Milton Friedman: The death of an icon
The death of Milton Friedman, my favorite economist, on 16th November 2006 marks a watershed event in economics. Clearly the most influential economist of the second half of the 20th century (Keynes who dominated the first half, died in 1946) and possibly of all of it, Friedman brought about profound changes in the way economists, politicians and the general public approached economics. Friedman pointed out that without economic freedom; there could be no political freedom. Governments, he argued, should do little more than maintain law and order, enforce contracts, promote competition and provide a monetary framework. Friedman was as much a gifted communicator as he was an insightful economist.
Friedman was a complete contrast to Keynes in his approach and thinking. Keynes concluded from the great depression that the free market had failed. Friedman concluded, instead, that the Federal Reserve had failed. Keynes wanted discretion for intellectuals like himself. Friedman believed governments should be bound by tight rules. Keynes thought that capitalism needed to be controlled. Friedman thought capitalists should be left alone.
Friedman’s laissez-faire philosophy came to be popularly known as monetarism. Friedman argued that the best thing the government can do is supply the economy with the money it needs and stand aside. Friedman blamed inflation on tinkering by governments and central banks. Along with Edmund Phelps of Columbia University, who won the 2006 Nobel Prize, Friedman showed that central banks cannot trade off lower unemployment for higher inflation.
Born on July 31, 1912, in Brooklyn, New York, Friedman received his bachelor's degree from Rutgers University. He studied economics at the University of Chicago, and got his PhD from Columbia University. Friedman spent most of his academic career in Chicago, and then became a senior research fellow at the Hoover Institution at Stanford University. In the 1970s, he and his wife created a documentary series called Free to Choose, which later became a book. Friedman was a member of President Reagan's Economic Policy Advisory Board and received from Reagan the Presidential Medal of Freedom. In his final years, he and his wife established the Milton & Rose D. Friedman Foundation, devoted to promoting parental choice in schooling through vouchers.
Friedman did pioneering work on inflation. In A Monetary History of the United States, 1963, co-authored with Anna Schwartz, he emphasized that a stable relationship existed between money supply and nominal demand. In his famous presidential address to the American Economic Association in 1968 he advanced the “natural rate of unemployment”, also known as the “non-accelerating inflation rate and output” implied by the then-fashionable “Phillips Curve”, introduced by William Phillips. Phillips had shown that when unemployment is low, wage inflation is high and high when inflation is low. Policymakers therefore faced a grand, macroeconomic trade-off. Friedman pointed out that this was an illusion. Pumping up demand pushed down unemployment only by fooling workers into thinking that wages had risen relative to prices, making them more willing to offer their labor. Once they realized the truth and they demanded more pay, unemployment would rise back to its "natural" rate. If governments tried to push unemployment below this rate, they would succeed only in pushing inflation even higher in the long run.
Friedman pointed out that governments simply had to adopt a stable monetary framework by controlling the growth of the money supply. Since central banks could control money supply more easily than prices, Friedman emphasized the targeting of some measure of the money supply. As chairman of the Federal Reserve, Paul Volcker did this in the US between 1979 and 1982. Margaret Thatcher’s government tried it in the UK between 1979 and the mid-1980s. In both cases inflation was drastically cut down.
In 1957, Friedman argued that consumption depended not on current, but on permanent or long-term income. People, he suggested, did not spend on the basis of the current year’s income, but according to their "permanent income"--what they expected to earn over a long period of time. In a bad year, they might dip into their savings. On the other hand, when they had a windfall, they might not spend the entire amount.
Friedman’s favorite economy was Hong Kong. Its astonishing economic success convinced him that economic freedom was necessary for political freedom. However, the converse was not true. Political liberty, though desirable, was not needed for economies to be free. Hong Kong had thrived even as Britain, which controlled it until 1997, lost much of its dynamism. But just before his death, Friedman expressed concern that greater state intervention in Hong Kong was putting a question mark on Hong Kong’s economic freedom.
Not that all of Friedman’s efforts were successful. Since 1989, when Ronald Reagan, Friedman's ardent supporter left office, America's government has grown just as fast as its economy. The public sector has also kept growing in Europe's three biggest economies--Britain, France and Germany--and in the OECD economies as a whole. In education too, what Friedman wanted, has not quite happened. For many years, Friedman argued that parents should be given more choice in schooling of their children. The government, he said, should not spend money on their behalf, but should give them vouchers that they could spend on the education they thought best. Competition between schools would do more to raise standards of education than any amount of bureaucratic direction. But vouchers have not really taken off in a big way across the world.
Friedman received the greatest complement from his contemporary and rival Paul Samuelson[1].: "Milton Friedman was a giant. No 20th-century economist had his importance in moving the American economic profession rightward from 1940 to the present." While Friedman was based at the University of Chicago, which became a bastion of conservative, monetarist thinking, Samuelson operated in MIT, where Keynesianism continued to have a foothold. Despite their sometimes open rivalry, their competition was always healthy and collegial. While admitting that he and Friedman had considerable differences on policy, Samuelson mentioned[2]: “Knowing that differences on policy and ideology often poison and taint personal relations, I think we should both be admired for the friendship and civility we maintained over all these years."
The death of Milton Friedman, my favorite economist, on 16th November 2006 marks a watershed event in economics. Clearly the most influential economist of the second half of the 20th century (Keynes who dominated the first half, died in 1946) and possibly of all of it, Friedman brought about profound changes in the way economists, politicians and the general public approached economics. Friedman pointed out that without economic freedom; there could be no political freedom. Governments, he argued, should do little more than maintain law and order, enforce contracts, promote competition and provide a monetary framework. Friedman was as much a gifted communicator as he was an insightful economist.
