Milton Friedman
2006年11月18日, 1:17:40 Greg Mankiw
We lost a great human being today. Here is what I wrote about him in 1998.The Economist of the CenturyBy N. Gregory MankiwAnyone who thinks that ideas matter (and who doesn't?) naturally takes an interest in people who generate more than their share. Milton Friedman is one of them. As he approaches his 86th birthday, Friedman remains one of the world's most influential living economists.Fans of this great intellect are in for a treat: Friedman and his wife, Rose, have just published their memoirs, Two Lucky People (University of Chicago Press, $35). The Friedmans take turns telling their story as they trace their lives from humble childhoods in Rahway, N.J. (Milton), and Portland, Ore. (Rose), through a lifetime of teaching, research, and policy controversies.The Friedmans are best known for their articulate and unwavering defense of the free market. Their policy objective is, simply, "the promotion of human freedom." This goal, they tell us, "underlies our opposition to rent control and general wage and price controls, our support for educational choice, privatizing radio and television channels, an all-volunteer army, limitation of government spending, legalization of drugs, privatizing Social Security, free trade, and the deregulation of industry and private life to the fullest extent possible." Milton and Rose were libertarians--aggressively vocal libertarians--before libertarians were cool.Their campaign for a freer society led them into the confidence of some of the great political figures of our times, including Barry Goldwater, Richard Nixon, Ronald Reagan, and Margaret Thatcher. The authors don't shy from judging these leaders: we are told, for instance, that Reagan's choice of George Bush as his Vice President was "the worst decision not only of his campaign but of his presidency."The Friedmans' political involvement came with its share of controversy. Most notably, in 1975 Milton spent six days giving lectures on public policy in Chile and had one brief meeting with right-wing dictator Augusto Pinochet. The result was a firestorm of protest. When Friedman won a Nobel Prize the next year, public objections came from all directions, including previous prize-winners David Baltimore and Linus Pauling.Friedman was--and is--unrepentant. Of course, he did not endorse the dictatorship. But, he wrote, "I do not regard it evil for an economist to render technical economic advice to the Chilean government to help end the plague of inflation, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean government to end a medical plague." He also notes that years later, when he offered similar economic advice to China, there were no similar protests, even though the left-wing Chinese dictators were no less oppressive than Pinochet.Friedman's politics may have generated public controversy, but his scientific contributions yielded a consensus of admiration among his professional colleagues. When students today are taught about the determinants of consumer spending, the history of monetary policy, or the relationship between inflation and unemployment, they owe much to the intellectual legacy of Milton Friedman. Legend has it that economist George Stigler once called Friedman "the best economist in a bad century." Stigler may well have been right that Friedman doesn't quite measure up to the 18th century's Adam Smith or the 19th century's David Ricardo--economists, like many of the things that they study, are subject to the law of diminishing returns. But Friedman runs a good race against such 20th-century luminaries as Paul Samuelson and John Maynard Keynes, and that is no mean feat.The book does drag at times, especially when it lingers over the minutiae of the Friedmans' home life. (How much detail do we really need to know about Friedman family vacations, for example?) But overall, it's charming. It's almost like a letter from a couple of old friends--a couple of old friends who had a long, compelling intellectual journey, came to know some of the great world leaders of this century, and had 60 years of happy, supportive marriage. After reading Two Lucky People, you really can't help but agree with the title.Update: Here is the NY Times obituary.
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November 19, 2006
On Milton Friedman's Ideas--BECKER
Milton Friedman died this past week. He was the most influential economist of the 20th century when one combines his contributions to both economic science and to public policy. I knew him for many decades starting first when I was a graduate student at Chicago, and then as a colleague, mentor, and very close friend.
I will not dwell here on what a remarkable colleague he was. However, I do want to describe my first exposure to him as a teacher since he enormously changed my approach to economics, and to life itself. After my first class with him a half-century ago, I recognized that I was fortunate to have an extraordinary economist as a teacher. During that class he asked a question, and I shot up my hand and was called on to provide an answer. I still remember what he said, "That is no answer, for you are only restating the question in other words." I sat down humiliated, but I knew he was right. I decided on my way home after a very stimulating class that despite all the economics I had studied at Princeton, and the two economics articles I was in the process of publishing, I had to relearn economics from the ground up. I sat at Friedman's feet for the next six years-- three as an Assistant Professor at Chicago-- learning economics from a fresh perspective. It was the most exciting intellectual period of my life. Further reflections on Friedman as a teacher can be found in my essay on him in the collection edited by Edward Shils, Remembering the University of Chicago: Teachers, Scientists, and Scholars, 1991, University of Chicago Press.
