Home > Economics - General > Milton Friedman: a brief appreciation

Milton Friedman: a brief appreciation

November 18th, 2006

Milton Friedman has died at the age of 94. He made some huge contributions to macroeconomics, notably including his permanent income theory of consumption, which paved the way for the modern life cycle theory and his work on expectations and the Phillips curve.

He was also the most effective advocate for free-market policies since Adam Smith. As has been said several times over at Crooked Timber recently, everyone, and particularly everyone with a leftwing view of the world, should read Capitalism and Freedom at least once. As Mill said, beliefs you hold merely because you haven’t been exposed to the strongest possible critique of those views, aren’t really well-founded. Certainly, my own views were changed in some respects by exposure to Friedman, and where they were not, I was forced to reconsider the basis for my positions.

Friedman was effective in part because he was obviously a person of goodwill. I never had the feeling with him, as with many writers in the free-market line, that he was promoting cynical selfishness, or pushing the interests of business. He genuinely believed that economics was about making people’s lives better and that disagreements among economists were about means rather than ends and could ultimately be resolved by careful attention to the evidence.

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  1. melanie
    November 18th, 2006 at 11:08 | #1

    Well, it took the people of Chile and Britain a long time to recover from the policies perpetrated in his name. But I suppose he would say that was caused by something else.

    The BBC replayed an interview the other day in which he dismissed the concern expressed by the interviewer about the misery inflicted by his ideas, in the hands of Thatcher, with a casual and very aggressively delivered assertion that there was no misery in the US (I don’t know whether it is true or not, but it wasn’t the point). He was no social democrat! And since when have good intentions ever absolved people from crimes against humanity?

  2. brian
    November 18th, 2006 at 13:20 | #2

    Friedman’s close links with the Pinochet regime,which he advised in the early years,makes him an accomplice to the crimes of Pinochet ,as well as those of Thatcher.
    Pinochet is now under house arest in Santiago. What a shame there is no international Tribunal for trying economists,who i their own way inflict misery and pain on millions of innocent victims too
    Dante didn’t know about ecomomists but perhaps there is a special circle of hell for their really bad ones like Friedman !

  3. November 18th, 2006 at 13:22 | #3

    What crimes did Thatcher commit?

  4. November 18th, 2006 at 14:12 | #4

    In what sense is Friedman responsible for the crimes carried out by the Pinochet regime in Chile? Did he advise the regime to commit the crimes? Did he help them commit the crimes? Did he praise them for committing the crimes? As far as I am aware, the answer to each of these questions is no. The only thing he is guilty of is trying to help the Chilean population by providing advice on how they might solve the problem of inflation. This is perhaps best captured by the following extract from a post by Greg Mankiw at his own blog:

    “Friedman was–and is–unrepentant. Of course, he did not endorse the dictatorship. But, he wrote, “I do not regard it evil for an economist to render technical economic advice to the Chilean government to help end the plague of inflation, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean government to end a medical plague.” He also notes that years later, when he offered similar economic advice to China, there were no similar protests, even though the left-wing Chinese dictators were no less oppressive than Pinochet.”

    The entire post can be found at the following website:

    http://gregmankiw.blogspot.com/2006/11/milton-friedman.html .

  5. melanie
    November 18th, 2006 at 17:30 | #5

    Mankiw’s statement is naive. Any economist who thinks their advice is merely technical is naive.

  6. November 18th, 2006 at 18:21 | #6

    Actually the term technical seems to have been Friedmans. It is the quote within the quote that was rendered by Damien:-

    “I do not regard it evil for an economist to render technical economic advice to the Chilean government to help end the plague of inflation, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean government to end a medical plague.â€?

    Giving advice to Pinochet to help bring an end to inflation is nothing like giving advice to Hitler on how to build gas ovens. I have no problem with his remark.

    However an economist can render advice that is flawed and ineffective or even counter productive and if so then they deserve to be taken to task. I don’t agree with Friedmans monetary advice from that era. Even he remarked a few years ago that he had been essentially wrong in this regard. Still this is a technical failing not an ethical failing.

  7. James Farrell
    November 18th, 2006 at 21:21 | #7

    …he was obviously a person of goodwill. I never had the feeling with him, as with many writers in the free-market line, that he was promoting cynical selfishness, or pushing the interests of business

    .

