The Captain of Capitalism : Even as Milton Friedman's Theories Have Gone Out of Vogue in Washington, His Ideas Have Come to Shape the Way Nations Manage Their Money. - Los Angeles Times (original) (raw)
Jonathan Peterson is a Times financial writer.
It’s a noisy, black-tie reception at the Biltmore Hotel downtown, and the keynote speaker is holding court at the bar, Scotch and soda in hand. Timidly, a 22-year-old college student asks Milton Friedman what he thinks about drug testing in the workplace. “I’m in favor of legalizing drugs,” replies the Nobel Prize-winning economist and anti-government crusader. “According to my value system, if people want to kill themselves, they have every right to do so. Most of the harm that comes from drugs is because they are illegal.”
The room, bathed in a soft, blue-green light, is packed with libertarians who hold similar views. Friedman, 74, has been asked by the free-enterprise Reason Foundation to speak after dinner. But for now the crowd looms over the speaker, who--at 5 feet, 2 inches tall, bald and bespectacled-- exercises the command of a revered professor surrounded by eager students.
Somebody grumbles about government ownership of railroads. “My solution in these cases has never been to sell them,” Friedman says, pausing for effect. “It’s to give them away.” A guest points out that such a move would be radical. “It wouldn’t matter if it’s radical,” Friedman retorts. “It’s right.”
A former student-turned-psychologist says he just can’t express how much he got out of Friedman’s economics course in college. The professor cracks: “If you turned into a psychologist, you didn’t get enough.” Moments later a giggly, middle-aged woman whispers in Friedman’s ear, then plants a worshipful kiss on his cheek. “You embarrass me,” he protests.
One by one they step forward: students, academics, entrepreneurs--true believers all in the professor’s capitalist credo. Some have serious questions; others merely want to shake the celebrated hand. Shortly, they will attack the roast beef, this assemblage of ideological outsiders who are a tad closer to the inside than they used to be.
Milton Friedman--adviser to presidents, hero or villain to millions, agitator extraordinaire --is smiling.
It has been a remarkable journey for a sheltered kid from North Jersey whose early ambition was to do arithmetic for insurance companies. And his speech topic for the libertarians is apt indeed: the relationship between the world of ideas and the world of practice. For Friedman’s career represents a dramatic collision between these worlds. In a striking range of areas--monetary policy, tax reform, deregulation, the volunteer army and currency exchange rates--his influence has been powerful, possibly unparalleled.
To be sure, the world of practice has been rather nasty of late to the scholar who now makes his home in Northern California. Friedman’s “monetarist” teaching, that a carefully controlled increase in the money supply is the key to prosperity, has fallen out of favor with many in Washington. Free trade, another cherished value, has been undermined by restrictions on everything from Japanese autos to Canadian lumber. Other proposals to severely curtail the federal government can’t get a serious hearing in Congress.
Yet to the many who consider Friedman an economist of epic stature, it’s a mistake to focus on such political ups and downs.
For years, Friedman’s was a lonely voice extolling the virtues of unrestricted capitalism at a time when controls over business were the vogue internationally. His crusading, once seen as reactionary, now looks prophetic. Today a capitalist renaissance is under way throughout the world. Entrepreneurs and business executives are glamorized on magazine covers. Countries as disparate as Britain, France, Argentina and even China are placing new faith in free enterprise. Capitalism, it seems, has even regained respectability among intellectuals, a trend with historic implications.
To Friedman’s followers, sparking this change in the tide of ideas is the professor’s legacy--and a profound one. “If you step back and look at all the sweeping political changes in the United States and even other countries--mainly in terms of economics--a lot of people have had an important effect,” says Martin Anderson, a former chief domestic policy adviser to President Reagan. “But if you had to say one person who had the most impact, it’s Milton Friedman.”
Says Jerry Jordan, chief economist at First Interstate Bancorp and formerly a member of Reagan’s Council of Economic Advisers: “He’s not a one-issue economist, and he’s not an economist for one era. He’s so broad in applying his economics--that’s why I think he will go down as the greatest.”
Win or lose, Milton Friedman seems a man at peace as he settles into his eighth decade. If politicians are too dense to see the truth, that’s no cause for torment. Progress is measured in terms of decades, not weeks or months. Friedman isn’t self-effacing--his living room features his likeness in both a bronze bust and a portrait--but he speaks modestly of his impact.
