The New York Review of Books: Who Was Milton = Friedman?

Volume 54, Number 2 =B7 February 15, = 2007

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Feature

Who Was Milton Friedman?

By Paul = Krugman

1.

The history of economic thought in the twentieth century is a bit = like the=20 history of Christianity in the sixteenth century. Until John Maynard = Keynes=20 published The General Theory of Employment, Interest, and Money = in 1936,=20 economics=97at least in the English-speaking world=97was completely = dominated by=20 free-market orthodoxy. Heresies would occasionally pop up, but they were = always=20 suppressed. Classical economics, wrote Keynes in 1936, "conquered = England as=20 completely as the Holy Inquisition conquered Spain." And classical = economics=20 said that the answer to almost all problems was to let the forces of = supply and=20 demand do their job.

But classical economics offered neither explanations nor solutions = for the=20 Great Depression. By the middle of the 1930s, the challenges to = orthodoxy could=20 no longer be contained. Keynes played the role of Martin Luther, = providing the=20 intellectual rigor needed to make heresy respectable. Although Keynes = was by no=20 means a leftist=97he came to save capitalism, not to bury it=97his = theory said that=20 free markets could not be counted on to provide full employment, = creating a new=20 rationale for large-scale government intervention in the economy.

Keynesianism was a great reformation of economic thought. It was = followed,=20 inevitably, by a counter-reformation. A number of economists played = important=20 roles in the great revival of classical economics between 1950 and 2000, = but=20 none was as influential as Milton Friedman. If Keynes was Luther, = Friedman was=20 Ignatius of Loyola, founder of the Jesuits. And like the Jesuits, = Friedman's=20 followers have acted as a sort of disciplined army of the faithful, = spearheading=20 a broad, but incomplete, rollback of Keynesian heresy. By the century's = end,=20 classical economics had regained much though by no means all of its = former=20 dominion, and Friedman deserves much of the credit.

I don't want to push the religious analogy too far. Economic theory = at least=20 aspires to be science, not theology; it is concerned with earth, not = heaven.=20 Keynesian theory initially prevailed because it did a far better job = than=20 classical orthodoxy of making sense of the world around us, and = Friedman's=20 critique of Keynes became so influential largely because he correctly = identified=20 Keynesianism's weak points. And just to be clear: although this essay = argues=20 that Friedman was wrong on some issues, and sometimes seemed less than = honest=20 with his readers, I regard him as a great economist and a great man.

2.

Milton Friedman played three roles in the intellectual life of the = twentieth=20 century. There was Friedman the economist's economist, who wrote = technical, more=20 or less apolitical analyses of consumer behavior and inflation. There = was=20 Friedman the policy entrepreneur, who spent decades campaigning on = behalf of the=20 policy known as monetarism=97finally seeing the Federal Reserve and the = Bank of=20 England adopt his doctrine at the end of the 1970s, only to abandon it = as=20 unworkable a few years later. Finally, there was Friedman the ideologue, = the=20 great popularizer of free-market doctrine.

Did the same man play all these roles? Yes and no. All three roles = were=20 informed by Friedman's faith in the classical verities of free-market = economics.=20 Moreover, Friedman's effectiveness as a popularizer and propagandist = rested in=20 part on his well-deserved reputation as a profound economic theorist. = But=20 there's an important difference between the rigor of his work as a = professional=20 economist and the looser, sometimes questionable logic of his = pronouncements as=20 a public intellectual. While Friedman's theoretical work is universally = admired=20 by professional economists, there's much more ambivalence about his = policy=20 pronouncements and especially his popularizing. And it must be said that = there=20 were some serious questions about his intellectual honesty when he was = speaking=20 to the mass public.

But let's hold off on the questionable material for a moment, and = talk about=20 Friedman the economic theorist. For most of the past two centuries, = economic=20 thinking has been dominated by the concept of Homo economicus. = The=20 hypothetical Economic Man knows what he wants; his preferences can be = expressed=20 mathematically in terms of a "utility function." And his choices are = driven by=20 rational calculations about how to maximize that function: whether = consumers are=20 deciding between corn flakes or shredded wheat, or investors are = deciding=20 between stocks and bonds, those decisions are assumed to be based on = comparisons=20 of the "marginal utility," or the added benefit the buyer would get from = acquiring a small amount of the alternatives available.

