This Friday on Fiscally Savage, we discuss the Chicago school of economics — an influential school of thought led by Nobel Laureate Milton Friedman that has left an indelible mark on economic theory and policy across the globe.
How did Friedman and his colleagues differentiate themselves from their contemporaries, like the Austrian economists? And how did their distinctive views on topics such as inflation, monetary policy, and business responsibility shape the world we live in today?
Join me in this episode as I explore the roots of the Chicago school of economics, its defining principles, its influence on economic thought and policy in the United States, and more.
- [01:08] The origin of the Chicago school of economics
- [02:01] The core principles of the Chicago school of economics
- [10:02] How the Chicago economists differed from the Austrian economists
- [12:55] How the Chicago economists differed from the classical economists
- [15:50] George Stigler and Gary Becker’s ideas that became core to the Chicago school of economics
- [19:17] Milton Friedman’s ideas in “A Monetary History of the United States”
- [21:40] The key differences between Friedman’s and John Maynard Keynes’ ideas
- [25:59] The social responsibility of businesses, according to Friedman
- [28:06] Monetary policy vs. fiscal intervention
- [32:34] How a negative income tax would work, according to Friedman
- [35:32] How Friedman viewed inflation
Links & Resources
🟢 @TheDylanBain on Instagram
🟢 @TheDylanBain on Threads
🟢 @TheDylanBain on YouTube
🟢 Intuitive Finance on Facebook
🟢 Intuitive Finance on Twitter
🟢 An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith
🟢 A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna Schwartz
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And Happy Friday, everybody. If you’re new here on these Friday shows, we try to take one thing in the news and go deeper although I kind of feel silly saying this at this point because I’ve been going on a series talking about economic schools of thought. I did an AMA. I did news last week. But then I got this email from a solid listener who had said that basically, “You talked about classical economics, you talked about Keynesian economics, you talked about Austrian economics. But man, you missed the two most relevant schools, that is, the Chicago school and supply-side economics.” And I thought, well, that’s true. So we’re going to do the Chicago school today and supply side economics next Friday. So if you are looking for your daily dose of Dylan-filtered economic education, you have certainly come to the right place.
[00:01:08] Okay. So the Chicago school of economics is called the Chicago school of economics because it was developed at the University of Chicago. And for any of you that know anything about the University of Chicago, one of its unofficial taglines is “University of Chicago: where fun goes to die.” And that’s not true if you’re an economist, though, because the Chicago school of economics is hugely influential, mostly because of the economics school that goes along with it. Now, one of the things — if you’ve ever listened to the show Freakonomics or read the books, the economist that is the main driving force in there, Steve Levitt, he’s a professor at the University of Chicago. And so when we say Chicago school, it’s not actually like tied necessarily to the city. It’s tied to the university because that is where the main proponents of what has become known as the Chicago school have actually — like that’s where they worked.
[00:02:01] Okay. So what is the Chicago school of economics? Well, as I’ve said repeatedly throughout the series, the schools of economic thought agree on more than they disagree, and so it’s not surprising to see that there’s a lot of overlap. And so the Chicago school follows a lot of the free market ideas of the Austrian school. The main difference here is is that it focuses on monetarism or the study of the money supply in terms of its economic impacts within the economic system. And so that becomes like the core basis of the Chicago school of thought. Yes, they agree with the Austrians that we should have deregulation and small levels of government interference and, for the most part, markets should be left alone, blah, blah, blah, blah, blah. But they also believe and have data, which is critical and a major departure from the Austrian school, on how the money supply impacts economic growth, the velocity of money, and a whole lot of other different things.
[00:03:04] The other thing that the Chicago school is famous for that this focus on that people draw from their individual experiences and the people around them. So everything in your ecosystem — your church, your job, the people you interact with, your personal history, the media you consume, the social media you consume — all of that creates a picture of how you view the world. And so when governments want to make a change in the economy, it’s really difficult for them to get people to go on board with that because they would be changing their economic behavior in a way that goes against that frame, and they’re making choices based upon that frame. And even though the government may have something they want people to do that would benefit the economy as a total whole, they’re going to run into these people’s individual frames.
