November 19, 2006

Friedman the free thinker

Posted in Euro · 25 comments ·

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.

  1. Paddy Hackett

    David McWilliams commenting on Friedman writes:

    “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.”

    The above constitutes a misconception. Price inflation in Ireland is due to the incapacity of the Irish economy to productively absorb all credit expanstion. In other words the rate of expanded reproduction of capital is too restricted to absorb current credit expansion. The outcome, instead of corresponding increases in value expansion in the form of capital acceleration, is price inflation. The problem is located within the process of production and not in the circulation process.

    Paddy Hackett

  2. Dan Hayes

    David & Co.:

    Who says that Friedman’s advice to the Chilean junta “blotted” his career. Actually his disciples (“The Chicago Boys”) saved Chile from Allende’s dish of Castro-style economics. And thanks should be accorded to Pinochet who had integrity enough not to follow the easier socialist path.

    But Friedman should also be remembered and honored for his dicta that open immigration and the welfare state are incompatible.

  3. laura

    I think there is an excellent point being made here, one which I think is partly down to a lack of user-friendly statistics in this area.

    I have consistently have arued that well-intentioned lobby groups for the “poor” such as CORI are doing immense harm and bringing about the dangerous kind of long term scenarios that have a bad social impact on society – not to mention the very people they believe they are helping, and those who are working on the lower wage brackets even more so.

    What you don’t question David, and its unfortunate that you don’t as I think its a subject you’d do justice to, is the rather quaint concept of concentrating almost 100% of social assistance on the minority of the population who simply do not work, rather than by assessing needs on a non-income basis. Groups like CORI claim to do so by using poverty indicators such as whether or not somebody has a winter coat or a hot meal – but these are exactly the subjective measures that you criticise – correctly – in the article above. For example, one thing often criticised for the “poor” (who are a rather ill-defined group to start with) is their quality of housing: yet there are no definitions as to what factors make these houses substandard. (Part of the problem here is that while there are objective factors defined in legal terms – such as, for example, the availability of hot water or washing facilities – so few local authorities actually carry out inspections that the limited data published is limited and questionable). The problem with definitions of poverty based on whether or not somebody has a warm winter coat is that one man’s essential is another’s incidental: as teenager I was fascinated at the fact that the girls at school who came from unemployed family backgrounds all had nice TVs and VCRs despite the fact that a lot of working people didn’t have them. Likewise, somebody who may appear to be “poor” because they don’t have a hot meal every other day and no winter coat may simply not bother cooking for themselves and may prefer to spend their money on something other than a winter coat: I mean, now that I think of it, the only group of people I know who all have winter coats are folks who use public transport!

    The problem goes back to the age-old Victorian adage – that giving money to those who don’t earn it to them because they don’t work doesn’t guarantee that the money will be wisely spent (as it indeed, it all too often isn’t wisely spent by working people!) What this leads to is a false statistic of poverty that is actually based on people’s ability to handle their money well, rather than on actual needs.

    What needs to be examined is the pernicious path that social welfare increases have taken over the last 4 years. Up until 2001, welfare increases fell behind inflation, and there was a corresponding drop in dependency rates. However, from 2001 onwards, rates have increased – not by the rate of inflation, not be the rate of average overall increases – not even at the exhuberant rate of public sector benchmarking rises – but nearly double that! Since 2001, social welfare rates have increased by a heady 13% per year. What this means in practice is that net income for people on social welfare has increased in 5 years from e106.65 to 165.80 for the basic adult rate, while the minimum wage has gone from e5.97 in 2001, to e7.65 in 2006. What this means in practice is that social welfare recipients are gaining income at the rate of 55.5% in 5 years, while those on the lowest pay rates have gained just 28.1%. This effectively means that income levels for those who don’t work are increasing at double the rate that working incomes are.

    Worse still, this rotten government have even made things worse, by making a committment to tie future increases into the so-called “average industrial wage.” Aside from its ambiguity, since the minimum wage is NOT tied to this it means that welfare dependants are guaranteed at least an average percentage rise, whilst those who work for the lowest incomes are not guaranteed the same rise. This is highly dangerous to say the least.

    Lastly, its interesting to note that the net level of welfare dependency appears to have rapidly increased since 2001: my source for this is levels of rent subsidy – which fell from 1998 to 2001, but have rapidly increased since 2001. Since only those on welfare can get this subsidy, it would suggest that long term welfare is a choice that many are choosing. The dangerous now is where the money will come from to cover this in the event of an economic slump, since we’ve more or less guaranteed a high level of cover?

