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Two Lucky People: Memoirs

Book Review

September 1, 1998


Anna J. Schwartz Research Associate, National Bureau of Economic Research
Two Lucky People: Memoirs

Two Lucky People: Memoirs
By Milton and Rose D. Friedman
The University of Chicago Press
660 pages

Photo of Milton Friedman and Rose D. Friedman Milton was not the scion of an intellectual family, in the tradition of a John Stuart Mill whose father was James Mill, nor of a John Maurice Clark, whose father was John Bates Clark. Only as a graduate student did he discover economics as an empire to be conquered. From that beginning, without an inherited intellectual advantage, economics became the central passion of his life. This feature of Milton's life is reminiscent of the life of David Ricardo, another great economist who had no early introduction to the discipline.

Milton is often described as a conservative economist, but that's a misrepresentation. He is a radical, in the sense of being disposed to change existing views, habits and institutions because they don't measure up to what he envisions they could be. He is responsible for fundamental changes in two broad areas: monetary thought and perceptions about free markets. His ideas have been influential in changing the content of monetary economics as it existed and also in changing the way central banks operate. In the broader area of economic and social organization, he has argued persuasively for expanding individual freedom by limiting government and has succeeded in making inroads against the opposing view.

When I first met Milton, he was an economics professor with a reputation of brilliance, particularly in innovating statistical methods, but he had not yet become a world celebrity. What has always fascinated me about Milton's life is how and why this transformation occurred. He started out by teaching standard economics courses on business cycles, price theory, and money and banking. For him, as for others in the profession, teaching was a foundation for many of the rewards doing it well offered. With experience came mastery of subject matter and ease of presentation. Supervising students' dissertations not only advanced his own research, but also helped train the next generation of economists. A separate reward was the opportunity to write papers and books that expanded the boundaries of the discipline. All these aspects of teaching Milton embraced, as did others who taught economics. As his reputation as an outstanding academic grew, members of congressional committees and executive branch agencies sought his advice.

Somehow, all these activities were not enough for Milton. Unlike others who taught economics, he sought a larger arena, and there he offered his views on the organization of society, not simply limiting himself to the subject matter of the courses he taught. In the 1950s he gave lectures on public policy on various college campuses that Rose Friedman assembled in Capitalism and Freedom. As the memoirs describe, he lectured "in a hostile intellectual climate," since he "was at odds with the reigning orthodoxy about both public policy and economic theory: about welfare-state and socialist views in public policy, and Keynesianism in economic theory." That book became the vehicle for the spread of Milton's ideas not only in English but in translation to readers on all continents.

Milton chose to oppose beliefs that since the 1930s had become ingrained in society at large. They dominated not only economic and political discourse but also literature, drama, visual arts and the movies. A short story, "Communist," by Philip Roth in the Aug. 3, 1998, New Yorker magazine gives the flavor of prevailing beliefs. The story takes place in 1948 during the presidential election campaign, when Henry Wallace was the Progressive Party candidate, opposing Harry Truman and Thomas E. Dewey. Communists had taken over the Progressive Party. Nathan Zuckerman, Roth's protagonist, a high school senior, has come under the influence of a somewhat older man, who has invited him to a Progressive Party rally. The father is suspicious of the older man's interest in his son, and questions him about whether he is a Communist Party member. He falsely denies his membership. The father then relates "that back before Roosevelt I was so disgusted with the way things were going in this country ... how the Republicans scorned the unfortunate in this country, and with how the greed of big business was milking the people of this country to death. ... And in the next election Franklin Roosevelt became the President, and ... capitalism began to get an overhaul the likes of which this country had never seen. A great man saved this country's capitalism from the capitalists ..."

In the popular view that Philip Roth's story expresses, the economy was inherently unstable. It broke down during the Great Depression because of the absence of government intervention. The economy improved after the war, on this view, because of government intervention.

