He had a double-barreled approach. He was a respected scholar who ingeniously sought to prove his views with empirical and statistical research. These views were largely anti-Keynesian. John Maynard Keynes preached that government spending could ward off recession or at least ameliorate their impact. Friedman argued there was little to do but maintain a regularly growing money supply.

There is a direct line from Milton Friedman's ascendancy in the 1970s to the debacle on Wall Street today. Friedman had been working his brand of economic ideology roughly since the late 1940s and early 1950s, but he did not strike gold with mainstream economists and the public until the hyper-inflation of the 1970s.

This marks, at last, the end of the Age of Friedman. And not too soon.

The End of the Age of Milton Friedman, by Jeff Madrick : The Bush administration has thrown in the towel on the long battle begun in the 1970s to minimize government oversight of the economy. In light of the credit crisis, it now wants to regulate Wall Street. Treasury Secretary Paulson has put to together broad set of reforms, not truly effectual, but a serious start.

But Friedman's monetarism was discarded long ago -- officially by the Federal Reserve in 1984. They worry about interest rates now... And, in fact, traditional Keynesian stimulus has made a big comeback. The conservative Bush clambered to get aboard a Keynesian fiscal stimulus package initiated by the House Democrats in December. The second barrel was Friedman's articulate popular policy writings. What did remain of Friedman's philosophy ... was his deeply held, well-articulated and simplistic view that government regulation was almost always bad for us. Competition was the great disciplinarian of market excess, wrote Friedman, obeying such predecessors as Friedrich van Hayek... By 1999, even Bill Clinton and many a Congressional Democrat fully supported the elimination of key financial regulations established in the New Deal. As night follows day, what happened was a return of the excesses of the 1920s. Competition is not enough to ward off excesses. Free floating prices do not automatically stabilize economies. Financial markets in particular encourage excess naturally, a point made by the more profound economist, Hyman Minsky. Friedman's followers will seldom admit that much of his public policy was not supported by genuine empirical research, unlike his monetarism. ... In my view, the empirics never supported the stronger propositions he made. But in the area of public policy, it was largely ideology. It was mostly an exaggerated application of Adam Smith's invisible hand: we would all be better off if we just maximize our profits. Why did Friedman's views become popular? As he himself conceded, crisis in the 1970s demanded a new set of ideas. Crisis in the 2000s is now demanding a return to greater realism. Will the nation overshoot, as it did with Friedman's ideological deregulation? Not likely. The powerful vested interests are around to keep government regulators in check. The Bush administration proposals reflect that; they are weak. And though the Democrats are on the case, it is most likely the nation will not do enough. But if the demise of simplistic Friedmanite ideology is now upon us, at least this crisis has had one silver lining. ...

A couple of comments. As I noted in this post, over the last several decades there was a general feeling among economists that, whenever possible, we should loosen regulations on markets. Friedman had something to do with that, but the idea predates him. However, contrary to claims above and elsewhere, I don't think the changes to the Glass-Steagall act under Clinton can be cited as a cause of the subprime crisis. The breakdown of the barrier between commercial and investment banking is not what led to the problems we are seeing now. The changes that were enacted reflected the general attitude toward regulation of the financial industry and regulation more generally -- there was a belief that it was time to loosen the strings and let competition work its wonders in terms of lower prices, increased quantities, and more robust innovation. Many pointed to all of the new financial products as evidence of how well deregulation of the financial sector was working (and while not all of the innovation was beneficial, the current crisis shows that, there were a lot of changes that came about as a result of deregulation that helped the typical household).

I also disagree that there is no empirical evidence to support Friedman's position. The article talks about Friedman's opposition to regulation, but he was opposed to government intervention generally, both through regulation and through monetary and fiscal policy intended to stabilize the economy. With respect to regulation, there are who knows how many papers discussing the welfare costs of regulation of financial markets, and if you broaden the discussion to all markets, there has been a substantial amount of work on this topic (e.g. think of Glaeser's work on regulation as one tiny slice of the entire body of work). Within that body of work, it is certainly possible to find support for Friedman's idea that regulation can inhibit market performance. As to government intervention to stabilize the macroeconomy, the Barro papers in the 1970s showing that only unanticipated money can affect GDP, and the large body of associated work, certainly supported Friedman. This work was very influential, and there were similar papers on Ricardian equivalence and the like showing that fiscal policy did not have much power to affect the macroeconomy (there are also papers on the other side of each debate and the idea that policy does affect the macroeconomy is now widely held).

As for whether markets stabilize themselves, it depends upon what you mean by stabilize. If we do nothing and markets crash leading to a big recession, the economy will eventually recover on its own. It might be in the long-run when "we are all dead," but I don't think many people believe we would be permanently crippled if we failed to intervene (beyond the legal and institutional structure required to support a market economy). The question is not if markets stabilize themselves - given enough time they do - the question is whether government intervention can make the adjustment less painful.

Stabilizing markets does not always mean shortening cycles. If the economy is about to crash and displace workers faster than they can be reabsorbed in other sectors - a worry in the present situation - that is less preferred to a somewhat slower adjustment where displaced resources can be quickly reabsorbed elsewhere. The sponge (moving resources elsewhere) can only sop up so much excess at a time, and sometimes it's necessary to smooth the adjustment over a longer time period to prevent the build up of idle resources. You don't want to force adjustment that is faster than the economy can handle in terms of making the appropriate transformations.

Conversely, the government should also try to shorten cycles. Continuing with the same example, the government can try to enhance the absorption rate. Retraining, tax breaks for moving, tax breaks that stimulate hiring in other sectors, government spending that creates employment opportunities, there are all sorts of ways the government can make the sponge absorb more excess in a given time period.

