MILTON FRIEDMAN, ECONOMIST, DIES AGED 94
By Samuel Brittan
Tuesday, November 21, 2006
Friedman in Cambridge I first met Friedman in the 1950's when I was a second-year undergraduate at Cambridge where he had come on a sabbatical. Unfortunately, I had to share supervisions with another student who had no difficulty in deflecting him into general political conversation. Friedman once arrived early and started to read a copy of Shaw's contribution to Fabian Essays which was lying on the table. “There are three mistakes in the first few pages,” he said, referring to Shaw's excursion into marginal productivity theory in which he thought he could instruct his less well-read fellow Fabians.
For all Friedman's charm, I received from him one of the best put-down remarks I have ever encountered. He mentioned to me a letter he had received from Arthur Burns (later chairman of the Fed) saying that Eisenhower was turning out well as President. I expressed surprise, to which Friedman responded: “First, Burns has much better knowledge of Eisenhower. Secondly, given equal knowledge, I would prefer his opinion to yours.”
In the 1950s, Friedman was much better known for his advocacy of floating exchange rates than for monetarism. The background was the widespread concern about a supposed dollar shortage, which Friedman believed entirely due to overvalued exchange rates in Europe and elsewhere. “Sure,” he would say, “there is a dollar shortage in Britain - in exactly the same way as there is a dollar shortage for every US citizen.” He had the last laugh, as within a few years the supposed dollar shortage had turned into an equally mythical dollar surplus.
What I did not discover until many years later was that Friedman had been spitefully frozen out of much of the intellectual life of the Cambridge Economics Faculty. For instance, there was an absurdly-named “secret seminar” that discussed capital theory, where Friedman could have helped very much by cutting through some of the mathematical problems and bringing out the essentials, but from which he was excluded. What dismayed him most were the illiberal attitudes of some in the faculty who were theoretically on his side. An example was the late Professor Sir Denis Robertson, who always maintained reservations about Keynes and who advocated zero inflation decades before that became fashionable. But he shocked Friedman by defending vigorously the right of County Agricultural Committees to dispossess farmers they deemed inefficient. The Chicago professor's admiration for the founding fathers of British economics became tinged with perplexity at what so many contemporary English people were inclined to assert.
“Permanent Income” and Money
During the rest of his career, Friedman was largely occupied with the empirical testing of economic ideas. His major achievement was his Theory of the Consumption Function, published in 1957. which was the work most prominently mentioned in the citation for the Nobel Prize which he won in 1974. His investigation was touched off by a well known paradox. Cross-section data appeared to show that the percentage of income saved increased as income rose. On the other hand, time series data showed much less change in the savings proportion over the years. The resolution of the puzzle was that spending and savings decisions depended on people's views of their long-term (“permanent”) income; but they were much less inclined to adjust to transitory income variations in either direction.
These findings had at least two implications which Friedman cherished. One was that capitalism did not after all suffer from a long-term tendency to stagnate because of under-consumption. Another was that fiscal fine-tuning would be very difficult, as consumers would ignore temporary variations in disposable income due to government budgetary tightening or relaxation. Here indeed is the clue to why Chancellor Kenneth Clarke's 1994 tax increases did not have the recessionary effects so widely predicted. Friedman's Consumption Function was so thorough and convincing in its marriage of theory and data that it convinced many economists who far from relished the political implications.It was in the late 1950 and 1960s that Friedman developed the monetarist doctrines by which he became best known. He treated money as an asset. The public desire to hold this asset depended on incomes, the rate of interest and expected inflation. If more money became available the effect would be initially to raise real output and incomes, but eventually just to raise prices more or less in proportion. Here was where the famous ‘long and variable lags' appeared: typically nine months before real output and income were affected and a further nine months before the main effects on prices came through. These time periods were much cited and much derided; but they were not the heart of Friedman's message.
The stock response of the anti-monetarists was to say that the money supply adjusted passively to events such as wage explosions or government deficits. Although this sometimes occurred it was important for Friedman to establish that this was not always the case. Sometimes money was the active agent, whether because of an inflow of gold, an official easy money policy, an attempt to maintain a particular exchange rate, or whatever.
Monetary History and Monetarism
The book in which he tried most fully to demonstrate money's active role was A Monetary History of the US, 1867-1960, published in 1963 and written jointly with Anna Schwartz it was one of Friedman's skills that he always found the right collaborator for a particular work. The Monetary History is Friedman's masterpiece. Containing hardly any equations, it has been read with profit and pleasure as history, even by people who have disagreed with, or been indifferent to, the doctrines it was designed to advance. Characteristically, it began as a by-product of an attempt to establish the factual record of the US money supply, which turned up so many problems and brought to light so much new material that the more ambitious volume more or less suggested itself.
A later attempt by the same two authors at a more formal equation-based approach, concentrating on cyclical averages and covering the UK as well, was not as successful. There were so many snags that the results did not appear until 1982; and the authors themselves admitted that they were hardly worth the effort. They particularly regretted the time spent on extending the analysis to the UK, which had not yielded much extra light. The scholarly debate on the new work was itself delayed for nearly another decade, partly because of the attempts of British anti-Thatcherites to harness the analysis of Friedman's critics for their own political purposes. One day the story will be told.
The policy conclusion Friedman drew was his famous money supply rule a stable growth of the money supply, year in year out. He accepted that this was not the only policy that could be derived from monetarist findings. But nearly all suggested monetarist strategies became embroiled in difficulties as financial assets proliferated and with them the number of rival definitions of money. In the early 1990s some monetarists were accusing the Fed of depressing the US economy with too tight a policy and at the same time as other monetarists were criticising it for expanding too much.
Friedman himself sometimes gave the impression that whatever a central bank did, it could do no right. To gain his favour it had not only to pursue monetary targets, but pursue them by a particular method known as monetary base control; and when the Fed attempted such a method in 1979-82 it was damned for getting the mechanics wrong.
