Milton Friedman. Eamonn Butler

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СКАЧАТЬ was critical of the prevailing faith in government economic management. It was at Chicago that Friedman met his future wife, Rose Director, with whom he wrote a number of radical books on public policy, and who provided constructive criticism of nearly all of his professional economics works.

      Friedman graduated in 1933, at the dawn of Roosevelt’s New Deal, with its large-scale public works projects aimed at creating new jobs, and high import tariffs aimed at preserving existing ones. Roosevelt’s expanding government was sucking in talented economists, and soon Friedman became one of them, joining the National Resources Committee in Washington. His research there on consumer behaviour gave him insights that would subsequently enable him to challenge Keynes himself.

      The wartime Keynesian

      Yet at this time, Friedman was – like everyone – a Keynesian. After a short teaching stint and a period at the National Bureau of Economic Research doing research with Simon Kuznets on professional incomes, Friedman returned to Washington in 1942 to undertake wartime work on tax policy for the US Treasury. He even worked on Keynes’s idea of raising taxes to combat inflation, testified to Congress in support of it, and co-authored a 1943 paper on the subject, Taxing to Prevent Inflation.

      Years later, Friedman would come to support almost any cut in taxes, famously rejecting the notion that tax rises could affect inflation: only changes in the supply of money, he insisted, could do that. But he had yet to develop these groundbreaking ideas: indeed, he never even mentioned money in his 1942 testimony.

      “I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”

      – Milton Friedman, interview with John Hawkins (2003)

      Friedman spent the rest of the Second World War in Columbia University’s Statistical Research Group, where he and colleagues developed a statistical technique known as sequential analysis. It still remains one of the key tools in quality control experiments, such as the clinical trials of new pharmaceuticals. Only after the war did he begin to strike out as a radical and controversial economic thinker.

      The emerging radical

      Milton Friedman was scarcely five feet tall. His friend George Stigler was over a foot taller. They acquired ironic nicknames: Mr Macro (Friedman, whose field was macroeconomics, the overall workings of the economy) and Mr Micro (Stigler, who specialised in microeconomics, the behaviour of individual consumers and households). In 1945, Stigler swung Friedman a job at the University of Minnesota, where they collaborated on the pamphlet Roofs or Ceilings?, a pungent repudiation of rent controls. This wartime measure, they argued, had perverse results. By keeping rents down, it made landlords less willing to rent out and maintain their property, reducing both the supply and the quality of accommodation.

      Economists and politicians considered the pamphlet an uncouth assault on their ability to shape and regulate markets through government action. It was a rude insult to the mood of the times. But it marked the birth of Milton Friedman the free-market economist; and it would be Friedman’s ideas that, albeit much later, would ultimately prevail.

      The same year, Friedman published Income from Independent Professional Practice, co-authored with Simon Kuznets, outlining the work they had done at the National Bureau of Economic Research. It is a dense statistical work of 600 pages, but it makes a strong public policy argument that Friedman the political radical would come back to again and again. It showed that the chief beneficiaries from occupational licensure – official regulation of professions such as doctors, dentists, lawyers, accountants and engineers – are the professionals themselves, rather than the public whom this measure is supposed to protect. Because regulation restricts competition, the public end up paying higher fees for a poorer service.

      The Chicago economist

      Friedman’s career at Minnesota was cut short by the offer of a teaching post at the University of Chicago – America’s leading centre for economics teaching and research. Although Friedman’s early teachers had mostly moved on, Chicago still retained a respect for markets that was deeply unfashionable elsewhere. Heavily influenced by Keynes, the overwhelming majority of economists and political scientists advocated a mixed economy with a large degree of government ownership and control – or even a democratic socialism. It seemed unimaginable that the market could achieve better results than deliberate planning and careful regulation. Keynes had demonstrated, to almost everyone’s satisfaction, that the capitalist economy had run out of steam, and needed government investment to kick-start job creation. Even at the best of times, he thought, capitalism was inherently unstable – a point demonstrated by the 1929 crash and the turmoil that followed.

      At Chicago, Friedman once again came under the influence of iconoclastic economists, of whom Frank Kinght was probably the most persuasive. Knight understood, and was able to explain, how the market system steered resources to where they were most urgently needed, without the need for government direction, planning or controls. Indeed, one of Knight’s students from the 1940s, James Buchanan – who would also receive the Nobel Prize for economics – wrote that within six weeks of enrolling in Knight’s price theory course, he had been converted from a rabid socialist to a zealous advocate of free markets.

      Another thing that Knight preached was that nothing should be sacrosanct in academic argument and debate. Though the orthodoxy of the time might be to believe that capitalism had deep failings and needed strong government intervention to correct them, Knight urged his colleagues and students not to shy away from questioning its assumptions, methods and conclusions.

      For his part, Friedman believed that Keynes’s macroeconomic analysis provided quite a useful way of understanding the economy. Its flaw, though, was that it was riddled with false assumptions and factual mistakes. True to his nickname of Mr Macro, he analysed the economy with the tools that Keynes had invented, using the same sweeping concepts such as national income, government spending, and total unemployment, consumption and investment. Indeed, one of the things that made him so effective a critic of Keynes’s followers was that he argued from within the same framework that they accepted and understood. But he deliberately confronted their prejudices with his 1948 article ‘A Monetary and Fiscal Framework’, which impertinently suggested that unfettered capitalism, built on the foundation of private property, produced much greater economic efficiency – and a larger measure of freedom and democracy too – than the socialist or interventionist alternatives. And this was not a question of theory. It was a matter of evidence.

      Evidence was at the core of Friedman’s concept of economic science. As he explained in The Methodology of Positive Economics, the choice of what goals we should strive for is a question of values and ethics. But economics must deal with facts, not values. Its subject is whether or not a particular policy helps to achieve our chosen goals. Economics is a science like any other: in science we formulate theories and make predictions about what an action will achieve, and then check the facts to see if we were right. Does the minimum wage, for example, reduce poverty (by giving workers higher wages) or increase it (by creating unemployment)? The evidence provides an answer that people can agree on, regardless of how high they rank poverty among our many social problems.

      The monetary theorist

      To Friedman, economics is about making accurate predictions, not about refining elegant mathematical models. Economists should aim to understand the big economic issues of the day, test their theories against the facts, and so find solutions that improve people’s lives. It may have been this idea that drew him to the fight against inflation – a particularly big problem in the postwar years – and to the economic theory with which he СКАЧАТЬ