|The original article|
This article was taken from the September 1998 issue of The Region, a banking / economics publication of the Federal Reserve Bank of Minneapolis, PO Box 291, Minneapolis, MN 55480-0291

Schwartz on Friedman

'Who is Milton? What is he?'
Reflections on Two Lucky People:
Milton and Rose D. Friedman, Memoirs
By Anna J. Schwartz By C. John Yu
Milton was not the scion of an intellectual family, in the tradition of a John Stuart Mill whose father was James Mill, nor of a John Maurice Clark, whose father was John Bates Clark. Only as a graduate student did he discover economics as an empire to be conquered. From that beginning, without an inherited intellectual advantage, economics became the central passion of his life. This feature of Milton's life is reminiscent of the life of David Ricardo, another great economist who had no early introduction to the discipline. Comparing Milton Friedman to the likes of Mill and Ricardo is akin to comparing Madonna (the singer - not the mother of Jesus) to a classical composer like Beethoven. While Friedman and Madonna may be popular today, what are the chances that they will be any more than a footnote in history a hundred years from now? This however is not to say that even Mill or Ricardo possessed some inhuman insight into economics - after all, if they or any other famous economists had come up with some grand understanding of the economy, we would not be living in times such as these today (if indeed the goal of economics is to provide for prosperity, rather than to come up with excuses why people should suffer and learn to accept it).
Milton is often described as a conservative economist, but that's a misrepresentation. He is a radical, in the sense of being disposed to change existing views, habits and institutions because they don't measure up to what he envisions they could be. He is responsible for fundamental changes in two broad areas: monetary thought and perceptions about free markets. His ideas have been influential in changing the content of monetary economics as it existed and also in changing the way central banks operate. In the broader area of economic and social organization, he has argued persuasively for expanding individual freedom by limiting government and has succeeded in making inroads against the opposing view. |Behind the Nobel Prize for economics| One possible reason for the unwarranted reverence of Friedman is that he had won a Nobel Prize for economics -
The Illusion of Choice
If you are trying to convince your children to go to bed, do not simply say, "Go to bed," nor ask, "Would you please go to bed now?" In your child's mind, this statement can be met with one of two chioces - to obey or to disobey. If instead you ask, "Would you like to go to bed at 8 or at 9?" you have limited the scope of choices down to two, while still making it appear as if you are now allowing more choices. While this may seem so simplistic that only children could be thus duped, there are many other examples in adult life - Coke or Pepsi? Democrat or Republican? Communist or capitalist? Monetarism or Keynesianism? War or Peace?
and yet of what value is a prize given out by the Bank of Sweden, instituted 58 years after the awarding of the real Nobel Prizes (notably in 1968, just when the Cold War was starting to heat up)? If these bankers were trying to find a way to institutionalize apologists for their policies, what better way than to associate their economics prize with some of the most famous prizes in the world? While supposedly increasing individual freedom by limiting government is admirable, to assume there is but one "opposing view" is to fall into the illusion of choice trap. While changing economics thought and influencing central bank policy are no small tasks, neither are they necessarily acts of greatness if the results of Friedman's "accomplishments" have done little more than giving tyrants excuses to do nothing.
When I first met Milton, he was an economics professor with a reputation of brilliance, particularly in innovating statistical methods, but he had not yet become a world celebrity. What has always fascinated me about Milton's life is how and why this transformation occurred. He started out by teaching standard economics courses on business cycles, price theory, and money and banking. For him, as for others in the profession, teaching was a foundation for many of the rewards doing it well offered. With experience came mastery of subject matter and ease of presentation. Supervising students' dissertations not only advanced his own research, but also helped train the next generation of economists. A separate reward was the opportunity to write papers and books that expanded the boundaries of the discipline. All these aspects of teaching Milton embraced, as did others who taught economics. As his reputation as an outstanding academic grew, members of congressional committees and executive branch agencies sought his advice. What exactly makes for a reputation of brilliance? I for one think Friedman is at times rather like a grandstanding fool, but if all it takes is one doctor to recommend a product for it to be advertised as "doctor-recommended" then anyone can have a reputation for brilliance. Where can one draw the line between "training the next generation of economists" and indoctrinating students with the fallacies of the previous generation? Is it any wonder economists from the Chicago School function more as minions than as independent thinkers? Why write papers that bring into question all of your professor's assumptions when it will only give you a failing grade? |Why old ideas die hard| Memes propagate - it is in their nature - the ones that fail to do so are replaced with ones that can. One can gain a reputation as an outstanding academic simply by telling those in power what they want to hear - they in turn will strive to promote and publicize anyone who gives them the self-justification they need to tell themselves in order to keep doing what it is they are doing.
