Common Sense Economics With Milton Friedman

Milton Friedman, (born in July, 1912, New York) was an American economist and an educator. He was best known for his ideas regarding monetarism and common sense economics, and he was also awarded the Nobel Prize for Economics in 1976.

Friedman grew up in Brooklyn, New York, until his family moved to New Jersey where he would also win a scholarship study mathematics and economics at the Rutgers University.

After receiving his bachelor’s degree in 1932, he moved to the University of Chicago to continue his studies in 1933. He finally finished his studies in the Columbia University, where he received his Ph.D. in economics in 1946. He became a full professor in 1948, and was later named the Paul Snowden Russell Distinguished Service Professor of Economics in 1962. Finally, he became an emeritus professor in 1983.

He received his Nobel Prize in 1976 as he retired from his position in University of Chicago. And in 1977 he became a member of the The Hoover Institution (the same institution Thomas Sowell was/is part of).

There’s more to Friedman’s story, of course, but I’ll leave it up to the reader to look it up if they so choose.

What this article will focus on are some of the lectures / speeches given by Milton Friedman, and what we can possibly learn from them even today. And that’s where we’ll move next.

Money And Inflation

But since what one man sells is what another man buys, that’s a neat trick if you can do it.

This excellent 1978 speech was aptly timed. The US experienced a massive spike in inflation during the 1970’s. First from 1972 (roughly) to 1975 (this period also contained the 1973 ‘oil shock,’ which then led to the 1979 oil crisis) and then from 1976 to 1980.

The reason for this was two-fold: President Nixxon’s decision to end the Gold-Backed US$ in 1971, and bad overall monetary policy.

CPI over time

The inflation beast was finally tamed with the right policy decisions. It left a burning memory of petrol station lines and ever-increasing price increases of commodities in the minds of anyone who lived through that era.

Unfortunately, it seems like history is about to repeat itself once again. Perhaps it would be prudent to listen to what Friedman had to say about the topic of inflation.

What is the cause of the disease (disease being inflation)?

“The first step to understanding the cause of inflation is to recognize that it is always and everywhere a monetary phenomena. It is always and everywhere a result of too much money...

Moreover, in the modern era, the important next step is to recognize that today governments control the quantity of money.”

From this we can gather that inflation is caused by the increase in monetary supply. The governments and central banks control how much currency is being printed at any given time.

This is important to keep in mind, because nobody likes to admit what they’re doing or have done is wrong. Not us as individuals, and not even as larger organisations. Governments are no different in this regard; they do not want to admit their mistakes.

The government(s) will always deflect and try shift the blame on something or someone else: the greedy businessmen, the trade unions or even the consumers themselves. Both capitalism and communism are also blamed. Anything but themselves. Yet, we also know that the only entity that has the ability to (legally) print more currency, are the governments and the central banks.

“Inflation is not a capitalist phenomena or communist phenomena. It’s a printing press phenomena.”

Without the constant printing of the press we would either live in a barter economy or in a deflationary scenario, so the press serves a function. It is the misuse of the printing press that causes problems.

What are the causes for rapid increases in monetary supply?

“There has never in history, been an extreme increase in quantity of money without inflation.”

The problem is that the entity that has the ability to print currency out of thin air also has their own interest in mind, and they also have their own bills to pay.

Friedman goes on to explain that it was previously possible to have inflation be caused by new discoveries or new methods of obtaining gold. As currencies were backed by gold, the amount of gold available directly affected the value of currencies. That, however, is yesterday’s news. Currencies are not backed by gold anymore, so it can’t be used as an explanation.

Today the reason for inflation is strictly due to currency printing by the governments. If currency creation creates inflation, and people can agree it isn’t always a force for good, why do governments still do it? In order to pay for government spending.

“If government spends more than it takes in, in the form of things that is called taxes, it has to meet the difference either by printing money or by borrowing from the public at large.”

But who’s really to blame for inflation? It is the people (usually) who ask for free handouts from the government, and the government obliges. Sometimes politicians promise their voters free goodies in the form of social security payments. People do this, while also not expecting to have to pay for any of the free goodies in return.

