Money and monetarism

You have written two biographies, one on Milton Friedman and one on Ayn Rand. So if we can, we will focus on each one separately, but first, let's talk about the ideas that two of them held in common, the value of individual freedom, skepticism of collectivism, and the ethics of capitalism. Can you talk about the big picture ideas they converge on? Yeah. So, Milton Friedman and Ayn Rand, in the biggest picture, they're both individualists, and they're skeptical of collectivities and collectivism. So, their unit of analysis is the individual. What's good for the individual? What works for the individual? Their understanding of society flows from that. They also both use this focus on individualism to justify and to support capitalism as a social and economic system. So, we can put them in a similar category. We can call them individualists. We could call them libertarians of a sort. They're also really different in how they approach capitalism, how they approach thinking.

There's also a Chicago School of Law and Economics that's really profoundly influential, and then there'll be a third generation that he's somewhat distinct from, but that goes on to really shape economics. But let me go back to these four pieces, and let me start with Great Depression. So, Milton Friedman actually lives through the Great Depression. He's in college when it hits. So, he is in college just 1928 to 1932. He's aware of the Depression, and he's deciding, "Should I study mathematics, or should I study economics?" He's had some good economics teachers, but it's really the context. It's looking around at the slow dissolving of economic prosperity. So, he decides to go to Chicago. He decides to study economics. What's really interesting is that the Great Depression is so unexpected. It's unpredicted. It's unprecedented, and economists are really struggling to know how to respond to it. So, he's going to arrive at the University of Chicago when the field is struggling to know what to do. So, he's in this really open space where the institutional economics of the 1920s has failed to predict, which was focused on business cycles.

Yeah. Just the basics. You mentioned Neoclassical. We mentioned Keynesian economics. We mentioned... What else did we mention? Well, the Chicago School of Economics.

Okay. So, if we can just linger on the definitions of things. So, we mentioned what neoclassical is and the institutional economics is, what's Keynesian economics? And the Chicago School of Economics, I guess, is a branch of neoclassical that's a little bit more empirical versus maybe model-based and Keynesian is very model heavy, more intervention of government. So, the real battle is Keynesian versus everybody else. That is what eventually comes to pass in the United States and in the overall developed profession of economics. The other piece of the puzzle here is the introduction of mathematics and it's been around the edges but it will pick up speed. In the 1930s, the Econometrics Society is founded, they start publishing, people start using more statistical and mathematical tools to think about economics and they're given a boost inadvertently by the rise of Keynesian economics. So, Keynes is trained in the neoclassical tradition, he's an absolutely fascinating figure, he's been there in the peace negotiations at Versailles, he basically calls World War II. He's like, "Hey, we're going to have another war here caused by Germany because this peace treaty has been done in such a vindictive way and people have made such bad decisions." He's there, he sees it happening.

Yes. So, the Austrians and the Chicago School see economic prosperity and growth comes from individual initiative, individual entrepreneurship, private sources. The private market is what drives economic growth, not the public sector. And so, for Friedman then the question is what is the government's role. And because he's lived through the Great Depression, he's not laissez-faire and he won't ever be laissez-faire. Now, interestingly, Hayek, living through the Great Depression, at first is laissez-faire and he's like, "Sure, let it rip." And things get so bad that Hayek's like, "Okay, that's not going to work." Can we actually define laissez-faire? So, what do we mean? What's the free market? What's laissez-faire? What's the extreme version here?

You mentioned Hayek. Who is this guy? What's his relationship to Milton Friedman in the space of ideas and in the context of the Great Depression? Can we talk about that a little bit? Sure. So, F.A. Hayek is an Austrian economist who takes up a posting in London and he's a mentor, a mentee rather of Ludwig von Mises. He's writing about business cycles, Austrian Capital Theory and the Depression hits and he's one of the few economists who, in the beginning, really is not calling for much intervention. Although, as he realizes how politically unpalatable that is, he will develop a more softened version of Austrian economics that has room for a whole range of social services. What's significant about Hayek is that he is also watching what's happening in Austria, what's happening in Germany and he's really worried the same thing is going to happen to the Western democracies. And he sees the root cause of this is socialism, the shift towards an expanded role for government which, we've been talking about, is happening in the United States, it's also happening in Britain.

