The two were the most important players in economics in the last half of 20th century. From the 1950s through the 1970s, Samuelson, a Keynesian, thought fiscal policy was more powerful than monetary policy as a tool to manage the economy. Throughout his career he believed in a large amount of regulation, taxation, government spending, and redistribution. Friedman believed monetary policy was more powerful than fiscal policy and believed that the United States and other countries should reduce government intervention substantially and bring all countries’ economies much closer to free markets. Although Friedman and Samuelson never agreed on the proper role of government, in the 1980s Samuelson did come around to Friedman’s view on the power of monetary policy and also to Friedman’s view that there was no long-run tradeoff between inflation and unemployment.
Misunderstanding monetarism / Many of the stories that Wapshott tells are fascinating, but he does not understand economics well enough to explain Friedman’s views. Wapshott seems to be an unreconstructed Keynesian and so explaining Samuelson’s views comes relatively easily to him. But he never shows a solid grasp of Friedman’s monetarism and so, in explicating Friedman’s thinking, tries to do the analysis within a Keynesian framework. My criticism is not that Wapshott doesn’t agree with monetarism, although he doesn’t appear to; it’s that he doesn’t seem to understand this school of thought.
One of Friedman’s biggest contributions to economics was his 1963 book with Anna J. Schwartz, A Monetary History of the United States, 1867–1960. In it, they showed that one of the important contributors to the Great Depression was the 30% reduction in the money supply that the Federal Reserve allowed to occur between 1929 and 1933. Yet, here’s how Wapshott explains their finding: “Had the Federal Reserve eased interest rates earlier, many of the businesses which had gone bust could have borrowed to remain open.” But Friedman and Schwartz said little about interest rates; their focus was on the money supply. Indeed, interest rates during the Great Depression were quite low and Federal Reserve officials mistakenly saw them as an indicator of a loose monetary policy.
Wapshott repeats his mistaken interpretation several times. Later in the same chapter, he writes:
At the heart of their argument was the long-abandoned quantity theory of money, which suggested that the more money in circulation, through low interest rates and cheaper borrowing, the more the value of money would decrease. Similarly, the less money in circulation, because of high interest rates, the more money would maintain its value over time.
Wapshott gets the “more money” and “less money” parts right, but he fails to appreciate Friedman’s point that while the immediate effect of more money is a lower interest rate, the later effect is the opposite: higher rates as people begin to anticipate higher inflation.
In a chapter titled “Money, Money, Money,” Wapshott refers to Friedman’s “big idea” that “inflation was caused solely by the velocity of money.” It’s hard to get Friedman more wrong because his actual big idea, which he first stated in 1963 in a speech in India and repeated countless times, was that “inflation is always and everywhere a monetary phenomenon.” In one sense this statement is tautological: the fact that inflation is, by definition, a reduction in the value of money means that inflation necessarily is a monetary phenomenon. But Friedman always made clear that he meant much more than that: his argument was the empirical one that one could not find a persistent inflation not caused by a persistent growth in the money supply. Friedman thought that the velocity of money was important too, but far less important than the growth of the money supply.
Respect and affection / Wapshott, appropriately, draws heavily from the regular columns in Newsweek that Friedman and Samuelson wrote from 1966 to the 1980s. He describes the different styles of the two: Samuelson was more the literary writer drawing on literature ranging from Rudyard Kipling to Charles Dickens to the Old Testament. Friedman’s desire was to “engage with the reader directly and make his case in practical terms.” With that, Wapshott put his finger on why I prefer Friedman’s style (content aside) to Samuelson’s: Friedman seems to be talking to me.
One of the nicest parts of the book is the quotations from public statements each made about the other’s work and from highly complimentary letters that Friedman and Samuelson wrote each other from the 1960s through the early 2000s. They had known each other since the 1930s, when Friedman was a graduate student and Samuelson an undergrad at the University of Chicago.
After the announcement of Samuelson’s Nobel Prize in October 1970, Friedman wrote in Newsweek that Samuelson was “a brilliant and original mathematical economist” who was “the leader in creating a great center of economic study and research at MIT, raising a run-of-the-mill department to one of the premier departments in the world.” After Friedman’s Nobel was announced in October 1976, Samuelson used his Newsweek column to congratulate Friedman for “his scientific contributions and his scholarly leadership.” Then Samuelson gave a more personal appreciation, writing:
What I have failed to convey is Milton Friedman’s bounce and gaiety, his rapier intelligence, his unfailing courtesy in debate. The world admires him for his achievements. His intimates love him for himself.
Has anyone ever said it better?
Their respect and affection for each other carried over to their personal correspondence. In 1995, Samuelson wrote to Friedman that they had met “62 years ago” when “I was a lowly sophomore and you were already spottable as a scholar of destiny.” Friedman replied that he and his wife Rose “were very touched” by Samuelson’s letter. But, always the exacting empiricist, he added: “I do have one correction to make. It must have been either 63 or 61 years ago that we first met; I suspect 63 years.”