That, however, is not true. People will have to pay for the governments spending. There are two different forms of payment all of us will have to make:

  • Payment through taxes
  • Payment through inflation

Inflation is a form of taxation, but because the government doesn’t have to suffer the consequences of their policy mistakes (at least not immediately), it is the better form of taxation from their point of view. So they will inflate rather than tax more whenever they can in order to pay for government spending.

This is because when the government spends more than it creates (this will always be the case… governments don’t need to turn in a profit) it will have to make up for the difference by taking from the people who create wealth.

“Printing money is a very attractive device, because inflation from the point of view of a person sitting in congress or the senate, is a wonderful tax. He doesn’t have to vote for it…

…(which means) inflation is a tax that is posed without representation.”

How do you cure the disease?

Simple. In order to stop inflation, you have to have the government spend less and print less. This is the only way to stop inflation.

But the real problem is not figuring out how to cure inflation, the real problem is having the political will to do so.

What are the side-effects of the cure?

Friedman uses the analogy of an alcoholic when explaining what the situation is:

When an alcoholic starts consuming their, it feels good at first, but come the next morning, it won’t feel so good anymore.

The same goes for currency printing. It works wonderfully at first. The government gets to pay down their obligations and there’s growth for a short period of time. The hangover that results from printing currency, on the other hand, comes in the form of inflation.

Same goes for the cure. When an alcoholic starts curing the problem, the bad feeling comes first. The good feeling comes after you’ve cured the problem for good.

What happens if a government attempts to stop inflation? Initially, it will be a painful experience for everybody, because slowing down the inflation slows down the economy as well.

The other problem with stopping inflation is because it is unclear whether anyone really wants to stop it. This is because if you stop to ask people whether inflation is good or bad, they’ll usually say “yes, its bad.” But when you explain to them that if inflation stops, the price of their house and stock valuations would also crash in the process, they’re not so keen on halting the currency printing.

“When most people say they want to stop inflation, what they mean is that they want to price of things they buy to go down, and the prices that they sell to go up. But since what one man sells is what another man buys; that’s a neat trick if you can do it.”

What will happen if we don’t cure the problem?

This is yet another simple question to answer: the prices of things will continue to go up indefinitely, the rich will get richer while the poor will continue to get poorer and the economy will, in the long run, suffer greatly. It will become more and more difficult to “escape the rat race” or to buy a house, or anything else for that matter. Wages will also not keep up with inflation. And, eventually, inflation will lead to higher taxes (on top of inflation itself already being a tax). This will continue until hyperinflation ultimately destroys the value of the currency and a new (usually gold backed) currency is put into place.

That’s enough on this topic. I recommend you watch the entire speech if you’re interested in hearing more, but for now we must move on to another topic.

Is Capitalism Humane?

This is one of Friedman’s more well-known speeches. He talks about the differences between socialism and capitalism, and how the intellectual debate (even by then) had shifted its focus from talking about merely economic issues to something completely else.

“The problem with this approach, the problem with trying to interpret and analyse a system, either pro or con, in terms of such concepts as morality of the system or the humanity of the system, whether capitalism is humane or socialism is humane, or moral or immoral. The problem with that is that moral values are individual. They are not collective.

Friedman begins the speech with a joke:

‘I’m sure many of you have heard the old story about the two Poles who met one another.

One Pole said to the other: “tell me, do you know the difference between capitalism and socialism?”

Then the other Pole said: “no, I don’t know the difference.”

And the first Pole said: “well, you know, under capitalism man exploits man.”

The other fellow shook his head (in agreement).

“Well under socialism,” he said, “it’s vice versa.”‘

Already by the time this speech was given, the idea that socialism offered a more efficient form of controlling economics (over capitalism) had already died. Friedman brings up the The Great Britain, Russia and some other countries that decided to adapt this form of government (+ the postal office) as examples of the poor results offered by central planning and control.

“There is widespread opposition for capitalism as system of organisation, and there is widespread support for some vague system labelled socialism.”

