The ‘Whole Milton Friedman thing’ Is Not Dead
By Andrew Reder, Joshua Antonini, Bradley Hunt and Andrew Morely
It is a tribute to Friedman’s lasting influence as an advocate for capitalism and freedom that today, long after his death in 2006, his intellectual opponents still feel it is necessary to repudiate him by name when defending their own agenda.
“Milton Friedman isn’t running the show anymore,” said candidate Joe Biden in an interview about his plans for massive new government spending. Hubert Proly, former CEO of Best Buy, echoed the sentiment when he advised his fellow CEOs “to rethink business and capitalism. The whole Milton Friedman thing is dead.”
However, precisely the opposite is true: Friedman’s ideas are more relevant than ever. Economic laws don’t cease to function when they’re not in vogue, and Friedman’s fundamental principles become more, not less applicable in times of crisis and confusion.
Today’s topical discussions in policy range from the Federal Reserve’s role in and response to inflation, to a growing push for school choice nationwide, to corporate-social responsibility: all key issues Friedman covers in his prescient 1962 book Capitalism and Freedom. It is as relevant, if not more so, now than it was when it was first published 61 years ago.
First, consider our recent monetary policy. In Friedman’s view, the inflation that we have experienced in recent years was both predictable and avoidable. Contrary to the Keynesian orthodoxy of his time, Friedman maintained that “inflation is always and everywhere a monetary phenomenon.”
Friedman’s prescription called for a stable and predictable economic monetary policy while taking every possible opportunity to divert discretionary power away from individual administrators. He rejected the notion that frequent use of government “stimulus,” or artificial manipulation of interest rates, could stabilize the economy. Such efforts, he argued, were more likely to destabilize it. Instead, he advocated a rules-based approach to monetary policy, reducing the Fed’s role in the matter to merely allowing the money supply to grow in a stable and predictable way.
When a shopping trip today yields 20% fewer groceries than it did for the same price three years ago, it’s clear to see how Americans have suffered from a departure from Friedman’s monetarism. No better example can be given than in the case of stimulus checks during the government’s COVID-19 response. Politicians fled to the old tried-and-failed Keynesian principles of government. While the government hoped we would spend our checks immediately, they failed to understand the mind of the threatened consumer who hoarded as much as possible for an uncertain future. This, of course, blew up when the emergency ended with the money dump that ensued as Americans emerged from their homes, fulfilling the monetarist’s worst inflationary nightmare.
Education reform is another policy area where Friedman’s ideas should be applied. Everyone has an interest in improving education. Parents want their children to succeed, employers want employees who can do their job well, and teachers want to make a positive difference in the lives of their students. The best way to achieve these results, Friedman argued, was to make parents “free to choose” their child’s school. He proposed a system of tuition vouchers, where taxpayer money follows the student to the school of their choice, whether public or private. The voucher system replaces the government monopoly with a competitive market for education. Schools, like any business without a guaranteed revenue, would have to become less complacent and more innovative. The positive effects would be most dramatic on poor families who cannot afford to move to a more affluent neighborhood or send their kids to private schools to escape an underperforming public school.
It was not until 1991, 36 years after he first proposed them, that the first tuition voucher program was established in the United States, affecting 341 students in Milwaukee, Wisconsin. Today, in spite of vigorous opposition from teachers unions seeking to protect their educational monopoly, there are 29 voucher-type programs in the U.S. affecting nearly 800,000 students.
Another development in school choice has been the introduction of charter schools, which are public schools that effectively operate as schools of choice for parents. Political support among parents for these programs increased dramatically following the school closures imposed during the coronavirus pandemic. What effect has this increased educational freedom had on students? A recent meta-analysis of the most rigorously designed studies around the world have found that these programs are producing higher student achievement at a lower cost, just as Friedman predicted.
As social scientists sift through the data on test scores and college admissions attempting to determine whether voucher programs benefit students, we shouldn’t forget that many of the outcomes parents care about most (e.g., character, optimism, and self-esteem) are not being measured. Arguably, a better standard to use would be to ask the parents directly, “Are you glad you had a choice, and do you feel you made the right one for your child?” Is there any doubt how the vast majority of parents would answer that question?
Finally, in today’s business environment where the line between political activism and business strategy is becoming increasingly blurred, we need to reconsider Friedman’s ideas concerning corporate social responsibility. In 1970, he made his own views on the subject clear in an essay published in the New York Times called, “The Social Responsibility of Business is to Increase Its Profits.” That does not mean, as some of his critics have implied, that managers must pursue profits at all costs and by any means necessary; only that they “make as much money as possible while conforming to the basic rules of society, both those embodied in law and ethical custom.”
Friedman acknowledged that both law and ethical custom require that businesses protect the environment, invest in worker safety, do not discriminate and in many other ways comply with the values of his most vocal critics. To that extent, they are in agreement.
But, he asked, what can it mean to say that corporate executives have a social responsibility that requires them to “act in some way that is not in the interest of (their) employers?” It can only mean that management must use company resources to support their favored charitable and political causes against the wishes of their employers. In effect, these managers impose taxes on the shareholders in the pursuit of their own objectives. Friedman argued that managers may support these causes with their own money if they choose, but they have no right, much less an obligation, to spend their employer’s money on them. This is especially true in the case of controversial causes where many shareholders are likely to hold contradictory opinions about what would be best for society and how best to pursue it. This is clearly the case in the era of “Environmental, Social and Governance” (ESG) investing, where corporate efforts to raise their ESG ratings has not only resulted in lower returns for shareholders, but has turned business into a new front in the culture wars, alienating customers and investors alike.
Friedman argued that this view of the purpose of business “shows a fundamental misconception of the character and nature of a free economy.” If the CEOs advocating ESG kept their companies out of political questions best left to the democratic process and instead just got higher returns for their shareholders, those shareholders could put those returns towards charities they value. That is why “the social responsibility of business is to increase its profits.” Leave the politics to our elected representatives.
Friedman’s incisive and original analysis was far ranging and touched on many economic issues; in this brief essay, we have highlighted only a few of them. Far from being obsolete, his arguments can help us better understand how to solve many of the most pressing problems of our own time.
ABOUT THE AUTHORS
Andrew Reder is an honors BBA/MBA student who studies in the Economics and Management. Andrew also is a research scholar for the Robert C. and Janice S. McNair Center for the Advancement of Free Enterprise and Entrepreneurship, where he participates in invaluable research projects manifesting the importance of The Northwood Idea to the success of the economy and human flourishing.
Bradley Hunt, of Alpena, Michigan, is enrolled in Northwood’s Adult Degree Program studying Business Administration Management Information Systems.
Andrew Morely is studying Entrepreneurship and Finance at Northwood University. A senior, Andrew is involved in Tau Kappa Epsilon, which has a passion for volunteerism. Since Andrew joined TKE, the club logged over 1,700 service hours and raised over $5,000 for St. Jude Children’s Research Hospital.
Joshua Antonini, of San Antonio, Texas, graduated from Hillsdale College in 2022 with a bachelor’s degree in economics. He currently serves as a research analyst in energy and environmental policy at the Mackinac Center for Public Policy. In his role with the Mackinac Center, Antonini accompanied a delegation from Northwood University to Capitaf, the summer home of famed economist and Nobel laureate Milton Friedman.