It's easy to make fun of this story. Nobody, not even Nobel-winning=20 economists, really makes decisions that way. But most = economists=97myself=20 included=97nonetheless find Economic Man useful, with the understanding = that he's=20 an idealized representation of what we really think is going on. People = do have=20 preferences, even if those preferences can't really be expressed by a = precise=20 utility function; they usually make sensible decisions, even if they = don't=20 literally maximize utility. You might ask, why not represent people the = way they=20 really are? The answer is that abstraction, strategic simplification, is = the=20 only way we can impose some intellectual order on the complexity of = economic=20 life. And the assumption of rational behavior has been a particularly = fruitful=20 simplification.

The question, however, is how far to push it. Keynes didn't make an = all-out=20 assault on Economic Man, but he often resorted to plausible = psychological=20 theorizing rather than careful analysis of what a rational = decision-maker would=20 do. Business decisions were driven by "animal spirits," consumer = decisions by a=20 psychological tendency to spend some but not all of any increase in = income, wage=20 settlements by a sense of fairness, and so on.

But was it really a good idea to diminish the role of Economic Man = that much?=20 No, said Friedman, who argued in his 1953 essay "The Methodology of = Positive=20 Economics" that economic theories should be judged not by their = psychological=20 realism but by their ability to predict behavior. And Friedman's two = greatest=20 triumphs as an economic theorist came from applying the hypothesis of = rational=20 behavior to questions other economists had thought beyond its reach.

In his 1957 book A Theory of the Consumption Function=97not = exactly a=20 crowd-pleasing title, but an important topic=97Friedman argued that the = best way=20 to make sense of saving and spending was not, as Keynes had done, to = resort to=20 loose psychological theorizing, but rather to think of individuals as = making=20 rational plans about how to spend their wealth over their lifetimes. = This wasn't=20 necessarily an anti-Keynesian idea=97in fact, the great Keynesian = economist Franco=20 Modi-gliani simultaneously and independently made a similar case, with = even more=20 care in thinking about rational behavior, in work with Albert Ando. But = it did=20 mark a return to classical ways of thinking=97and it worked. The details = are a bit=20 technical, but Friedman's "permanent income hypothesis" and the = Ando-Modigliani=20 "life cycle model" resolved several apparent paradoxes about the = relationship=20 between income and spending, and remain the foundations of how = economists think=20 about spending and saving to this day.

Friedman's work on consumption behavior would, in = itself, have=20 made his academic reputation. An even bigger triumph, however, came from = his=20 application of Economic Man theorizing to inflation. In 1958 the New=20 Zealand=96born economist A.W. Phillips pointed out that there was a = historical=20 correlation between unemployment and inflation, with high inflation = associated=20 with low unemployment and vice versa. For a time, economists treated = this=20 correlation as if it were a reliable and stable relationship. This led = to=20 serious discussion about which point on the "Phillips curve" the = government=20 should choose. For example, should the United States accept a higher = inflation=20 rate in order to achieve a lower unemployment rate?

In 1967, however, Friedman gave a presidential address to the = American=20 Economic Association in which he argued that the correlation between = inflation=20 and unemployment, even though it was visible in the data, did not = represent a=20 true trade-off, at least not in the long run. "There is," he said, = "always a=20 temporary trade-off between inflation and unemployment; there is no = permanent=20 trade-off." In other words, if policymakers were to try to keep = unemployment low=20 through a policy of generating higher inflation, they would achieve only = temporary success. According to Friedman, unemployment would eventually = rise=20 again, even as inflation remained high. The economy would, in other = words,=20 suffer the condition Paul Samuelson would later dub "stagflation."

How did Friedman reach this conclusion? (Edmund S. Phelps, who was = awarded=20 the Nobel Memorial Prize in economics this year, simultaneously and=20 independently arrived at the same result.) As in the case of his work on = consumer behavior, Friedman applied the idea of rational behavior. He = argued=20 that after a sustained period of inflation, people would build = expectations of=20 future inflation into their decisions, nullifying any positive effects = of=20 inflation on employment. For example, one reason inflation may lead to = higher=20 employment is that hiring more workers becomes profitable when prices = rise=20 faster than wages. But once workers understand that the purchasing power = of=20 their wages will be eroded by inflation, they will demand higher wage=20 settlements in advance, so that wages keep up with prices. As a result, = after=20 inflation has gone on for a while, it will no longer deliver the = original boost=20 to employment. In fact, there will be a rise in unemployment if = inflation falls=20 short of expectations.

