Friedman's illuminating ideas will continue to live on
By John Greenwood
Wednesday, November 29, 2006
Milton Friedman, who died last week, was renowned for work of scintillating originality. He invariably had a fresh perspective that derived from his analysis of the basic ideas as much for their own sake as for their policy implications and he was always willing to follow the logic wherever it led, not compromising with what he called the “tyranny of the status quo”.
Four big issues of our time illustrate his continuing relevance. First, on economic development he did not fall back on the easy slogan “trade not aid”, but advocated free private markets with equal emphasis on each word. The point was that it was just as important to free and privatise the domestic economy as to abolish border controls and restrictions, although free trade was a step in the right direction.
If prices were not free to vary – or if goods and capital were subject to controls and taxes – then distortions, waste, and corruption would result. Without private ownership, entrepreneurs would not have the incentives to innovate. Bureaucrats could not know what the market wanted. Marketswere the only mechanism that would reward producers and satisfy consumers while enlisting the best of motives on both sides: voluntary co-operation.
Second, on corporate responsibility he took a characteristically maverick stance. The job of a company, he said, was to make profits for its shareholders, not to pursue socially responsible goals. If a company attempted to fulfil goals beyond its obligations to customers, employees, creditors and shareholders then the entire economy would suffer. Earning lower profits than normal would send misleading signals, distorting the proper level of investment and employment in that sector. The way to achieve “socially responsible” goals was through personal or direct government action.
Third, in the debate about public services Friedman invariably took the side of the consumer, arguing that it was impossible for a state-owned, command-and-control system to be responsive to multiple needs of a diverse population. He questioned whether government could produce any goods or services more effectively than the private market, let alone services as complex as healthcare or education. However, he always distinguished between the provision of a service and its financing.
Historically schools and medical services had been provided privately – commercially or through charities – but then governments started to intervene. Laws imposing compulsory attendance at schools, for example, came with a Faustian side-contract: government control of schools and standards, public sector teachers' unions and administrators who seized control of the curriculum, denying parents and children a say in the content of the education. Parents, pupils and politicians have struggled ever since to deal with the consequences of an increasingly bureaucratised and centralised education system.
To deal with the problem of low-income families unable to afford privately owned and operated schools, Friedman devoted much of his later years to promoting voucher plans modelled on the GI bill that provided educational benefits to US military veterans. Under his scheme parents would get a voucher good only for educational expenses and would be free to choose the school at which they used it, provided only that the child qualified for the school. The voucher's value would be set at the basic cost of education for each age group and accrue to the selected school. Schools would be free to raise additional tuition fees, or raise funds for scholarships. Schools would then have to compete.
Fourth, Friedman played a crucial role in the development of financial futures. Foreseeing the demise of the Bretton Woods fixed exchange rates system, he wrote a paper in December 1971 on extending futures markets from their agricultural base to the currency markets. With Friedman's paper, Leo Melamed was able to open the Chicago International Money Market in May 1972. Futures in gold, interest rates, Treasuries and stock indices followed and the modern world of derivatives and risk management was born.
Friedman's championing of free markets to enhance personal liberty and achieve the optimal al
location of society's limited resources helped turn the tide on collectivism in the past quarter century. But the battle of ideas is never permanently won. Exploring ideas from fundamentals was his hallmark. Long after he has gone, people will debate these four issues, but few will achieve his ability to illuminate them with such laser-beam clarity.
The writer is chief economist at Invesco-Perpetual