  4. Caitriona

    Pete you obviously have way too much time on your hands!!

  5. Glen Quinn

    To Laura,

    You are absolutely correct and I could not agree more with you.

    I actually know people who buy properties to rent out based on the rent subsidy that you outlined.

  6. webmaster

    While Pete’s posting was a wonderful insight into what a 2 year old with a chip on his shoulder might write if he/she could type, I’ve consigned his post to the scrapheap.

  7. Ian

    Friedman’s 1962 book “Capitalism and Freedom” should be compulsory reading for people who lazily talk about “neo-liberalism”. The protectionism that characterises both the EU and the US would find no endorsement there and the best way for poor countries to develop would be through being allowed to trade in free and open markets, not through the handouts of Western nations who hide behind tariff walls. In “Capitalism and Freedom” Friedman actually advocates removing one’s own tariffs, even if others don’t!

    Similarly in Ireland, the best way to alleviate poverty is not to pour billions into welfare dependence (the CORI line), but to bring people into the market place by not penalising them with heavy taxes and PRSI as soon as they begin work, which, like tariffs discourage productive employment, but instead by rewarding work.

    Friedman’s economic ethos is deeply rooted in the Hebrew Scriptures – but sure, who reads the Old Testament these days?

  8. kit

    People use economists to justify their own political perspective. That’s why Mrs Thatcher, Ronald Reagan and David McWilliams liked Milton Friedman.

  9. Gareth

    David, please read Laura’s comment, an obviously well researched and excellent arguemnet. Why aren’t more economist highlighting this discrepency???

  10. Isobel

    Great letter Laura….

  11. Hi David,

    Would it be possible for you to create a podcast of you reading each article? Not to sound lazy it’s just the general trend of journalists (David Pogue and many more) in the United States and would be great to see this happening here too.


  12. Mark Murray

    Laura – I agree that a lot of ‘poor’ people have lifestyles which suggest that they’re not really that badly off at all. But what about massive increases in electricity and fuel costs (e.g. ESB prices just increased by 4% – set to increase by 20% in early 2007) and the costs of public transport? Surely these alone justify the recent increases in Social Welfare rates?

  13. Paul R

    “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.”

    David, since EMU our Central Bank is the ECB which sets rates based on the overall Euro-zone economy, not that of a small part of it. Just as the old Irish Central Bank set rates based on the overall Irish economy (=mainly the Dublin economy), and not that of, let’s say, Mayo.

    Since EMU, the old Irish Central Bank has largely been made redundant but survives because politicians never have the courage to close anything down. It really should be renamed something like “ECB – Dublin Branch”, much like in the US, the Federal Reserve has branched in NY, Phil. etc.

    Incidentally, there would be a lot less enthusiasm for pumping money into property here if there were annual property taxes, like exist in most countries. People would be trying to get their houses under-valued by quantity surveyors (to avoid tax), rather then over-valued (so they can borrow more money based on the valuation of their property).

    The stupidity of the current system can be illustrated by an example – Joe Rich inherited a Large 3 million Euro House in South Dublin plus a Million in Cash from his parents in 2000. He decided to give up work, live in the house and spend the money, which he proceeded to do on the bare essentials plus an expensive cocaine habit. Today, Joe – despite his wasteful lifestyle – will now have a much, much higher Net Wealth as a result of the appreciation in house prices (plus he might additionally have benefited if he lived close to the Luas, after the Government sponsored-project finally finished). However, the tax the Government will have gotten from him is miniscule as he didn’t sell the property, doesn’t work and spends most of his cash on (untaxed) cocaine. In fact, it is quite probably that Joe Poor and Joe Middle will have paid much more tax to the Government as they will have needed to work to support themselves. How smart is a tax system that penalises the hard-working and lets the idle away tax-free?

  14. Glen Quinn

    Hi Mark,

    “But what about massive increases in electricity and fuel costs (e.g. ESB prices just increased by 4% – set to increase by 20% in early 2007) and the costs of public transport? Surely these alone justify the recent increases in Social Welfare rates?”

    In my view they should not be on the Social Welfare in the first place because there are jobs out there for everyone (unless they have a disability that they cannot work), we have a booming economy and one of the lowest unemployment rates in Europe. Also what about the income earning families who are working and they also have to pay for rising electricity and transport costs as well. It does not seem fare for the income earning families who work hard and try to raise a family to supplement people on the social welfare for there lack of work (It seems people on the Social Welfare are the masters and people working are the slaves).

