Financial Express, 21 November 2006
Milton Friedman died on 16 November at the age of 94. Few people have shaped our world like he did.
When Friedman began his intellectual life, there prevailing consensus involved a powerful government that interfered in the lives of citizens and firms. On one hand, Nazi and Communist ideas sought to infringe into the personal freedom of individuals. In parallel, many economists were eager to infringe into the economic freedom of individuals through capital controls, welfare programs, license-permit systems, etc. Putting these two lines of attack together, the liberal dream was endangered. Friedman was perhaps the most important figure of the 20th century who laid the intellectual foundations of modern liberal thought.
His most important book was `Capitalism and Freedom', written in 1962, which has inspired an endless sequence of intellectuals ever since. This book underlined the connections between economic freedom and political freedom. Under socialism, where economic power is controlled by the State, it is all to easy to sink into one-party rule.
Friedman did not have a rosy belief that the free market was always perfect. But he was clear-headed enough to see that government interference into markets was often worse, and that this interference came at the cost of not only economic efficiency but also political freedom. Today, these ideas are commonplace. But in the early 20th century, it required remarkable independence of thought to be able to break with the mainstream.
As an example, Friedman was one of the first people to understand the blunders that India was making with the experiment in socialism. At a time when our economists did not understand how markets work, and were drunk with power, Friedman correctly understood that this was the path to perpetuating poverty (see http://tinyurl.com/yx353s for his writings on India dating back to 1955).
The most remarkable thing about Friedman's life is the sequence of ideas that came from him, which went from being absolutely heretical to being completely mainstream. He was the first to pin the blame for the Great Depression on bad monetary policy. This was radically different from the conventional wisdom, which viewed the Great Depression as being consistent with the Marxist prediction of ever-expanding crises in capitalism. The US Federal Reserve obviously did not like to be blamed for having made such huge mistakes. In 2002, Ben Bernanke said (http://tinyurl.com/y7wus6) "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.".
Floating exchange rates. Education vouchers. Investment-based pension programs. Currency futures trading. Monetary policy that stabilises, monetary policy that is based on publicly stated rules. Redistribution by a negative income tax. All these ideas were invented by Friedman. All of them were vehemently opposed by entrenched government bureacracies, and have now become the mainstream consensus. In each of these issues, Friedman had the unique ability to not get intimidated by conventional wisdom and the bureacratic establishment. He knew how to think about issues from first principles, rigorously apply economic reasoning, and be unafraid about where the reasoning took him even if it involved making many powerful people unhappy. It is a style of thinking that all of us should aspire to.
If Friedman had merely written a few papers and won the Nobel Prize, he would have been a very good economist. But he went far beyond this, carrying his radical ideas into newspapers and television with great success. Just five feet three inches high, he was the most dangerous opponent in a public debate imaginable. He was the most important single figure who shifted the global economics profession away from socialist ideas, and injected liberal thoughts back into the political landscape. He lived to see the tremendous impact of improved economic policy on the prosperity of the US, the UK and Chile, some of the countries which executed a radical shift away from socialist economic policy.
The biggest miracle in human history, where there has been poverty reduction on a large scale, was the drop in poverty in China and India after 1980 owing to faster GDP growth. Never before has there been such a large mass of people escaping poverty. If the a prize was to be awarded for the person who did the most in terms of helping people escape from poverty, it should go to Milton Friedman, for he was the most important single figure who made it possible for China and India to escape from socialism.
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