If you listen carefully, you can hear Milton Friedman – the father of neo-conservative economic theory – turning over in his grave. Milton, who believed markets to be rational, perfectly transparent, and generally smart enough to look after their own interests argued vigorously against government regulation or government intervention in economic policy. In Milton’s world, corporations would be smart enough to avoid an economic crisis, and if one occurred, they would be able to pull themselves out of it. Alas, the 2008 economic crisis seems to have successfully unsettled his basic premises and derailed a half century neo-conservative economic policy and dogma.
Friedman’s onetime idol and conceptual opposite was John Maynard Keynes. Keynes was the most influential economist of the 30s and argued that in cases of catastrophic economic crises, corporations and markets may not be capable of pulling themselves out of the “death spiral”, resulting in a recession or even depression much deeper with more severe societal dislocation than would otherwise be necessary. In the direst cases, strong government intervention was the only solution to ending economic collapse. In fact, massive government spending and employment did successfully end the great depression.
So who is ultimately right?
They both were in a sense. The challenge with Keynes was that he argued for consistent and regular government meddling in short-term economic swings, which ultimately led to the stagflation of the 70s. Ultimately, Friedman was correct in the respect that short term meddling in unemployment rates and economic growth lead to unintended consequences. But he – like Allan Greenspan – was wrong to think that corporations can operate at optimal efficiency without government regulation. This being proven by the failure of:
- AIG: One of the largest insurers of the world
- Fannie Mae and Freddie Mac : The largest mortgage originators of the