Theory vs. empiricism / While much of the book is on the two economists’ differences on macroeconomic policy, Wapshott does a reasonable job of laying out their differences on the appropriate levels of taxation and government spending and the appropriate amount of regulation. Samuelson believed in high taxation and government spending and extensive government regulation. There was a limit, though: Wapshott points out that Samuelson was relieved in 1961 when newly elected president John F. Kennedy did not appoint left-wing economist John Kenneth Galbraith as his top economic adviser.
Friedman believed in a great deal of economic freedom in the form of low taxation, low government spending, and little regulation. One thing that doesn’t come across in the book is the extensive empirical case that he made for his policy conclusions. In his professional work, by contrast, Samuelson, ever the theoretical economist, rarely if ever made an empirical case for his policy conclusions. His case was more philosophical, with little attention to detail. In that respect, Wapshott is faithful to Samuelson’s views. He quotes, for example, Samuelson’s statement on coercion: “Libertarians fail to realize that the price system is, and ought to be, a method of coercion.” He also quotes Samuelson’s provocative statement in which he undercut the importance of freedom:
My privacy is your loneliness. My freedom to have privacy is your lack of freedom to have company. Your freedom to “discriminate” is the denial of my freedom to “participate.”
Ad hominem / Disappointingly, Wapshott doesn’t understand that an ad hominem attack is a criticism of someone’s views based not on those views but on the character of the person espousing them. He tells of a June 1980 speech that Friedman gave at a monetary conference held by the American Bankers Association in which he scathingly critiqued the monetary policy carried out by then Federal Reserve chair Paul Volcker. Friedman claimed that Volcker’s monetary targets were a “particularly egregious example of the contrast between talk and action.” Friedman also stated that Volcker’s monetary policy was “incredibly restrictive.” Wapshott calls this “a brutal ad hominem assault on a friend and colleague.” It was brutal, but it was an attack on Volcker’s policies, not on Volcker as a human being.
By contrast, Wapshott himself engages in actual ad hominem against Friedman, calling him “an Archie Bunker with brains.” Archie Bunker, recall, was the bigoted antihero in the classic 1970s TV series All in the Family. Yet, Wapshott gives zero evidence that Friedman was racist or bigoted. Such evidence would be hard to provide; I knew Friedman well and I never saw evidence of any bigotry. Indeed, he was one of the first white academics to hire a black secretary.
Libertarian laissez-faire? / In the last chapter of the book, “Capitalism Teeters,” Wapshott covers both the 2007–2008 financial crisis and the 2020–2021 COVID crisis and commits several important mistakes on both. For example, in examining monetary policy during the financial crisis, he makes a key error of omission, one that many economists have made: he fails to note that in October 2008 the Federal Reserve started paying interest on banks’ reserves. So, what looked like expansionary monetary policy by then Federal Reserve Chair Ben Bernanke really was not.
Unfortunately, Samuelson, despite his earlier warmth to Friedman, became more hard-edged after Friedman’s death. In that chapter, Wapshott quotes Samuelson’s statement:
At the bottom of this worst financial mess in a century is this: Milton Friedman–Friedrich Hayek libertarian laissez-faire capitalism, permitted to run wild without regulation. This is the root source of today’s travails. Both of these men are dead, but their poisoned legacies live on.
Had Hayek and Friedman been alive, they would have been surprised to learn that in 2007 the United States had laissez-faire capitalism. And those of us economists who are alive and pay attention to details would be surprised, too.
This statement, though, is consistent with Samuelson’s style: making broad literary statements with little or no factual backing. At no point does Wapshott challenge Samuelson’s claim. Indeed, he hops on the Samuelson bandwagon, stating that the small-government movement for which Friedman provided intellectual justification “successfully altered the [Republican] party from one of traditional middle-of-the-road conservatism to one of unabashed libertarianism.” Of course, Wapshott gives no evidence for this. That would be hard to do for a party that, along with Democrats, voted to add $600 a week in federal money to state unemployment benefits during the COVID pandemic and that paid employers hundreds of billions of dollars to keep their employees in place.
On COVID, Wapshott is even further off the mark. He claims that amid the pandemic the federal government “was now in total control of the market, and decided which businesses were allowed to operate, which lived, and which died.” In fact, state governments exercised a lot of that power, though the feds did impose price controls on some medical equipment, prevent foreigners from entering the United States, and guarantee a market for COVID vaccines.
The book has many other errors, some trivial, others not. An important one is Wapshott’s claim that the federal deficit in the 1990s fell “from 47.8 percent of GDP in 1993 to 31.4 percent in 2001.” In fact, the numbers he gives are for the federal debt, not the deficit, which is a pretty big difference.
Wapshott is a good storyteller. Read his book if you want to follow the fascinating history of interactions between Friedman and Samuelson and want to know of an era in which ideological opponents could be friendly. But don’t read it if you want to understand economics.
