JULY 31, 1912 - NOVEMBER 16, 2006Economist who gave voice to the monetary theories which propelled the governments of Ronald Reagan and Margaret Thatcher
KNOWN at his pinnacle as “Mrs Thatcher’s favourite economist” and hailed almost universally as the instigator of monetarist economics, Friedman was a pivotal intellectual inspiration for the Reagan and Thatcher revolutions of the 1980s. Friedman did not invent monetarism — it had been first discussed centuries earlier — but he did combine academic pre-eminence and popular showmanship to propel it to the forefront of politics.
Although the quantum change in economic debates towards neoclassical, anti- Keynesian assumptions was not solely his achievement — Friedrich Hayek and Robert Lucas were also among a group who influenced the shift over several decades — it was Friedman who by 1980 supplanted Keynes as the world’s most influential economist.
He became better known than his peers less because of his academic contribution (which was certainly substantial) than from his promotion by right-wing political lobbyists as a credible pundit to validate their cause. With postwar Keynesianism (recommending expansionary policy to maintain full employment) discredited by economic crisis, a neo-classical alternative (warning that governments could do little to boost economic fortune) had become easier to advance.
But it needed a non-political, intellectual champion. This role Friedman amply filled. The chance to challenge Keynesianism had been evident from the mid-1960s, when simultaneously rising inflation and unemployment were countering previously held assumptions that a trade-off existed between the two negative indicators. Friedman emphasised research also being undertaken by his fellow economist, Edmund Phelps, and claimed that the commonly held inflation/unemployment trade-off was in the long run false.
Instead of people being “fooled” by greater government spending or an expanded money supply into greater economic activity and thus the creation of jobs, Friedman argued that they would anticipate higher inflation and demand higher wage rates — and in so doing leave output and employment unchanged, with inflation higher. As chance had it, the early 1970s brought unusually strong labour union wage demands and a quadrupling of world oil prices, resulting in historically high inflation and unemployment — vindicating Friedman’s denial that a trade-off existed between the two variables.
With the efficacy of expansionary policies doubted, Friedman’s prescription comprised the monetarist understanding that price rises were a function of money growth in the economy. If governments announced limits on that growth they would reduce inflationary expectations and wage demands — and thus reduce inflation itself. Unemployment would remain at its Natural Rate — Friedman’s earlier hypothesis — and could only be reduced by supply side measures such as those improving productivity.
So ran the theory. It was, however, Friedman’s homespun, plain-speaking capacity as a marketable populist, not economic detail, that brought him international fame. As the 1970s progressed new movements on the political Right began to finance his lecture tours and provided audiences for his opinions — a way for them to combat the Keynesianism espoused by established luminaries such as the elegantly patrician J. K. Galbraith.
Further popularisation came in a significant TV series, Free to Choose (1980). Accessible and irrepressible, with a verbal skill that resonated with Main Street America, Friedman provided great comfort to Galbraith’s many bitter enemies within the American Right, now beginning a final push to restore power to ideological conservative hands. Friedman’s justification of the case for private, not public, affluence played a significant influence on political debates — and certainly aided Ronald Reagan’s accession to the presidency in 1980.
But one political alignment had already involved him in virulent controversy. In 1973 the freshly installed Pinochet military regime in Chile sought his advice on reducing hyper- inflation, running at more than 350 per cent. Friedman recommended a shock treatment of budget cuts and monetary contraction — which he claimed improved the economy. But they were accompanied by massive increases in unemployment and bankruptcies, and a painful drop in food supplies.
His leftwing critics seized on Chile — “the laboratory of Friedmanism” — as proof of the impracticality and cruelty of his ideas. The bitterness erupted into violence in 1976, when demonstrations marred the ceremony marking his winning the Nobel Prize. But, as George Soros recalled, the decisive twin events which gave Friedman’s career such historical significance were the elections of Margaret Thatcher and Ronald Reagan to government in 1979 and 1980. As Soros put it, the “market fundamentalism” unleashed in UK and US economic policy- making now put Friedman’s reputation to the most awkwardly visible of tests.
But it also initiated his decline. Enacted beyond his control, the flawed attempts to target monetary aggregates in leading economies soon ended in failure. In Britain the chosen main money aggregate, M3, overshot almost immediately, boosted by companies and households easily sidestepping moves to prevent them borrowing. The US Federal Reserve had already long attempted to target its primary aggregate, M1, without success. In 1979 the US authorities toughened measures to limit the money in circulation. Unemployment soared in both countries. Critics slammed the “motorway madness” of policymakers’ eerily over-credulous implementation of untried economic theories.
Pragmatism soon prevailed. The decline of monetarism was highlighted first by the Bank of England’s Charles Goodhart coining a much-cited new economic law, namely that the moment an economic indicator — say a monetary aggregate — was cited for targeting, the public would adjust its behaviour, making the stated target useless as a policy tool.
Next, Friedman himself — previously a well-noted visiting adviser at Downing Street — dramatically distanced himself from Thatcher’s economic record.