At the time Friedman and Phelps propounded their ideas, the United = States had=20 little experience with sustained inflation. So this was truly a = prediction=20 rather than an attempt to explain the past. In the 1970s, how-ever, = persistent=20 inflation provided a test of the Friedman-Phelps hypothesis. Sure = enough, the=20 historical correlation between inflation and unemployment broke down in = just the=20 way Friedman and Phelps had predicted: in the 1970s, as the inflation = rate rose=20 into double digits, the unemployment rate was as high or higher than in = the=20 stable-price years of the 1950s and 1960s. Inflation was eventually = brought=20 under control in the 1980s, but only after a painful period of extremely = high=20 unemployment, the worst since the Great Depression.

By predicting the phenomenon of stagflation in advance, Friedman and = Phelps=20 achieved one of the great triumphs of postwar economics. This triumph, = more than=20 anything else, confirmed Milton Friedman's status as a great economist's = economist, whatever one may think of his other roles.

One interesting footnote: although Friedman made great strides in=20 macroeconomics by applying the concept of individual rationality, he = also knew=20 where to stop. In the 1970s, some economists pushed Friedman's analysis = of=20 inflation even further, arguing that there is no usable trade-off = between=20 inflation and unemployment even in the short run, because people will = anticipate=20 government actions and build that anticipation, as well as past = experience, into=20 their price-setting and wage-bargaining. This doctrine, known as = "rational=20 expectations," swept through much of academic economics. But Friedman = never went=20 there. His reality sense warned that this was taking the idea of Homo = economicus too far. And so it proved: Friedman's 1967 address has = stood the=20 test of time, while the more extreme views propounded by rational = expectations=20 theorists in the Seventies and Eighties have not.

3.

"Everything reminds Milton of the money supply. Well, everything = reminds me=20 of sex, but I keep it out of the paper," wrote MIT's Robert Solow in = 1966. For=20 decades, Milton Friedman's public image and fame were defined largely by = his=20 pronouncements on monetary policy and his creation of the doctrine known = as=20 monetarism. It's somewhat surprising to realize, then, that monetarism = is now=20 widely regarded as a failure, and that some of the things Friedman said = about=20 "money" and monetary policy=97unlike what he said about consumption and = inflation=97=20 appear to have been misleading, and perhaps deliberately so.

To understand what monetarism was all about, the first thing you need = to know=20 is that the word "money" doesn't mean quite the same thing in Economese = that it=20 does in plain English. When economists talk of the money supply, they = don't mean=20 wealth in the usual sense. They mean only those forms of wealth that can = be used=20 more or less directly to buy things. Currency=97pieces of green paper = with=20 pictures of dead presidents on them=97 is money, and so are bank = deposits on which=20 you can write checks. But stocks, bonds, and real estate aren't money, = because=20 they have to be converted into cash or bank deposits before they can be = used to=20 make purchases.

If the money supply consisted solely of currency, it would be under = the=20 direct control of the government=97or, more precisely, the Federal = Reserve, a=20 monetary agency that, like its counterpart "central banks" in many other = countries, is institutionally somewhat separate from the government = proper. The=20 fact that the money supply also includes bank deposits makes reality = more=20 complicated. The central bank has direct control only over the "monetary = base"=97the sum of currency in circulation, the currency banks hold in = their=20 vaults, and the deposits banks hold at the Federal Reserve=97but not the = deposits=20 people have made in banks. Under normal circumstances, however, the = Federal=20 Reserve's direct control over the monetary base is enough to give it = effective=20 control of the overall money supply as well.

Before Keynes, economists considered the money supply a primary tool = of=20 economic management. But Keynes argued that under depression conditions, = when=20 interest rates are very low, changes in the money supply have little = effect on=20 the economy. The logic went like this: when interest rates are 4 or 5 = percent,=20 nobody wants to sit on idle cash. But in a situation like that of 1935, = when the=20 interest rate on three-month Treasury bills was only 0.14 percent, there = is very=20 little incentive to take the risk of putting money to work. The central = bank may=20 try to spur the economy by printing large quantities of additional = currency; but=20 if the interest rate is already very low the additional cash is likely = to=20 languish in bank vaults or under mattresses. Thus Keynes argued that = monetary=20 policy, a change in the money supply to manage the economy, would be=20 ineffective. And that's why Keynes and his followers believed that = fiscal=20 policy=97in particular, an increase in government spending=97was = necessary to get=20 countries out of the Great Depression.

