Politics & Policy

Economist on a White Horse

How Milton Friedman saved the world.

Editor’s Note:  In what we hope is the beginning of what will eventually become a national memorial, the Chicago City Council declared January 29, 2007, to be Milton Friedman Day.  In honor of the economist who did so much to defend liberty, NRO is publishing a couple of articles from our archives.  The following article, by National Review Editor-at-Large John O’Sullivan, appeared in National Review shortly after Friedman’s death in late 2006.

‘There is but one event, but that is an event for the world — Burke is dead!” wrote Canning, the Tory wit and future prime minister, to a diplomat friend who had asked for the latest news. “He is the man that will mark this age . . . to all time.”

It would be no exaggeration to say the same of Milton Friedman, who died this November. The Age of Friedman began approximately in 1979–80 when his disciples, Margaret Thatcher and Ronald Reagan, took power in Britain and America — the two great centers of world economic thinking — and began to apply his ideas. It was entrenched more widely following the discrediting of planned socialist economies in the late 1980s and the consequent spread of anti-inflationary and free-market solutions throughout the First, Second, and Third Worlds. And the Age of Friedman will continue until some new economic ills emerge that require a new diagnosis from a new theoretician.

By the time of his death Friedman’s victory was more or less complete, as the respectful obituaries even in staunchly liberal newspapers conceded. But the campaign to establish (or revive) his classical-liberal ideas had been hard and long, beginning in the late 1940s when he joined the economics faculty of the University of Chicago and not glimpsing success until the late 1970s. Indeed, in a development that would have delighted a Gibbon or an Evelyn Waugh, Richard Nixon declared that “we are all Keynesians now” at the very moment when the Age of Keynes, Friedman’s great theoretical antagonist, was drawing visibly to its close.

Friedman’s antagonism was entirely theoretical. Though he was to replace Keynes as the dominant influence on world economics, he admired the great English economist. He submitted his first theoretical paper to Keynes’s Economic Journal. (Keynes rejected it.) As late as 1974 he described Keynes’s General Theory as “a great book, at once more naive and profound than ‘Keynesian economics.’” William Coleman of the Australian National University rightly describes this remark as “marvelously apposite.” For the edifice of Keynesianism that Friedman eventually brought down was both massively imposing and crucially flawed. A caricature on the 1970 paperback cover of Keynes and After by Michael Stewart brilliantly captured the imposing nature of Keynesian orthodoxy at its summit. It showed the Sage relaxing in an armchair. Behind him was a graph showing high unemployment until it disappeared behind his right shoulder and then showing low unemployment as it emerged from behind his left thigh. Before Keynes, you see, we had suffered from joblessness and slumps; after him, we enjoyed prosperity and a low, stable rate of unemployment. Q.E.D.

This picture expressed more than an economic theory; it summed up an entire moral and political outlook called social democracy. For the economic theory underpinning this success presupposed that government had the principal role in running the economy through macroeconomic policy. When the economy was in danger of inflationary “overheating,” government would reduce spending and raise taxes; when it was moving into recession or deflation, government would pump money into the economy through tax cuts and spending programs. Deficits would stimulate us out of slumps; surpluses would cool down inflation. This administrative balancing act was the magic that would enable a modern economy to grow permanently without suffering the exaggerated slumps and inflationary fevers that had previously characterized capitalism.

To be fair, the theory was never actually applied as Keynes had prescribed. Postwar Britain, where Keynes was a secular saint, ran deficits consistently even though most of the time its economy was booming modestly. Keynesians were far more opposed to unemployment than to inflation and they had adopted Keynesian economics in part because it justified a dominant role for government. Keynes himself was well aware that this risked igniting inflation. At a meeting in Cambridge, he told his friend and critic Friedrich von Hayek that he intended to correct his followers’ errors when he had the time. He died shortly afterwards with the Keynesians still uncorrected.

For a time Keynesian economics worked as smoothly as the caricature suggested. But the fundamental flaw was lying in wait. Keynesians taught that inflation and unemployment were opposites: The more you had of one, the less you had of the other. Given this choice, they preferred to maintain full employment by running a continuing mild inflation through a lax monetary policy that accommodated wage and price hikes. Friedman challenged this view. He pointed out that a monetary stimulus could produce only a temporary rise in production (and so fall in unemployment). Once people realized that the value of their money was falling under even mild inflation, they would build expected future inflation into wage demands and price hikes. Inflation would then accelerate further, unemployment would rise too, and eventually the economy would be disrupted as the signaling effect of prices was destroyed in a hyper-inflationary crisis. He outlined this revolutionary analysis in his 1970 lecture “The Counter-Revolution in Monetary Theory.”

Darren Gygi

In the mid-1970s, Friedman was proved right. An “impossible” combination of inflation and unemployment — dubbed “stagflation” by liberal economist Paul Samuelson — spread throughout the industrial world. Among its victims were President Carter in the U.S. and Britain’s Labour prime minister, James Callaghan. An American “misery index” of 21 percent and Britain’s similar “winter of discontent” ensured that they were replaced by Ronald Reagan and Margaret Thatcher. Both were admirers and friends of Friedman. And these two leaders embarked on economic policies, broadly inspired by his theories, that have given their countries a quarter century of fast economic growth interrupted only by two short and shallow recessions in the U.S. and one deeper recession in the U.K.

