My Friendly Fights with Dr. Friedman

The Rational, The Relentless – Liberty Magazine – September 2007

by Mark Skousen

“To keep the fish that they carried on long journeys lively and fresh, sea captains used to introduce an eel into the barrel. In the economics profession, Milton Friedman is that eel.”— Paul A. Samuelson

Milton Friedman, the intellectual architect of the free-market reforms of the post-World War II era, was a dear but prickly friend. We constantly argued over a variety of issues, but remained friends throughout. I was probably the last person to go out to lunch with him before he died of a heart attack on Nov. 16, 2006.

It was a privilege to know him, despite our policy differences. The triumph of free-market reforms introduced by Thatcher, Reagan, and other leaders in the post-Berlin Wall era (reforms such as lower taxes, deregulation, and privatization that showed the collapse of the Keynesian and Marxist paradigm) can be laid at the feet of a single giant figure: Milton Friedman. Other free-market economists made their mark, but Friedman was the most influential.

Founder of the modern-day Chicago school of economics, Milton Friedman was the force behind many new and excit­ing ideas: policies such as monetarism, privatization of Social Security, school choice, and futures markets in currencies, and also scholarly pursuits that transformed the economics profession from the “dismal science” to the “imperial sci­ence” of today. He was the first economist to counter effec­tively the Keynesian monolith and its myths: that capitalism is inherently unstable, that money does not matter, that there is a trade-off between inflation and unemployment. Friedman debunked them all. He demonstrated that money mat­tered a lot: “Inflation is always and everywhere a monetary phenomenon.”

His most important work is his 1963 magnum opus, A Monetary History of the United States, 1867–1960, with co-author Anna J. Schwartz. This book carefully demonstrates a close correlation between monetary policy and economic activity. Friedman and Schwartz demonstrated beyond doubt that ineptitude by a government body, not free-enterprise cap­italism, caused the Great Depression, when the Fed allowed the money supply to contract by over a third. This book marked the beginning of a counterrevolution, away from the Keynesian view that big government and the welfare state were beneficial. Now government was seen as the cause of our problems, not the cure, as Reagan used to say. Textbooks replaced market failure with government failure. And Friedman made it happen.

He was able to succeed where other free-market econo­mists failed because he had impeccable credentials within the economics profession — earning his Ph.D. from Columbia University, becoming president of the American Economic Association, being published by Princeton University Press, teaching at the University of Chicago, and winning the Nobel Prize in Economics (in 1976, appropriately on the 200th anni­versary of America’s Declaration of Independence).

After establishing himself as a top-ranked economist, he wrote for the general public, especially in Capitalism and Freedom (1962) and Free to Choose (1980), co-authored by his wife and fellow economist, Rose Friedman. (Rose was his beloved companion in life — they traveled and worked together, reared two children, and wrote the memoir “Two Lucky People.”) Milton told me that he always regarded Capitalism and Freedom as his best book for the intelligent layman. I recommend it as an ideal libertarian document.

On a personal level, Milton was unique. He had an “open door” policy toward people of all walks of life. Always intelligent and demanding of evidence, he kept his secretary busy with a huge correspondence with friends and strangers. When I met him in the early 1980s, he didn’t know me from Adam, but he was willing to talk with me and answered my questions seriously. I kept up our friendship by letters, emails, telephone calls, dinners, and lunches over the past dozen years. In 1988, he invited me to my first meeting of the Mont Pelerin Society, and through his influence, I became a member in 2002. He generously wrote blurbs for my recent books and was a big fan of FreedomFest, my annual gathering of freedom lovers. When I had the opportunity to teach at Columbia Business School, he wrote a favorable letter to the dean, which helped me win the position.

Friedman loved to debate, and took on all comers. Unlike many erudite libertarians, he suffered fools gladly and, to my knowledge, never excommunicated anyone over intellectual disagreements. He disagreed sharply with Keynesian economists such as Paul Samuelson and John Kenneth Galbraith, yet he remained friends with both. At times, my own disputes with him were so intense that I thought our relationship was threatened, but my friendship with this happy warrior continued to the end.

