Milton Friedman

A concise guide to the ideas and influence of the free-market economist

Eamonn Butler

• Publisher: Harriman House
• Year: 2011
• ISBN:
  9780857191250
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftsgeschichte

"One of the most important economic thinkers of all time"- Paul KrugmanMilton Friedman changed the world. From free markets in China to the flat taxes of Eastern Europe, from the debate on drugs to interest rate policy, Friedman's skill for vivid argument and ideas led to robust and often successful challenges to a dizzying amount of received wisdom.Relying on big-picture economic analysis and an insistent faith in human freedom, he took on the economic and political orthodoxies of his day - and if he didn't always win, he never failed to change the terms of the debate.Rarely an uncontroversial figure, with his disciples and detractors to this day, this is neither a credulous nor a critical look at the Nobel laureate. A brand new guide, it simply sets out to explain his economic and public policy thinking in a straightforward and accessible way for the general reader and student.Find out: - how Friedman undermined Keynesianism and the prevailing wisdom of large-scale economic intervention- how he demonstrated the true cause of the Great Depression and identified its real culprits (they weren't the ones jumping out of the windows)- what Friedman believed really destroys the value of the money in your pocket and how it can be stopped- his arguments for why regulations and minimum- wage laws actually achieve lower standards and greater poverty- his reasons for why big corporations prefer markets that aren't free, and how high taxation harms the wealthy less than anyone else.With more, too, on democracy, equality, global trade, education, public services and financial crises, this is a concise but comprehensive guide to the influence of a key 20th century thinker. It is a must-read for anyone who wants to know more about the economist whose work changed everything.

Chapter 1. The Economist Who Changed Everything

“There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people.”

– Alan Greenspan, former chairman of the US Federal Reserve

Worldwide Influence

Alan Greenspan was right: the change in direction that has resulted from Milton Friedman’s powerfully original work is indeed remarkable. For most of Friedman’s career as a professional economist, from the 1930s to the 1980s, the world was dominated by the ideas of government planning, management and control. But at last a new set of ideas started to spread – Milton Friedman’s ideas of free markets, open trade, freedom and capitalism. Though these ideas remain controversial to many, they have become part of the everyday life of billions of the world’s citizens.

On the fall of the Berlin Wall and the ending of Soviet occupation in Eastern Europe, the small republic of Estonia embarked on a comprehensive reform programme that lifted the prosperity of its citizens to previously undreamed-of levels. Within a decade it had become the most internet-wired country in the world; state industries were privatised, business taxes were abolished, personal taxes were slashed, controls were swept away. Estonia became the Baltic Tiger, a model to which other ex-Soviet countries aspired.

Mart Laar, Estonia’s prime minister at the time (1992–94 and 1999–2002), explained the source of his radicalism as he received the 2006 Milton Friedman Prize for Advancing Liberty. In the Soviet era, Western economics books were unobtainable. The only one he could get hold of was Milton Friedman’s Free to Choose (1980). And luckily, he joked, he had none of the West’s mainstream economists around to assure him that these ideas could not possibly work. Facing 1,000% inflation, a 30% drop in the economy and 35% unemployment, he simply adopted Friedman’s ideas. They worked far better than anyone expected.

“Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

– Milton Friedman, Capitalism and Freedom, Preface to 1982 edition

The passing of the revolutionary communist Mao Zedong saw China opening up to Friedman’s economic thinking too. In 1980, just over a year after the reformist Deng Xiaoping became China’s ‘paramount leader’, Friedman was invited there to lecture on the use of market mechanisms within a planned economy. Today, China’s adoption of market mechanisms has seen it storming up the league table of world economies, and has improved the lives of hundreds of millions of its citizens.

Meanwhile, a billion people in India are enjoying another huge economic boost, following the country’s economic liberalisation of 1991, which ended price controls, cut taxes, abolished public monopolies and scrapped regulations. India’s free-market reforms made it one of the fastest-growing economies in the world, and brought its people rising literacy and life expectancy. The people of India and China may not realise it, commented Nobel economist Gary Becker, but “the person they are most indebted to for the improvement of their situation is Milton Friedman.”