    No, but was still a fanatic and egomaniac, which can get in the way of progress. Joan Robinson said of Keynes in one of her reminiscinces that he was free of the vice of wanting to have been right. Even in Keynes’s case this was was probably too generous; but one suspects that particular vice had Friedman well and truly in its grip.

  8. Tam o’Shanter
    November 18th, 2006 at 21:43 | #8

    This encyclopedic and even-handed survey of the evidence on global warming
    is a welcome corrective to the raging hysteria about the alleged dangers of
    global warming. Moore demonstrates conclusively that global warming is more
    likely to benefit than to harm the general public.
    –Milton Friedman on T.G. Moore’s Climate of Fear, 1998

  9. Tam o’Shanter
    November 18th, 2006 at 21:56 | #9

    Just to be helpful, here is an outline of Moore’s book so strongly endorsed by St Milton (Stern & JQ please note):
    Conventional wisdom says that global warming is a serious problem. While many people believe the answer to that problem is stringent government regulation — regulation that would lower productivity and standards of living around the world — Thomas Gale Moore asks, “So what?”

    In Climate of Fear: Why We Shouldn’t Worry About Global Warming, Moore argues that in this case, as in so many others, conventional wisdom is wrong. If global warming were to occur, it would not be the disaster that many doomsayers have predicted. Instead, most people would actually benefit from the slightly higher temperatures it would produce.

    Moore shows that two periods in history that were warmer than today were not characterized by economic and social stagnation. Instead, mankind flourished. He demonstrates that increased carbon dioxide emissions, coupled with warmer autumns and winters, would boost agricultural production, reduce heating costs, improve transportation, and cut fatalities. And he asks, why should we complain about a four- or five-degree increase in temperature when most people prefer to live in warmer climates, and millions have moved and changed jobs in order to do so?

  10. melanie
    November 19th, 2006 at 08:30 | #10

    “careful attention to the evidence”

    I don’t think this ever got in Friedman’s way.

  11. Tam o’Shanter
    November 19th, 2006 at 11:53 | #11

    Melanie: you are wrong. Friedman was one of the most empirical of all economists, see his work on the consumption function and on money supply. Ironically his most precise policy recommendations (mechanistic dtermination of money supply growth rates) all failed, and his final policy stance was essentially Keynesian (as was his work on the consumption function); as a result today we have stricter limits on money supply growth than he proposed and a broadly Keynesian fiscal policy.

  12. Tam o’Shanter
    November 19th, 2006 at 12:14 | #12

    Confirmation of my last point: Prof. Robert Solow of M.I.T., a Nobel laureate himself, and other liberal economists continued to raise questions about Mr. Friedman’s theories: Did not President Reagan, and by extension Professor Friedman, they asked, revert to Keynesianism once in power?

    “The boom that lasted from 1982 to 1990 was engineered by the Reagan administration in a straightforward Keynesian way by rising spending and lowered taxes, a classic case of an expansionary budget deficit,� Mr. Solow said.
    (New York Times obit.)

  13. melanie
    November 19th, 2006 at 13:34 | #13

    Well Tim(Tam), I was in the UK while those policies were being applied by Thatcher. Friedman used to write regularly to the Times, endlessly reasserting his point against all kinds of argument and empirical evidence from other economists, as well as evidence that, for large numbers of Britons, things were getting worse rather than better.

    Being an ‘empirical’ economist doesn’t mean that you don’t ignore evidence that stares you in the face. You just select the evidence you want. Remember the saying about lies and statistics?

    Actually, the BBC replayed an old interview with him. The interviewer, asking about all the misery his policies had caused, was dismissed by an aggressive ‘what misery? there was no misery in the US’. As you demonstrated in #12, that is precisely where his theory was not applied.

  14. rog
    November 19th, 2006 at 14:30 | #14

    Thatcherism turned ‘the sick man of Europe’ to the success that the UK is today, a few tears were shed by those whose beliefs were shaken but it is generally accepted that economically Thatcher snatched the UK from the jaws of ruin.

  15. melanie
    November 19th, 2006 at 15:13 | #15

    Yes rog and Pinochet/Friedman turned Chile into the success it is today. But the US, where the theory was not applied, managed with much less pain – in a shorter time frame.

  16. Shiraz Socialist
    November 19th, 2006 at 15:57 | #16

    Economics, evidence, statistics, lies.

    Ross Gittins in the SMH on Saturday 18/11 had it right in my view.

