Building the Friedman Myth

Richard Ebeling, president of The Foundation for Economic Education, editorialized last month about Milton Friedman's "deep and determined allegiance to human liberty." Presumably, we are indebted to Friedman and many of his University of Chicago colleagues for explaining that free markets "are the institutional guarantor of choice, opportunity, and limits of government control over people's lives."

Friedman, Ebeling suggests, was the freeman's bulldog, defending him from state encroachment. The author quotes from Friedman's popular Free to Choose (1980):

Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised.

While these words might have a nice ring to some libertarians, on closer inspection they're burdened with problems. For one thing, why split freedom into categories? We're either free or we're not. If a government can take away our freedom in one area, by what principle is it constrained in another?

And how exactly does the existence of some degree of economic freedom "reduce the area over which political power is exercised"? The State views the economy as a wolf does an unguarded flock of sheep. That there are sheep still remaining doesn't mean they won't be eaten. As Thomas Paine tells us, government "watches prosperity as its prey."

To Ebeling's credit he does contrast the Chicago school with its chief competitor in market defense, the Austrian school of economics, which he says is led by Ludwig von Mises and F. A. Hayek. Ebeling doesn't say this, but Austrians are laissez-faire, and especially since the latter half of the twentieth century, anti-state. How many members of the Chicago school embrace laissez-faire and see the existence of the state as incompatible with freedom? Could it be Friedman and his Chicago cohorts believe unalloyed liberty just doesn't work, that people need slave masters (but preferably gentle ones), that some degree of government regulation of the economy is needed to support "justice" and avoid disasters such as the Great Depression? Indeed, if we are to take their writings seriously, they do. So why is an eminent scholar and economist like Richard Ebeling not telling us these things? Why, in other words, is he trying to protect the reputation of Milton Friedman and the Chicago school?

He also says that each school has radically different starting points "in reaching their pro-market positions." Friedman outlined his approach in a "famous" 1953 essay called "The Methodology of Positive Economics." According to Ebeling, Friedman argued

that the goal of science was successful quantitative prediction and that any hypothesis, no matter how unrealistic its assumptions, was good if it resulted in better predictions.

What might this mean in the real world? Ebeling goes on to explain:

Thus, as one critic pointed out, if a strong correlation was found between the anchovy catch off the coast of Peru and business cycle fluctuations in the United States, this would be considered a good predictive theory, regardless of any real causality between these two measured events.

With this as Friedman's foundation, it's not surprising the economic edifice he built relied on State support.

The Chicago School of economics began to grow in influence when Friedman joined the faculty in 1946 and after his long-time friend, George A. Stigler, did the same in 1958. "Friedman revolutionized macroeconomics, while Stigler helped to do the same in microeconomics," Ebeling tells us. In particular,

Friedman challenged the dominance of Keynesian economics in the postwar period, and Stigler’s writings undermined many of the rationales for government regulation of business.

Thus, the Chicago school supports the traditional split of economics into the micro and the macro. Murray Rothbard, the Austrian giant unmentioned in Ebeling's essay, critiqued this division as follows:

The idea is that there are two sharply separated and independent worlds of economics. On the one hand, there is the "micro" sphere, the world of individual prices determined by the forces of supply and demand. Here, the Chicagoans concede, the economy is best left to the unhampered play of the free market. But, they assert, there is also a separate and distinct sphere of "macro" economics, of economic aggregates of government budget and monetary policy, where there is no possibility or even desirability of a free market.

In common with their Keynesian colleagues, the Friedmanites wish to give to the central government absolute control over these macro areas, in order to manipulate the economy for social ends, while maintaining that the micro world can still remain free. In short, Friedmanites as well as Keynesians concede the vital macro sphere to statism as the supposedly necessary framework for the micro-freedom of the free market.

No commentary on Friedman would be complete without mentioning his views on the Depression, and Ebeling doesn't disappoint us. He says that

Friedman looked at Federal Reserve policy in the 1920s and saw that the general price level had remained relatively stable [and] concluded that Fed policy had done nothing wrong. The only error by the Fed was in the early 1930s, when it did not print more money to counteract the price deflation that was occurring at that time.

Of course, the Fed had been printing money (inflating) throughout the 1920s, but to Friedman and other Chicagoites this didn't constitute inflation because prices weren't rising; productivity improvements kept pace with the Fed's printing presses. The prices of stocks and real estate did shoot up but most people saw it as a reflection of the general mood of optimism, rather than a red flag. (Mises was a notable exception.) A few years ago Ben Bernanke apologized to Friedman publicly for the Fed's failure to inflate during the early 1930s and promised it would not make the same mistake again.

By contrast, Austrians hold that monetary inflation creates the boom which leads to the remedial bust. Following Friedman, Bernanke promises to cure the disease with more of the disease. As Rothbard wrote:

For while the Austrians hold that [the expansionist monetary policies of Benjamin Strong, who ran the Fed from New York,] made a later 1929 crash inevitable, [the Chicago school represented by Irving Fisher and Friedman] believe that all the Fed needed to do was to pump more money in to offset any recession. Believing that there is no causal influence running from boom to bust, believing in the simplistic "Dance of the Dollar" theory, the Chicagoites simply want government to manipulate that dance, specifically to increase the money supply to offset recession.

The gold standard, of course, restricts government's ability to increase the money supply, and it's not surprising that Friedman favored cutting all ties to gold and going on a complete fiat dollar standard, with the Fed having total control of the money supply. Friedman advised the Fed to use its power responsibly, however, and recommended it increase the money stock at a fixed rate of 3-4 percent annually. Is this what is meant by Friedman's "deep and determined allegiance to human liberty"? Rothbard:

. . . we must realize that Friedman’s automatic inflationist policy is simply another variant in his pursuit of the same old Fisherine-Chicagoite aim: stabilization of the price level – in this case, stabilization over the long run. Thus, Milton Friedman is, purely and simply, a statist-inflationist, albeit a more moderate inflationist than most of the Keynesians. But that is small consolation indeed, and hardly qualifies Friedman as a free-market economist in this vital area.

Nevertheless, Ebeling concludes thusly:

. . . in the face of Keynesian domination after 1945, Milton Friedman, with courage, determination, and intellectual integrity, went against the tide and, along with only a few others, succeeded in stopping the advance toward ever-increasing government control of society.

Let the man's record speak for itself. His rhetoric about freedom and the wonderful blessings of the free market notwithstanding, Milton Friedman pushed hard for policies and programs that cost us dearly in lost freedom. If he really did succeed "in stopping the advance toward ever-increasing government control," as Ebeling asserts, why is the state so much more intrusive and belligerent today than it was yesterday, or ten years ago, or thirty years ago? Nothing has stood in the way of Leviathan's growth. Friedman's state-sponsored "freedom" has failed.