“You try your best to get your ideas across,” he explains. “You do the best you can. If you don’t succeed, you try again. You’ve got to have a sense of humor about these things. People shouldn’t take themselves too seriously. No one person is going to make that much difference. If you have a little effect, you should be happy about it.”
During more than five decades in the intellectual trenches, Friedman has churned out a dizzying array of ideas. Though many observers consider economics to be about as reliable a science as astrology, Friedman approaches the field with devotion, and he brings to it an extraordinary scientific mind. A discovery in statistics he made 50 years ago survives today in computer software packages as the “Friedman test.” His official bibliography lists more than 25 scholarly books and hundreds of academic articles. He has been translated into Russian, Chinese, Hungarian. The non-scholarly activities, however, have made Friedman arguably the best-known economist in the world. He wrote a Newsweek column for 18 years, and hosted the 10-part public television series “Free to Choose” in 1980. The series led to a book that topped the U.S. best-seller list. The enormous response to his “unscientific” endeavors is a sensitive point with Friedman. Almost apologetically, he declares that political activities have taken a greater share of his time in recent years “because people’s capacities to do scientific work decline with age--while their capacities to throw the bull increase.”
He has nonetheless capitalized on the exposure, expressing ideas in clear, simple terms and winning converts with an engaging sense of humor. Rather than seeming defensive about his height, for instance, Friedman has joked that he lost an inch from carrying the “weight of the world” on his shoulders.
Wit is a tool that Friedman--whose voice often settles into nasal, lecturing tones--uses to dominate or disarm. He can be rough on his counterparts--dismissing John Kenneth Galbraith, for example, as a mere “publicist”--but is patient with the less sophisticated. His administrative assistant, Gloria Valentine, who has no economics background, tells how her new boss put her at ease 15 years ago by poking fun at some of his learned colleagues: “You don’t have to worry about not knowing anything about economics,” he lectured her. “There are many people who studied economics for years and don’t know anything about economics. Stick with me and you’ll learn the correct way.”
Whether arguing to increase the money supply or to decrease Social Security, such cocky irreverence delights supporters and maddens critics. To believers and skeptics alike, Friedman has served as a beacon, his light shining far too brightly to be ignored. “I used to say that the people at MIT and Harvard didn’t know what they were going to work on until Milton made a speech,” says George J. Stigler, a fellow Nobel laureate in economics and longtime friend.
Friedman is unawed by reviews, pro or con. When he won the Nobel Prize for economics 10 years ago, he said he was more concerned with what his academic colleagues thought of him than the opinions of the Swedish jurors. He still carries on much the same routine as always, usually starting off the day with about five hours of research. He no longer teaches classes, however, serving since 1977 as a senior research fellow at Stanford University’s Hoover Institution.
He divides his time between an apartment atop San Francisco’s Russian Hill, with a sweeping bay view, and his Sea Ranch retreat 100 miles to the north.
His wife, Rose, is an economist and occasional collaborator, and the two are obviously close--Friedman typically lapses into “we” when discussing his past or his current activities.
But unlike Rose, who frequents the symphony and opera, Friedman’s imagination is drawn almost exclusively to economic research and public policy. The two have similar views on economics, although Friedman can overshadow his wife, on occasion jumping into a conversation to answer a question directed at her.
One day in in their apartment, however, Rose Friedman is more vivacious. The subject is her husband’s lack of appreciation for music, and she recalls dragging him to the symphony in New York before they were married 48 years ago. The attempt to civilize her studious beau was doomed: “When I saw that he sat beside me reading a book while the music was on, I gave up.”
Friedman actually does have outside interests. Despite having had a heart attack and two bypass operations, he plays a spirited game of tennis, sometimes three times a week, and occasionally skis in Utah, navigating the expert slopes alongside William F. Buckley. For all Friedman’s vigor, the years sometimes show, though, such as when he returns heavily winded from scampering to check his Stanford mailbox.
Although he is secure financially, he hasn’t even considered retirement. His overriding interest, he says, remains the same: “To try to understand as much as I can of the world around me--and to enjoy myself in the process. And no doubt, one has to confess, not only to understand, not only to enjoy--but to reform.”
Friedman’s quest to understand began in Rahway, N.J., an old industrial town, 20 miles south of New York City, best known for its state prison. He didn’t have to look beyond his own immigrant family to appreciate the uplifting powers of capitalism. Friedman’s parents emigrated to the United States in the late 19th Century from a province of what was then Austria-Hungary and is now part of the Soviet Union. Before Friedman was born, his mother worked in a sweatshop in New York City. Later, the family income came from a small dry-goods store that his parents ran. Friedman was the youngest, the only boy of three children.
