Zaks Investment Advisory Service

On Milton Friedman

Today, I would like to take a brief detour from our discussion of the financial markets. The last week saw the passing of Milton Friedman, an eminent economist and, not by profession but thanks to the resonance of his ideas, a man of the world. He may be of special interest to us because Friedman came from a family of Eastern European immigrants, founded the Chicago school of economics, and devoted his life to the defense of free markets and society as a whole.

Milton Friedman was born in 1912 to a family of Jewish immigrants from that part of the Carpathian Mountains that changed hands between Austria-Hungary and Czechoslovakia, then the USSR, and which now belongs to Ukraine. He completed Rutgers University and later received training at New York’s Columbia University under the tutelage of future Nobel Laureate Simon Kuznets. He worked at the Department of the Treasury during the war, helping develop financing programs essential for the government’s enormous war spending effort, and after the war ended up at the economics department of the University of Chicago. The most prevalent economic ideas of the time were those developed by the eminent English economist John Maynard Keynes. Keynes believed that in countries with market economies, the government is able to affect the economic situation by raising or lowering budget spending, and thus speeding up or slowing down economic activity. He also believed that it must intervene in the country’s economic life when the markets fail to accomplish their designated roles. It must be remembered that not long before then, the United States, Germany and practically all of Western Europe suffered through the deepest of economic crises, which in the United States was called the Great Depression. The idea that the markets sometimes fail, and that the government must intervene in order to support the economy’s normal functioning, was generally accepted and was not under serious doubt. I would like to remind you that in the post-war years, Western Europe also restored its economy with direct government involvement. And of course, in certain circles, the prestige of the Soviet Union – with its planned Magnit and Norilsk plants and Belomoro-Baltiysk canals – was also extremely high.

But Milton Friedman started working on something that in economics is called “monetarism.” The main (and radical) principle of monetarism is the central role of money in the country’s economy. The central bank controls the amount of money in the economy, and in order for the economy to function normally, the amount of money being supplied by the central bank has to correspond to the demand for money from the so-called economic agents, i.e. you and me and the companies at which we work. The amount of required money, for its part, is mostly decided by economic activity and labor productivity. If there is too much money, then inflation occurs, and if there is too little of it, then the economy falls into recession or, in extreme cases, depression. We will talk a little bit about the central bank’s role in our future programs, but at the moment we are interested in the following: Friedman rejected the idea that the government is able to help and should intervene in the country’s economy. He came to the conclusion that if the money supply in the economy corresponds to its demand, then the markets will manage to handle all the problems in a much more efficiently manner than the government could. And, as a consequence, he decided that the role of the government should be minimal. Friedman formulated the role of government in a wonderful manner. He said: “Progress could be achieved only in an order in which government activity is limited primarily to establishing the framework with which individuals are free to pursue their own objectives.” And also: “The free market is the only mechanism that has ever been discovered for achieving participatory democracy,” in other words, a society in which citizens take an active part in the democratic process. These ideas became the foundation of an economic school of thought that started being called the Chicago school of economics, and which produced an entire constellation of Nobel Prize laureates.

Friedman, who believed that economic analysis could help explain many of the processes occurring in society, was not a politician: he was an economist. In the 1970s, when OPEC nations declared an oil embargo on the United States and Western Europe, and Western economies got caught in a trap of growing unemployment and simultaneously rising inflation (something that Keynesian thought should never occur), Friedman’s analysis placed most of the blame in the situation on our central bank, the Federal Reserve. For his research in this field, Friedman was awarded the Noble Prize in Economics in 1976. By the way, Friedman also showed that the Federal Reserve was primarily responsible for the fact that the country fell into depression in the 1930s: instead of raising the amount of money in the economy, the Federal Reserve sharply decreased it, which led to catastrophic consequences.

Friedman’s idea that the government’s role must be minimal had great influence on two prominent politicians: Ronald Reagan and Margaret Thatcher. One of them, of course, became the president of the United States and for the large part helped liberalize markets and reduce taxes, with resulting multiyear growth for the US economy, while the other became the prime minister of Britain and reformed a collapsing economy, which had been under the trade unions’ control. Friedman, for his part, was a great admirer of Reagan and wrote the following about him: “To Mr. Reagan, of course, holding down government spending was a means to an end, not an end in itself. That end was freedom, human freedom, the right of every individual to pursue his own objectives and values so long as he does not interfere with the corresponding right of others. That was his end in every phase of his remarkable career.”

Friedman worked through the last days of his life. He was 94.

With this, we will draw today’s program to a close. This was Sergey Zaks. Thank you for your attention and until next time.