Milton Friedman: a brief appreciation

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.

50 thoughts on “Milton Friedman: a brief appreciation

  1. 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?

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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

  7. “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?!

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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?”.

  16. 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.

  17. 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.

  18. 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.

  19. 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.

  20. 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.

  21. 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

  22. 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.

  23. 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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