Milton Friedman In Memoriam
By Paul Craig Roberts
Clearing House" -- -- Early in the morning of November 16,
2006, at the age of 94, Milton Friedman passed away.
Friedman was the great economist of our time who more than
anyone saved the economics profession from dogma.
There was Keynesian dogma, which justified increased
government spending as a full employment policy. Phillips
Curve dogma, which specified trade-offs between inflation
and employment. And market failure dogma, which justified
inefficient government interventions and regulations.
Friedman pointed out to the Keynesians that deficit spending
would not increase total demand unless the central bank
accommodated the deficit by increasing the money supply.
Otherwise, the rise in the government’s spending would be
offset by the decline in spending by the bond purchasers. In
making this point, Friedman arrived at the conclusion
reached earlier by Michael Polanyi in Full Employment and
Free Trade (1945). Polanyi had taken the point to its
logical conclusion and wrote that it was nonsensical for
government to incur interest charges by selling bonds when
the point was to increase the money supply.
Friedman was skeptical of Phillips Curve trade-offs between
employment and inflation. He addressed the issue as “more
inflation, more unemployment.” But it was supply-side
economists who explained “stagflation” as the consequence of
a wrong policy mix that pumped up demand with easy money
while restraining real output with high marginal tax rates.
The long economic expansions of the 1980s and 1990s were the
results of the reversal of the Keynesian policy mix by
supply-side economists in the Reagan administration.
Friedman won the Nobel Prize in 1976 for his permanent
income hypothesis (1957), a necessary correction to the
Keynesian consumption function. But his most important work
was the Monetary History of the United States (1963),
co-authored with Anna Schwartz, especially the section
explaining the collapse of the money supply during the 1930s
as the result of perverse monetary policy by the Fedeal
Reserve. Economists had come to the conclusion that the
Great Depression in the US was caused by insufficient
aggregate demand to support full employment. However,
economists had no convincing explanation for the cause of
inadequate demand. Friedman and Schwartz showed that the
Federal Reserve had reduced the supply of money by one-third
and that this dramatic contraction was the cause of
insufficient demand to maintain full employment.
The Great Depression and mistaken explanations of its cause
gave us the New Deal and its assaults on the Constitution,
in particular the New Deal assault on the principle that the
law making power of Congress cannot be delegated to
regulatory agencies in the executive branch. Since the time
of the New Deal, “laws” passed by Congress are simply
authorizations for executive branch agencies to legislate by
writing the regulations that interpret and implement the
acts passed by Congress.
It was the failure of the Federal Reserve’s monetary policy
in the 1930s that caused the Great Depression and the
enormous growth of central government power. Despite
Friedman’s work, this story is still so little known that
Lawrence Stratton and I addressed it anew in “The Fed’s
Depression and the Birth of the New Deal” (Policy Review,
No. 108, 2001). Contrary to New Deal historians, the Great
Depression was not a failure of the old order. It was the
failure of the new order that had just begun.
Friedman was an insightful economist, and his theoretical
gifts did not prevent him from being a real world economist
who could address the public. Friedman regarded this task as
one of his functions as an economist. In his book,
Capitalism and Freedom, and in his television series, Free
to Choose, Friedman reminded people, who had been taught to
look to the government for protection from economic
dislocation and exploitation, that historically government
was the threat to social and political freedom. Friedman,
thus, did what he could to correct the change in the
American outlook toward government that resulted from the
Fed’s mistaken monetary policy in the 1930s.
Friedman never grew arrogant or inaccessible from his fame.
He was a friend to younger scholars with inquiring minds and
respected the efforts of others to arrive at the truth.
Small of stature, he was a giant of intellect and character.
Craig Roberts , was Assistant Secretary of the
Treasury in the Reagan Administration. He is the author of
Supply-Side Revolution : An Insider's Account of
Policymaking in Washington ; Alienation and the
Soviet Economy and Meltdown: Inside the Soviet Economy, and
is the co-author with Lawrence M. Stratton of The Tyranny of
Good Intentions : How Prosecutors and Bureaucrats Are
Trampling the Constitution in the Name of Justice