Noah Smith on Milton Friedman by Emily Skarbek of EconLog.
"In commenting on Milton Friedman's contributions to economics, it was once remarked
that "attempting to portray the work of Milton Friedman . . . is like
trying to catch the Niagara Falls in a pint pot." In yesterday's
Bloomberg View, however, Noah Smith argues that it is time economists give up on Milton Friedman's biggest idea - the Permanent Income Hypothesis (PIH).
It seems to me that Smith has chosen to take one of the many
contributions of Milton Friedman - far from his biggest or most
important idea, I would argue - and give some examples of why it may not
hold in particular cases. Smith then uses this to suggest that
Friedman's contributions are passé and economists and the general public
should not invest further in learning or caring about these insights.
If this were true, what would the public be missing? Here are just a few:
1. Friedman's theory concerning the positive relationship between
economic freedom and political freedom. Friedman long argued that
political freedoms are inextricably related to economic freedom. In
today's political climate, I would argue the public discussion
desperately requires a renewed understanding of this relationship and
what it means for questions of immigration, civil liberty, healthcare,
security, war on terror, etc. Political campaigns in the UK and the US
capitalise on the ability to decouple questions of political freedoms
from their related economic freedoms.
2. Friedman ended the military draft in the United States. A topic
David Henderson has written on extensively - for example, see here, here, and here.
3. Friedman and Schwartz showed that the Federal Reserve's monetary
policies were largely to blame for the severity of the Great Depression.
An important contribution with which even Ben Bernanke agrees. More
generally, Friedman brought renewed understanding to the dangers of
inflation and central banks as a source of macro -instability.
4. Friedman argued for ending the war on drugs. A policy long overdue.
5. Friedman argued for how markets work to weed out discrimination
and provide opportunities for discriminated groups to overcome bias.
These ideas are under-explored when it comes to understanding processes
of social change. When minority groups face political discrimination,
markets and civil society can provide in-routes to positive change. For
an illustration, consider the case of the Green Book. [a book that told travelers where hotels and restaurants that would serve blacks were located]
4. Occupational licencing - for contemporary relevance see the recent CEA report;
the costs of government-supplied public schooling; negative-income tax
(or its political manifestation, the Earned Income Tax Credit).
Finally, to go back to Noah Smith's examples of how the PIH doesn't
hold, it is curious that each of his examples involves relatively small
windfall gains, not investment decisions. Smith looks at evidence
relating to things like a bonus at work, or a tax refund, or a
government stimulus check. It seems to me that the PIH is a useful way
to understand personal investments decisions over one's lifetime. For
example, why young people who expect (even if inaccurately in many
cases) to have high earnings after college incur student loans instead
of directly entering the workforce. Or why people take out 30 year
mortgages to buy homes. It doesn't seem surprising that in some
instances people's behavior does't conform to the exact predictions of
consumption smoothing at any given point in time (for possibly many
reasons - individual time preference, cognitive biases, etc). But that
also doesn't mean it isn't a useful way to understand a general life
cycle pattern of lower consumption/higher borrowing when young ; high
consumption/higher savings or debt repayment when older; and lower
consumption/dis-savings during retirement.
You don't have to believe that markets are always efficient to see
that many people think Friedman's arguments are worth taking seriously. Just look at his citations."
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