February 07, 2007
Guest column from John Taylor on Milton Friedman
Econbrowser is pleased to host these remarks from Stanford Professor John Taylor, which were delivered at the memorial service held at Hoover Institution and Stanford University on January 22.
Remarks by John B. Taylor at the Milton Friedman Memorial
Long before I met Milton Friedman I learned an enormous amount from him-- from his books, his papers, his columns. And long after he is gone I will continue to learn from his writings, just like millions of others around the world. I keep asking myself, "What would Milton say? What would Milton do?" when various issues come up, and I hear friends and colleagues here at Hoover and Stanford and elsewhere asking the same questions. Just last Wednesday I was at the University of Chicago talking with Nobel prize-winning economist Robert Lucas about a new research idea in monetary economics. Bob recalled how Milton-- the grand master of monetary economics-- had ingeniously formulated a simple equation that described consumption for the whole economy. Though quite simple it captured a highly complex theory of how families made decisions about how much to consume. And Bob and I wondered together if that approach could be applied to the problem at hand-- finding a simple equation that might capture the complexity of how price and wage decisions in the entire economy are made. Milton Friedman wrote down his equation in a book called A Theory of the Consumption Function in 1957 and there Bob and I were seeing if we could apply it-- exactly 50 years later-- in 2007. I know others will be discussing the ideas in that book in 2057, 3007, and so on.
And there are many other books. You can easily tell which books on my shelves are authored by Milton. They're the ones with the signs of love-- cracked bindings, loose pages, numerous markings.
His book Essays in Positive Economics is a favorite because it contains the papers which made his case for monetary policy rules, for inflation control, and for flexible exchange rates-- the three bedrocks of modern monetary theory and policy-- which is my own field of research. It is not an exaggeration to say that this theory is the reason why the United States is in a 25 year long boom, and why that boom is now global in its reach with no recessions anywhere. Central bankers found out that it was a good idea to follow Milton Friedman's principles, and they found a way to do so.
Another favorite book is A Monetary History of the United States with Anna Schwartz. It proved, better than any modern econometric method, that money is inextricably tied to inflation, with long and variable lags.
Capitalism and Freedom, which I read in college in the 1960s, still inspires, and should be read again and again by today's college students. And I recommend watching the tapes of Free to Choose, especially the version where Arnold Schwarzenegger does the introduction. Watch Milton at the Hong Kong border calling for economic freedom in China and you will never forget the importance of economic freedom.
It was not until I moved to Stanford and Hoover in 1984 that I had the privilege of really getting to know the person who authored these favorite books, and his wife Rose. True to legend, Milton was impressive with his sharp mind and quick debating skills, but even more impressive to me was his gregariousness, kindness, and humor. He was genuinely interested in what people had to say, no matter what their education, no matter what their position; he respected people.
He always answered letters and emails-- and imagine how many emails he got from around the world. He told me that if someone took the time to write to him with a question that he felt he should find the time to answer.
He was always willing to be a guest lecturer in my Economics 1 course, speaking to hundreds of Stanford students. He would start off telling the undergraduates that two major things the government is involved in are a mess: education and drugs-- and that would set off a lively round of questions with his memorable answers impressing both those on the left and the right.
He and Rose put MV=PY on their California license plates, a story I always use to help students remember that famous quantity equation.
I remember calling him from Washington in 1990 during a stint at the Council of Economic Advisers. It was my job to ask for his support for President George H.W. Bush's "revenue enhancements" alternatively known as tax increases. I didn't even have to ask the question before he realized why I was calling and simply said, "No!" adding "You better come back to Stanford right away, John. Washington is corrupting you."
One of the best things about returning from Washington last year was the opportunity for my wife Allyn and me to see more of Milton and Rose, to have dinner with them in that North Beach restaurant they love so much, and for me to talk more with Milton about monetary theory.
