Milton Friedman was born 99 years ago and his ideas are timeless. He was leader of the monetary school of thought at the University of Chicago, a founding member of the legendary free market organization, the Mont Pelerin Society, co-author with his wife, Rose, of the television series and international bestselling book Free to Choose, winner of the Nobel Prize in economics,Newsweek columnist for many years, and a fearless champion of economic and personal freedom. He was in many ways a hero to me, one who led me to a greater appreciation of free markets.
1) Licensing–I recall coming across his book, Capitalism and Freedom, during my first class in economics in the 1960’s. While nearly every professor, textbook, and student spoke of government as the universal solution to economic ills in those days, here was a clear skeptic.
Among many topics, I can recall that he spoke of the perverse effects of occupational licensing laws. Far from benefiting consumers, Friedman argued that such restrictions on entry into various professional guilds, from doctors to plumbers, served primarily to stifle competition, raise prices, hinder innovation, and reduce services.
2) Fiscal Policy—Later in the same semester I heard him debate Keynesian economists. His opponents said that fiscal policy of government spending and taxation was more important in controlling business cycles than the policies of money supply and interest rates.
Among the argumentation, he chided them saying that fiscal policy was inconsequential because it was merely the practice of taking from one party to give to another (with potentially less valuable purpose), later characterized by the notion TANSTAAFL, “there ain’t no such thing as a free lunch.” The government’s generosity and “stimulus” doesn’t materialize out of thin air, but was offset by costs and disincentives to the owners and producers of wealth.
To promote growth, Friedman argued that government spending and taxation should both be minimized and he promoted the idea of a flat tax for incomes above a certain level. Such low tax policies have been adopted with considerable positive effect in countries like Estonia, Chile, New Zealand, and Hong Kong.
3) Monetary Policy—The Federal Reserve Board (the Fed) was established in 1913 to help stabilize the economy, but this was soon followed by the Great Depression of the 1930’s. The work of Friedman and Anna Schwartz in A Monetary History of the United States demonstrated that the Fed, contracting the money supply by a third, had been the principle cause of turning a mild recession into a major depression—deep and prolonged.
While he believed the Fed had positive potential for stabilizing growth in an economy, it could be used to ill effect as well. After all, the Fed was the source of inflation, which he abhorred. If Friedman was alive today, I think he would conclude that the powerful tools of the Fed are still being used poorly.
4) Free Trade—Friedman was unrivaled in championing free trade. Opening the world to the benefits of mutual exchange made possible the extraordinary specialization of labor that resulted in the low cost of production for all goods, including even the simplest pencil.
He also believed that open trade was the best tool for countering the harmful effects of localized monopolies. Nations such as Hong Kong, India, and China are extraordinary examples today of the benefits of trade for raising hundreds of millions of people out of poverty.
5) Exchange rates—The Bretton Woods System of fixed exchange rates was inherently unstable, he believed, especially as the U.S. undertook inflationary policies for the Vietnam War and the War on Poverty during the 1960’s. He was ultimately proven right when President Nixon closed the “gold window” in August, 1971, and ended convertibility of the dollar at a fixed rate of exchange. The world was forced to adopt Friedman’s floating exchange rates, an open market for currencies.
Of all the presidents he advised, he thought Nixon had the highest intellect, but the lowest moral character. While Ronald Reagan was a smart man, Friedman believed that his greatest virtue was in having the courage of principled and moral character.
6) Education vouchers—Always at the forefront of controversy, Friedman took on various battleground issues. Sacrosanct was the education system in America, yet he argued that education would be improved by competition. Students and parents should be given greater choice in education by allowing public funds to be allocated through vouchers to the students and parents themselves, much as the G.I Bill offered funding to veterans after World War II in selecting higher education.
Vouchers introduce a measure of market incentives for teachers and school administrators to improve their performance in services and costs. Voucher systems have subsequently been adopted in many states and in some countries, such as Sweden and Chile, with positive effect.
7) Privatization of Social Security—Likewise, Friedman urged that citizens be allowed to allocate their own public pension funds among competing private annuities. He believed that this would lead to improved incentives for providers to offer greater returns and wiser, more productive investments than by a single government agency. Similar ideas have been positively adopted in Singapore and Chile.
8) All Volunteer Military—In the midst of the Vietnam War, Friedman was among the most prominent of advocates for replacing the draft with an all-volunteer military. For him, it was a matter both of ethics and of practicality.
General William Westmoreland challenged Friedman saying that he didn’t want to lead an army of “mercenaries.” Friedman reminded Gen. Westmoreland that even generals are paid professional soldiers who serve proudly and effectively for their country…and this does not denigrate them as mercenaries. Eventually the military draft was discontinued in the U.S.
9) Drug Prohibition—In company with William F. Buckley and former Secretary of State George Schultz, Friedman argued that marijuana prohibition should end. He believed that such cases of prohibition did more harm than good.
His arguments have been used in the promotion of modest changes in drug laws, especially in states that have allowed the use of marijuana for medicinal purposes.
10) Replacing Welfare—Friedman was also alarmed by the perverse incentives of the welfare state that encouraged dependency on a costly bureaucracy and discouraged people from getting off welfare rolls and into productive jobs. He argued that a negative income tax could provide a guaranteed income directly through the tax structure.
This income for people would gradually diminish as people took up employment. Perhaps this idea might gain more traction as Congress seeks ways to reduce the heavy costs of massive and intrusive bureaucracy of entitlement programs.
Friedman was guided by principles that favored a free society, one that was driven by competition and consumer choice. He believed that ultimately, there was a connection between personal and economic freedom.
He was one who was willing to offer practical solutions in the climate of public opinion in order to advance the cause of freedom. Friedman accomplished much by his intellect, the courage of his convictions, and by his superb wit.