The economist par excellence who sought “Positive Scientific Knowledge that enables mankind to predict the consequences of a possible course of action” passed away on 16th November, leaving a gaping vacuum behind.
Milton Friedman
(1912 –2006)
The economist par excellence who sought “Positive Scientific Knowledge that enables mankind to predict the consequences of a possible course of action” passed away on 16th November, leaving a gaping vacuum behind.
Prof. Milton Friedman—the winner of the Nobel Prize in Economics, “for his achievements in the field of consumption analysis, monetary history and theory, and his demonstration of the complexity of stabilization policy,” is the best-known and most respected free market economist in the world. His interest in, and advocacy of free market can well be traced back to his very formative years as an economist when, at the young age of 33, he co-authored the article—“Income from Independent Professional Practice”—with Simon Kuznets, arguing that “the state licensing procedures limited entry into the medical profession, thereby allowing doctors to charge higher fees to the detriment of patients than if competition were more open.”
In his landmark work of 1957 – A Theory of the Consumption Function, Prof. Friedman countered the Keynesian view that individuals and households adjust their expenditure on consumption to reflect their current income. His empirical study threw a puzzle at him: the cross-section data showed increase in the percentage of income saved as the income rose, while the time series data showed much less change in the savings proportion over the years which Friedman resolved by postulating a new concept—“people’s annual consumption is a function of their expected lifetime earnings” that was prominently quoted in the citation for his Nobel Prize.
It is his monumental work of—Monetary History of the United States, 1867-1960—that was published in 1963, along with Schwartz, that sparked a great debate in macroeconomics between the Keynesians and the monetarists. Though Friedman started out as a conventional Keynesian in the 1940s, he led the intellectual counter-revolution against Keynes, of course with an abiding respect for him all through his life. His respect for Keynes can be gauged from what he said of him in one of his interviews: his “General Theory of Employment, Interest and Money is a fascinating theory. It is one of those very productive hypotheses—a very ingenious one, a very intelligent one. But it turned out to be incompatible with the facts when it was put to the test.” Yet, he was of the opinion that this theory had “altered the shape of economics.”
Coming back to his monetarism, the bone of contention between Keynesians and monetarists is: which is more important in determining the short run course of the economy? Keynesians argued that the economy as a whole will be affected through fiscal policy—through changing government taxes and spending. As against this, monetarists argued that it is the quantity of the money impacted by monetary policy, which is affecting the economy. Friedman, based on his studies, postulated that in the long run, increased monetary growth increases prices, but has little or no effect on output. In the short run, he argued that increased monetary growth cause employment and output to increase, and decrease in the money supply will have the opposite effect.
He also commented that when fiscal policy and monetary policy are moving in the same direction, one cannot tell which is more important. But whenever fiscal policy and monetary policy move in opposite directions, it is invariably the monetary policy and what happens to growth in money supply under it, is what determines the economy. Of course many economists have disagreed with Friedman’s monetarist ideas but the stagflation of the 1970s—the period in which there was expansive fiscal policy in the US which, according to Keynesians view, should have resulted in expansion in the economy but contrary to that, there was high level of unemployment and rapidly rising prices – had only vindicated what Friedman’s monetary theory cautioned: “run away government spending and spiraling wage costs would some day culminate in a toxic coexistence of moribund economic growth, double digit inflation and soaring unemployment.” It is this radical argument against government pump-priming in tough economic times that earned him a reputation as the contrarian.
Prof. Friedman’s Presidential address to the American Economic Association is often rated by some economists higher than even his famous money supplier rule. In this address, he demonstrated that the Phillips curve—the stable trade-off between inflation and unemployment that held sway over the central bankers—is invalid. In the process of proving its invalidity, he came out with a new concept, the “natural rate of unemployment”, which was subsequently termed as the “non-accelerating inflation rate of unemployment” (Nairu).
Prof. Friedman—a non-armchair economist—is highly persuasive as a public policy analyst and path-breaking as a scholar and scientist. During 1955, Prof. Friedman was in India on behalf of the US government to serve as an economic advisor to the ministry of finance. At that time, he presented a memorandum to the government of India with the opening remarks: “A 5% per annum rate of increase in real national income seems entirely feasible on the basis of both the experience of other countries and of India’s own recent past. The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the US 150 years ago.” What we are today gloating about the post-liberalization average annual growth rate of 6.5 to 7% is what Friedman prophesied on 5th November, 1955. He also offered his suggestions for improving the economic lot of the country, but it is a different matter that we almost took 35 years to heed the words of his wisdom.
Friedman is one of those rare economists, who can convey his message to even a layman in such words that help him understand easily. In one of his interviews, he observed that Europe’s plan for single currency may not come true in his lifetime. The reasons cited by him are so pragmatic that he alone could visualize them: to have a unified currency you have to have an area in which people and goods move relatively freely, and in which there is enough homogeneity of interest so that severe political strains are not raised by divergent developments in different parts of the area.
He is a great teacher and willing to labor to make people understand what is important for them. He worked all through his life to stress “the importance for humanity of a correct understanding of positive economic science” and this belief might have made him to consciously conclude his Nobel Memorial Lecture by citing the two hundred year old statement of Pierre S du Pont, a Deputy from Nemours to the French National Assembly that so vividly stresses the necessity for such understanding of economics: “Gentlemen, it is a disagreeable custom to which one is too easily led by the harshness of the discussions, to assume evil intentions. It is necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally.”
More than his monetary theories, it is his relentless championing of the cause for unfettered free markets and least government intervention in the affairs of people that made him dearer to many, while that many have also treated him as the “evil from west”. In a talk on “Economic Freedom, Human Freedom, Political Freedom” delivered on November 1st 1991, he argued that “the essence of human freedom as of a free private market, is freedom of people to make their own decisions so long as they don’t prevent anybody else from doing the same thing.” Quoting Thoreau: “Government is best that governs least”, Friedman envisaged three primary functions for the government— one, military defense of the nation, two, enforcement of contracts between individuals and three, protect citizens against crimes against themselves or their properties. His prime advocacy has been promotion of human freedom and his main contention is that the growth of the government and its increasing control over the lives of people is the major cause for the loss of that freedom.
Friedman is known to often assert: “no one spends somebody else’s money as carefully as his own.” He argued that “when government—in pursuit of good intentions—tries to rearrange the economy, legislate morality, or help special interests, the costs come in inefficiency, lack of innovation and loss of freedom.” Hence, he demands that people must be allowed to pursue their “self interest”. And he was absolutely certain that the “self interest, rightly understood, works for the benefit of society as a whole”.
But the question is what if the “self interest” is not rightly understood. Nevertheless, this utopian concept of economic, political and social freedom of man as enunciated by Friedman reminds us of what M N Roy proposed under his philosophy of the New Humanism: man is a maker of his world. His brain is his instrument of thought and it is owned by him. He is rational, and morality is embedded in it. Revolutions are heralded by iconoclastic ideas generated by gifted brains. He, therefore, hopes that man being “keenly conscious of the urge for freedom and fired by a vision of a free society of free men, and motivated by the will to remake the world, will restore the primacy and dignity of the individual” and this utopia was visualized in the early 50s.
Will the kind of freedom that Friedman desired or M N Roy postulated, and “Friedmanists” and “Royists” aspired for, ever become real or would it remain a utopian dream, or will it wait for the arrival of someone of their caliber to carry it forward, is something that time alone can resolve.
- GRK Murty
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