Its Time to Put Milton Friedman Into Proper Perspective

This article describes the legacy of Milton Friedman. He did more than any other US economist to popularize the advantages of markets. Unfortunately, in his zeal to popularize markets he also popularized the view that government was the enemy of markets. Most of the ideas that flow from the Economics Department of The University of Chicago reinforce that theme. For example, rational expectation theory, which dominated macroeconomics for decades, leads to the conclusion that individuals will anticipate the consequences of government policy and take actions which will thwart the intention of the policy. Even if government wanted to fine tune the economy, market responses would keep this from happening. Robert Lucas is one of many economists who argue that our slow recovery from a balance sheet recession is due to the expectations that businesses have about the potential impact of government regulation and higher taxes. The assumption is that businesses would increase investment in an economy with slack demand if government policy were less harmful to their interests.

While markets can provide many benefits, it is foolish to ignore the numerous benefits that government provides which enable the potential of markets to do the magic ascribed to them. Some of these benefits are described in this article, and the example of China is raised to show how government policies have led to the rapid expansion of its economy. The suggestion is that Friedman and his successors would have difficulty explaining China's successful use of industrial policy.

The conclusion of the article is that one of the icons of economics is somewhat diminished because of his failure to see the important role that government plays in the mixed economic systems that actually exist. One can't take criticisms of Friedman to far however, because it is important to the profession to show some reverence for those who have risen to the top of the profession.

I have a view of Friedman that is similar to the view that Keynes had of Ricardo. He suggested that Ricardian ideas came to dominate classical economics because they justified the status quo and ratified the positions of those who dominated society at that time. Friedman was just the right economist during the cold war, and his ideas were useful to those who wanted to turn back the clock to the gilded age that preceded the New Deal and the Great Society programs that stood in the way.