Page 1 of 3 COMMENT Friedman's misplaced monument
By Henry C K Liu
The University of Chicago's plans, announced in June, to establish an economics
research institute to be named after Nobel Prize-winner Milton Friedman, a
free-market monetarist professor at the university from 1946 to 1976, faces
strong vocal opposition from none other than Friedman's own colleagues in the
Friedman was widely regarded as the intellectual leader of the Chicago School
of monetary economics, which stresses the overwhelming importance of the
quantity of money as an instrument of government economic policy and as a
of business cycles and inflation. He was also an outspoken public defender of
free markets, which he inevitably linked with political freedom.
Friedman was the 1976 recipient of the Nobel/Sveriges Riksbank Prize in
economics. The press release of the award cited Friedman's coining of the term
"money matters" or even "only money matters" as an arresting slogan for
monetarism. On November 17, 2006, one day after his death at age 94, the Wall
Street Journal printed an opinion piece by Friedman entitled: Why Money
The official press release on the award explained the choice of Friedman as
This strong emphasis on the role of money should be seen in
the light of how economists - usually advocates of a narrow interpretation of
Keynesian theory - have, for a long time, almost entirely ignored the
significance of money and monetary policy when analyzing business cycles and
inflation. As far back as the beginning of the fifties, Friedman was a pioneer
in the well-founded reaction to the earlier post-Keynesian one-sidedness. And
he succeeded - mainly thanks to his independence and brilliance - in initiating
a very lively and fruitful scientific debate which has been going on for more
than a decade. In fact, the macro-econometric models of today differ greatly
from those of a couple of decades ago as far as the monetary factors go - and
this is very much thanks to Friedman. The widespread debate on Friedman's
theories also led to a review of monetary policies pursued by central banks -
in the first place, in the United States. It is very rare for an economist to
wield such influence, directly and indirectly, not only on the direction of
scientific research but also on actual policies.
release was factual in some respects and outright inaccurate in others. It is
accurate that Friedman strongly emphasized the role of money. But it is
inaccurate to describe Friedman as having reversed the "narrow interpretation"
of Keynesian theory because "only money matters" is literally a narrowing
spotlight among the broad range of factors that Keynesian theory normally
considers in formulating economic policy, including monetary factors.
It is accurate to say Friedman was an early pioneer in reaction to
post-Keynesianism, but it is not accurate to label post-Keynesianism one-sided.
In fact "only money matters" sounded definitively one-sided to most listeners.
Friedman's reaction to Keynesianism is hardly well-founded, though it is
admittedly reactionary. As the press report noted, Friedman's emphasis of money
is important to the analysis of the business cycle and inflation. But business
cycles are not the economy, only one aspect of it. In fact, Friedman's
fundamental flaw is his fixation on the business cycle as expressed by the
stock market, rather than looking at the whole economy with a wide range of
meta-finance concerns such as agricultural economics, labor economics,
population economics, the economics of war, pollution, development, and so
forth. The list is long and interlinked and any economist ignoring any of part
of the list runs the risk of being one-sided.
The market is merely the transactional record of the economy. Students of the
market economy tend to confuse business, which is transacted in the market, as
the whole economy itself. That is the problem with Business School economists
who really should be called "busi-nomists" rather than eco-nomists because by
definition and by design they are not concerned with eco, a Greek word oikos,
meaning "house". The word describes the complex symbiotic relationships of all
living organisms in relation to their environment in the eco-system. Business
is only a subsystem of the socio-economic ecosystem. The goal of busi-nomists
is to keep the business cycle from recurring crashes even if it means
destroying the economy in the process. To achieve this goal, central banking
This is not to denigrate business experts. All experts, however narrow their
field, perform useful functions, and brilliant experts deserve admiration. It
is just that they should refrain from fantasizing that they are generalists
dealing with the economy. Business exists to make profit for the businessman
and there is nothing wrong with that as long as ethical rules are observed.
Unlike business, the economy exists to enhance progress in civilization. The
former is artificial, the latter is actual. The key problem of the recent
decades of Friedman monetarism has not been that money matters but that it
matters too much.
