Milton Friedman Got Another Big Idea Right

Long ago, people thought the business cycle was akin to a natural event, like the phases of the moon. That has since been disproven, but there are a number of other competing hypotheses. Many mainstream theories hold that recessions are the result of unpredictable events — changes in the rate of technological innovation, monetary policy or asset prices — that randomly speed the economy up or slow it down. Some alternative theories hold that booms cause busts, because good times allow bad investments to build up in the financial system. According to these theories, the larger the boom, the larger the crash that follows.

Then there’s the so-called plucking model. Proposed by the legendary economist Milton Friedman, it holds that the economy is like a string on a musical instrument — recessions are negative events that pull the string down, and after that it bounces back. Just as a string snaps back faster if you pull it harder, this theory holds that the deeper the recession, the faster the recovery that follows. But you can only pluck the economy in one direction; bigger expansions don’t lead to bigger recessions.