    ” … monetarism was wrong and didn’t work. It was a theory built on assumptions that didn’t hold. ‘Money’ was something that was hard to define and measure in practice. The assumption that the central banks could control the supply of money was mistaken.”

    My personal revelation was that when money was targeted, or at least considered as an indicator of something, the regulated_or_not financial system worked its way around the problem by innovation or sidestep. Whatever assumed link between money growth, inflation and real activity could never be borne out by the statistics, because the formal measures were at least one step behind the market. Money Base, M1, M2, M3, broad money, “L” and…. now more faith is put in credit aggregates.

    Even those have to evolve to keep up with innovation. Gearing into private equity is proving difficult to measure….

  17. November 19th, 2006 at 21:10 | #17

    Friedman was essentially right on money. To keep inflation under to control you have to keep money supply under control. He was wrong to want a fixed money supply growth rate, but that was incidental to the main points he was making about the Phillips curve being wrong and inflation being a monetary phenomenon.

    Of course, Friedman holds no blame for giving his monetary advice to anybody who asked, whether democratically elected or not. The anti-Friedman ideologues have failed to answer the hypotheticals asked by Jason — http://catallaxyfiles.com/?p=2108

    It is nice that JQ recognises Friedman’s goodwill. On the same note it is interesting to see that Friedman held the same view for most left-wing economics and policy thinkers. He dedicated “Free to Choose” to the left.

  18. November 20th, 2006 at 02:12 | #18

    Friedman, unlike his critic, Brian ? above, was not morally perfect. Brian will pass without notice.

  19. November 20th, 2006 at 06:37 | #19

    JH,

    How can you say that a fixed rate of money growth was merely incidental to what monetarism was abount? I think this is an appaling revision of history.

    Yes Friedman was right that inflation was a monetary phenomena with too much money chasing too few goods. However this was nothing new and had been well understood by classical economists and even old Keynes accepted it (but thought you should try and trick the masses for their own good in the short term). The difference with Friedman was that he proposed money quantity measures as the appropriate target day to day for open market operations. It is what set monetarism apart from the broader field of ideas. And it was a horid failure.

    Regards,
    Terje.

  20. El Poppin
    November 20th, 2006 at 07:50 | #20

    Me thinks that too much influence is attributed to economists as to the real working of the economy. Was Friedman guilty of collaborating with Pinochet? Yes he was and that remains a stain on his character. Was he guilty of the suffering? No. Chile was and is a poor country. Ten years ago I asked my cousin (a former deputy president of the chamber of commerce) how many people were not guranteed a meal a day and in his estimate the figure was about 5%. This supposedly after a “successful” economic transition. Were the figures the same prior to the military coup? probably. The social upheavals witnessed in third world countries is due to extreme poverty and with almost no way to get out of it. Will free trade help? No. Some areas in the world are too poor in evry sense of the word – poor to mediocre soil and lack of reliable water supply means that agriculture will never be anything other than subsistance, lack of minerals and other natural resources do not provide a means of earning an income, and lack of people means that manufacturing and services can never take root. Yet people still ‘live’ there. They are poor and will remain poor. Move to teh capital? they become homeless and destitute subsisting on crime and begging – try living there for a year. Did Friedman have an answer for this? No, and as far as I am aware no one seems to. At the other end of course things are very different although boasting about living with security guards and gated communities struck me as ironic for they are now living in a prison of their own making.
    I think that Friedman remains an intellectual giant and that he did provide insights. however at the end of the day he was an economist no more, no less. And national economics still remain a mystery.

  21. November 20th, 2006 at 08:10 | #21

    El Poppin,

    I disagree. Poverty has very little to do with physical resources and lots to do with social structures and governance. Africa has some of the poorest people on Earth and yet it is sparcely populated (compared to Wester Europe) has an abundence of mineral resources and lots of very fertile land. With the right policies and leadership it could be a very prospereous place. Poverty is very much a solevable problem which is why it is such a horendous tragedy. If you doubt this then take a considered look at asia over the last 30 years.

    Regards,
    Terje.

  22. melanie
    November 20th, 2006 at 09:44 | #22

    Technical advice has human and social consequences and the risks have to be taken into account. I don’t blame the architects of the World Trade Centre for failing to take account of what would happen if a passenger jet hit them. Nobody could have predicted it and they were otherwise very successful buildings. But I do think Friedman has an ethical problem with failing to take account of the consequences of his economic advice – which were clearly predictable to many people to whom he was unwilling to listen. His ‘technical advice’ was more akin to the doctor who goes to cure an epidemic, but gives the medicine only to half the affected population since the rest aren’t worth saving.

