Milton Friedman's Description Of An Imaginary World Is Simply Wrong

In this article, Brad DeLong takes a big step. He has moved from arguing that many of the arguments coming from economists at The University of Chicago, about how to deal with the economic crisis, violated some of the views held by Milton Friedman, to the view that Friedman was simply wrong. Friedman advocated a libertarian view in which the free market would work its magic to produce the best of all possible worlds. Market failures, or externalities would be rectified by the legal system. There was no need for government interference with the market mechanism. The problem with Friedman's perspective is that he described a world that that does not exist. DeLong provides several examples to make that point.

 Paul Krugman seconded DeLong's critique of Friedman's libertarianism. He took it a step further, however. He argued that the research done by the Friedman's on the causes of the Great Depression showed that the Fed could have prevented the Great Depression by expanding the money supply. This implied a more active role for the government than they liked, so they argued instead that the government caused the Great Depression. The best of all possible worlds would exist as long the Fed did not play an active role in adapting monetary policy to the business cycle. They advocated a passive policy in which the money supply expanded with the economy. Moreover, there was no need for counter cyclical fiscal policy. Market mechanisms were sufficient to deal with recessions. We still live with the legacy of Friedman's description of an imaginary world.