Milton Friedman deserves our gratitude for a multitude of contributions to American economic theory, political thought and public policy. But possibly his greatest contributions have been destroying the credibility of Keynesian economics and making libertarian philosophy and the idea of free markets academically respectable.
What has made Friedman so effective over the years is that he has the ability to express economic principles in terms that non-economists can understand. Yet at the same time, his technical brilliance has changed the direction of scientific research in economics. Fortune magazine has called him the "economist of the century."
I was reflecting on all this at "An Evening with Milton and Rose Friedman," as the 86-year-old Nobel Prize winner and his wife and collaborator Rose helped the National Center for Policy Analysis celebrate its 15th birthday recently.
In the 1950s, the economic theories of John Maynard Keynes were still regarded as gospel. Keynesians held that government could fine-tune the economy by stimulating or dampening spending, and promoting investment through mechanisms like adjusting interest levels and tax rates or by deficit spending.
But Friedman demonstrated in his work in that era that government can't time stabilization measures correctly and can wind up destabilizing the economy instead. "We simply do not know enough" to make the needed changes in expenditures or taxation, he has written. "We make matters worse by introducing a largely random disturbance that is simply added to other disturbances."
The "stagflation" the United States experienced in the 1970s — when the government tried to use monetary policy to reduce unemployment and instead got raging inflation — provided tangible proof of Friedman's contention.
He also put forth the common-sense theory that people tend to spend on the basis of their expected long-term income — their "permanent income." Your total consumption doesn't fluctuate all that much based on what your income is today. If you lose your job, you don't stop spending; conversely, if you win the lottery, you don't necessarily change your long-run spending habits, but are likely to save more.
Instead of government manipulation of the markets, Friedman championed free markets — really free markets, without special favors, tariffs, tax breaks and the like for some businesses — as the way to a balanced and noninflationary rate of economic growth. He maintained that a fairly fixed rate of increase in the supply of money, rather than sharply expanding or contracting the money supply, was a key factor in economic stability.
Importantly, Friedman had been a statistician early in his career, and had developed innovative econometric approaches for subjecting theories to experiment and observation. He was able to prove his theories scientifically. One writer said Friedman's 1957 work A Theory of the Consumption Function "gave a new standard for empirical economics generally by showing how studies should be done." In its announcement that the 1976 Nobel Prize in Economics was being awarded to Friedman, the Royal Swedish Academy of Sciences said, "The macro-econometric models of today differ greatly from those of a couple of decades ago as far as the monetary factors go — and this is very much thanks to Friedman."
In addition to the United States, nations around the world have been influenced by Friedman's ideas on economics. His economic ideas have helped spur the growth in free markets and economic freedom worldwide. Capitalism and Freedom, published in 1962, explained in detail his views about competitive capitalism, which Friedman considered a way to gain economic freedom and a prerequisite to political freedom. It has served ever since as a guide to "liberalism" in its classical sense: "a movement that emphasizes freedom as the ultimate goal and the individual as the ultimate entity in society."
Friedman is indeed a champion of the libertarian philosophy of individual freedom, which implies free markets and limited government. The number of Friedman disciples in colleges and universities has proliferated over the years — although there remains a shrinking number of academics who cling to socialism or state authoritarianism. His 1980 book Free to Choose, written with Rose and later the basis of a PBS series, helped to popularize these ideas.
Today we see vigorous public discussions of such Friedman ideas as vouchers to allow school choice and a flat income tax — ideas that he has been setting forth for more than three decades, ideas whose time may yet come.
The memoirs of Milton and Rose Friedman have lately been published. The book is entitled Two Lucky People. As I see it, we who have benefited from their wisdom are really the lucky ones.
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The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues.