A free market economist’s view

To this day, Milton Friedman is the greatest economist of the last century, a brilliant communicator, prolific researcher, and fearless thinker. He touched on almost all areas of economics. As an undergraduate at the University of Chicago in the late 1990s, I still felt the influence of Friedman’s intellectual shadow, even though he was no longer with us. Chicago at the time was still Chicago, and Friedman was sowing the seeds of the future by educating the next generation of Chicago Nobel economists such as Gary Becker, Robert Lucas, James Heckman, and Edward Prescott. Ta.

Was Friedman a microeconomist or a macroeconomist? Both. His early work on price theory established the perverse effects of market forces and government intervention. He has written widely and publicly on issues such as price controls, excessive state interference in education, Prohibition and drugs, and corporate social responsibility, which would be unique today. But he is equally, if not more, famous for founding the monetarist school of economics. And that’s where his take on electronic money begins to touch on his Bitcoin.i. ”

monetarism

The most common definition of monetarism is that it advocates a continuous increase in the money supply. Even as an undergraduate at the University of Chicago, I used to joke that if Friedman asked a question in class, the students would answer, But the answer is to increase the money supply. ” In fact, in his 1968 essay “The Role of Monetary Policy,” he argues for a “growth currency rate of 3 to 5 percent per year for all commercial bank deposits combined.”

This has angered the Bitcoin community, which defends Bitcoin’s timeline for issuance to decrease over time and eventually converge to zero in 2140. However, it would be a mistake and a misreading to cast Friedman as an opponent of Bitcoin for this reason alone. Part of his larger body of work. There is a more fundamental reason why Friedman’s ideas support Bitcoin.

Money is important, but it’s complicated

Friedman argued that money is important first and foremost. “All major inflations have been caused by monetary expansion, mostly to meet the overriding demands of war, which forced the creation of money to supplement explicit taxation.” , more famously: “Inflation is a monetary phenomenon everywhere.” This discussion is important today. The current U.S. president and Federal Reserve chairman have repeatedly denied the money supply’s role in current inflation, citing a variety of other factors, including pandemic-induced supply constraints, Russia’s war in Ukraine, and semiconductor shortages. .

They effectively take attention away from money. Friedman knew that money was important because during the Great Depression he observed that the amount of money was reduced by a third. In fact, the greatest enemy of freedom is the Fed’s power to control money. In his essay “Monetary Policy in the 1980s,” Friedman writes, “There is nothing like the proposition that there are 12 (or 19) people sitting around a table in Washington, unaffected by elections or electioneering.” It turns out that there is very little that is unacceptable even to experts.” There are no layoffs or strict administrative or political control, and they have the power to determine the amount. That power is too important and too pervasive to be wielded by a few, no matter how public-spirited. ”

Friedman thus points to the extreme concentration of power built into a statutory system in which central banks decide on a whim the supply of money throughout the economy. And why does this matter? Because the money supply is too complex for humans to reliably manage. “Recognizing small-scale disruptions when they occur, accurately predicting what their impact will be, and anticipating what monetary policy will be needed to offset their impact.” We just don’t know enough to do that.”

Friedman was therefore deeply skeptical of central power embedded in central banks and their ability to precisely fine-tune and stabilize the economy. In this respect, Friedman’s view is consistent with Bitcoin’s. Bitcoin takes money supply decisions out of the hands of individual discretionary decisions and places them in a protocol deployed and secured by a worldwide network of independent computer nodes.

Rules, not discretion

In his book with longtime co-author Anna Schwartz, “Does the Government Play a Role in Money?” he says, “Strict financial rules are preferable to the discretionary monetary controls of the Federal Reserve.” It is stated without being explicitly stated. Therefore, the fact that this rule is strict is more important than focusing on 3-5% expansion. Friedman himself admits this. “I believe that the aggregate amount is the best immediate guide or standard currently available for monetary policy, and that it is the amount chosen, rather than which specific aggregate amount is selected.” “Essentially, Friedman says that no matter what the rules are, whether it’s 3%, 5%, or today’s Bitcoin decline schedule, I’m saying it doesn’t matter. More importantly, the rules are predictable and cannot be changed.

All of the negative effects of today’s unhealthy currencies stem from the discretion exercised by a small number of individuals on the Federal Open Market Committee (FOMC). For these reasons, I believe Mr. Friedman supports Bitcoin as an alternative to the current Federal Reserve. We know that it is impossible for the Fed to follow certain rules. This is why the Taylor Rule, which fixes interest rates to a predictable formula based on publicly available macroeconomic indicators, has never been adopted since its invention more than 30 years ago. Given this impossibility, Bitcoin’s predictable and unchangeable supply schedule is certainly better than the current discretionary system.

In a 1999 interview, Friedman was asked what made him optimistic about the next century. His answer is: “The Internet will be one of the major forces that will reduce the role of government. The only thing missing will be reliable electronic cash, which will soon be developed. It’s a way to transfer funds from A to B over the Internet without B knowing A.”

That’s what Friedman called it 10 years before Bitcoin was introduced.

follow me twitter Or LinkedIn. check out my website.