[00:03:58] This gets incorporated in this idea of what’s known as the rational actor. A rational actor is just basically the idea that each and every single individual in an economic system is acting in their own self-interest. But the Chicago school takes that one step further from the Austrian school in saying, “No, people are rational actors in all things;” that the economic thinking that we make when we go to the grocery store and we choose food is exactly the same type of thinking that we do when choosing jobs, when choosing houses, when choosing mates, when choosing schools for our kids. We are always acting in a completely rational and self-interested way, rational being the most important part here. So even from our standpoint, if we are looking at an individual under the Chicago school of economics’s viewpoint, if we’re looking at an individual and we say, “My God! That person is acting against their own self-interest, why in the world would they do that? Can’t they understand that very clearly that’s not going to help them?” what the Chicago school would say is, “No, you just don’t understand their individual frame, and so that person is always 100% completely rational. You just don’t understand the parts that they’re using to take in and process information in a rational way because you don’t have the same ecosystem and frame that they have.” So this kind of dispenses with a lot of the criticisms of Austrian economics and classical economics saying that each individual person is acting in their own self-interest when clearly we can see people who do not actually do that. The Chicago school now has a response to that criticism.
[00:05:38] The Chicago school also doubles down on the ideas of globalization from classical economics, free trade from the Austrian school, and deregulation that kind of is a natural outgrowth of both of them. The Chicago school of economics, both the proponents of it and then the students of it who went into things like public policy, were some of the main drivers that created free-trade systems like NAFTA and the opening of China in the 1970s. These economists were making the argument that if we globalize and we allow for free trade, deregulation, low-tariff environments, we’re all going to benefit because when the entire economy benefits, everybody benefits.
[00:06:19] One of the things that I think has been really fascinating for me as I’ve been researching these schools is to understand that classical economics was moral philosophers looking at the world and trying to describe it in their own terms for what they saw and they kind of accidentally created a new system of thought called economics. And then, the Austrians were actually a result or a response to Marxist thoughts that were actually themselves an extension of the classical thoughts. So you start out with classical economics. And if you remember, the classical period more or less ended in 1848 with John Stuart Mill when he started to say, “Well, yes, there’s all these markets and these invisible hands, but there are market failures. This is why we have orphans. No one tends to the orphan when their arm is ripped off in the machine at the factory they’re working, and now they’re no longer economically viable. There is no market solution to that. There’s no market solution to respond to plagues. There’s no market solution that’s going to help us shore up our borders. These are market failures, and that requires a different response.” But 1848 was also the period of time in which The Communist Manifesto comes out. And we also have the revolutions of 1848 all across Central and Eastern Europe. And most of those were workers’ revolts. People who had been being, at least in their own mind, oppressed by factory work and wage slavery, rising up and trying to overthrow the establishment in order to be able to win a better life for themselves. Now, how true were those conditions or any of that other stuff? I don’t know, and I don’t want to get into it. But it’s important to understand that Marxism’s core principle is exactly in line with the classical school of economics’s core principle, and that is labor is the first and foundational input to any economic product. And so Marxism was a response to the classical economics, and Austrian school of economics was a response to Marxist economics. It is no mystery why the Austrian school has, as a core tenet, this idea of the subjective theory of value. That is to say that the value of a given thing, the price, changes from context to context. The reason they’re doing that is because they’re looking at Marxism and saying, “No, no, no, no. The labor is actually not nearly important. It’s all subjective and relative.” And we can have large conversations about how Marxism actually went way off the rails and created some of the most bloody and totalitarian regimes the world has ever seen, but that’s not the point of this podcast. The point I’m trying to make is that these schools are sort of developing now in response to each other.
