MILTON FRIEDMAN - A CRITIQUE

Milton Friedman's numerous treatises have been, hitherto,

criticized, debated, and analyzed many times and by many people.

However, these evaluations were mostly done in relation to one

single work or one aspect of Friedman's writings. Few, if any,

have taken all of his publications and treated them as an overall

composite theory. The necessity for doing so stems from the manner

with which one deals with the nature of economics. If one holds

economics to be equivalent to the physical sciences, then each

publication is an entity in and of itself�9 However, since economics

is a social science, one theory is related and dependent on another.

Consequently, to fully understand the economics that Friedman ad-

vocates, it is necessary to analyze simultaneously all of his theo-

ries and publications. The purpose of this paper then, is to

convince the reader that Friedman's treatises were written, not

merely on an economical analytical basis, but rather as a justifi-

cation for his philosophical beliefs. In addition, I will deal

with the validity of Friedman's works.

In order to criticize any economic theory or work, some means

of appraisal must be adopted in order to determine the validity of

the proposed theory. Relevant to the problem of validity is the

meaning of economic theory. The system to be used throughout this

paper is the one proposed by Leo Rogin in his book, The Meaning

and Validity of Economic Theory. Thus,

�9 . . the objective meaning of a theory is to be discovered in the uses to which it is put in the sphere of economic policy, the objective meaning of a giyen theoretical model . . . will vary over time.

Since Friedman's publications are recent, there may be a slight,

if indeed any, variation of the objective meaning of his treatises.

In addition, we should also concern ourselves with the strategic

factors. A strategic factor is ". . . some institutional aspect of

human enterprise which has become a central public issue, drama-

tized by politics, as expressed in projects either of reform or of

iLeo Rogin, The Meaning and Validity of Economic Theory (New York: Harper and -- - ~ , . Brothers Publlshers, 1956) p. 13

42

,, 2 revaluations.

tion system.

of a theory:

The theory must be judged invalid if the historical facts which are relevant to the practical program reveal the disturbing element to be perversions of the normal economy which either cannot be reformed or would, if reformed, introduce other elements

3 involving perversions of an equal magnitude.

This then is the appraisal system which I will use to criticize

Milton Friedman's works. In the process of the evaluation I will

at times refer to one or other of his theories and in particular

to his monetary theory.

As a conclusion to his monetary theory, Friedman states that

monetary velocity is stabler than the investment multiplier. In

order to analyze velocity, it is necessary to look at the factors

influencing the demand for money. Friedman claims that the demand

for money is determined by the following factors:

national income in constant prices; the fraction of wealth in nonhuman form (or, alternatively, the fraction of income derived from property); the expected nominal rate of return on money; the ex- pected nominal rate of return on fixed-value secu- rities, including expected changes in their prices; the expected nominal rate of return on equities, including expected changes in their prices; the ex- pected rate of change of prices of goods and hence the expected nominal rate of return on real assets; and whatever variables other than income may a~fect the utility attached to the services of money.

Due to the fact that the demand for money is limited to a number

of explicit variables, Friedman postulated that it is a predictable

and stable function. He then sets out to compare the stability

of the demand for money with the stability of Keynes's consumption

function. He defines consumption as the total of two components:

permanent and transitory consumption. The permanent consumption

is stable over time while the transitory consumption varies but

The meaning is merely the first part of the evalua-

The second and the more important part is the validity

2Rogin, p. 13.

3Rogin, p. 8.

4Robert J. Gordon, Milton Friedman's Monetary Framework: A Debate with His Critics, ed. (Chicago: The University of Chicago Press, 1974), p. 13.

45

averages out to zero. As it stands today there is an increasing

amount of data to measure the permanent factor of consumption.

However, there are no data or measurement possibilities of the

transitory part of consumption. For this reason, the consumption

function is less stable than the demand for money. Since the

consumption function determines the investment multiplier and since

the demand for money determines the velocity of money, necessarily,

if the above is true, monetary velocity is more stable than the

investment multiplier. Consequently, monetary policy should have

precedence over fiscal policy. However, Friedman places no faith

in the possibility of discretionary macroeconomic stablilzation

policy. From his works "it is implied that policy makers are not ,, 5

quite capable of behaving rationally in the interests of society.

