The U of C's Milton Friedman Institute and the Subprime Crisis
An ongoing faculty squabble over a planned, $100 million Milton Friedman Institute at the University of Chicago now has the enormous subprime blowup for a backdrop, and so far it's not a terribly flattering one.
One can't help but be struck by the irony of the fact.
Just when the academic disciplines most influenced by Friedman came together to praise him in 2007, a year after his death, it looks like the rest of the world may wind up burying him in practice.
As a principle, limited government intervention into the economy is defunct. Greater regulation is likely to follow. These changes have been led so far by products of the Reagan Revolution to which Mr. Friedman's wagon was hitched: The country's first MBA President, a veteran Wall Street investment banker, and an academic economist.
They will, in turn, be followed with great reluctance by an angry electorate that now detests Wall Street even more than it detests Washington.
It's a fundamental shift in popular sentiment that might undercut the longstanding appeal of Milton Friedman's more popular ideas far beyond academic economists.
The irony is the founding of an Institute in honor of the Age's Great Man, exactly when the the Great Man's Age seems to be collapsing. When you read a passage from the 2007 U of C proposal outlining the structure and goals of the Friedman Institute, it now seems out of joint with the economic situation:
As Friedman and other continually demonstrated, design of public policy without regard to market alternatives has adverse social consequences. [italics added]
The presumption in this passage, one noted by a group of U of C faculty opposed to the MFI, is that our biggest problems are government actions that ignore or contravene the signals of the marketplace.
While there's certainly a great deal to be said for the wisdom of that perspective, it doesn't address the problem we have now.
What we do have right now is a credit crisis that had little if anything to do with government meddling in the economy, and certainly nothing to do with regulatory impediments.
By suggesting, as the language of the Friedman Institute proposal does, that the field of economics is to serve primarily as an antidote to poorly conceived public policy, it neglects the inverse possibility that well conceived public policy may occasionally be the antidote to poorly functioning economies.
In light of current events, this part of the MFI's mission statement reads like the creed of another era. Socialism, Friedman's bete noire, is gone. That old bogey has been chased away. Globalization and the explosion of the financial sector are the new ghosts in the machine, to say nothing of climate change. What would Friedman say about where we've ended up, after Bear Stearns, after Freddie and Fannie and Lehman and A.I.G and Wachovia and now, the Bailout, and the mortgage-backed securities behind it all?
Friedman's high standing as an accomplished economic scholar is unquestioned. But the policy tradition associated with him, and alluded to in the MFI proposal, bears the marks of the age in which it matured: The crises of the 1970s. It was the age before credit default swaps roamed the earth, when the demon was inflation. It was a time when the prevailing Keynsian wisdom no longer worked, the post-World War II growth consensus faltered, and new voices with new ideas pointing in new directions were needed.
Friedman's was one of those new voices with new ideas. But that was 30-some years ago. The ideas of John Maynard Keynes similarly ruled the roost for about 30 years before that. If history is any precedent, Milton Friedman may continue, as Keynes has, to exert a powerful and salutary influence in both scholarly research and public policy. But, as happened with Keynes, he will become one figure in a pantheon, not the God above lesser gods.
Depending on how bad things get, Friedman may continue to symbolize the argument that markets provide the best solution to most problems. But he may not continue to symbolize the acceptance of that argument by large segments of educated voters, the kind that propelled the Reagan Revolution, which seemed at the time to be not just a political movement, but a global trend, if not the unstoppable march of history.
So, to all the U of C faculty opponents of the Milton Friedman Institute and its conspicuous $100 million: You might rest a little easier. History may be doing your work for you.
(But that shouldn't stop you from getting out there and getting your own $100 million.)