Yeah. So that's a fascinating story. And so what happens is Friedman has advanced all these ideas, he's ruled the economics profession, he's built a political profile and then he becomes the head of the American Economics Association. And he is asked in that role to give a presidential address. And so he gives his presidential address December 1967, and he says, "I'm going to talk about inflation and I'm going to talk about the trade-off between inflation and unemployment." And this is what's generally known as the Phillips Curve and the Phillips Curve in its original form is derived of post-World War II data. So it's derived of about 12 years of data, and it shows that when inflation goes up, unemployment goes down. And the idea would make sense that as the economy's heating up and lots of things are happening, more and more people are getting hired. And so this relationship has led policymakers to think that sometimes inflation is good, and if you want to lower unemployment, you could let inflation go a little bit. And in the crude forms, it becomes to seem like a menu. Like you could take your model and you could plug in, I want this much unemployment. And it would say, well, great, this is how much inflation you should do. And so then you would target that inflation rate.

Can we go back to Frank Knight and the big picture thing we started with, which is the justification of capitalism? Yes.

How did he conceive of freedom? So individual freedom, economic freedom, political freedom, civil freedom, what was the tension, the dynamic between those different freedoms for him? So he really begins focusing on economic freedom. And he says it's really important to focus on economic freedom because in the United States we don't value it enough. By economic freedom he means the ability to keep what you've earned, the ability to make decisions about your business, the ability to make decisions about the work that you do. So this will translate into things like, there shouldn't be a minimum wage. He believes the minimum wage has bad social effects, but he also believes you should be free to accept a job at a wage that you yourself have determined is acceptable to you. And there should be very minimal regulation questions around safety and other things, because the market will ultimately, if you create an unsafe product, it won't sell. And that's sort of your incentive.

Just to go back to Frank Knight a little bit, he wrote an essay called The Ethics of Competition, he had the metaphor that economic life is a game. And then maybe that extends to society as a whole, like the entirety of it is a competitive game. And Milton Friedman, I think, adapted some of this, appreciated some of this. Can you speak to this metaphor? Yeah. I think what the metaphor of the game does is it asks you, okay, well what are the rules then? And let's focus on the rules that keep the game going. So he didn't use the concept of an infinite game, but I think that's an interesting one, a game that all the players are in and keep going again and again and again.

So my friend, she's a poker player, philosopher of sorts, great human being, she has a podcast called Win-Win that everybody should listen to. And the whole purpose of the podcast and her whole way of being in spirit is to find win-win solutions. So do you think of economic life as having such win-win solutions? So being able to find rules where everybody wins, or is it always going to be zero-sum? I definitely believe in win-win, but with a big asterisk, you can have win-win, but it can feel like win-lose, which is, it's not just are people getting more, it has a lot to do with do people feel they're getting more, and do people feel they're getting what's fair and equal?

That's so interesting that the experience of the economy is different than the reality of the economy. On the topic of corruption, I think the reality of corruption versus the perception of corruption is really important in a lot of these nations. You take Ukraine for example, the perception of corruption has a big impact on the economy. You don't want to invest. You're very cautious as a business person. The reality of corruption can be way different than the actual perception. But if narratives stay cold, it's a self-fulfilling prophecy, that it has a big effect on the psychology of the people involved. It's interesting. Yeah. This goes back to Keynes's analysis of the great depression. If people won't invest, if they're spooked, if the investing classes are spooked, you could be in real trouble. And in some ways, this simple analysis of the problem and proposal of a solution was enough to restore eventually the path to academic prosperity, right? That's Franklin Roosevelt, "nothing to fear, but fear itself." The sense of we know we have a future, we have optimism, then you believe in it.