His extraordinary drive for logical consistency manifested itself early on. His parents weren’t the most religious of Jews, and Friedman recalls at a very early age pushing them to be more observant. But by the time he turned 13, he abandoned Judaism altogether. “When I thought the religion I was brought up in was correct, I was very rigid and strict in observing it,” he says. “On the day I decided there wasn’t any sense to it, I quit. I’ve been an agnostic ever since.”
A month before his 16th birthday he graduated from high school with a scholarship to Rutgers. His early ambition seems surprisingly modest: to become an actuary, a statistician specializing in insurance matters. But Friedman’s horizons would quickly broaden. This was the early 1930s, and the nation was racked by the Great Depression. Serious thinkers weren’t drawn to mortality tables or insurance rates. They were confronting basic questions about what happened to the nation’s prosperity, how to get a chicken back in the pot for millions of hungry Americans.
For an enthusiastic young scholar, economics was the ticket. Arthur F. Burns, later to become chairman of the Federal Reserve Board, taught economics at Rutgers at the time and cultivated his bright student. Friedman moved on to study economics at the University of Chicago in 1932. Years later, he would reminisce for the Nobel committee that Chicago “exposed me to a cosmopolitan and vibrant intellectual atmosphere of a kind that I had never dreamed existed. I have never recovered.”
The decision to go to Chicago was fateful. In the coming decades, the “Chicago school” of economics would stand as a fortress of free enterprise in an academic world increasingly distrustful of unregulated business. Ultimately, Friedman would become its spiritual leader.
From early on, his work got attention. One study, at the private National Bureau of Economic Research in the late 1930s, found that doctors’ incomes had been boosted 10% to 15% by their profession’s limits on newcomers. Moreover, the gains of such “union” workers came at the expense of everyone else. Some of the bureau’s directors were uncomfortable with the finding, and the project, which served as Friedman’s doctoral dissertation, was held up. Five years later, after World War II and some modifications in language, Friedman finally got his Ph.D. from Columbia University.
Even before that problem was resolved, a more troublesome lesson about the world was in store when Friedman got a junior teaching post at the University of Wisconsin. There, his quest to gain an associate professorship managed to become entangled in a long-simmering rivalry among the business and economics faculty and exploded into a campus cause celebre , which also, say some sources, involved an undercurrent of anti-Semitism. Students, led by Walter Heller--later to become an eminent economist in his own right and a philosophical adversary of Friedman--demonstrated in favor of their ambitious young teacher.
The efforts failed. The Friedmans packed their bags and left Madison for Washington. “Obviously it enhanced my realism about the character of the world,” he recalls today. “I was relatively naive and innocent at the time.” Then he unsheaths the debater’s stiletto: “As you know, there’s nothing worse than academic politics. The reason is that when there isn’t much at stake, people really fight.”
Some might find an irony in what happened next. Friedman’s efforts at the Treasury Department helped lead to the withholding of income taxes from paychecks during the year, ending the practice of paying up once a year. The idea was to help the public pay the high taxes needed for the war effort. Yet the innovation had an unintended consequence: It made it easier to finance the big postwar growth in federal programs that Friedman would deplore.
Friedman’s tenure in the capital would provide a further loss of innocence. In Washington, he believed, political expedience consistently won out over honest solutions. That is no minor issue to Friedman. Alan Greenspan, a longtime Republican economic adviser who describes Friedman as one of the most productive intellects of the 20th Century, puts it this way: “As far as Milton Friedman is concerned, if something is true, it’s true. He talks the same way to an 18-year-old college student as he does to the President of the United States.”
As might be expected, the Friedman household was a center of animated debate. Friedman’s son, David, says that until he was about 15 “it had not occurred to me that there were forms of conversation that didn’t involve argument and analysis.”
Now 41, David still remembers the childhood train ride from Chicago to Portland that his father turned into an economics lesson. The elder Friedman gave his son and daughter, Janet, the choice of sleeping in Pullman berths or sitting up and getting the extra fare that Friedman saved in cash. “Of course, we chose to sit up,” says David, who this year is a visiting fellow in law and economics at the University of Chicago. “It was a matter of letting us decide for ourselves whether the cost was worth more than the benefit.”