Just about one year ago Milton wrote a technical paper on some of my monetary research, which we had been discussing at length in the previous months. He downloaded the data for the paper from the internet. He analyzed the data on his Mac. And he demonstrated, in a more convincing and sophisticated way than I had ever seen, that the improvement in economic stability in the United States in the past 25 years was mostly due to monetary policy. He did not try to give himself any credit for the theory that led to the policy, but he obviously deserved it.
I assigned the paper to my Ph.D. students in a course I taught last spring. I debated the technical parts of the paper with Milton last summer, and the debate was televised for a conference just last August. Of course, Milton won that debate, and I can't refute it, because it's on tape. But it was a moment for me with the grand master that I'll never forget.
Posted by James Hamilton at February 7, 2007 11:41 AMdigg this | reddit
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Tracked on February 7, 2007 12:25 PM
Tracked on February 7, 2007 03:40 PM
The government used Friedman. Despite the fact that he said the size of government is what it spends, not what it taxes, the government has grown to become a shameful proportion of the economy. While some of Friedman's ideas have been implemented, this has only been done so in a bastardized manner. I'm not sure I'd credit our "recessionless" stability to the excellence of the implementation of his ideas. It's more like the calm before the storm in an enourmous debt bubble which is an elaborate ruse to sidestep raising taxes.
We have more than $11 trillion in public debt in this country. That's the size of the national product (leaving out the rate of foreign borrowing). How can anyone congratulate the state for this?
Posted by: Aaron Krowne at February 7, 2007 04:32 PM
On a positive note, at least Chile did a much better implementing Friedman's ideas. Public debt burden: 3.9% of GDP.
Posted by: Aaron Krowne at February 7, 2007 04:36 PM
The session in August was for a conference in honour of David Laidler. Here is a brief summary of their presentations, along with the graph Friedman presented:
Posted by: EclectEcon at February 7, 2007 06:55 PM
Anybody have a link to the video featuring the debate between Taylor and Friedman?
Posted by: BimetallismBaby at February 7, 2007 07:43 PM
Thanks for the post, Professor Hamilton. Milton Friedman was a great inspiration to me. Besides his tremendous intellect and penetrating writings, he was a sharp and civil debater and a kind and generous spirit. I am sure that Rose misses him, as do many others.
Posted by: Rich Berger at February 8, 2007 05:47 AM
Not able to get the latest figures, but I am reasonably certain that the number you are citing is the percentage of the GDP (or possibly of the budget) that is the budget deficit, not the national debt. If so, 3.9% is substantially higher than the current figure for the US, which is less than 2%, I believe.
Posted by: Barkley Rosser at February 8, 2007 11:16 AM
Don't know where you get the $11T number, Aaron. I see $8.7T from a number of sources, compared to $13.3T GDP (ratio is 65.4%).
I thought this was supposed to be about Milton Friedman.
Posted by: Rich Berger at February 8, 2007 12:22 PM
No. The CIA World Factbook claims that Chilean public debt circa 2006 is 3.9% of Chilean GDP (I know, I know, what's intelligence from the CIA worth anyway?)
The United States' states have public debt too... to the tune of about $2 trillion (the number is surely larger than this now... I believe those are 2004 or 2005 figures).
Debt burden computation:
debt burden = (federal_public + state_public) / (GDP - national_financial_deficit) * 100
Which is, approximately
($9 trillion + $2 trillion) / ($12 trillion - $1 trillion) = 100%
You can quibble about the exact size of all of these figures, but their order of magnitude is quite certain. The national product statistics probably contain a large fraction of accumulated over-estimation due to systemic inflation under-reporting.
Posted by: Aaron Krowne at February 8, 2007 02:17 PM
Some googling got me to that source, and maybe it is correct. However, some other googling got that as of 1995 the ratio was 40%, and in 1999 there was a budget deficit of 1% and in 2002 one of 2%, although for the 90s as a whole the budget averaged a surplus of a bit over 1%. Anyway, budget deficits and surpluses give the net changes in the national debt. I find it hard to believe that in the last few years there have been such humongous surpluses that a 40% national debt ratio would be cut to 1/10 of itself, but it is not impossible.
Posted by: Barkley Rosser at February 8, 2007 03:15 PM