Well, SubF*ckers. Here we are. Time for old Max to put up or shut up.
Today we’re going to cover a little more than 100 years of economic theory through two world wars, The Great Depression, stagflation in the ‘70s, post war booms, market busts and the rise and fall of looming intellectuals. Our story has it all. War, peace, love, sex, money, ego, fame. You name it. Okay, not a ton of sex but it’s there.
That said, it’s almost embarrassing how many great economists we left on the cutting room floor. Too many, in fact, to even run through in a list.
In assembling the notes for this show over the past few months, I decided it best to tell the story in chronological order. So it’s actually going to take a bit for us to get to Uncle Fucknut. To understand what was done in the Friedman years when the Chicago School ruled the discipline, we have to understand what was undone.
It’s my great hope that we contextualize the Chicago School of Economics and its high priest Milton Friedman by alternately expanding our view of the world and narrowing in on crucial moments that changed the course of history. The idea is ambitious, but so were the men - mostly men - and the institution behind these ideas. They might not be household names but their work has impacted every citizen of the world. And that’s no exaggeration. The latter part of the 20th Century and the beginning of the 21st belonged to them in both theory and practice and our existence is the very real manifestation of their policies.
As I mentioned in the teaser last week, I will give credit where credit is due. At no point will I call into question the intellect or even integrity of Milton Friedman or the institution he is synonymous with. To the contrary, I firmly believe that Milton Friedman was indeed a man of great integrity. His downfall, as I’ll argue, was his undying commitment to orthodoxy. His belief that economics is an exact science and that markets are inherently just and therefore capable of taming the worst instincts of human nature.
That, and his ego, the intellectual’s surrogate for avarice, the true villain of our story.
Thomas Midgley, Jr. was by any standard a brilliant engineer and chemist. This son of an inventor held a few positions before being recruited to work at what would become the research arm of General Motors in 1919. Midgley is credited for discovering that adding lead to gasoline eliminated chronic engine knocks, a discovery that earned him great recognition as well as lead poisoning.
Still, Midgley was convinced that lead could be used safely in gasoline and he continued a successful career as an executive of companies that helped popularize the use of it, despite the widespread understanding that it was harmful. Later in his career, he would discover that freon could be used as an effective, non odorous refrigerant in air conditioning and refrigeration. Midgley would be honored by his industry peers throughout his illustrious career, which slowed down considerably when he contracted Polio in 1940. Ever the inventor, Midgley devised a pulley system that allowed him to hoist himself in and out of bed so he could continue to work.
Thomas Midgley is credited today as quite possibly the single most environmentally destructive person to ever walk the Earth. Sadly, for us, Midgley wouldn’t live long enough to hear himself referred to as such. He strangled himself to death with his homemade pulley system in 1944.
That was weird.
Confused as to why we would start with a story about lead gasoline? Don’t be. We’ve drawn our conclusion up front through our analogy to Midgley and will spend the balance proving our theorem.
Midgley was a scientist’s scientist. He was an excellent craftsman, the top of his trade in chemical engineering. In the beginning of his career he toiled in obscurity and fought the tide until backed by an institution that became infatuated with what his discoveries could accomplish in the short-term, regardless of the long-term implications. And those implications grew beyond the man and the organization itself.
Midgley’s chemical engineering might have been inevitable. Had he not discovered the benefits of lead additive to reduce engine knocking or freon as an effective non-odorous refrigerant, someone else probably would have. But he was as much a master salesman as he was an engineer. So firm was he in his belief that lead was non-toxic in small quantities that he inhaled the vapors of his own invention in a public forum to prove a point. That he was then committed to bed rest for several weeks as a result of lead poisoning hardly mattered to him. What remains beyond his rather ignominious demise by his own hand, is catastrophe.
Milton Friedman was a pure scientist. In fact, one of the ideas he held dear was that economics was indeed a science and not an art. It was a science based upon immutable laws that were to be respected. And if applied as prescribed by capable theorists and not the political class, it would work perfectly under natural governing laws and ultimately benefit the human race.
