Milton Friedman on Budget & Economy

Libertarian Economist


Capitalism isn't greed; it improves lot of ordinary people

Milton Friedman, confronted in the 1970s about the "greed" behind capitalism, responded: "Tell me: Is there some society you know that doesn't run on greed? You think Russia & China don't run on greed? The world runs on individuals pursuing their separate interests. The great achievements on civilization have not come from government bureaus. Einstein didn't construct his theory under order from a bureaucrat. Henry Ford didn't revolutionize the automobile industry that way. In the only cases in which the masses have escaped from grinding poverty, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it's exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system."
Source: A Time for Truth, by Ted Cruz, p.338-9 , Jun 30, 2015

Gov't inefficiency comes from spending other people's money

Nobel-winning economist Milton Friedman, like Adam Smith before him, had a gift for explaining complex systems in commonsense terms. No tool better explains why government tends to be terribly inefficient and wasteful than the Friedman table that follows
Whose Money is SpentOn Whom Money is Spent
YourselfSomeone Else
YoursThe free market at maximum efficiency

Free individuals shop for themselves and exercise choice

The free market but less efficient

Free individuals buy gifts for someone else

Still efficient but the best price is not the highest value

Someone Else The government economy at its best

Agency travel, junkets

The government economy at its worst

Most federal spending including "stimulus"

Source: The Debt Bomb, by Sen. Tom Coburn, p.130-1 , Apr 17, 2012

Inflation is a hidden tax, so governments like it

Debt Bomb, Stage 4: Inflation soars, and the value of the dollar declines.

In this 4th and final stage we experience a debt crisis. Borrowing enough money to fund our military and other programs will become more expensive.

Inflation will then accompany currency debasement. Inflation will make government debt seem smaller by shrinking the value of the dollar. Yet, for individual Americans, inflation will be an insidious hidden tax increase that will make everything you buy more expensive, and everything you own worth less. If our government tries to inflate its way out of a debt crisis, much of your life savings will be wiped out. Milton Friedman put it well: "Inflation has been increasingly attractive to sovereigns because it is a hidden tax that at first appears painless or even pleasant...It is truly taxation without representation."

Source: The Debt Bomb, by Sen. Tom Coburn, p. 20-21 , Apr 17, 2012

Government spends somebody else's money on somebody else

The great free market economist Milton Friedman once explained the necessity of limiting power of government:
    "There are 4 ways in which you can spend money.
  1. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.
  2. You can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.
  3. I can spend someone else's money on myself, then I'm sure going to have a good lunch!
  4. Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get."
Friedman concluded: "And that's government."
Source: Now Or Never, by Sen. Jim DeMint, p.120-121 , Jan 10, 2012

1920s: Federal Reserve monetary expansion caused Depression

The "forgotten depression" of 1920-21 was brought on by the Fed's printing money for Woodrow Wilson's war. Why is that depression so little known? Because President Harding refused to intervene. He let businesses and banks fail and prices fall. The fever broke, and America, after slashing Wilson's wartime tax rates, took off into the Roaring Twenties.

Then, as Milton Friedman related in "A Monetary History of the United States," which contributed to his Nobel Prize, the Fed began to expand the money supply in the mid-1920's. Cash poured into equity markets where stocks could be bought on 10 percent margin. The market soared. When the market stalled and stocks began to fall, margin calls went out. Americans ran to the banks to get their savings. Panic ensued. Banks closed by the thousands. Stock prices fell by almost 90 percent. A third of the money supply was wiped out. Thus did the Federal Reserve cause the Depression. Smoot and Hawley were framed.

Source: Suicide of a Superpower, by Pat Buchanan, p. 36-37 , Oct 18, 2011

1965: we are all Keynesians now; and nobody is a Keynesian

Keynesian in economics." The famous "We're all Keynesians now" came from a cover story in the Dec. 31, 1965 edition of Time magazine, which attributed the quote to Milton Friedman. As the [post-WWII] economy grew, the debt shrank as a percentage of it. "We're all Keynesians now," Richard Nixon purportedly proclaimed in 1971.

(In fact, Nixon didn't actually say this. He said, "I am now a Keynesian.")

By then even a conservative like Nixon had accepted government's ability to keep people employed, to fill in the breach when consumers and businesses did not spend enough. Even this wasn't precisely accurate. In a commentary appearing in the Feb. 4, 1966 edition of Time, Friedman clarified that he had actually said, "In one sense we are all Keynesians now; in another, nobody any longer is a

Source: Aftershock, by Robert Reich, p. 44-45 , Apr 5, 2011

Every politically free society has a free market

Restricting economic freedoms limits our political freedoms. History teaches that the two are intimately entwined. Economic freedom disperses political power and distributes it among the people. With a free market system we separate economic power from political power, so that each may offset the other. As the late Nobel Prize-winning economist Milton Feldman put it, "Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity." Economic independence is what allows people to protect their political rights and freedoms. Once the powerful hand of government subsumes our economic independence, it immediately becomes more difficult to stand up that government. The natural logic of capitalism requires democracy.
Source: Leadership and Crisis, by Bobby Jindal, p.165-166 , Nov 15, 2010

The Great Depression was the fault of the Federal Reserve

Bernanke's comment to Milton Friedman at a dinner honoring Professor Friedman's ninetieth birthday on November 8, 2002, reveals it all. He apologized to Professor Friedman and said Friedman was absolutely right--the Depression was the fault of the Federal Reserve. It wasn't the fault of the central bank managing a fiat currency or participating in credit expansion or debt monetization; the problem lay only with the Federal Reserve's inability or unwillingness to inflate the currency early and massively starting in 1929.