So maybe we could speak to this tension between how much government intervention is okay for Milton Friedman. So he was against minimum wage, but he was for guaranteed minimum income. Can you explain actually the difference between the two? Yeah. So this was one of the discoveries I made in my research. I found a paper from 1938. He wrote advocating what we would call today a universal basic income, a minimum income. And he basically sees this as part of the effort to create a new liberalism. And he basically says, we have advanced societies, we have prosperous societies. We have decided in keeping with our morals and our ethics that people should not be starving in an advanced society like this. The question is how are we going to make that happen?

Yeah. Inspiring. You call Milton Friedman, The Last Great Conservative, maybe to be a little bit controversial and make bold statements that get everybody excited, but what do you mean by that, and what makes it great conservative?

What do you think Milton Friedman would say about Donald Trump about him winning in 2024, and just in general, this political moment? I think he would love DOGE. I think that's goes without saying.

You wrote The Wall Street Journal essay titled How Inflation Ended Neoliberalism and Re-elected Trump, so can we weave that into this discussion in terms of inflation and Trump? What's the main idea of the essay? So, the main idea is looking back and saying, "So today, we have been living in a world where people have been focused on monetary policy, steady monetary policy, free trade, reducing regulation. This is all called the neoliberal era." And my argument was a lot of that arose was driven by inflation, so we have Milton Friedman predict inflation in 1967. It starts breaking out in the 1970s. Britain and the United States, and every institution was designed around stable prices. And once inflation broke out, prices were no longer stable. So, for example, tax rates weren't inflation-adjusted. So if your income went up because of inflation, you might bump from a low tax rate to an extremely high tax rate, but you don't actually have more money, on paper you have more money, but everything costs more, so you don't actually have more money and your taxes have gone up. That kicks off the taxpayer revolt.

Like you said, Milton Friedman would be a big fan of DOGE, so if he was still here today and rolled with Elon Musk and Vivek, what advice would he give? What do you think he would focus on in terms of where to cut, how to cut, how to think about cutting? His signature policy move, I talk about this, is taking the price mechanism and trying to make that into the policy. And that seems obvious to us today, but in the era that he came in, so there would be rent controls, let's take away rent controls, let's let housing prices set themselves, or he was very against national parks, I actually think that national parks are good, so I hope that DOGE people don't take this up, but that rather than an allocation to fund the national parks, they should be funded by the revenue that they bring in when people visit them. And so I think he was always looking to, let's let prices make the decisions here, so I think that would be one of the key pieces.

I did a podcast with Javier Milei. He has consistently praised Milton Friedman and cited him as one of his inspirations. So what do you think Milton Friedman would say about what's going on in Argentina and what Javier Milei's trying to do in Argentina? Yeah, I think he would appreciate it. I think Milei is a much more of an Austrian-inspired thinker, but I think he definitely appreciates Friedman. And on the macro level, Friedman always understood it's really painful to treat inflation, but the more you put it off, the harder it is. So I think he would be trying to get him as he's doing to just message that short-term pain, long-term gain. I think he'd be very supportive. I think he'd be thrilled to see, also, that Milei is very good at explaining these abstract ideas and putting his policies in the framework of the bigger picture. That was really meaningful to Friedman. I don't know how politically persuasive it is overall. Milei's very intense. He doesn't have the same gifts of salesmanship and setting people at ease that say someone like Ronald Reagan had, but it seems to be that's what his country was calling for right now.

If we can pivot a little bit, we've talked about Reagan. What are some interesting stories about how Milton Friedman navigated the Reagan and maybe even the Nixon administrations and how he was able to gain influence? Well, the Nixon administration is an interesting case because... So, I've been talking about inflation and the different consequences it had. One consequence it had is that it began to undermine the Bretton Woods currency system that was established in the wake of World War II. Now, Bretton Woods, what it did, basically, it ended up inadvertently putting the US dollar at the center of the world economic system. But under Bretton Woods, countries of the industrialized West agreed to trade their currency in set ratios that government set, so a franc was worth so many dollars or a German mark was worth so many francs, and then also under this system, countries could come to the United States, and they could trade the dollars that they held for gold because the US was on a modified gold standard. There was a ratio of gold to paper money. And so the system was set up and very quickly, most countries, the dollar was at the heart of it in that the converting into and out of dollars was really the mechanism of trade for many of these countries.

