he reduces his story down to the friendly duel between Friedman and Samuelson in Newsweek magazine’s pages. They had two opposing columns. We all know what happened, or at the very least we think so. But, as Wapshott to his credit makes clear, Friedman’s victory was ambiguous. Though Paul Volcker’s interest rate hike in 1979 put a stop to inflation in the US, Friedman disowned the experiment. Volcker’s shock therapy was not monetarism, as Friedman had envisioned. The UK’s Thatcher government tried monetary targets but abandoned them too soon. Reagan and Thatcher did not follow a consistent path of fiscal discipline. It was too important to cut taxes and win elections. Friedman didn’t object in the end. What was important was the defeat for the left.

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Paul Samuelson, who declined a job in the Kennedy administration in 1961. ‘He didn’t need to be in the West Wing, his brand of economics was everywhere’ © Getty Images

1989 saw communism on the run. But who was the one who ruled? Bill Clinton governed the US in 1989 with a team made up of MIT alums. It was Samuelson’s followers who gutted the welfare state and pushed through a budget surplus. The Republicans, however, abandoned any pretence to fiscal rigour. Meanwhile, Alan Greenspan, supposedly a disciple of the libertarian Ayn Rand, was endlessly tinkering, adjusting interest rates in homeopathic doses as chair of the Federal Reserve under presidents Reagan, Clinton and both Bushes.To mark Friedman’s 90th birthday in 2002, Ben Bernanke, then a board member of the Federal Reserve, paid tribute to him and Schwartz. Referring to the Fed’s baneful role in the Great Depression, he remarked: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”But what was the cost of keeping that promise? Bernanke, his colleagues and Lehman Brothers failed in 2008 The result was that the world was facing its worst financial crisis since 1930s. Bernanke only then returned to the monetarist script, flushing the system with cash. We will never know what Friedman thought of it all. He died in 2006. But Schwartz, his longtime collaborator, roundly denounced Bernanke’s ad hocery.

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Samuelson was also shocked by the 2008 shock. Although he was a proponent of fiscal policy, Friedman, too, believed that macroeconomics could be a key to the success of the markets. This was a mistake. Friedman, Samuelson and their students underestimated the volatility of the capitalist economy. They underestimated the power of technocrats and the willingness of divided democratic parties to implement the best solutions. He is the author ‘Shutdown: How Covid Shook the World’s Economy’ (2021)Join our online book group on Facebook at FT Books Café
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