Somehow, all these activities were not enough for Milton. Unlike others who taught economics, he sought a larger arena, and there he offered his views on the organization of society, not simply limiting himself to the subject matter of the courses he taught. In the 1950s he gave lectures on public policy on various college campuses that Rose Friedman assembled in Capitalism and Freedom. As the memoirs describe, he lectured "in a hostile intellectual climate," since he "was at odds with the reigning orthodoxy about both public policy and economic theory: about welfare-state and socialist views in public policy, and Keynesianism in economic theory." That book became the vehicle for the spread of Milton's ideas not only in English but in translation to readers on all continents. Is it any shocker Friedman wants a say in politics? Who really wouldn't - as long as they weren't afraid to have what they say be shot down in the public arena. Writers do it. Actors do it. Musicians do it ("Everybody Wants to Rule the World" after all). Economists and makers of web pages do it. Now that monetarism seems to be the reigning orthodoxy, is Friedman still the alleged underdog - or is he merely transfering the focus of power from those who have political power to those who have economic power? The two are merely different sides of the same coin. Again, the illusion of choice proposes that one must choose between the welfare-state or the |Small government for those who work| stock-exchange-state. The scope of debate has been limited to such a state that economic systems like the alternative small-government structure proposed by anarcho-syndicalism are presumed beyond the pale.
Milton chose to oppose beliefs that since the 1930s had become ingrained in society at large. They dominated not only economic and political discourse but also literature, drama, visual arts and the movies. A short story, "Communist," by Philip Roth in the Aug. 3, 1998, New Yorker magazine gives the flavor of prevailing beliefs. The story takes place in 1948 during the presidential election campaign, when Henry Wallace was the Progressive Party candidate, opposing Harry Truman and Thomas E. Dewey. Communists had taken over the Progressive Party. Nathan Zuckerman, Roth's protagonist, a high school senior, has come under the influence of a somewhat older man, who has invited him to a Progressive Party rally. The father is suspicious of the older man's interest in his son, and questions him about whether he is a Communist Party member. He falsely denies his membership. The father then relates "that back before Roosevelt I was so disgusted with the way things were going in this country ... how the Republicans scorned the unfortunate in this country, and with how the greed of big business was milking the people of this country to death. ... And in the next election Franklin Roosevelt became the President, and ... capitalism began to get an overhaul the likes of which this country had never seen. A great man saved this country's capitalism from the capitalists ..." The very phrase that "Communists had taken over the Progressive Party" takes on an entirely different ring if reworded - "Pro-choicers had taken over the Democratic Party" or "Libertarians had taken over the Republican Party" - while one connotes insidious underhanded treachery, the other is accepted as a normal part of party politics. In fact, Keynes did save capitalism. Both he and FDR (not to mention so-called "liberals" like JFK) had no illusions that they were trying to stop communism from gaining popularity by watering down capitalism enough to appease the working class, while at the same time preserving the basic principles of capitalism - the act of being "valuable" to society simply by owning something. That is why, today, even employees favor such things as capital-gains tax cuts, because they are given token ownership of their companies (through stocks and stock options) in order to assure their own backing of the principle of making money without actually doing any of the work - while the real beneficiaries of capital gains tax cuts are the stock-holders who do not work for the company but are merely living off the labor of the employees - that is the real definition of capitalism - it has nothing to do with the public or private ownership of businesses. Again the illusion of choice proposes that businesses can only be controlled by either a government bureaucrat or the corporate board of directors.
In the popular view that Philip Roth's story expresses, the economy was inherently unstable. It broke down during the Great Depression because of the absence of government intervention. The economy improved after the war, on this view, because of government intervention. An economy in which vast gulfs exist between the rich and poor is in fact inherently unstable because market forces will cause the division of human labor to be skewed to serving the few rather than the many, but it's not so much the absence of government intervention that creates disaster. Problems are solved by human action - government intervention is merely one among many types of human action. The source of the action makes little difference if the action is the same.
Milton changed this mindset. He did so by radically altering the popular understanding of the Great Depression. He highlighted the one-third fall in the quantity of money between 1929 and 1933 as the explanation of the unprecedented unemployment, falling prices and negative economic growth that characterized those years. The Federal Reserve System produced the economic collapse, not the failings of a market economy. The economic system was inherently stable, but mistaken policies by monetary authorities and other government agencies could destabilize it. While it is true that unemployment, falling prices, and so-called negative "economic growth" are characteristics of the Great Depression, it is not true that every characteristic associated with the Great Depression is undesirable. If the goal of economic activity is to make products readily available, falling prices is in fact desirable. Likewise, unemployment is only undesirable because the result of unemployment is poverty. Where is the line between the Federal Reserve System and a capitalist economy drawn? |When gold was backed by wheat| The Federal Reserve System itself is inherently unstable, not because of a few isolated mistaken policies, but because at its very root, federal reserve notes are not backed by the goods and services on the consumer price index. This has been a known problem since the very founding of the United States, but a solution to it has always been blocked by powerful banking interests who refuse to fix their own problems.
