The Hindu Business Line : Milton Friedman: Radical and visionary economist

Milton Friedman, sophisticated economist, towered above his contemporaries in the sweep of his contributions, the depth of understanding and the radical vision that informed his multi-faceted interactions in public debates.

Milton Friedman, the American Nobel Prize winner, died on 16th November 2006 at the age of 94. Rich tributes have been paid to him by the economic cognoscente of the world. He was perhaps the most influential economist of the last half century. He towered above his contemporaries in the sweep of his contributions, the depth of understanding and the radical vision that informed his multi-faceted interactions in public debates.

His main attribute, which endeared him to his many admirers, was his clarity and astute inference from observations of human behaviour, both at the individual and collative levels. He was a believer in the free market and pleaded for the state to withdraw from all but essential functions.

Friedman is perhaps best known for his monetarist theories, in which he famously attributed to money the explanatory power for all inflation. This resulted from his epoch-making study of the monetary history of the United States. Particularly, he laid stress on the role of money in economic activity.

While he pleaded for a definitive role for money, Friedman did not prescribe any rule by which central banks should govern their behaviour. He had, however, to live to learn that economies behave in different ways. He found that the monetary aggregates were losing their value as guiding figures as there were many financial innovations that led to their becoming relatively irrelevant.

Indeed, the Fed Reserve has reportedly stopped publishing details of monetary aggregates with the frequency it used to. Thus, while Friedman's ideas on money supply gathered strength, central banks started behaving differently. They have begun to focus on inflation targeting instead.

Friedman was too sophisticated an economist to be discouraged by such developments. He recognised that Alan Greenspan had, indeed, contributed a great deal, notwithstanding that he did not quite follow Friedmanite logic. Friedman's contribution was to make people rethink these basic assumptions.

Belief in market forces

Above all, Milton Friedman believed in the withdrawal of the State. He was as passionate as Hayek was in advocating the dominance of market forces. It is, however, instructive to know that notwithstanding the general acceptance of Friedmanite "nuggets" of wisdom by policy-makers, the State's role has not decreased in most developed economies.

A recent issue of The Economist notes that since Ronald Reagan — the American President most close to Friedman — left office, the US Government has grown as fast as the GDP. The state's slice of GDP has grown to 36.6 per cent in 2006, up from 36.2 per cent 17 years ago. Similarly, the public sector has grown in Europe's economies as well.

One of Friedman's accomplishments was his successful fight against the draft — conscription into the army which the US had resorted to. He served as a member of the US President's Commission on the subject. He played an important role in getting the US to give up the draft. After all, he argued, the army should be able to get its recruits at market wages, not force their entry into fighting.

One of Friedman's ideas that has not quite taken off is that of education vouchers which are given to parents who can use them to finance their children's education. This has met with resistance from the Teachers' Union, even in the US. There is no chance that it can find acceptance in emerging market economies.

India connection

The Friedmanite contributions to economic theory and practice are many. I propose to devote this piece to his brief but important encounter with India. In his informative and entertaining memoirs, Two lucky people, co-authored with his wife Rose Friedman, the economist recounts the circumstances which led to his visit. In 1955, Arthur Burns, Chairman of the US President's Council of Economic Advisers, asked Neil Jacoby, a member of the Council and Dean of the UCLA School of Business, together with Milton Friedman to advise the Indian Government.

Dr I.G.Patel in his memoirs has an interesting comment on this. It was a counter-point to the seemingly strong Leftist intellectual influence on the Planning Commission at the time.

In this regard, Milton Friedman has a puckish comment on a certain conversation in which Galbraith figured. Galbraith had participated in a dinner at the time in Geneva, which P.C.Mahalanobis attended, wherein he had mentioned that Milton Friedman was being sent by the US Administration to India to advise the Planning Commission.

Galbraith's comment — as quoted by Friedman from his memoirs — is instructive: "I responded thoughtfully to the news of Milton Friedman going to India — noting that asking Friedman to advise on planning was like asking the Holy Father to counsel on the operations of a birth control clinic. Mr Mahalanobis, who was pleased by my metaphor, proposed that I (Galbraith) come to India".

Friedman quotes this part of Galbraith's narrative to comment that a rather amusing side-effect of Friedman's visit to India was that he was indirectly responsible for John K. Galbraith's becoming Ambassador to India!

Diagnosis

Friedman made his visit to India after a long journey via Hong Kong and Baghdad. He was assigned to the Planning Commission. The fruit of his consultancy was a memorandum he wrote in 1957. The note was not officially published but leaked to the Press. Its main headings give us a flavour of Friedman's comments. "Overemphasis on capital output rates; Attempt to do too much in the public sector; Attempt to control private investment in too rigid and detailed a fashion; Protection to inefficient methods of production; Coddling of private industry in certain directions combined with severely restrictive controls in other monetary policy - erratic policy; and Deficit financing".

In his concluding note, Friedman wrote "I consider the fundamental problem for India is the improvement of the technical quality of her people, the awakening of their hope, the weakening of the rigid social and economic arrangements". The report obviously referred to limits on deficit financing and the threat of inflation. Surprisingly, the report got little reaction from Government at the time.

Incidentally, Dr Patel, in his interesting memoirs, makes no reference to the memorandum, though he speaks of his meetings with Friedman with great affection and respect. Apparently, Friedman's remarks did not fall on sympathetic ears at the time. Milton Friedman refers, however, to the comment of B.R. Shenoy, who was a member of the Advisory Panel of economists, who vigorously expressed his dissent to the plan and its assumptions. His remarks were similar to those of Friedman, although they did not obviously share their thoughts.

Friedman noted in his memoirs that India has come to accept some of these ideas since 1991. There is a wistful reference to what might have been had the advice of Friedman, the original revolutionary, been heeded. Friedman's encounter with India's planning process was brief but important not in what it achieved but what it did not. It took decades for India to rebalance its economy and it took a crisis to knock sense into the country's policy-makers, Friedman's advice notwithstanding.