    In my view this system needs to change dramatically where people are not depending on the state for anything and they shouldn’t. We should have a system that rewards people for trying to reach new hights e.g if you go to University and get a degree then you should be on a much higher salary than someone who did not go to University.

    At present our system is a Communist system where most major Irish companies are still under state control (ESB, CIE, Ianrod Eireann, etc) and everyone is more or less on the same salary regardless of higher education. (Primary school teacher e31,000, Luas driver 32,000, IT engineer e32,000)

    Also people need to understand that you cannot please everybody but you should please the majority of the population (This is called Democracy).

  15. David

    Seems like a no-brainer, that it’s a disincentive to return to work if in real terms you are worse off than if you had stayed on social welfare.Our taxation rates penalise the middle class while the unemployed pay none and the wealthier 1% pay little. Joe Middle supports the economy.

    In general terms, the economy is worse off than we were twenty, thirty, forty years ago, since we have not yet factored in quality of life into the economic equation. Yes we have cars, houses, less emigration, credit cards but we also have traffic jams, child care, pollution, environmental degradation, reduction in resources, an increased dependency on imported energy, declining health and an emigrant population still abroad unable to return because of the cost of living in our Celtic Ireland..

  16. Ciarán Mc

    You rightly pay tribute to Friedman’s contribution. I would make three points, the last of which concerns the responses on this page.

    1.While Friedman was a giant, he isn’t as rare as you make him sound. There are many other economic thinkers who could stand with Friedman and whose contributions to the debate have been far reaching. I’m thinking of Keynes, Sen, Samuelson, Galbraith, and so on. But you were writing about Friedman, so fair enough, but he’s not unique.

    2.Freedom – in the sense of free markets, open trade etc – is a good starting point. But market failures are now widely acknowledged and studied. In not all cases do they provide optimum outcomes. Who would want Nuclear missiles for sale on the free market? But of course less striking examples are well known. I think Galbraith contributed to the debate with his theory on assymmetry of information.

    3.I see that the responses on this page are very reactionary and for want of a better word, right wing. Nothing wrong with that, but the issues around poverty are far more complex than the comments here allow. I dislike freeloaders as much as the next, but there are social issues too: having a tv or disposible income does not mean there are not social problems. Poverty is the wrong term – it suggests financial lack of resources. Even in communities which have good housing, enough food, and the basic modern cons, even in communities like this there can be black spots of crime, high drop out rates from school, frighteningly high teenage pregnancies, alcoholism, drug abuse and so on. In the end society pays for not addressing the problem: through violence or lack of achievement etc. Of course hand outs are not the answer – which brings me back to how useless is the median wage as an inequality index. A better inequality index would be to plot the numbers who reach degree level, who have full health insurance, and so on. This would paint a picture of sustained exclusion in some communities.

    In short – let’s not get carried away with indices of income that prove that everything is ok. The rising tide has lifted nearly all boats that can be lifted. Remarkably though, there are, scattered around, numerous ports where the level rose only marginally. In other places great ships sailed out on the buoyant tides. Inequality is there. Let’s open our eyes and take it on. We will all benefit

  17. Ian


    To suggest people are “reactionary” just because you disagree with them doesn’t advance discussion and I don’t see anyone suggesting that poverty is anything but complex.

    I do know from people with whom I have direct dealings that welfare dependence is a miserable existence, to be constantly trapped at subsistence level does nothing for human dignity. There is a settled traveller whom I see a few times a year who tells me that she would love the chance to get a job and have the chance of a few quid to spare, but if she got a job her welfare entitlements would disappear and she would end up worse off. Far from creating an inclusive society, the welfare system as it is currently structured perpetuates the cycles of poverty.

    It is not “right wing” to suggest that the possibility of work be available to everyone, nor to suggest that work should be rewarded.

  18. Ciarán Mc

    Hi Ian,

    I used the terms reactionary and right wing not because I disagreed with people, but because I found their approach to poverty to consist mainly in denoucning the welfare state and smugly suggesting that if welfare is removed people will work for a decent living thereby solving the problem. I didn’t see much of an attempt to recognise that serious problems do indeed exist. I think one commentator referred to our communist system!

