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Friedman's Large Legacy

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By Robert J. Samuelson
Monday, November 20, 2006

The ideas of economists and political philosophers . . . are more powerful than is commonly understood. . . . Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

-- English economist John Maynard Keynes,

1883-1946

What Keynes said was true of economist Milton Friedman, who died last week at 94, except that Friedman's immense influence emerged well before his death. He belongs on any list of the 100 most important people since World War II. In some ways, the conversion of China to a market economy, the conquest of double-digit inflation in the United States and elsewhere, the decisions of countless governments to sell (aka "privatize'') nationalized industries -- these developments and many more could be traced to him. There was no more ardent or articulate advocate of free markets and personal liberty than Friedman.

It may seem strange to cite these familiar notions to affirm his historical significance, but that's the point. These ideas were wildly out of fashion when Friedman first championed them in the 1950s. Remembering the Great Depression, when unemployment was 18 percent, Americans were suspicious of free markets. In 1962, the appearance of his "Capitalism and Freedom," which remains in print with nearly 1 million copies sold, was a seminal event. It began to change the conversation. Its big theme was that economic freedom was not just good economics; it was "a necessary condition for political freedom." Of course, it wasn't enough, Friedman added, citing prewar fascist Germany.

Free markets favored individual choice and creativity. "The great advances of civilization," he wrote, "have never come from centralized government." But Friedman was not indifferent to societies' hopes to improve themselves through government, and his ideas often aimed to reconcile these goals with maximum individual choice. We have adopted -- or are still debating -- many of his plans: school vouchers (he believed public schools perform poorly because they are monopolies); the negative income tax (Friedman proposed substituting direct payments to the poor for the "rag bag" of existing government services -- an idea that partially inspired today's "earned-income tax credit," providing subsidies for low-income workers); the all-volunteer military, created in 1973; and personal accounts for Social Security.

Friedman, winner of the 1976 Nobel Prize in economics, made three huge scholarly contributions. First, he helped explain the Great Depression. Until the publication in 1963 of "A Monetary History of the United States, 1867-1960," co-written with Anna Schwartz, the Depression was cast as an extreme example of capitalism's instability. Not so, Friedman and Schwartz said. The Federal Reserve caused the Depression through mistakenly tight money policies that led 40 percent of U.S. banks to fail. Though this story has been amended and extended, it remains the central explanation for the Depression.

The second contribution, made in 1967, was to show that there was no convenient "trade-off" between inflation and unemployment: Governments could not, as many economists then believed, choose a slightly higher inflation rate (say, 5 percent) for a slightly lower jobless rate (say, 3 percent). Trying to hold unemployment at unrealistically low levels would produce ever-higher inflation, he argued. That's what happened. Inflation went from 1 percent in 1960 to 13 percent in 1979. Finally, Friedman debunked the theory that as nations got wealthier, people would spend less and less of their incomes; that was once thought to doom affluent societies to stagnation.

All these findings qualified or contradicted Keynes, and Friedman was effectively the anti-Keynes. Whereas Keynes and his disciples relied on "fiscal policy" (government spending and taxes) to stabilize the economy, Friedman emphasized the importance of "monetary policy" (interest rates and the money supply as set by the Fed). Friedman was an anti-inflation hawk before it was fashionable. His tutorial of Ronald Reagan that inflation resulted from excessive money creation -- too much money chasing too few goods -- helped explain Reagan's patience in allowing Paul Volcker's Fed to crush double-digit inflation with the brutal 1981-82 recession (peak monthly unemployment: 10.8 percent). Following Friedman and not Keynes, most governments now rely on monetary policy as their main tool for economic stabilization.

Above all, Friedman believed in the power of ideas. Some of his were wrong. He thought cutting taxes would restrain government spending ("starve the beast''); it didn't. His faith in "privatization" for the old Soviet Union was overdone. He wanted the Fed to limit growth of the money supply; unfortunately, the money supply proved hard to define. But these are footnotes. For decades, Friedman cheerfully and relentlessly pushed his main ideas, although they were outside the political and intellectual mainstream. From 1966 to 1984, he wrote a column for Newsweek. With his wife, Rose, he became a best-selling author ("Free to Choose," in 1980, a pro-market manifesto). Time was on their side. Competing ideas proved unworkable, inferior or wrong. Friedman never joined the mainstream, but the mainstream joined him.


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