Hence, his recommendation is to increase the money supply constantly

by a fixed rate without any human interference. He sees the tasks

of the monetary authorities as to: "(i) set an external limit to

the amount of money and (2) prevent counterfeiting. If these tasks

are carried out properly, a stable monetary framework will result. ''~

However, I cannot agree with his conclusions and recommendations

for a number of reasons. First, Friedman does not claim that any

one variable in his demand function for money is of primary im-

portance. Thus, in fact, he sets up a tautology. That is, he

introduces all the variables that have an effect on the demand for

money, including a general utility variable that takes into account

any variable he left out, and by definition it is true. But, such

a cumbersome function is impractical. Keynes, in contrast, set

up a consumption function, which includes many variables, but

nevertheless, stated that its prime determinant is income. Second,

it is ironical that Friedman assumes overwhelming importance in

rational individual decision making yet does not rely on the

5Charles K. Wilber and Jon D. Wisman, "The Chicago School: Posi- tivism or Ideal Type", Journal of Economic Issues, 9 (December 1975), p. 674.

6William Breit and Roger L. Ransom, The Academic Scribblers (London: Holt, Rinehart and Winston, Inc., i97i), p. 245.

44

rationality of policy makers. Third, although he is right that

currently transitory consumption is immeasurable and as such, no

data exists; nevertheless, this fact does not disprove Keynes

theory nor does it prove his conclusion in regards to the stability

of the monetary velocity. Fourth and last, and here I quote Karl

Brunner and Allan H. Meltzer's criticism of Friedman's monetary

theory, in as much as he neglects to mention the government's role:

One of the more striking features of Friedman's (monetary) analysis is that in sixty-two pages of text . . . the fiscal role of government is mentioned only once and only to be dismissed. Changes in government expenditure and taxes, apparently, have so little effect that they can be ignored entirely. We7know of no evidence to support this conclusion.

Although Brunner and Meltzer correctly stated the fact that Fried-

man did not deal with the government's role, it is not a striking

feature. For, in most of his works Friedman either ignores the

role of the controlling institution, i.e., the government, the

Federal Reserve, etc., or mentions it as having an overall negative

effect on the economy. This then is Friedman's strategic factor--

the abolishment of controls in order to reinstitute the laissez-

faire market economy. As such, he is not interested in monetary

policy per se. Rather, the analysis of the subject serves as a

vehicle to promote the strategic factor behind it. This strategic

factor is constantly found in his treatises. In his chapter on

the role of government in education, in Capitalism and Freedom, he

says that in order to make the educational system competitive, govern-

ment intervention must be stopped. Furthermore, in his conclusion

of Capitalism and Freedom he quotes A. V. Dicey:

'The beneficial effect of State intervention . . . is direct, immediate, and, so to speak, visible, whilst its evil effects are gradual and indirect, and lie out of sight . . . Nor . . . do most people keep in mind that State inspectors may be incompetent, careless, or even occasionally corrupt . . . ; few are those who realize the undeniable truth that State help kills self-help. Hence the ma- jority of mankind must almost of necessity look~ with undue favor upon government intervention. ''v

7Breit and Ransom, p. 68.

8Milton Friedman, Capitalism and Freedom, fourteenth impression (Chicago: The University of Chicago Press, 1962), p. 201.

45

In addition, Friedman claims that ". . . the most important source

of monopoly power has been government assistance, direct and

indirect "9 while ". . . (technical monopolies) are more limited than

is supposed but they unquestionably do arise. "10 That is, monop-

olies and monopolistic powers are not viewed as institutional

characteristics of a modern industrial society. It is clear, as

we have seen, that there is an underlying strategic factor

throughout Friedman's works. This strategic factor is the abolish-

ment of State and Federal controls. We now can deal with the mean-

ing of all his works.

