Detours on the Road to Freedom: Where Milton Friedman Went Wrong

by Gary North
Tea Party Economist

Recently by Gary North: Obama’s Executive Order To Make Inner City Schools Great

Yesterday was the 100th anniversary of Milton Friedman's day of birth. The Wall Street Journal ran a laudatory article on him.

This year is the 100th anniversary of Ludwig von Mises' Theory of Money and Credit. There has been no article in the Wall Street Journal. The Mises Institute took my advice and held several sessions on that book at its March week-long Austrian Scholars Conference. A book on that book will be published next year. Few people in academia and the financial media will notice.

This reflects the shape this nation is in: bad.

It reminds us once again: halfway measures don't change anything. They only slow things down. Too often they deflect and confuse. This was the case with Friedman from beginning to end.

Let's survey the article.

In the 1960s, Friedman famously explained that "there's no such thing as a free lunch." If the government spends a dollar, that dollar has to come from producers and workers in the private economy. There is no magical "multiplier effect" by taking from productive Peter and giving to unproductive Paul. As obvious as that insight seems, it keeps being put to the test.

This was a direct assault on Keynes. Yet Friedman never directly confronted Keynes. He never wrote a comprehensive critique of Keynes. He even declared, famously, "We are all Keynesians now" in Time magazine in late 1965. He referred to methodology, but that was a crucial admission of defeat.

Mises and his followers offered a rival methodology. It begins with the individual's decisions, not with mathematics.

Friedman did not directly engage in the central theoretical battle of the era: refuting The General Theory of Employment, Interest, and Money (1936). Most economists also refused.

Mises saw before anyone else the threat that Friedman's methodological mentor offered to liberty: the fiat money economics of Irving Fisher. Mises confronted Fisher in 1912 in The Theory of Money and Credit. Friedman did more than anyone else to revive academic interest in Fisher's central bank-based fiat money economy. He called Fisher the greatest American economist. Fisher was a catastrophe. He was the economist who, in September 1929, said that the stock market was at a permanent high plateau. He died penniless, having lost his own fortune and his sister-in-law's.

Equally illogical is the superstition that government can create prosperity by having Federal Reserve Chairman Ben Bernanke print more dollars. In the very short term, Friedman proved, excess money fools people with an illusion of prosperity. But the market quickly catches on, and there is no boost in output, just higher prices.

That was Mises' insight. It was not Friedman's. Friedman thought that a little monetary inflation is a good thing: 3% to 5% per annum. Bernanke always positioned himself as a disciple of Friedman. He sold out all schools of opinion with his hyperinflation of the monetary base in 2008 and again in 2009. But he was criticized only by the followers of Mises.

Next to Ronald Reagan, in the second half of the 20th century there was no more influential voice for economic freedom world-wide than Milton Friedman. Small in stature but a giant intellect, he was the economist who saved capitalism by dismembering the ideas of central planning when most of academia was mesmerized by the creed of government as savior.

What major piece of practical advice did any government accept from Friedman? Only one: income-tax withholding. He provided the defense in 1943. As we read in The Freeman,

Friedman, who admitted being "one of the architects" of the Treasury's proposal for a withholding system, correctly noted in his memoirs that the system "would have been introduced had I been involved or not." Withholding was an essential element of the government's wartime revenue grab. "At the time," concluded Friedman, "we concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing."

He promoted free trade. So did Adam Smith. He promoted reduced government spending in theory, but never on a scale recommended by the Austrians. No government ever cuts spending. Keynesian economists – dominant today – ignore his advice. He was a voice chatting in the wilderness. He was ignored, except once: in 1943.

The great opponent of central planning was Mises, who wrote the definitive essay on this in 1920: "Economic Calculation in the Socialist Commonwealth." Friedman never wrote anything comparable.

Friedman was awarded the Nobel Prize in economics for 1976 – at a time when almost all the previous prizes had gone to socialists. This marked the first sign of the intellectual comeback of free-market economics since the 1930s, when John Maynard Keynes hijacked the profession.

F. A. Hayek won it in 1974. He had been battling against central bank policies, following Mises, as early as 1931. He wrote The Road to Serfdom in 1944, the year after Friedman gave us withholding. That book did change the world for the better. That was a frontal assault against central planning.

Friedman's 1971 book A Monetary History of the United States, written with Anna Schwartz (who died on June 21), was a masterpiece and changed the way we think about the role of money.

