The Nobel Prize winning economist Milton Friedman had a major influence on modern America and much of the rest of the world. His laissez-faire economics came at an opportunistic time, as he would have admitted. The world was ripe for turning way from progressive, welfare state economics and he gave it an understandable and remarkably comprehensive model with which to work. He died this week at 94, and he was an extraordinary man. I interviewed him or spoke to him several times and he was also, if demanding, a nice man. I think that attribute should be held in great esteem.
But that does not mean that he was right about his central contentions. And it does not mean that his views did more good than harm.
What made Friedman's vision of the world so persuasive? There were three general reasons, I think. Two of those reasons are contained in his popular book, Capitalism and Freedom, published in 1962.
The first is that Friedman was a moralist. He argued that his view of economics--which required a minimum of government intervention--was necessary not only for prosperity, but of great importance, for freedom. The free market gave consumers and workers free choice, he argued. Competition would keep business straight. Government interference restrained choice and ultimately could lead to tyranny. His book was regarded by some as the American version of Hayek's best seller, The Road to Serfdom, with Nazi Germany fresh in mind.
In fact, all great economics books have been centrally moral in purpose. That is certainly true of Adam Smith but also of Malthus, Mill, Marx, Alfred Marshall, Thorstein Veblen, Karl Polanyi, Joseph Schumpeter, John Maynard Keynes, John Kenneth Galbraith, and Amartya Sen. Economics is surely about prosperity, but to these great writers, it was even more about maintaining freedom, access to opportunity, equality, decency, and democracy.
Friedman was providing his answer to these great issues. What was that answer? Here was the second key to his influence. His model was remarkably simple. Not only did he write with ease and clarity. The model of the way the world works was also clear to him. It was an extension of Adam Smith's invisible hand. To almost every social problem, Friedman cleverly and often brilliantly provided the invisible hand as its solution. Market forces, through competition, would distribute goods and services at the appropriate price as long as people acted in their self interest. Thus, workers would get the wages they deserved, business the profits, and growth would be maximized, creating the optimal number of new jobs given resource and technological constraints. Schooling could be subjected to this ideal solution, as could healthcare and even racial prejudice in the labor markets. The setting of currency values could be subjected to this as well.
The public eventually warmed to Friedman's views. At first, he told me in an interview, no major publication reviewed his book. But eventually Capitalism and Freedom sold hundreds of thousands of copies.
Ironically, the monetarism that he is best known for was not entirely consistent with his view of government non-interference. Friedman maintained that the central bank should maintain a constant rate of growth of the money supply. This would keep inflation in check, and the invisible hand would do the rest. Keynesian policies to increase government spending in order to promote demand and forestall recession, by contrast, were wrong, even destructive. But just when Friedman's views were accepted, if for other reasons, it turned out the Fed, as Keynesians had long warned, could not really control the money supply. Moreover, the growth of the economy and the growth of money supply did not move in a fairly exact and predictable relationship, as Friedman had strenuously claimed. Keynesians also warned about that.
But embedded in this battle with Keynes was the final major reason for Friedman's influence--a third reason. His views were adapted in the great fight against inflation, which afflicted the nation so damagingly in the 1970s. Keynesianism was failing, it seemed. Monetarism was the answer, and it was used to fight inflation by the Democratic appointee to the Federal Reserve chairmanship, Paul Volcker. The cost was a Draconian recession of high unemployment and falling wages.
On the occasion of Friedman's death, I shouldn't dwell on his obvious errors. The point for now is that one should not accept at face value the accolades in the recent obits about his constructive influence. That he was brilliant, there is no doubt, and some of his thinking was a useful corrective. His empirical methods were pioneering and exemplary. But for the most part, his central propositions were highly over-simplified.
The bottom line is this. His thinking has contributed to the nation's refusal to invest adequately in its schools, daycare, and pre-K education.
It has contributed mightily to the refusal of the nation to reform its healthcare system, the main social tragedy of this wealthy nation, because of the widespread scorn for government involvement. Yet the nation pays far more of its income than other rich nations largely with inadequate results. Credit Friedman.
The nation's economy grew very slowly on average from 1973 to 1995 partly because of over-attention to inflation--again partly Friedman's influence.
Friedman had beneficial influence over the adoption of the earned income tax credit, which has helped many poor working families. But the federal government has refused to raise the minimum wage adequately--again partly Friedman's influence. And forces line up with great assurance based on his writing against the living wage movement as well.
His influence over the deregulation of international capital flows has on balance been damaging, and his advocacy of floating exchange rates taken too literally.
His followers have developed rational expectations theories and real business cycles theories, which reinforce with still greater fervor the central Friedman point that government is the problem, not the solution.
All this has gone much too far. I think what best defines Friedman's mistaken world view is a line or two from Capitalism and Freedom.
Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.
But there were relatively free market economies without political freedom. One close to Friedman's early experience was Nazi Germany. And there was never--there was no example in place or time, to quote Friedman--when a free market existed without a government to protect it through the enforcement of contracts and property rights. There is no example of capitalism in which business was not regulated to some important degree by a government. There is no example of a broadly accessible system of education, so critical to economic development, which was built by the free market. There is no example of the development of sanitation and sewage systems built by private enterprise and integral to growth.
The real lesson of history is that economic development was always a partnership between business and the government, each necessary and neither sufficient. This is the lesson we need to relearn in this new century. Friedman would have had us believe otherwise.