Milton Friedman at 110
The most influential 20th century economist, Milton Friedman, was born 110 years ago today. Many economists say that J.M. Keynes was the most influential economist of the 20th century, if not of all times. Keynes supposedly invented macroeconomics, and proved the case for demand side economic theory and policies. This is all untrue. David Hume invented macroeconomics centuries ago, and Thomas Malthus invented demand side economics in the early 18th century. Demand side economics came back to life during the 1920s, and it was stated clearly by Wilhelm Lautenbach in 1929. Keynes published his book on demand side economics in 1936. Keynes did little more than popularize an existing theory. Friedman did more than any single economist, or perhaps any 10 economists, to debunk demand side economics. What were the main contributions of Milton Friedman to economics?
It takes time for policymakers to recognize and react to economic crises or recessions. It also takes time for new policies to work. Policies to manage the economy therefore come too late. No sensible person disputes this fact.
Friedman had impact not only as a researcher, but also as a teacher. My former professor James Buchanan recalled Friedman's graduate class at the University of Chicago. All of the students in Friedman's class started out as either Social Democrats or as New Dealers, including Buchanan. By the end of this semester half the class embraced free market economics. Milton Friedman influenced many other students who went on to be prominent economists; Robert Lucas, Gary Becker, Thomas Sowell…
People react to short term macroeconomic management policies in ways that are hard to predict, and that also undermine the real effects of these policies. Attempts to stimulate the economy with quick cuts in inflation or tax rates do not produce reliable increases in aggregate spending. People think in terms of their long term income when deciding to buy more goods. Policies that induce transitory changes in our incomes have little effect on total spending. Most economists accept Friedman's permanent income hypothesis as at least plausible.
Federal Reserve monetary policy has stronger effects and Treasury Department fiscal policy. Nearly all economists accept this proposition as true.
The effects of monetary policy are temporary. The Federal Reserve can achieve short-term reductions of unemployment by raising the rate of inflation. The alleged tradeoff between inflation and unemployment is however, temporary. the effects of monetary policy and inflation disappear as people adjust their plans to expected inflation. Friedman’s student Robert Lucas carried this reasoning further, and integrated it into modern macroeconomics.
The Federal Reserve financed the boom of the 1920s, And triggered the Great Depression by tightening up on monetary policy. Most economists accept that monetary policy was at least a major factor in interwar economic instability.
The Federal Reserve can accommodate long term economic growth by growing the money supply at a constant rate of three or 4% at most. Short term changes in the money supply produce temporary and unreliable results, due to shifts in the so-called Phillips curve. Many economists dispute this policy, with the track record of short-term monetary policy is poor, in some cases disastrous.
Macroeconomic theories need to be grounded in microeconomic incentives. Friedman's student Robert Lucas made microfoundations the requirements for modern macroeconomic models.
Economic freedom and political freedom interrelate. Policies that restrict economic freedom In private markets and enterprises may impair democratic political freedom. Many economists ignore this idea, but some do perceive its merit. Friedman's colleague F.A. Hayek made a similar and more sophisticated argument along these lines. Friedman and Hayek are unfortunately being proved correct by the woke left of today. Those who propose socialism in the United states have in fact turned in a Orwellian anti free speech direction.
Milton Friedman argued that empirical tests matter more than the realism of theoretical propositions. Seemingly sensible theoretical propositions that fail empirical tests should be rejected. Theories that don't seem 100% realistic, but fit the data well should be accepted. Most economists accept empirical testing of theoretical models.
Friedman changed the way modern economists think about economics and public policy. Friedman was less influential with those who determine public policies. As President Biden put it recently “Milton Friedman isn't running the show anymore”. We would all be better off if politicians like president Biden understood and acted upon Friedman's ideas.