November 19, 2006
It’s probably a bit sad if your hero is a five-foot-three Jewish intellectual with a weakness for hard sums, statistics and argument.
But for many economists, Milton Friedman – who passed away aged 94 last Thursday – was the real deal. The reason he was so important is less to do with the accuracy of his theories or their universal applicability than because he stood up and argued for economics and science at a time when it was deeply unfashionable.
Friedman dragged economics onto the central stage of public debate. He is best known for his idea that the more money you print, the more likely you are to have inflation. He said that inflationary booms are a product of too much credit and similarly, deflationary recessions are caused by too little credit. He predicted the end of the golden age of western economics from 1945 to 1975, way before there was an outward sign of crisis. For this he was vilified and then subsequently lauded. His ideas spread throughout the world and are still very much the kernel of most mainstream economic thinking these days.
Although, not always spot-on, Friedman was the ultimate rigorous thinker, always questioning and never afraid to attack ‘conventional wisdom’ (ironically a phrase coined by his old adversary and great friend JK Galbraith).
Most importantly, Friedman argued that economics can explain much more than prices, inflation and recessions; he advocated introducing rigorous economic analysis to most aspects of daily life.
Everything from the performance of children in school to why traffic lights don’t work was fair game to him.
He argued that people reacted to economic incentives, not in a solely self-interested way, but in a complex socially inclusive way. This type of enquiry – which in the 1950s was novel and highly unpopular – spawned an intellectual revolution in the way we look at the world.
He mentored countless disciples, including Gary Becker, the Nobel Laureate and more recently, Steven Levitt, the author of the best selling book Freakonomics. Rather than accepting platitudes about how the world should work, Friedman always contended that we should look at the numbers and see how the world works in reality.
This dispassionate approach can be very useful when looking at our own society.
Take for example two of the biggest issues affecting the Irish economy today: income equality and the housing boom.
In Ireland today, when wishful thinking sometimes tends to dominate public social debate, a dose of Friedmanite clear thinking could do us all a power of good. Take first the example of income equality.
For many years, the language surrounding this factual issue has been dominated by a combination of Christian Brother pieties and soft Marxist dreams of forced redistribution. So when the economy is doing well, the charge is: ‘‘Ah yes, but for whom?”
Rarely in Ireland are issues argued on the strength of evidence as Friedman would urge. On the contrary, positions are emoted rather than argued on the basis of ‘feelings’ rather than facts.
Consider the example of equality or inequality.
The EU (a relatively impartial observer of Ireland and the source of all credible comparative statistics in Europe) calculates that Ireland is not an unequal country in European terms. This may come as a surprise to you, given the hot air that surrounds the subject in public debate: Here are the facts.
The EU’s inequality findings are based on the well-accepted benchmark of dividing the income of the top 20 per cent by the income of the bottom 20 per cent. According to Eurostat, on average across Europe the top 20 per cent have incomes that are 4.8 times higher than the bottom 20 per cent. For Ireland, the top 20 per cent make 5 times more than the bottom 20 per cent.
So we are just above average. That makes us more unequal than Germany, the Scandinavian countries and France, but less unequal than Iceland, Britain, Italy, Portugal, Greece, Slovakia and any of the new accession states. It omits to say that incomes have been growing four times faster than the EU average for five years now. So we are getting rich and if you compare the figure to 1996 – ten years ago – when the top 20 per cent here earned 5.1 times the bottom 20 per cent, we are getting more equal.
This is the hard evidence. Yet from what you read and hear on radio or TV, you could be mistaken for thinking that Ireland is the most unequal society in Europe and getting more so. This is not the case.
When someone points this out, a chorus of derision descends on their head from those in the pious corner who, rather than engage with the facts, abuse the messenger.
This is the way America was in the 1950s when Friedman first started pointing out the holes in the central narrative of how America worked. Facts can be uncomfortable, but they can’t be dismissed.
If we accept the facts, then the discussion can start; but when the facts are dismissed as an inconvenient irrelevance (as is so often the case in Ireland), then we are faced with a dialogue of the deaf where the most indignant, rather than the most accurate, wins.
Turning to house prices, looking at Ireland today Friedman would simply conclude that there is too much cash around.
House price inflation is a product of too much credit looking for a home. Doubtless, originally there were good demographic reasons for the rise in prices, but now the dominant reason is too much credit that can’t really go anywhere else.
The only thing that will slow prices is slowing credit. Friedman would have argued that the Central Bank should have tightened monetary policy years ago.
However, it has no control over this due to EMU (as argued here last week), and therefore, we are in the lap of the gods.
Milton Friedman wasn’t always right and his advice to the Chilean junta after the coup against the Allende government blotted his career. But he was that rarest of breeds – a free thinker – and for that, he will be celebrated and fondly remembered.