Bernanke closed his remarks by directly addressing Friedman: "You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Source: End the Fed, by Rep. Ron Paul, p.110-111 , Sep 29, 2010

Money supply needs to expand, to support economic growth

What did Milton Friedman believe about money? He was a free-market economist who called himself a libertarian and contributed tremendously to an understanding of how the free market works. There was, however, strong disagreement between Milton Friedman and the hard-money camp of the Austrian school. Friedman believed that the money supply needed to expand in order to support economic growth. He despaired, from time to time, of the Fed's incentive to do what was right, but he believed in the old monetarist principle that the money supply needed to expand by some amount.
Source: End the Fed, by Rep. Ron Paul, p.112 , Sep 29, 2010

Economic freedom is a component of political freedom

With the FairTax in place, to compete with America in the global market, other countries will have to recognize that the best way to economic prosperity is to allow people to be free in their economic endeavors--to make whatever voluntary arrangements they choose, with WHOMEVER they choose, WHENEVER they choose, without constraint from unfair tax consequences. That has huge implications for the world economy, and for the cause of freedom.

As Nobel laureate Milton Friedman wrote in 1962, "Freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. Economic freedom is also an indispensable means toward the achievement of political freedom."

As other nations turn their constituents into "voluntary" taxpayers by copying us, they will also eliminate the coercive nature of their tax collection system & allow economic freedom to expand throughout the world. More than anything we can think of, that would spread freedom across the globe!

Source: The FairTax Book, by N.Boortz & Rep.J.Linder, p.109-110 , May 31, 2006

Erratic monetary policy is greatest threat to economy

I called for all of Reagan's speeches and interviews in which he referred to economic matters. I reviewed the economic theories on which the President's remarks were said to have been based and discussed them with my staff. Reviewing my notes at the end of this process, I saw that there was a remarkable consistency in the President's public utterances.

He was influenced by the economic theories of Professor Milton Friedman, the Nobel laureate from the University of Chicago. Friedman is a strong believer in monetarism, which holds that the level of economic activity is most directly affected by the money supply, or, in institutional terms, but the Federal Reserve. Friedman also believes--in my view, correctly--that erratic monetary policy by the Federal Reserve is perhaps the greatest threat to economic stability and growth. Friedman is a true believer in free markets, that is, markets free of government regulation and interference. Ronald Reagan sympathized with these ideas.

Source: For the Record, by Donald Regan, p. 157-158 , May 2, 1988

Government's role is only to determine the rules

A major source of objection to a free economy is precisely that it does this task so well. It gives people what they want, instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.

The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on. What the market does to reduce greatly the range of issues that must be decided through political means and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity.

Source: Capitalism and Freedom, by Milton Friedman, p. 15 , Nov 15, 1962

Government caused Great Depression, and recessions since

"Full employment" and "economic growth" have in the past few decades become primary excuses for widening the extent of the government intervention in economic affairs. A private, free-enterprise economy, it is said, is inherently unstable. Left to itself, it will produce recurrent cycles of boom and bust.

These arguments were particularly potent during and after the Great Depression of the 1930's. These arguments are thoroughly misleading. The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. A governmentally established agency--the Federal Reserve System--had been assigned responsibility for monetary policy. In 1930 and 1931, it exercised this responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe.

Source: Capitalism and Freedom, by Milton Friedman, p. 37-38 , Nov 15, 1962

Fed should grow money supply by 3%-5% and nothing else

My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. I would specify that the Reserve System shall see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X%, where X is some number between 3 and 5.

As matters now stand, while this rule would drastically curtail the discretionary power of the monetary authorities, it would still leave an undesirable amount of discretion in the hands of the Federal Reserve with respect to how to achieve the specific rate of growth.

I should like to emphasize that I do not regard my particular proposal as a be-all and end-all of monetary management, as a rule, which is somehow to be enshrined for all future time. It seems to me to be the rule that offers the greatest promise of achieving a reasonable degree of monetary stability in the light of our present knowledge.

Source: Capitalism and Freedom, by Milton Friedman, p. 54 , Nov 15, 1962

Repeal recession spending once expansion begins

More recently, the emphasis has been on government expenditures as a balance wheel. When private expenditures decline for any reason, it is said, governmental expenditures should rise to keep total expenditures stable.

Unfortunately, the balance wheel is unbalanced. Each recession, legislators hasten to enact federal spending programs of one kind or another. Many of the programs do not in fact come into effect until after the recession has passed. The haste with which spending programs are approved is not matched by an equal haste to repeal them or to eliminate others when the recession is passed and expansion is under way. On the contrary, it is then argued that a "healthy "expansion must not be "jeopardized" by cuts in governmental expenditures. The chief harm done by the balance-wheel theory is therefore that it has continuously fostered an expansion in the range of governmental activities at the federal level and prevented a reduction in the burden of federal taxes.

Source: Capitalism and Freedom, by Milton Friedman, p. 75-76 , Nov 15, 1962

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Page last updated: Apr 30, 2021