Milton Friedman R.I.P.
Milton Friedman, who died this week, appears to be being remembered as a populariser of free-market ideas, which he was, but he was also one of the four most brilliant economists of the 20th century.
It always seemed to me that there were almost two Milton Friedmans - the brilliant academic, who was objective, balanced, nonpartisan, and immensely insightful, and the doughty champion of free markets, who presented a far more simplistic picture and came out with some memorable word pictures.
Of course, many of the things which people think they know about Friedman were myths assiduously spread by people opposed to the political message he spread. The classic example was the suggestion that that he supported the Pinochet regime in Chile. I can still remember, pretty much word for word, a Bernard Levin opinion piece from The Times of 30 years ago on the subject:
"Professor Milton Friedman (Boo) has been writing to The Daily Telegraph (Boo) about Chile (Boo). The poor devil has been trying to explain that he is not economic adviser to the Chilean government, which he isn't, and that he never has been, which is likewise so"
Levin added that he called Friedman a poor devil because he had "about as much chance of dislodging that particular myth from the minds of the left" as he had of persuading them of various other things which you would not expect a left winger to believe.
I can remember the full quote but I don't want to repeat it for reasons which are a sad reflection on the way political debate takes place in 2006. I regard the former Pinochet regime in Chile as a disgraceful bunch of mass murderers. Taken in context the full quote from Bernard Levin supports that view, but it would be possible to take the final phrase out of context in a way which could be twisted to mean something different.
I've already had one opinion which is the opposite of what I think attributed to me this month in a letter to the Whitehaven News from someone who should have known better. I'm not going to write anything which makes it easy for anyone to try the same trick again. Isn't it sad that anyone with aspirations to public life has to watch not just the actual meaning of everything we say and write in public, but how it could be twisted and misrepresented?
Friedman the propagandist came up with some great phrases - "There aint no such thing as a free lunch" was perhaps the best and it will be remembered. I suspect that fewer people will remember the sayings that Friedman the brilliant economist came out with - I think it's an absolutely safe bet that very few indeed would believe that "We are all Keynsians now" was one of them. But it was.
Friedman the propagandist has been represented as an ivory tower extremist as part of the attack on Thatcherism, but ironically even those who helped give him that reputation, such as New Labour, have been very quick to use the ideas of Friedman the great economist. To give one simple example, the terms under which Gordon Brown delegated to the Bank of England and it's Monetary Policy Committee the power to set UK interest rates were exactly the sort of policy which Friedman advocated.
Those who study economics seriously will remember Friedman for two things. The first was his studies of the monetary history of the United States and particulaly the Great Depression of the 1930s, in which he demonstrated the role of banking failures and the collapse of the money supply in helping to cause and greatly exacerbate that recession. This was the work for which he was awarded a Nobel Prize.
The fact that governments and central banks had absorbed the lessons which Friedman pointed out is one of the reasons that none of the stock market crashes or recessions since the 1980s have been allowed to deteriorate into an economic disaster of 1930's proportions.
Friedman's second great contribution was to explain in 1968 why the "Phillips Curve" relationship which correctly predicted the relationship between unemployment and wage increases between the late 19th century and the late 1960's was about to collapse. From the 50's, governments started to use the "Phillips Curve" as a means of policy, believing they could make a trade-off between inflation and unemployment, and this did work for nearly two decades.
Friedman's insight followed on from the Keynsian concept of "money illusion" e.g. when inflation fools people about the value of the money they were being paid in. He argued that if a government tries to reduce unemployment at the price of higher inflation, people will not stay fooled. Once inflation becomes embedded in the economic system, people will start to take it into account when they are looking at the value of their wages and the prices they pay, so that higher and higher levels of inflation become necessary to fool people and reduce the level of unemployment. Eventually everyone measures all price and wage changes against current and expected increases in the published inflation indices and the trade-off between inflation and unemployment collapses. This is exactly what happened in the late sixties and seventies.
You can see from the paragraph above that, although Friedman has a reputation as the arch monetarist, he was quite willing to take ideas from Keynes if he thought they were right. This goes both ways. A very prominent Keynsian economist, Modigliani, once paid tribute to Milton Friedman's work, and specifically referring to Friedman's comment that "We are all Keynesians now" he responded that in the sense that almost all economists recognised that we can learn from Friedman's work, "We are all monetarists now."
