Milton Friedman on the efficient market hypothesis

In the orgy of eulogization and evaluation that has followed the death of Milton Friedman, a couple of odd myths have been promulgated.

One is that his monetary theories have been discredited. What has been discredited is Friedman’s belief that monetary policy could be run on a purely automatic basis, by simply allowing the money supply to grow at a certain pace. It turns out the money supply is far too slippery a thing to measure accurately enough for such a policy. But Friedman’s main messages — that inflation is always and everywhere a monetary phenomenon, and that central banks should focus all their energies on keeping prices stable — have been accepted at the Federal Reserve and pretty much every other respectable central bank on the planet.

Another myth, central to a Michael Kinsley essay in Slate this week that I dissected in the Curious Capitalist today, is that Milton Friedman believed that financial markets were efficient. Shawn Tully at Fortune does a great imitation of Friedman saying something along the lines of, “Yes, over the long run, markets might be efficient, but in the short-term …”

I didn’t get anything quite like that out of Friedman when I interviewed him on the subject in 2004, but he did, as always, deliver an interesting quote. I had mentioned that Friedman’s friend and long-time intellectual ally George Stigler had told then-Chicago-grad-student Baruch Lev at a cocktail party in the 1960s that he didn’t believe in the efficient market hypothesis.  Friedman responded:

You don’t have to believe it. I don’t believe it. We all know the market is not efficient in a descriptive sense. But that doesn’t mean that the efficient market is not the best approximation if you don’t have anything else to use. …Warren Buffett proves that there’s not an efficient market, and yet Warren Buffett is what makes the market efficient, and both statements are right. If the market were 100% efficient, nobody could make any money making it efficient, and then it wouldn’t be efficient again. So in a way it’s self-contradictory to suppose that there really is an efficient market.

Friedman didn’t believe markets were perfect. He just thought that they were better, and more accommodating of human liberty, than government. He may have oversold that argument on occasion. But don’t go calling the man an efficient marketeer.

3 thoughts on “Milton Friedman on the efficient market hypothesis

  1. More Friedman Memories Appreciations

    – William F. Buckley grieves the death of his friend.
    – Alan Meltzer offers an appreciation of Milton Friedman.
    – Brian Doherty says what Milton Friedman did was based on his belief in us.
    – Jacob Sullum asks conservatives to let Friedman be Friedman.

  2. what you are saying is a contradiction again: if the government can’t do any intervention, then you are just admitting that the markets “tend to be efficient”. The EMH doesn’t mean the markets are absolutely efficient, but that they are MORE efficient without intervention. The proof that the whole theory was a HUGE SCUM in the financial crisis, that came due to a lack of intervention and the extreme freedom of markets, that resumed in the creation of dozens of “fraudy” financial products that would have never existed with regulation.
    So the EMH, as well as the Rational Expectations were proven to be ABSOLUTELY wrong, and many scholars knew about that. They were paid by the banks to say the opposite. Just have a look at Inside Job and see how SHAMEFUL their reactions are. All just part of the biggest financial bigotry since 1929.

  3. “One is that his monetary theories have been discredited. What has been discredited is Friedman’s belief that monetary policy could be run on a purely automatic basis, by simply allowing the money supply to grow at a certain pace. It turns out the money supply is far too slippery a thing to measure accurately enough for such a policy.”

    How has this been discredited? He did say during wartime he would remove the policy. However the economy ran for 200 years on a fixed money supply in gold – which is incredible. Clearly, it would be better off running on an automatic system. Whether or not we have the methods to calculate money supply accurate doesn’t prove that he is wrong. It would just prove that we need a better way to estimate. But I don’t think he is wrong ,anyways, I think a system of increasing the money supply by the same rate as Real GDP to be even more genius today then when he proposed it.

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