The Milton Friedman agenda

When I was younger, I used to think of Milton Friedman, who died on this day ten years ago, as a great man who’d changed the world but gotten a few things wrong. His books, Youtube clips and Free to Choose series made me a liberal. But my liking for Austrian economics persuaded me that he had been wrong about monetary policy and economic methodology; my belief in private charity made me think his negative income tax was unnecessary.

The arrogance of youth! The older I get, the more I realise that Friedman was right about pretty much everything, and I wrong. And, as my friend Dan Klein points out, he gets the credit he deserves – in all the classical liberal pantheon only Adam Smith is more widely respected by liberals and non-liberals alike. Eamonn’s discussion of Friedman’s life is a must-read, and Madsen's new video about him is brilliant.

He deserves to be recognised as one of the leading lights of modern capitalism. But there’s a lot left in the Friedman agenda that still needs to be done. Here at the Adam Smith Institute what we do in policy terms is a continuation of Friedman's priorities.

  1. Drug legalisation. Friedman, a long-time advocate of the legalisation of drugs, argued that “the harm that comes from drugs is because they are illegal”, as rising costs led to drug users switching to things that give a stronger hit for a given amount of money. He would have been heartened today to see the rapid move towards legalisation and regulation of cannabis in the United States, a move that seems to be gaining momentum in lots of developed countries. We have a paper on what this means for Britain out next Monday.
  2. Monetary reform. Friedman’s greatest achievement, and the one that won him his Nobel Prize, was to recognise and demonstrate that “Inflation is always and everywhere a monetary phenomenon” and that the Great Depression was, above all, caused by bad monetary policy – in that case, excessively tight money. Friedman also realised that the stagflation of the 1970s was caused by excessively loose money. Some mistakenly characterise him as a hardcore anti-inflation advocate for this reason, forgetting about his other work. He was neither a consistent dove nor a hawk – he wanted monetary stability and realised that the discretionary approach to central banking, where a panel of wise men made all the decisions, could not produce that. Instead he wanted rules that were predictable for markets and designed to keep the macroeconomy on an even keel. As Scott Sumner argues, he probably would have supported nominal GDP targeting if that had been a live issue while he was alive. And he supported quantitative easing for Japan in the 2000s. Our Sound Money paper is in this tradition, though we would ultimately like to see central banks scrapped altogether.
  3. Negative income taxes. Friedman worried about welfare creating a poverty trap. Since minimum wages can cause unemployment, Friedman favoured replacing most of the US welfare apparatus with a Negative Income Tax that topped up low-paid workers’ wages in a way that made work always pay more than welfare. That nearly made it into law under Nixon, eventually through a second-best compromise of an “earning income tax credit”, a cash transfer to poor workers. Our Free Market Welfare paper made the case for this, and we've done a huge amount of media and events work promoting this solution to the problems with welfare.
  4. School choice. Why should only rich parents be able to choose the school their children go to? Friedman pushed for school choice throughout the later years of his life so that competition between schools and independence from a central authority would drive up standards for poor children. We’re halfway there – free schools in Britain emulate this, imperfectly, and where charter schools in the US have been allowed they’ve been amazingly good for kids from poor backgrounds, in terms of lifetime earnings, pregnancy rates, incarceration rates and math skills – especially for non-white kids
  5. Economic methodology. This might not sound sexy, but it’s a very interesting one. Some economists do it with models, but Friedman was a hardcore empiricistpioneering a “natural experiment” method that has now become one of the most effective tools in economics. This approach looks for special events in history that allow us to filter out complicating factors, so that we can identify effects of a single cause we’re trying to understand – like a boatlift of Cuban refugees, which allows us to isolate the effects of a large influx of immigrants into a city’s economy. This lets us dispense both with deductive theorising and abstract modelling in favour of testing our hypotheses against reality.

And of course Friedman made the case for lower, simpler taxes; for free trade between nations; for a liberal, but controlled, immigration policy; for giving people control over their own lives. And he did it with a smile.

I’ll leave you with the words of Milton Friedman himself: “A major source of objection to a free economy is precisely that it gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.”

It's in that spirit that that we here at the ASI try to continue his great work.