[00:09:02] And so contemporary to the Austrian school, we had the Keynesian school, which basically said that the economy’s driven by aggregate demand. And so when demand goes down, the government should print money and spend it. They should prop up the demand, and he was a huge critic of the gold standard because you couldn’t print more gold. And as we talked about in the podcast on Keynesian economics, when Keynesian ideas started being used in these governments that were suffering from the Great Depression, they started to improve. One by one, each one of these governments went off the gold standard. And as they did so, their economic recoveries began with the United States being really late to the party at the end of it. And so the Chicago school is coming in and looking at that because what Keynes is basically arguing for is an expansion of the money supply. And the Chicago school is now saying, “Well, let’s study it and see what happened.” And so it develops as a response to Keynes, which is always really interesting to me.
[00:10:02] But before we get into some of the luminaries that were of the Chicago school of economics, let’s actually talk about some of the differences between the Chicago school and the Austrian school and the Chicago school and the classical school. So the differences from the Austrian school: unlike the Austrian school, Chicago school of economics uses something called econometrics. This is a fancy way to say that they have data and they use statistical analysis to try to understand that data. The Austrian school had praxeology, which was as I’ve been pointed out I clearly derisively refer to as locking yourself in a room and thinking really hard about life and then coming up with a theory. And again, it makes sense because the Austrian school’s in response to Marx. Marx himself was a very poor man, and so he’s looking at the individual day laborer’s experience. He’s looking at the very lower levels of class and then thinking more broadly about that. The Austrian school said, “No, no, no. Don’t look at any of that. Just think about the theory across the top and then extrapolate from there from the idea that everybody’s rational.” The Chicago school says, “Well, I think the Austrians are onto something. I mean, at least their headline ideas sound really good. I wonder if we could actually model this with statistics.” So the Chicago school of economics is where we really start to see a lot of the economic modeling that we have come to expect as standard in economic practice. As I pointed out, one of the biggest differences between Keynes and the Austrians is that Keynes was, by training and disposition, a mathematician. So his work was very grounded in mathematical equations. Where the Austrian school was grounded in a lot of prose and fantastical writing, the Chicago school is actually kind of taking from both of them here.
[00:11:48] Another difference is that the Austrian school of economics basically blames central banks as the core problem for everything. The Great Depression? Central banks. World War II? Central banks. World War I? Central banks. They don’t really care. They just say that the central banks themselves are making decisions that are damaging the economy and creating the boom-bust cycle. The Chicago school of economics actually takes a completely different view of this. They say that the role of government, when it comes to the economy first and foremost, is to manage the money supply. That is to say that their job is to help grow the money supply as the economy grows because if you don’t, you end up sparking off a bunch of deflationary cycles. And so central banks are core to Chicago school thinking. That is to say, Austrians hate central banks; Chicago school wants to run the central banks. And fun fact: almost all central bankers in the United States basically follow the Chicago school of economic thinking, which of course is why my listener pointed out this is a huge influence. “If you’re going to talk about this, you have to talk about the Chicago school.”
[00:12:55] Okay. So differences from the classical school, though, is the classical school supports the ideas of public goods. So parks and, you know, like the national park system, roads, railroads on a lot of levels, depending on which context you’re looking at. And having these public goods — a classical economist, John Stuart Mill himself specifically, would have pointed out that public health is a public good. So having things like sewer systems and sanitation systems that create a healthier workforce will create a more vibrant economy. So that is a public good, and that the government’s role should be addressing that inequality. And so in places where the market won’t do it, the government should step in and do it. So like roads are a great example of this, lighthouses, we’ve talked about GPS, sanitation systems — you name it. There’s a bunch of things that will fit into this.
[00:13:44] But one of the things the classical school didn’t say was anything about money. And so the Chicago school of economics would say “No, no, no. Like public goods, okay, maybe. But really everything should be privatized. The government’s role is monetary policy.” And a classical economist would have gone, “What’s monetary policy?” So this is a new idea. A classical economist would have had no concept of what a monetary policy could have been. And had you explained it to them, it wouldn’t have made any sense because, well, they were all still on the gold standard, and the Chicago school doesn’t function with the gold standard.