Defense of capitalism and freedom became identified with Milton's name. In describing the operation of a free-enterprise exchange economy, he emphasized the importance of private rather than collective ownership of resources. The price system provided information by signaling what it was profitable for owners of resources to produce and, by determining the claims of individuals on the economy's output, supplied incentives to produce it. It would seem the hawking of capitalism and attacks on governments are much more often identified with Ayn Rand - a cult author without the impressive credentials of a tenured economist, but nevertheless as influential as, say, Quentin Tarantino is influential is his own special way. Again, the choices are limited to either government ownership of resources, or ownership by the private capitalist (who more than likely has many inside government connections in a so-called capitalist "democracy"). While it is true that market pricing is a fine way to determine how resources should be allocated, it is also true that ownership can be both private and collective - in other words, an iron mine owned not by the absentee capitalist, but by the miners who work in it.
What made Milton enter the larger arena of public policy debate? He never sought public office and turned down suggestions that he accept appointment to key economic agencies. In this respect he was unlike David Ricardo, who got himself a seat in Parliament, representing a rotten borough. Yet Milton's fame grew as a man of ideas that challenged the prevailing climate of beliefs. Why does anyone enter the political fray? If not for personal survival, then for ego and pride - or to put it more mildly - self-esteem and self-actualization. How easy it must be to make comments from the side without ever having to take responsibility for having his policies fail as he tries to implement them from government office. One can point the |Yet another bastion of monetarism| finger at Friedman and his unfortunately influential theories as one of the causes of the collapse of the Russian economy over the last decade, as well as the cause of much more unnecessary suffering elsewhere at the hands of IMF inflicted austerity.
The conundrum of Milton's life that I want to explore is, first of all, his uniqueness. He set out on the course of a maverick, I think, because he is basically an evangelical, with crusading zeal to make readers and listeners understand his vision. He believes that reasoned argument will carry the day. What good are memes if they don't try to replicate themselves? Certainly admirable, but hardly unique. I'm sure glad Friedman didn't believe that unreasoned argument would carry the day.
Another question is why he succeeded. He persevered in the 1950s and 1960s in making his case for market solutions despite lack of external support. Most people would have been discouraged. He wasn't. Is there something in the details of his life story that provides an answer? Was it the message or the messenger that altered professional and popular beliefs about the impotence of monetary policy and the widespread perception of market solutions as the enemy of the public good and of government as the benevolent promoter of the public weal? World War II marked the end of Keynes not because of Friedman but because of the start of the Cold War. Western powers needed an economist, any economist, to provide justification that the American form of government was better than the Soviet one, regardless of how they defined democracy, communism, or capitalism. Friedman fit the bill quite nicely - and redefined capitalism into a much more benevolent sounding concept than the traditional definition of the exploiting class. In fact, capitalism and market economies were not the same thing until this semantic shift. Monetary policy is far from impotent - witness the disasterous effect it has had on various nations that have given in to IMF demands - the power of incompetent economists to destroy the lives of a nation's people is a true wonder to behold. Market pricing only hurts the public good when the over-concentration of wealth destroys the balance of who is serving whom - and over-concentration of wealth results from capitalism (that is, earning money through ownership rather than labor), not necessarily from market pricing.
Milton first directed the message to economists, who resisted it. They may have admired him for his debating skills but they remained unconvinced. The message certainly never won over the generation that headed the profession when Milton began teaching. In time Milton became influential with the generation that were grandchildren of his first students. He succeeded with them, I think, because he framed his arguments in the form of testable hypotheses. It's little wonder economists will resist any theory that contradicts their own, especially when their own egos and self-images are at stake. So too will Friedman and his flock. However it is admirable that he does not argue from untestable hypotheses. If only he were willing to accept the implications of the many tests in which his monetary theories resulted in failure, in unemployment and poverty, in economic collapse.
