Friedman as a hero

When I was at university, the vast majority of liberal-thinking people were in the Federation of Conservative Students – an organisation that was shut down by Norman Tebbit for being too libertarian. Ironically, its chairman at the time was John Bercow the now not-remotely-libertarian speaker of the House of Commons. For most of the more studious members Friedman probably had the edge as a hero over Hayek.

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.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

4 thoughts on “Friedman as a hero”

  1. Posted 01/08/2012 at 02:59 | Permalink

    A very interesting article here, Philip. I enjoyed reading it. But I have to strongly diagree with your claim that ‘he [Friedman] would make opponents of free markets look distinctly second division’. I recall reading an article a year or so back, by the Keynesian high-priest Paul Krugman, in which he utterly demolishies Friedmanism. Anna Schwartz tried to defend her deceased colleague, in a letter to some newspaper, but I have to say it was rather pale. Krugman’s technical wizardry in economics really would take Friedman to pieces, I think. Also, didn’t Friedman and Paul Samuelson have some pretty heated debates back in the day, with Milton struggling to ever land any serious blows against him? With regard to the Friedman doctrine in general though, I would make a couple of points: Back during the 70s/80s the Friedmans made three central claims about how the economy works – claims that perhaps seemed true at the time (to some at least), but now seem to be clearly false. Their case for small-government libertarianism depended massively on those claims, and has now pretty much fallen to bits because of the way things panned-out. The first claim is that macroeconomic malaise is caused by government intervention and not the instability of the private sector. Quite amusingly though, when you probe the Friedmanite argument, what it really suggests is government producing economic recovery by purchasing enough bonds for cash to pump liquidity into the economy. Friedmanism implicity required government to manage a steady rate of money supply growth. Ben Bernanke aptly executed the Friedmanite playbook to perfection during the global financial crisis, but lets face it, it hasn’t been enough to rapidly restore full employment in the US. The second claim, that externalities were relatively small and were better resolved through contracts and tort rather than govt. regulation, since the disadvantages of said regulation outweighed the marginal public cost of the externalities. Yet again the reality of it is significantly different than the fantasy conjured up in ‘Free to Choose’. One need only look at the Frankinstein horrors whipped up in Wall Street in the prelude to the Financial Crisis, to realise that effective government regulation is needed, since quite simply, the sheer complexity of establishing libility in a court case pertaining to finance, would be mind boggling in complexity- nigh on impossible. The third claim, and by far the most amusing, is that the free market would magically produce an egalitarian distribution of income. The notion that a minimal safety net for those down on their luck, would lead to the most equitible outcomes, and that profit seeking employers through the use and promotion of human talents would lead us all to the economic nirvana. Well I hate to break it to you, but despite the IEA’s glory days of Raeganism free-marketeering and Clinton cutting the proportion of state expenditure, the US is now more than ever, a winner-take-all information-age economy. There’s an extraordinary unequal pre tax distribution of income. A stark contrast to the age of the American Dream at the height of the Keynesian era.

  2. Posted 01/08/2012 at 12:15 | Permalink

    Jason – interesting comments. Friedman’s views on central banking did evolve (and, to be honest, I don’t know what his latest position was). Regarding the other things, though, I think he would be strongly against the fiscal stimulus, very, very distorting tax policies, the huge increase in regulation and government spending under Bush (and continued under Obama) and the huge increase in statutory regulation of the financial sector. I think he would argue that Bush/Obama made much the same mistakes as FDR in the 1930s and that this has delayed recovery. Regarding Krugman – a brilliant technical economist, yes, but seriously wanting in the areas he now seems most keen to speak about. On the Wall Street issue, it is possible that his later views on banking would have proposed structural reform that would have dealt with that – I am not sure. However, I don’t think that one can ignore the role that regulators and moral hazard played in the run up to the crash.

  3. Posted 02/08/2012 at 09:50 | Permalink

    Friedman is on the dividing line, and that’s too bad, because I don’t know how you could dismiss his legacy. But on the other side, he probably went too far himself, which makes the criticisms against him only the more relevant (for example DeLong :
    What’s not clear (at least to me), is how he differentiated his analyses and policy recommendations according to the economic situation. In my understanding, he admitted there was a demand failure during the Great Depression, and considered it should have been fought with a more aggressive monetary policy. He only took the conservative approach for normal times.
    Would he believe that times are normal now, or that demand is depressed?

  4. Posted 02/08/2012 at 11:04 | Permalink

    Zorblog – that is a good question. I believe (though I do not know the details) that his views on free banking/central banking/narrow banking evolved over his life. John Blundell says in his article in the Telegraph that he would have been against QE. I do not think that is right – though he may have named it differently. He would have been against fiscal policy measures and the increased regulation and government spending in the US we have seen recently – we can say that for sure. His argument on QE, I think, would have been that he was not being inconsistent, that the Depression was not a special case, and that money growth should simply be kept at a constant rate. The failure was to allow money growth to collapse (though modern free marketeers also point to the problems in the real economy caused by policy uncertainty etc).

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