By Michael S. Olympios
One of the greatest economic thinkers of our time Milton Friedman died last week on November 16th at the age of 94. A half century ago, Milton Friedman’s advocacy of free markets over government intervention and his prescription for inflation-fighting by central banks were treated as fringe notions by many economists. Mr Friedman taught for most of his academic career at the most prestigious institution in economics in the
A diminutive man known for his strong-willed and combative style, Mr. Friedman provided the intellectual foundations for the anti-inflation, tax-cutting and antigovernment policies of President Ronald Reagan and British Prime Minister Margaret Thatcher and an era of more-disciplined central banking. His ideas helped to end the military draft in the 1970s, gave birth to staple conservative causes such as school vouchers and created the groundwork for new economic views about the Great Depression, unemployment, inflation and exchange rates.
As with many of his ideas, his prescriptions weren’t immediately accepted by central bankers when he advanced them in the 1950s and 1960s. Many economists believed inflation could arise from other factors, such as the influence of unions, corporations or oil-producing countries.
These views were advanced by Mr. Friedman’s early mentor and friend, Arthur Burns, Federal Reserve chairman from 1970 to 1978. Mr. Friedman was harshly critical of Mr. Burns’s monetary policy, and as inflation rose and unemployment took hold, his own views grew in prominence. By the time he won his Nobel, the unemployment rate had climbed to more than 7% and was on its way to surpassing 10%. The inflation rate, too, had flirted with double-digit levels.
It took Paul Volcker, who became Fed chairman in 1979, to put the monetarist theory into practice, adopting money-supply targets that drove interest rates to double digit levels, sent the economy into a deep recession, and ultimately brought inflation down drastically. But unemployment eventually fell as well, proving that Mr. Friedman and Mr. Phelps were right about the absence of a rigid trade-off between unemployment and inflation.
While central bankers still accept that inflation is largely a result of money-supply growth, few target the money supply in practice because it is difficult to measure and its relationship to overall spending often shifts.
“Friedman’s monetary framework has been so influential that, in its broad outlines at least, it has nearly become identical with modern monetary theory and practice,” according to Fed Chairman Bernanke.
Early in his life, he planned to become an actuary. But he emerged after World War II as a strong-viewed young professor at the
Mr. Friedman, who had started his studies at
Influenced by such earlier free-market thinkers as Friedrich von Hayek, Mr. Friedman — some of whose relatives died during the Nazi occupation of
“No one in the 20th century has had the ideological influence that Milton Friedman has had in moving the economic profession from Great Depression-era do-goodism towards a friendliness toward, and appreciation of, the free market,” said Paul Samuelson, a fellow Nobel laureate and frequent ideological opponent of Mr. Friedman. “We’ve lost a giant in economics.”
He also attacked the system of fixed currency-exchange rates that emerged after World War II with encouragement from Mr. Keynes. George Shultz, a long-time friend of Mr. Friedman who served in both the Nixon and Reagan administrations, says that after Mr. Nixon was elected in 1968 but before he took office, Mr. Friedman wrote to him saying that “pressures on the tie of the dollar to gold are relentless” and that Mr. Nixon would be wise to sever the link immediately as an affirmative action, rather than be forced to. Mr. Friedman “turned out to be right,” but Nixon didn’t listen “until he was forced to,” Mr. Schultz says.
Mr. Nixon abandoned the gold standard in 1971.
By the 1970s, his influence had become substantial. He was a member of the Commission on an All-Volunteer Armed Force, appointed by Mr. Nixon in 1969. Former Fed Chairman Alan Greenspan, who was also a member, says that at the outset, panel Chairman Thomas Gates “was very clearly unconvinced that a volunteer army would work. At the end of the commission hearings he was strongly in favor of it, and the main reason was Friedman kept dissuading him on all the concerns he had.” Mr. Nixon ended the draft in 1973.
That same year Mr. Reagan, who had just made an unsuccessful bid for the presidency, noted the demonstrations in a radio address and said, “It seems when Milton Friedman talked, someone in
Mr. Friedman once described his refusal to leave academia as necessary to his larger mission: “For society to be at once humane and to give opportunity for great human achievements, it is necessary that a small minority of people who do not have materialistic objectives have the greatest degree of freedom.”
For those of us who studied economics in western schools Milton Friedman will remain an inspiration not just as one of the greatest economist of the 20th century but also as a visionary and accomplished man who pursuit vigorously his scientific goals in search for the truth.
