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November 24, 2006

Lucky Milton: William Coleman assesses the career of Milton Friedman and finds similarities with the free market - the market is brash, impolitic, competitive, utilitarian and innovative - and so was Friedman

Posted by William Coleman

Dr William Coleman - Reader in Economics at the Australian National University and the author of Economics and its Enemies: Two Centuries of Anti-Economics - assesses the career and life of an optimistic economist, Milton Friedman.

Milton Friedman's life illustrates how a certain conjunction of social forces and individual idiosyncrasies is required to produce a remarkable life.

His story falls into three parts.

In the first part he surfaces from the limited milieu in which he was raised. Friedman was born in Brooklyn in 1912 to Yiddish and Hungarian speaking parents, who had only recently immigrated from a corner of Eastern Europe that today lies within the Ukraine. With a characteristic directness Friedman once described his father as a "petty trader", who "never made much money". The teenage Friedman himself engaged in some peculiar trading schemes that he cheerfully describes in his autobiography.

On his father's death, his mother resolved that the 15 year old Friedman would for one year commute everyday to the nearest synagogue, in order to pronounce the Kaddish. Friedman states:

I must say I was glad to see the year's end.
As a child Friedman had been "fanatically religious", but he was already firmly agnostic. His parents failed to pass on their faith, but did bequeath the value they placed on education, and it bore rich fruit in their one son.

The second part of Friedman's story would tell of his ascent by industry and talent through American academia; from a graduate student in Depression Chicago supporting himself by waiting on tables (paid one meal a day, and the use of single room above the restaurant), to the uncontested leader of the Chicago School of Economics, then the world's most vigorous current in economic thought.

The principal achievement of this part of Friedman's life was the critique, and demoralisation, of Keynesian economics. This was not the dogmatic project it may seem. To the end of his life Friedman held that Roosevelt's job creating Public Works Administration of the 1930s was an "appropriate response" to Depression conditions.

Friedman was "thoroughly Keynesian" while serving in the US Treasury of the early 1940s. The place he chose to visit in his first sabbatical year (1953/54) was the University of Cambridge. He had submitted his first academic paper to Keynes, as editor of the Economic Journal. (Keynes rejected it). He categorised his most novel single piece of work, Theory of the Consumption Function (1957), as one part of the "outpouring" of research into consumption that followed Keynes' General Theory of 1936. Friedman in 1974 wrote:

The General Theory is a great book, at once more nave and profound than "Keynesian economics".
It is a marvellously apposite judgement.

Friedman's critique of Keynes may be interpreted as no more than the outermost wing of "neo-Keynesian" reformulation of Keynes by American economists. To put it another way, Monetarism was the culmination, or end-point, of the American engagement with Keynes.

The American engagement with Keynes was never going to be a matter of the faithful duplication of what the Master had said. It was always going to be different. For one thing, the Keynesian revolution in England had a social significance that it lacked in the United States. An important part of the charge attached to British Keynesianism of 1930s was its anti-Victorianism. Keynes' struggle against classical "political economy" was the economic manifestation of a more general recoil from Eminent Victorians. That was never going to have same resonance in the United States. There classical political economy had never been the point of cultural orientation it once was in Britain. Ricardo may, as Keynes once wrote, have:

conquered England as completely as the Holy Inquisition conquered Spain.
But Ricardo certainly never conquered the United States.

Secondly, in their engagement with Keynes, Americans would draw on their own native intellectual capital. This was partly theoretical: especially the financial theory of Irving Fisher, an under-estimated figure on the other side of the Atlantic.

This intellectual capital was also partly empirical: and included the elaborate quantitative studies of contemporary economic conditions that had barely begun in Britain. In 1930 a new economics PhD student at the University of Chicago would be taken on a tour of their impressive electronic computation machines. In Oxford of 1930 any student wishing to undertake quantitative research was given pencil and a log book. This American commitment to empirical study was important in launching monetarism. How did Friedman come to write his massive Monetary History of the United States, where his monetarist theses were first fully aired? By "inheriting" the task of writing the unwritten monetary chapter of Wesley Mitchell's projected but unfinished "empirical" study of the business cycle. Mitchell was far distant from Friedman in doctrine - he was an "institutionalist" - but in empirical method Friedman was in part his progeny.

