FROM BUSINESS WORLD OF 25 NOVEMBER 2006
Milton Friedman
Milton Friedman
was no doubt a formidable liberal; he campaigned actively for free markets and
a minimum state. As such, he would be of interest to likeminded liberals, for
few people ever read ideologies they disagree with. As a liberal, I have hardly
read fellow liberals; I find ideologies I agree with even more boring than
those I disagree with. But Friedman was an exception: he was a first-class
empirical economist. He marshaled facts to support his hypotheses, and more often,
to demolish those he disagreed with; I found his method more instructive than
his madness.
Seeing his
origins, it is surprising than Friedman became a liberal. He came from an poor
Jewish immigrant family from Eastern Europe. He was extremely hard up as a
student. He encountered anti-Semitism as a young man. Such early experience
should have made him an advocate of laws to ensure fairness and state assistance
for the underprivileged. But it had just the opposite effect: as he said, “The rich in Ancient Greece would have benefitted hardly at
all from modern plumbing: running servants replaced running water. Television
and radio? The Patricians of Rome could enjoy the leading musicians and actors
in their home, could have the leading actors as domestic retainers.
Ready-to-wear clothing, supermarkets - all these and many other modern
developments would have added little to their life. The great achievements of
Western Capitalism have redounded primarily to the benefit of the ordinary
person. These achievements have made available to the masses conveniences and
amenities that were previously the exclusive prerogative of the rich and
powerful.”
Milton Friedman did his MA at 21 in 1933; but then he could
not get an academic position. He wrote a paper on
“Professor Pigou’s method for measuring elasticities of demand from budgetary
data” and sent it to The Economic Journal
in 1934, but John Maynard Keynes, who
was its editor, rejected it because Pigou, his teacher and fellow Kingsman,
disagreed with it (it was published in Quarterly
Journal of Economics). When the US entered the War, Friedman joined the
Treasury in 1941. It was 1946 before he finished his Ph D, on income from independent
professional practice, hardly an earthshaking subject. But through those long
years he had done a lot of figure work, and worked under America’s best
empirical economists – Arthur Burns, Wesley Clare Mitchell, Simon Kuznets and
Henry Schultz. That is what made him so solid a protagonist; it is difficult to
argue with facts, especially properly analyzed statistical facts.
Friedman got
tenure in Chicago University in 1946; then he could concentrate on serious
economics. In the next 20 years, he took various parts of the Keynesian model and
took them apart. By the end of the 1960s, the neoclassical model, which Keynes
had demolished with such verve in his General
Theory, was back in the saddle, at any rate in the US.
First Friedman
attacked the consumption function, with data on professional incomes he had
collected 20 years earlier. He showed that temporary fluctuations in people’s
incomes were largely reflected in their savings; their consumption was much
less sensitive. It followed that the marginal propensity to save was high,
which would make the Keynesian multiplier small. If that were so, expenditure
injected into an economy to take it out of depression would have a much smaller
expansionary effect than Keynes posited.
Then he showed
that historically, there was close correlation between the course of money
supply and prices; that implied that the IS-LM construct, which asserted that a
change in money supply would impact the rate of interest, and thereby the rate
of investment, was wrong. That punched a hole in cheap money policy as a way
out of depressions.
Finally, he
attacked Keynes’s idea of money illusion: that workers might resist a reduction
in wages, but would not resist a fall in their real wages as a result of a rise
in prices. According to Friedman, when prices rose, employers would experience
a rise in their profits and employ more people. But that effect would be
temporary; increased competition among employers for workers would soon raise
wages and bring down employment. In other words, a stimulus to aggregate
expenditure would be only temporary; eventually, employment would soon be back
to its “natural” level, prices being all that changed.
These were some
of the themes of his prolific academic writings while he was in Chicago. Then
in 1976, he retired and moved to San Francisco. There he bought a beautiful
penthouse apartment overlooking the Bay, and thence he sallied forth every once
in a while to give talks or make a TV series. That is where I met him six years
ago. He was very affable; not at all the fierce intellectual fighter that his
writings gave an impression of. He had been twice to India: once in the 1960s,
when Professor Prasanta Mahalanobis invited so many eminent economists to Delhi
and Calcutta, and then while making the PBS series in the 1970s. But he did not
have much of an impression of it; India remains a waste land for liberalism.
