Milton Friedman was a tiny, balding man who would have looked at home wearing green eye shades in an accountant’s cubicle. But he was a giant of the 20th century whose impact, good and bad, is still reaching every corner of the globe in the 21st. He was also a big enough man to admit that his ideas may have occasionally overreached in helping to generate a free-market revolution.
Austrian economist Friedrich von Hayek is invoked more often than Friedman as the patron saint of modern laissez-faire capitalism. It was Hayek who mainly inspired the twin free-market revolution in Great Britain, where Prime Minister Margaret Thatcher, Ronald Reagan’s ideological soulmate, launched a historic campaign to privatize nationalized industry at about the time the Reagan Revolution was taking off. But Hayek’s main impact was as a political theorist who delivered a powerful critique of the fallacies of socialist central planning. It was Friedman and his Chicago School, whose prominent disciples included Robert Lucas, George Stigler and Gary Becker, who laid much of the theoretical groundwork for the rebirth of laissez-faire thinking in the United States in the 1990s.
Friedman convinced U.S. policymakers to adopt the then-radical idea that government intervention will hinder, not improve, markets. Elucidated in his 1962 book “Capitalism and Freedom,” Friedman’s laissez-faire ideas on politics and markets filtered from the Chicago School to Washington: from Barry Goldwater (Friedman was his economic adviser) to Reagan (whose famous 1964 debut at the Republican National Convention was an early call to arms over high taxes and government bureaucracy) to Wall Street, Alan Greenspan and Bill Clinton.
Friedman’s ideas came into their own in the late 1970s. Vietnam-era inflation, exorbitant spending on the war and Great Society-type government programs had led to high unemployment and inflation rates of up to 14 percent. This double plague, called “stagflation,” undermined the central belief of John Maynard Keynes that unemployment and inflation trade off with each other and can be managed by policymakers. Keynes believed they could tend to the economy as janitors putter over a cranky boiler: if you poured enough inflation in at one end, unemployment would go down at the other, and vice versa. Keynes thought enlightened policymakers could fine tune the whole contraption, throwing in a fiscal stimulus when recession loomed and removing it when the economy heated up again. But Keynes had misunderstood how hard it would be for politicians to eliminate such government-spending programs once they were put into place, and how businesses and consumers would anticipate and work against such moves. These flaws contributed to ever-growing deficits and rising inflation, and this seemed to vindicate the Friedmanites.
Hayek and Friedman’s free-market revolution reached its international peak in the 1990s. To the same extent that Keynesianism, with its emphasis on government control of markets, had once been the unquestioned orthodoxy, the pendulum now swung completely in the other direction. The collapse of the Soviet Union seemed to prove the unworkability of state-run economies, and free-market absolutism went from being a mocked, maverick ideology to a secular religion. It shifted the axis of economic debate sharply rightward, turning Republicans into small-government zealots and liberal Democrats into “Eisenhower Republicans,” which is what Clinton called himself. Even today, laissez-faire capitalism still underpins most economic policy decisions. As Stephen Roach, an economist with Morgan Stanley, told me, Friedman and the Chicago school “created a mindset that policy is impotent to solve economic problems and that the system can do it on its own terms.”
When it came to promulgating American economic ideas abroad in the post-cold-war era, American policymakers had a one-size-fits-all zeitgeist. Without fully realizing it, perhaps, they ended up giving different advice abroad than they would have at home. The U.S. government didn’t suddenly disassemble the welfare state in favor of rampaging markets--Reagan ran record deficits to support it, and government spending as a percentage of GDP rose during his term. But developing economies, especially newly enfranchised economies like post-Soviet Russia, provided a clean slate for rapid marketization. Clinton preached like a baby-boomer Friedman. In 1993 the president made free trade through the General Agreement on Tariffs and Trade and NAFTA the centerpiece of his economic policy agenda. His trade negotiators promoted little but open markets and free-flowing capital abroad.
Friedmanism, like most revolutions, overreached. In the flush of victory after the cold war, it went too far in trying to be a panacea for the developing world. Free-market fervor produced an infectious passion for deregulation. Under the tutelage of young free-marketers, too many nations rushed too quickly to embrace instant marketization--throwing billions of dollars into privatization, ditching old systems without a thought as to what might replace them.
But Friedman and his Chicago School disciples were correct in much of what they wrote and said. Broadly speaking, markets are more efficient than governments at allocating resources. There’s no question that the free-market ideology of the ’90s produced a wealthier world. But the open-trading system also exacerbated inequalities between rich and poor nations: while finance was free to go where it wanted, labor was not. That’s why globalization seemed so real to the enthusiastic elites of Wall Street and Washington, but not to those on the bottom rungs of society. “I think when historians look back at the last quarter of the 20th century,” says former Federal Reserve vice chair Alan Blinder, “the shift from labor to capital, the almost unprecedented shift of money and power up the income pyramid, is going to be their No. 1 focus, along with the failure to integrate poor countries into the global system. And they will marvel at the equanimity with which it was accepted.”
Even Friedman came to understand this to some degree. Especially in the case of the former Soviet Union, his greatest ideological foe, he saw that too-rapid privatization led to "grabitization," the unfair seizure of old state assets by former Communist Party apparatchiks. And that in turn has led to out-of-control corruption. When I last interviewed him in early 2003, he conceded that the privatization revolution had gone overboard. Critics, he said, like former World Bank chief economist and Nobel Prize winner Joseph Stiglitz, were correct in urging a less-rapid move to free markets and more building of state infrastructure. “In the immediate aftermath of the fall of the Soviet Union, I kept being asked what the Russians should do. I said, ‘Privatize, privatize, privatize.’ I was wrong. [Stiglitz] was right. What we want is privatization, and the rule of law.” But the ideas that he and the Chicago School had disseminated took root around the world and for that, he said, he was “gratified.”
Hirsh is the author of “At War With Ourselves: Why America Is Squandering Its Chance to Build a Better World” (Oxford).