Why was Milton Friedman so influential?

The death of Milton Friedman at age 94 has brought widespread recognition of his significant influence over an extended period on thinking about the most desirable structure of society and the government policies likely to achieve that.

This influence reinforced attempts by the Australian federal treasury, where I was employed from 1958 to 1987, to persuade governments to adopt budgetary and monetary policies to bring inflation under control. But despite Treasurer Frank Crean describing inflation in his 1973-74 budget speech as “our major economic problem”, it took three recessions here before effective anti-inflation policies were adopted.

Much commentary on Friedman’s thinking and advocacy has concentrated on economic issues. But his importance also derived from the propounding of a philosophy based on the importance of individual freedom and the role governments play in determining a conducive economic and social structure.

In his famous Capitalism and Freedom, first published in 1962, Friedman argued “there is an intimate connection between economics and politics, … only certain combinations of political and economic arrangements are possible and … in particular, a society which is socialist cannot also be democratic in the sense of guaranteeing individual freedom”.

This philosophy led to Friedman being characterised as a free marketeer, which he was, and as a conservative, which he wasn’t. His belief that government should have a minimal role in society required major changes rather than stability in the social structure. Moreover, his free market philosophy was not only based on a belief that this was the most efficient way of increasing material welfare. While accepting that capitalist and undemocratic political arrangements can co-exist - as in China today - he argued that economic freedom is an extremely important part of total freedom because the separation of economic and political power enables the one to offset the other.

This attitude was reflected in his support for governmental action to alleviate poverty. There he stressed the need for programs to minimise distortions to the operation of markets and to limit help “to people as people not as members of particular occupational groups or age groups or wage-rate groups or labor organisations or industries”. Many governments including the current one still fall well short of applying such wisdom.

Although often described as a monetarist, his advocacy of a monetary policy based on having a fixed rate of increase in the quantity of money did not simply reflect his research suggesting this as the most efficient way of supplying monetary needs. It also reflected his deep mistrust of the ability of humans, particularly those running central banks (he blamed the Federal Reserve for the 1930s depression), to judge the effect on economic activity and prices of making short term adjustments to the money supply.

That his advocacy of a quantitative monetary rule was eventually shown to be impractical did not reduce Friedman’s conviction that humans would tweak monetary policy inappropriately, as happened in Australia in the 1980s.

As it was first applied by Federal Reserve Governor Paul Volker in the early 1980s, Friedman’s analysis undoubtedly contributed, however, to the widespread establishment of low inflation as the main objective of monetary policies, thereby reducing the potential for mistakes in the operation of such policies. Hopefully, central banks have also taken sufficient account of Friedman’s warnings about the dangers of high rates of growth in the money supply, such as are now occurring here and elsewhere.

Friedman’s demonstration in the late 1960s that there is no stable trade off between inflation and unemployment, also overcame the Keynesian notion that budgetary policies can readily be twiddled to stimulate a higher rate of growth without risking higher inflation. It took some time for this to be accepted in Australia, particularly among academic economists, but it is now reflected in the bipartisan acceptance of a fiscal strategy aimed at maintaining budget balance over the medium-term. The discrediting of fine-tuning in both monetary and fiscal policies is a major Friedmanite achievement.

Why was Friedman so influential? It was not due to esoteric analyses of economic theory accepted in academia. He did very little of this and many academics resented his rebuttals of the merits of government intervention. His influence came importantly from his ability to explain and defend his beliefs in terms that were comprehensible and persuasive to the layman. His constant theme that adoption of free market policies were in the interests of the common man helped enormously.