Why does this matter? Monetary policy is a highly technocratic, = mostly=20 apolitical form of government intervention in the economy. If the Fed = decides to=20 increase the money supply, all it does is purchase some government bonds = from=20 private banks, paying for the bonds by crediting the banks' reserve = accounts=97in=20 effect, all the Fed has to do is print some more monetary base. By = contrast,=20 fiscal policy involves the government much more deeply in the economy, = often in=20 a value-laden way: if politicians decide to use public works to promote=20 employment, they need to decide what to build and where. Economists with = a=20 free-market bent, then, tend to want to believe that monetary policy is = all=20 that's needed; those with a desire to see a more active government tend = to=20 believe that fiscal policy is essential.

Economic thinking after the triumph of the Keynesian revolution=97as = reflected,=20 say, in the early editions of Paul Samuelson's classic textbook^[*]=97 gave = priority to=20 fiscal policy, while monetary policy was relegated to the sidelines. As = Friedman=20 said in his 1967 address to the American Economic Association:

The wide acceptance of [Keynesian] views in the economics=20 profession meant that for some two decades monetary policy was = believed by all=20 but a few reactionary souls to have been rendered obsolete by new = economic=20 knowledge. Money did not matter.

Although this may have been an exaggeration, monetary policy was held = in=20 relatively low regard through the 1940s and 1950s. Friedman, however, = crusaded=20 for the proposition that money did too matter, culminating in the 1963=20 publication of A Monetary History of the United States, = 1867=961960, with=20 Anna Schwartz.

Although A Monetary History is a vast work of=20 extraordinary scholarship, covering a century of monetary developments, = its most=20 influential and controversial discussion concerned the Great Depression. = Friedman and Schwartz claimed to have refuted Keynes's pessimism about = the=20 effectiveness of monetary policy in depression conditions. "The = contraction" of=20 the economy, they declared, "is in fact a tragic testimonial to the = importance=20 of monetary forces."

But what did they mean by that? From the beginning, the = Friedman-Schwartz=20 position seemed a bit slippery. And over time Friedman's presentation of = the=20 story grew cruder, not subtler, and eventually began to seem =97there's = no other=20 way to say this=97intellectually dishonest.

In interpreting the origins of the Depression, the distinction = between the=20 monetary base (currency plus bank reserves), which the Fed controls = directly,=20 and the money supply (currency plus bank deposits) is crucial. = The=20 monetary base went up during the early years of the Great Depression, = rising=20 from an average of $6.05 billion in 1929 to an average of $7.02 billion = in 1933.=20 But the money supply fell sharply, from $26.6 billion to $19.9 billion. = This=20 divergence mainly reflected the fallout from the wave of bank failures = in=20 1930=961931: as the public lost faith in banks, people began holding = their wealth=20 in cash rather than bank deposits, and those banks that survived = began=20 keeping large quantities of cash on hand rather than lending it out, to = avert=20 the danger of a bank run. The result was much less lending, and hence = much less=20 spending, than there would have been if the public had continued to = deposit cash=20 into banks, and banks had continued to lend deposits out to businesses. = And=20 since a collapse of spending was the proximate cause of the Depression, = the=20 sudden desire of both individuals and banks to hold more cash = undoubtedly made=20 the slump worse.

Friedman and Schwartz claimed that the fall in the money supply = turned what=20 might have been an ordinary recession into a catastrophic depression, = itself an=20 arguable point. But even if we grant that point for the sake of = argument, one=20 has to ask whether the Federal Reserve, which after all did increase the = monetary base, can be said to have caused the fall in the overall money = supply.=20 At least initially, Friedman and Schwartz didn't say that. What they = said=20 instead was that the Fed could have prevented the fall in the = money=20 supply, in particular by riding to the rescue of the failing banks = during the=20 crisis of 1930=961931. If the Fed had rushed to lend money to banks in = trouble,=20 the wave of bank failures might have been prevented, which in turn might = have=20 avoided both the public's decision to hold cash rather than bank = deposits, and=20 the preference of the surviving banks for stashing deposits in their = vaults=20 rather than lending the funds out. And this, in turn, might have staved = off the=20 worst of the Depression.

An analogy may be helpful here. Suppose that a flu epidemic breaks = out, and=20 later analysis suggests that appropriate action by the Centers for = Disease=20 Control could have contained the epidemic. It would be fair to blame = government=20 officials for failing to take appropriate action. But it would be quite = a=20 stretch to say that the government caused the epidemic, or to use = the=20 CDC's failure as a demonstration of the superiority of free markets over = big=20 government.