In order to look at the meaning of his theories it is necessary

to identify Friedman with a certain school of thought. This is

easily done, for as we all know, Friedman is a member of the

Chicago School. The members of this School are further associated

with nineteenth-century liberalism. As Friedman himself claims,

". . . I shall resolve these difficulties (of definition) by using

the word in its original sense - as the doctrine pertaining to a

free man. "II This doctrine of the free man is the central philo-

sophical belief of the neo-Austrian school. Initially, the neo-

Austrians criticized the economic theory of socialism that Marx

developed. However,

. . . since the 1940s, this economic critique has been supplemented and complemented by a political one. The neo-Austrian version of the social philosophy of liberal individualism con- tends that:

I. Competitive market capitalism also is an in- dispensable requisite for the attainment and maintenance of individual economic and politi- cal freedoms and the sustenance of democracy;

2. A blend of capitalist and socialist ingredients is structurally untenable, and attempts to modify or reform capitalism, carried too far, will snowball or escalate into (presumably a highly centralized form of) socialism.

3. Socialism would be characterized by or lead to the absence or diminution of individual free- doms and political democracY,l~nd the creation of totalitarian dictatorship.

9 Ibid. p. 129.

i0 Ibid. p. 28.

llIbid, p. 6.

12john E. Elliot, Comparative Economic Systems (New Jersey: Pren- tice Hall, Inc., 1973), p. 245.

46

Thus, Friedman holds that individual freedom is of the utmost

importance. Moreover, economic freedom is a basic freedom in that

it is essential to the existence of all other forms of freedom and,

in addition, it gives the form of all free conduct. Consequently,

he sees the problem as seeking "to divide the space in which social

life takes place so there is a maximum economic and a minimum

political sector. ''13 Henceforth, the meaning of Friedman's works

is the justification of his social philosophical ideology. He

preaches throughout his treatises the need for eliminating economic

controls. However, this need is justified on philosophical ideas

rather than on economic principles and facts. It is interesting

to note that another Chicago School economist, Henry Simons, who

had a great influential impact on Friedman 14,

insisted that philosophical beliefs are necessarily the foundations of any econo- mist's policy conclusions. He scoffed at those who tried to practice economics as a 'science' devoid of any set of values:

'It has become conventional among students of fiscal policy . . . to dissemble any underlying social philosophy and to maintain a pretense of rigorous, objective analysis untinctured by mere ethical considerations. The emptiness of this pretense among economists is notorious . . . Having been told that senti- ments are contraband in the realm of science, they religiously eschew a few proscribed phrases, clutter up title pages and intro- ductory chapters with pious references to the science of public finance and then write monumental discours~ on their own prejudices and preconceptions.

Now that the meaning is clear, Friedman's methodology is more

easily understandable. In his book, Essays in Positive Economics,

he claims that positive economic theory is actually a set of

tautologies, as his demand function for money. Their function is

to serve as a specialized language. He goes on and states that a

13john McKinney, "Frank H. Knight and Chicago Libertarianism", Journal of Economic Issues, 9 (December 1975), p. 781.

J

14Breit and Ransom, P. 221.

47

". . . theory is to be judged by its predictive power . . . ,

the only relevant test of the validity of a hypothesis is compari-

son of its predictions with experience. ''16 Hence, he seems to rule

theory out altogether in favor of empirical generalizations.

Furthermore, he argues that "to be important . . . a hypothesis must

be descriptively false in its assumption . . . ,,17, since a model

cannot capture or reproduce the whole of reality. Since he is

writing so as to justify a philosophical belief, he necessarily is

not concerned with economics per se. Consequently, he devised his

methodology in accordance with his needs. Not only did he do so

with regard to his methodology, but in fact, he did so with all

the subjects that he dealt with. Friedman is not interested in

monetary policy, the consumption function, etc., in and of them-

selves. As a matter of fact, his analyses are not complete works.

Usually, as he carefully points out, they are merely general

outlines. Nevertheless, his theories are always developed to that

point which serves his needs. Moreover, only phenomena which is

applicable to his model merits investigation. Questions of monop-

olies, theories of imperfect competition, and so on, are dismissed.

Thus, the subjects serve only as a vehicle for the development of

his argument.

Finally, after identifying the strategic factor and the meaning

of Friedman's works, I will deal with their validity. The analysis

will be in relation to the theories as a whole, and not to any one

theory in particular. Generally, I hold his policy suggestions to

be invalid for a number of reasons. First, his proposal for accept-

able government functions are unrealistic. Those functions are the

same that Adam Smith prescribed in 1776. As Wilber and Wisman

stated:

Two hundred years of change in the economic world is irrelevant to the economic theory of the Chicago School. No Rockefellers, no multinational corporations, no imperialism, no environmental destruction; just many small

15Breit and Ransom, p. 209.

