Milton Friedman had very strong and well-known views on the size and role of the government. At his centennial celebration, a panel of economists who represent the best of the generation of Chicago economists that followed Friedman explained the source of his views, and how they would apply to policy questions today.
Applying Economics to Government and Policy
“Milton was not an anarchist, he didn’t believe in no government,” said Edward Lazear, Friedman’s colleague first at UChicago and later at the Hoover Institution. “He was always fearful that government would grow to take on tasks for which it was not well suited. To have a well-functioning government, Milton believed it was important that it be kept small.”
“Friedman famously said, ‘I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.’ That’s because he believed that if taxes were kept in check, the government couldn’t grow out of control,” said Lazear, chair of the Institute’s Board of Overseers.
Lazear presented data showing that for 30 years, spending has exceeded tax revenue by a fairly constant 2.5 percent of GDP—not ideal, but not a terrible deficit, he said. “Projections show that expenditures will skyrocket under pressure from health care spending and other entitlements; if taxes remain at current levels, we’d be running deficits of 10 percent of GDP, and that is unsustainable,” Lazear said.
One solution often put forth is the value-added tax, used in most other developed countries. Friedman testified against it, Lazear said, not because it wasn’t efficient, but because it’s a way government can generate large sums of revenue for unfettered growth of government.
Likewise, Lazear said Friedman wouldn’t be a fan of the government bailouts and increased regulation seen in the wake of the recent financial crisis. As Friedman would have, he turned back to data and showed that in the wake of the recession, the economy has not returned to the steady growth trajectory that has held for more than a century.
“Economic policy is not bringing us back to the traditional growth rate trend line; we’re not even paralleling it. We’re moving in the wrong direction. I’m sure that is something that would not only make Milton nervous but something that he would also argue is due to government actions. If Milton saw these numbers, he would be concerned,” Lazear said, but added, “Milton was always an optimist. He was quick to point out what people were doing wrong, but fundamentally believed things would turn out all right. He believed in the effectiveness of the market to discipline government.”
That belief grew out of a distinctive, scientific approach to economic analysis, according to other colleagues on the panel.
Using Economics as a Tool
“He used economics as a powerful tool to understand the world around him,” said Kevin Murphy, PhD’86, George J. Stigler Distinguished Service Professor of Economics in Chicago Booth and the Law School. “So much of his policy was built on his research, and when you do that, you have a platform on which other people can build.”
For example, Murphy noted, Friedman’s iconoclastic opposition to the VAT tax was rooted in careful analysis of how individuals and governments. “His view was different because he asked the basic question: what’s the incentive?”
Murphy and James J. Heckman concurred that Friedman’s special genius was merge theory and data in a “cycle of knowledge” that led to deep understanding.
“Anyone who knew him knew he was clever, creative, and insightful,” said Heckman, Henry Schultz Distinguished Service Professor in Economics and the College and 2000 Nobel Laureate. “The key thing was not just that he was clever. Friedman was an economic scientist.”
Heckman cited Friedman’s view that the key goal of positive science was development of a theory that will reveal predictions about unknown phenomenon. He used theory to construct a hypothesis and apply it to data. If the theory didn’t fit and explain the data, he went back to the theory, then back to the data in a cycle until he achieved understanding, Murphy said.
Heckman noted, “He really was a Marshallian economist. He believed theory is an engine for discovery of concrete truths.”
“He learned, he failed, he synthesized across a body of data. Everything was rooted in data,” Heckman continued. “That’s what gave his work power.”
This kind of scholarship is difficult and demanding work. “Anyone who tries to produce this serious scholarship finds that it is a legacy that is really hard to follow,” Heckman noted.
Treating Economics as a Science
Hard though it may be, Murphy said we could learn not only from what Friedman did but how he did it.
“He kept his toolkit small. He used a few things he understood, and he used them to the utmost. He had what I would call well-placed confidence in this toolkit, because he used it over and over again for everything he did: writing for Newsweek, for journal articles, for policy statements, for teaching graduate students,” Murphy said. “This was important because it allowed him to get feedback on his ideas across all these dimensions.”
“The striking thing about Friedman to me is that when I see him on Free to Choose or inNewsweek or in an article or on TV, he’s always the same guy. It’s always the interplay between theory and data and always coming back to the same economics,” Murphy added.
Heckman noted that a powerful measure of a person’s impact is their influence of his ideas on others and on the world. By that measure, Murphy noted, “Milton has passed the market test. He has influenced people around the country and around the world; his so-called opponents are influenced by him. He has answered questions about why we see things the way they are.”
“I think Friedman helped create the Chicago School,” Heckman said. “When Friedman talks about what makes Chicago distinctive, comparing it to Harvard, it wasn’t just price theory. It was treating economics as a serious science, not just an extension of mathematics, and applying it to real problems to get some knowledge and answers.”
Moderator Jose Scheinkman, a faculty member at UChicago in the 1970s in Friedman’s last years here, recalled the unparalleled learning experience of listening to Friedman, George Stigler, Gary Becker, Ted Schultz, and others argue economics over lunch at the Quad Club.
Scheinkman, now the Theodore A. Wells ‘29 Professor of Economics at Princeton University, noted, “Kevin, you, and Jim explain why places like the Becker Friedman Institute are important. They are places where people generate ideas; places where policymakers should come and pay attention.”