- February 8, 2024
- Linda Yueh
- Themes: Books, Economics
Milton Friedman's revolution in economic thought was so total that even his intellectual opponents would admit 'We are all monetarists now.'
Milton Friedman: The Last Conservative, Jennifer Burns, Farrar, Strauss & Giroux, £31.99
‘The age of John Maynard Keynes gave way to the age of Milton Friedman.’
This was proclaimed by John Kenneth Galbraith at the end of the 1970s, himself one of the most famous economists in the world.
The Keynesian revolution took hold during the 1930s when unemployment was the challenge of the day. In the 1970s, however, the theories of John Maynard Keynes could not explain stagflation (stagnant economy and high inflation), but Friedman could, with his focus on the role of the money supply dubbed monetarism. This theory was described by Friedman as ‘Inflation is always and everywhere a monetary phenomenon.’
Even Friedman’s great rival in the battle of ideas acknowledged the dominance of Friedman by then. In his 1976 presidential address to the prestigious American Economics Association, Franco Modigliani declared ‘We are all monetarists now.’
This was quite an admission coming from MIT’s Modigliani, who, along with Paul Samuelson, had pitted themselves against Friedman and his Chicago School of Economics for much of the post-war period. Along with Robert Solow and James Tobin, they had embodied Keynesian thought. His declaration reflected the paradigm shift in economics wrought by Friedman.
How did this come about? Burns’ comprehensive biography, drawing on Friedman’s archives held at the Hoover Institute at Stanford University, where she is also based, tells the rich tale of how Friedman became such an influential economist whose ideas reshaped the economic landscape.
The subtitle refers to his visible public role and notable involvement with the Republican party, including presidents from Richard Nixon to Ronald Reagan, that cemented his influence beyond academia. Economic policies, such as the negative income tax and flexible exchange rates, can be traced to Friedman.
Friedman was a great economist, like those who came before and after him, because he did not shy away from grappling with the big challenges of the day. He was recognised with the top prize, the Nobel Prize in Economics in 1976, just a decade after the inception of the annual award, but, his reach was wider than most.
Burns captures Friedman’s desire to influence widely in his own words in the opening to her excellent biography:
‘Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.’
Burns not only details the formation of the man, but also the societal context that shaped Friedman and his libertarian and conservative beliefs. She also incorporates the important roles that his wife, Rose, played in his life, as well as his long-time collaborator, Anna Jacobson Schwartz. All of which makes this the sort of biography that gives the reader the bigger picture and thus a deeper understanding of the subject.
Burns also helps the reader to understand Friedman through his own words. Since her engaging book includes numerous quotes from a very quotable man, this review will also do so in order to highlight some of the key aspects of Friedman’s life and work.
First, Friedman’s wit was apparent in his aforementioned battle of ideas with Keynesians. In a book review, he described the Keynesian savings-investment theory as ‘unbelievably simple. Yet simply unbelievable’.
He did not reserve his pithy observations for fellow academics. In his memoir, he recalls his impression of US Treasury Secretary Henry Morgenthau, Jr: ‘I repeatedly was amazed that anyone with such limitations could occupy so important a position.’
Responding to his student, the future Nobel Laureate Gary Becker after he had jumped to respond to a question, Friedman said: ‘That is no answer, for you are only restating the question in other words.’
Friedman’s classes at the University of Chicago where he spent the bulk of his career promulgated his focus on the supremacy of the market and prices, and his libertarian bent. He believed the government must set up basic rules and institutions so that the prices could operate efficiently, but do no more than necessary.
A prolific contributor to many areas of economics, his approach also shaped his view of the role of business. He observed: ‘There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.’ Indeed, the 1980s saw the rise of Reagan and Thatcher on both sides of the Atlantic, which ushered in a period of financial deregulation and an emphasis on the free market. The ethos of that time was captured by ‘greed is good’, the line from the movie, Wall Street, featuring the fictional banker, Gordon Gekko.
His 1962 book co-authored with Rose, Capitalism and Freedom, set out their belief that ‘if the public wants this kind of an activity enough to pay for it, private enterprise will have every incentive to provide such parks’. They were referring to public parks, but they also mentioned the post office, public housing, toll roads, and the state pension system, and social security. In fact, they listed 14 areas of public ownership that they felt could not be justified and stressed that this ‘list was far from comprehensive’.
He also supported flexible exchange rates. Friedman argued that currencies, like any other product, should have their prices set in a free market. He advocated for the end of the gold standard in favour of allowing currencies to float, as does the current US dollar, the euro, the pound, and others.
An example of the extent to which Friedman applied his philosophy to his own life is when he took a laissez faire approach to the consumption of candy on Halloween. When the theory that his son and daughter would eventually become sated proved false, he instituted regulation.
In my book, The Great Economists, I included a quote from Friedman which captures his thinking: ‘One of the great mistakes is to judge policies and programs by their intentions rather than their results.’ Many who seek influence shy away from speaking truth to power. Not Friedman. When the Nixon administration struggled to contain inflation, George Shultz, director of the Office of Management and Budget, tried to appease a publicly critical Friedman. When President Nixon said to Friedman, ‘Don’t blame George’, in Friedman’s recollection, he replied ‘I don’t blame George, Mr President, I blame you.’
He did not entirely eschew a role for the government beyond establishing the parameters to support a market. His proposal that everyone should have a minimum income, presented as a negative income tax, became the Earned Income Tax Credit, a tax rebate for low-income people. It was originally implemented as a temporary measure to address high inflation, but had become permanent by 1978.
Of all of his notable achievements, his seminal work, co-authored with Schwartz, was on the importance of money supply in explaining the depth of the Great Depression. The extensive data in A Monetary History of the United States, published in 1963, showed a stark 33 per cent decline in the quantity of money, dubbed the ‘great contraction’. They argued that the Fed’s decision to contract the money supply, dampening credit and economic activity, is why the Great Crash of 1929 became the Great Depression of the 1930s.
Indeed, even among his many accolades and numerous contributions to economics, it was money supply that seemed to predominate.
Friedman had a custom vanity plate made for his car, MV = PY, the equation which captures the quantity theory of money that links money supply (M) and its velocity of circulation (V) to the economy’s price level (P) and national output (Y). But Californian plates didn’t have an equal sign, so Friedman used pieces of black tape to create one. Even after he was pulled over by eagle-eyed police officers, he would remain a repeat offender.
Perhaps it’s the great economist Robert Solow who captured Friedman’s focus in the most memorable way when he quipped: ‘Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper.’
These sorts of details add colour to a weighty tome. Burns also doesn’t shy away from detailing his controversies or prejudices, whether that relates to Civil Rights or Chile under Pinochet. Despite its length, Burns’ biography of one of the most fascinating great economists of the 20th century is an entertaining read because of her adept storytelling. It is an important read not only for what we can learn about past policies, but also lessons for today.
As paraphrased by a newspaper, Friedman said: ‘The belief that only a strong government can generate a social market economy or markets open to the world was dangerous to assert.’ He also used his weekly column in Newsweek magazine to state that political freedom ‘is a necessary condition for the long-term maintenance of economic freedom’.
That is certainly a lesson worth hearing today.