Friedman and I were friend and foe on many issues, to the point where I was criticized for being both too sympathetic and too critical. In 2001, at my first board meeting as president of the Foundation for Economic Education, I was approached privately by Bettina Greaves, a long-time FEE employee and devotee of Misesian (“Austrian”) economics. She said, “Mark, I support you in every way as the new president of FEE, but please be more critical of Milton Friedman.” I thanked her for the suggestion. Then, half an hour later, another board member, Muso Ayau, past president of the Mont Pelerin Society and founder of the Universidad Francisco Marroquin in Guatemala, pulled me aside to give me some advice. He whispered, “I support you in every way, but could you do me a favor? Please stop being so critical of Milton Friedman!” When I told Milton this story, he had a belly laugh.

I first met Milton Friedman at the San Francisco Money Show. I approached him with a question about Murray Rothbard’s book, America’s Great Depression, and he willingly engaged me. At the time, I was quite enamored with Rothbard’s Austrian-school explanation of the depression — his argument that it was caused by an inflationary boom in the 1920s that had to collapse, and that the 1930s was actually a good cleaning for a defective financial system. Friedman quickly disparaged Rothbard’s scholarly work, saying that the Fed’s policies during the 1920s were not the problem and that Rothbard had artificially inflated the money supply figures to justify his Austrian position. “The Great Depression was caused by inept Fed policy in the 1930s, not the 1920s,” he told me.

Afterwards, we continued our correspondence by mail, arguing largely about Austrian vs. Chicago economics. This correspondence eventually culminated in my book, Vienna and Chicago, Friends or Foes? (2005). When I asked Milton about the title of this book, he answered, “We’re both friends and foes!” Once I made the mistake of referring to Anna Schwartz, co-author of Monetary History, as his “researcher,” and he blew up. He accused me of being “narrow-minded” and “intolerant” in a way he termed “typical of Austrian economists.” He urged me to look at the back­ground papers and letters dealing with Monetary History at the Hoover Institution, where I would quickly realize that Schwartz was clearly a bona fide “co-author” and not just a “researcher.” This letter is still burning in my files. Funnily enough, a month later, I saw a picture of Anna Schwartz in the American Economic Review, and the short summary of her professional career listed the terms “researcher” and “research” seven times! But I dared not write him back with this comment for fear of retaliation.

A few years after the Money Show I was back in California for a meeting of political conservatives where Friedman was a speaker. I called his hotel room and invited him to lunch, just the two of us. He agreed, and we had a delightful two-hour luncheon overlooking the California coastline. I showed him a chart of M1, the narrowly defined money supply, noting that it had declined sharply in the mid-1980s. I interpreted this to mean that another economic collapse was imminent. He disputed my interpretation. “You can’t rely on M1 anymore — it’s out of date due to the deregulation of the bank­ing system. If you look at M2, which includes money market funds, the money supply is growing. There isn’t going to be any collapse.” He was right. The Reagan era was booming.

When the lunch was over, the bill came and I insisted on paying. As I was signing the credit card bill, I turned to him and said, “Dr. Friedman, one of your favorite sayings is ‘There’s no such thing as a free lunch.’ Well, I’m here to disprove it today because I’m paying for yours.” Quick as a flash, he retorted, “Oh, no, no, Mark, that wasn’t a free lunch. I had to listen to you for two hours!”

When my book Economics on Trial (1991) was pub­lished, I prepared an advertisement with the headline: “Japan and Germany Win World War III,” followed by these words: “Their formula multiplies wealth so rapidly that they will achieve their goal of world domination by the year 2000.” In the ad, I referenced the sound economic model that had transformed war-torn Germany and Japan into economic powerhouses and strengthened their stock markets in one generation. The principles were high savings rates, low taxes on capital and investment, low inflation, balanced budgets, and free markets.

I sent a copy of my ad to Friedman, and he took no time debunking it. “This prediction is a bunch of nonsense,” he scribbled over the ad copy. “I will not live long enough to see it falsified, but you will. In the year 2000, the U.S. standard of living will be higher than the Japanese.” He was, of course, proven right.