Speaking in 1983, he said that British unemployment had not doubled because his theory was wrong. Instead he blamed “gyrations” in policy. “It’s gone down, it’s gone up, it’s gone down, it’s gone up,” he complained. Thus “you (the British) had a much more severe recession than would have been necessary”.
The guru was not alone in his retreat. Reagan, Thatcher and other previously amenable Western leaders had already abandoned excessive dependence on monetarist recipes. By 1985 few accorded significance to money aggregate targets that, for form’s sake, governments continued to announce along with annual budgets. The US shifted economic strategy in 1982 to one of what was in effect deficit financing of tax cuts; Nigel Lawson would shift to exchange-rate targeting and fiscal expansion. Although counterinflation policy continued in the form of independent central banking theory, the Friedmanite monetarist experiment was over.
Milton Friedman was born in Brooklyn, New York, in 1912, one of four children and the only son of Carpatho-Ruthenian Jewish immigrant parents, Jeno Saul and Sarah Ethel (née Landau) Friedman. The family income from his father’s various jobbing ventures and his mother’s store was, Friedman recalled, “small and highly uncertain” — but the household’s atmosphere was “warm and supportive”. His father died when he was 15, shortly before Friedman’s graduation from Rahway High School in New Jersey, where the family had moved in 1913.
A scholarship (and jobs as, variously, waiter, shop assistant and sometime vacation entrepreneur) funded him, during the trough of the Depression, through Rutgers University. Initially, he specialised in maths, aiming to become an actuary. But his interest in economics grew, and he soon redirected his studies towards it. He was helped by some inspiring instructors, including the young Arthur Burns, a future chairman of the Federal Reserve, whom Friedman credited with introducing him to “the highest scientific standards”.
He graduated with a major in both maths and economics in 1932. Financially assisted by a tuition scholarship, he gained his masters degree from Chicago University 12 months later, meeting (initially aided by an alphabetical seating plan) his future wife, Rose Director.
Friedman credited Chicago with “a cosmopolitan and vibrant intellectual atmosphere of a kind I had never dreamed existed”. He was next offered a fellowship at Columbia, where he further sharpened his mathematical capabilities. A government job followed at the National Resources Committee — a Rooseveltian New Deal creation — before he joined the National Bureau of Economic Research. There in 1946 he co-published with Simon Kuznets his first book, Incomes from Independent Professional Practice. Accusing physicians of price-fixing monopoly practices, the work — an extension of what was also Friedman’s PhD thesis — provoked trenchant opposition, delaying its publication by six years.
When the Second World War began, Friedman assisted on federal tax policy, and from 1943 as a statistician investigating problems of weaponry and military tactics. In 1946 he made the pivotal move of his career, to teach economic theory at Chicago.
There his Tuesday afternoon workshops on money supply became legendary. Friedman recalled that participants included “a large fraction” of those who later helped monetary economics to its 1970s revival. During his career his supervision of more than
50 doctoral theses did much to create a Friedmanite school, which would propagate its own secondary policy-making influences.
Meanwhile, he pioneered theories that elevated him long before his declarations on monetarism. A Theory of the Consumption Function (1957) was followed by A Monetary History of the United States 1867-1960, written with Anna Schwartz and published in 1963. It became a classic volume on the monetary system. By now he was already being drawn into more public arenas, serving as economic adviser of Barry Goldwater’s ill-fated 1964 presidential campaign, and on Richard Nixon’s successful 1968 bid. In 1966 he began a regular Newsweek column, which he continued until 1983.
His intellectual output also included creative contributions to the theories of uncertainty in mathematical statistics, and clarifying the distribution of incomes and welfare theory. He conceded that there were working imperfections in even the most attractive theoretical market system. But he argued, as politicians say of democracy, that those doubting the market should ponder the alternatives.
On reaching retirement age in 1976, he joined Stanford University’s Hoover Institution, and from there he continued to campaign for economic freedoms worldwide. This mission took him to China months before the Tiananmen Square massacres. As one observer recalled, the young Chinese “followed Milton around like he was a god”. The Left maintained its onslaught, not least for his alignment with the Pinochet regime. Yet a late endorsement came from a most unexpected left source: when the Mayor of London, Ken Livingstone, introduced the central London congestion charge in 2003, he joked that he had stolen the idea from Friedman, who had apparently written in favour of such a charge in a paper in 1951.
Friedman maintained his output of policy statements. He pointedly opposed the Euro, giving warning that the UK should avoid joining — unless with the help of “an undervalued exchange rate”.
Friedman looked the part of a modern sage: he was a bespectacled little gnome of a man. He published well over 20 books, and his devotion to liberty was most evident in his Capitalism and Freedom (1962), co-written with his wife, to whom he attributed many of his ideas. In person he was the opposite of the cloistered academic, a cheerful outgoing man with a seemingly inexhaustible patience for answering questions, however rudimentary, from those without an economics training. His other hobbies included tennis, wooden cabinet making and assembling stereo equipment.
He married Rose Director in 1938. The couple published their autobiography, Two Lucky People, in 1998. His wife and their son and daughter survive him.
Milton Friedman, economist, was born on July 31, 1912. He died on November 16, 2006, aged 94.