The deflation of Friedman

By Richard Adams (THE GUARDIAN, 18/11/06):

The death of Milton Friedman has provoked an outpouring of tributes to one of the modern era’s most controversial economists. But given how little success he had in translating his ideas into practice, it is worth asking just what his legacy is. Thanks to his status as a hate figure for the left, many assume that Friedman’s agenda was cemented by the Reagan and Thatcher regimes of the 1980s – especially his famous view that inflation is solely influenced by changes in money supply. But few of his most cherished proposals were ever put to the test. Of those that where, such as monetarism, almost all dissolved into failure.

This is not to say that Friedman was not respected as an academic economist. He was a deserved winner of the Nobel prize for economics – even if he reacted churlishly, saying: “I would not want a professional judgment of my scientific work to be those seven people who selected me for the award.” But even Friedman’s academic influence is less than might be expected from his profile; no mainstream academic economist today is an avowed monetarist.

In terms of the policies he inspired, the report card is not glowing. His great claim that “inflation is always and everywhere a monetary phenomenon” may have set off the monetarist v Keynesian “econ-wars” of the late 70s and 80s. But Friedman’s ideas of directly targeting the money supply were tried and rejected, and Friedman later backed away from these positions. It is significant that no major central bank now directly targets money-supply data in setting monetary policy – they are far too pragmatic. Even Friedman’s great admirer Alan Greenspan never tied himself to the monetarist mast.

Friedman clamoured for school vouchers to be adopted, to little avail; his libertarian leanings led him to call for recreational drugs and prostitution to be legalised; and the bulk of his lobbying against environmental protection and regulations of all kinds was happily ignored. Even the economic reforms in Pinochet’s Chile that he is said to have inspired have run into trouble.

In 1964 Friedman got his first big role as a policy adviser to Barry Goldwater – the least successful Republican presidential candidate in the past 100 years. His next gig was for Richard Nixon – unsuccessful in a different way – who ignored him except when he could use Friedman as cover for politically difficult decisions, such as ending military service. Friedman argued against the draft, yet it was Vietnam that triggered the end to conscription in the US.

It could be argued that Friedman’s greater success was as a figurehead and champion of free markets and floating currencies – although those ideas were not new, merely unfashionable. Yet even then his role is debatable. In his own tribute to Friedman, Sir Samuel Brittan wrote: “Friedman’s direct influence on Margaret Thatcher was much less than often supposed.” It was Friedrich Hayek, rather than Friedman, who inspired Thatcher and Thatcherism.

The irony for Friedman’s fans is that the one piece of public policy he was responsible for that was widely successful and internationally adopted greatly increased the ability of governments to collect tax. In 1942 Friedman worked for the US government and helped to design the payroll tax known in Britain as pay as you earn, which allows governments to take income tax directly from salaries. It was the best thing that Keynesian-style government could have hoped for, and Friedman bitterly regretted it. Years later he wrote: “It never occurred to me … that I was helping to develop machinery that would make possible a government that I would come to criticise severely as too large, too intrusive, too destructive of freedom.”

RIP Milton Friedman, big government’s best friend.