Yet many economists, and even more lay readers, have taken Friedman = and=20 Schwartz's account to mean that the Federal Reserve actually caused the = Great=20 Depression=97that the Depression is in some sense a demonstration of the = evils of=20 an excessively interventionist government. And in later years, as I've = said,=20 Friedman's assertions grew cruder, as if to feed this misperception. In = his 1967=20 presidential address he declared that "the US monetary authorities = followed=20 highly deflationary policies," and that the money supply fell "because = the=20 Federal Reserve System forced or permitted a sharp reduction in the = monetary=20 base, because it failed to exercise the responsibilities assigned to = it"=97an odd=20 assertion given that the monetary base, as we've seen, actually rose as = the=20 money supply was falling. (Friedman may have been referring to a couple = of=20 episodes along the way in which the monetary base fell modestly for = brief=20 periods, but even so his statement was highly misleading at best.)

By 1976 Friedman was telling readers of Newsweek that "the = elementary=20 truth is that the Great Depression was produced by government = mismanagement," a=20 statement that his readers surely took to mean that the Depression = wouldn't have=20 happened if only the government had kept out of the way=97when in fact = what=20 Friedman and Schwartz claimed was that the government should have been = more=20 active, not less.

Why did historical disputes about the role of = monetary policy=20 in the 1930s matter so much in the 1960s? Partly because they fed into=20 Friedman's broader anti-government agenda, of which more below. But the = more=20 direct application was to Friedman's advocacy of monetarism. According = to this=20 doctrine, the Federal Reserve should keep the money supply growing at a = steady,=20 low rate, say 3 percent a year=97and not deviate from this target, no = matter what=20 is happening in the economy. The idea was to put monetary policy on = autopilot,=20 removing any discretion on the part of government officials.

Friedman's case for monetarism was part economic, part political. = Steady=20 growth in the money supply, he argued, would lead to a reasonably stable = economy. He never claimed that following his rule would eliminate all=20 recessions, but he did argue that the wiggles in the economy's growth = path would=20 be small enough to be tolerable =97hence the assertion that the Great = Depression=20 wouldn't have happened if the Fed had been following a monetarist rule. = And=20 along with this qualified faith in the stability of the economy under a = monetary=20 rule went Friedman's unqualified contempt for the ability of Federal = Reserve=20 officials to do better if given discretion. Exhibit A for the Fed's=20 unreliability was the onset of the Great Depression, but Friedman could = point to=20 many other examples of policy gone wrong. "A monetary rule," he wrote in = 1972,=20 "would insulate monetary policy both from arbitrary power of a small = group of=20 men not subject to control by the electorate and from the short-run = pressures of=20 partisan politics."

Monetarism was a powerful force in economic debate for about three = decades=20 after Friedman first propounded the doctrine in his 1959 book A = Program for=20 Monetary Stability. Today, however, it is a shadow of its former = self, for=20 two main reasons.

First, when the United States and the United Kingdom tried to put = monetarism=20 into practice at the end of the 1970s, both experienced dismal results: = in each=20 country steady growth in the money supply failed to prevent severe = recessions.=20 The Federal Reserve officially adopted Friedman-type monetary targets in = 1979,=20 but effectively abandoned them in 1982 when the unemployment rate went = into=20 double digits. This abandonment was made official in 1984, and ever = since then=20 the Fed has engaged in precisely the sort of discretionary fine-tuning = that=20 Friedman decried. For example, the Fed responded to the 2001 recession = by=20 slashing interest rates and allowing the money supply to grow at rates = that=20 sometimes exceeded 10 percent per year. Once the Fed was satisfied that = the=20 recovery was solid, it reversed course, raising interest rates and = allowing=20 growth in the money supply to drop to zero.

Second, since the early 1980s the Federal Reserve and its = counterparts in=20 other countries have done a reasonably good job, undermining Friedman's=20 portrayal of central bankers as irredeemable bunglers. Inflation has = stayed low,=20 recessions=97except in Japan, of which more in a second=97 have been = relatively=20 brief and shallow. And all this happened in spite of fluctuations in the = money=20 supply that horrified monetarists, and led them=97 Friedman = included=97to predict=20 disasters that failed to materialize. As David Warsh of The = Boston=20 Globe pointed out in 1992, "Friedman blunted his lance forecasting = inflation=20 in the 1980s, when he was deeply, frequently wrong."

By 2004, the Economic Report of the President, written by the = very=20 conservative economists of the Bush administration, could nonetheless = make the=20 highly anti-monetarist declaration that "aggressive monetary policy"=97 = not=20 stable, steady-as-you-go, but aggressive=97"can reduce the depth of a=20 recession."

