Milton Friedman was a highly original economic thinker. But even in the one area he was proved correct, his work is likely to be outshone by that of another economistby Paul Ormerod / December 16, 2006 / Leave a comment
Milton Friedman, John Maynard Keynes and Friedrich Hayek: the three great famous economists from the middle decades of the 20th century. What were the similarities and differences between them, and how do they stand in the discipline of economics as it develops in the 21st century?
All three were tremendous self-publicists. Keynes had a long involvement in public policy advocacy. Hayek’s 1944 book The Road to Serfdom sold an incredible 2m copies. Friedman’s Free to Choose was the bestselling non-fiction book of 1980. All were iconoclasts, never afraid to challenge the conventional wisdom, whether within academia or more widely.
Many of the obituaries of Friedman have focused on his work on monetary policy, on his assertion that inflation, in the long run, is purely a monetary phenomenon. But his monetary work was just one of three areas explicitly mentioned in his Nobel prize citation in 1976. Just as well, because economists and policymakers have subsequently qualified Friedman’s hypothesis very substantially. His theory of consumption, probably Friedman’s major academic contribution, implied that as rich people save a higher proportion of their income than poor people, the proportion of overall income saved should rise as average incomes do. But this theory has even less empirical support than Friedman’s monetary work. If anything, personal savings as a proportion of income have fallen since Friedman put forward his hypothesis in 1957.
Friedman’s final Nobel citation was for demonstrating “the complexity of stabilisation policy.” It is in this area where his relationship to Hayek and Keynes is most instructive. Friedman argued that it is very difficult for governments to control fluctuations in output and employment. He developed this view at a time when the overwhelming consensus was that he was wrong. These short-run fluctuations, the “business cycle,” have been a fundamental feature of western market economies ever since the industrial revolution. But contrary to popular perception, Friedman’s position here was very similar to that of both Hayek and Keynes.
In his General Theory, Keynes argued that firms’ investment decisions were subject to great uncertainty: “the outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield [of a new investment] have to be made.” He emphasised that, in the context of the booms and busts of western economies, “it is our innate urge to activity which makes the wheels go round, our rational selves choosing between alternatives…