How Keynesians Hijacked Milton Friedman's Helicopter
by Gary North: Government
Promises Are Hallucinatory Drugs
was very smart and a great debater. I knew him. I liked him. But
he was no different from other very clever fellows. When he got
something conceptually wrong, he was dangerous.
of apologetics at seminary was Cornelius Van Til. Apologetics is
the philosophical defense of the Christian faith. Van Til was every
bit as smart as Friedman. He had a bunch of great metaphors in his
arsenal of rhetoric. My favorite was the buzz saw metaphor. He said
this: "You can sharpen a buzz saw all you want, but if it is set
at the wrong angle, it will never cut straight."
"buzz saw" on monetary theory was always set at a crooked angle.
It never cut straight.
the distribution of fiat money in terms of a metaphor: a helicopter
full of paper money. It drops this money on the population below.
He used this metaphor in a chapter titled "The Mystery of Money."
It is chapter 2 in his 1994 book, Money
Mischief. His goal for the chapter was to show that this
free money from the sky, if it continues, will raise prices. He
introduced the metaphor on page 29. (For the moment, you can read
the chapter here.
But Web pages come and go.)
What the metaphor
does not show is what Austrian School monetary theory emphasizes:
the new money is introduced at specific points in the economy.
It is spent into circulation by the national government,
which sells its IOUs to the official counterfeiter: the central
bank. The national government gets first access to this money. It
then spends it. The recipients of this government spending get access
to the newly created money earlier than other citizens do. So, prices
in general do not rise uniformly. They may not rise at all if overall
economic production increases. What always rises is government
spending. This fact, not the general price effects of counterfeit
money, is the heart of any accurate analysis of central bank money.
It is discussed in detail only by Austrian School economists.
admitted that this process of sequential spending is relevant. He,
like his intellectual mentor Irving Fisher, self-consciously rejected
the Austrians' analytical approach. What is this approach? The approach
of the script of All
the Presidents' Men: "Follow the money."
Mises refuted Fisher's 1911 book on monetary theory in Mises' 1912
Theory of Money and Credit. Fisher never responded explicitly
to Mises. Their respective disciples did battle. Murray Rothbard
repeatedly critiqued Friedman on this same point. Friedman never
responded explicitly to Rothbard.
metaphor became a powerful rhetorical tool to persuade others of
his arguments against free-market pricing. He always said he preferred
free-market pricing. But there was always this glaring exception:
the pricing of money. He spent his career trying to undermine the
legitimacy of the idea of free market money (gold coins) and a price
system based on it. He became a public figure with his 1961 book,
and Freedom. Chapter 3 is on money. It begins with a rejection
of the gold coin standard.
FLY THE HELICOPTER
From the beginning,
Keynesians loved his metaphor of the helicopter full of paper money.
Why? Because that metaphor portrayed the central bank as a supplier
of free goods. They understood what the Austrian School economists
understand: The national government gets to sell its IOUs at a lower
rate of interest to the central bank than the private investors
who cannot legally create money out of nothing. This lets the government
spend more money than it collects from taxes and loans from the
private sector. Here is the law of economics: When the price
of something is reduced, more of it is demanded. Fiat money
issued by a central bank therefore allows the government to buy
more power and influence in the overall economy. Central bank
fiat money subsidizes the national government.
believe that government can and should increase its purchase of
goods and services. Friedman always said that the government shouldn't
be allowed to do this very often, and only on an efficient basis
(e.g., school vouchers). But he ignored the obvious: fiat money
lowers the government's cost of issuing IOUs. This means that the
central bank provides lower-cost power and influence for the government.
The government demands more of this money at artificially low interest
rates, because it expands the range of government operations.
was the heart of his analytical error all his life. This error has
played well among Keynesians. They see the greatest benefit of the
central bank as providing "free extra money" for government spending.
this aspect of the arrangement. He promoted the idea of a required
3% to 5% monetary inflation as a way to keep the "engine" of the
economy moving smoothly. Friedman's necessary economic lubricant
my metaphor, not his was money. He really did believe that
it can be supplied by the central bank free of charge.
He made his
reputation with his jointly authored book, A
Monetary History of the United States (1963). In it, he
and Anna Schwartz blamed the Federal Reserve for the Great Depression.
Why? Because it did not inflate enough to save 9,000 banks and thereby
stop the contraction of M1. This was ideological manna from heaven
for Keynesians. This was Friedman's "helicopter drop" of free anti-capitalist
ideology: blaming central banking for insufficient price inflation
and insufficient monetary stimulus by way of increased government
believed in a free lunch in this one area of the economy. It colored
his entire economic analysis. It also got him a Nobel Prize.
It was dead
dead-wrongness was why Keynesian Ben Bernanke invoked the metaphor
in his November
21, 2002 speech against price deflation.
of the policy options I have discussed so far involves the Fed's
acting on its own. In practice, the effectiveness of anti-deflation
policy could be significantly enhanced by cooperation between the
monetary and fiscal authorities. A broad-based tax cut, for example,
accommodated by a program of open-market purchases to alleviate
any tendency for interest rates to increase, would almost certainly
be an effective stimulant to consumption and hence to prices. Even
if households decided not to increase consumption but instead re-balanced
their portfolios by using their extra cash to acquire real and financial
assets, the resulting increase in asset values would lower the cost
of capital and improve the balance sheet positions of potential
borrowers. A money-financed tax cut is essentially equivalent to
Milton Friedman's famous "helicopter drop" of money.
Yes and no.
Friedman did not discuss government and taxation in the section
on the helicopter drop. But Bernanke had it right. Ultimately, because
central banks buy the IOUs of the national government, central bank
monetary expansion results in increased government spending apart
from added taxation. This really is the implication of Friedman's
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2013 Gary North
Best of Gary North