[00:14:22] The other difference is that, as I pointed out, that the classical economist at its heart had in it the idea that labor is the fundamental input into everything. Labor is the precursor to all capital. That is Adam Smith, Wealth of Nations. It’s in the book. You can go find it. What the Chicago school does, though, is that this is the point in the story where we break from the labor value theory entirely. So once the Chicago school found itself ascendant in the 1970s, we stopped thinking about labor as adding value because now value is all subjective. This is also around the same time where you start to see union participation in the United States starting to decline. Now, are those two things linked? I don’t actually know. It’s an interesting coincidence and correlation, but correlation does not inherently mean causation. So it’s important to understand that these schools of thought, these philosophies, if you will, actually have very real-world consequences. When I was a school teacher, I would ask students sometimes, “What is your philosophy?” And they would all like, “Well, we don’t even have a philosophy. I never think about a philosophy.” But the reality here is we all have one, and that philosophy will drive our decision-making as we move through this world. And so the Chicago school of economics, as it grew in popularity, had very real-world effects, which we’re going to talk about here in a bit.
[00:15:50] So there is one superstar, but I do want to give some credence to a couple of other people, both of whom were writing in the 1960s and ’70s, and that is George Stigler and Gary Becker. George Stigler had a very interesting observation. So one of the things that was happening during the time he was writing is that the United States government was expanding. So he’s writing at the late sixties, early seventies, and this is the time in which we have a Supreme Court. This is the Warren Court that is starting to say things. We have, you know, Brown v. Board of Education is in here. And we are starting to take a more societal view of how we actually function as a society. And we’re saying, “Well, we need to have some rules and regulations because our commerce is becoming more global.” You can now ship lobster from Maine all the way to Omaha, Nebraska. We need to have some sort of way to look at this.
[00:16:44] But what Stigler is observing is that some of these agencies are actually starting to become captured by the very businesses they’re supposed to be overseeing. The USDA is a great example of this. The FDA, Food and Drug Administration, is another great example of this, where they’re lobbying for laws that will inherently allow them to capture the regulation so that the regulators are working for them and not being monitored by them. And this is the idea of regulatory capture. It’s very prevalent. And if you talk to people who have worked in the regulatory environments, some of them will talk about like the day they realized the regulatory apparatus had been captured for them.
[00:17:24] And so places where you see this is, you know, let’s use an example for a hair salon. We have a hair salon, you know, anyone can, you know, start to cut hair. Well, so, you know, some of the bigger hair salons get together and they say to the regulators, “You know? We want to make sure that people’s haircuts can, you know, they’re good quality, and they’re sanitary, and there’s not lice, so they should all have to go to cosmology school.” Okay. So they pass a law, and the regulatory agencies will do that, and now you’ve just made the bar higher and pushed out other people. Then, they say, “Well, you should really have a shampoo, right? And so if you have a shampoo, then it’s going to be cleaner and everything’s gonna be better.” So then, the regulators put in that rule and this pushes even more people up. What’s happening is you are raising the barrier to entry into being able to cut hair, and therefore lowering the number of choices that consumers would have. This is in fact exactly why to cut hair in the state of Texas takes more education, training, and oversight than it does to become a police officer.
[00:18:24] So it’s interesting to understand how the regulators could be captured. And in fact, we actually codify some of this in the idea of, well, regulatory agencies must do an economic analysis of how it will affect the bottom line. Okay. Well, you’re literally poisoning a river and we can light it on fire now at this point, but your bottom line’s good, so we’re fine with that. I don’t think so. But he’s pointing out that like regulation by itself isn’t actually going to help anything if they get captured at the end of the day.
[00:18:51] Becker is the guy who starts to say economic thinking is not just in business when there’s money involved; it is literally to all parts of life. It’s really important to understand that we’re thinking in terms of economics the entire time. And this is where we started to come into the idea that everyone’s making an economic choice at all times. It has really informed how we talk about it today.