In considering his many contributions to economics I will pass over his major innovations in scientific economics. These include his emphasis on permanent income in explaining aggregate consumption and savings, his study of the monetary history of the United States, his explanation of the stagflation of the 1970's, his analysis of the value of a stable and predictable monetary framework to help stabilize the economy, his early contributions to the theory and measurement of human capital, his discussion of choice under uncertainty, and his famous essay on methodology in economics.
I will discuss instead several ideas in his remarkable book, Capitalism and Freedom, published in 1962, that contains almost all his well-known proposals on how to improve public policy in different fields. These proposals on based on just two fundamental principles. The first is that in the vast majority of situations, individuals know their own interests and what is good for them much better than government officials and intellectuals do. The second is that competition among providers of goods and services, including among producers of ideas and seekers of political office, is the most effective way to serve the interests of individuals and families, especially of the poorer members of society.
The famous education voucher system found in this book, and based on an article published in the 1950's, embodies both principles: that parents generally know the interests of their children better than teachers unions and school boards do, and that competition among schools is the best way to serve the educational interests of children. He added the further insight that one can and should separate government financing of education from government running of schools. The voucher system retains government financing, but forces public schools to compete for funds against private for-profit and non-profit schools. The voucher proposal has I believe won the intellectual battle over the value of competition among schools at the k-12 school level as well as at the college level, but so far vouchers have won only limited political victories in terms of actual implementation. This is mainly due to the dedicated opposition of public school teachers unions who fear competition from private schools.
Both individual choice and competition are the foundation of Friedman's 1962 radical proposal to privatize the social security system. He argued, correctly in my judgment, that the vast majority of families could be trusted to provide for their retirement if given appropriate incentives, and that they should be allowed to invest in retirement funds provided by competitive investment companies. The government-run social security systems then in effect in the United States and all other countries with retirement systems taxed earnings in ways that discouraged effort and encouraged underground activities. These tax receipts were then paid out to retirees according to politically determined criteria. Chile started the first private system of personal accounts modeled along the lines laid out in Capitalism and Freedom, and Chile has since been followed to some degree by many other countries, such as Mexico, Singapore, and Great Britain. The United States has its tax-free IRA's and Sep savings accounts, but this country has not yet implemented privatization of its basic social security system, even though an enormous financial deficit on this system will occur in about 15 years unless the system is significantly reformed.
Friedman also proposed a flat income tax rate in Capitalism and Freedom, and showed that a rate of about 20% in the United States could raise the same revenue and in a much simpler and far less costly way than the quite progressive income tax system in effect in the early 1960's. Further theoretical analysis of what is called optimal tax rates has generally concluded that a rather flat tax would be best at combining efficiency with redistribution of income to poorer families. The appeal to Friedman of the flat tax was based again on his confidence that individuals react to incentives, and that they take steps to further their interests. In this case, he argued that highly progressive taxes induce taxpayers to find and exploit tax loopholes, so that legally, and at times illegally, taxpayers cut their tax payments by hiding income or converting income into other forms. A flat income tax was early introduced by Hong Kong, and has in recent years been followed by many countries, including Russia and eight other Eastern European countries. The United States significantly flattened its income tax structure since the time Friedman wrote this book, especially as a result of the tax reform act of 1986. Unfortunately, a more progressive structure has crept back since that reform.
The voluntary army was not discussed in Capitalism and Freedom, but Friedman did propose to replace the military draft in several articles published about the same time as the book was published. He argued that a voluntary army would attract at reasonable cost a dedicated military force of men and women who volunteered due to a combination of patriotism and economic opportunities. A voluntary system is especially effective in situations where full-scale mobilization of available manpower is not required. His advocacy of the voluntary army induced President Nixon to put Friedman on a committee to consider whether the United States should replace its military draft by a fully voluntary armed force. Many persons on the committee initially opposed this idea, especially General William Westmoreland, head of military operations in Vietnam. Friedman's persuasiveness eventually won over the vast majority of the members to this position, and in 1973 the United States changed to a voluntary armed force. Seeing how well this system has operated, very few military leaders now want to return to a draft.