Now, a word about Japan. During the 1990s Japan = experienced a=20 sort of minor-key reprise of the Great Depression. The unemployment rate = never=20 reached Depression levels, thanks to massive public works spending that = had=20 Japan, with less than half America's population, pouring more concrete = each year=20 than the United States. But the very low interest rate conditions of the = Great=20 Depression reemerged in full. By 1998 the call money rate, the rate on = overnight=20 loans between banks, was literally zero.

And under those conditions, monetary policy proved just as = ineffective as=20 Keynes had said it was in the 1930s. The Bank of Japan, Japan's = equivalent of=20 the Fed, could and did increase the monetary base. But the extra yen = were=20 hoarded, not spent. The only consumer durable goods selling well, some = Japanese=20 economists told me at the time, were safes. In fact, the Bank of Japan = found=20 itself unable even to increase the money supply as much as it wanted. It = pushed=20 vast quantities of cash into circulation, but broader measures of the = money=20 supply grew very little. An economic recovery finally began a couple of = years=20 ago, driven by a revival of business investment to take advantage of new = technological opportunities. But monetary policy never was able to get = any=20 traction.

In effect, Japan in the Nineties offered a fresh opportunity to test = the=20 views of Friedman and Keynes regarding the effectiveness of monetary = policy in=20 depression conditions. And the results clearly supported Keynes's = pessimism=20 rather than Friedman's optimism.

4.

In 1946 Milton Friedman made his debut as a popularizer of = free-market=20 economics with a pamphlet titled "Roofs or Ceilings: The Current Housing = Problem" coauthored with George J. Stigler, who would later join him at = the=20 University of Chicago. The pamphlet, an attack on the rent controls that = were=20 still universal just after World War II, was released under rather odd=20 circumstances: it was a publication of the Foundation for Economic = Education, an=20 organization which, as Rick Perlstein writes in Before the Storm = (2001),=20 his book about the origins of the modern conservative movement, "spread = a=20 libertarian gospel so uncompromising it bordered on anarchism." Robert = Welch,=20 the founder of the John Birch Society, sat on the FEE's board. This = first=20 venture in free-market popularization prefigured in two ways the course = of=20 Friedman's career as a public intellectual over the next six = decades.

First, the pamphlet demonstrated Friedman's special willingness to = take=20 free-market ideas to their logical limits. Neither the idea that markets = are=20 efficient ways to allocate scarce goods nor the proposition that price = controls=20 create shortages and inefficiency was new. But many economists, fearing = the=20 backlash against a sudden rise in rents (which Friedman and Stigler = predicted=20 would be about 30 percent for the nation as a whole), might have = proposed some=20 kind of gradual transition to decontrol. Friedman and Stigler dismissed = all such=20 concerns.

In the decades ahead, this single-mindedness would become Friedman's=20 trademark. Again and again, he called for market solutions to=20 problems=97education, health care, the illegal drug trade=97that almost = everyone=20 else thought required extensive government intervention. Some of his = ideas have=20 received widespread acceptance, like replacing rigid rules on pollution = with a=20 system of pollution permits that companies are free to buy and sell. = Some, like=20 school vouchers, are broadly supported by the conservative movement but = haven't=20 gotten far politically. And some of his proposals, like eliminating = licensing=20 procedures for doctors and abolishing the Food and Drug Administration, = are=20 considered outlandish even by most conservatives.

Second, the pamphlet showed just how good Friedman was as a = popularizer. It's=20 beautifully and cunningly written. There is no jargon; the points are = made with=20 cleverly chosen real-world examples, ranging from San Francisco's rapid = recovery=20 from the 1906 earthquake to the plight of a 1946 veteran, newly = discharged from=20 the army, searching in vain for a decent place to live. The same style, = enhanced=20 by video, would mark Friedman's celebrated 1980 TV series Free to=20 Choose.

The odds are that the great swing back toward laissez-faire policies = that=20 took place around the world beginning in the 1970s would have happened = even if=20 there had been no Milton Friedman. But his tireless and brilliantly = effective=20 campaign on behalf of free markets surely helped accelerate the process, = both in=20 the United States and around the world. By any measure =97protectionism = versus=20 free trade; regulation versus deregulation; wages set by collective = bargaining=20 and government minimum wages versus wages set by the market=97the world = has moved=20 a long way in Friedman's direction. And even more striking than his = achievement=20 in terms of actual policy changes has been the transformation of the=20 conventional wisdom: most influential people have been so converted to = the=20 Friedman way of thinking that it is simply taken as a given that the = change in=20 economic policies he promoted has been a force for good. But has it?