    I fully agree with your final comment that work should be available to all and that it should be rewarded. Further, I fully support the reduced tax rates on labour of the past decade and the much improved commitment to stop welfare fraud.

    But there are serious blackspots, not just in Dublin, and they require a massive and sustained effort by the state in order to attempt to break the cycle.

    All the best

  19. David

    Remove the income tax band system and apply a consumption tax only. You pay for what you use. If you want an SUV, Speedboat, 10 bedroom house or swimming pool then there is an applicable tax charge. If you want imported potatoes over domestic, then there is a further tax.

    We’ll soon be down sizing, reevaluating lifestyles, creating a new, more innovative and efficient economy, with the possiblity for everyone to contribute to society in a productive manner. We’ll even do the environment a service in the process, since non-renewable resources would have a higher burden of taxation applied.

    The current system doesn’t work, we just don’t see it yet!

  20. David J.

    As an FYI, the David responding above is not David Mc Williams so I have changed the name to David J. Sorry for any confusion.

  21. Laura

    To answer Mark Murray re: questions of inflation of ESB prices and public transport – in fact these impact people on social welfare far less than the working population since a large proportion of people on welfare are entitled to fuel subsidies and free travel – for example people on disability – which from what I can see is particularly common amongst people suffering from depression – get free transport. Those I know who get it use it for shopping trips to Dublin and fun weekends in Galway, which I am quite sure was not what it was designed for. The fueld subsidy gives people a set amount of units per month which from what I recall is humble enough but from the same people (who also claim it) it almost covers their bills leaving only a few euros to pay with. Every single one of these welfare recipients – who have been claiming for between 5 and 8 years has an SSIA by the way. What would be most interesting is to see a study such as that alluded to in a very interesting article in the Nation by TCD professor Constatin Gurdgiev – which you can find here – – is how living standards actually match those expected by modern lifestyles. I think it is the fact that the “poor” are now able to almost match the spending power of those on modest incomes which is frustrating and annoying those who do work on below average wages and those in similar circumstances who have chosen work and self-suficiency over dependency.

  22. Laura

    Actually forgot to point out that I have actually worked out that since around 2004, a person earning the minimum wage for a 30 hr working week is actually worse off than somebody on social welfare and getting the lowest level of rent supplement – a scary scenario indeed if work isn’t paying even at that level – see here for my Mathcad print out –
    Its very basic but a big part of the problem is that basically the minimum wage is rising by around 5% per year on average while the basic welfare rate is going up by around 9%. It would make sense that at that level they will converge at some point. Problem is, for many people it was a few years ago. Hence a huge number of native Irish are choosing the welfare route over work. And sadly, it does make sense.

  23. Glen Quinn

    Hi Laura,

    You hit the nail on the head. I have read both articles that you provided links too and I completly agree.

    The main point is: Financial benefits that the government provides changes Irish society (or any society). This is were the government when planing financial benefits needs to take a longer term look into the future and decide if that is the society they want Ireland to be in the future.

    An example would be if there are significant benefits for single parent mothers then most women will not get married and will instead live with the partners and receive the full financial benefit.

    The type of tax structure that Ireland would need would be as follows:
    1. Better tax incentives for married couples who work (This will entice people to marry and also the children will be raired in a loving family environment which will then keep our society intact)

    2. Less tax incentives for single people who work (This will encourage single people to get married because of the tax incentive they will receive)

    3. Lower social welfare payments. Welfare payments should work out to be lower than working on a low income this would also include benefits in this calculation as well as cash received. (This will encourage people to work and to upgrade there skills)

    4. People on legitamte disability and cannot work should get the present social welfare entitlement.

    5 Gay couples would not be regocnised because it would not be good for society.

    It has been proven in other European countries that if you break up the family unit then you create social problems in your society.

    I get phone calls from insurance and banks asking me do I know any Irish people that are looking for a job. They tell me that they are finding it so hard to recruit Irish people. They don’t want any imigrants because there level of English is very bad compared to what the job needs.

  24. Celtic Tiger – Challenges – Wealth redistribution…

    Celtic Tiger Challenges Wealth redistribution Ireland’s new wealth is not evenly distributed. The United Nations reported in 2004 that Ireland was second only to the United States in inequality among Western nations.<ref name=”guardian1″/> ……

  25. [...] and that since the 1960s Ireland had grown “more equal” in the twenty years to 2006 (Friedman the Free Thinker). In this analysis he failed to account for the astronomical growth in wealth which had occurred in [...]

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