As the influential economist approaches
his 90th birthday, it must be satisfying to see how many of his ideas have
shaped our economic world
Milton Friedman's professional career has been
marked by controversy over his many policy proposals. Yet as he approaches his
90th birthday in July, Friedman is increasingly recognized as the most
influential economist in a 20th century that witnessed towering contributions
from John Maynard Keynes, Paul A. Samuelson, and others.
Friedman is best
known for "monetarism," a view that stability in the growth of the money supply
is crucial to controlling inflation and recessions. Although the relation
between the money supply and the economy has often been highly variable, no less
an authority than Federal Reserve Chairman Alan Greenspan has indicated that
Friedman's emphasis on a stable monetary framework was instrumental in guiding
central banks in Europe and the U.S. toward low inflation during the past two
Before Friedman, economic conventional wisdom held that
inflation reduces unemployment because prices rise faster than labor costs. In
the late 1960s, Friedman argued instead that there is no permanent reduction in
unemployment from continuing inflation because wages eventually catch up to
prices as expectations about inflation become more accurate. His analysis has
been validated twice since then--by the high U.S. unemployment during the 1970s
despite rapid inflation, and the low unemployment during the '90s even though
inflation was negligible.
Some of Friedman's contributions to micro
policy have been fully implemented, such as his persuasive advocacy of a
voluntary army while serving on the Gates Commission set up to reconsider the
draft after the Vietnam War. At a recent White House event to honor Friedman on
his approaching birthday, I discussed a few of his policy proposals that have
only been partially adopted and continue to generate controversy.
decades before Chile introduced its revolutionary private individual account
retirement system, Friedman's classic 1962 book Capitalism and Freedom
criticized the prevailing pay-as- you-go Social Security systems for restricting
the ability of individuals to choose how much and in what form to save for
retirement, and for mixing a welfare program for elderly poor with a compulsory
program that applies to all the elderly. Had his advice been followed 20 years
ago, there would be no impending Social Security financing crisis in the U.S.
and other developed nations with aging populations.
In the same book,
Friedman showed that without any change in the tax base, a flat income tax rate
of 23% could bring in the same revenue as the system of rates that ranged in the
1960s from 20% to an incredible 91%. A few years later, he went further by
demonstrating that the flat rate could be reduced to 16% without any diminution
in tax revenue if all special deductions for mortgage interest, charitable
contributions, and the like were eliminated.
All nations have since
brought down their top rates from frequently above 90% to 50% or less. So the
world has moved about halfway toward his flat-tax system.
In the early
1950s, Friedman revived the case for allowing foreign exchange rates to be
determined by supply and demand for different currencies. Flexible rates had
fallen into intellectual disrepute because exchange rates were unstable during
the 1930s, and after the post-World War II Bretton Woods Agreement introduced a
worldwide system of supposedly fixed exchange rates.
flexible exchange rates continues as American political leaders condemn Treasury
Secretary Paul H. O'Neill for his refusal to seek a strong dollar. Meanwhile,
exporters want him to promote a weak dollar that would make their goods cheaper
to other nations. Secretary O'Neill is right in his commitment to let markets
decide the international value of the dollar rather than government officials or
business leaders with vested interests.
School vouchers is the micro
program most closely identified with Friedman. In the 1950s, he first proposed
that governments give tuition vouchers to parents with school-age children that
they could use at private or public schools of their choice as long as these met
education standards. He was confident that even poor parents would generally
select a good education for their children if they had real
Although voucher advocates have largely won the intellectual
battle, vouchers have been effectively opposed by teachers' unions and by many
suburban parents who fear vouchers would encourage poor children to attend
schools in their communities. The U.S. Supreme Court will soon decide the
legality of several voucher experiments.
Friedman has displayed enormous
courage in sticking to his guns after his work was greeted with hostility and,
frequently, nasty personal attacks. It must be gratifying to see how much the
world has moved toward his positions. We all owe an enormous debt to this great
economist as he completes his ninth decade.
Gary S. Becker, the 1992 Nobel laureate, teaches at the University of
Chicago and is a Fellow of the Hoover Institution.