Consider first the macroeconomic performance of the = US economy.=20 We have data on the real income=97that is, income adjusted for = inflation=97of=20 American families from 1947 to 2005. During the first half of that=20 fifty-eight-year stretch, from 1947 to 1976, Milton Friedman was a voice = crying=20 in the wilderness, his ideas ignored by policymakers. But the economy, = for all=20 the inefficiencies he decried, delivered dramatic improvements in the = standard=20 of living of most Americans: median real income more than doubled. By = contrast,=20 the period since 1976 has been one of increasing acceptance of = Friedman's ideas;=20 although there remained plenty of government intervention for him to = complain=20 about, there was no question that free-market policies became much more=20 widespread. Yet gains in living standards have been far less robust than = they=20 were during the previous period: median real income was only about 23 = percent=20 higher in 2005 than in 1976.

Part of the reason the second postwar generation didn't do as well as = the=20 first was a slower overall rate of economic growth=97a fact that may = come as a=20 surprise to those who assume that the trend toward free markets has = yielded big=20 economic dividends. But another important reason for the lag in most = families'=20 living standards was a spectacular increase in economic inequality: = during the=20 first postwar generation income growth was broadly spread across the = population,=20 but since the late 1970s median income, the income of the typical = family, has=20 risen only about a third as fast as average income, which includes the = soaring=20 incomes of a small minority at the top.

This raises an interesting point. Milton Friedman often assured = audiences=20 that no special institutions, like minimum wages and unions, were needed = to=20 ensure that workers would share in the benefits of economic growth. In = 1976 he=20 told Newsweek readers that tales of the evil done by the robber = barons=20 were pure myth:

There is probably no other period in history, in this or any = other=20 country, in which the ordinary man had as large an increase in his = standard of=20 living as in the period between the Civil War and the First World War, = when=20 unrestrained individualism was most rugged.

(What about the remarkable thirty-year stretch after World War II, = which=20 encompassed much of Friedman's own career?) Yet in the decades that = followed=20 that pronouncement, as the minimum wage was allowed to fall behind = inflation and=20 unions largely disappeared as an important factor in the private sector, = working=20 Americans saw their fortunes lag behind growth in the economy as a = whole. Was=20 Friedman too sanguine about the generosity of the invisible hand?

To be fair, there are many factors affecting both economic growth and = the=20 distribution of income, so we can't blame Friedmanite policies for all=20 disappointments. Still, given the common assumption that the turn toward = free-market policies did great things for the US economy and the living=20 standards of ordinary Americans, it's striking how little support one = can find=20 for that proposition in the data.

Similar questions about the lack of clear evidence = that=20 Friedman's ideas actually work in practice can be raised, with even more = force,=20 for Latin America. A decade ago it was common to cite the success of the = Chilean=20 economy, where Augusto Pinochet's Chicago-educated advisers turned to=20 free-market policies after Pinochet seized power in 1973, as proof that=20 Friedman-inspired policies showed the path to successful economic = development.=20 But although other Latin nations, from Mexico to Argentina, have = followed=20 Chile's lead in freeing up trade, privatizing industries, and = deregulating,=20 Chile's success story has not been replicated.

On the contrary, the perception of most Latin Americans is that = "neoliberal"=20 policies have been a failure: the promised takeoff in economic growth = never=20 arrived, while income inequality has worsened. I don't mean to blame = everything=20 that has gone wrong in Latin America on the Chicago School, or to = idealize what=20 went before; but there is a striking contrast between the perception = that=20 Friedman was vindicated and the actual results in economies that turned = from the=20 interventionist policies of the early postwar decades to = laissez-faire.

On a more narrowly focused topic, one of Friedman's key targets was = what he=20 considered the uselessness and counterproductive nature of most = government=20 regulation. In an obituary for his one-time collaborator George Stigler, = Friedman singled out for praise Stigler's critique of electricity = regulation,=20 and his argument that regulators usually end up serving the interests of = the=20 regulated rather than those of the public. So how has deregulation = worked=20 out?

It started well, with the deregulation of trucking and airlines = beginning in=20 the late 1970s. In both cases deregulation, while it didn't make = everyone happy,=20 led to increased competition, generally lower prices, and higher = efficiency.=20 Deregulation of natural gas was also a success.