Friedman proposed in Capitalism and Freedom, and earlier in an article in the 1950's, to abolish the Bretton Woods System of fixed exchange rates, and move to fully flexible exchange rates. Under a flexible exchange system, rates are determined by the competitive supply and demand for different currencies by individuals and businesses. The prevailing view had been that such a system of flexible exchange rates would be unstable, so he argued at length why flexible exchange rates would be not constant but stable--unstable rates implied, he argued, that speculators on the average would lose money, which he did not believe was likely. This view of the behavior of speculators was challenged, but I believe Friedman was basically right. In any case, the issue was decisively settled after Nixon took the United States off the gold standard in 1972, and replaced it with a system of flexible rates in 1973. The Chicago Mercantile Exchange led by Leo Melamed then saw the opportunity to set up futures markets in currencies, which it did with Friedman's help. These markets were enormously successful, and put to rest forever the belief that one could not have an effective system of flexible exchange rates. They provide an opportunity for businesses to hedge their currency risks by trading on currency futures.
The first chapter of Capitalism and Freedom considers the link between economic and political freedom. He argues there that economic freedom promotes political freedom, and that political freedom is not likely to persist without economic freedom. "The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other." Findings since then suggest that while economic freedom can begin under totalitarian regimes, such as under General Pinochet in Chile and General Chiang Kai-Shek in Taiwan, economic freedom produces economic growth and other changes that usually eventually lead to much greater democracy, as in Taiwan, South Korea, and Chile. The important implication is that China would become more democratic if it continues on its path of greater economic freedom and greater growth.
On whether one can have democracy without economic freedom, Friedman said, "I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity." Sweden and other Scandinavian countries have been vibrant democracies, and yet governments in these countries tax away more than half the income. However, the majority of these taxes are transferred back to individuals in the form of retirement incomes, medical care, and in other ways. Although these countries mainly rely on private enterprise, not government enterprises, to organize their economies, is that "enough" freedom to qualify as economically free? That depends on the definition of economic freedom, yet I believe Friedman is right that thoroughgoing restrictions on economic freedom would turn out to be inconsistent with democracy.
To conclude on a more personal level, I was most impressed by Milton Friedman's sterling character--he would never soften his views to curry favor--his perennial optimism, his loyalty to those he liked, his love of a good argument without any personal attacks on his opponents, and his courage in the face of prolonged and virulent attacks on him by others. I cannot count the number of times I participated with him in seminars, nor how many visits my wife and I shared with Milton and Rose, his wife of almost 70 years. Rose, a fine economist, would not hesitate to differ with her husband when she believed his arguments were wrong or too loose.
When I spoke on the phone with him last Monday, he sounded strong and a bit optimistic about his health, even though he had just returned from a one-week hospital stay with a severe illness, an illness that a few days later took his life. Although his ideas live on stronger than ever, it is hard to believe that he is not here. I can no longer seek his opinions on my papers, but I will continue to ask myself about any ideas I have: would my teacher and dear friend Milton Friedman believe they are any good?
Milton Friedman--Posner's Comment
I knew Milton Friedman, but not well; and I am not competent to express an informed opinion on his major academic work, which was in macroeconomics. The economists of his generation with whom I principally associated were George Stigler, Ronald Coase, and Aaron Director (Friedman's brother-in-law)--microeconomists who had a major impact on the law and economics movement.
I did, however, read a few of Friedman's essays. Two in particular struck me around the time I came to Chicago. One was his essay on the methodology of positive economics, in which he argued that the way to test a theory was not by assessing the realism of its assumptions, but by assessing the accuracy of its predictions. Economics makes heavy use of unrealistic assumptions, primarily concerning rationality, and yet the predictions generated by models based on those assumptions are often accurate. Where they are inaccurate, this is a spur to reexamining the assumptions and perhaps modifying them, as is occurring in such fields as finance, where assuming a more complex human psychology than finance theorists traditionally assumed has helped to explain anomalies (from a rational-choice perspective) in the behavior of financial markets.
The emphasis on predictions connects Friedman's essay to Karl Popper's philosophy of science, in which the scientific method is viewed as a matter of making bold hypotheses, confronting them with data, and ascribing tentative (always tentative) validity to the hypotheses that survive the confrontation. Popper's methodology of fallibilism has strong affinities with Friedman's methodology. Both are strongly empiricist. Stigler in conversation merged these two closely related approaches, and I was very struck by the melded approach.