On the other side of the world, Friedman’s influence can also be seen in Chile. After the military coup that ended the socialist government of Salvador Allende, Friedman accepted an invitation to lecture there on the merits of economic freedom; and he wrote to the military dictator, Augusto Pinochet, outlining a programme to end the country’s hyperinflation and establish a market economy. Pinochet promoted a number of young Chilean economists – dubbed the Chicago Boys – who had studied at the University of Chicago, where Friedman was a professor. They cut import tariffs, replaced the failing state pension system with one based on personal savings and accounts, privatised farms, stabilised the currency and liberalised the financial sector. Their reforms turned Chile’s economic crisis around, making it one of Latin America’s most thriving economies.

Ongoing impact

Today, in countries as diverse as Estonia, China, India and Chile, we can see the benefits of the economic prosperity and personal freedom that have followed the adoption of Friedman’s ideas. Alan Greenspan summed up Friedman’s legacy, saying that: “His impact is not only on the 20th century but on the 21st, and I suspect ongoing.”

Friedman was engaged in all the late 20th century’s most bitter but pivotal intellectual conflicts over the role of government in economic and social affairs. For most of that time, his views were very much in the minority. From the upheavals of the 1930s, through the New Deal, to the economic ‘fine-tuning’ and planning of the postwar years, a belief deepened that government activism in the economy was both essential and inevitable – a belief given credence by the writings of the time’s most prominent economist, John Maynard Keynes. Further afield, the Soviet Union was dominating Eastern Europe and exporting international socialism to Asia, Africa and Latin America, in an onslaught that seemed unstoppable.

Though it often seemed hopeless to resist these sweeping movements, Friedman joined the intellectual battle with enthusiasm. He relished a good argument, and took on even his sternest opponents in a characteristically cheerful manner – his common-sense, optimistic style winning him many supporters. A naturally brilliant teacher and communicator, he spoke to the wider public in popular books, magazine articles and interviews, and through a widely influential worldwide television series, Free to Choose. He was the world’s leading exponent of personal and economic freedom.

Friedman’s economic impact

Friedman won important battles in economic science, too. He is best known for his part in the fight against inflation, where his ideas were hugely successful. Through following the high-spending policies of Keynes and his followers, postwar governments had quickly found their finances getting out of control, their currencies losing their value and prices escalating. By the time the Berlin Wall fell in 1989, world inflation was a staggering 19% and rising. At that rate, prices double every five years.

“Inflation is a disease”, wrote Friedman: “a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society.” It could not be endured or safely traded off against other economic objectives like employment, as mainstream economists believed. He argued that there was a “natural rate” of unemployment, which reflected the realities of the labour market. When governments adopt high-spending policies to expand employment beyond this level, they succeed only in making things worse. Their policies raise inflation, which undermines the delicate workings of the market economy, and so causes more unemployment.

Friedman was blunt: the source of this disease could be explained in a single sentence – “Inflation is always and everywhere a monetary phenomenon.” To cure inflation, governments must take more care with money. It was a simple message from a brilliant communicator that eventually the world came to understand. As more and more governments adopted Friedman’s advice, world inflation plummeted, from a peak of nearly 29% in 1994 to just over 3% a decade later. With that came a significant rise in peace and prosperity. And most of the credit belongs to Milton Friedman.

The Making of an Economist

Though a staunch defender of free-market capitalism, Friedman came from a poor background. He was born in Brooklyn, New York, in 1912, to Hungarian Jewish immigrant parents. His father traded goods and took work as he could get it, while his mother sewed garments in a New York sweatshop. Some 68 years later, Friedman would take his Free to Choose television audience to exactly the same sort of workshop – this time in Hong Kong – to make the point that, while the pay and conditions might be poor, such places gave unskilled and often unloved immigrants their first step onto the ladder of self-improvement.

“My mother came to this country when she was 14 years old. She worked in a sweatshop as a seamstress, and it was only because there was such a sweatshop in which she could get a job that she was able to come to the US. But she didn’t stay in the sweatshop and neither did most of the others. It was a way station for them, and a far better one than anything available to them in the old country. And she never thought it was anything else. I must say that I find it slightly revolting that people sneer at a system that’s made it possible for them to sneer at it.”

– Milton Friedman, Playboy interview (1973)

From this foothold, the Friedmans were eventually able to move to a new home, 20 miles from New York, where they lived over the dry-goods store that his mother now ran while his father worked in New York. In Friedman’s early years, the family never earned enough to be above what today would be considered the poverty line; but through hard work they improved their lives.

