Posted on 11/19/2006 3:26:02 PM PST by MadIvan
Our correspondent on the legacy of a great economic guru
The leading economists of history can be divided into two classes. There are those who mainly contribute to the development of economics as a science; they usually have most influence on their fellow economists. There are others who become global gurus, and have direct influence on politicians, bankers, businessmen and journalists. There is some overlap between them, though it is possible to be a third-rate economist but a first-rate guru.
The gurus are usually remembered by the world for two or three interconnected ideas that provide rules of thumb in later generations. Adam Smith is remembered for the division of labour, the benefits of competition and free trade; David Ricardo for providing the intellectual basis for the gold standard; Thomas Malthus for the view that population growth might outstrip resources; Karl Marx for socialism and the class struggle; John Maynard Keynes for advocating deficit finance as a cure for mass unemployment; and Milton Friedman for the revival of monetary theory and the advocacy of free markets.
Friedman died last week. There is now no great guru left who can tell the world how to think about economics. However, Friedmanism has become the high orthodoxy of the day. All central bankers are more or less monetarists — they believe that control of the money supply is the way to influence prices. Almost all governments at least pay lip service to the liberalisation of trade. Gordon Brown’s most important decision as Chancellor has been to give the Bank of England independence to fix interest rates. That was a Friedmanite decision, but before the Friedmanite revolution it would have been unthinkable.
We need not worry that the world has been left without a global economist, that there is no pope on the economic throne. The influence of these economists is usually at its height in the period after their death. Ricardo, who is now the least well remembered of these great economists, died in 1823; Britain finally went off the gold standard in 1931, 108 years later. In fact, the Victorian gold standard lasted much longer than its Keynesian successor, the Bretton Woods system that survived for fewer than 30 years; the gold standard had a far better record for price stability than the world has enjoyed since it was abandoned.
Keynes died in 1946; the world of the next quarter century was a Keynesian world, which came to an end only in the 1970s. Marx, like Ricardo, had an influence that lasted for about a century; he died in 1883 and the Soviet system fell apart in 1989. There is no doubt about the influence of Friedman and the Chicago School on world policy, or, more particularly, on Britain. Although Margaret Thatcher was personally closer to Friedrich Hayek, Thatcherism itself was more of a Friedmanite than an Austrian policy.
Despite the quality of his work on US monetary history, Friedman was a radical conservative rather than an originator. He defended the free-market principles of the classical school and renewed the quantity theory of money. He became the prime advocate of these ideas. They regained their earlier influence in Britain through the Institute of Economic Affairs and through journalists such as Peter Jay of The Times and Samuel Brittan, of The Financial Times. But Friedman was the intellectual leader.
In 1970 Friedmanite monetarism was a minority doctrine, regarded by most economists as cranky or obsolete. By 1975, under the pressure of world inflation, Milton Friedman had the best of the battle, and the Keynesians were in full retreat. By 1980 practical policy around the world had become monetarist. The battle was fought over the most effective remedy for inflation. Keynes had written The General Theory (1936) as an anti-deflation book; it did not deal effectively with inflation.
After 30 years of broadly monetarist policies the world now enjoys low inflation and relatively high rates of growth. So long as Keynesianism delivered the goods — which it continued to until the late 1960s — it remained orthodox; Friedmanism is now delivering the goods. So long as that continues, monetarism and free markets will remain the world orthodoxy.
All economic theories must be tested by their outcomes. Classical theory, of which the Friedmanites are a subsect, dates back to 1776 and Adam Smith’s Wealth of Nations. The same year produced the US Declaration of Independence. Political and economic liberty are twins; they stand or fall together.
There are, undoubtedly, 21st-century threats to this Friedmanite consensus. We do not know whether economic liberties would survive a world slump that, like the next earthquake in California, may now be overdue. Inflation is sleeping, but not dead. We do not know whether Friedmanism will survive the switch of economic power from North America to Asia. We do not know whether it can handle global warming or economic terrorism.
In 1914 the Victorian system based on classical economic theories failed to survive the outbreak of the First World War. The Russian Revolution introduced an epoch of tyranny. Revolutions and world wars destroyed the free global economy of the 20th century and could again destroy that of the 21st.
However, we can look at all the setbacks of the past century in a more positive way. In 1913 the world enjoyed monetary stability, widespread free trade and free travel, rapid scientific advance, widespread liberal institutions. That was lost in 1914, lost again in the slump of 1931, lost again in the war of 1939, frozen for decades in the Cold War, blown up by the inflation of the 1970s. Yet in 2006 the world has regained many of its free characteristics. The classic laws of Adam Smith have reappeared in their original validity. Milton Friedman was the prophet of their rebirth. Truth always resurfaces.
Regards, Ivan
Ping!
I guess the Labour Party can be given credit for that much, at least. Maggie Thatcher broke the centralized economy and the death grip of the unions into pieces, and no one has yet dared to reverse her legacy after the obvious wave of prosperity that followed.
But frankly, when I think of Gordon Brown I remember that he is the man who sold off most of the UK's gold reserves at the bottom of the market. Indeed, since he did it on an announced schedule, the price of gold regularly dipped a few dollars lower on sale days, making him look even stupider.
Regards, Ivan
I will miss him, but I will not forget him nor his contributions.
Excellent post. Friedman's book "Free to Choose" is written for the layperson and it lays out his free market policies clearly. His chapter on why government spending is inefficient vs. the market, is fantastic.
Agreed, a great book.
Seeing as how we are still paying under the pernicious income withholding system he developed in WWII, I don't see how I can agree with this statement.
Gordo has been a very fine crypto-tory. Shhhhhh.
Is it true that William Rees-Mogg invented The Frug?
Dr. Friedman was a sweetie. I met him, and his son (Chris? - author of "Price Theory") when I was in college.
I look forward to seeing him, and his star pupil, Dr. Thomas Sowell, at the great Chicago School Seminar in the Sky, one of these days!
He did not develop it, he helped implement it.
I don't try to understand why he pushed that, as it is completely backward from what he represented.
But he was a great man, even with that error.
"Friedman contributed to another important effort while in Washington during World War II. At the Treasury Department, he helped create the current federal income tax withholding system. Friedman says he now regrets his role, although at the time he believed the new system was superior to the one it replaced (Friedman and Friedman 1998, 123). Working in Washington gave him great insight and the chance for a firsthand look at how bureaucracies function. http://www.dallasfed.org/research/ei/ei0202.html
snip
Surprisingly, it was a free market economist who helped the federal government implement the withholding tax in the first place.
The Curse of the Withholding Tax, Ludwig von Mises Institute
Very fine article.Even if truth always resurfaces, the great problem is to keep it from sinking from view in the first place.
In that respect, I've been bothered by a quote I can't dig up. In the deep dark recesses of my memory I recall my history book back in high school quoting a prominent Briton critique of the US Constitution contemporaneosly calling it "all sheet and no anchor."
And I think that although that judgement didn't do justice to the stability of American society under the Constitution, it is true that freedom allows change whether change is needed or not. I believe that Big Journalism has change as its reason for existence. If ever we had things perfectly right, they would insist on change anyway. The idea of "good enough" is anathema to them and would imply that their caterwauling was no longer needed.
Great man bump!
His book actually helped save my sanity. Here was a book (of any kind) that actually made sense!
His thought got the wheels turning, and from free market capitalism I drifted through libertarianism, Objectivism, natural law and ultimately Thomas Aquinas. Thanks Milton!
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