Though economists speak an arcane language that seems far removed from daily life, the greatest among them have unleashed forces that reshaped the world. Americans associate 1776 with Thomas Jefferson’s Declaration of Independence. Yet a different document, extraordinary in its own right, appeared the same year. “An Inquiry into the Nature and Causes of the Wealth of Nations,” written by the Scotsman Adam Smith, set forth a philosophy of laissez faire that would underpin America’s emergence as an economic power of undreamed magnitude.
Smith’s view of people wasn’t sentimental. He expected each to strive for his own self-interest, to try to roll over the other guy if necessary. But Smith had a provocative insight: that all of these competing personal aims combined to form an “invisible hand” that benefited society. The trick was to leave private industry alone. In the next century, German-born Karl Marx publicized a radically different view. His indictment of capitalism and call for centralized control of goods and services became a revolutionary anthem for years to come.
In 1883, the year Marx died, a giant of economics was born in England, a man whose writings would be used to justify much of the huge federal expansion in the United States after World War II. Contrary to deeply ingrained views, John Maynard Keynes preached that if politicians handled the throttles of tax and budget policy with sufficient finesse, a nation’s economy would hum like a well-oiled engine.
None of this history is lost on Friedman. In “Free to Choose”--a book he co-authored with his wife and one that Ronald Reagan called “must reading for everyone”--Friedman writes of “the importance of the intellectual climate of opinion, which determines the unthinking preconceptions of most people and their leaders, their conditioned reflexes to one course of action or another.”
Most people, of course, don’t worry about academic theories. Conditions of affluence, depression, peace and war mean a lot more to the public than some scholar’s latest article. But the choices made by their leaders will depend on the ideas hanging around at the time. Whether Friedman is advising the British House of Commons, visiting Israeli officials or corresponding with a Chinese architectural student, this is his aim--influencing the ideas that one day may shape events. “The tide of ideas isn’t local,” he says. “It’s international; it’s worldwide.”
Friedman is driven by a faith in the marketplace and a disdain for bureaucracy. If Adam Smith is Friedman’s spiritual forebear, Keynes is his spiritual foil. For most of Friedman’s career, he has aimed his intellectual artillery at the Keynes-influenced assumptions held by many of his colleagues, particularly on the government’s usefulness in the economy.
As a consequence, he used to be considered something of a gadfly. Gradually, though, he made his academic mark by exploring such questions as how people spend and save over a lifetime in relationship to their income, and the impact that the supply of cash--and its expansion--has on the health of a nation’s economy.
As the early study on doctors showed, Friedman had a knack for finding provocative links between theory and real events. Consider the Great Depression. Friedman set out to understand what went wrong. In 1963 he astonished policy makers with his explanation: The Depression began as an unspectacular downturn that was needlessly accelerated by foolish and erratic monetary policies. In other words, the Federal Reserve Board blew it. Although his research has traversed vast landscapes, Friedman is most identified with such questions of money supply, or monetarism. His argument is that the most important ingredient for economic vitality is a modest but constant increase in the amount of money in circulation. This can be accomplished through policies of the Fed, which, operating like the engineer of a dam, can create either a flood or a trickle of new money by its influence over the amount of reserves held by banks. The Depression, he says, was exacerbated by the lack of money growth. More recent periods of inflation were fueled by an excess. Though monetarism is currently under attack, Friedman is credited with having taught his profession a great deal about the role of money and how it affects the national economy.
Despite his enthusiasm for research, Friedman is remembered as a dedicated teacher. In his classroom, clear communication was sacrosanct. Raymond Zelder, a former student who today is an economics professor at Western Michigan University, remembers that back in the 1950s Friedman crossed out about a third of the words in his doctoral thesis because the writing wasn’t precise enough. “Mean what you say, and say what you mean,” was his message, Zelder says.
In those years, Friedman clung to the world of pristine ideas, steering clear of the more vulgar political plane. He turned down President Dwight D. Eisenhower’s invitation to serve on the Council of Economic Advisers because of what he considered the corrupting influence of politics. For many economists, such an opportunity to join the big leagues of policy-making would have been irresistible. But Friedman preferred to remain the outsider:
“I really thought I could be much more helpful and useful in the world at large as a maverick than I could be in Washington as a civil servant,” he explains. “If you’re going to be an economist you have no business being a politician. And yet it’s almost impossible for anybody to stay in Washington very long without subtly shifting focus from what is economically desirable to what is politically feasible. That is what I mean by being corrupted.”