Friedman’s anger flared again in the late 1990s, when we gathered in Vancouver for a Mont Pelerin Society meet­ing. Milton and Rose Friedman were in charge of the conference program. Its title was “Can Creeping Socialism Be Stopped?” In one of the breakout sessions I asked Friedman about his easy-money solution to Japan’s economic problems. I held up an article he published in The Wall Street Journal, “Rx for Japan,” in which he advocated a massive printing of yen to jumpstart the Japanese economy, while ignoring such free-market solutions as cutting taxes, deregulating, or open­ing up the Japanese economy. “Isn’t printing more money another example of creeping socialism?” I asked. He was not amused, and noted that, historically, increasing the money supply has stimulated economic recovery, and that fast monetary growth was necessary, given Japan’s fragile condition. I countered, “Ah, so there is a free lunch, after all, Dr. Friedman?” “A free disaster!” he interjected with high emotion. Afterward, Professor Jim Gwartney came up to me and said, “You attacked God today!” Indeed. Yet even free-market icons can make mistakes.

A year later, Milton and Rose were invited to speak at the New Orleans Gold Conference, an annual gathering of hard-money investors. After Milton spoke, he took questions from the audience. I tempted him with the question, “Who’s the better economist, Ludwig von Mises or John Maynard Keynes?” I knew Milton would answer straight; he didn’t care what gold bugs thought. “Keynes,” he proclaimed to a shocked audience. When asked who was the greatest economist ever, he didn’t say Adam Smith, but settled on Alfred Marshall, the British economist who invented supply and demand curves.

Rose dissented. I had never seen her disagree with her husband in public, but she stood up and said that Marshall was infamous for treating his wife poorly and refusing to support her professional career as an economist. In all my private meetings with the Friedmans, Rose was always graciously reserved and seldom if ever argued with her husband. I had heard a rumor that she differed with Milton on Austrian capital theory, and one time I asked her if this was true. She simply smiled and winked.

My most embarrassing moment with the Friedmans came later that evening when I invited them to dinner at the best restaurant in New Orleans, Commander’s Palace, along with two friends, Gary North and Van Simmons. After we ordered and exchanged greetings, Milton turned to me and asked in a serious tone, “Mark, why are gold bugs so passionate about gold?” It was a perfect opportunity to talk about the importance of “honest money,” a theme that Ludwig von Mises, Henry Hazlitt, and other Austrian economists have taught for years. I pulled out of my jacket pocket a large oversized $20 banknote, a “gold certificate” issued in the 1920s. Together we read the words spelled out on it: “This certifies that there has been deposited in the Treasury of the United States of America TWENTY DOLLARS IN GOLD COIN payable to the bearer on demand.” I then explained, “Milton, we’re passionate about gold because under the gold standard, there’s a contract between the government and its citizens. For every gold certificate issued, the government had to back it up with a $20 gold coin. Under a genuine gold standard, the Treasury can’t just print up money to pay their bills. It’s honest money.”

All along, I felt that Friedman was simply playing along, since after all, he was the world’s foremost monetary historian. I went on, “So, what kind of contract exists today between the government and its citizens? Milton, do you have a $20 bill?” He reached into his pocket and handed over a $20 bill. “See, the contract has completely disappeared. Now it only says ‘Federal Reserve Note.’ And the Fed doesn’t even pay interest!” I paused and said, “Milton, this $20 bill isn’t worth the paper it’s printed on.” And I tore it up! I ripped Milton Friedman’s $20 Federal Reserve Note into a half-dozen pieces.

Suddenly, the atmosphere changed. He turned to me and said angrily, “Mark, you had no right to destroy my property!” Rose chimed in, “Yes, Mark, you shouldn’t have done that. That was Milton’s private property.” Gary North and Van Simmons stared in horror and didn’t say a word. Milton’s voice rose, and other dinner guests looked over at us and could see emotions rising. At this point, I was worried. My relationship with the Friedmans seemed to be ending that very night. Finally, I said, “Well, I suppose you want your money back?”

They assented heartily. So I reached into my pocket and pulled out a $20 St. Gaudens Double Eagle gold coin, handed it to Milton, and said, “Okay, here’s your $20!”