It always seemed to me that there were almost two Milton Friedmans - the brilliant academic, who was objective, balanced, nonpartisan, and immensely insightful, and the doughty champion of free markets, who presented a far more simplistic picture and came out with some memorable word pictures.
Of course, many of the things which people think they know about Friedman were myths assiduously spread by people opposed to the political message he spread. The classic example was the suggestion that that he supported the Pinochet regime in Chile. I can still remember, pretty much word for word, a Bernard Levin opinion piece from The Times of 30 years ago on the subject:
"Professor Milton Friedman (Boo) has been writing to The Daily Telegraph (Boo) about Chile (Boo). The poor devil has been trying to explain that he is not economic adviser to the Chilean government, which he isn't, and that he never has been, which is likewise so"
Levin added that he called Friedman a poor devil because he had "about as much chance of dislodging that particular myth from the minds of the left" as he had of persuading them of various other things which you would not expect a left winger to believe.
I can remember the full quote but I don't want to repeat it for reasons which are a sad reflection on the way political debate takes place in 2006. I regard the former Pinochet regime in Chile as a disgraceful bunch of mass murderers. Taken in context the full quote from Bernard Levin supports that view, but it would be possible to take the final phrase out of context in a way which could be twisted to mean something different.
I've already had one opinion which is the opposite of what I think attributed to me this month in a letter to the Whitehaven News from someone who should have known better. I'm not going to write anything which makes it easy for anyone to try the same trick again. Isn't it sad that anyone with aspirations to public life has to watch not just the actual meaning of everything we say and write in public, but how it could be twisted and misrepresented?
Friedman the propagandist came up with some great phrases - "There aint no such thing as a free lunch" was perhaps the best and it will be remembered. I suspect that fewer people will remember the sayings that Friedman the brilliant economist came out with - I think it's an absolutely safe bet that very few indeed would believe that "We are all Keynsians now" was one of them. But it was.
Friedman the propagandist has been represented as an ivory tower extremist as part of the attack on Thatcherism, but ironically even those who helped give him that reputation, such as New Labour, have been very quick to use the ideas of Friedman the great economist. To give one simple example, the terms under which Gordon Brown delegated to the Bank of England and it's Monetary Policy Committee the power to set UK interest rates were exactly the sort of policy which Friedman advocated.
Those who study economics seriously will remember Friedman for two things. The first was his studies of the monetary history of the United States and particulaly the Great Depression of the 1930s, in which he demonstrated the role of banking failures and the collapse of the money supply in helping to cause and greatly exacerbate that recession. This was the work for which he was awarded a Nobel Prize.
The fact that governments and central banks had absorbed the lessons which Friedman pointed out is one of the reasons that none of the stock market crashes or recessions since the 1980s have been allowed to deteriorate into an economic disaster of 1930's proportions.
Friedman's second great contribution was to explain in 1968 why the "Phillips Curve" relationship which correctly predicted the relationship between unemployment and wage increases between the late 19th century and the late 1960's was about to collapse. From the 50's, governments started to use the "Phillips Curve" as a means of policy, believing they could make a trade-off between inflation and unemployment, and this did work for nearly two decades.
Friedman's insight followed on from the Keynsian concept of "money illusion" e.g. when inflation fools people about the value of the money they were being paid in. He argued that if a government tries to reduce unemployment at the price of higher inflation, people will not stay fooled. Once inflation becomes embedded in the economic system, people will start to take it into account when they are looking at the value of their wages and the prices they pay, so that higher and higher levels of inflation become necessary to fool people and reduce the level of unemployment. Eventually everyone measures all price and wage changes against current and expected increases in the published inflation indices and the trade-off between inflation and unemployment collapses. This is exactly what happened in the late sixties and seventies.
You can see from the paragraph above that, although Friedman has a reputation as the arch monetarist, he was quite willing to take ideas from Keynes if he thought they were right. This goes both ways. A very prominent Keynsian economist, Modigliani, once paid tribute to Milton Friedman's work, and specifically referring to Friedman's comment that "We are all Keynesians now" he responded that in the sense that almost all economists recognised that we can learn from Friedman's work, "We are all monetarists now."
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