The leading economists of history can be divided into two classes. There are those who mainly contribute to the development of economics as a science; they usually have most influence on their fellow economists. There are others who become global gurus, and have direct influence on politicians, bankers, businessmen and journalists. There is some overlap between them, though it is possible to be a third-rate economist but a first-rate guru.
The gurus are usually remembered by the world for two or three interconnected ideas that provide rules of thumb in later generations. Adam Smith is remembered for the division of labour, the benefits of competition and free trade; David Ricardo for providing the intellectual basis for the gold standard; Thomas Malthus for the view that population growth might outstrip resources; Karl Marx for socialism and the class struggle; John Maynard Keynes for advocating deficit finance as a cure for mass unemployment; and Milton Friedman for the revival of monetary theory and the advocacy of free markets.
Friedman died last week. There is now no great guru left who can tell the world how to think about economics. However, Friedmanism has become the high orthodoxy of the day. All central bankers are more or less monetarists — they believe that control of the money supply is the way to influence prices. Almost all governments at least pay lip service to the liberalisation of trade. Gordon Brown’s most important decision as Chancellor has been to give the Bank of England independence to fix interest rates. That was a Friedmanite decision, but before the Friedmanite revolution it would have been unthinkable.
We need not worry that the world has been left without a global economist, that there is no pope on the economic throne. The influence of these economists is usually at its height in the period after their death. Ricardo, who is now the least well remembered of these great economists, died in 1823; Britain finally went off the gold standard in 1931, 108 years later. In fact, the Victorian gold standard lasted much longer than its Keynesian successor, the Bretton Woods system that survived for fewer than 30 years; the gold standard had a far better record for price stability than the world has enjoyed since it was abandoned.
Keynes died in 1946; the world of the next quarter century was a Keynesian world, which came to an end only in the 1970s. Marx, like Ricardo, had an influence that lasted for about a century; he died in 1883 and the Soviet system fell apart in 1989. There is no doubt about the influence of Friedman and the Chicago School on world policy, or, more particularly, on Britain. Although Margaret Thatcher was personally closer to Friedrich Hayek, Thatcherism itself was more of a Friedmanite than an Austrian policy.
Despite the quality of his work on US monetary history, Friedman was a radical conservative rather than an originator. He defended the free-market principles of the classical school and renewed the quantity theory of money. He became the prime advocate of these ideas. They regained their earlier influence in Britain through the Institute of Economic Affairs and through journalists such as Peter Jay of The Times and Samuel Brittan, of The Financial Times. But Friedman was the intellectual leader.
In 1970 Friedmanite monetarism was a minority doctrine, regarded by most economists as cranky or obsolete. By 1975, under the pressure of world inflation, Milton Friedman had the best of the battle, and the Keynesians were in full retreat. By 1980 practical policy around the world had become monetarist. The battle was fought over the most effective remedy for inflation. Keynes had written The General Theory (1936) as an anti-deflation book; it did not deal effectively with inflation.
After 30 years of broadly monetarist policies the world now enjoys low inflation and relatively high rates of growth. So long as Keynesianism delivered the goods — which it continued to until the late 1960s — it remained orthodox; Friedmanism is now delivering the goods. So long as that continues, monetarism and free markets will remain the world orthodoxy.
All economic theories must be tested by their outcomes. Classical theory, of which the Friedmanites are a subsect, dates back to 1776 and Adam Smith’s Wealth of Nations. The same year produced the US Declaration of Independence. Political and economic liberty are twins; they stand or fall together.
There are, undoubtedly, 21st-century threats to this Friedmanite consensus. We do not know whether economic liberties would survive a world slump that, like the next earthquake in California, may now be overdue. Inflation is sleeping, but not dead. We do not know whether Friedmanism will survive the switch of economic power from North America to Asia. We do not know whether it can handle global warming or economic terrorism.
In 1914 the Victorian system based on classical economic theories failed to survive the outbreak of the First World War. The Russian Revolution introduced an epoch of tyranny. Revolutions and world wars destroyed the free global economy of the 20th century and could again destroy that of the 21st.
However, we can look at all the setbacks of the past century in a more positive way. In 1913 the world enjoyed monetary stability, widespread free trade and free travel, rapid scientific advance, widespread liberal institutions. That was lost in 1914, lost again in the slump of 1931, lost again in the war of 1939, frozen for decades in the Cold War, blown up by the inflation of the 1970s. Yet in 2006 the world has regained many of its free characteristics. The classic laws of Adam Smith have reappeared in their original validity. Milton Friedman was the prophet of their rebirth. Truth always resurfaces.
William Rees-Mogg