He looked startled and stared at the coin. I thought he would be pleased, but I was wrong. Suddenly, he handed it back to me. “I don’t want it!”

I gulped, struggling for words. “But Milton, it’s a gift. Here, take it. It’s a $20 gold coin, worth a lot more than a $20 Federal Reserve Note.”

“No,” he repeated emphatically. “I don’t want it.”

After an agonizingly pregnant pause, I finally figured out a solution. Setting the coin aside, I reached into my pocket, pulled out a fresh new $20 paper note, and handed it to him. “There, okay, will this help?”

He calmed down and took the $20 bill. Gathering up some courage, I brought out the gold coin again. “Look,” I said, as I handed it over to him, “look at the date.” He examined the coin again. “Oh, 1912 — my birth year!” He laughed haltingly. Rose looked on and smiled.

I explained that the entire evening was a set-up, an opportunity for me to give him a St. Gaudens Double Eagle gold coin minted in the year he was born. The coin was in a PCGS certificated plastic container with the words, “To the Golden Milton Friedman.” I told Milton and Rose that my friend across the table, Van Simmons, was a coin dealer and had gone to great lengths to find a 1912 Double Eagle, which was rare. Van added that it had been shipped overnight from Switzerland and had arrived only an hour before dinner. I think that only then did the Friedmans recognize what was going on. The next morning they came up and thanked me for the coin and my gesture of appreciation.

Throughout the evening Gary North — a well-known economic historian and gold bug — said nothing. But in the morning, he came up to me at the conference and said something profound. “Mark, I’ve thought all night about what happened at dinner at Commander’s Palace. You and I have an ideology of gold. And Milton has an ideology of paper money. Mark, last night you attacked his ideology!”

Milton and I never discussed the coin incident again. (I keep his torn-up $20 bill in my wallet as a keepsake.) We met on many other occasions, but I shall never forget our last lunch together in San Francisco. There for the Money Show, I took the opportunity to call him. We met at his favorite Italian restaurant, the North Beach. For the past few years he had walked with a cane and traveled only on cruises or in private jets. At age 94, he had weak legs, a serious heart condition (after two open heart surgeries in the 1980s), and was losing his eyesight. Yet his mind was still sharp.

We discussed the latest Nobel laureates in economics. “We’re running out of good names,” he said. I showed him a Photoshopped picture I had created of him standing next to the 6 foot 10 inch John Kenneth Galbraith, the premier Keynesian and welfare statist of the 20th century. Galbraith towered over the diminutive Friedman. Beneath the picture* was a funny line from economist George Stigler: “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” Milton was so pleased with the photo and caption that he sent it to all his friends.

As we left, I asked him, “Do you think you’ll live to be 100?” He answered quickly, “I hope not!” But he was almost always upbeat about life, even to the end. He was not a religious man, but he expressed interest in religious topics near the end of his life. His favorite poem was Keats’ “Ode on a Grecian Urn” which ends, “ ‘Beauty is truth, truth beauty’ — that is all / Ye know on earth, and all ye need to know.” He discovered both in a full and complete life. I consider it a privilege and honor that I knew him.

Friedman’s Less Familiar Quotations

Milton Friedman was not only a great economist, but a memorable quotesmith. Besides the standard-bearers, such as “Inflation is always and everywhere a monetary phenomenon” and “There’s no such thing as a free lunch” (which he popularized), here are some others less well known:

“If a tax cut increases government revenues, you haven’t cut taxes enough.”

“I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.”

“A society that puts equality ahead of freedom will end up with neither equality nor freedom.”

“Competition is a tough weed” (George Stigler). “Freedom is a rare and delicate flower” (Milton Friedman).

“Nothing is so permanent as a temporary government program.”

“Inflation is taxation without legislation.”

“The economy and the stock market are two different things.”

“If government is to exercise power, better in the county than in the state, better in the state than in Washington.”

“The great advances of civilization, whether in archi­tecture or painting, in science or in literature, in indus­try or agriculture, have never come from centralized government.”

