In compiling a list of the greatest economists of all time, Milton Friedman’s name will surely be one of the first to come to mind.  There is of course his technical work, such as his famous Monetary History of the United States (co-authored with Anna Schwartz), that established him as the chief architect of the theory of monetarism. More important was his ability to explain in clear layman’s terms the basic principles of our economic system, how it creates wealth for all members of society, and the importance to a successful society of individual liberty.  If one were to pick two books that our country’s leaders should read, they would be his Capitalism and Freedom and Free to Choose.  They are a treasure trove of solutions to the social problems of today.

Freidman wrote the first of these in 1962.  In a period where we were about to launch The Great Society, as is the case today, people were looking to the federal government to improve their lives. Friedman offered an alternative based upon market forces and individual liberty. His cogent examination of the effect of incentives on people’s behavior led him to offer solutions to societal problems that were both insightful and effective.  He offered ideas such as allowing individuals to invest in the education of others, so poor children would be able to obtain funding for high school and college in return for the investor receiving a fraction of their future earnings.  This innovative idea would be much more successful than Pell Grants in encouraging and enabling students to finish high school and graduate from college.  

Today we are more than ever in need of a resurgence and rediscovery of Milton Friedman’s ideas. Examples of this need abound.  The stimulus package was supposed to keep the unemployment rate below 8 percent. Instead we have unemployment between 9.5 and 10 percent and $800 billion added to the federal debt.  The Obama administration is now pushing for a second stimulus package. Thirty years ago Friedman explained that fiscal policy is not an effective method of reducing unemployment.  Had we followed Friedman’s advice, we would be less burdened in debt and further along in economic recovery. 

His argument for vouchers as a mechanism of moving public education from a socialist system to a market system has found traction in the last decade.  Nonetheless, voucher proposals are very difficult to pass due to the power of the teachers' unions.  As a consequence of not following Friedman’s advice, thousands of children in our urban schools have lost their chance for a good education.   

Due to a massive 2000-page health care bill, the federal government is now managing the entire health care and health insurance industry.  Freidman explained in a cogent article in The Public Interest, that health care costs are so high and customer satisfaction with the system is so low because federal government intervention has pushed us into an employer- and government-based third-party payment system.  In typical Friedman fashion he impels us to observe that advances in technology in every area other than health care have led to reduced costs and increased satisfaction with the product or service and to ask why this is so.  He asks why we single out medical care for tax-free status.  Food is more important than medical care, and yet we do not exempt the cost of food if provided by the employer. He must be surely rolling over in his grave: the new health care legislation will compound the problem of third-party payment.

The President recently signed a 2300-page bill granting the federal government control over the entire financial industry.  Professor Friedman wrote famously of how the Federal Reserve was not capable of determining how to manipulate the credit markets effectively due to its inability to know the information necessary to conduct effective monetary policy, and thus argued that the Federal Reserve should be constrained by rules. He certainly would have argued strenuously against giving the Federal Reserve and Securities and Exchange Commission the enormous powers that they received under the financial regulation legislation.

In Free to Choose, Friedman and his wife, Rose, argued for a constitutional amendment requiring a balanced budget.  As we see deficits of nearly $1.5 trillion staring us in the face for at least the next few years, this suggestion, too, has gained new relevance.

Concluding Free to Choose, he wrote:

“The two ideas of human freedom and economic freedom working together cane to their greatest fruition in the United States.  Those ideas are still very much with us. But we have been straying from them.  We have been forgetting the basic truth that the greatest threat to human freedom is the concentration of power, whether in the hands of government or anyone else.  We have persuaded ourselves that it is safe to grant power, provided it is for good purposes.”

Some thirty years later those words again ring true.  Our hope should be that his final statement also is true:

“Fortunately, we are waking up….Fortunately, also, we are as a people still free to choose which way we should go—whether to continue along the road we have been following to ever bigger government, or to call a halt and change direction.”

This post originally appeared at The Business and Media Insitute's Balance Sheet of July 28, 2010: http://www.businessandmedia.org/commentary/2010/20100728123110.aspx