The U.S. Needs Milton Friedman More than Ever

In compiling a list of the greatest economists of all time, Milton Friedman’s name will surely be one of the first to come to mind. There is of course his technical work, such as his famous “Monetary History of the United States” (co-authored with Anna Schwartz), that established him as the chief architect of the theory of monetarism.

But more important was his ability to explain in clear layman’s terms the basic principles of our economic system, how it creates wealth for all members of society, and the importance to a successful society of individual liberty. If one were to pick two books that our country’s leaders should read, they would be his “Capitalism and Freedom” and “Free to Choose.” Those books are a treasure trove of solutions to the social problems of today.

Freidman wrote the first of these in 1962. At a time when the U.S. was about to launch The Great Society, as is the case today, people were looking to the federal government to improve their lives. Friedman offered an alternative based upon market forces and individual liberty. His cogent examination of the effect of incentives on people’s behavior led him to offer solutions to societal problems that were both insightful and effective.

He offered ideas such as allowing individuals to invest in the education of others, so poor children would be able to obtain funding for high school and college in return for the investor receiving a fraction of their future earnings. This innovative idea would be much more successful than Pell Grants in encouraging and enabling students to finish high school and graduate from college.  

Today, in the year Friedman would have turned 98 years old, we are even more in need of a resurgence and rediscovery of his ideas. Examples of this need abound in the economy, education and other realms of public policy.

The stimulus package was supposed to keep the unemployment rate below 8 percent. Instead we have unemployment between 9.5 and 10 percent and $800 billion added to the federal debt. The news media and liberals have even pushed for a second stimulus package. But thirty years ago Friedman explained that fiscal policy is not an effective method of reducing unemployment. Had the U.S. followed Friedman’s advice, we would be less burdened by debt and further along in economic recovery. 

In education, his argument for vouchers as a mechanism of moving public education from a socialist system to a market system has found traction in the last decade. Nonetheless, voucher proposals are very difficult to pass due to the power of teachers unions. As a consequence of not following Friedman’s advice thousands of children in urban schools have lost their chance for a good education.   

Due to a massive 2,000 page health care bill, the federal government is now managing the entire health care and health insurance industry. Freidman explained in a cogent article in “The Public Interest,” that health care costs are so high and customer satisfaction with the system is so low because government intervention has pushed us into an employer and government-based third party payment system.

In typical Friedman fashion, he forced readers to observe that advances in technology in every area other than health care have led to reduced costs and increased satisfaction with the product or service and to ask why this is so. He asked why we single out medical care for tax-free status. Food is more important than medical care and yet we do not exempt the cost of food if provided by the employer. He must be rolling over in his grave at the realization that the new health care legislation will only compound the problem of third-party payment.

Even more recently, the government has tightened its grip on the financial industry. President Obama recently signed a 2,300 page bill granting the federal government control over the entire sector. Friedman famously wrote that the Federal Reserve was not capable of determining how to manipulate the credit markets effectively due to its inability to know the information necessary to conduct effective monetary policy. So he argued that the Federal Reserve should be constrained by rules.

Friedman certainly would have argued strenuously against giving the Federal Reserve and Securities and Exchange Commission the enormous powers that they received under the financial regulation legislation.

In “Free to Choose,” Friedman and his wife, Rose, argued for a constitutional amendment requiring a balanced budget. Now as we see deficits of nearly $1.5 trillion staring us in the face for at least the next few years, this suggestion too has gained new relevance.

Concluding “Free to Choose,” he wrote:

“The two ideas of human freedom and economic freedom working together cane to their greatest fruition in the United States. Those ideas are still very much with us. But we have been straying from them.  We have been forgetting the basic truth that the greatest threat to human freedom is the concentration of power, whether in the hands of government or anyone else. We have persuaded ourselves that it is safe to grant power, provided it is for good purposes.”

Some thirty years later those words ring true again. Our hope should be that his final statement also cones true:

“Fortunately, we are waking up … Fortunately, also, we are as a people still free to choose which way we should go—whether to continue along the road we have been following to ever bigger government, or to call a halt and change direction.”

Gary Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College and a Business & Media Institute adviser.