Their success was achieved in part because they followed Friedman’s broad recipe for slaying the dragon. Not always precisely — Friedman once said that monetarism in Britain was “whatever Margaret Thatcher did.” But they got the essentials right: Restrain the rise in money and prices would stop rising. When that happened, the supply side of the economy — its manufacturers, service-providers, and other producers — would no longer be plagued by monetary instability. They would then be better able to plan and produce for the future. Friedman’s prescription for monetary policy proved to be as correct as his prediction of stagflation. Inflation fell steadily and stabilized at a low annual level in both countries and throughout the world. The period since 1980 has been the Age of Friedman economically as the period from 1945 to 1975 was the Age of Keynes.


How did Friedman do it? Naturally, we should not overlook the trivial fact that his economic ideas were correct. That is a great advantage if your aim is to increase human wealth and happiness. Usually, however, the mere correctness of policies is not sufficient for their adoption. Friedman’s ideas had to overcome a vast residue of intellectual and political hostility to classical liberalism on both left and right. His views were seen and scorned as “flat-earth economics” in the 1950s and 1960s. He overcame these obstacles for three reasons.

First, he was an accomplished statistician who got the technicalities right. Friedman had the skills — and, together with collaborators such as Anna Schwartz, he did the work — to overcome objections through sheer weight of evidence. Other able economists from the classical-liberal tradition — notably, Hayek, Lionel Robbins, and William Hutt — had developed early critiques of Keynes that in retrospect look powerful and prescient. But their arguments, unfashionable at the time, were simply ignored. Friedman escaped their fate by compelling agreement. If you were disagreeing with him, you were disagreeing with the facts he had assiduously and scrupulously assembled. And when the future facts of his stagflation prediction were confirmed, that settled the matter.

Second, as a debater he was brilliant, fearless, and charming. He won converts in the most surprising places. In a recent article on the late Ralph Harris, I cited the occasion in London when Milton was so fiercely cross-examined by Peter Jay of the London Times that Ralph felt obliged to apologize. Milton said that no apology was necessary since Jay had not been rude. Besides, he added, Peter is clever; he’ll come over to our side of the argument. Less than a decade later, Jay wrote the crucial paragraph in the annual Labour-conference speech of Prime Minister Callaghan. It shocked his Labour audience, abandoned 30 years of official British Keynesianism, and embraced Friedmanite monetarism three years before Mrs. Thatcher came to power. That’s winning the debate.

Third, along with Hayek and a handful of others, Friedman helped to found the Mont Pelerin Society in 1947 to keep alive the classical-liberal tradition when it seemed lost in the postwar atmosphere of socialist inevitability. Over the years the MPS grew into a large and influential intellectual network that both supported and spread the ideas of its leading members. Thus, Friedman’s monetarism could rely for support on what Hayek called “second-hand dealers in ideas” in Europe and Asia when he promulgated them in the 1960s. Ralph Harris, for instance, was secretary of the MPS for many years; other members included Keith Joseph and Geoffrey Howe, leading members in the Thatcher governments. The counterrevolution in monetary economics had counterrevolutionaries in waiting around the world. Milton was in a minority, but he was not a lonely voice.

Once Friedman received the Nobel Prize in 1976, he became the principal public spokesman for free-market ideas. Other Nobel laureates disappear into the obscurity of a learned institution; he went on, with his wife Rose (also an accomplished economist), to become a television star through the series Free to Choose. The series was translated into several languages and seems to be showing somewhere in the world at any given moment. When Friedman met Queen Elizabeth, she said: “I know you. Philip is always watching you on the telly.”

He used this unique status to advocate, popularize, and often get adopted a series of public-policy reforms. These ideas were not always conservative, but they reflected a faith in markets and human freedom that equaled the faith of Keynesians in government action. As Allan Meltzer, his friend and fellow monetarist, points out, they include: ending the military draft, floating currencies, earned income tax credits, education vouchers, and drug liberalization. The first three have been adopted — floating currencies because a Friedman prediction (that the fixed-exchange-rate system of Bretton Woods would break down) was once again confirmed by events. Education vouchers are slowly making headway against the opposition of the teachers’ unions. Drug liberalization remains controversial. But few economists have had such success in persuading government to adopt specific policies — let alone to surrender some of its power in doing so.

Milton Friedman was an agnostic, like many of the great liberal thinkers, but he did not exhibit a contemptuous dismissal of religious belief. As Peter Robinson has revealed on National Review Online, Milton thanked him for his promise of prayer for his recovery. He appreciated the sentiment even if he doubted its efficacy. That was a response very typical of Milton’s general outlook. There was a balance, a sanity, a reasonableness, and a decency in him that bore some similarity to the peace of mind offered by deep religious faith. He seemed to be a cheerfully good man who needed neither the consolations of religion nor its restraints on malice.

On the website of the London Social Affairs Unit, William Coleman casts an interesting light on his sunny character:

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 judgments, Friedman seemed to be without enmity or resentment. He got “along well personally” with Joan Robinson [the Keynesian economist]. He found Andreas Papandreou [the Greek socialist] to be “very helpful.” [Swedish socialist] Gunnar Myrdal was “awfully charming and intelligent.”

One might make the same point in a slightly different way: Friedman was one of those rare souls who seem to be untouched by Original Sin or at least by its more vicious aspects. To be sure, he was not humble. He could hardly avoid knowing that he was far cleverer than almost anyone he met and had greatly benefited the world by his work. But he approached both a mass television audience and a single nervous student with the same democratic respect. He assumed that they were capable of understanding his arguments and that, if he proved his case, they would respond honestly to it. He never despised opponents nor tried to deceive listeners with deliberate obscurity. And he bore the slanders of the 1970s Left with fortitude and astonishing good humor.

His friends will miss a cheerful companion, economics a great explorer, and the world a liberator. Rest in Peace.

Mr. O’Sullivan, an NR editor-at-large, is the author of the newly published The President, the Pope, and the Prime Minister: Three Who Changed the World.


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