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Beginning 1966 and extending well into the early 1980s, two veritable titans nursing tangentially different ideologies in the domain of economics, pitted their wares against each other by penning alternating columns for the Newsweek magazine. Such a marvelous exercise or experiment even, has not been repeated since by either Newsweek or any other publication. Paul Samuelson and Milton Friedman were chalk and cheese when it came to identifying the contours and expounding the benefits of a free market economy. Samuelson was a staunch Keynesian, who advocated informed and calculated government interventions in the workings of the economy. Friedman, an Ayn Rand acolyte, in stark contrast was the very epitome of leaving business alone to conduct business and thoroughly antagonistic to any form of government intervention. Friedman was arguably the most committed, passionate and incorrigible libertarian of his time, and possibly as many may argue, of all time.
Nicholas Wapshott’ s new book, Samuelson Friedman, chronicles the echoes arising out of the battle between Samuelson and Friedman whose reverberations can be felt even today. While one school continues to cry foul about the need and workings of a welfare state, another school is quick to point out the mendacity that is the free market economy. Wapshott captures an invigorating period where two dueling professionals who continued to remain faithful friends, cleaved the world of economics, and consequently politics. As Wapshott informs his readers the spill over effect of the Samuelson Friedman debates influenced not just the common reader but also many a policy maven. Samuelson v Friedman was also Carter v Reagan and James Callaghan v Margaret Thatcher.
The editor of Newsweek in the 1960s, Osborn Elliott in an attempt to best his eternal rival Time hit upon an idea of securing two economists cut out of a different clothes to pen argumentative columns that would whet the appetite of a younger audience. While bagging Samuelson was nothing short of a coup, Friedman needed strong persuasion from Rose, his wife, to accept the job. A prescient Rose instantly detected the merits of Friedman in going head-to-head with the man who was then acknowledged to be one of the greatest economists ever, and a true successor to the greatest ever, John Maynard Keynes. A formidable economist herself, Rose Friedman also doubled up as the co-author of innumerable works emanating from the Milton stable.
At the heart of the Samuelson Friedman debate lay the scourge of inflation. The causes of inflation and the potential remedial measures to curb it were the two topics which caused immense and intense difference of opinion between these two warring giants. Friedman along with economist, Anna Schwartz, in his magnum opus “A Monetary History of the United States, 1867-1960” argued that the Great Depression would not have materialized had the Federal Reserve Board done its job and stabilized the money supply. Friedman was of the unshakeable belief that policy makers could lend a great degree of stability to an economy by ensuring steady, slow growth in the money supply. Samuelson, on his part choose to adopt a more traditional Keynesian/neo-classical approach by advocating a measured and judicious blend of increased taxes and opening up the spigot of public spending.
Ronald Reagan and Margaret Thatcher both came to power placing their trust more towards “Friedmanism” than banking on Samuelson’s tenets. Reagonomics proceeded to slash taxes, (but primarily on and for the wealthy), and curbed the power of trade unions. Reagan also clamped down on a lot of necessary welfare schemes primarily aimed at sustaining minority groups such as single black mothers. But all those naysayers who were busy writing the epitaph on Keynesianism were in for a rude jolt.
The insidious financial recession exposed the fatal chinks in the armour of “Friedmanism”. A plethora of materials abound on the vulnerability of Friedman’s theories when applied in the context of a recessionary condition. Even Ben Bernanke, the erudite Chairman of the Fed (incidentally an authority on Depressions since his doctorate thesis was on the Great Depression of 1929) and an unabashed Friedman fan, had to ultimately rely on the humongous Troubled Asset Relief Package (“TARP”) that infused close to $700 billion into a fragile economy bursting at its seams. It was finally fiscal policy and Keynesianism that ruled the roost.
The COVID-19 pandemic and the extraordinary measures implemented to reign it in further lent credence to the importance of Government intervention in shoring up an ailing economy. The disbursement of funds as part of stimulus packages across the globe did not warrant even a reluctant whisper of the dreaded word “Austerity”. Direct Benefit Transfers to migrant labourers and employees furloughed or displaced by the pandemic paid unabashed homage to the Keynesian notion of a welfare state.
In conclusion, I personally feel that it is time for economics to take a stab at heterodoxy. Science, even if it is a dismal one, needs to evolve in lockstep with the passage of time. The assumption that all individuals are rational and take economic decisions that maximise their utility is a theory that has long passed its sell by date. Behavioural economics has demonstrated this in no great uncertainty. Individuals are more often than not are refreshingly irrational rather than being cold, calculated and cunning rational creatures, and are driven by factors such as coercion, coaxing, social constraints and paucity of information. New and emerging theories such as institutional, feminist, Post-Keynesian and Modern Monetary Theories need to be evaluated seriously to complement the neo-classical synthesis.
Even Samuelson would have accorded his wholehearted approval to such a notion!