Milton Friedman and More

Excerpted from Brad DeLong's Obituary for MF who died at 94 on November 17th:

Milton Friedman said, when he arrived at the University of Chicago in the 1930s, that he encountered -- "a vibrant intellectual atmosphere of a kind that I had never dreamed existed." ... "I have never recovered."

His worldview began with a bedrock belief in people and their ability to make judgments for themselves, and thus an imperative to maximize individual freedom.

On top of that was layered a trust in free markets as almost always the best and most magical way of coordinating every conceivable task.

On top of that was layered a powerful conviction that a look at the empirical facts -- a comparison, or a "marking to market," of one's beliefs with reality -- would generate the right conclusions.

And crowning that was a fear and suspicion of government as an easily captured tool for the enrichment of cynical and selfish interests.

Suffusing all was a faith in the power of argument and the primacy of reason. Friedman was an optimist. He was convinced people could be taught the truths of economics, and if people were properly taught, then institutions could be built to protect society as a whole against the corruption and overreach of the government.

And he did fear the government.

He was a conservative of the old, libertarian school, from the days before the scolds had captured the levers of power in the conservative movement. He hated any government intrusion into people's private business. And he interpreted "people's private business" extremely widely. He detested the war on drugs, which he saw as a cruel and destructive breeder of crime and violence. He scorned government licensing of professionals -- especially doctors, who heard over and over again about how their incomes were boosted by restrictions on the number of doctors that made Americans sicker.

He abhorred deficit spending -- again, he was a conservative from another era. He feared that cynical politicians could pretend that the costs of government were less than they were by pushing the raising of taxes to pay for spending off into the future. He sought to inoculate citizens against such political games of three-card monte. "Remember," he would say, "to spend is to tax."

This did not mean that government had no role to play.

He endorsed the enforcement of property rights, adjudication of contract disputes -- the standard and powerful rule-of-law underpinnings of the market -- plus a host of other government interventions when empirical circumstances made them appropriate.

Sometime empirical circumstances could win Friedman some unexpected allies. Left-wing Mayor Ken Livingstone's congestion tax on cars in central London is an idea straight out of Milton Friedman.

Friedman's negative income tax is one of the parents of what is now America's largest anti-poverty program: the earned-income tax credit, which was greatly expanded by Bill Clinton.

And, most important, government had a very powerful and necessary role to play in keeping the monetary system working smoothly through proper control of the money stock. If there was always sufficient liquidity in the economy -- enough but not too much -- then you could trust the market system to do its job. If not, you got the Great Depression, or hyperinflation.

Prior to Friedman, the economic giant of the previous generation, John Maynard Keynes, was an equally ferocious debater. The Great Depression had convinced Keynes that central bankers alone could not rescue and stabilize the market economy. In Keynes' view, stronger and more drastic strategic interventions were needed to boost or curb demand directly. Keynes was perhaps the prime influence on U.S. liberals and U.S. economic policy up through the Reagan era; Friedman worked tirelessly to supplant and minimize his influence.

In their "Monetary History of the United States," Friedman and co-author Anna J. Schwartz argued that the Keynesian reliance on intervention was a misreading of the lessons of the Depression. Friedman did think that government was required to undertake relatively narrow but crucial strategic interventions to stabilize the macroeconomy -- keep production, employment and prices on an even keel.

But he believed the Depression might have been rapidly alleviated by skillful monetary management alone.

Over the course of 40 years, Friedman's position carried the day, ... Current Federal Reserve chairman Ben Bernanke now holds Friedman's view, not Keynes', of what kind of strategic interventions in the economy are necessary to provide for maximum production, employment and purchasing power, and stable prices.

Friedman's thought is, I believe, best seen as the fusion of two strong and very American currents: libertarianism and pragmatism.

Friedman was a pragmatic libertarian. He believed that -- as an empirical matter -- giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results.

It was not that he thought this was a natural law. He didn't believe that markets always worked best. It was, rather, that he believed that places where markets failed were atypical:

that where markets failed there were almost always enormous profit opportunities from entrepreneurial redesign of institutions; and that the market system would create new opportunities for trade that would route around market failures.

Most important, his distrust of government told him that government failure was pervasive, and that any expansion of government beyond the classical liberal state would be highly likely to cause more trouble than it could solve.

For right-of-center American libertarians, Milton Friedman was a powerful leader. For left-of-center American liberals, Milton Friedman was an enlightened adversary, and one whose view is now ascendant. We are all the stronger for his work. We will miss him.

-- By Brad DeLong

John Gelles' blog follows Brad DeLong's tribute:

There is something terribly wrong with MF's view of markets, their failures, and government and it's continuum with "management" that forms the "power structure".

The great failure of the power structure has been its inability to eliminate poverty and minimize misery in what should be by now economic (and political) democracies within the global political economy. This failure has been the failures of great men -- not of "markets". There are men and laws and maybe even nations. But these actors cannot turn to "markets" -- markets do not exist. If trade between owners and communications between nations are supposed to create "markets", there will have to be laws (natural or artificial) found on which predictions may be based. These would have to foretell success or failure of the human race in its struggle to overcome scarcity, vulnerability and pain.

MF may have believed (with Hayek and Von Mises) that market prices rationalize our monetary systems of production.

I believe differently: their reach is far less than that -- only government can inform decisions aimed to overcome that trinity -- and cost price and prize juries should play the bigger role in humanity's quest for progress.

People must be free to choose their governors and great men. But shopping for shoes and socks dies not aggregate all wisdom when it comes war and peace, production and consumption, profit and loss versus cost accounting, and the information revolution and appearances before we were able to know the patterns which that revolution is revealing.

The above is my point: the bargained price in money tells us nothing of the price and work required to satisfy rational need in the long run. Our task is to satisfy that need. The function of transaction price is limited to settlement between two people.

Yes we must be free to choose. But we must choose great leaders and allow science to establish reliable prescriptions. Government, governors, generals, merchants and producers form power structures. A theory of limited government is far inferior to a theory of enforceable affordable political and economic individual rights

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