    The problem is that to apply this kind of advice you require a fairly repressive regime – depending on the extent to which people are going to resist having their lives torn apart, as well as their capacity to resist.

    The Thatcher years were quite unsuccessful, despite (or because of) the pain. At the end of the 1980s, while the rest of Europe had got inflation well under control, Britain had not. The rest of Europe had reduced unemployment, Britain had not, productivity growth remained on its trend line since 1960, etc. Parts of Britain have never recovered, while those that did well under Thatcher have boomed and others have managed to pull themselves back up – perhaps with the aid of New Labour. All she really achieved was to destroy the bargaining power of the unions, so British workers remain less skilled and work longer hours than their European counterparts (and the railways are still a disasater).

  23. November 20th, 2006 at 10:03 | #23

    His ‘technical advice’ was more akin to the doctor who goes to cure an epidemic, but gives the medicine only to half the affected population since the rest aren’t worth saving.

    I think that for most economic remedies it is more like a doctor that goes to cure an epidemic and knows that the medicine will kill a percentage of people that receive it. It is then a case of balancing risk and involves a question of disclosure. I support public vaccination against various diseases, however I accept that for a small number of people the consequence of vaccination will be quite dire.

    I think Friedmans monetary medicine was a pretty awful brew. It’s main merit was that it was less awful than some of the other brew being offered at the time. Their were Keynesians at the time pushing the idea that fiscal policy was the correct tool with which to control inflation and that all that was required was higher taxes. Given a limited choice between two such awful brews I’d take the Friedman brand because it would offer the least harm.

  24. November 20th, 2006 at 11:36 | #24

    John, a very good comment. It is no coincidence that the most prosperous countries on the planet have listened to him. Many also seem to overlook the fact that he was not a conservative. After all this is a man who advocated drug legalisation and did an interview in Playboy in 1973 on personal freedom.

  25. November 20th, 2006 at 11:52 | #25

    Was it El Poppin who said that free trade won’t help the poor of the world?

    http://www.iie.com/publications/newsreleases/newsrelease.cfm?id=77

    Headline: World Economy Could Gain $600 Billion from Reducing Global Price Differences

    Excerpt:

    “The world economy could gain $600 billion in annual income if price differences across the globe could be reduced to the level of differences that now exists within the United States, according to a speculative new study by the Institute. The poorest countries would experience a 20 percent rise in their standards of living, the longest relative gain of any grouping. These gains could be achieved by further reductions of trade and investment barriers, reforms of internal policy distribution, and continued exploitation of declines in global transportation and communication costs.”

    As for Friedman: he did the right thing. Democracy arises out of wealthier societies, and he did no harm in trying to imrove the living standards of the Chileans. His position on money in the final years was almost free-banking and “Austrian” though in the past he had prescribed Keynesian policies to Japan etc. The permament income hypothesis and negative income tax have and should have changed the direction of public policy.

  26. November 20th, 2006 at 11:53 | #26

    It is no coincidence that the most prosperous countries on the planet have listened to him.

    I don’t know of any nation that uses his advice on monetary policy. And the size of the tax take in most nations is larger now than it was in his heyday. So in what regard do you think any nation has listened to him?

  27. El Poppin
    November 20th, 2006 at 12:06 | #27

    Terje,
    I did say some areas – I did not refer to whole continents, thus in Africa Cape Verde will most likely be poorer than some of the other countries (likewise Mauritania) on that continent. I do agree that proper policies and institutions the worst cases of poverty should not exist. However there is always the tension that policies that take 10 years to bear fruit will ‘fail’ politically and be terminated – Ecuador this decade is a fine example (admittedly their institutions are very weak). With respect to Friedman and Chile, I was trying to say that he should not be held responsible for the human rights violation, the misery that his policies caused should have been eased by a proper political discourse (at their worst the official unemployment rate was 27.8% and everyone was heading for the personal bankruptcy courts) however he remains a very good scholar whose work should be read. It is the political process that blunts the edges of the theorical.