But the next big wave of deregulation, in the electricity sector, was = a=20 different story. Just as Japan's slump in the 1990s showed that = Keynesian=20 worries about the effectiveness of monetary policy were no myth, the = California=20 electricity crisis of 2000=96 2001=97in which power companies and energy = traders=20 created an artificial shortage to drive up prices=97reminded us of the = reality=20 that lay behind tales of the robber barons and their depredations. While = other=20 states didn't suffer as severely as California, across the nation = electricity=20 deregulation led to higher, not lower, prices, with huge windfall = profits for=20 power companies.

Those states that, for whatever reason, didn't get on the = deregulation=20 bandwagon in the 1990s now consider themselves lucky. And the luckiest = of all=20 are those cities that somehow didn't get the memo about the evils of = government=20 and the virtues of the private sector, and still have publicly owned = power=20 companies. All of this showed that the original rationale for = electricity=20 regulation=97the observation that without regulation, power companies = would have=20 too much monopoly power=97remains as valid as ever.

Should we conclude from this that deregulation is always a bad idea? = No=97it=20 depends on the specifics. To conclude that deregulation is always and = everywhere=20 a bad idea would be to engage in the same kind of absolutist thinking = that was,=20 arguably, Milton Friedman's greatest flaw.

In his 1965 review of Friedman and Schwartz's = Monetary=20 History, the late Yale economist and Nobel laureate James Tobin = gently=20 chided the authors for going too far. "Consider the following three=20 propositions," he wrote. "Money does not matter. It does too matter. = Money is=20 all that matters. It is all too easy to slip from the second proposition = to the=20 third." And he added that "in their zeal and exuberance" Friedman and = his=20 followers had too often done just that.

A similar sequence seems to have happened in Milton Friedman's = advocacy of=20 laissez-faire. In the aftermath of the Great Depression, there were many = people=20 saying that markets can never work. Friedman had the intellectual = courage to say=20 that markets can too work, and his showman's flair combined with his = ability to=20 marshal evidence made him the best spokesman for the virtues of free = markets=20 since Adam Smith. But he slipped all too easily into claiming both that = markets=20 always work and that only markets work. It's extremely hard to find = cases in=20 which Friedman acknowledged the possibility that markets could go wrong, = or that=20 government intervention could serve a useful purpose.

Friedman's laissez-faire absolutism contributed to an intellectual = climate in=20 which faith in markets and disdain for government often trumps the = evidence.=20 Developing countries rushed to open up their capital markets, despite = warnings=20 that this might expose them to financial crises; then, when the crises = duly=20 arrived, many observers blamed the countries' governments, not the = instability=20 of international capital flows. Electricity deregulation proceeded = despite clear=20 warnings that monopoly power might be a problem; in fact, even as the = California=20 electricity crisis was happening, most commentators dismissed concerns = about=20 price-rigging as wild conspiracy theories. Conservatives continue to = insist that=20 the free market is the answer to the health care crisis, in the teeth of = overwhelming evidence to the contrary.

What's odd about Friedman's absolutism on the virtues of markets and = the=20 vices of government is that in his work as an economist's economist he = was=20 actually a model of restraint. As I pointed out earlier, he made great=20 contributions to economic theory by emphasizing the role of individual=20 rationality=97but unlike some of his colleagues, he knew where to stop. = Why didn't=20 he exhibit the same restraint in his role as a public intellectual?

The answer, I suspect, is that he got caught up in an essentially = political=20 role. Milton Friedman the great economist could and did acknowledge = ambiguity.=20 But Milton Friedman the great champion of free markets was expected to = preach=20 the true faith, not give voice to doubts. And he ended up playing the = role his=20 followers expected. As a result, over time the refreshing iconoclasm of = his=20 early career hardened into a rigid defense of what had become the new=20 orthodoxy.

In the long run, great men are remembered for their strengths, not = their=20 weaknesses, and Milton Friedman was a very great man indeed=97a man of=20 intellectual courage who was one of the most important economic thinkers = of all=20 time, and possibly the most brilliant communicator of economic ideas to = the=20 general public that ever lived. But there's a good case for arguing that = Friedmanism, in the end, went too far, both as a doctrine and in its = practical=20 applications. When Friedman was beginning his career as a public = intellectual,=20 the times were ripe for a counterreformation against Keynesianism and = all that=20 went with it. But what the world needs now, I'd argue, is a=20 counter-counterreformation.

Notes

^[*] See = Paul A.=20 Samuelson, Economics: The Original 1948 Edition (McGraw-Hill, = 1997).