Milton changed this mindset. He did so by radically altering the popular understanding of the Great Depression. He highlighted the one-third fall in the quantity of money between 1929 and 1933 as the explanation of the unprecedented unemployment, falling prices and negative economic growth that characterized those years. The Federal Reserve System produced the economic collapse, not the failings of a market economy. The economic system was inherently stable, but mistaken policies by monetary authorities and other government agencies could destabilize it.

Defense of capitalism and freedom became identified with Milton's name. In describing the operation of a free-enterprise exchange economy, he emphasized the importance of private rather than collective ownership of resources. The price system provided information by signaling what it was profitable for owners of resources to produce and, by determining the claims of individuals on the economy's output, supplied incentives to produce it.

What made Milton enter the larger arena of public policy debate? He never sought public office and turned down suggestions that he accept appointment to key economic agencies. In this respect he was unlike David Ricardo, who got himself a seat in Parliament, representing a rotten borough. Yet Milton's fame grew as a man of ideas that challenged the prevailing climate of beliefs.

The conundrum of Milton's life that I want to explore is, first of all, his uniqueness. He set out on the course of a maverick, I think, because he is basically an evangelical, with crusading zeal to make readers and listeners understand his vision. He believes that reasoned argument will carry the day.

Another question is why he succeeded. He persevered in the 1950s and 1960s in making his case for market solutions despite lack of external support. Most people would have been discouraged. He wasn't. Is there something in the details of his life story that provides an answer? Was it the message or the messenger that altered professional and popular beliefs about the impotence of monetary policy and the widespread perception of market solutions as the enemy of the public good and of government as the benevolent promoter of the public weal?

Milton first directed the message to economists, who resisted it. They may have admired him for his debating skills but they remained unconvinced. The message certainly never won over the generation that headed the profession when Milton began teaching. In time Milton became influential with the generation that were grandchildren of his first students. He succeeded with them, I think, because he framed his arguments in the form of testable hypotheses.

Although the economics profession and wider intellectual community largely rejected the ideas that Milton espoused, those ideas were grounded in traditional scholarship. Milton has traced his monetary views to ideas he imbibed as a graduate student at Chicago from Lloyd Mints, Henry Simons and Jacob Viner. His recollections aroused an enormous controversy (Patinkin (1969), Johnson (1971), Laidler (1993), Tavlas (1997). Milton was accused of discovering a quantity theory tradition that did not exist at Chicago during his student years. That controversy may now subside because of an accumulation of detailed evidence supporting Milton's recollections.

His broader views on economic organization also had antecedents. In their memoirs, both Rose and Milton refer affectionately to their teacher Frank Knight, although they do not attribute to him their core intellectual disposition. According to David Fand (1997), a student of Milton's in the late 1940s, "At the most basic level—in the deepest philosophical sense—Friedman was a disciple of Knight especially in his efforts to use economic theory to help define and fashion a liberal and free society. ... Accordingly, in his overarching approach to economic theory and economic philosophy, Friedman was following Knight's famous course in economic theory."

There were antecedents not just to the larger themes that Milton stood for. He also worked on ideas in common with associates. For example, Rose, Dorothy Brady and Margaret Reid were all studying savings and consumption behavior. They clearly contributed to the construction of the permanent-transitory income hypothesis. Milton's participation, however, meant that the hypothesis would be explored at a much deeper level than would have been the case had he not been involved. Moreover, he gave the hypothesis a testable formulation. Still, the common intellectual enterprise with these associates gave Milton a camaraderie that was absent when he presented his views to the wider world. There during the first two decades of teaching at Chicago, he was on his own, isolated from the mainstream.

Even if Milton emerged from his student days with the imprint on him of Chicago's teachers of money and banking and of Frank Knight, there was a crucial difference between his economics and that of his predecessors. Unlike them, he was an empiricist. He insisted that theory was only part of the process of economic analysis. Theory served as the source of hypotheses, but hypotheses had to be submitted to the test of evidence. If the evidence did not bear out a hypothesis, it had to be discarded. Tested knowledge was the goal. I think the generation that responded to Milton's teachings did so because of his empirical emphasis.