  28. November 20th, 2006 at 12:55 | #28

    Thankyou for your qualification. I am not sure that a policy that takes 10 years of pain before delivering any benefit is the right policy. Most poor nations have a list of policy reforms that would cause no pain but would improve things immediately. For instance the obsessive levels of taxation on ethiopian farmers are good for nobody. Taxing farmers at a marginal rate of nearly 90% for producing above average amounts of food is dumb in a country that periodically starves. There are many instances of disfunctional policy such as this. Policies that don’t do anything positive or useful.

  29. November 20th, 2006 at 13:54 | #29

    Terje,
    I think one way to look at monetarism is that it picked the disease correctly but advocated the wrong cure. Keynesianism, as practiced through the 60s and 70s, had both the disease and the cure wrong.
    The fact that Friedman had the cure wrong at the time should not detract from the fact that he got the diagnosis right – ahead of the vast majority of other economists operating at the time.

  30. November 20th, 2006 at 14:03 | #30

    Terje — perhaps the money-growth rule took up a lot of time at the start, but it makes up a very small part of the monetarist revolution and it makes up a small part of the history of the monetarist movement as taught in universities. If you’re appalled by the re-writing I suggest you would have a heart-attack if you studied monetary economics. The issue is hardly worth a footnote in a four year degree.

    As taught in economics, the primary issue in the monetarist v keynesian debate was about the effectiveness of monetary v fiscal policy, the Phillips curve and whether inflation was a monetary phenomenon. I think the monetarists were correct on all of these vital areas.

    What monetarists wanted was to keep money supply stable to stop inflation. If the initial monetarists were wrong on which rule to use to keep the money stable, this is incidental to their central thesis. They changed tack soon enough.

    True, the monetarist ideas were not new. They existed with the classical economists, but at the time Friedman was writing you could count the number of classical economists left on one badly deformed hand. What set monetarism apart was that they directly challenged the prevailing orthodoxy of the time that (1) inflation was not about money (2) fiscal policy worked and monetary policy didn’t (3) you could trade off between employment & inflation.

    This is pretty standard history of economics and I don’t know where you could go to learn your version of history at university.

  31. November 20th, 2006 at 16:40 | #31

    Keynesianism, as practiced through the 60s and 70s, had both the disease and the cure wrong. The fact that Friedman had the cure wrong at the time should not detract from the fact that he got the diagnosis right – ahead of the vast majority of other economists operating at the time.

    Don’t mistake me for somebody that defends Keynesianism, and particularily not the Keynesianism of that era. I know that compared to the Keynesians what Friedman was selling was the lesser of two evils. However there were other voices in the crowd.

    What set monetarism apart was that they directly challenged the prevailing orthodoxy of the time that (1) inflation was not about money (2) fiscal policy worked and monetary policy didn’t (3) you could trade off between employment & inflation.

    It set them apart from the Keynesians. And the Keynesians dominated the field. However there were other voices that were more accurately interpreting the situation that did not receive the accolades. Robert Mundell did get a Nobel Prize years later on (1999) however he was mostly ignored at the time (at least in terms of Monetary theory) even though his insight on monetary policy was far superior.

    Friedman gets big points in my book for advocacy and salesmanship with regards to notions of liberty, low taxes and free trade and in reaching out to the masses to sell these ideas. And these are important achievments that I don’t wish to take anything away from. However in terms of the specifics of monetary policy he got the mechanistic aspects of the solution wrong. Of course I say that with the benefit of hindsight and I don’t wish to pretend that this negates the rest of his contribution to the debate. However I think it is an issue of predominant importance because whilst I think that our monetary policy these days is better than naive monetarism, or 1970s Keynesianism it continues to carry defective genes from both those schools of thought and it continues to cause problems for the world.

    If you want to limit his analysis of monetary theory to his statments such as “inflation is always and everywhere a monetary phenomenon” then I agree with him. However that would be a very superficial review of the topic.

    Regards,
    Terje.

    P.S. Whilst not definitive a discussion on monetary policy between Mundell and Friedman can be read here: http://www.irpp.org/po/archive/may01/friedman.pdf

  32. November 21st, 2006 at 10:11 | #32

    “I never had the feeling with him, as with many writers in the free-market line, that he was promoting cynical selfishness, or pushing the interests of business.”

    Perhaps John can name some local free marketeers who fit that description of cynical and selfish?

    I don’t know of any, but then, I would have to say that wouldn’t I?!

  33. George
    November 21st, 2006 at 10:23 | #33

    I don’t really see what all the fuss is about.

