Paradigms and Proposals of Milton & Rose Friedman for Economic Revitalization1

PARADIGMS AND PROPOSALS OF MILTON & ROSE FRIEDMAN

FOR ECONOMIC REVITALIZATION[1]

The United States of America was chartered politically as a democracy and based economically on capitalism. However, various modes of collectivism have turned this nation toward social democracy and non-competitive forms of capitalism. Rousseau had argued in 1762 for the submission of the individual to the general will as the optimum source of freedom, Hegel argued for submission to the nation-state, and Marx placed man's whole consciousness in a social context. Soon there were sociologies of knowledge and of law. Man was viewed increasingly as a social being—a member of a group. In the 1890s, collective bargaining and trade unionism grew rapidly for the first time since their inception at the turn of the century. Anti-trust laws and regulations were passed against big business. The intellectual climate was one of growing favor for intervention by government in economic affairs. Fabian socialism gained credibility in Britain in the 1920s during an extended depression. Likewise, the Keynesian revolution and the New Deal were initiated in America with the depression of the 1930s. America needed a change. They sought to cure America's erratic business cycles by turning to increased activity by the central government.

Today it is obvious to most Americans that something is wrong with our government's function in the economy. Disrespect for the law, waste, corruption, and endless debate are the disorder of the day. The federal government has grown so large that its spending amounts to over forty percent of the national income, and it employs nearly three million civilians (plus military personnel). Washington is ensnared in a bureaucratic jungle of power groups and red tape. The cost of government is more an externality or wasteful neighborhood effect than it is a useful service. It has fostered the psychology of a welfare state which undermines the normal values of its recipients and an environment of big business and big labor unions. It is the primary cause of our current stagflation—rising unemployment and rising inflation. In all honesty, the real problem has been socially and politically induced more than it has been generated by ignorance of economic realities. What can be done to turn it around?

Milton and Rose Friedman believe they have some answers. President Reagan thinks they might too. Of their recent book Free to Choose, he comments: A superb book. The Friedmans eloquently diagnose the problems facing America and make imaginative proposals for change. It is 'must reading' for everyone—from the President to the private citizen—who is concerned about the future of America.[2]

Despite the vacuousness of Reagan's remarks, it is evident that the Friedmans may be a shaping force with whom we should reckon. Milton Friedman spent most of his professional life as Professor of Economics at the University of Chicago as a major figure of the "Chicago school" of laissez faire economics and public policies, and he stands in the monetarist school of neoclassical thought. He was also awarded the 1976 Nobel Prize in economics. He advocates limiting the power of the government so that individuals can work voluntarily and cooperatively through the free market system to bring health to our economy. His monetary analyses show the merits of his arguments. He also indicts the present paradigm for having fulfilled every plank of the 1928 Socialist party platform.[3]

This author concurs with most of Friedman's analyses of our current problems. However, the purpose of this paper is to examine the foundations of his proposed solutions. His answers imbibe some combinations of ambiguity: Newtonianism with indeterminate results, positive economics with normative overtones, laissez faire with a negative income tax, and freedom with subjective ethics. His suggestions must be examined more rigorously to test their merit. Perhaps this paper can develop greater precision regarding the answers.

The Friedman Approach to Economics Methodology[4]

Milton Friedman has labeled his approach as "positive economics."- He is concerned to develop value free "scientific" economic theories. Thus he seeks "what is"—positive economics—prior to "what should be"—normative economics. He believes this is the only way to achieve the development of a theory or an hypothesis which can yield meaningful (i.e., not truistic) predictions about phenomena not yet observed. Theories arise out of observation and logic. But they must predict and not merely describe. The only relevant test of the validity of an hypothesis is a comparison of its predictions with experience.

If the theory is not contradicted by experience, then it can be accepted if it gives sufficiently accurate predictions and good approximations. He acknowledges the difficulty of utilizing empirical data to formulate or test an hypothesis. One expedient is to resort to past phenomena to test a theory, such as the Friedmans do in their monetary analysis of the Great Depression.[5] He notes other difficulties relating to the necessary interaction between the process of measurement and the phenomena being measured, the interaction between the observer and the observed, and the impossibility of a comprehensive self-contained logic. Thus Gödel’s theorem and the indeterminacy principle of Heisenberg limit science to probability statements. The Friedmans conclude that the physical sciences and the social sciences should not be seen as radically distinct:

In both, there is no 'certain' substantive knowledge; only tentative hypotheses that can never be 'proved,' but can only fail to be rejected, hypotheses in which we may have more or less confidence, depending on such features as the breadth of experience they encompass relative to their own complexity and relative to alternative hypotheses, and the number of occasions on which they have escaped possible rejection.[6]

In both "anomalies give rise to new theories ad infinitum . . .experiment is not always possible," and "no experiment is completely control led."[7] Thus the Friedmans have attempted to employ the best scientific methodology to yield value free economic theories prerequisite for normative judgments.