To me, stabilizing the economy means allowing the economy to make the structural changes it needs to make with the least amount of pain possible. Sometimes that requires speeding up the process so that excesses are sopped up faster, and sometimes that means slowing down the process so that resources aren't displaced only to sit idle while waiting to move to where they are needed. Monetary and fiscal policy are useful here, but regulation can help too by preventing conditions that lead to instabilities, and by creating conditions that facilitate smooth adjustment.

Markets will adjust on their own given enough time, they are not unstable in that sense, and there are two views out there. There are those, like me, who believe that government can make the adjustment process less painful through regulation and active intervention, and those who believe the economy is best left to make adjustments on its own, any intervention just makes things worse.

I agree with the article that the belief in the wonders of free markets, brought about in part by Friedman's advocacy, led to a general belief that deregulation was best, and that in following that prescription economists forgot some of the lessons of the Great Depression, the S&L crisis, and other financial meltdowns around the world. I hope we have relearned that markets can have meltdowns when substantial market failures are present - financial markets are particularly problematic - and that cyclical fluctuations are still a worry. Both things that Friedman opposed, regulation and government intervention to stabilize the economy, can be used to prevent market excesses that lead to costly adjustment as they are corrected, and to minimize the costs of adjustment to structural and cyclical changes in the economy.

Too much regulation stifles markets, and too little regulation can also be a problem. The same is true about monetary and fiscal policy, both tools can be over- or under-utilized, or used inappropriately. As I noted here, my bias is clearly toward letting markets work on their own to the extent possible. Like Friedman and most other economists, I think markets do have desirable properties and solve allocation problems better than other systems we have tried (which is not to say the market system is perfect at this task). But markets don't always perform optimally, and we shouldn't hesitate to impose regulation or use monetary and fiscal policy when they are needed.

Update: A follow-up:

A Fresh Look at the Apostle of Free Markets, by Peter S. Goodman, NY Times: Joblessness is growing. Millions of homes are sliding into foreclosure. The financial system continues to choke on the toxic leftovers of the mortgage crisis. The downward spiral of the economy is challenging a notion that has underpinned American economic policy for a quarter-century — the idea that prosperity springs from markets left free of government interference. The modern-day godfather of that credo was Milton Friedman, who attributed the worst economic unraveling in American history to regulators, declaring in a 1976 essay that “the Great Depression was produced by government mismanagement.” Five years later, Ronald Reagan entered the White House, elevating Mr. Friedman’s laissez-faire ideals into a veritable set of commandments. Taxes were cut, regulations slashed and public industries sold into private hands, all in the name of clearing government from the path to riches. As the economy expanded and inflation abated, Mr. Friedman played the role of chief evangelist in the mission to let loose the animal instincts of the market. But with market forces now seemingly gone feral, disenchantment with regulation has given way to demands for fresh oversight, placing Mr. Friedman’s intellectual legacy under fresh scrutiny. Just as the Depression remade government’s role in economic life, ... the current downturn has altered the balance. As Wall Street, Main Street and Pennsylvania Avenue seethe with recriminations, a bipartisan chorus has decided that unfettered markets are in need of fettering. Bailouts, stimulus spending and regulations dominate the conversation. In short, the nation steeped in the thinking of a man who blamed government for the Depression now beseeches government to lift it to safety. ... “What Milton Friedman said was that government should not interfere,” said Allen Sinai, chief global economist for Decision Economics Inc., a consulting group. “It didn’t work. We now are looking at one of the greatest real estate busts of all time. The free market is not geared to take care of the casualties, because there’s no profit motive. There’s no market incentive to deal with the unemployed or those who have lost their homes.” Mr. Friedman['s] ... intellectual bent was forged as a graduate student at the University of Chicago, a base for those who saw themselves as guardians of classical economics in a world then under the spell of woolly-headed revisionists. The chief object of their scorn was John Maynard Keynes, and his message that government had to juice the economy with spending during times of duress. ... So firm was his regard for market forces, so deep his disdain for government, that Mr. Friedman once said: “If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.” ... Among professional economists, Mr. Friedman’s analytical mastery was near-universally admired. ... But the reviews for Mr. Friedman’s work grow mixed when the subject moves to his role as chief proselytizer in the drive to reduce the role of government in public life. He laid out a blueprint in his 1962 book, “Capitalism and Freedom,” calling for the end of the military draft, the abolition of the licensing of doctors and the creation of “education vouchers” that parents could use to send children to private schools, injecting competition into public education. Two years later, Mr. Friedman put those principles to work as an economic adviser to the presidential campaign of Senator Barry Goldwater, a Republican from Arizona. The campaign called for the abolition of government oversight of the energy, telephone and airline industries and the dismantling of the Social Security system and national parks. Mr. Goldwater took a drubbing at the hands of Lyndon Johnson. Mr. Friedman would remain in the policy wilderness until the rise of President Reagan. Then, his notions about rolling back government took on the force of dogma. ... In the United States, the reconsideration of the Friedman doctrine came via the global financial crisis that has resulted from the collapse of American real estate. Many economists blame regulators for ignoring warning signs that banks and investors were growing reckless. One Friedman acolyte has taken the brunt of such criticisms — Alan Greenspan, the former chairman of the Federal Reserve. But as America reaches for regulation to tame the markets, the keepers of the Friedman flame remain resolute that government is no solution. “Friedman taught some fundamental long-run truths and he was adept and skilled and almost brilliant at getting them into the public domain,” said Allan H. Meltzer, an economist at Carnegie Mellon. “Now we’ve come into a crisis that has dampened enthusiasm for those policies, and we’re headed back into a period of more regulations that will do the same bad things as in the past.”

Paul Krugman and Brad DeLong discuss this article, though I cut the part Krugman discusses since I thought it was misleading (at best).