    The central bank can control currency currency plus bank reserves pretty well.

    As it happens, there is almost a perfect positive correlation between trend growth in this particular aggregate and trend inflation in Australia over the 1959-2006 period (a period which includes huge changes in the financial system, the exchange rate regime, and so on).

    In other words, Milton Friedman was right.

    Of course, there is no monetary aggregate that is going to be adequate for some kind of short-run fine tuning of the economy, for stabilizing the inflation rate on a quarterly basis. That is just silly, and I doubt that Friedman ever advocated this sort of policy.

  34. gordon
    November 21st, 2006 at 17:26 | #34

    The historian Niall Ferguson observes here that “As a result [of cheap Asian labour keeping consumer prices down], monetary expansion in our time does not translate into significantly higher prices in shopping malls. We don’t expect it to. Rather, it translates into significantly higher prices for capital assets, particularly real estate and equities. The people who find it easiest to borrow money these days are hedge funds and private equity firms. Through leveraged buy outs, the latter can easily acquire companies and, by improving their cashflow, boost their valuations. These guys then buy houses in Chelsea with the millions they make…

    “No one can say for sure what the consequences will be of this new variety of inflation. For the winners, one asset bubble leads merrily to another; the key is to know when to switch from real estate to paintings by Gustav Klimt. For the losers, there is the compensation of cheap electronics…”

    Sums it up nicely, I thought.

  35. melanie
    November 21st, 2006 at 20:02 | #35

    George #33, PQ=MV: it’s a tautology.

  36. Terje (say tay-a)
    November 21st, 2006 at 22:37 | #36

    Of course, there is no monetary aggregate that is going to be adequate for some kind of short-run fine tuning of the economy, for stabilizing the inflation rate on a quarterly basis.

    There is no “quantity” targets that are suitable for short-run fine tuning. However there are “price” targets. The one we use today is the price of credit (also called interest). The one we used prior to 1971 was the price of gold. Compared to attempts to target “quantities” these approaches have had loads more success. Although they only work in so far as they are reflective of the “price” of money. Exchange rates serve a simimlar price of money function which is why it can also be quite a reasonable target for monetary policy to focus on.

    Since the end of the Brenton Woods gold standard no monetary system has managed to achieve the same level of short term price stability in commodites. We have become all too acustomed to weekly fluctuations in the price of oil and wheat etc. However when money was stabilised on a daily basis against a measure of value set by gold there was (over both the short and mid term) massively more stability in the price of all commodities.

    That is just silly, and I doubt that Friedman ever advocated this sort of policy.

    Without a doubt his followers did. And the following quotes suggest that he did also:-

    2003: “The use of quantity of money as a target has not been a success. I’m not sure that I would as of today push it as hard as I once did”.

    1970: “A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society”.

    This is simply wrong. It applies only in certain circumstances. During the black plague in the middle ages in Europe there was significant inflation even though the stock of money (mostly gold coin) did not increase significantly. This is because the falling demand for money in an economy in decline will lead to a decline in the value of that money.

    In fact reading the wikiquotes there is lots that he has wrong. Here is another that I find very objectionable.

    2003: I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending.

    I believe the exact opposite is true. The big problem is not government spending, the big problem is taxation.

  37. November 21st, 2006 at 23:20 | #37

    Spending is tax. All spending must eventually be paid for through tax, either now or in the future. One way to decrease spending is by cutting the government’s pocket money. You can’t rely on them cutting spending if they have spare tax money to spend.

  38. Terje (say tay-a)
    November 21st, 2006 at 23:54 | #38

    All spending must eventually be paid for through tax, either now or in the future.

    Yes but Friedman was quite consistently vocal about the fact that it wasn’t the taxation process that was the problem it was the spending process. He spoke of tax cuts as being all about “starving the beast”. In any case government spending does not necessarily lead to taxation, it is always possible that a government will default on it’s debts and there is certainly no end of examples from history. And in the early part of US history the federal government was financed in part at least by the benevolence of the first president.

    Spending by government occupies productive resources and distorts the society away from the type of production it might otherwise choose. However taxation drives an active wedge between economic participants and throws sand in the gears of production. The later has a far more debilitating impact. And if we can imagine a hypothetical government that undertakes most of its spending in a manner consistent with how people would spend their money anyway we can somewhat negate the crowding out effect, however we can not negate the disincentive, and misallocative effect of taxation.

