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Marx and Friedman see eye to eye on money

By David R. Francis / June 4, 1980



New Orleans

"Karl Marx was a monetarist." Milton Friedman, the world-famous economist who leads the monetarist school of economic thinking, noted this with a chuckle. Marx believed in the so-called "quantity theory of money" -- the precursor of modern monetarism. This economic doctrine holds that the supply of money to an economy largely determines nominal growth and the rate of inflation.

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This fact about Marx amused Dr. Friedman, possibly because his economic views are so contrary to communism. Dr. Friedman believes in free enterprise and limited government, a government that should take a smaller proportion of national output than is common in the Western industrialized nations today, and, of course, a far smaller role for government than that in communist countries.

Monetarism, however, is a scientific economic theory that is just as applicable to the "state capitalism" of communist countries as the "free-enterprise capitalism" of the West.

In fact, Dr. Friedman told this correspondent at an International Monetary Conference here attended by the chief executives of most of the noncommunist world's largest commercial banks, and many leading central bankers, that some economists in communist countries, such as Yugoslavia, follow his economic work carefully.

The Soviet Union is monetarist, he notes. So is China.

And both nations regard as state secrets their statistics on money supply. If they were made public, Western economists could quickly make estimates of the national income of these countries, estimates that might be more accurate than those now made.

In communist countries, the bulk of prices are set by the state. Nonetheless , the monetarist control of the money supply may partly account for the relative price stability in these nations.

Dr. Friedman has been invited to visit China in September by the Academy of Economic and Social Sciences. The Chinese asked him to talk on three topics: the most fascinating of these was what market mechanism can be utilized in a socialist economy.

With his public-television series on economics, his column in Newsweek magazine, his peppery clarity in debate, and his "quotability" for the press in general, Dr. Friedman has become well known to a sizable portion of the public -- a rare experience for an academic economist. Nonetheless, he is often misunderstood even by other economists.

For instance, he maintains that the best monetary policy for a central bank would be to supply money to the economy at a steady, noninflationary rate. In effect, the monetary policy role of central bankers would be eliminated; they could be replaced by a computer -- or maybe even a hand calculator.

Contrary to the impression of many, Dr. Friedman does not believe such a system would be a cure-all for the economy. A steady supply of money would not, for instance, completely eliminate the business cycle. There would still be modest ups and downs in the economy.

However, Dr. Friedman holds that central banks, including the Federal Reserve System, have more often than not accentuated business booms and busts. Therefore, getting central bankers out of the act would practically eliminate inflation and deep depressions, or even large recessions, such as that of 1973- 75 in the United States.

Nor does he maintain that a stable monetary policy would cure many other economic problems -- such as poor productivity, or a bad distribution of income between rich and poor, and so on.

Nonetheless, he does regard such a firm monetary policy as a condition for controlling inflation and for better economic performance.

He notes the role of semantics in policy debates. A low rate of monetary growth is called "harsh," but he says the harshest policy would be one of rapid monetary growth that would ensure a high rate of inflation. That would be "inhumane," he says.

A top US central banker agreed with Dr. Friedman in this regard, likening inflation to a thief entering a home and stealing wealth. He added that many of those put out of work by recession -- but certainly not all -- were protected by unemployment insurance, food stamps, and supplementary employment benefits.

This central banker, however, disagreed with Dr. Friedman's contention that monetary policy should consider the supply of money alone and completely ignore interest rates. In the "real world," he said, interest rates matter. When they rise as high as this spring, they clobber the construction industry and automobile sales, and hurt the savings and loan associations, for instance.

Thus, although the Fed should control the money supply over some months, it should consider interest rates in the short term, he argued.

Whatever the argument over details, monetarism has been largely accepted in most industrial nations of the West today as the operative theory. However, the application of this theory has been weak up to now in most nations except Japan, West Germany, Switzerland, and Chile, Dr. Friedman says.

He is close to finishing another book, together with Anna Schwartz, the economist who helped him with the previous influential volume dealing with the monetary history of the United States. The new book will be an econometric examination of 100 years of monetary experience of both Britain and the US.

It shows that the single monetary "function" can explain most of the business cycle and inflation over 100 years in both countries, he says, though it does not "track" as well for the periods immediately after the two world wars. The book will undoubtedly cause a fuss in economic circles.

But then, Dr. Friedman is no stranger to controversy.