Perhaps significantly for his subsequent career, Friedman’s parents spoke English, not their native Hungarian, in the home. Milton entered school earlier than most other children, and was a voracious reader. At 16, he won a scholarship to study mathematics at Rutgers University. And in addition to what he learnt in class, Rutgers also taught him something about the market. Freshmen at Rutgers were expected to wear green neckties: Friedman and a friend made some money by buying up a stock of these ties and selling them door to door. The next year they did a deal with Barnes & Noble to buy their classmates’ used textbooks and supply new ones.

But the big intellectual issue of the time was the stock market crash of 1929 and the Depression that followed it. Two of Friedman’s professors, Arthur Burns and Homer Jones, passed on to him their enthusiasm for how economics might explain these events and prevent them happening again. So Friedman turned to the study of economics.

He entered graduate classes at the University of Chicago, under the tutelage of the economists Jacob Viner, Frank Knight and Henry Simons – founders of what subsequently became known as the Chicago School of Economics, which was critical of the prevailing faith in government economic management. It was at Chicago that Friedman met his future wife, Rose Director, with whom he wrote a number of radical books on public policy, and who provided constructive criticism of nearly all of his professional economics works.

Friedman graduated in 1933, at the dawn of Roosevelt’s New Deal, with its large-scale public works projects aimed at creating new jobs, and high import tariffs aimed at preserving existing ones. Roosevelt’s expanding government was sucking in talented economists, and soon Friedman became one of them, joining the National Resources Committee in Washington. His research there on consumer behaviour gave him insights that would subsequently enable him to challenge Keynes himself.

The wartime Keynesian

Yet at this time, Friedman was – like everyone – a Keynesian. After a short teaching stint and a period at the National Bureau of Economic Research doing research with Simon Kuznets on professional incomes, Friedman returned to Washington in 1942 to undertake wartime work on tax policy for the US Treasury. He even worked on Keynes’s idea of raising taxes to combat inflation, testified to Congress in support of it, and co-authored a 1943 paper on the subject, Taxing to Prevent Inflation.

Years later, Friedman would come to support almost any cut in taxes, famously rejecting the notion that tax rises could affect inflation: only changes in the supply of money, he insisted, could do that. But he had yet to develop these groundbreaking ideas: indeed, he never even mentioned money in his 1942 testimony.

“I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”

– Milton Friedman, interview with John Hawkins (2003)

Friedman spent the rest of the Second World War in Columbia University’s Statistical Research Group, where he and colleagues developed a statistical technique known as sequential analysis. It still remains one of the key tools in quality control experiments, such as the clinical trials of new pharmaceuticals. Only after the war did he begin to strike out as a radical and controversial economic thinker.

The emerging radical

Milton Friedman was scarcely five feet tall. His friend George Stigler was over a foot taller. They acquired ironic nicknames: Mr Macro (Friedman, whose field was macroeconomics, the overall workings of the economy) and Mr Micro (Stigler, who specialised in microeconomics, the behaviour of individual consumers and households). In 1945, Stigler swung Friedman a job at the University of Minnesota, where they collaborated on the pamphlet Roofs or Ceilings?, a pungent repudiation of rent controls. This wartime measure, they argued, had perverse results. By keeping rents down, it made landlords less willing to rent out and maintain their property, reducing both the supply and the quality of accommodation.

Economists and politicians considered the pamphlet an uncouth assault on their ability to shape and regulate markets through government action. It was a rude insult to the mood of the times. But it marked the birth of Milton Friedman the free-market economist; and it would be Friedman’s ideas that, albeit much later, would ultimately prevail.

The same year, Friedman published Income from Independent Professional Practice, co-authored with Simon Kuznets, outlining the work they had done at the National Bureau of Economic Research. It is a dense statistical work of 600 pages, but it makes a strong public policy argument that Friedman the political radical would come back to again and again. It showed that the chief beneficiaries from occupational licensure – official regulation of professions such as doctors, dentists, lawyers, accountants and engineers – are the professionals themselves, rather than the public whom this measure is supposed to protect. Because regulation restricts competition, the public end up paying higher fees for a poorer service.

The Chicago economist

Friedman’s career at Minnesota was cut short by th...