[00:19:17] And if Keynesianism really had John Maynard Keynes and he was a socialite, people liked him, people wanted him at parties, the Chicago school’s equivalent is Milton Friedman. This guy was the John Maynard Keynes of the ’60s and ’70s. He’s the famous one. If you go on YouTube and type in “the miracle of the pencil,” he’s the guy in the video talking about how no one man could make a pencil and just expounding on the glories of the capitalistic global system. And he really is the champion. People love this guy, invited him to speak. He’s not exactly charismatic, but he makes a really good argument. And he kind of sounds like your authoritative grandpa when he’s talking. And so he feels like a guy you can trust. His famous work was, it was A Monetary History of the United States from 1867-1960. He published this in 1963, and it was co-authored by a woman by the name of Anna Schwartz, who is considered to be the best monetary economist to have ever lived. She is a powerhouse in her own right, but she was co-authored in this book.
[00:20:29] And so the goal of the book, and this was foundational to the entire Chicago school of thinking, it wanted to frame the Great Depression as something else other than a failure of capitalism. At the time, in the ’60s, when people looked at the Great Depression, people looked at it and said, “See? Capitalism will fail, and this is what happens. Do we want to go back there? No.” So unfettered, unregulated capitalism cannot be. This is why they would point to things like the Glass-Steagall Act that separated retail banking from investment banking and saying, “See? We’re better off. We’re not having a panic every five years.” But Milton Friedman comes in and says, “No, no, no. It had nothing to do with capitalism per se. It was monetary policy.” When the stock market crashed in 1929, you had a massive destruction of wealth that locked up the monetary supply. And because we were on the gold standard, we couldn’t actually inject more money into the economy. Therefore, the big contraction in the money supply was driven in part by the gold standard and made the problem worse. And you can point to when we went off the gold standard and we were able to increase the money supply along with an expansionary economy, things started to get a lot better.
[00:21:40] And so where Keynes was looking at it and saying, “Yes, the economy collapsed and we need fiscal policy. That is, we need to put people back to work, we need to create money and spend it so that we can get it into the economy,” Milton Friedman’s saying, “No, we just need to increase more money and allow it to find its way into the economy naturally.” This way of thinking is a huge influence on central bankers. Paul Volcker, who was a central banker in the late ’70s when we had massive levels of inflations in the late ’70s, early ’80s that ushered Ronald Reagan into office, he himself was greatly influenced by the thinking of this book. And so when he was assigned and said, “Hey, get inflation under control,” what he did was just tick, tick, tick up those interest rates until they were nosebleed high, and people started getting laid off. When people came to him and said, “Mr. Volcker, how much unemployment are you willing to take for the sake of inflation?” He said, “As much as it takes” because in his mind, as a central banker, his sole job was to manage the money supply, not think about employment. That’s huge. And if you’re looking at Jay Powell right now, with him tick, tick, ticking up things trying to adjust the levers of monetary policy and raising interest rates, that’s what he’s doing. He’s following the Chicago school playbook right now today.
[00:23:05] This brought the idea of monetarism into the forefront of the public imagination. It started linking the idea of the money supply to inflation. Again, this is a direct critique of Keynes. He’s writing, basically thumbing his nose at the dead man saying, “Ha ha! You weren’t so smart.” Money supply too much if it exceeds the amount of the economy — this was economy grows, the money supply grows, but the money supply grows faster than the economy — that he says is what links to inflation. Now, whether he’s right or not, we’re going to talk about in a second. But when people talk about this and they say that the money supply is linked to inflation, they’re quoting this guy. It was not until Milton Friedman published this book that this idea really even existed in the public imagination.
