Milton Friedman

Posted: Jul 30, 2002 12:00 AM
Wednesday, July 31, marks the 90th birthday of Milton Friedman, the most influential economist of the second half of the 20th century. Almost single-handedly, he rejuvenated the free market among professional economists, after a long period in which planning and socialism held sway. The economic reforms of Ronald Reagan and Margaret Thatcher would not have been possible without the intellectual foundation laid by Friedman. Historically, economists had always been free-market oriented. The great classical economists like Adam Smith, David Ricardo and John Stuart Mill were all deeply skeptical of government intervention in the economy. Government's job was to maintain the peace, enforce contracts and provide a limited number of public goods. Beyond that, it should stay out of the way and let the private economy operate freely. In the wake of the Great Depression, however, voters and politicians lost faith in the free market. Indeed, many viewed the depression itself as a failure of the free market and demanded government intervention to fix its perceived flaws. This led to a vast expansion of government in all Western countries. Industries were nationalized, cradle-to-grave welfare programs were introduced, taxes and spending skyrocketed, and huge government regulatory agencies were established. The most influential economist of this period was John Maynard Keynes. He argued that governments could moderate or even eliminate business cycles by increasing the budget deficit to stimulate demand during downturns and raising taxes to reduce demand when inflation emerged. This philosophy became an article of faith among all democratic leaders in the postwar era. Although there were a few voices in the wilderness saying that Keynesian economics was unsustainable, such as Ludwig von Mises and Friedrich Hayek, they were dismissed as reactionaries. The preponderance of economists accepted the Keynesian system. It reached a high point under John F. Kennedy, who studied Keynesian economics at Harvard and surrounded himself with Keynesian economists. The 1964 tax cut was viewed as a triumph of Keynesian economics, and Keynes even made the cover of Time Magazine in 1965, even though he had been dead for 20 years. However, even as Keynesian economics was celebrating a victory, Milton Friedman and his followers were eating away at its foundation. He was more successful than Mises and Hayek because he fought the Keynesians on their own terms, with rigorous mathematical and statistical studies. For example, Friedman's studies showed conclusively, contrary to Keynesian theory, that consumers did not change their buying habits automatically in response to changes in their disposable income. He also showed that mistakes by the Federal Reserve were primarily responsible for the Great Depression, not capitalism. But Friedman went beyond merely undermining the theoretical foundations of Keynesian economics. He knew that when it collapsed of its own contradictions, there had to be something to replace it. Toward this end, Friedman resurrected the free market as a guiding principle. It was the only approach to economics that was consistent with a free society, he argued, and was vastly more effective at increasing wealth than any other system. One reason Friedman was so effective at promoting the free market is that he always tied it to specific policy proposals. Thus, rather than just criticizing government provision of education, he was the first to propose vouchers to allow private schools to compete with public schools. Friedman also proposed a "negative" income tax to replace welfare, an idea that led to creation of the Earned Income Tax Credit. Furthermore, Friedman did not only debate his fellow economists in the pages of obscure academic journals. He had a regular column in Newsweek for many years and also hosted a popular television program on economics, called "Free to Choose." A book based on this program was a major best-seller. Friedman was rewarded by his peers by being elected president of the American Economic Association in 1967 and receiving the Nobel Prize in Economics in 1976. He trained many students at the University of Chicago who carry on his work. And even in retirement, Friedman has continued to write and speak on the issues of the day, always bringing clarity and perception to them. I have always had a special affinity for Milton Friedman because we both graduated from Rutgers University. When I was an undergraduate there, 40 years after he was, Friedman was one of the few economists I could cite in class in support of free market policies who wasn't automatically dismissed as irrelevant. I learned far more economics from his books than the justly forgotten texts I was forced to study. I like to think that makes me as much a Friedman student as those who had the privilege of sitting in his classroom.