Nevertheless, the Friedmans have not given us an adequate methodology. Their attempt to be value free is a residuum of nineteenth century positivism which cannot be reconciled with the lip service they give to modern uncertainty principles. Thus, they tack on their normative statements about freedom at the end of their research. The point of modern philosophy is that one's presuppositions must be expressed initially in order to develop comprehensiveness and to limit overstatements. The crucial problem for the Friedmans is that a comprehensive view of man is an integral part of any approach to theorizing about the social sciences. Thus, they unintentionally retain the Kantian split between science (reason as certain knowledge of natural laws) and ethics (practical reason as rationally self-imposed knowledge). Their central concern with freedom is brought in as a second class companion for their monetary analysis. This privatization of ethics is represented quite clearly by their need for a subtitle in Free to Choose: A Personal Statement. Likewise, freedom to choose is assumed to be an optimum expression of freedom, presumably in the name of ethical neutrality. Thus their positive economics points toward relative values.

A second methodological problem is their leveling of the social and physical sciences in the name of indeterminacy. In reality the imprecision of the social sciences is of a different nature and far greater than that of the physical sciences. This is because the social sciences deal with human realities which are not so quantifiable or rationally directed as the physical sciences. Any positive economics must be limited to only a small portion of economic reality. One obvious result of this mistake is the retention of laissez faire by the Friedmans. Apparently they assume that since they cannot falsify it with empirical analysis that they can leave it intact as a part of their system.

Man and Economic Freedom

The Friedmans are writing against the concept of equality which dominates the welfare state. They believe the current economic controls to be a violation of all our basic civil liberties and a source for men preferring equality in slavery to inequality in freedom.[8] Their concept of the ethics of distribution is opposite Marx's: "To each according to what he and the instruments he owns produces."[9] Distribution must be allocated by a market economy of cooperation through voluntary exchange. This entails a "considerable inequality of income and wealth."[10] Fairness as equality of outcome destroys both equality and freedom. The Friedmans correctly think that equality of opportunity and liberty and personal equality before God and the law are the proper expressions of equality.[11]

The basis for this analysis and indeed the heart of their message is a concept of freedom. The Friedmans hold up the Enlightenment view of the sovereignty of the individual and his inalienable rights.[12] Implicitly, it is the freedom of individuals to act in their own self-interests which can best bring responsibility, creativity, excellence, and progress in society. They quote with approval the invisible hand concept of Adam Smith which declares that individuals intending their own gain are led as by an invisible hand so that most often they promote the interests of society.[13] They also cite approvingly John Stuart Mill's views that the sovereignty of the individual is supreme and that the only place for interfering with another's liberty is for self-protection or preventing harm to others."

Although they recognize economic freedom as only one component of freedom[14] broadly understood, it is this freedom which dominates their thought.[15] It is an indispensable prerequisite for political freedom. If economic coercion exists, centralized power emerges and usurps both economic and political freedom. Economic freedom means freedom to choose how to use our income, to use our resources according to our own values, and to own property. The safeguard of economic freedom is the power of the competitive market to coordinate voluntary exchange and thereby to bring about the progress of society.

However, a free market only has hope for maintaining freedom so long as society has certain moral (Christian) convictions. Of course in a fallen world the free market capitalism of a democracy offers as much hope as any other system. In fact it could not even emerge unless certain moral conditions prevailed. Nevertheless, the Friedmans have not gone far enough in their concept of freedom. The free market is an ideal which cannot guarantee freedom in the real world.[16]

The Power of the Market

The Friedmans define freedom in terms of individual free choice and economics; thus, they naturally embrace classical liberalism. Classical liberalism presupposed the Enlightenment view of man as rational, autonomous, selfish, and self-determining. It also inherited several views of Newtonianism: reality as a closed system of laws which can be manipulated, a methodology based on deductive and rational logic, the tendency of nature to move toward equilibrium, and similarly a movement toward a harmony of interests. It was also utilitarian and did not embrace absolute values. The Friedmans assume all these dynamics although they do incompletely attempt to extract themselves from Newtonianism.

Laissez faire is the guiding light for the Friedmans’ economic theories. This means that the government can promote economic cooperation and coordination but should not be coercive. However, laissez faire is too simplistic and a leftover of the Newtonian world view. Men are not always rational; there are no natural laws which produce equilibrium; social conventions often produce an unjust distribution of income (from a defensible Christian perspective); and government control is sometimes a necessary evil.[17] However, the Friedmans do occasionally supplement laissez faire. For example, discrimination and segregation, consumer safety, and pollution are just three areas which they recognize require government controls.[18] But their faith in voluntary exchange and the competitive market system sometimes results in overstatement. Often, their laissez faire recommendations have merit for reason other than laissez faire.