“The minimum wage law is one of the most, if not the most, anti-black laws on the statute books.”

“Nobody spends somebody else’s money as carefully as he spends his own.”

“The government solution to a problem is usually as bad as the problem.”

A Tribute to Milton Friedman

Mark Skousen and Milton Friedman at lunch

Mark Skousen and Milton Friedman at lunch

I was at the New Orleans Investment Conference when I learned that free-market economist extraordinaire Milton Friedman, died on November 16. He was a dear friend. I was probably the last person to go out to lunch with Milton. We met at his favorite restaurant in San Francisco, where I showed him a picture of him standing next to John Kenneth Galbraith, the premier Keynesian and welfare statist of the 20th century. Galbraith towered over the diminutive Friedman. Beneath the picture was a funny line by George Stigler: “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” Milton was so pleased with the photo and caption that he sent it to all his friends only two weeks before his passing.

“All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” –George J. Stigler

George Stigler, Milton Friedman and John Kenneth Gailbraith -- "All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman." --George J. Stigler

George Stigler, Milton Friedman and John Kenneth Galbraith

(Left to right: George Stigler, Milton Friedman, John Kenneth Galbraith.
Creation of Mark Skousen. Technical assistance by James Durham.)

Milton had just turned 94, yet his mind was sharp. We discussed the latest Nobel Prize in economics. He said, “We’re running out of good names.” What about the new field of behavior economics that Richard Thaler (Chicago), Robert Shiller (Yale), and Jeremy Siegel (Wharton)? “Yes,” he agreed. “They are making an important contribution. Siegel worked with me at Chicago in the 1970s and is doing brilliant work.”

I asked Milton if he wouldn’t mind giving me a blurb for my next book, “The Big Three in Economics.” He loved my previous history, “The Making of Modern Economics,” and agreed to give me a quote. It saddens me to know he never got to it.

For the past few years, he walked with a cane. He suffered from pain in his legs, a weak heart (after two heart surgeries in the 1980s), and was losing his eye sight. As we left, I asked him, “Do you think you’ll live to be 100?” He answered quickly, “I hope not!”

A few days later he fell and was taken to the hospital. He died a couple weeks later of a heart attack.

Friedman was not only a great economist, but a memorable quotesmith. Besides the standard bearers, such as “Inflation is always and everywhere a monetary phenomenon” and “There’s no such thing as a free lunch,” here are some others less well known:

“Competition is a tough weed, but freedom is a rare and delicate flower.” — (with George J. Stigler)

“If a tax cut increases government revenues, you haven’t cut taxes enough.”

“I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.”

“A society that puts equality ahead of freedom will end up with neither equality or freedom.”

“Nothing is so permanent as a temporary government program.”

“Inflation is taxation without legislation.”

“The economy and the stock market are two different things.”

“If government is to exercise power, better in the county than in the state, better in the state than in Washington.”

“The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government.”

“The minimum wage law is one of the most, if not the most, anti-black laws on the statute books.”

“Nobody spends somebody else’s money as carefully as he spends his own.”

“The government solution to a problem is usually as bad as the problem.”

I will miss our lunches and dinners together. He was one of the most unforgettable people I ever met.

In liberty, AEIOU, Mark

P. S.  At our luncheon last month, Milton Friedman and I also talked about the upcoming FreedomFest.  He was a big fan and was looking forward to it. He wrote me this statement to all freedom lovers:  “FreedomFest is a great place to talk, argue, listen, celebrate the triumphs of liberty, assess the dangers to liberty, and provide that eternal vigilance that is the price of liberty. We have so much to celebrate but also much to be concerned about.”  We are going to have a special tribute to Milton Friedman at FreedomFest 2007, set for July 5-7, 2007, at Bally’s in Las Vegas.  For more information, go to

Pulling Down the Keynesian Cross

Ideas On Liberty
Economics on Trial
June 2001

by Mark Skousen

“The circle had come right round; it was as though Keynes had never been.”
-Robert Skidelsky1

“Textbooks have to be rewritten in the aftermath of each scientific revolution.”
-Thomas S. Kuhn2

In his third and final volume on John Maynard Keynes, Robert Skidelsky comes to the shocking conclusion that the Keynesian revolution was temporary, that Keynes’s General Theory was really only a “special” case, and that “free market liberalism” has ultimately triumphed. This is all the more amazing given that Lord Skidelsky has spent the past 20 years of his professional career studying Keynes and resides in Keynes’s old estate, Tilton House. Few scholars would have the guts to repudiate the theory of the man they adore.