    Monetarists and the followers of Friedman found common cause with supply-side economists under the Reagan presidency. However they offer very different models for how the economy works and how policy is best applied. And in terms of the differences between these two groups I think it is Friedman that got it wrong.

    Regards,
    Terje.

  39. derrida derider
    November 22nd, 2006 at 10:10 | #39

    OK, John and Terje, isn’t it amazing how the “starving the beast” strategy has led to terrific cutbacks in the size of goverment in the US government under Reagan and GWB? Or isn’t that what happened?

    One critique of “Keynesian” fiscal policy you used to hear (I put the “Keynesian” in inverted brackets because, like Marx, Keynes’ position was badly vulgarised by his followers) was that it gave pollies bad incentives – as we were all uncertain what the “right” pump-priming deficit was pollies could use this as an excuse to spend more and hide the cost of that spending from today’s electorate. The irony is that it is the bastard Keynesians’ ideological foes who have used deficit financing to hide the real cost of their policies; those tax cuts would not have come to pass if the presumed “starve the beast” consequences – far less spending – actually happened. Voter enthusiasm for the tax cuts would have been very considerably less.

    I’ve done a lot of work on the effects of various tax wedges, and the extreme estimates of the effects of taxation just don’t stand up to analysis, even at a less technical level (the technical level aint that flash either). For a start, given the deadweight cost of taxation is proportional to the square of the rate, and the supply siders hold that the (vague and largely untested) “dynamic” effects on innovation swamps the static allocative effects anyway, then the Swedish, French, etc economies just ought not to exist.

  40. November 22nd, 2006 at 10:58 | #40

    DD,

    Can you point to any real world examples where tax cuts of any statistical significance have been the cause of an overall sustained tax revenue decline? I can’t but I would certainly be interested to look at any good case studies or examples you can point to.

    Regards,
    Terje.

  41. derrida derider
    November 22nd, 2006 at 14:35 | #41

    Terje, depends very much on that word “sustained”. Remember we have no counterfactual – would US revenues be now larger or smaller than if the 1983 tax cuts had never been passed? What about the 1989 tax increases (but then the 1986 and 1989 tax increases would not have happened without the 1983 cuts, so there’s an obvious endogeneity problem …). I’m not trying to dodge your question – really – but just pointing out that it is a question that is in practice impossible to answer rigorously.

    No polity will wait until they’ve run a disastrous deficit for twenty years before they undo the cuts – which I suppose gives you your answer.

    The easiest way to see my point is to rephrase your question: “Can you point to any real world examples where tax cuts of any statistical significance have not had to be reversed because of too low revenue?”.

  42. November 23rd, 2006 at 07:46 | #42

    DD,

    Okay. Maybe you can cite some examples of significant tax rate cuts that were reversed because of clearly declining revenues. Preferably examples where the increase corrected the decline.

    Regards,
    Terje.

  43. November 23rd, 2006 at 18:48 | #43

    Terje, the post-Black Death (not “plague”) inflation had less to do with fewer heads for a given stock of gold than with a dislocation of agriculture and the wider economy that put a greater proportion into cash activities. That did have something to do with the amount of money per head, of course, but far more to do with the amount of improved land per head and the need to find more capital intensive approaches to providing things that hadn’t shrunk in absolute terms (e.g. warfare).

    However a really significant monetary metal inflation came during the 16th and early 17th centuries, from Spanish conquests, and was followed by an ebbing of bullion to the east during the 18th century. Both of these had profound effects.