Inevitably, Friedman the reformer was lured out of the ivory tower. In 1962, at age 50, he unleashed his manifesto on the merits of capitalism and its relationship to personal freedom, “Capitalism and Freedom”--dubbed by followers “Capitalism and Friedman.”
It was not a book only for the professors. It was light on science and heavy on political philosophy, written in vivid prose that the public could easily grasp. In typical, image-shattering form, he attacked John F. Kennedy’s call to “ask not what your country can do for you; ask what you can do for your country,” as unworthy of the ideals of free men in a free society. Individual freedom was paramount, Friedman was saying--not unquestioned adherence to a central government. Free enterprise was an essential condition to political freedom. This was not politics as usual. Friedman sought no less than a revolutionary change in the status quo. The government had little business beyond defending the nation, watching over the currency and maintaining law and order. In that and later writings he would outline an austere vision in which much that is taken for granted in modern life--Social Security, consumer protections, worker safety laws, minimum wages, federal highways, rent controls, agriculture price supports, public housing, trade limits, national parks and more--would be eliminated or left to private enterprise. Although many saw this view as brutal or naive, Friedman’s intent wasn’t mean. He simply believed that free markets could do far more good for society than people supposed. He argued--often ingeniously--that government activities accomplished the opposite of what they were supposed to. The minimum wage didn’t help poor youngsters, he contended. It hurt them by discouraging business from adding new, low-paying jobs. Public housing reduced the quality of life for its residents by fostering juvenile delinquency and other social ills.
In 1964, Friedman moved further into the public fray, serving as an economic adviser to Republican presidential candidate Barry Goldwater. Goldwater shared most of his economist’s enthusiasm for free enterprise but not all of the antipathy to trade restrictions. If Friedman the scholar operated in a world of no compromise, Friedman the reformer learned swiftly how to tread murkier waters, by some accounts.
In his book “The Economists,” Leonard Silk wrote that “these differences (between Goldwater and Friedman) were glossed over by Friedman in his public pronouncements. He immediately recognized that if he was going to play the political game he would have to soften or blur his own positions when they were in conflict with his candidate’s.”
Liberal critics--and many moderates--were horrified by some of Friedman’s ideas. But although Goldwater lost in a landslide, Friedman’s star was ascendant in Republican policy circles. Public confidence in the federal bureaucracy was waning, and Friedman made for a devastatingly effective advocate. “Milton Friedman is a superb debater,” concedes Galbraith, an economist who views unchecked free enterprise with far more skepticism than does Friedman. “I am possibly a better writer than he is, but I’ve always avoided debating him.”
Friedman’s politics defied conventional labels. He was identified with conservatives, yet he preferred to see himself as a classic liberal, concerned with the rights of the individual. Criticized as heartless for seeking to abolish welfare programs, he devised a novel approach to supporting the poor: giving them cash directly through a negative income tax. The beauty of the idea was that it could also eliminate the welfare bureaucracy.
In different forms, the negative income tax has been considered by Presidents Richard M. Nixon, Gerald R. Ford and Jimmy Carter. In 1966 Friedman began aiming the gospel directly at the public with a Newsweek column. His visibility reached new heights in 1969 when he was featured on the cover of Time. The magazine called him a “maverick messiah.”
Friedman had a secret weapon unshared by most of his academic colleagues: a talent for matching his rhetoric to the ear of the listener. If he was with a Los Angeles crowd and wanted to make a point about unfair federal policies, he might declare that government “taxes the people of Watts to send children from Beverly Hills to college.”
Friedman’s lacerating skills as a debater served him well on the question of ending the draft, an issue on which he parted company with conservative hawks. When Nixon got interested in a volunteer army, he appointed Friedman to a panel exploring the matter. Martin Anderson, then a Nixon aide, recalls one meeting in which a general kept using the term mercenaries in his arguments against a volunteer army.
“You could see Milton getting more and more agitated,” Anderson says. “Finally, he went up to the mike and said to the general, ‘If you will stop calling young men who volunteer to serve their country mercenaries, then I will not start calling people who are drafted slaves.’ The general caught on quickly. There was no more talk of mercenaries.” Anderson says that Nixon’s decision to end the draft is due largely to Friedman: “Several million young American males did not get drafted that would have gotten drafted if we hadn’t moved to a volunteer army. They owe Milton one for that.”