In the American encounter with Keynes, the General Theory was to be stimulus; not a revelation, or an emancipation. In this frame of mind Keynes would be judged on his usefulness. And to Friedman he did not often seem useful. On the remedies for stagnation Keynes "had nothing to offer" over the monetary stimulus already favoured by American monetary reformers. And on inflation, it seemed Keynes had almost nothing to offer at all. For at bottom Keynes' model was one in which money wages were fixed. That is to say, it was a zero inflation model. How useful can a zero inflation model be for understanding inflation?

Over all, it might be said that Milton Friedman's intellectual passage, and (above all) his success, was a manifestation of the silent, rapid and total shift of intellectual leadership in economics from Great Britain to the United States.

The third part of Friedman's life was as a celebrity economist.

He was the television's economics professor. On his meeting the Queen, she said:

I know you: Phillip is always watching you on the telly.
He was the counsel of Presidents. During one Whitehouse meeting he told Nixon:
I don't blame George Schulz [for inflation]. I blame you, Mr President.
He was the winner of the 1976 Nobel Prize for economics.

His task as a celebrity economist was not so much to criticise Keynesianism as to provide a sunny expression of free market heresies. His anti-Keynesian monetarism was obviously congruent with free-market philosophy: for while Keynesianism said the market is to blame for unemployment, monetarism said the state is to blame for inflation. But as a celebrity economist he made a deeper impression by his unexpected defence of (in the minds of some) an indefensible market freedom.

Speculation in financial markets? Friedman was all for it. Speculation is only profitable to speculators insofar as their actions stabilise prices. Thus a system of floating exchange rates will actually benefit from speculation on currencies.

Conscription to fill the ranks during the United State's longest and most unpopular war? Friedman was dead against it. Pay volunteers to fill the ranks. He succeeded in having an enquiry appointed by President Nixon recommend an end to the draft. He later judged this to be his greatest policy triumph.

Legalised drugs? Fine. End Prohibition, and give people freedom to choose.

There was, evidently, something tearless about Friedman's vision of life. There seemed to be an obliviousness to tragedy. He never seemed, for example, to entertain the thought that addiction might constitute a tragedy.

Or, perhaps, he was not so much unseeing of misfortune, but confident that from bad some good can always be salvaged. To illustrate: he was always optimistic about his crusades against bad government policy. He never shared the pessimism of his closest colleague, George Stigler, who was just as convinced of the destructiveness of state regulation, but was without any hope that it could be reformed. Perhaps it was Friedman's optimism that led him to those ill-starred six days in Chile in 1975, when he met and "advised" Pinochet. Here seemed to be an opportunity to obtain good from the political convulsions and torments of that country. The feeling that it might actually be bad to obtain good from bad would be to him mysterious, or nonsensical.

The free market, too, is tearless. And Friedman's psychological profile in general was congruent with the free market. The free market is brash, impolitic, competitive, utilitarian, and innovative. Friedman was brash, impolitic, competitive, utilitarian, and innovative. Yet while the free market - like Friedman - is tearless, it should also be allowed that the market, like Friedman, is neither rancorous nor vengeful. For all his unvarnished speech and pungent judgements, Friedman seemed to be without enmity or resentment. He got "along well personally" with Joan Robinson. He found Andreas Papandreou - the (pre-PASOK) economist to be "very helpful". Gunnar Myrdal was "awfully charming and intelligent".

If Friedman's reaction to the news of his winning the Nobel Prize was unthankful - as Rose Friedman put it

No one would ever call my husband humble
- it still contrasts well to the obnoxious response of Gunnar Myrdal to the same news: to declare in indignation that he would return his own previously awarded Nobel Prize.

Obviously a tearless optimism can produce its own Willy Lomanesque tragedies. But Friedman from that was exempted by the clemency of fortune. Aged 49 Milton Friedman's father was felled by heart disease. At the age of 59 Milton Friedman was diagnosed with the just the same condition, and prescribed the same

well remembered nitroglycerine pills
that had failed to save his father. But bypass surgery had been recently developed, and vigorously marketed, despite its (then) alarming death rate. Friedman elected to have the procedure, survived, and lived another 35 years of his "lucky" life: feted and revered, skiing until age 83, commuting in his 90s in a "little sports car" the 50km from Stanford to San Francisco, giving incessant interviews (the most recent in September this year), his mind as sharp as ever until his last days.

Dr William Coleman is Reader in Economics at the Australian National University and the author of Economics and its Enemies: Two Centuries of Anti-Economics, (Palgrave Macmillan, 2002).


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