  44. peterd
    November 23rd, 2006 at 22:10 | #44

    It appears there has been little recent comment, here and elsewhere, on the role of monetarism a la Friedman in the recession of 1982. I am old enough to remember that year and some of the many co-workers who suddenly vanished, all on the same day. Here is J.K. Galbraith: “The [Reagan] administration had been briefly captured by what was to be the high moment of monetarism: the thought emanating from Professor Milton Friedman that prices would be stable and all would be well in the economy if the money supply, as it proceeded from bank lending and the resulting deposit creation, could be stoutly controlled. Repressive interest rates- tight money- that discouraged the borrowing and deposit creation would achieve this purpose. Accomplished instead was the sharp recession, with Professor optimistic design receding into the wings.” (Galbraith, ‘A Journey Through Economic Time’, Houghton Mifflin, 1994, p.216)
    I don’t believe I have read any mention of this aspect of Friedman’s “achievements” among the various recent eulogies of the man.
    I am also disappointed that so much of the comment here on Friedman is concerned with relatively technical issues having to do with taxation, and very little with the philosophical bases of Friedman’s freedom. Prof. Q. commends the reading of ‘Capitalism and Freedom’ and writes that
    “[a]s Mill said, beliefs you hold merely because you haven’t been exposed to the strongest possible critique of those views, aren’t really well-founded”. However that may be, I find it difficult to shake off the suspicion that decisive arguments against Friedman’s views on the connection between capitalism and freedom were advanced by political theorist C. B. Macpherson in his essay “Elegant Tombstones: A Note on Friedman’s Freedom” (republished in his ‘Democratic Theory: Essays in Retrieval’). Macpherson concluded his essay as follows: “The humanist liberal in the tradition of Mill and Green will quite properly reject Friedman’s postulate [that freedom of the individual is the liberal’s ultimate goal]. The logical liberal will reject his fallacious proof that the freedom of the capitalist market is individual economic freedom, his undemonstrated case that political freedom requires capitalism, and hs fallacious defense of the ethical adequacy of capitalism. The logical humanist liberal will regret that the postulate and the fallacies make Capitalism an Freedom not a defence but an elegant tombstone of liberalism.”
    It is perhaps interesting that Friedman and R. Friedman’s later ‘Free to Choose’ contained no explicit response to Macpherson and his arguments. But perhaps Americans think that such response to Canadians is beneath them.
    I commend Macpherson’s essay to all readers, past and future, of Friedman.

  45. peterd
    November 23rd, 2006 at 22:14 | #45

    Oops. Galbraith wrote: “…Professor Friedman’s optimistic design…..”

  46. November 24th, 2006 at 07:22 | #46

    Peterd,

    Your quote includes a lot of claims without much argument that we could either embrace or reject. It seems more shallow than the discussion of “technical issues”.

    Taxation is a key issue for freedom. Tax oppression was at the heart of the American revolution and the revolt at Eureka stockade. In Thatchers time the poll tax brought the masses onto the streets of London.Tax is a yoke that can be as oppressive as almost any other.

    Regards,
    Terje.

  47. Terje (say tay-a)
    November 26th, 2006 at 01:02 | #47

    Just to reiterate my revised question to derida derida (or anybody else that wishes to answer).

    Can anybody cite some examples of significant tax rate cuts that were reversed because of clearly declining tax revenues. Preferably examples where the subsequent increase in the tax rate then corrected the former decline in tax revenues.

  48. peterd
    November 27th, 2006 at 12:14 | #48

    Terje,
    I’m quite prepared to accept that some might not wish to accept the claim by Galbraith, or Macpherson’s arguments on the unfounded bases of Friedman’s “freedom”. I quoted them to show that the reverence in which Friedman’s thought is held is by no means universal.
    However, you’ve provided no argument at all for some of your own assertions. As in your unargued assertion that “Spending by government occupies productive resources and distorts the society away from the type of production it might otherwise choose.” Really? ALL spending by government?

    Cheers
    peterd

  49. November 27th, 2006 at 21:47 | #49

    Peterd,

    If society would spend it’s resources on the same things anyway without a tax funded government then why would anybody see a need for the latter? I did not think this was an at all controversial statement. And it was a point I was merely conceding to the likes of Friedman as a trivial tautology and from there I went on to state what I thought were more significant reasons to advocate tax cuts.

    You may not have noticed but I disagree with much of Friedmans economic framework. Dismissing the essence of that disagreement as a minor technicality and then offering some supposedly superior, but largely obscure, reasons for disgreement was kind of inviting some form of rebuke. Nothing personal but I don’t think these “technicalities” are minor.

    Regards,
    Terje.

  50. November 27th, 2006 at 23:24 | #50

    Terje, peterd, one example I keep at the back of my mind is how the Dutch funded their culture/cultivation system in the East Indies. Oversimplifying just a little, they depreciated the currency to set up a cash crop plantation system (however, they did bring in some funds from Dutch investors). They also put their thumbs on the scales to mandate proportions of agricultural output to go to cash crops – by fiat, not by indirect means. The result was profitable but was not what the locals would have chosen freely. So yes, it was a distortion, but it was nevertheless constructive (albeit with most winners in the mother country, which does not invalidate the gains from the scheme).

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