Professor Milton Friedman - the man who was too right

(Source of image: Wikipedia)

Professor Milton Friedman was, in my humble opinion, one of the greatest economists ever, not only because of his groundbreaking researches, but also because of his talent to explain the fundamental principles of economy, in a simple and straightforward way. This is not a trivial achievement, as economy can be easily misrepresented as a very complex thing. Something that only a chosen few can really understand. That is unless it is explained by those who insist to tell the simple truth, even if it is unpopular. 

This post is based on an article that I wrote in my Hebrew blog on Professor Friedman’s 100th birthday. It was in the summer of 2012, a year after the (in)famous summer of 2011 with its wave of socioeconomic related protests  around the world. A year later, as the Arab spring turned into the Arab winter, and movements like “Occupy Wall Street” still licked their wounds after being beaten up to disillusionment ( I think they were not such a big failure after all, but that’s a subject for another post), it was enough to mention Friedman’s name to make some of my best friends become very unfriendly. Now, you may think that in response, I was trying to defend Friedman and his ideas, saying that like those of Adam Smith, or Darwin, they were greatly misunderstood or misrepresented, but in fact I didn’t because this is not exactly so.
 

Unlike Darwin or Smith, in the case of Milton Friedman, all those who speak, and act, as if on his behalf, understand very well what he said. It's not that hard, and even if so, he made sure  to explain his ideas very well. His books were written in a popular and simple language, and in his legendary TV series about the fundamentals of the economy, he presented his approach clearly and firmly.  For the sake of the discussion, and for the readers who might not know, I will mention here the general idea of ​​Friedman's teachings, which can put it this way: "The market forces are the only ones that determine the behavior of the economy, and they work the same way regardless of the considerations, wishes and choices of individual players”. In other words, the government can think as much as it wants that it can intervene and affect the market, and we, as individuals, can imagine as much as we want, that out values, beliefs and other aspects of our decisions, have an impact on the conduct of the economy, but in fact they do not. What really counts is a limited number of factors such as market size, number of players, and some other objective factors. According to Friedman, the economic system is a mechanism for solving problems, and the optimal solution is obtained when we just let this mechanism work without interference.
 

Especially today, when we see what  the alleged over-enthusiasm of economists of Milton Friedman ideas have led to, these ideas may be really aggravating. What does it mean that the our decisions do not matter? What is this attitude towards us as meaningless? Could we really be replaced by monkeys or even game dice? These are really annoying ideas, but still, this is the truth.
 

A man goes into a casino, hoping  to win some money. He has big dreams about what he will do with this money. But is there any significance to his dreams in terms of his chances of winning? The casino's financial system is built so that the house always wins. From the point of view of the casino owners there is no chance or risk. The principle of large numbers will always work in their favor. The total activity of all the players creates a steady cash flow for them, expected and deterministic. It does not matter if the game is completely random as roulette or a random and skill combo,  like poker. The casino only need to control some basic parameters and that's it - everything is in its hands. It can not lose.
 

The same is true with less questionable businesses too. Business management always involves dealing with unexpected elements and risks. But when we look at companies that succeed over time, we see that they have learned to neutralize these elements. They gained control of the critical parameters - the size of their market and their positioning in it, the quality of their products and the like. Have you ever heard Coca-Cola complain about the "economic climate", or that Apple blamed the market situation for their performance? Have you ever seen the CEO’s of IBM, Intel or Cisco looking for excuses? These companies are successful over time because they are conducting themselves according to scientific and objective standards, and are making their critical decisions in accordance with the really important global parameters. Surprisingly these companies provide the most creative freedom to their workers and encourage them to innovate and dare. They allow themselves to do so precisely because apparently it is economically meaningless, and the reason it works in their favor is because one of the most important parameters that determines the behavior of an economical system, is the degree of diversity in its decision-making processes. This principle, known as "Friedman’s Law", was actually formulated by David Friedman, Milton Friedman's son, and it states that  the more the number and diversity of decision makers in an economic system grows, the more optimal it gets.
 

David Friedman is an avowed anarchist, and the direction in which he took his father's ideas, reveals their tragedy. The problem with Milton Friedman is not that he was wrong, but that he was right. Too much right. The problem is that governments can not "act according to Friedman", and can not impose "a Friedmanist policy", as there is no such thing. Any attempt to do so is an intervention that harms the system’s optimality. But politicians, like politicians, want headlines and slogans. It is very easy for them to point at Friedman and say, "It's not us, it is market forces" when in fact, that is totally irrelevant. In other words, it's the opposite of what Bill Clinton said - “this is not the economy, idiots!”.  Friedman did not say that governments should not do anything, he just said that they should not call what they do, "economy".
 

The significance of the observations of Professor Friedman is that they show how questions concerning national priorities, the manner of distribution of the government budget and the ways it should or should not intervene with economical affairs, are not questions about economy but questions about values ​​and morality. Friedman did not say that there is no room for moral or ethical decisions, he only said that they do not have such great economical  significance as we tend to believe. They do have some significance, indirectly, through thier influence on the national mood, and on the quantity and quality of economical decisions made by the citizens. Frightened people with their faces looking at the floor are more likely to behave like a herd, which damages the economic system’s optimality, and that in turn has a great influence on the bottom line of economical performance, especially in times of crisis. When politicians and bankers in shiny suits blame everything on a global economic crisis, they try to make us forget that it is their conduct in better times that harmed the economic system’s ability to cope with crisis and even take advantage of opportunities inherent in it. Friedman would say that capitalism is a necessary condition for freedom, but is not enough. You should also have values ​​and a firm moral stand, that for the loss of which, he and other messengers if the truth, shouldn’t be blamed.