Friedman had also written extensively on public policy, always with primary
emphasis on the preservation and extension of individual freedom, going beyond
economics. His books, periodical columns, media personal appearances and a 1980
10-part series on Public Television with the grand title of Freedom to Choose,
followed by a second three-part series in 1984 which together commanded more
air time than the 10-part series by Kenneth Clark on Civilization, made
him an influential national opinion molder beyond economics. In time, Friedman
readily transformed himself from the role of a social scientist to that of a
globe-trotting, faith-peddling evangelist of what a disillusioned Japanese
central banker later called snake-oil economics.
In 1988, Friedman was awarded the National Medal of Science by the National
Science Foundation and the Presidential Medal of Freedom by president Ronald
Reagan. Thus encouraged, Friedman went on to publish in 2002 Capitalism and
Freedom, a passionate echo of official calls for extending individual
economic freedom and limiting government action, except in foreign affairs.
Free trade, officially endorsed by pseudo-science, has since become the central
focus of US "transformational" foreign policy to spread freedom around the
world. It is Adam Smith turned upside down.
President George W Bush has defended the free-trade agenda in moralistic terms.
"Open trade is not just an economic opportunity, it is a moral imperative," he
declared in a May 7, 2001 speech. "Trade creates jobs for the unemployed. When
we negotiate for open markets, we're providing new hope for the world's poor.
And when we promote open trade, we are promoting political freedom." While such
claims remain highly controversial when tested by actual data, it explains why
Friedman, a free-trade economist, was awarded the Presidential Medal of
Phyllis Schlafly, a syndicated conservative columnist, responded three weeks
later in an article "Free Trade is an Economic Issue, Not a Moral One". In it,
she notes that while conservatives should be happy to finally have a president
who adds a moral dimension to his actions:
The Bible does not instruct
us on free trade and it's not one of the Ten Commandments. Jesus did not tell
us to follow Him along the road to free trade ... Nor is there anything in the
US Constitution that requires us to support free trade and to abhor
protectionism. In fact, protectionism was the economic system believed in and
practiced by the framers of our Constitution. Protective tariffs were the
principal source of revenue for our federal government from its beginning in
1789 until the passage of the 16th Amendment, which created the federal income
tax, in 1913. Were all those public officials during those hundred-plus years
remiss in not adhering to a "moral obligation" of free trade?
argues Schlafly, whose views were noteworthy because US politics was at that
time enmeshed in a struggle between strict-constructionist paleo-conservatives
and moral-imperialist neo-conservatives. Despite the ascendance of
neo-imperialism in US foreign policy, protectionism remains strong in US
political culture, particularly among conservatives and in the labor movement.
And now in 2008, a new populism is rising against the US version of free trade.
Redefining humanist morality, the US asserts that world trade is a moral
imperative and as such free trade promotes democracy, political freedom and
respect for human rights in trade participating nations. Unfortunately, income
and wealth equality are not among the benefits promoted by free trade. Even if
the validity of this twisted ideological assertion is not questioned, it
clearly contradicts US practice of trade embargo against countries the US deems
undemocratic, lacking in political freedom and deficient in respect for human
rights. If trade promotes such desirable conditions, such practice of linking
trade to freedom is tantamount to denying medicine to the sick.
Love is blind and infatuation disguises faults as virtues. As Rudyard Kipling
fell in love with the pageantry of colonialism and saw racial exploitation as
the "white man's burden", Friedman fell in love with colonial Hong Kong,
seduced by the wine-and-dine hospitality of its colonial masters and elite
compradors before China reclaimed sovereignty of it in 1997. Friedman mistook
Hong Kong's colonial economic system as a free market, despite Hong Kong's long
history of highly orchestrated colonial command economic structure. The Hong
Kong economy that Friedman loved prospered from Cold War geopolitical tension,
not free-market principle. The Asian financial crisis that broke out in
Thailand on July 2, 1997, one day after China took back Hong Kong, put
monetarist market fundamentalism in the public opinion doghouse in Asia.