Although the economics profession and wider intellectual community largely rejected the ideas that Milton espoused, those ideas were grounded in traditional scholarship. Milton has traced his monetary views to ideas he imbibed as a graduate student at Chicago from Lloyd Mints, Henry Simons and Jacob Viner. His recollections aroused an enormous controversy (Patinkin (1969), Johnson (1971), Laidler (1993), Tavlas (1997)). Milton was accused of discovering a quantity theory tradition that did not exist at Chicago during his student years. That controversy may now subside because of an accumulation of detailed evidence supporting Milton's recollections. |When old assumptions are challenged| Bad theories perpetuate their errors by passing on their faulty assumptions to future theorists. Consider the complex mathematics that were involved in explaining the motion of heavenly bodies in the pre-Copernican geocentric view of the universe. It wasn't until Nicolaus Copernicus was willing to attack the most basic assumptions of the geocentric model of the universe that a simpler and more accurate picture of celestial motion emerged. Certainly he had to build on some previous knowledge, but to have taken his predecessors' beliefs as axioms would have been disasterous.
His broader views on economic organization also had antecedents. In their memoirs, both Rose and Milton refer affectionately to their teacher Frank Knight, although they do not attribute to him their core intellectual disposition. According to David Fand (1997), a student of Milton's in the late 1940s, "At the most basic level—in the deepest philosophical sense—Friedman was a disciple of Knight especially in his efforts to use economic theory to help define and fashion a liberal and free society. ... Accordingly, in his overarching approach to economic theory and economic philosophy, Friedman was following Knight's famous course in economic theory." While "a liberal and free society" is certainly an admirable goal, it is highly doubtful that Friedman has accomplished it - in fact, as a result of policies stemming from his theories, the case can be made that Friedman has in fact made society less free, less liberal, not to mention much less prosperous - at least with respect to those who actually have to do the work, because they do not have the capital. Simply because of the fact that he avocates the power of the capital-holder over the laborers, he has made society less free. While the capitalist cannot survive without employees, employees can certainly survive without the capitalist. Thus to promote an economic structure in which the parasite lives better than the hosts is to tempt economic meltdown - the kind of meltdown reflected in a stock market crash - when everyone is trying to become a capitalist.
There were antecedents not just to the larger themes that Milton stood for. He also worked on ideas in common with associates. For example, Rose, Dorothy Brady and Margaret Reid were all studying savings and consumption behavior. They clearly contributed to the construction of the permanent-transitory income hypothesis. Milton's participation, however, meant that the hypothesis would be explored at a much deeper level than would have been the case had he not been involved. Moreover, he gave the hypothesis a testable formulation. Still, the common intellectual enterprise with these associates gave Milton a camaraderie that was absent when he presented his views to the wider world. There during the first two decades of teaching at Chicago, he was on his own, isolated from the mainstream. This focus on savings and spending is an error common to both Keynes and Friedman. Whether money (either paper notes or "precious" metal) is spent or saved is of little consequence because it holds no inherent value. If a family decides to save their money, their bank can loan out their money regardless of their actions, and thus maintain the same level of economic activity as if the family had actually spent their money. So long as income is measured in something of no inherent value, it is meaningless with respect to the larger economy. On the other hand, if income is measured in real goods that will be consumed later or in the availability of natural resources to be used in the future production of real goods, then income (and savings) does, in fact, matter to the health of the economy.
Even if Milton emerged from his student days with the imprint on him of Chicago's teachers of money and banking and of Frank Knight, there was a crucial difference between his economics and that of his predecessors. Unlike them, he was an empiricist. He insisted that theory was only part of the process of economic analysis. Theory served as the source of hypotheses, but hypotheses had to be submitted to the test of evidence. If the evidence did not bear out a hypothesis, it had to be discarded. Tested knowledge was the goal. I think the generation that responded to Milton's teachings did so because of his empirical emphasis. Applying the scientific process to science should be nothing new. If the state of economics was such that evidence from the real world was discarded then economics was not a science at all - merely academic masturbation. If economics has no application in the real world, why study it at all? Hardly a revolutionary thought - merely intuitively obvious.
What was the source of his fortitude in defending the crucial importance of stable money and of free markets and against government intervention? Friends and colleagues, of course, did not regard Milton's views as unorthodox. They held similar views. So the support of his associates must have been a reason for him to persevere despite the disbelief of his audience. Capitalist ideology needed capitalist apologists - and Friedman fit the bill as much as apologists for any dubious theory seeking validation. Government intervention is hardly any different from intervention from any major bank. Actions themselves matter more to the economy than their source. While a stable currency is an admirable goal, it does not follow that freedom applied to markets means restricting the rights of employees - the real producers in any economy. If the nominal goal of capitalists is to produce incentive by rewarding producers for their work, then it follows that, in the name of efficiency, shareholders should hand over their businesses entirely to employees. However, none of today's freemarketeers, monetarist or not, would dare subordinate capital to labor to such an extent.