What we’ll argue is that, like Midgley, Friedman was a skilled economist who adhered to strongly held convictions throughout his life. Like Midgley, he was a master salesman who pushed through professional ridicule to emerge at the top of his field and would unleash catastrophe on the world. Unlike Midgley, he would live long enough to see it with his own eyes and yet his ego wouldn’t allow him to accept any blame.
Pretty fucking clever. Amirite?
The “Dismal Science”
Perhaps the first main character we should properly introduce is the field of economics. We’ll paint a pretty broad picture of the discipline quickly in order to place other key figures in relation to the field. You see, economics wasn’t much of an intellectual or academic field, especially in North America, prior to the 20th Century. That doesn’t mean economic theory didn’t exist and wasn’t important, it just wasn’t a field unto itself.
Even the greats such as Smith and Marx were considered social theorists and philosophers first and foremost. They were concerned with society and economic systems, and they created the foundations of thought that would ultimately forge economics as an independent field of study, but it was considered philosophy more than science.
For example, the London School of Economics, a member of the federally chartered University of London was founded in 1895. Harvard University followed suit in 1897 by establishing an economics department as MIT and Cambridge University did in 1903.
The University of Chicago as we’ll cover later in the episode, was one of the first schools to pursue economics as a field of study from inception, though it too was established at the turn of the 20th Century. Frank Knight, an important figure in the Chicago School story, divided economics into five parts. How society decides which goods and services will be produced, how production of said goods will be organized, the distribution of goods and services, a system that brings production and consumption in line and, finally, how the facilitation of the above maintains or improves society.
Economics wasn’t much of a profession and was considered even by leading academics to be the “dismal science”. The giants of classical theory such as Adam Smith and David Ricardo were pre-Industrial philosophers who were thinking out loud about the best ways to structure a society. Marx and Engels had the benefit of witnessing the beginning of the Industrial era and thought to therefore infuse insight about the plight of the classes that emerged as a result. But even their frameworks were largely philosophical and less mathematical.
The aforementioned philosophers are considered the founders of modern economic theory, to the extent that they were writing in the post feudal landscape of burgeoning nation states and the beginning of the end of monarchical systems. Each would possess fundamental flaws given the periods they existed but on the whole they helped to create a universal language around the concept of capital, labor and the distribution of resources and wealth. What emerged in the beginning of the 20th Century is now referred to as neoclassicism, which focuses on the mechanics of economies with supply and demand as the driving forces behind production and consumption.
Neoclassical economics would evolve over the past century to include the concepts of John Maynard Keynes as well as competitive theories that emerged after the Keynesian period. Elements of traditional Keynesian economics would be infused with ideas regarding consumer behavior and expectations and developing theories on pricing, trade, interest rates, inflation and employment. At various points particular elements would be disproven, then refined and re-adopted, but on the whole the past 120 years has produced a system of scientific beliefs on how the world operates according to economic theory.
Ultimately, economics seems to have split into two camps: Those who side with John Maynard Keynes and the preeminence of fiscal policy and others who side with Milton Friedman, the godfather of monetarism and champion of free markets above all things.
One thing about the discipline that remains true, and is something we must carry with us throughout this episode, is that every theorist, regardless of which camp they reside, believes in the final concept of Knight’s tenets of economic theory. That their work exists to help determine a system that ultimately provides the maximum benefit to society.
Two Roads Diverged
While we’re hanging at the turn of the 20th Century, it’s a good time to introduce two central characters in our story. Not people, but organizations. The first is obvious and that’s the Chicago School. Today the University of Chicago is one of the finest and most prestigious schools in the world. As a New Yorker, it’s not something I ever thought about growing up as conversations of elite schools usually ended with the Ivys. But Chicago is no fucking joke.
In his book, The Chicago School, which Milton Friedman himself reviewed as “Thorough and extraordinarily well informed,” Johan Van Overtveldt describes the characteristics of the Chicago Tradition as, “a strong work ethic, an unshakable belief in economics as a true science, academic excellence as the sole criterion for advancement, an intense debating culture focused on sharpening the critical mind, and the University of Chicago’s dimensional isolation.” By the way, I read the shit out of this painful fucking book so you don’t have to.
