Lex Fridman: prediction

Transcript context

…Milton Friedman didn’t get such things, or I’ll meet someone, and they’ll say to me, “Ayn Rand is the reason I went to medical school.” A woman said this to me a few years back, “It never even occurred to me that I could be a doctor until I read Ayn Rand, and I said, “I’m going to go to medical school.” So, she has that really intense impact on people. So, she thought of herself as rational. She thought of rationality as what she was doing, but she was actually doing a kind of mythopoetic psychological work as well. Whereas Friedman, on the one hand, was much more rational, and there’s a whole set of economic thinking. He provides a rational framework for understanding the world, and it’s the framework of neoclassical economics. At the same time, he does pull on mythologies of the idea of America and the Gilded Age, the frontier mythology, the individual immigrant, the settler mythology. He pulls on these, but he doesn’t create them, and he’s more kind of playing a tune he already has. Whereas I think Rand really does something a little bit deeper in her ability to reach into people’s psyche, and then take that emotional psychological experience, and fuse it to an intellectual world and a political world. That’s really what makes her so powerful. So, I think she comes back in to relevancy in a different way than Friedman does, because I think in some ways she’s tapped into a more universal human longing for independence and autonomy and self-creation and self-discovery. Nevertheless, there’s still pragmatic ideas that are still important today from Milton Friedman, even just on the economics level. So, let’s dig in. Let me try. I took some notes. Let me try to summarize who Milton Friedman is, and then you can correct me. So, he is widely considered to be one of the greatest and most influential economists in history, not just the 20th century, I think, ever. He was an advocate of economic freedom, like we said, and just individual freedom in general. He strongly advocated for free market capitalism and limited government intervention in the economy, though you do give… I’ve listened to basically everything you have on the internet. You give some more depth and nuance on his views on this in your books. He led the famed Chicago School of Economics, and he won the Nobel Prize in economics in 1976. He greatly influenced economic policies during the Reagan administration and other administrations. He was an influential public intellectual, highly influential, not just among economists. He lived 1912 to 2006. So, that means he lived and worked through some major world events where his ideas were really important, the Great Depression with the New Deal, World War Two with post-war reconstruction, the Rise and Fall of the Bretton Woods Monetary System as we may talk about, the Cold War and all the conflicts involved in that, the tensions around communism and so on, so the fall of the Soviet Union. Also, he has some interesting relationships to China’s economic transformation since the 1970s, the stagflation of the 1970s, and I’m sure there’s a lot more. So, can you maybe continue this thread, and give a big picture overview of the ideas he’s known for? Yeah, sure. That’s a great summary. You learn fast. So, let me start with the economics, and then I can transition to how he used those economic ideas to become a real voice in the American conservative movement, in the American political realm. So, I’ll highlight for ideas or contributions or episodes. One was his work with Anna Schwartz in revising our understanding of the Great Depression. That’s tightly related to the second, which is the School of Monetarism that he and Schwartz really become founders of. Then there is the prediction of stagflation and the explanation of that in the 1970s, which really is one of these career-making predictions, and we can dig into that. Then in terms of technical economics, he’s known for the permanent income hypothesis, which he develops with a group of female collaborators that I can talk about. So, those are four technical pieces end up being really brought together in what becomes the Chicago School of Economics. He’s undoubtedly the head and the leader of the Chicago School of Economics. There’s an earlier generation that he learns from. There’s his generation. There’s also a Chicago School of Law and Economics that’s really profoundly influential, and then there’ll be a third generation that he’s somewhat distinct from, but that goes on to really shape economics. But let me go back to these four pieces, and let me start with Great Depression. So, Milton Friedman actually lives through the Great Depression. He’s in college when it hits. So, he is in college just 1928 to 1932. He’s aware of the Depression, and he’s deciding, “Should I study mathematics, or should I study economics?” He’s had some good economics teachers, but it’s really the context. It’s looking around at the slow dissolving of economic prosperity. So, he decides to go to Chicago. He decides to study economics. What’s really interesting is that the Great Depression is so unexpected. It’s unpredicted. It’s unprecedented, and economists are really struggling to know how to respond to it. So, he’s going to arrive at the University of Chicago when the field is struggling to know what to do. So, he’s in this really open space where the institutional economics of the 1920s has failed to predict, which was focused on business cycles. This is the irony. Their big thing was charting and understanding business cycles, and then we have the biggest business cycle of all time. They haven’t seen it coming, and they don’t have a good explanation for it. What he will get at Chicago is the remnants of a monetary understanding of the economy. So his teachers, they don’t know exactly what’s going on, but they look first to the banking crisis. They look first to 1933. It’s bank runs failures of maybe it’s up to a third of American banks. Thousands of banks are failing per week. So, they’re focused on that. So, that’s the first imprint he will have.…

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