The economies of North America and Europe finally appear to be in the beginnings of a slow recovery, a coda to the worst global recession since the 1980s.

Even with the return to growth haltingly underway, however, economists and other pundits are already beginning to argue about the lessons learned.

Milton Friedman, considered an intellectual gunslinger by some, changed the way governments look at inflation. (Eddie Adams/Associated Press)

For some, the widespread financial turmoil marks the return of John Maynard Keynes to the forefront of economic policymaking.

His comeback is predicated on whether the massive stimulus Washington and most other nations injected into their economies was the critical factor in preventing the collapse of global trade and production.

Other experts attribute the imminent recovery of major economies to the buoyancy of industrial markets, which prevented a sharp, nine-month contraction from becoming a multi-year depression.

As policy makers scramble to dust off previously forgotten economic theories, however, one influential thinker whose formerly popular ideas are unlikely to regain any of their former following any time soon is the curmudgeony Milton Friedman.

Spent supernova

The acerbic economist from the University of Chicago, who died in 2006, became world-famous and won a Nobel in economics for his work on the monetary policy.

"It is very rare for an economist to wield such influence, directly and indirectly, not only on the direction of scientific research but also on actual policies," said the Nobel committee in giving Friedman the award back in 1976.

Indeed, his theory about how governments should handle inflation gained acolytes from prominent academics to world leaders such as U.K. Prime Minister Margaret Thatcher.

That, however, was 30 years ago.

Nowadays, no one is raising the so-called 'k-per cent rule' and Friedman's theory of money as the answer to the current day's economic woes.

In fact, as much as he breathed life into economics in the late 1960s and '70s, Friedman's notion of how to fix an ailing economy might have had its day in the sun.

"To an important extent, Friedman turned out to be wrong," said John McCallum, federal Liberal finance critic and former economics professor.

Arguing upstream

Most people who study the dismal science know Friedman as a fierce advocate of freer markets and one who bravely battled the prevailing wisdom about how to generate economic growth.

"He didn't believe that markets always worked best. It was, rather, that he believed that places where markets failed were atypical," wrote Obama adviser and economics professor Bradford DeLong in a 2006 tribute upon Friedman's death.

Former British prime minister Margaret Thatcher, seen here in 2008, was a key convert to monetarism when she was in power in the 1980s. (Sang Tan/Associated Press)

A sentiment that generally seems common sense now was radical 40 years ago.

At that time, many public policy types believed a government could control important economic variables — mainly inflation, or the rate of change of prices in an economy, and unemployment — by how much it spent or whether it raised or lowered taxes.

Back then, economists consulted the now-arcane Phillips curve, a graph that measured the tradeoff between national unemployment and inflation, in order to figure out how fast the country's gross domestic product could expand without dire economic consequences.

Friedman thought such graph-paper policy-making was nonsense and, instead came up with the notion that more government spending could only lead to higher prices, not more jobs.

The early 1970s was the era of stagflation, when prices rose coincidentally with unemployment, something thought impossible in the geometric world of the Phillips Curve.

Friedman's theory — by offering a plausible explanation of the higher unemployment and inflation — caught the attention of academics and politicians, especially conservative ones who had grown tired of clumsy government controls which appeared ineffective.

Friedman figured that governments should focus on stopping inflation and forget about stimulating the economy to create jobs.

Monetary breakthrough

Friedman's real contribution to government policy, however, was not the free-market emphasis but instead why prices rose in the first place.

Four decades ago, economists believed inflation was generated because too many people wanted too few goods or services.

Friedman shook his head at that thinking.

He figured the cause of inflation was pretty simple: too much money sloshing around the economy.

The Bank of Canada targeted growth in money supply to reduce inflation in the 1970s and 1980s. (Fred Chartrand/Canadian Press)

Governments, or more specifically central banks, caused prices to rise by letting the amount of paper money in circulation, plus near-cash bank accounts and similar financial instruments, climb faster than overall GDP growth rate, Friedman figured.

"If you kept pumping up the money supply, inflation goes up," said Peter Drake, a former bank economist who is currently vice-president of economic and retirement research for Fidelity Investments Canada.

Keep the growth of those variables under control and you can whip inflation, went Friedman's thinking.

So, he developed his "k rule." which basically stated that governments should keep the money supply growing at a constant rate every year.

In the 1960s, Friedman's small band of economists, known as "monetarists," focused on money indicators, which were given such unimaginative handles as M1 and M1+.

And, to a large extent, his idea worked.

Central banks abandoned their fixation with economic indicators that measured how demand and variables such as capacity utilization, rose and fell.

In their place, governments eyed monetary aggregates, in some cases, explicitly mandating these indicators to grow by a certain amount.

The Bank of Canada was one convert to monetary targets, with decent success.

National inflation, which averaged 2.5 per cent in the 1960s, had soared to an annual average of 7.2 per cent in the next decade.

By the 1990s, however, Canada's consumer price index was back down to 2.2 per cent.

These were happy days for monetarists and the zenith of Friedman's popularity.

End of the rainbow

Unfortunately, the same free market that killed the ability of government to fine-tune demand in the 1960s also murdered the chances that central banks could keep a grip on money growth 30 years later.

Banks' ability to devise new financial instruments spelled the end of central banks' power to control money supply. (CBC)

Starting in the 1980s, North American and European banks and near banks developed new financial instruments that mimicked conventional money but were not counted in official statistics.

Central bankers came up with new ways to measure new money, a development that only hurt the ability of central banks to control monetary growth.

For example, for the past 13 years, M1 growth, the most basic money measure that governments use, ranged between 2.3 per cent and 14.5 per cent without any perceptible change in Canada's inflation rate.

Recognizing the shifting world, the Bank of Canada began setting a target for inflation rather than the money supply, a sea change as far as economic theory was concerned.

In fact, the Bank of Canada's July 2009 monetary policy report does not contain any prominent reference to money supply growth at all, something unheard-of merely twenty years ago.

'The use of quantity of money as a target has not been a success.'—Milton Friedman

Even Friedman realized his money control theory might have outlived its usefulness by the turn of century.

"The use of quantity of money as a target has not been a success. I'm not sure I would as of today push it as hard as I once did," he told the Financial Times in a 2003 interview

Friedman's legacy

Still, economists conceded that Friedman was unlikely to become the conservative equivalent of Walt Rostow, a prominent U.S. economist during the presidency of John Kennedy but one who has all but disappeared from the modern psyche.

Friedman basically changed how governments view inflation and how they should try to solve that often vexing problem, Fidelity's Drake said.

"You can see threads of his thinking with (current Bank of Canada governor) Mark Carney," Drake said.

Just don't look for Carney or U.S. Federal Reserve Chairman Ben Bernanke to be poring over M1 statistics in the hope of figuring how best to get the Canadian and American economies back on track, others said.

"[For Friedman's theory to work], there has to be a stable relationship between some measure of money supply and inflation. And I don't think it's constant anymore," McCallum said.