A Giant of Economics

Milton Friedman belongs in a list of the most important and influential people of the last 100 years.

He promoted what were then new ideas in the 1950’s – free markets and personal liberty. He argued that economic freedom was good economics and was also necessary for political freedom. At that time, remembering the great depression (unemployment 18 per cent), many Americans were suspicious of free markets.

Friedman’s philosophy influenced many major achievements including the move by many governments to sell nationalised industries, the conversion of China to a market economy, the fall of the Berlin wall, the successes of Margaret Thatcher and Ronald Reagan and the conversion of the Australian economy from a protectionist society to a prosperous one via the removal of protectionism, floating of the dollar and demolishing state ownership.

Many of his ideas have been adopted and many are still being debated – school vouchers, negative income tax and a volunteer army.

He won the Nobel Prize in 1976. His number one huge contribution to economics was his explanation of the Great Depression.

At the time it was believed to be an example of capitalism’s inherent instability. Friedman showed the Federal Reserve caused the depression through mistakenly tight money policies that led 40 per cent of U.S. banks to fail. Friedman’s ideas essentially disputed the ideas of John Maynard Keynes who relied on fiscal policy (government spending and taxes) to manage the economy, whereas Friedman believed monetary policy (interest rates and the money supply) were the keys.

Remember that economic slumps rarely become disasters. Since the late 1940’s, the United States has suffered 10 recessions –

* On average, they’ve lasted 10 months, and

* They have averaged peak monthly unemployment of 7.6 per cent,

* The 1973-75 recession lasted 16 months and had peak unemployment of 9 per cent, and

* The worst 1980-81, lasted 16 months and had peak unemployment of 10.8 per cent.

The U.S. is almost certainly in a recession now, but joblessness at 6.1 per cent in September, would have to rise spectacularly to match those highs.

In the stock market, since the late 1940s, there have been 10 previous bear markets (i.e. declines of at least 20 per cent) as defined by S & P’s 500 Index –

* The average decline was 31.5 per cent,

* Those of 1973-74, 2000-02 and 2007-08 were nearly 50 per cent.

This compares with the Great Depression, where by the low point in July 1932, stocks were down almost 90 per cent. Yet, by 1940, unemployment was still at 15 per cent and not responding to self-correcting market mechanisms, nor government policies. At that time Keynes theories held sway. Friedman changed all that.