The Carter presidency largely falls. Foreign policy is a big part of it, but the failure to tame inflation is part of it. And then Reagan comes in, and now Reagan loves Friedman and Friedman loves Reagan, very mutual feeling. The Reagan administration creates an advisory economic board. Friedman's on it. He's retired now. He's entering golden years, but he really has Reagan's ear. And here what he does is he convinces Reagan of his theory of inflation, which is inflation has been caused. It's a monetary phenomenon that has been caused by bad monetary policy. Inflation has an accelerating dynamic. The only way to end inflation is by really showing and signaling that government policy has changed. And when you do that, it's very painful for a short amount of time, people will suffer, but then you will come out on the other side into stable prices, and this is what you need for economic prosperity. So the man who implements this policy, Paul Volcker, he's definitely influenced by Friedman, buys the big picture of Friedman. He even buys Friedman's specific technique of the monetary growth rule and of the focus on monetary aggregates, which Friedman has said, "Money matters, aggregates matter, and that's what money is." Pretty quickly Volcker finds that because of inflation and the financial deregulation in response to it, the aggregates don't work the way Friedman said they would. And so the specific policy Friedman recommends, Volcker tries it for a year or so, doesn't work super well. But what does work is letting interest rates go high, go above inflation, to a point where both the general citizenry and the financial markets believe like, oh, they're actually serious about inflation. And because we've had a decade of inflation with all these presidents saying, Ford, "We're going to whip inflation now," that monetary policy has lost credibility. This is why people focus so much on credibility today, because once it's lost, it's really hard to get it back. And one way Volcker gets it back is interest rates over 20%. Unemployment very high, as high as 25% in construction sectors. And as this is happening, Milton Friedman is whispering in Reagan's ear, "This is the right thing. Stay the course. This is going to work." Now, interestingly, he hates Volcker or Volcker hates him, and Friedman will never give Volcker credit for this policy, but he will give Reagan credit for this policy. But he owes credit himself for keeping Reagan from wobbling on this policy and just pushing it through. And he also tells Reagan, very pragmatically, "You better do this now. You've got a four-year term. Do this in the first two years of your term. Things will have turned around by 1984 when you run for reelection and you'll benefit from it." And that's absolutely what happens.

If we could take a small tangent, a question I have to ask about, since we mentioned Bretton Woods and maybe the gold standard, maybe just have a general discussion about this whole space of ideas, there's a lot of people today that care about cryptocurrency. What do you think that Milton Friedman would say about cryptocurrency and what role crypto might play in the economy, whether he would be for this idea against this idea, and if we could look at it for today, and also just 10, 100 years from now? There's a clip, I think it's in 1992, where people say, "Oh, Friedman predicted cryptocurrencies," because he's talking about how payments will eventually be electronic. So in some ways definitely, as he was looking at the computer and money, he knew these would come together in some way. I think he probably would see a use case for crypto. He definitely would not buy the stronger forms, I think of crypto ideology in which we could be heading towards a future in which there's many different currencies that compete or that are distributed or there's a stateless currency. And he addresses this very, very clearly because Hayek's Denationalization of Money, it's a paper in the late '70s. Hayek argues for this kind of competing currency model or regime. And so he's responding to that. He's responding to people writing about free banking, and he basically says, "Look, even if you developed a variety of competing currencies, eventually society would converge on one."

Yeah, it's always sad, and it always makes me wonder about the private, secret conversations between partners because they might not show up in the record, but they probably influence the person more than almost anything else, those quiet little conversations. If we can switch our path to another great mind of the 20th century, Ayn Rand, we talked about some of the similarities here, about them being fighters for freedom and fighters for capitalism. What is Ayn Rand's philosophy? If you can give a big 10 summary of objectivism? Yeah, so she called it objectivism. She used to do this thing, "I can stand on one foot and say it." It goes something like, "Epistemology, reason, ethics, selfishness, politics, capitalism." That was how she summarized it. So what she did, there's a couple of things she did with objectivism. First of all, she says the key defining element of humanity is rationalism, the rational faculty. That's what defines what humanity is. Therefore, there is an objective reality that we can access a know with our reason. That's the objective epistemology. And the one social and economic system that lets rationality flower and is based upon rationality is capitalism. And then rationality only works in her view as an individual capacity and that rationality teaches that what you should do is pursue your interests. And so she ends up calling that selfishness.

