Economist Arnold Kling writes:

In 1968, Milton Friedman was on the fringe of respectability. His Presidential Address to the American Economic Association in 1967 could not have been more defiant of the conventional wisdom. At that time, economists thought that the economy could be “fine tuned” by government to achieve any desirable unemployment rate, with a “trade-off” that allegedly involved accepting higher inflation. Inflation, in turn, could be curbed by government action to control, or at least influence, the price- and wage-setting decisions of private firms.

Friedman argued instead that there is a “natural rate” of unemployment to which the economy will tend, regardless of how government manipulates aggregate demand. He warned that attempts to use monetary and fiscal policy to drive the unemployment rate lower would only result in ever-accelerating rates of inflation. Moreover, he argued that the only cure for inflation was control over the rate of growth of the money supply.

In 1968, Friedman’s views were far from the mainstream. When Paul Samuelson wrote an article for the Canadian Journal of Economics on “What Classical and Neoclassical Economic Theory Really Was,” he sneered that for modern economists trying to understand monetarism was like being a farmer who had lost his jackass and having to ask, “If I were a jackass, where would I go?” In short, Samuelson considered Friedman a jackass.

About this time, “fine tuning” began to fail, and inflation started to rise, just as Friedman had predicted. In 1971, President Nixon tried the Conventional Wisdom and adopted wage and price controls. The results proved disastrous. Finally, in 1979, President Carter in desperation allowed a new Federal Reserve Chairman, Paul Volcker, to attempt the monetarist cure for inflation. The result was successful.

Today, it is Milton Friedman’s views that are conventional wisdom, and the 1960’s Keynesians who are the jackasses. For me, seeing this unfold (I was a freshman economics major when President Nixon tried wage-price controls in 1971, and I was a newly-minted Ph.D in economics working at the Fed in the early 1980’s) was a major life experience. Somehow, many liberal economists of my generation managed to forget they ever believed in wage-price controls and hang on to the rest of their Conventional Wisdom security blanket. But I also noticed the other ways in which the Conventional Wisdom failed to match reality.

The full article can be found here.