Milton Friedman. Eamonn Butler
on Keynes
Friedman’s work on consumer behaviour at the National Resources Committee 20 years earlier gave him more facts to back up his thinking. It also enabled him to demolish another key part of Keynes’s economic structure, one that had encouraged governments to expand in size and to raise taxes.
Keynes thought that as we grow wealthier, we tend to spend less and save more. With less being spent on goods and services, production would decline and unemployment would rise. That argued for high taxes to limit people’s incomes, and for higher government spending to fill the spending gap.
But in The Theory of the Consumption Function, published in 1957, Friedman showed that people who have different levels of lifetime income actually have remarkably consistent spending and saving habits. Keynes was simply wrong about the facts of human behaviour, and consequently had greatly overstated the need for government spending and taxation.
The Public Intellectual
However, the postwar years were dominated by a general belief in the necessity and effectiveness of government controls. Those who, like Friedman, valued individual freedom and supported free-market capitalism were a beleaguered minority. In 1947 the economist and political scientist Friedrich Hayek brought a handful of them together in the Swiss resort of Mont Pelerin. He hoped they could form an intellectual kernel to keep the values of liberalism – in the classical, European sense – alive during what seemed particularly dark times.
Two of the participants at Hayek’s meeting were Milton Friedman and his friend George Stigler. Though the ideas of the Mont Pelerin Society, as it became known, remained in the intellectual wilderness for decades, it continued to grow, becoming a leading focus for liberal ideas. It would produce many Nobel economists – including Friedman, Hayek and Stigler – and Friedman would become one of its most distinguished presidents.
Some 15 years after that first meeting in Mont Pelerin, Friedman produced a book that changed him from a little-known professional economist (albeit one who focused on the big public issues like inflation) into a famously controversial public intellectual.
His 1962 book Capitalism and Freedom, written with his wife Rose, pulled no punches. It began with a thoroughgoing endorsement of the principles of personal liberty on which their country was founded. It went on to show how government intervention had eroded this liberty, leaving human society less free and the economy less efficient, capable and prosperous. It closely reflected the views of the 19th-century English philosopher John Stuart Mill: a belief in the dignity of the individual, a conviction that progress occurs only through the genius of individuals, and the conclusion that we must uphold the diversity and variety that allows individualism to flourish. It also drew from the arguments in Hayek’s seminal book The Road to Serfdom, that the greatest threat to freedom and progress is concentrated power.
From this liberal foundation, Capitalism and Freedom went on to address the great public issues of the day – economic policy, trade, education, discrimination, monopoly and poverty. Its policy prescriptions seemed unachievably radical at the time; but 40 years on, almost all of them have begun to be implemented or trialled in some part of the world or another. It called for flat taxes, with everyone paying the same rate – a system pioneered by Estonia and now adopted by a score of other countries. It demanded that state-run Ponzi-scheme pension systems should be replaced by saving through personal accounts – a transformation made by Chile and a growing number of other nations. It recommended replacing the state mail service by competition, which is happening today across the European Union. It called for an end to military conscription, a bitter argument in the United States at the time, which Friedman eventually won. It recommended that drugs should be decriminalised – a policy that is now being tested in several places.
“Every friend of freedom. . .must be as revolted as I am by the prospect of turning the United States into an armed camp, by the vision of jails filled with casual drug users and of an army of enforcers empowered to invade the liberty of citizens on slight evidence.”
– Milton Friedman in The Wall Street Journal, 7 September 1989
The book was a huge success, selling hundreds of thousands of copies. Milton and Rose called their summer cottage in Vermont Capitaf after it. And it confirmed Friedman’s status as a national controversialist. His quick wit, engaging personality and easy-to-grasp arguments made him a natural participant in any public debate – particularly when some lone voice against mainstream thinking was needed. He wrote magazine articles, appeared on radio discussions, and was always happy to criticise the Federal Reserve at Congressional hearings in Washington.
Political involvement
Friedman’s quick mind and economic expertise also put him in demand with politicians. In 1964 he became chief economic advisor to the US presidential candidate Barry Goldwater – though he did not share in any campaigning. Goldwater’s crushing defeat at the hands of his opponent Lyndon Johnson – who branded Goldwater as a bellicose extremist – did nothing to make Friedman’s ideas any more popular.
In the early 1970s, President Richard Nixon invited Friedman to be one of his economic advisors. Following Friedman’s guidance, Nixon’s budget director (and fellow Chicago economist) George Schultz ended 25 years of fixed exchange rates and floated the US dollar. But Friedman openly disagreed with Nixon’s introduction of wage and price controls, which he argued would have no impact on the inflation of the time and would only harm the US economy.
Later, another President, Ronald Reagan, was much influenced by Friedman, had read his Capitalism and Freedom, would quote him, and accepted the folly of politicians trying to control markets. He consulted Friedman, who advised him to cut spending, taxes and regulation, and pay keen attention to the money supply.
Widening influence
Friedman found a wider audience with the regular column he wrote in the popular news magazine Newsweek between 1966 and 1984. He produced around 300 of these articles, using them to challenge the economic and political orthodoxy of the day. He explained why minimum wages would hurt young blacks rather than help them; how current policy would produce inflation and recession at the same time (something that mainstream economists thought impossible); how big business talked free markets but prospered on government favours; and many other issues. These Newsweek columns made Friedman one of America’s most prominent – and most controversial – policy thinkers. Gradually, Friedman’s startlingly fresh views, and his clear and unfussy explanations, brought an understanding of economics – and in particular, of free-market economics – to a whole generation of Americans.
“There is a standard pattern. When anybody threatens an orthodox position, the first reaction is to ignore the interloper. The less said about him the better. But if he begins to win a hearing and gets annoying, the second reaction is to ridicule him, make fun of him as an extremist, a foolish fellow who has these silly ideas. After that stage passes, the next, and the most important, stage is to put on his clothes. You adopt for your own his views, and then attribute to him a caricature of those views saying, ‘He’s an extremist, one of those fellows who says only money matters – everybody knows that sort. Of course money does matter, but. . .’ ”
– Milton Friedman, The Counter-Revolution in Monetary Theory
But it was in later life that Friedman would gain the widest – indeed, worldwide – exposure for his liberal, free-market ideas. Retiring from Chicago at 65 in 1977, he and Rose moved to California, where he took up a fellowship with the Hoover Institution, a public policy research centre at Stanford University. Shortly afterwards, Robert Chitester, a public broadcaster from Pennsylvania, put to Friedman an audacious project: a multi-million-dollar documentary series in which he would present his own social, economic and political ideas.
There was no script; in each half-hour segment, Friedman merely explained his ideas off the cuff in his usual fluent and candid way, against the backdrop of world locations from America to the Far East. The series, Free to