Yeah, yeah. You mentioned We The Living is one of the books that you like of hers the most, but can we stay in the Mythic Register with the Fountainhead and Atlas Rugged? What are some memorable, inspiring moments, insightful moments from those books that may be scenes or ideas that you take away from them that are important for people to understand?

Okay, sticking on the drama and the theatrics, who was Nathaniel Branden? Oh yes.

You study and write about history of ideas in the United States over the past 100 plus years. How do you think ideas evolve and gain power over the populace, over our government, over culture, just looking at evolution of ideas as they dance and challenge each other and play in public discourse? What do you think is the mechanism by which they take hold and have influence? Yeah, there's a couple different ways, I think, it happens. I really am interested in the relationship between the thinker and then the reader and the interpreter of the ideas, and then the conditions on the ground that make that idea resonate or not resonate. I think a lot. As an intellectual historian, I'm studying the ideas. I'm always putting them in their historical context like, "What is happening that is making these things resonate? That is making them... People seek them out. For Rand's case, she has this credibility because of her experience of communism. She's one of these defining moments of the time. Then I think the idea comes out in a pure form, and then other people rework it and reshape it as they read it. And I'm really interested in how people form communities around these ideas. A bunch of people started calling themselves objectivists and getting together to read Rand's work. That was spontaneous and ground up. It wasn't supported by any money. Nobody planned it. It just happened.

Yeah, I think in the broadest sense, what I'm interested in, kind of two dimensions, that guide me in doing intellectual history. One is what I talked about, like how does an idea go from a book, an elite space, out to more popular dimensions? How does that happen? What happens to the idea along the way? How is it distorted or changed? And the other is just search for meaning in a post-Christian era or a secular era. Like, "What are people coming up with?" And I think to replace that void in their religious or spiritual lives, I think both Rand and Friedman offered these alternatives, right? Objectivism, quasi-rationalist religion. People take economics as a theory of the world that you can almost believe in it, right? It can almost take that place. And in both cases, how did those ideas travel? When I think about postmodernism, it first struck me... If you read the original postmodern thinkers, it's really tough going. I make my students do it, and they suffer. I think they see it's worthwhile, but it's no fun to read Derrida. But somehow it's trickled down into how do we go from Derrida to Tumblr? And I realized like, "Oh, this has happened with postmodernism." It's followed the same path, say, from Milton Friedman's economic theory to free to choose on YouTube. We've had a similar path of high French theory down to Tumblr, and I sexually identify as an attack helicopter or whatever it may be. That was really interesting. Then I also thought, "Well..." At the same time, this is clearly a structure of meaning. And I actually think it's followed the same path of objectivism, which is distilled down and then turning into its opposite.

So you're super passionate about teaching. You mentioned Milton Friedman had a very interesting way of teaching. So how do you think of teaching, teaching history, teaching history of ideas, teaching bright young minds about the past? Yeah. It's great. It's really inspiring the ways the old school dominating way in which Friedman taught would not fly in today's university wouldn't be permitted. And also, the students wouldn't respond to it. So I try to share my enthusiasm. I think that's almost the number one thing I bring, is my enthusiasm. Look how neat and interesting these ideas are.

Please allow me to say a few words about my interview with the president of Ukraine, Volodymyr Zelensky, now that a few days have passed and I've had the chance to think about the conversation itself, the response, future upcoming conversations, and what it all means for the war in Ukraine, for global geopolitics, and for us humans in general. I've gotten a lot of heartfelt positive words from all sides, including, at least so far, literally everybody who knows me personally inside Ukraine, which includes a lot of soldiers and many high profile figures, some who are supportive of the president, and some who are critical of him.