The other essay of Friedman's that struck me was an essay on taxation in which he argued, contrary to the conventional view at the time (though I gather the argument was not original with him), that there was no theoretical reason for supposing income taxes superior in point of efficient resource allocation to excise taxes. An excise tax--say, a 10 percent tax on yachts--drives a wedge between cost and price and so deflects buyers to substitutes that may cost more to produce but look cheaper because they are not taxed at so high a rate. (The effect is the same as monopoly pricing.) But Friedman argued that income taxes have the same effect, by driving a wedge between the cost of work and the wage (price) received by the worker, thus deflecting him to untaxed substitutes, such as leisure, or to jobs that generate untaxed benefits, including leisure in the case of teaching (for example), but also prestige, amenities, tax-favored fringe benefits, and job security. This idea of the parity of excise and income taxes has wide-ranging implications for public policy, since the tendency (still) is to neglect the misallocative effects of income taxation--a neglect of which I think even Friedman was sometimes guilty, as I am about to argue.
Perhaps his most important general contribution to economic policy was the simple, but when he first propounded it largely ignored or rejected, point that people have a better sense of their interests than third parties, including government officials, do. Friedman argued this point with reference to a host of issues, including the choice between a volunteer and a conscript army. With conscription, government officials determine the most productive use of an individual: should he be a soldier, or a worker in an essential industry, or a student, and if a soldier should he be an infantryman, a medic, etc.? In a volunteer army, in contrast, the determination is made by the individual--he chooses whether to be a soldier or not, and (within limits) if he decides to be a soldier what branch, specialty, etc., to work in. A volunteer army should provide a better matching of person to job than conscription, and in addition should create a more efficient balance between labor and capital inputs into military activity by pricing labor at its civilian opportunity costs.
But this is in general rather than in every case. The smaller the armed forces and the less risk of death or serious injury in military service, the more efficient a volunteer army is relative to a conscript one. These conditions are not satisfied in a general war in which a significant fraction of the young adult population is needed for the proper conduct of the war and the risk of death or serious injury is substantial--the situation in World War II. For then the government's heavy demand for military labor, coupled with the high cost of military service to soldiers at significant risk, would drive the market wage rate for such service through the roof. Very heavy taxes would be required to defray the expense of a volunteer army in these circumstances and those taxes would have misallocative effects that might well exceed the misallocative effects of conscription.
I mention this example because I find slightly off-putting what I sensed to be a dogmatic streak in Milton Friedman. I think his belief in the superior efficiency of free markets to government as a means of resource allocation, though fruitful and largely correct, was embraced by him as an article of faith and not merely as a hypothesis. I think he considered it almost a personal affront that the Scandinavian nations, particularly Sweden, could achieve and maintain very high levels of economic output despite very high rates of taxation, an enormous public sector, and extensive wealth redistribution resulting in much greater economic equality than in the United States. I don't think his analytic apparatus could explain such an anomaly.
I also think that Friedman, again more as a matter of faith than of science, exaggerated the correlation between economic and political freedom. A country can be highly productive though it has an authoritarian political system, as in China, or democratic and impoverished, as was true for the first half century or so of India's democracy and remains true to a considerable extent, since India remains extremely poor though it has a large and thriving middle class--an expanding island in the sea of misery. What is true is that commercial values are in tension with aristocratic and militaristic values that support authoritarian government, and also that as people become economically independent they are less subservient, and so less willing to submit to control by politicians; and also that they become more concerned with the protection of property rights, which authoritarian government threatens. But Friedman seemed to share Friedrich Hayek's extreme and inaccurate view that socialism of the sort that Britain embraced under the old Labour Party was incompatible with democracy, and I don't think that there is a good theoretical or empirical basis for that view. The Road to Serfdom flunks the test of accuracy of prediction!
I imagine that without the element of faith that I have been stressing, Friedman might have lacked the moral courage to propound his libertarian views in the chilly intellectual and political climate in which he first advanced them. So it should probably be reckoned on balance a good thing, though not to my personal taste. His advocacy of school vouchers, the volunteer army (in the era in which he advocated it--which we are still in), and the negative income tax demonstrates the fruitfulness of his master micreconomic insight that, in general, people know better than government how to manage their lives. But perhaps not always.
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