Overtveldt is describing the economics school here, but it’s reflective of the whole school ethos. Its first president, a man William Rainey Harper was responsible for wooing the great financier and businessman John D. Rockefeller to establish an institution in the midwest that would rival the elite institutions back east. Prior to its founding as the school we know today, the University was actually a religious institution that ultimately failed from under endowment. Harper saw the opening to create a research based institution and vigorously pursued Rockefeller, who would wind up giving a whopping $35 million between 1888 and 1920. If not for Harper’s genuine salesmanship and enthusiasm, there would be no Chicago School.
We mentioned the last tenet of The Chicago Tradition characteristics was its two-part isolation. The campus is isolated and this fact alone has created an insular community feel among the faculty in particular like few other elite schools. Secondly, it was far from Washington D.C., which theoretically shielded it from the policy groupthink of the political class.
Debate among the faculty was encouraged and expected from the outset and the familial nature of the living quarters made those who survived the rigor of discourse almost fanatical in their loyalty to the school. They referred to their debates as bullfights and encouraged dissent among their ranks. For the first 50 years, there was no particular dogma to the economics department. In fact, to the extent there was consensus, it typically looked a great deal like what was espoused by Keynes.
Chicago school professors viewed themselves as outsiders. They thumbed their noses at the elite schools in London, New York and Boston. They were argumentative, almost religiously so. And they believed that economics was a science.
This was where the die was cast for uncle chickenfart. This is where he was cultivated and nurtured. The only approval he would ever require was from this place.
In stark contrast to the arguments, the rigor, the science of this formative institution, was the organization that nurtured and best explains John Maynard Keynes.
In the early 1900s, well before Keynes was a proper economist, he joined a secret society among Cambridge undergraduates known simply as the “Apostles.” The Apostles were pure intellectuals and they carried with them a healthy disdain for the old world aristocracy and the debased political class. As Keynes grew in stature as one of the keenest minds in the group, he grew further apart from their distrust of politics and would eventually part ways with a handful of other luminary figures of the time such as Leonard Woolf, E.M. Forster, Adrian Stephen and his sister Virginia who would later marry Leonard. Yes, that Virginia Woolf.
The new sect adopted the name of the quaint neighborhood they moved to called Bloomsbury. The Bloomsbury Group as they would henceforth refer to themselves were lovers of discourse, of the arts and sciences and, in large part due to the influence of Keynes, liberal politics. The group experimented with sex and held dinner parties and discussions that went well into the night. Keynes was known as a prolific lover, with a particularly keen eye for young men, and would frequently steal the love interests of his fellow group members.
Throughout their lives, members of the Bloomsbury Group would fall in and out of favor with one another and often argue about war, government and lovers. But they were forever linked by their time at Bloomsbury, which they regarded as the greatest period of their lives. For his part, Keynes would seek the approval of this group of confidants more than he sought the approval of presidents, prime ministers and generals for the rest of his life. To understand his motivation is to appreciate the deep and abiding love and respect between the members of this illustrious group.
Milton Friedman and John Maynard Keynes never met in person. The only recorded interaction between the two was when, in 1935, Keynes refused to publish one of Friedman’s papers in a British journal he ran. It’s tempting to think that this was the moment of Keynes’ undoing like that scene in Casino when Robert DeNiro’s character refuses a favor to the commissioner played by L.Q. Jones, which unwittingly touches off the beginning of the end of his career in Vegas.
I don’t think it’s that at all, but it’s fun to speculate.
The Great Man
To understand Milton Friedman is to know John Maynard Keynes intimately and understand just how large he loomed over politics and economics for nearly half a century. Though he came from some means, he wasn’t part of the British aristocracy. He was always considered a towering intellectual and he worked hard to curry favor with classmates, colleagues, and artists and later politicians and world leaders. He was a people pleaser with a voracious appetite for sex, even tabulating his conquests throughout his Bloomsbury years.