Not that the maverick always prevailed. Nixon, concerned with his own reelection, disregarded Friedman in August, 1971, and imposed wage and price controls to arrest inflation. To such a free-market apostle as Friedman, the measures were not merely wrong, they were deeply disturbing. Friedman publicly attacked the policy. No less galling was the conservative President’s declaration that “We are all Keynesians.” Later, Friedman would tease the liberal Galbraith in a note: “You must be as chagrined as I am to have Nixon for your disciple.”
Nor were wage and price controls Friedman’s only disappointment. Friedman expected his views on the money supply to get a true test in 1975 when the Fed, under pressure from Congress, announced plans to set goals for controlled monetary growth. Conditions were perfect. The new chairman was none other than Arthur Burns, Friedman’s early mentor. In Newsweek, Friedman described Burns as “the right man in the right place at the right time.” But Friedman would be disappointed again. Burns, who declared that it was the Fed’s job “to take away the punch bowl just when the party’s getting good,” pursued policies that his star pupil considered erratic. Looking back on his early hopes, Friedman concedes: “I have to admit I was wrong. He was a great disappointment to me as a chairman.”
By the time Friedman won the Nobel Prize in 1976, his reputation as a disinterested researcher had been damaged by his forays into public affairs. According to newspaper accounts, the Nobel committee argued heatedly for two hours over whether his magazine commentaries and efforts on behalf of Goldwater undermined Friedman’s credibility as a scholar. After he won the award, Swedish leftists protested, citing his role as an occasional economic adviser to the military junta in Chile. He responded that the Chilean people had nothing to lose by any strengthening of free enterprise.
Four years after winning the Nobel, Friedman received a different sort of reward: the election of Ronald Reagan as President. At long last, a proponent of the free-market, anti-regulatory policies that voters had repudiated in 1964 was in control of the White House. The President of the United States spoke unabashedly of “the magic of the marketplace.” To many intellectual conservatives, Reagan’s election was a historic triumph. And no economist seemed to embody the new Administration’s philosophy more than Milton Friedman.
That was the view from 1980. Today, looking back on six years of the Reagan presidency, the chasm between philosophy and politics is glaringly clear. Government spending continues to increase. The plethora of federal programs inherited by Reagan is largely intact. A balanced federal budget is further away than ever. New trade restrictions are on the books. Once again, the world of theory has bumped into the world of practice.
The thing is, there’s a deep practical problem with many of Friedman’s proposals, which has nothing to do with whether they might ultimately work. Politicians, who dance to the music of voters, have a very limited appetite for ideas that cause pain. And many of Friedman’s proposals would cause pain, certainly at first.
Take the Food and Drug Administration. Friedman calls it “a disgraceful outfit” and condemns it for keeping helpful drugs off the market while they go through a time-consuming, bureaucratic approval process.
But how would a congressman explain eliminating the FDA to the victims of some new thalidomide, a drug blamed for thousands of deformed babies overseas--and successfully held off the U.S. market by regulators? The same is true for worker safety laws, Medicare, consumer protections, pollution controls and much of the other federal roles that Friedman would gladly wipe out. Walter Heller, who served as chairman of the Council of Economic Advisers under Presidents Kennedy and Lyndon B. Johnson, says: “It’s a matter of deciding where the market can regulate itself--and where the cost of regulating itself is so great that most people are not willing to endure it.”
Friedman’s own willingness to endure sacrifice as a way to build a better future is high. “Sweatshops serve a very useful function,” he says. “If present-day labor laws had been in effect in the 19th Century, you never would have been able to have all the immigration that you did.” This isn’t just intellectual fancy. Friedman’s mother worked in a sweatshop for several years, starting at age 14.
Similarly, tight monetary policies in Friedman’s name have exacted much pain in the effort to whip inflation. The Fed tried the approach in 1979, toward the end of Jimmy Carter’s term, and stuck with it at first under Reagan. By late 1982, however, with the United States in recession, Europe stagnant and Mexico shoulder-deep in debt, the White House lost its appetite to “stay the course,” and the Fed began pumping up the money supply.
Jordan, a Friedman fan who served on the Council of Economic Advisers at the time, recalls the early Reagan days: “We had three words for the monetary growth--slow, steady and predictable. That was pure Milton Friedman, and it has now been explicitly rejected by the Reagan Administration.”
Although the Friedman medicine was rejected, the patient has had a strong recovery. Currently, the money supply is growing faster than Friedman has urged; yet many economists fear that cutting it would bring on a new recession. Some inaccurate Friedman predictions in recent years haven’t helped the monetarist cause either. In 1983, for example, he predicted both a recession and resurgence of inflation for the following year. He was way off the mark on both counts.