16Milton Friedman, Essays in Positive Economics (Chicago: The University of Chicago Press, i~53), p. 8~

17Ibid. p. 14.

48

buyers and sellers engaging in exchange and thus maximizing their freedom and economic welfare. If we could only get government to tend to its proper business, all would be well. This vision of the world may be beau- tiful, but it is a vision. It has ~ esta- blished basis in empirical reality.

Second, his exaggerated pursuit after individualism dissociates

the individual from society. Furthermore, he ". . sees indi-

vidual behavior governed by rational choice rather than jointly

influenced by feelings and intellect. ''19 Third, he tries to solve

economic problems with a philosophical ideology which is inappro-

priate and inapplicable. Fourth, and last, his solutions will cause

more problems than we already have. For instance, he claims that

mcnopolies will be abolished if government is abolished. Notwith-

standing, monopolies have their advantages. For, as Schumpeter

stated in an example, the reason a car has brakes is to enable it

to go faster. That is, although monopolies are restrictive and need

to be regulated, the technological benefits that they provide are of

great importance. Moreover, through this technological development

they stimulate growth in the economy.

To conclude, no matter how convincing the above reasons may

be, only the future will say whether or not Friedman's policies

are valid. Nevertheless, I hope I have convinced the reader that

he must deal cautiously with Friedman's analyses due to the fact

that he is interested in a philosophical question rather than in

a merely economic analysis.

18Wilbert and Wisman, p. 675.

19Warren S. Gramm, "Chicago Economics: From Individualism True to Individualism False", Journal of Economic Issues, 9 (December 1975), p. 759.

49

B I B L I O G R A P H Y

Breit, William, and Roger L. Ransom, The Academic Scribblers. London: Bolt, Rinehart and Winston, Inc., 1971.

Elliott, John E. Comparative Economic Systems. Prentice-Hall, Inc., 1973.

New Jersey:

Friedman, Milton. Capitalism and Freedom. of Chicago Press, 1975.

Chicago: The University

Friedman, Milton. Inc., 1968.

Dollars and Deficits. New Jersey: Prentice-Hall

Friedman, Milton. An Economist's Protest: Columns in Political Economy. New J--ersey: T. Horton, 1972.

Friedman, Milton. Essays in Positive Economics. Unversity of Chicago ~u 1953.

Chicago: The

Friedman, Milton. Monetary vs. Fiscal Policy b/Milton Friedman and Walter W. Heller. ~-6w York: Norton,1969.

Friedman, Milton. The Optimum Quantity of ~ and Other Essays. Chicago: Aldin-~-Publishing Company, 19-6~.

Friedman, Milton. A Program for Monetary Stability. Fordham University Press,---~961.

New York:

Friedman, Milton Studies in the quantity Theory of Money. Chicago: The Universi~o-~Chicago Press, 193-6.

Friedman, Milton. A Theory of the Consumption Function. Princeton: Princeton Unl--~ver'---sity Press, 1957.

Gordon, Robert J. Milton Friedman's Monetary Framework: A Debate with his Critics. Chicago: The University of Chicago Pr-~? ~-~.--

Gramm, Warren S. "Chicago Economics: From Individualism True to Individualism False." Journal of Economic Issues, 9 (Dec. 1975), pp. 753-775.

Henderon, John P. "The History of Thought in the Development of the Chicago Paradigm." Journal of Economic Issues, I0 (March 1976), pp. 127-147.

Hirsch, Eva and Abraham. "The HeteradoxMethodology of Two Chicago Economists." Journal of Economic Issues. 9 (Dec. 1975), pp. 645-664.

McKinney, John. "Frank H. Knight and Chicago Libertarianism." Journal of Economic Issues, 9 (December. 1975), p. 777-779

50

Rogin, Leo. The Meaning and Validity of Economic Theory. New York:----Harper an~--~rothers Publishers, 1956.

Viorst, Milton. "Friedmanism, n. Doctrine of most audacious U.S. Economist; esp. theory 'only money matters' " New York ~imes, 25 Jan. 1970.

~ilbert, Charles K. and Jon D. Wisman. "The Chicago School: Positivism Or Ideal Type." Journal of Economic Issues, 9 (Dec. 1975), pp. 753-775.