And while his sexual preference throughout his youth was almost entirely for men, he would mend his promiscuous ways after falling in love with a young woman named Lydia Lopokova, a dancer and performer who became Keynes’ obsession for the entirety of his adult life.
Keynes’ romance with Lydia came as a shock to the Bloomsbury set, all too familiar with his proclivity for young men and often the lovers of his dearest friends. He was a scoundrel but a loving one no one could stay angry with for very long. But something about Lydia fascinated the man and he would devote himself to her as much as his work.
On the business side of things, Keynes would make a living as a young man primarily because of his capacity of intellect. He was an imposing figure who stood at six feet and seven inches and commanded a room with his presence alone, though as soon as he opened his mouth he had the words to back it up.
He was entirely optimistic about the future of society, so long as it could wrestle with the fundamental issues of the post industrial landscape. His early works were regarded as thoughtful and meaningful but it wasn’t until he was recruited by the British government during World War I that he began to ascend in his career. The Brits pressed Keynes into service to determine how best to finance their war efforts, which threatened to bankrupt the island nation. It was Keynes who led the charge to convince the Americans to intercede with funds long before it was conceivable that the young nation would commit its military to the dispute.
In 1916, Keynes led a delegation of diplomats from England and France to the United States to try and convince the New World to financially support the war abroad. Financier J.P. Morgan was on the hook for loans to the British - under pretty favorable terms for him - but the delegation was coming hat in hand.
They needed more. A lot more.
Keynes and company were seeking $1.5 billion, a staggering sum. They left without a commitment or inclination as to how the Americans would respond, but as Keynes’ biographer Zachary Carter notes, the “Treasury had only weeks before its gold reserves would be completely exhausted. London’s prowess as a financial center was on the brink of annihilation. Without access to American money, the British war machine would collapse.”
At the same moment, President Woodrow Wilson, who was in a tight spot having won the election by campaigning on isolationism, helped convince a wary Congress to enter the war. This allowed the financial coffers from Wall Street to open up and for British debt to be financed approximately one week before Keynes calculated the British Treasury would be empty.
Keynes’ reputation as a pragmatist and diplomat who inspired confidence among the business and political class was firmly crafted during this period. Most of his prognostications about financing the war effort and subsequent impact on the British economy was spot on. He was trusted and respected, though still somewhat of a sideline player. But his clout was enough to secure a spot in the landmark negotiations that ended the war in 1919.
Diplomats from around the world gathered at this time in 1919 to determine what the fuck had just happened and how exactly to exact revenge upon the Germans for completely screwing up the balance in the world. Lloyd George of Britain, Clemenceau of France and Wilson from the New World took center stage, but it was Wilson who carried the initial stages of the negotiations and was received as a hero. Keynes was incredibly impressed by Wilson and almost exuberant that he would be rubbing elbows with him, much to the chagrin and mockery of the Bloomsbury set.
It wouldn’t take long for Keynes, and nearly the entire delegation to lose whatever respect they had for Wilson as negotiations were badly blundered and Clemenceau especially was able to force an incredibly punitive agenda upon Germany, which Keynes viewed as a huge mistake that would most certainly result in catastrophic failure for Germany and perhaps even cause another war. Yes, this lanky ass motherfucker was prescient.
Now, stop me if this next part sounds eerily familiar. While the world leaders cut a formidable presence in Paris, there was another uninvited guest who had an even bigger effect on the proceedings. The pandemic.
Keynes, among countless others, would get violently ill during this period. And it’s now widely understood that Wilson was also suffering from the virus and, according to many historians, might have been extremely delusional at several points during the negotiations. Imagine that? Having a fucking delusional president with a virus trying to run the world? Weird.
Back to our story. What transpired in Paris in 1919 is perhaps one of my favorite times to study. For Keynes, he would leave the negotiations frail, disappointed and disillusioned. As he recovered and reconnected with his old Bloomsbury pals, he began work on paper that would put him on the map and invited acclaim, rebuke, criticism and admiration the world over.