[00:23:54] And, of course, he also went on to say things like, “Free markets are good markets. The freer the better.” And in his idea, government intervention almost always does more harm than good. Rent controls would be a great example of this. In his mind, if you put rent controls on an apartment, so I get in an apartment and if I’m paying a thousand dollars a month for this apartment, I’m always going to be paying a thousand dollars for the apartment. What he said is that it’s going to disincentivize the landlords from doing things to the apartment, like make it nicer, do maintenance, build more buildings, and so on and so forth. And so in his case, he would say, “Well, the solution to high rents is building more. And so it’s interesting when you actually kind of look at this, though, is that right now in the United States, we have this massive amount of increased value in real estate. And it’s causing huge problems for everyday Americans. It’s, in fact, one of the main drivers of inflation. What Milton would say here is, “Well, of course they are, but the suburbs are nothing more than government-supplied housing. That’s what the suburbs are.” You know, yes, builders come in and build all the stuff and put in the streets and blah, blah, blah. But he would point out to say like, well, but yes, you’re reliant on fuel subsidies, which is why you have the big cars, so you can have car dependence, so you can get out of the suburbs and live in your own individual box. And then, as the price of real estate increases, we should be able to build more, but we can’t because you have minimum lot sizes and setbacks and restrictions and how many rooms you can have in a house. And then, that doesn’t even get into HOAs, which he would have viewed as a little mini government tyrannies, telling people what they can and cannot do with their properties. And so what he would say is that our current plight of having such high house prices is entirely due to the government telling us that I can’t rip down my house in the suburbs and build a fourplex. I’ve got a quarter-acre lot, I could do it, it would be great for housing and great for me as the landowner. But the government of my city tells me I can’t do it. That’s a great example.
[00:25:59] He also started bringing up this idea — and this is going to be huge when we get to supply-side economics — but the idea that the social responsibility of business is merely to increase its profits. To put it another way, in Milton Friedman’s mind, a corporation’s job was purely, solely, and only to increase shareholder value. Full stop. Nothing else. And so this is a seed change. We take that for granted today because we’ve had 50 years of everyone saying, “This is how we need to go.” But prior to this, a corporation that was in a town would look at itself as a citizen of that town. They would look at themselves as having responsibility to that town and how they pay the workers, how they’re interfacing the town, sponsoring like Little League teams and stuff like that. They would look at the stakeholders of everyone who worked there, the customers who are buying their end product, their role in interfacing with government typically as some of the largest taxpayers in an area, and so on and so forth. This was huge, and this is actually what created the boom of the fifties and sixties and even in the early seventies was that these local corporations became the economic beating hearts of the town.
[00:27:13] You can go through the Midwest and the Rust Belt States, and you can go to these smaller towns that were once at one time amazing hubs of economic activity. And in their heart, they almost all have closed factories. In my hometown, there’s literal holes that you can look at a satellite map of Kenosha, Wisconsin and see where American Brass and the car factory used to be, nevermind Jockey International, Snap-on Tools, the Kenosha Harbor, and all these other things. Prior to Milton Friedman, they looked at themselves as citizens of Kenosha. And in their mind, if Kenosha does well, we do well. And if we do well, Kenosha does well. Now, after Milton Friedman, fuck Kenosha; I only care about shareholder value. If I shut down this factory and devastate this town but it increases shareholder value, that is good. That is what I should do. You can kind of see where this is going to go.
[00:28:06] Another argument that Milton Friedman makes is that the Fed should focus on monetary policy. And I’ve kind of talked on this before, but there’s a question of the Fed and the government really has two levers to pull: monetary policy and fiscal policy. Monetary policy is interest rates and bond buying. You know bond buying by a different name. It’s called quantitative easing. So that is to say — and 2008’s a great example of this. What happened in 2008 from a monetary perspective? Everybody and their brother who was a central banker in 2008 dropped interest rates as low as they thought they could get away with. And in some cases they dropped them into negative rates. So that is, instead of when I take my money and I go put it in the bank or earn a little bit of interest on it, now the bank’s going to charge me to have the money in there. I’m earning a negative percentage. And that happened specifically in Germany. The other thing that starts happening is quantitative easing where they start the Fed starts printing money and buying bonds. Both of those are monetary interventions. They’re trying to increase the money supply because in 2008, when so much of it collapsed, it looked a lot like the Great Depression. So the money supply is falling off the side of a cliff and they’re trying to prop it back up.