It’s even tougher for old dogs to learn new tricks, and that refrain applies to Paul Samuelson, the “American Keynes” who introduced millions of students to the “new economics” of the master. He continues to hang his hat on the Keynesian cross, even as he publishes the 17th edition of his world-famous textbook. The pedagogical paradigm keeps shifting further toward the classical model of Adam Smith, and as each edition of Economics moves in that direction, Samuelson resists the change. He cites his mentor more than any other economist; only Keynes, not Adam Smith or Milton Friedman, is measured as a “many-sided genius.” His textbook still begins macroeconomics with the Keynesian model, even though most other textbook writers have adopted Greg Mankiw’s method of starting with the long-run classical model.3 According to Samuelson, Adam Smith’s invisible-hand doctrine-that laissez-faire behavior maximizes social welfare-“holds only under very limited conditions.”4 On the final page (755) of his massive textbook, he renders “two cheers to the market, but not three.”

Two Cheers for Hayek and Friedman

Having reviewed all 17 editions of Samuelson’s magnum opus, I conclude that his textbook has gradually shifted, albeit grudgingly, from one cheer to two cheers for the market. Much of this improvement is due to Yale’s Bill Nordhaus, his co-author since 1985. (He writes the entire text now, which Samuelson then reviews.)

What’s new about the latest edition? More free-market economists are cited, including Julian Simon, Ronald Coase, James Buchanan, Arthur Laffer, Robert Mundell, and Gary Becker. Samuelson and Nordhaus devote an entire page (41) to F.A. Hayek and Milton Friedman, “guardians of economic freedom.” They recommend Hayek’s The Road to Serfdom and Friedman’s Capitalism and Freedom, saying, “All thoughtful economists should study his arguments carefully.”

In chapter 2, “Markets and Government in a Modern Economy,” the authors highlight the benefits of globalization and the importance of property rights, noting that Russia and other former communist nations have suffered because of a failure to enforce “the legal framework.”

They also add an entire new page on the issue of lighthouses as public goods. For years Samuelson used the lighthouse as a prime example of market failure; only government could build and operate lighthouses. Several years ago I chided Samuelson for ignoring Ronald Coase’s famous essay, “The Lighthouse in Economics,” which proved that the Trinity House and other lighthouses in England were built and owned by private firms that imposed tolls on ships docking at nearby ports.5

Now, finally, Samuelson and Nordhaus have responded to Coase’s challenge in the 17th edition (pp. 37—38). They admit that privately operated lighthouses existed in England, but then point to the east coast of Florida as a case where “there were no lighthouses until 1825, and no private-sector lighthouses were ever built in this area.” According to Nordhaus, the only response to shipwrecks was a thriving private “wrecking” industry that charged high fees for “saving lives and cargo.” Nordhaus goes on to note that lighthouses have become obsolete, replaced by the satellite-based Global Positioning System, a service provided by the government.

In sum, the paradigm in economics has definitely shifted from Keynesianism to classical economics, but the case for complete laissez faire is still raging in the halls of academia.

1. Robert Skidelsky, John Maynard Keynes: Fighting for Britain, 1937-1946 (London: Macmillan, 2000), p. 506.
2. Thomas S. Kuhn, The Structure of Scientific Revolutions, 2d ed. (Chicago: University of Chicago Press, 1970), p. 137.
3. See N. Gregory Mankiw, Principles of Economics, 2d ed. (Ft. Worth, Tex.: Harcourt College Publishers, 2001). I still regard Roy J. Ruffin and Paul R.Gregory, Principles of Economics, 7th ed. (Boston: Addison Wesley Longman, 2001) as the best mainstream textbook on the market today.
4. Paul A. Samuelson and William D. Nordhaus, Economics, 17th ed. (New York: McGraw-Hill Higher Education, 2001), p. 325.
5. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, Spring 1997, p. 145. Coase’s article appeared in the Journal of Law and Economics, October 1974, pp.357-76.

