In a memorandum submitted to the United Kingdom Treasury and Civil Service Committee early this past summer, Prof. Milton Friedman gave his design for guiding the modern economy and, as always, with clarity and succinctness. "Inflation over any substantial period," he said, "is always and everywhere a monetary phenomenon, arising for a more rapid growth in the quantity of money than in output," adding that "few economic propositions are more firmly grounded in experience -- experience extending over thousands of years and the face of the globe." Then came his classic corollary -- keep the supply of money in line with the rate of economic growth and you have solved the principal problems of modern economic life. Price stability will then be combined with high employment and general prosperity. He would also get rid of many public services and much public regulation. But this is secondary and possibly an escape clause. Monetary action is the thing.
The present British government has warmly embraced our fellow countryman. Speaking in the House of Commons last July 22, Mrs. Thatcher said of various opposition measures that they would force her government to "print money, which we will not do." Only by holding tight on the money supply could "hyper-inflation and hyper-unemployment" be avoided. Prof. Friedman could not ask for more. The good thing about Mrs. Thatcher's faith is that, at long last, we are seeing the Friedman design getting a full, fair trial.
Much of the past argument over this design has been intellectually immature.
Friedman is for lower taxes, less regulation, fewer services by the state. With such California co-religionists as Howard Jarvis and Paul Gann of Proposition 13 fame, he has been an aggressive advocate of constitutional limits on government taxation, expenditure and activity. The major rewards from the tax reduction are to the affluent; the curtailment of government services -- hospitals, schools, libraries, parks, police services, housing, welfare -- is most noticed by the poor. Conservatives applaud their fellow conservative and accept automatically that his monetary design must be workable; how could so good a man be wrong?
The liberal reaction has been equally catatonic. Anyone so beloved by the right must, indeed, be wrong. Thus has the debate elided the real question: does Friedman monetarism work?
I must confess my own belief -- to the extent that it is not known: it is that monetarism does not work. There is first the terrible uncertainty in the modern economy as to what is money. For nearly all of the "thousands of years" to which Friedman adverted in his Treasury paper, it was silver, gold or copper. Now we have hand-to-hand coins and paper, current bank deposits, savings deposits, the purchasing power that lies back of credit cards and lines of credit and quite a few other candidates for the count. It is hard to manage something if you do not quite know what is to be managed. But this is only the beginning.
By severely curtailing bank lending for public or private purposes, it is possible to reduce a major part of the money supply, that being deposits usable as money. And if this effort is stern enough, market demand from the spending and respending of the money so created will be curtailed. At issue is what happens next.
The first consequence is a cutback on funds for investment. That is what most bank lending is for. This, in turn, has an adverse effect on productivity. It is also hard on smaller enterprises that rely heavily for their operations on borrowed money. House building especially suffers, as all by now have noticed. But small business generally is hurt.
None of this troubles Friedman. In his market system, all firms are pretty much alike; that large corporations can finance their own operations, are first in line at the bank, are thus less affected by a monetary squeeze, is not a valid objection. The special power and strength of big business is a liberal hang-up.
Corporate power in combination with union power has a more immediate -- and obvious -- effect. The reduction in demand does reduce output and employment and bring recession. But unions, however they may grieve for their unemployed members, see prices going up and continue to press for higher wages. And because of this pressure, prices go up. So in the corporate sector monetary policy has become a design for combining unemployment and recession with continuing inflation.
The policy should work better against farm prices, where the individual producing units lack market power. But here modern governments intervene to protect or enhance prices. A monetary policy stern enough to produce a recession can cut energy use; but OPEC is there to keep up and even increase oil prices. Recognizing some five years ago what the OPEC cartel did to his system, Friedman predicted its early demise. Not since that of Mark Twain has word of a death been so exaggerated. In a world of free markets, Friedman would be a prophet. But, alas, we have those unions, and those corporations, and those farmers and that OPEC.
Such is the case against the workability of the Friedmanite formula, and all experience shows that for the faithful it is not convincing. What has been needed is a trial; thus one's gratitude that Britain has, in effect, volunteered to be the Friedmanite guinea pig.
There could be no better choice. Britain's political and social institutions are solid. The British people do not take easily to the streets. At the end of 15 months of Friedmanite policies in Britain a few weeks ago, inflation was at 21 percent, manufacturing output was off by 8 percent, small business bankruptcies were up and unemployment, at just under two million, was the highest since the Great Depression. No one is suggesting that British democracy is being undermined, that Britons are reacting with other than the stiff upper lip. The British social services and social insurance also soften what elsewhere might be intolerable hardship. British phlegm is a good antidote for anger, but so is an adequate system of unemployment insurance.
Friedman has shown himself over the years to be both an able and an agile protagonist. If inflation and idle plant and unemployment persist in Britain in face of his policies, he will be tempted to wiggle, and this he does with commanding skill. Control of the money supply was not wholly in accordance with his requirements. Another year was necessary for a true test. If there is a U-turn, it will be said that it came only months before the policy, had it been allowed to endure, would have proved itself a triumph. And overall, nothing is so good for an economic system as suffering. tWeak managements are culled out; weak businesses go to the wall; unemployment teaches people the worth of work. The worse things are and for the longer the time, the better things are. I would urge Prof. Friedman to resist such excuses.
Instead, let him give the British another six months or a year. That is a long time to suffer, even if the suffering is by someone else. Israel and Chile, two countries that have previously made overtures to the Friedman policies, have been disavowed by their teacher -- Chile for very civilized reasons. He will not now be convincing if he disavows Britain too.