[00:29:17] Fiscal intervention is different. Fiscal intervention is economic stimulus. So that’s where we go and we spend money directly. Basically during the COVID era, the Trump administration kind of abandoned the monetary policy and went solely with the fiscal policy: stimulus bill after stimulus bill after stimulus bill. And then Biden, when he got into office, he had his own stimulus bill. But if you look at the national debt, so much of it, almost a quarter of it was rung up under the Trump administration. But why? Because of COVID. Because when they had a disaster, they went all fiscal, no monetary.
[00:29:53] And so you can kind of see how this works. This is why Milton Friedman’s so critical of the gold standard because you can’t just print more gold. And he would say that that leads to price instability. You can look at all the panics that happened in the United States from 1776 to 1930, almost every 10 years. And if you track — and this was the whole point of his book — if you track the money supply at the same time, what you start seeing is that these panics are Triggered because the economy outstrips the money supply, which then causes a deflation, which then drives everyone into bankruptcy, and that leads to price instability. This is why, ladies and gentlemen, when people tell me that Bitcoin is going to replace the global currency as a medium of exchange, a store of value, and a unit of account, I laugh all the way to the bank because Bitcoin has the same problem as gold. It’s a fixed number of things. And there are people who are like, “See? It will never inflate.” Yeah. It would also create massive levels of economic chaos exactly like the gold standard did for exactly the same reasons.
[00:31:00] One of the things about Milton Friedman, though, that I think is really interesting — and this is worth talking about because I’ve said in the podcast before that this podcast is very much Dylan Reads Things So You Don’t Have To, but I’ve also made the point that people tend to read only the parts of the book they like. So like with Keynes, they read the, like, when times are bad, print money, spend money, prop up demand, and then they fail on the other side of it, but when things are good, reel it back in because you’re going to have a problem if you don’t. And they forget that. So people love this idea of like hands-off government, low regulations, all this other good stuff because it sounds really good and makes, and, you know, it’s their opinion in someone else’s mouth. But what they miss is the second half of the book where he talks about a negative income tax. The fuck’s a negative income tax? Well, Milton Friedman is libertarian at heart. And I got to say, at the end of the day, I am, too. What he looked at is he said, “Well, we’re sitting on almost a hundred individual means-tested welfare programs, and that seems horribly inefficient when we already have a way to do this.” And so the negative income tax would be a way to simplify the welfare system and eliminate poverty by providing a floor to the standard of living. This is a precursor to universal basic income or what we’re calling UBI, which is suddenly having a day in the sun with some very large organizations running experiments with it in Ottawa, in San Francisco, and in LA. And with AI technology right around the corner, it’s been getting a lot more talk.
[00:32:34] So here’s how a negative income tax would work: we would set a bar for a standard of living that would be inflation-adjusted. Call it 50 grand. So we say that the minimum floor that everyone in the United States should have is 50 grand, and we organize the progressive tax system so that at 50 grand, you’re paying zero. And then, we have tax brackets that go up from there with pretty high tax brackets on the highest marginal earners. So people who are making, say, above 400k, they’re going to be in this top-tier tax bracket. Milton Friedman set the idea somewhere 50-60%, okay? But if you are below that, your tax rate becomes negative, which then functions as a subsidy from the government. So rather than having to go through a welfare system where you have to stand in line and fill out a form and tell them you tried to find work and blah, blah, blah — and this is a system that I have PTSD talking about because I’ve had to go through it when we were on food stamps and WIC — he just says, “Do it through the tax system. You already have all the information. This would be far more efficient, this would shrink the size of government because we wouldn’t need all of these different alphabet organizations trying to manage all of this stuff, and it wouldn’t have the same work disincentive that the current system has.” And so if I am at zero, I’m going to get 50 grand, right? Like that’s what happens. But if I go get a job, well, I just get that same 50 grand minus what I earned on my own. So as I’m continuing to earn more money, I’m not losing any of the current supports that I have.
