An enduring legacy
Nov 17th 2006
One of the most influential economists of the 20th century has died
MILTON FRIEDMAN won the John Bates Clark Medal, awarded to an outstanding American economist under the age of 40, in 1951. Many consider it harder to win than a Nobel Prize. One of the measures of his greatness is that when he got it, he still had not done any of the work for which he would become most famous. Still to come were the permanent-income hypothesis, his groundbreaking “A Monetary History of the United States” (co-written with Anna Schwartz) and the proposal of a natural rate of unemployment.
These works revolutionised the conduct of central banks around the world. But to non-economists Mr Friedman's great achievement is not his challenge to Keynesian demand management but the popular writings that challenged a consensus favouring ever-greater state intervention in the economy. This work, too, came long after his peers had recognised him as a leading light. At the time of his death on Thursday November 16th, the 94-year-old economist was still working to spread his ideas about free markets, this time through a documentary for American public television.
It is another mark of his greatness that so many of the ideas that seemed crazy when he came up with them—from blaming the Depression on bad central-bank policy, to school vouchers and the volunteer army—have gained mainstream acceptance. But Mr Friedman always recognised that his success was fragile; free markets and stable money have lots of enemies, particularly among politicians. He has left us a staggering legacy of economic theory and public-policy prescriptions—but is that inheritance growing or shrinking?
Certainly, on the monetary side, Mr Friedman remains a giant. His critics point out that central bankers no longer try to target the money supply directly, but to those who remember the inflationary 1970s it is perhaps more important that futile attempt to push unemployment to zero no longer trigger inflationary spirals. In developed countries politicians may talk like Keynesians, but they behave like monetarists, looking to the central bank, rather than fiscal policy, to stave off inflation and recession.
And what of his other crusades? His proposal of a volunteer military force, once rejected as impractical, is now so deeply ingrained in American culture that politicians who proposed bringing back the draft for the war in Iraq were dismissed as crackpots or worse. His quest to replace anti-poverty programmes with a "negative income tax" that would give cash to the working poor has come to fruition in the form of the earned-income tax credit. This is now the favoured policy prescription on both left and right for boosting incomes at the bottom. School vouchers, too, are making progress, albeit slowly. And where they are not, the idea that students should be able to choose between public schools is nonetheless bringing competition to America’s educational system.
Even outside his homeland, his ideas continue to make inroads. He was pilloried for briefly advising the Pinochet regime in Chile, where his students, "the Chicago boys", ran economic policy. Thirty years later that oppressive government is gone but his free-market reforms have made Chile the economic star of Latin America. The World Bank and IMF continue to push for stable financial systems and market-based reforms around the world. Proposals like the negative income tax were forerunners of the consensus growing in Europe (and elsewhere) that governments should provide safety nets through taxation and distribution of cash benefits rather than heavy regulation of markets.
But despite Mr Friedman's work, thickets of regulation thrive in most countries, particularly his homeland. Nor has he succeeded in trimming back the state, which is still growing in many places, including America. Ironically, another legacy may be to blame: income-tax withholding, which he helped to invent during the second world war. The fact that the tax is deducted from most peoples' pay before it reaches their pockets is perhaps the main reason why the state has been able to grow so large. Mr Friedman deeply regretted this contribution to economic science—but like his other inventions, it will long outlive him.