Friedman was a complete contrast to Keynes in his approach and thinking. Keynes concluded from the great depression that the free market had failed. Friedman concluded, instead, that the Federal Reserve had failed. Keynes wanted discretion for intellectuals like himself. Friedman believed governments should be bound by tight rules. Keynes thought that capitalism needed to be controlled. Friedman thought capitalists should be left alone.
Friedman’s laissez-faire philosophy came to be popularly known as monetarism. Friedman argued that the best thing the government can do is supply the economy with the money it needs and stand aside. Friedman blamed inflation on tinkering by governments and central banks. Along with Edmund Phelps of Columbia University, who won the 2006 Nobel Prize, Friedman showed that central banks cannot trade off lower unemployment for higher inflation.
Born on July 31, 1912, in Brooklyn, New York, Friedman received his bachelor's degree from Rutgers University. He studied economics at the University of Chicago, and got his PhD from Columbia University. Friedman spent most of his academic career in Chicago, and then became a senior research fellow at the Hoover Institution at Stanford University. In the 1970s, he and his wife created a documentary series called Free to Choose, which later became a book. Friedman was a member of President Reagan's Economic Policy Advisory Board and received from Reagan the Presidential Medal of Freedom. In his final years, he and his wife established the Milton & Rose D. Friedman Foundation, devoted to promoting parental choice in schooling through vouchers.
Friedman did pioneering work on inflation. In A Monetary History of the United States, 1963, co-authored with Anna Schwartz, he emphasized that a stable relationship existed between money supply and nominal demand. In his famous presidential address to the American Economic Association in 1968 he advanced the “natural rate of unemployment”, also known as the “non-accelerating inflation rate and output” implied by the then-fashionable “Phillips Curve”, introduced by William Phillips. Phillips had shown that when unemployment is low, wage inflation is high and high when inflation is low. Policymakers therefore faced a grand, macroeconomic trade-off. Friedman pointed out that this was an illusion. Pumping up demand pushed down unemployment only by fooling workers into thinking that wages had risen relative to prices, making them more willing to offer their labor. Once they realized the truth and they demanded more pay, unemployment would rise back to its "natural" rate. If governments tried to push unemployment below this rate, they would succeed only in pushing inflation even higher in the long run.
Friedman pointed out that governments simply had to adopt a stable monetary framework by controlling the growth of the money supply. Since central banks could control money supply more easily than prices, Friedman emphasized the targeting of some measure of the money supply. As chairman of the Federal Reserve, Paul Volcker did this in the US between 1979 and 1982. Margaret Thatcher’s government tried it in the UK between 1979 and the mid-1980s. In both cases inflation was drastically cut down.
In 1957, Friedman argued that consumption depended not on current, but on permanent or long-term income. People, he suggested, did not spend on the basis of the current year’s income, but according to their "permanent income"--what they expected to earn over a long period of time. In a bad year, they might dip into their savings. On the other hand, when they had a windfall, they might not spend the entire amount.
Friedman’s favorite economy was Hong Kong. Its astonishing economic success convinced him that economic freedom was necessary for political freedom. However, the converse was not true. Political liberty, though desirable, was not needed for economies to be free. Hong Kong had thrived even as Britain, which controlled it until 1997, lost much of its dynamism. But just before his death, Friedman expressed concern that greater state intervention in Hong Kong was putting a question mark on Hong Kong’s economic freedom.
Not that all of Friedman’s efforts were successful. Since 1989, when Ronald Reagan, Friedman's ardent supporter left office, America's government has grown just as fast as its economy. The public sector has also kept growing in Europe's three biggest economies--Britain, France and Germany--and in the OECD economies as a whole. In education too, what Friedman wanted, has not quite happened. For many years, Friedman argued that parents should be given more choice in schooling of their children. The government, he said, should not spend money on their behalf, but should give them vouchers that they could spend on the education they thought best. Competition between schools would do more to raise standards of education than any amount of bureaucratic direction. But vouchers have not really taken off in a big way across the world.
Friedman received the greatest complement from his contemporary and rival Paul Samuelson[1].: "Milton Friedman was a giant. No 20th-century economist had his importance in moving the American economic profession rightward from 1940 to the present." While Friedman was based at the University of Chicago, which became a bastion of conservative, monetarist thinking, Samuelson operated in MIT, where Keynesianism continued to have a foothold. Despite their sometimes open rivalry, their competition was always healthy and collegial. While admitting that he and Friedman had considerable differences on policy, Samuelson mentioned[2]: “Knowing that differences on policy and ideology often poison and taint personal relations, I think we should both be admired for the friendship and civility we maintained over all these years."
To know more, read the following articles :
“Keynes v Friedman: Both Can Claim Victory,” Business Standard, 23rd November 2006.
“A natural choice,” The Economist, 14th October 2006, p79.
“Unfinished business,” The Economist, 25th November 2006, p13.
“A heavyweight champ, at five foot two,” The Economist, 25th November 2006, pp 79-80.
“Milton Friedman: Death of a Giant,” BusinessWeek Online, 17th November 2006.
[1] “Milton Friedman: Death of a Giant,” BusinessWeek Online, 17th November 2006.
[2] “Milton Friedman: Death of a Giant,” Business Week Online, 17th November 2006.
No comments:
Post a Comment