John Kenneth Galbraith argues that the technocratic management structure of corporations seeks self-preservation more than profit maximization.[19] Milton Friedman however shows that this is not a valid picture and that government mismanagement is often the source of corporate inefficiency.[20] Big government especially has colluded with big business and big labor. Friedman is less successful in arguing that advertisement is chiefly informative and not a consumer manipulator.[21]

The Friedmans also point out the real contributions of the market.[22] Cooperation through voluntary exchange does tap the energy of self-interest. It also allows the price mechanism to communicate information, produce incentives, and to distribute income. Needless to say there is a good deal of complaint about the distribution. But so far collective decisions at the government level are just as prone as individuals to self-interest and inequities. In fact, upsetting this last component of the pricing mechanism interferes with its other two functions.

The Role of Government The Friedmans believe the government should serve as a rule maker and umpire.[23] We need government to facilitate cooperation and coordination without coercion and the concentration of directing power. In the government sphere, the Friedmans postulate a second invisible hand which works opposite the one suggested by Adam Smith:

. . . an individual who intends only to serve the public interest by fostering government interventions is 'led by an invisible hand to promote' private interests, 'which was no part of his intention.'[24]

Government control simply does not work:

The great movement toward government has not come about as a result of people with evil intentions trying to do evil. The great growth of government has come about because of good people trying to do good. But the method by which they have tried to do good has been basically flawed. They have tried to do good with other people's money. Doing good with other people's money has two basic flaws. In the first place, you never spend anybody else's money as carefully as you spend your own. So a large fraction of that money is inevitably wasted. In the second place, and equally important, you cannot do good with other people's money unless you first get the money away from them. So that force ... is fundamentally at the basis of the philosophy of the welfare state.[25]

Thus one group coerces another in a sick over-governed society ruled by men and not laws. Perhaps this analysis deserves our greatest support. But lest we imbibe on the spirit of the time, we must recognize that government must promote mercy and justice, not just cooperation. Our real problem remains a moral one. The Friedmans approach some of this problem by reaffirming some of Adam Smith's views about government.[26] Government must protect its citizens from coercion and mediate justice. It must also serve the public welfare with services which would not be well suited to private enterprise and mediate solutions to neighborhood effects such as pollution. This area is the most difficult to resolve. Government must also protect individuals who cannot be regarded as responsible.

Milton Friedman's monetary analyses of the available data of all inflationary societies demonstrates that inflation generally is preceded about six months by a corresponding increase in the money supply.[27] The government's reliance upon fiscal policy has been a failure. The problem is much simpler. The government cannot print money faster than we increase our real goods and services without causing inflation. But then government has a lot of incentives to do just that since Keynes. Inflation increases government resources and tax revenues while decreasing its debt. But it has many bad side effects including psychological ones. It is true that monetary policy cannot be a panacea. Monetary decisions cannot be based on perfect knowledge. The credit revolution may raise the potential for changing the velocity or quantity of money in a way which cannot be readily or quickly directed from the federal level. Nevertheless, we cannot continue to ignore that sound monetary policy could alleviate most of our inflation. It is particularly shocking to see how bad policy generated the severity of the Great Depression.[28]

In fairness, the inflation issue is a complicated one beyond a depth analysis here. Less satisfactory than Friedman's quantity theory are the old Keynesian theory of income determination, cost-push theories, and theories focusing on structural maladjustments such as a demand-pull inflation associated with excess demands for credit.[29] Friedman has recently improved the old Phillips curve which was a cost-push theory emphasizing the trade off between unemployment and inflation.[30] Thus Friedman's analysis appears to be valid. Of course any implementation of a solution is a political hot potato.

Policy Suggestions

This section cannot cover the details of the Friedmans' suggestions but can only survey some of them. The Friedmans are strictly free traders except for rare defense needs. Aid for steel, special interests groups, or infant industries is unwarranted. A negative income tax could substitute for nearly all welfare programs and reduce bureaucratic expense and red tape to a mere fraction of the present arrangement. Education should be controlled locally by parents and teachers instead of being fifty percent government funded and run by big unions and administrative bureaus. All private schools (including religious) and public schools should be supported through vouchers to parents. Schools would have to perform or lose students. State universities should increase tuition. Any concentration of power should be opposed. For example, labor unions really provide higher wages for higher paid workers at the expense of the lower paid workers. Anti-trust laws should be applied to them. There should also be several amendments to the Constitution such as for a non-progressive income tax, a balanced budget, an abridgment of wage and price controls, and international free trade act, mandatory inflation riders, or a fixed monetary policy. Big government must stop.