Today would have been the 100th birthday of Milton Friedman, the economist and author who helped inspire some of the most important economic policies of our time and helped millions of people escape poverty. Friedman doesn’t get much recognition outside of economic circles, but his achievements in that field were more than just writing a few textbooks. He helped change the face of the American economy for the better.
When Milton Friedman won the Nobel Prize for Economics in 1976, the world was enamored with the ideas of John Maynard Keynes, who taught that government spending would somehow produce a "mulitplier effect" that would lead to economic growth. The theory was that if the government were to spend $1 it would produce more than $1 in economic activity. In the 1960s, Friedman famously wrote that "we’re all Keynesians now"—a position later adopted by Richard Nixon in 1971.
In the 1950s through the 1970s, one could credibly think that the future lay not with free markets but with centrally-planned economies. Keynesianism was the dominant theory in economics and government policy. Governments across the globe were expanding the reach of central planning in a whole host of economic sectors. The ideas of the Austrian Economic School were dismissed as crackpot theories.
But then, the crash hit.
In the 1970s, the world economy entered into a massive downslide. The Arab oil embargo pushed gas prices through the roof. But more critically, something happened that Keynesian theory said was impossible: stagflation – high inflation and economic recession. Conventional Keynesian theory taught that inflation and economic recession were opposites and could not happen at the same time. Yet in the 1970s, that is precisely what happened.
Across the globe, politicians tried the conventional Keynesian remedies. In the United States, Richard Nixon instituted wage and price controls to try to stop inflation, an effort that appeared to work at first until it led to massive shortages of goods. Governments tried to spend their way out of the recession, to little forward growth. The world economy was hanging by a thread, and the conventional economic theories were not helping the world pull out of its economic recession.
But it was Milton Friedman that popularized the way out of the mess. Friedman had already chipped away at the intellectual foundations of Keynesianism. He observed that Keynesian spending and the Keynesian multiplier did not work in practice—once the spigots were turned off, a fiscal hangover resulted. Because there was no new production happening to support all the extra spending, the result of Keynesian stimulus was inflation and recession. Governments wanted to try to inflate their way out of the borrowing costs of all the extra spending, which only made things worse. Further, government “investment” was taking place at the expense of private investment that would produce long-term growth.
Friedman’s theories were right, and his work led him to receive the Nobel Prize in 1976. It was not until the end of the 1970s into the early 1980s that leaders such as Ronald Reagan and Margaret Thatcher embraced his ideas that the world economy truly began to recover.
Free To Choose
But Friedman was more than just a theoretical economist. He was a gifted philosopher and writer as well, and his work on why free markets are so important to a free society is some of his most important work. His first major popular work, Capitalism and Freedom went into the details of why the economic theory of capitalism was so deeply entwined with having a free society. When it was first published, Capitalism and Freedom was a revolutionary work: Friedman advocated such bizarre notions as a “negative income tax,” an all-volunteer military, and school vouchers.
Friedman continued to popularize his pro-free market ideas in the press, writing columns for Newsweek and other publications. But it was in 1980 when Friedman published one of his most accessible works, Free to Choose, that Friedman’s ideas started truly influencing the popular conversation.
Friedman dedicated himself to pursuing advocacy for free markets and limited government, and he did it with a sense of clarity and purpose. He was able to explain why even the most well-intentioned government programs are thwarted by the complexity of a modern economy. The following clip from the Donohue show in the 1980s shows Friedman at his best:
Friedman, of course, had the better argument, and was able to not only write about economics, but to get millions of people to look at economics in a new way. Instead of viewing economics as the “dismal science,” concerned with the shuffling of abstract value, Friedman popularly imbued economics with a moral aspect. Economics was about maximizing the freedom of the individual rather than the collective or the State. It was about ensuring that individuals were best able to pursue their own ends, provide for their own families, grow their own businesses, and prosper. This shift seems common-sense to us now, and that is due in large part to the influence of Milton Friedman.
A Legacy of Freedom
Today, some of the revolutionary ideas in Capitalism and Freedom are a common part of our day-to-day lives. Milton Friedman pushed for an all-volunteer military prior to the Vietnam War, and today the military is and will remain an all-volunteer force. Friedman’s idea of a “negative income tax” blossomed into the Earned Income Tax Credit, a system where people in poverty who choose to work are rewarded for their efforts with a payment from the government. Instead of welfare, which subsidizes poverty, the EITC encourages work and employment. In 2010 alone, the EITC was responsible for lifting an estimated 5.4 million Americans out of poverty. Friedman’s ideas have lifted 200 million people from poverty into prosperity, an achievement that will stand the test of time.
Now, more than ever, we need leaders who will carry Friedman’s mantle of freedom. Keynesianism, discredited in the 1970s and later by the Japanese “lost decade” in the 1990s is making a resurgence. It isn’t that Keynesian theories suddenly work better than they did in the past, it is that governments are using Keynesianism as a rationale for consolidating political power and justifying more and more control over the world economy. Friedman would have seen right through these efforts.
Just as it was in the 1970s, what the world needs now is not more central State planning, but more economic freedom. The solution to our economic problems is to unleash the creative energies of our people and to get government out of the way of economic growth. Friedman understood this from both a philosophical and a practical viewpoint. Friedman was right back then, and he is right today. And if we listed to his wise counsel again, our economy can come roaring back once again. Milton Friedman’s legacy of freedom can bring millions more from poverty to prosperity again if we are only willing to listen.