Milton Friedman was the leader of the Chicago School of Economics at the University of Chicago. Following his death in November 2006 at the age of 94, The Economist wrote that he was “...the most influential economist of the second half of the 20th century…possibly of all of it.”
Fan of Free Market Capitalism
Friedman studied such mysterious topics as consumption theory and stabilization policy, and won the Nobel Prize for Economics in 1976 for his work in these areas. However, Friedman is known more for his theories about the place where politics and economics meet.
Friedman was a passionate believer in unrestricted capitalism. He was scornful of the ability of government to provide services for people, once saying, according to Kerry Stirton writing in The Globe and Mail (January 16, 2009), “If you put the federal government in charge of the Sahara desert, in five years there’d be a shortage of sand.”
The core of Milton Friedman’s theories is that the free market, motivated by profit and self-interest, is capable of solving all economic problems. Governments should get out of the way and let the creative force of capitalism perform its magic.
Friedman’s Ideas were Unpopular at First
He started writing about his faith in capitalism early on. In 1946, he co-authored a pamphlet entitled “Roofs or Ceilings.” In it he argued that government-imposed restrictions on rent lead to a shortage of rental housing; developers will not build rental properties if they must charge government-dictated rents. The point of the essay was to ask the public if it wanted a “ceiling” on rents or a "roof" over their heads. According to Friedman it was not possible to have both.
At the time, just after the Great Depression and the Second World War, there was wide acceptance that government had a major role to play in the economy. Milton Friedman’s pro-capitalist view was definitely a minority one; so much so that one reviewer, quoted by The Economist (November 23, 2006), wrote “Economists who sign their names to drivel of this sort do no service to the profession they represent.”
Thatcher and Reagan Converts to Friedman’s Theories
However, 30 years later there were plenty of influential people who though Friedman was on to something and it wasn’t drivel.
Britain’s Prime Minister Margaret Thatcher and U.S. President Ronald Reagan were firm believers in Friedman’s ideas. They accepted as gospel truth Friedman’s dictum that the best government was the smallest government. Thus began an era of privatization and deregulation.
Shortly after his death, Lady Thatcher was quoted by The Telegraph (November 17, 2006) as saying, "Milton Friedman revived the economics of liberty when it had been all but forgotten...I shall greatly miss my old friend's lucid wisdom..."
Under various socialist regimes the British government had come to own the coal, steel, oil, and electricity industries, several auto companies, the railway system, the telephone service, a major airline, and much more. These were all sold off to private enterprise by Thatcher. Reagan was not as radical, but he did privatize a rail freight business, Conrail, and Fannie Mae.
Thatcher and Reagan Cut Regulation
Both leaders also heeded Friedman’s advice to cut government red tape. In 1982, Ronald Reagan signed into law the Garn-St. Germain Depository Institutions Act. This deregulation of the financial industry was recommended by Reagan’s advisers, one of whom was Milton Friedman.
Economist Paul Krugman, writing in The New York Times (May 31, 2009) says this bank deregulation “ended New Deal restrictions on mortgage lending - restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.”
Families began to pile on debt on a scale that would have been impossible if regulations had remained in place. Eventually, overstretched borrowers ran into trouble and began defaulting on their loans. “These defaults,” wrote Krugman, “in turn wreaked havoc with a financial system that - also mainly thanks to Reagan-era deregulation - took on too much risk with too little capital.”
And, it’s all tied to the economic theories of Milton Friedman and the people who followed his advice.