Critics say that the monetarist focus oversimplifies things, that the economy is an awesomely complex organism that responds to a variety of medicines in a variety of ways. “Friedmanism got too strong a hold,” Heller says. “For a while it became the lazy man’s formula for projecting and analyzing everything.”
Friedman’s theories also have taken a beating in the Treasury Department. His view that exchange rates between currencies of different countries should be set in the same way that commodity prices are set--by balancing supply and demand in a free market--prevailed in the 1970s. But queasy about disruptions in international finance, Treasury officials now seek to re-establish some controls.
The professor, who still serves on a panel of economists that advises the White House every few months, admits disappointment on free trade and on exchange rates. But he contends that his monetary approach has yet to receive a meaningful tryout. Even in Great Britain, where conservative Margaret Thatcher launched ill-fated policies in the name of monetarism, the approach, Friedman says, was all wrong. He also says that his views on the relationship between money supply and U.S. economic performance are much more accurate than they seem to many, because of differences in the way people define the money supply.
Intellectual adversaries cite the policy setbacks as evidence of Friedman’s fall from grace. “If you had asked that question three or four years ago, I’d have had to say Milton Friedman was the most influential economist of our time,” Galbraith says. “Now, of course, he’s been deserted by Ronald Reagan. Like so many others, he has passed under a cloud.”
Friedman nonetheless remains upbeat on the President. The new tax law, while hardly meeting all his wishes, is arguably a step toward the lower rates and simplicity that he has sought for many years. He is particularly pleased with tax indexing, an earlier change endorsed by Reagan that shields taxpayers from being forced into higher brackets because of inflation.
Like his followers, Friedman looks beyond the political losses--however disappointing--to the larger picture of a world where capitalism is resurgent and regulators are on the defensive after years of influence. Reagan, he declares, is “the first President in my lifetime who was elected not because he was saying what the people wanted to hear, but because the people wanted to hear what he was saying.”
It’s late on a balmy autumn afternoon, and the Stanford University campus is quiet. Friedman has invited a visitor into the faculty lounge, where the professor munches on a chocolate-chip cookie and sips coffee. Something is bothering him today. It’s the lingering charge that his scientific pursuits have been biased by policy aims, that he has loyalties that transcend the findings of painstaking research. He feels that Sidney Blumenthal suggested precisely that in a new book on conservatism that says, among other things, that Friedman “felt obliged to explain it (the Depression) in a way that vindicated the market.”
More recently, liberal Wall Street Journal columnist Alexander Cockburn bashed monetarism in an essay and--echoing many of the economist’s critics--wrote that “more than any other prominent economist, Mr. Friedman speaks unequivocally on behalf of the capitalist class and for that class’ political agents in the form of Ronald Reagan, Margaret Thatcher and Augusto Pinochet.”
Friedman declares that it would be disgraceful for a scholar to let political views bias research. “I regard it personally as an insult of the grossest kind to my personal integrity,” he says of Blumenthal’s book, “The Rise of the Counter-Establishment.” “The function of scholarship is to try to find out what’s true, what works, and fundamentally the kind of scholarship I have done in my opinion has no ideological quality whatsoever. Nobody who has ever looked at my work is going to accuse me of being a hired minion of the capitalist class.” Cockburn he dismisses as “silly.”
The lounge is emptying quickly now, as professors hit the road for the daily struggle with afternoon traffic. Friedman must leave soon also. He’s planning a visit, with his wife, to Sea Ranch, where he’ll tinker on the computer and catch up on reading and writing. Rose will tend to their assorted fruit trees while he plays a little tennis. But he’s not leaving the campus quite yet. The talk has been about ideas and integrity, always a serious matter. He pauses to savor an old memory.
For a moment, the eminent professor is a student again in a Rahway, N.J., classroom. The day’s lesson is on the theory of Pythagoras--a Greek thinker born six centuries before Christ--who popularized a new way to reckon the size of a right triangle. The ancient discovery holds great fascination for a young, would-be mathematician sitting in class. The instructor is moved as well, and he leaps from math to the poetry of John Keats, reciting for the schoolchildren: “Beauty is truth, truth beauty--that is all ye know on earth, and all ye need to know.”
“I can still remember it today,” Friedman marvels, “though it was 63 years ago.”