What was the source of his fortitude in defending the crucial importance of stable money and of free markets and against government intervention? Friends and colleagues, of course, did not regard Milton's views as unorthodox. They held similar views. So the support of his associates must have been a reason for him to persevere despite the disbelief of his audience.

His participation in Mont Pelerin Society meetings, where those present shared his basic values, probably also counteracted any discouragement provoked by the experience of speaking to listeners unwilling to believe his judgments.

By the 1970s, however, the climate had changed. Even if he was a skilled indoctrinator and the message itself was powerful, external conditions also played a role. From 1965 to 1982 the country experienced high and rising inflation and periodic recessions. More than anyone else, Milton explained the events of the period as consequences of the behavior of the Federal Reserve. Audiences found the logic of his arguments convincing. A change in economic conditions that Milton predicted would occur gave his words the weight of validated prophecy. Inflation stayed high in the late 1960s and early 1970s but, as he had predicted, unemployment did not stay low. Instead, there was stagflation. In a broader sense, the collapse of collectivist regimes in the past decade underscored his celebration of free enterprise market economies.

The 1970s brought Milton prominence on two fronts. He was awarded the Nobel Prize, and Rose and he took advantage of the opportunity to illustrate key ideas about market economies in a series of lectures televised on PBS. Videotapes and transcripts of the lectures, published in a book, Free to Choose, reached out to a greater audience than had previously been exposed to these ideas. This was a receptive audience.

Milton occupies a unique position among economists. Younger economists acknowledge his teaching that inflation is always and everywhere a monetary phenomenon—central banks cause inflation—that monetary authorities should follow a rule rather than exercise discretion—activist monetary policy is a source of instability—that fixed exchange rates are a source of instability, that monetary collapse causes depression, that misperceptions about the price level can lead to deviations of output from what it would otherwise be, that in the long run there is no relation between the rate of inflation and the rate of unemployment, that unemployment returns to its normal rate, regardless of the rate of inflation, that centrally planned economies cannot operate efficiently.

In addition to his teachings, Milton has offered an astounding range of public policy ideas. He can claim credit for the decision by many central banks to forgo fine-tuning in favor of the objective of low inflation. He was an important backer of a volunteer army rather than a draft. The world has by and large embraced his positions: for low tariffs, against import quotas, foreign exchange restrictions, price supports, rent controls and interest rate ceilings. His opposition to minimum wages, however, has had recent setbacks. Milton and Rose are ardent advocates of a voucher system of payments to parents for schooling their children, permitting them to pay tuition at private or public schools, as they prefer, but the future of this proposal is still to be determined. Likewise, Milton's support for a flat-rate tax with no deductions allowed has not yet won general approval, although his espousal of a negative income tax—tax credits—has. Long before the current awareness of the need to reform Social Security, Milton argued for the purchase of a retirement plan from private or public insurers, as a voluntary act, rather than the compulsory purchase of the Social Security System government retirement plan.

Milton thus combines technical mastery of economics with the gift of communicating ideas about business and society that, until he addressed them, intelligent people had not been exposed to. The ideas were beyond the pale at the outset of Milton's career. Ultimately they made sense of the major economic events of the past three decades in a way that conventional wisdom could not, and so his ideas were vindicated. They were testable implications of Milton's economics. His predictions came to pass.

Milton filled an intellectual vacuum. His persistence in challenging views that were taken for granted since the 1930s is a tribute to his belief that rational thought can displace fallacious thinking. At the same time rational thought for Milton is the seedbed for the many ways that he has proposed to improve human existence. The messenger has been persuasive because of the intellectual force of his ideas, and because at home and abroad events have not falsified them.

Photo of Anna Schwartz Professor Schwartz is a Distinguished Fellow of the American Economic Association, a research associate with the National Bureau of Economic Research in New York and an adjunct professor of Economics at the Graduate School of the City University of New York. Among her many works, she co-authored, along with Friedman, the seminal A Monetary History of the United States, 1867-1960 (1963), as well as Monetary Statistics of the United States (1970) and Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867-1975 (1982).