Friedman begins talking about Germany (one of the best examples at the time). How it suffered through the 1930’s under Nazi regime, and how it began to prosper after the Second World War. After the war, the German people experienced rapid increase in living standards; enormous increase in personal income and well-being.

Yet, despite Germans having experienced the horrors of living under a totalitarian state and then seeing the contrast of living under free market, the intellectuals in the country still support the ideas of collectivism. Some would say those beliefs have only strengthened over time.

“…a very large portion of the intellectuals, those who write for the newspapers, those who are on the television and so on, are fundamentally anti-capitalist in their mentality. And the question is… why?”

Friedman goes on to talk about Igor Shafarevich’s essay in the book From Under the Rubble (edited by Aleksandr Solzhenitsyn). In his essay, Shafarevich talks about the history of collectivist (socialist) ideas, and the death wish of an individual and how this death wish can manifest itself also in larger organisations, and even nation states. Shafarevich argues that this death wish, the idea of death of mankind (the death of all humans), evokes a response in the human psyche and can unite people – and so it is social force.

…The impulse toward self-destruction may be regarded as an element in the psyche of mankind as a whole

Socialism is one of the aspects of this impulse of mankind toward self-destruction and Nothingness, specifically its manifestation in the sphere of organizing society.

Igor Shafarevich, The Socialist Phenomenon

Judging by what I see happening around me today, it does seem like this ideology is heading towards self-destruction of the society, and possibly the end of the entire human race. Yes, it sounds insane to any rational person, but I guess people in the position(s) of power aren’t exactly rational. Also, I’m kind of glad to hear someone refer to socialism as a death cult.

If you can, you should read “From Under The Rubble” and other Igor Shafarevich’s essays.

That being said, Friedman doesn’t fully agree with Shafarevich’s point of view (though he may be right). He prefers a much simpler analysis. The problems caused by collectivism are caused by these simple reasons:

  1. The supposed emphasis on moral values
  2. Ignorance and misunderstanding about the relationship between moral values and economic systems

He goes on to say that the people imposing certain moral values on others, more often than not, do not have economic problems themselves. They are not part of the masses.

“The problem with this approach, the problem with trying to interpret and analyse a system, either pro or con, in terms of such concepts as morality of the system or the humanity of the system, whether capitalism is humane or socialism is humane, or moral or immoral. The problem with that is that moral values are individual. They are not collective.”

Friedman then mentions that since it doesn’t make sense to look at a system from a moral point of view, we should instead direct our attention to looking at what the results of each system are. We have plenty of examples of collectivism and socialism destroying social systems. Then we have the idea that capitalism supposedly destroys systems once it reaches its end point.

The idea that centrally planned and controlled system work is a myth. Worse than that, its a myth that has been tested over and over again, and it always fails. When people are free to make their own choices where they can go and what they can buy or sell, it seems to lead to a more prosperous society in the long run.

Collectivism doesn’t work, ever.

This was just a small snippet from the entire speech. Once again, I recommend you watch the video in its entirety. We’ve got one more video to go through.

I, Pencil

In this short, yet famous clip, Milton Friedman talks about how no one in the world can make a pencil by themselves.

The wood from which the pencil is made, comes from one part of the country. To cut the wood, it took a saw to cut it. The make the saw, it took steel to make it. To make the steel, it took iron ore. The graphite used in the pencil comes from a different country altogether. And so does the rubber, the brass, the paint and the glue used to make the pencil. Thousands of people around the world joined together to create a single pencil.

See, this is how free markets work. Different people from all around the world come together to create something. They are all motivated by profits and the chance at improving their own living standards. It doesn’t matter what their personal beliefs are, what language they happen to speak or what the colour of their skin may be.

That is why the operation of free markets is essential. Not only to promote productive efficiency, but also to foster harmony and peace among the people of the world.

This concludes the article. I hope you got something out of it.

You can find many of Milton Friedman’s interviews, lectures and speeches online for free. I highly recommend all them.

An extra video

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