[00:34:06] And one of the things, when I was on food stamps that was super interesting, was I had to make sure that I didn’t earn anything more than an X amount or I’d have to get it in cash so that I didn’t have to report it, not that that ever happened for any of the FBI who were listening. But you get the idea of how this would work. Our system has massive penalties for people to work. And so the same Republicans who like to go about, you know, welfare queens are the same ones who designed that. They did that on purpose because now they can sit there and always point to the welfare queen. But I’ve talked to people on welfare. I’ve been on welfare. A lot of people want to weigh off welfare because it sucks.
[00:34:41] And the other thing that he would say, that Milton Friedman would say about this was it’s unconditional. Like we’re not going to sit here and be like, “Oh, yeah. You have to be a single mother with auburn hair that has two teeth, one of which is made of jade and a red Swingline stapler.” Then, you can have this support. And that’s kind of how our current system works. If I had been a single guy, I would have been SOL in terms of my income when we were on welfare. But because I had a wife and kid, whole different ballgame. Milton Friedman says, “This is bonkers! And we’re just sitting here trying to make lots of arts and crafts. Just set the bar, make it unconditional, shrink the government, let’s move on.” And, of course, they don’t read that part of the book because it’s not their opinion in everyone else’s mouth. And so it’s important to understand that like this was a part of his thinking as well.
[00:35:32] Okay. Let’s end on the most important part of Milton Friedman’s thinking, and that is inflation. In his mind, inflation was one of the worst things you could have. The only thing worse than that was deflation. But inflation was far more likely in the era of fiat currency. It’s really important to also understand that he came up with an equation that he figured would model inflation; that the money supply times the volume of money would equal the price times the quantity. Pretty simplistic equation. But this is his equation where he’s linking the idea of the money supply as it increases. If it increases too fast too quickly too assuredly, it’s going to create inflation. The problem with this equation is it has no relevance to reality at all. So one of the questions I have, particularly for the people and the Bitcoin bros who are like “Bitcoin! It’s going to be a store of value and inflation is going to be gone because there’s a set number of it,” and blah, blah, blah, blah. They forget about all the problems with that. But they also, when I say to them, “Why do you think the money supply is driving inflation?” and they go, “Well, blah, blah, blah, blah. Milton Friedman, Chicago school, this equation.” And I go, “Does that equation actually predict anything?” And the answer is no; it doesn’t. There is no equation to predict inflation. And in fact, since 2008, so much of what Milton Friedman developed in his ideas of a monetary policy and inflation are currently being rewritten because according to him, we should have had massive inflation starting in 2008. And the fact that we had negative interest rates from central banks, particularly in the European union, has called into major question whether or not his equation actually makes any sense in the first place. That is to say, we try to use his work to create economic models. Remember Chicago school, unlike the Austrian school, is not afraid of math. So statistically, we have all the data. We should be able to figure this out. Unfortunately, the modeling doesn’t match reality, and we don’t know why. And right now, we’re having massive levels of inflation, but again, they don’t match. And so what that tells us is that he’s probably onto something. The money supply has an influence on inflation for sure. We do know that. But we also have to understand that there are going to be other factors like supply chain, like trying to increase shareholder value by jacking prices and blaming inflation, and so on and so forth. That is to say that it’s a really complicated thing to think about. And it can’t be boiled down to four letters and an equal sign.
[00:38:11] But ladies and gentlemen, as always, thank you very much for listening. I hope that you’re walking away with a better understanding of some of the discussions and arguments that we’re having. My whole goal here is to really give you the tips, tools, and tricks to be able to improve your financial life, take control of your finances, and live free. And I think understanding the debates and politics around you is a major component of being more sovereign. So with that, have yourself a lovely weekend. Please be safe out there, and if you can, try to get in an argument about economics. And I will see you on Tuesday.
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