Friday, November 17, 2006

Capitalism and Friedman

November 17, 2006

There are some public figures whose obituaries can be written years in advance. Milton Friedman was not one of them.

Arguably the greatest economist of the 20th century, he won his Nobel Prize 30 years ago. His classic "Capitalism and Freedom" was published 44 years ago. He died yesterday at the age of 94, but as the op-ed running nearby attests, he was active in writing about, thinking about and explaining how economics affects our world until the end.

In today's feature, he updates and re-examines conclusions he reached about the Great Depression in "A Monetary History of the United States, 1867-1960," a book published with Anna Schwartz 43 years ago. His thesis was that the Great Depression was not, as was once commonly presumed, a "market failure," but a failure of government policy. Contraction of the money supply in the wake of the stock-market crash of 1929 was what turned a financial event into an economic catastrophe.

This insight flowed from Professor Friedman's conviction that "money matters." As the Royal Academy of Sweden noted in announcing his 1976 Nobel, Friedman's was a lonely voice in arguing for the importance of the money supply in economics when he began writing about it in the 1950s.

By the late 1970s, stagflation -- the combination of high inflation and high unemployment -- had made it obvious that the then-dominant Keynesian model had some large holes. These included the effect of the money supply on inflation and the fact that inflation and employment did not move in lockstep as some of Keynes's disciples asserted. It was a seminal insight, creating what became known at the University of Chicago and elsewhere as the "monetarist school" and laying the intellectual basis for central bankers to break the great inflation of the 1970s.

In awarding its Nobel in 1976, the Royal Swedish Academy of Sciences cited his "achievements in the fields of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy." The citation covers a huge swath of economic thinking, and suggests both the range and the consistency of Professor Friedman's thought. In layman's terms, the Swedish Academy credited him with nothing less than shredding the Keynesian consensus.

First, he had shown that men are no fools. People spend money in accordance with their income expectations over the long-term, not in response to one-time "stimuli" from the government. This is known as the "permanent income" hypothesis, and it called into question Keynesian notions of how short-term stimulus affects the economy. In addition to his monetary insights, Mr. Friedman questioned the degree to which fiscal policy could be used to "fine-tune" the economy by adjusting spending, tax or monetary policy. Today we take for granted that all of these operate with a lag, but it was Milton Friedman who first highlighted the problem.

For all of his academic accomplishments, Professor Friedman's role as a popularizer of free-market principles was arguably more important. He wrote a column in Newsweek for 18 years starting in 1966, preaching the importance of economic freedom to a generation that had never heard such things in school. His 1980 book, "Free to Choose," was a best seller, and the videos that accompanied it were smuggled behind the Iron Curtain like seeds of revolution.

He was among the first to point to Hong Kong as a model of free-market success, a lesson that even today is remaking Communist China. And he first suggested educational vouchers to rescue failing public schools as long ago as 1955; in recent years, he established a foundation to support this idea that continues to advance despite ferocious opposition from unions and other entrenched interests.

This newspaper had the privilege of publishing Milton Friedman's articles on numerous occasions over the years. We've also disagreed with him from time to time, notably on exchange rates and drug legalization. These disputes always gave us cause to reflect, and 20 years ago amid one debate on the benefits of fixed exchange rates we noted that "being spanked by Milton Friedman is one of life's most humiliating experiences."

In truth, Professor Friedman always argued with civility and a bracing wit. One of his best barbs on the size of government: "Given our monstrous, overgrown government structure, any three letters chosen at random would probably designate an agency or part of a department that could be profitably abolished." And he popularized "There is no such thing as a free lunch."

In "Two Lucky People," written with his wife, Rose Friedman, who survives him as a distinguished economist in her own right, Mr. Friedman well described the role of a public intellectual: "We do not influence the course of events by persuading people that we are right when we make what they regard as radical proposals. Rather, we exert influence by keeping options available when something has to be done at a time of crisis."

On the death of Ronald Reagan, whom he advised, Mr. Friedman wrote on these pages that "few people in human history have contributed more to the achievement of human freedom." The same can and long will be said of Milton Friedman.

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