RALEIGH—While Milton Friedman might not be a household name to most people, he was the equivalent of a rock star to economists. I say “was” because Professor Friedman died late last year, just a few years shy of the century mark in age.
One of the characteristics that made Friedman special was his ability to span both the academic world and the real world. In the academic world he published scores of research monographs, journal articles, and university press books, and, among many accolades, was awarded a Nobel Prize in economics.
But he also brought economics to the everyday person by writing popular books and newspaper articles, making appearances on TV and radio, and giving presentations to noneconomic groups. He was an inspiration to my own career at NCSU.
So what is the contribution of Professor Friedman? It would perhaps take an entire book to adequately cover all his insights and analyses, so let me highlight only three areas that show the diversity and impact of his thinking.
Behind Inflation is Money: Throughout time, inflation has been blamed on many factors—rising energy prices, natural disasters such as hurricanes and droughts, the abandonment of the gold standard, and even credit card debt.
Friedman dismissed all these explanations and said the cause of any sustained increase in prices is simple: too much money in circulation. When the amount of money in circulation is growing faster than the quantity of products and services that money buys, then the excess money will be “soaked up” by higher prices—that is, inflation will occur.
Who controls the money supply in any country? It’s the country’s central bank, which in the United States is the Federal Reserve. Therefore, Friedman argued, it is ultimately the responsibility of the government, via the Federal Reserve, to put a lid on inflation by keeping the growth in dollars in line with the growth in the economy’s production. Managers of central banks around the world have come to regard Friedman’s monetary explanation of inflation as a key guide to their policies.
To Combat Poverty – Send Money: Professor Friedman had a simple solution for alleviating poverty—simply provide poor households with more income. Friedman would have had the IRS also act as the nation’s primary poverty fighter. When a household filing an income tax form was identified as falling below the poverty level, that household would receive an income supplement from the government that could be used to improve its standard of living. He called it a negative income tax.
Of course, such a program is different than curing poverty, which requires adequate education, training, and economic opportunity. Yet curing poverty is a long-run proposition, while alleviating poverty assists people now. The beauty of Friedman’s idea is that it is simple, requires a minimum amount of government bureaucracy, and gets cash in poor people’s hands. Today it lives in the form of the earned income tax credit.
People Look Back and Ahead for Spending: One of Friedman’s earliest contributions was in the area of personal economics. Although his insight might seem trivial, it was really groundbreaking. Friedman concluded that people don’t base their current spending only on how much income they have today. Instead, they try to form some estimate of what their long-run trend in income will be—something he termed permanent income.
So, a young person with relatively low income today but who has great income prospects in the future will live above his means today because he expects higher income down the road. Or, an older person with high income might curtail her spending now because she knows her income in retirement will be much lower.
Friedman has passed from us, but his theories and proposals will be discussed and debated well into the future. Whether you agree with Friedman or not, I think you’ll have to say he was an economist with the power of ideas.
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.