An Enemy Hath Done This

Economics on Trial – Ideas on Liberty – SEPTEMBER 2000

by Mark Skousen

“Government measures . . . give individuals an incentive to misuse and misdirect resources and distort the investment of new savings.”

Several months ago, I had the opportunity of speaking before a Miami chapter of Legatus, a group of Catholic business leaders organized originally by Tom Monaghan, founder of Domino’s Pizza. The topic was the outlook for the stock market, which had reached sky-high levels and by any traditional measurement appeared extremely overvalued. Even many experienced Wall Street analysts recognized that a bear-market correction or crash was inevitable and necessary. As the old Wall Street saying goes, “Trees don’t grow to the sky.” Indeed, in the spring the stock market took a well-deserved tumble. What is the cause of this boom-bust cycle in the stock market? Does capitalism inherently create unsustainable growth? Is the bull market on Wall Street real or a bubble?

The Parable of the Wheat and the Tares

To answer these questions, I applied Jesus’ parable of the wheat and the tares (Matthew 13:24-30) to today’s financial situation.

Jesus tells the story of a wheat farmer whose crop comes under attack by an unknown assailant. In the middle of the night this enemy sows tares (weeds) in his wheat fields. Soon the farmer’s servants discover that the farmer’s crop appears to be twice the normal size. Yet the master realizes that half the crop is fake-weeds instead of wheat. But he warns his servants not to tear out the weeds for fear of uprooting the good shoots; they must wait and let the wheat and the tares grow up together until harvest time. Months later, the wheat produces good grain, while the tares are merely weeds and provide no fruit. The servants pull out the weeds and burn them, and store the grain in the barn.

The parable is imminently applicable to the recent wild ride on Wall Street. In today’s robust global economy, the wheat represents genuine prosperity-the new products, technologies, and productivity generated by capitalists and entrepreneurs. It represents real economic growth and when harvested, reflects a true higher standard of living for everyone. Under such conditions, stock prices are likely to rise.

On the other hand, the tares represent artificial prosperity that bears no fruit in the end and must be burned at harvest time. Where does this artificial growth come from? The central bank’s “easy money” policies! The Fed artificially lowers interest rates and creates new money out of thin air (through openmarket operations). This new money, like regular savings, is invested in the economy and stimulates more growth and higher stock prices-higher than sustainable over the long run.

Who is the enemy who sows artificial prosperity? Alan Greenspan! (Or, to be more accurate, central bankers.) The money supply-which is controlled by the Fed-has been growing by leaps and bounds, especially since the 1997 Asian crisis.

But there is no free lunch, as sound economists have warned repeatedly. At some point, the harvest time comes and the wheat must be separated from the tares. This is the crisis stage, where the boom turns into the bust. Harvest time in wheat is fairly easy to predict, but not so in the economy. Clearly economic conditions are heating up, as measured by asset inflation, real estate prices, the art mar ket, and recently the Consumer Price Index. At some point, a “burning” of excessive asset values in the financial markets must occur. As Ludwig von Mises stated long ago, “if a brake is thus put on the boom, it will quickly be seen that the false impression of `profitability’ created by the credit expansion has led to unjustified investments..”2

Lesson: Globalization and supply-side freemarket policies have justified genuine economic growth and higher stock prices over the past two decades, but “easy money” policies have at the same time created an artificial boom and “irrational exuberance” on Wall Street. Ignore this lesson at your own peril. Remember the parable of the wheat and the tares!

1. Milton Friedman, Capitalism and Freedom (University of Chicago, 1962), p. 38.
2. Ludwig von Mises, “The `Austrian’ Theory of the Trade Cycle,” in The Austrian Theory of the Trade Cycle and Other Essays, compiled by Richard M. Ebeling (Auburn, Ala.: Ludwig von Mises Institute, 1996), p. 30.