On Milton Friedman

Looking back, it seems in every age Providence sees fit to send one amongst us who stumbles upon an overlooked truth which changes everything, literally altering the arc of human history by fundementally correcting our trajectory into the future. In our time, Milton Friedman was that man—until last November.

Delightfully, the new truth is nearly always a very unassuming detail that, nevertheless, once revealed, sweeps away ancient ignorance and frames an utterly new understanding of the worldly phenomena we witness every day: thanks to Copernicus' thinking about spinning balls, we know what days, and years, and seasons really are. And thanks to Gallileo's observation of the phases of Venus, we know Copernicus was right—and, as a mere side benefit, what science is. Thanks to Einstein's E=mc² we know what time is, and what space is. Thanks to Jefferson noticing that all men are created equal, we know what dignity and prosperity are.

And thanks to Milton Friedman, we now know what money is. Friedman's insight? Well it starts with an obvious fact that was mostly overlooked by economists until Friedman came along: the laws of supply and demand apply to money, just as they apply to most goods and services. When the laws of supply and demand are determining the exchange value of a good or service in terms of a money price, they are simultaneously determining the "price" (exchange value) of money in terms of that good or service. In other words, the laws of supply and demand are commutative; when a loaf of bread is sold for a dollar, that same dollar is sold for a loaf of bread.

Although this idea doesn't seem subversive on its surface, in its basic implications lay the power to explain both inflation and economic depression as simple expressions of the already well-understood laws of supply and demand. Up until Friedman came along, depressions were considered by most as some type of shadowy and inevitable natural failure of the free marketplace, a bug in the capitalist system. What Friedman demonstrated was that depressions were caused by monetary events where something causes the supply of money to suddenly and substantially contract. When this happens, buyers in the economy suddenly find theselves with less money to buy things. Thus sellers have difficulty selling what they make or do, so they start cutting prices. Some sellers find themselves unable to pay their bills, and firms start to fail. Bank loans go unpaid, and in desperation banks begin to call other loans which often also go into default. Unemployment lines start to grow. Government finds itself with falling revenues while demand for government services simultaneously rises. Unemployment grows even more. Voilá: depression.

But Milton Friedman wasn't content to rely on the strength of theory alone, as sound as it was. In his 1963 book A Monetary History of the United States, 1867-1960, he and Anna Schwartz demonstrated with data that every economic depression that occurred in those 93 years in the US was accompanied by a precipitous drop in the money supply, and every precipitous drop in the money supply that occurred was accompanied by a depression. Most of these monetary events, especially the really bad ones like the Great Depression, are caused by rapid, multiple bank failures.

With this book, Milton Friedman became to Adam Smith what Gallileo was to Copernicus: the empirical validator. And in doing so, they've both shown us what economics is. It's capitalism.

If this were the only thing that Friedman gave to us, it would have been enough. But over the long course of his life it proved to be merely the tip of the iceburg, both academically and publicly. Fortunately for us, Friedman's light was allowed to shine for a long time. Whether it was long enough for us to get it, time will tell.