True, and how "we" think about it is all wrong. The only section of that fat book that the academic world ever cites is the section in which he blamed the Great Depression on the Federal Reserve's unwillingness to inflate, 1931-33. But the FED did inflate. So, he got the story wrong. That book has been the document cited by statists ever since on why the FED must inflate, and how the gold standard is a liability – the position of Fisher and Keynes.

He did more harm with that book than with anything else he ever wrote.

More influential than Friedman's scholarly writings was his singular talent for communicating the virtues of the free market to a mass audience. His two best-selling books, Capitalism and Freedom (1962) and Free to Choose (1980), are still wildly popular. His videos on YouTube on issues like the morality of capitalism are brilliant and timeless.

I agree with this assessment regarding Free to Choose. It is a good book. As for Capitalism and Freedom, it is a mixed bag. It promotes school vouchers, a really bad idea. It promotes Federal Reserve inflation. Above all, it promotes a government-guaranteed income for everyone. But it does oppose occupational licensing and price controls. The book is popularly written. It has sold 500,000 copies.

Friedman stood unfailingly and heroically with the little guy against the state. He used to marvel that the intellectual left, which claims to espouse "power to the people," so often cheers as states suppress individual rights.

Bunk. He sold out on key issues, because he was always ready to compromise with politics. He always sounded a pair of trumpets, one for the free market and the other for the mixed economy.

He loved turning the intellectual tables on liberals by making the case that regulation often does more harm than good. His favorite example was the Food and Drug Administration, whose regulations routinely delay the introduction of lifesaving drugs. "When the FDA boasts a new drug will save 10,000 lives a year," he would ask, "how many lives were lost because it didn't let the drug on the market last year?"

He had zero influence in this argument. So did his disciples. To praise him as a pioneer who got people to listen to him and follow his advice is misleading. When he was wrong, governments followed his advice, not because it was his advice, but because politicians like to pursue policies that increase their power. In a case where he was right, such as floating exchange rates after Nixon closed the gold window, it was because market forces forced the politicians to do the right thing. On the day that Nixon floated exchange rates, he also imposed price and wage controls (which Friedman opposed) and killed the gold standard (which Friedman wanted). Nixon was not following Friedman's economics. He was simply interfering with contracts.

He supported drug legalization (much to the dismay of supporters on the right) and was particularly proud to be an influential voice in ending the military draft in the 1970s. When his critics argued that he favored a military of mercenaries, he would retort: "If you insist on calling our volunteer soldiers 'mercenaries,' I will call those who you want drafted into service involuntarily 'slaves.'"

His University of Chicago colleague Sol Tax had more influence here than he ever did. It was Tax who promoted the first conference on repealing the draft. The most important economist in ending the draft was Martin Anderson, who was a Nixon advisor. I have discussed this here.

The issue he devoted most of his later years to was school choice for all parents, and his Friedman Foundation for Educational Choice is dedicated to that cause. He used to lament that "we allow the market, consumer choice and competition to work in nearly every industry except for the one that may matter most: education."

He never promoted a free market solution. He promoted tax-funded schools. He promoted vouchers, which are a tool for bringing private schools under political control: "No curriculum conformity – no eligibility for vouchers." I call them the double tax. I debated Friedman on this.

As for congressional Republicans who are at risk of getting suckered into a tax-hike budget deal, they may want to remember another Milton Friedman adage: "Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with."

True, but he never got any major politician to believe him and vote accordingly every time. Ron Paul did, but he is a follower of Mises, not Friedman.

I remember asking Milton, a year or so before his death, during one of our semiannual dinners in downtown San Francisco: What can we do to make America more prosperous? "Three things," he replied instantly. "Promote free trade, school choice for all children, and cut government spending."

So, there it is. Free trade, which was promoted in theory as far back as David Hume's 1752 essay. Friedman added nothing new. Vouchers, which no city has adopted, and which are based on coercion. Finally, reduced government spending. Yet he was the economist who gave the theoretical justification for the greatest increase in tax revenues in American history: income tax withholding. No government has ever followed his advice on spending cuts. No government has ever acknowledged his intellectual leadership in reducing spending.

If that's the basis of a victory parade, I think I'll watch the highlights on YouTube.

August 1, 2012

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

Copyright © 2012 Gary North

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