Friedman as a hero
There were a number of reasons for this. In the early 1980s we had been waiting a long time for Hayek’s big work Law Legislation and Liberty and there had not been a huge amount of output from him during a period in which Friedman was prolific. The absence of the internet meant that only the particularly well informed were aware of others such as von Mises, Rothbard, and so on. And, this was quite important. We can read about these people today without reading their books but, back then, we could not and reading a major book is a big investment of time.
And, perhaps this is one of the most important driving forces behind Friedman’s wide impact: he wrote brilliantly. Whereas Law Legislation and Liberty requires an investment of weeks of spare time, Free to Choose requires an investment of a few days (at most). His academic writing was as fluent as his popular writing. He is one of the few writers who could produce technical papers that could be read by an under-graduate in one go. And the breadth of his work was astonishing. His work on the consumption function showed that, as we get richer, we do not automatically save more – contrary to an important misapprehension that had helped bolster Keynesian economics. This work involved new statistical techniques and resolved a long-standing empirical problem. His work on the Great Depression showed that it was not animal spirits that caused the boom and bust and was crucial in putting to bed the myth that huge depressions just happened spontaneously. Friedman’s empirical analysis showing the long-run absence of the Phillips’ curve was crucial in completely changing macro-economic policy throughout the world. There is no long-run trade-off between unemployment and inflation: so, if we are to have central banks, make them independent, tell them to keep stable prices and stop pretending that we can have more growth if we accept a little more inflation.
When Friedman wrote academic papers, they could almost immediately be reprinted as IEA monographs so fluent was his style. In addition to this, his conceptual insights were quite amazing. This is a summary of his key conclusions in his Wincott Lecture “A Counter Revolution in Monetary Theory”.
· There is a consistent, though not precise, relationship between the rate of growth of the quantity of money and the rate of growth of national income.
· There are long and variable lags.
· The growth in money affects output first and then prices.
· How money growth affects output depends on various factors such as the level of saving, government policy, the structure of industry, and so on.
· Government spending may or may not be inflationary depending on how it is financed.
· The effect of an increase in money is first on asset prices.
· An increase in the rate of growth of money will lower nominal and real interest rates and then – when inflation and inflation expectations increase – raise nominal rates.
· The relationships are too unstable to allow governments to fine tune the economy. We do not know enough to do anything other than allow a constant rate of money growth.
These issues, identified in just one 4,000 word lecture, essentially define the research agenda in monetary economics whether you are a new-Keynesian, an Austrian, a neo-classicist or a monetarist, with the addition of a couple more concepts introduced in his Nobel Laureate lecture.
There were two other reasons why the youngsters of the 1980s admired Friedman. He was a great advocate of innovative practical policy ideas that we all wanted to see adopted and which we thought would rescue Britain from socialism. Free trade, deregulating professions, denationalisation, negative income taxes, vouchers, road pricing, and so on where ideas developed by or taken forward by Friedman.
Many IEA readers would argue that Friedman relied too much on empirical evidence as a matter of philosophy. That may be true. He was a principled person too, but his academic method was generally empirical. In the popular domain, however, that is important. If we are talking about the damage done by the minimum wage, the press is not interested in diagrams or a philosophical argument. They want to know how many people will not get jobs. At the very least, we must be able to counter the arguments put forward by socialists when they base their own arguments on empirical evidence – we must be able to critique their empirical approach.
Friedman’s empirical work, his use of theory and his brilliant use of analogy led him to be able to communicate a completely convincing case for a policy proposal and demolish the opposing case. He patiently, and kindly, tore the opposing case to shreds, using a mix of theory and empirical evidence in a manner that is not replicated in any free-market economist today. He was also kind and courteous. Disingenuous people on the left often point to the advice he gave (one trip, one meeting) to Pinochet. The simple fact is that Friedman would argue with anybody because he believed they could come to understand the arguments for freedom. The left are comfortable with Mo Mowlam talking to Gerry Adams about peace but are not comfortable with Friedman talking to Pinochet about freedom. That says more about the left than it does about Friedman.
We desperately need a Friedman today – as a communicator and as an academic. He would make his current opponents of free markets look distinctly second division.