The Economic Consequences of the Peace pulled no punches. Though Keynes could be rambling and even biting at times, his take on the management of the peace process was regarded as a breakthrough work. In it he critiqued everything from Burke to Lenin and excoriated the diplomatic process and failings of world leaders by name, which didn’t exactly garner him much support in the halls of power. But The Economic Consequences was bigger than that. It was at times radical, attacking capitalism and inequality. At others it was extremely practical, especially when addressing the onerous terms of German reparations and what it portended for financial markets globally. He emerged as someone bigger than the sum of the parts that created the doomed Treaty of Versailles and an uncompromising intellectual that challenged conventional political and economic thought. And the distribution of this work made him a very rich man.
Coming out of the war and into the Roaring Twenties, Keynes had somehow managed to retain the admiration of Bloomsbury, that of his peers, accumulate enough wealth to never again bend to power and a reputation for speaking truth to such power. The Keynes era had officially begun.
The study of economics would intensify in the years after World War One. Keynes would continue to earn a good deal of money and be sought after for his opinion both in Britain and the United States, particularly as his predictions began to ring true. The ‘20s were, of course, unhinged in the New World with America fully taking the reins as the financial center of the world, much to the annoyance of the banking class in London. But they were unremarkable in terms of new burgeoning theories until, of course, they came to an unceremonious end beginning with the stock market collapse.
The Great Depression spared no one. Germany was already reeling from an inability to manage reparation payments and the other European countries were still trying to regain their footing and were ill prepared for the financial calamity that ensued. What surprised everyone was the inability of the United States to weather the market collapse as it spiraled out of control and into the economic abyss.
The Depression would mark the true ascendance of John Maynard Keynes as even the Brits would put aside their petty differences stemming from his critique of the peace process. Keynes was once again pressed into service and, once again, his focus was on the United States. As the new center of the economic universe, any recovery globally would have to be led by the U.S. And so Keynes penned an open letter to the new President, Franklin Roosevelt, pleading for massive fiscal intervention into the U.S. economy to, above all else, get Americans back to work. America was the key production engine the world needed to restart.
This open letter was met with a shrug across the pond, but elsewhere in the world people were taking note. Much to his dismay, the British government was not inclined to gamble on his theory that governments could run extraordinary deficits with public works programs and stimulus that would fill the pockets of citizens and consumers. This wasn’t the only intervention he prescribed, but it was the most controversial as deficits were seen as death to the political and economic futures of governments and the men who ran them.
But the letter was also important because it contained the basic framework of a larger theory that would ultimately become the most important and oft-quoted economic book of all time.
Much of the language associated with macroeconomic theory is derived from the seminal work of John Maynard Keynes titled, The General Theory of Employment, Interest and Money. Published in 1936, Keynes’ General Theory upended conventional wisdom in economics and quite literally changed the entire field of study forever. It’s no exaggeration to say that it was, and probably still remains, the most influential economic theory book since The Wealth of Nations.
In The Price of Peace, author Zachary Carter describes The General Theory as, “a dangerous book because it reframed the central problem at the heart of modern economics as the alleviation of inequality, pivoting away from the demands of production and the incentives facing the rich and powerful that had occupied economists for centuries.”
The General Theory is a difficult book to read and many scholars believe this to be purposeful. It contained elaborate equations and charts. It was written in grand, sweeping prose that could be both inaccessible and hauntingly beautiful. It was conceived with the scars of the first great war still fresh in everyone’s mind and the pain of The Great Depression evident all around. It called upon government to intervene in ways that were never considered possible. It gave us new tools and principles that are still used today. And it created a human approach to a cold and opaque field that honored markets above people.
Not everyone was as enthralled with The General Theory, however. President Roosevelt, perhaps still smarting from Keynes’ audacity to publish an open letter to him, took the prescriptions lightly. Ultimately, he would give Keynes an audience and warm to many of his ideas, but he stopped short of fully implementing them because of the prevailing sentiment that a government could not and should never run a budget deficit.
There was another detractor who plays prominently into our story and serves as our human bridge to Milton Friedman.
Hayek: The Bridge to Milton
Friedrich Hayek is regarded today in libertarian circles as an equally important figure to Friedman. Born in Vienna, Austria in 1899, Hayek believed strongly in Smith’s concept of the invisible hand and would move it to the front of his philosophy in order of magnitude. Hayek immediately savaged The General Theory, though at the time, no one really gave a shit. For the time being.
Hayek is an interesting figure in that he represents the first real counterpoint to Keynes, even as he toiled in relative obscurity to the great man. Gradually throughout the course of the Depression, governments began to awaken to the concepts in the General Theory, though not fast enough to jumpstart a meaningful recovery until the onset of the second great war.
Keynes believed that unemployment was the key ingredient behind fascism. He argued over and over that employment and production above all else would spur productivity during a decline and rebalance the economic equation. His concept of the Paradox of Thrift essentially said that during periods of recession or decline, a government could stimulate growth by driving toward full employment no matter how it was achieved. Through a mix of monetary policy to encourage borrowing and investment and fiscal infrastructure programs and government incentives, the only thing that mattered was that consumers felt secure and could pay their bills.
Ultimately he would be proven correct on this account where the Depression was concerned. Only it wasn’t the construction of bridges and roads that ultimately solved the employment piece, it was bullets and tanks. Of course, Keynes knew all too well that this would serve as a viable economic substitute for government infrastructure spending. But to understand him as a man is to also know that this was a heartbreaking revelation he spent a lifetime trying not to revisit.
In 1944, our story takes a sharp turn. It was the twilight of World War II and nations were just beginning to look forward and attempt to perceive what the next chapter of the world would look like. In this year, Friedrich Hayek would publish the seminal work of his career titled The Road to Serfdom, dedicated to “the socialists of all parties.” In it he claimed that, “the rise of Fascism and Nazism was not a reaction against the socialists trends of the preceding period, but a necessary outcome of these tendencies.”
Keynes’ contended that a form of socialism was the natural outcropping of capitalism in a positive manner. Here, Hayek was arguing the opposite. His economic theories were strictly monetary, as he believed the government had no place in the affairs of individuals nor of the economy. Unlike Friedman, Hayek did have the opportunity to know Keynes and the two actually maintained a fairly cordial professional relationship. In fact, Keynes did not dismiss Hayek’s assertions out of hand. In fact, he quite agreed with his views of monetary policy. But in broad strokes, he simply disagreed with Hayek’s conclusions.
A note of historical irony, our protagonist Milton Friedman was recruited by the Treasury during World War II to work on issues of taxation. During his tenure, he was a crucial part of the team that created the withholding tax, a revolutionary method of collecting taxes in advance at the time and something that we’ve been stuck with ever since. While it was an effective way to ensure that our war efforts would be financed, Friedman would have a tough time living this down. In fact, the one person who never forgave him for coming up with this idea was his wife Rose, daughter of Aaron Director, one of the most prominent figures of the Chicago School of Economics.
Back to ‘44
But I digress. The other seminal event of 1944 was the conference in Bretton Woods. Here the world would once again descend upon a conference to determine the path forward out of conflict. Bretton Woods would conclude with somewhat of a victory for Keynes who argued for a central bank that could stabilize currencies and interest rates and intercede on behalf of debtor nations to facilitate the forgiveness of debt. On this last point he lost, but in most ways he was successful with the establishment of the International Monetary Fund and the World Bank.
He also argued successfully that participating nations make their currencies convertible into dollars at a fixed exchange rate. In turn, the dollar could be converted to gold. This enabled the world to finally be free of the physical gold standard without throwing the balance of financial power into complete disarray.
But the negotiations at Bretton Woods would break Keynes once and for all. The towering man made it through two world wars and the Great Depression occupying the spotlight on center stage for most of this time and it had taken a toll on him. His health declined rapidly and though he would linger and be somewhat productive after a brief respite with the love of his life, he would never be the same. Keynes died in 1946 right before the birth of a new society that would ultimately come to define the next generation of economic thought.
…. To be Continued