Economist Guide: 5 Lessons Milton Friedman Teaches Us

 Economist Guide: 5 Lessons Milton Friedman Teaches UsBy Sean Ross | February 12, 2016When Milton Friedman won the Nobel Prize in Economic Sciences in 1976, it marked the turning of the tide in academic economic thought, away from doctrinaire Keynesianism and toward the burgeoning “Chicago school.” Friedman brought about a renewed emphasis on prices, inflation and human incentives, a direct counter to Keynes’ focus on employment, interest and public policy.To the extent that Keynes saw himself as the enemy of laissez-faire (evidence suggests this is exactly how he felt), Friedman was the new public face of free markets. Friedman won a major intellectual victory after three decades of Keynesian policies ended in stagflation in the late 1970s, something establishment Keynesians, such as Paul Samuelson, thought was impossible.From a technical perspective, Milton Friedman is best known for his monetary policy and “A Monetary History of the United States,” an epic volume devoted to his scientific work. But this is only one of the many contributions Friedman made to the political economy. The following are five lessons contemporary economists can still learn from Milton Friedman.1.  You Should Judge Policies by Their Results, Not Their IntentionsIn many ways, Milton Friedman was an idealist and libertarian activist, but his economic analysis was always grounded in practical reality. He famously told Richard Heffner, host of “The Open Mind,” in an interview: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”Many of Friedman’s most controversial positions were based on this principle. He opposed raising the minimum wage because he felt it unintentionally harmed young and low-skilled workers, particularly minorities. He opposed tariffs and subsidies because they unintentionally harmed domestic consumers. His famous 1990 “Open Letter” to then-drug czar Bill Bennett called for the decriminalization of all drugs, mostly because of the devastating unintended effects of the drug war; this letter lost Friedman a swath of conservative supporters, whom he said failed “to recognize that the very measures you favor are a major source of the evils you deplore.”This lesson is critical for economists and policy wonks of all stripes. As Henry Hazlitt once put it: a bad economist only looks at the seen; the good economist looks at the seen and unseen consequences.2.  Economics Can Be Communicated to the MassesDuring Friedman’s landmark interviews on Phil Donahue’s show in 1979 and 1980, the host said his guest was “a man who will never be accused of making economics confusing,” and told Friedman “the nice thing about you is that when you speak, I almost always understand you.” Dr. Friedman gave lectures on college campuses, including Stanford and NYU. He ran a 10-series television program entitled “Free to Choose” and wrote a book with the same name. At all times, Friedman adjusted his content for his audience.Friedman’s gift for communication was rare. Economist Walter Block, sometimes a friendly agitator of Friedman, memorialized his contemporary’s 2006 death by writing, “Milton’s valiant, witty, wise, eloquent and yes, I’ll say it, inspirational analysis must stand out as an example to us all.” More economists should learn from Friedman’s success; learning a social science is not very useful if you cannot communicate it to laypeople.3.  Inflation Is Always and Everywhere a Monetary PhenomenonThe most famous excerpt from Friedman’s writings and speeches is, “Inflation is always and everywhere a monetary phenomenon.” He defied the intellectual climate of his era and reasserted the quantity theory of money as a viable economic tenet. In a 1956 paper titled “Studies in the Quantity Theory of Money,” Friedman found that, in the long run, increased monetary growth increases prices but does not really affect output.Friedman’s work busted the classic Keynesian dichotomy on inflation, which asserted that prices rose from either “cost-push” or “demand-pull” sources. It also put monetary policy on the same level as fiscal policy. Amusingly, Friedman’s insight was so sharp in his criticism of the Federal Reserve’s mismanagement of the money supply that the Fed actually stopped releasing minutes from the board’s meetings to avoid his scrutiny.4.  Technocrats Cannot Control the EconomyIn a 1980 Newsweek column, Milton Friedman said: “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”Friedman was a vicious critic of government power and was convinced free markets operated better on grounds of morality and efficiency. In terms of the actual economics, Friedman rested on a few truisms and basic, incentive-based analyses. He offered that no bureaucrat would or could spend money as wisely or as carefully as the taxpayers from whom it was confiscated. He spoke often of regulatory capture, that phenomenon where powerful special interests co-opt the very agencies designed to control them.Friedman’s lesson is easy to understand: government policy is created and carried out through force, and that force creates unintended consequences that do not come from voluntary trade. Indeed, the valuable political power of government force creates an incentive for the wealthy and devious to misuse it, helping generate what Friedman dubbed “government failure.”5.  Government Failures Can Be Just as Bad, or Worse, Than Market FailuresFriedman combined his lessons about unintended consequences and the bad incentives of government policy. “Here you have a market failure,” Friedman told a Chicago student in a recorded lecture, “but in those same cases it’s also difficult to have government do anything about it…You have to put into the balance that when government seeks to achieve an answer, you’re likely to have a government failure.”Friedman loved pointing out government failures. He exposed how President Nixon’s wage and price controls led to gas shortages and higher unemployment. He railed against the Interstate Commerce Commission (ICC) and Federal Communications Commission (FCC) for creating de facto monopolies in transportation and media. Famously, he contended that the combination of public schooling, minimum wage laws, drug prohibition and welfare programs had unintentionally forced many inner city families into cycles of crime and poverty.This concept wraps up many of Friedman’s most powerful ideas: policies have unintended consequences; economists should focus on results, not intentions; and voluntary interactions between consumers and businesses often produce superior results to crafted government decrees.Source: Investopedia