
The flag flies at half-mast here at IHNJ, and it has since 11/16/2006, when Milton Friedman passed away at the age of 94.
A quick check of political/economics/policy blogs will tell you how he has been at once hated and loved. It's been very popular among bloggers over the last few days to do a RIP Milton Friedman post, deifying the man and his ideas. I want all of you to know that I've been working on a post since Friday morning when I heard the news, and I have filled nearly an entire legal pad with my thoughts and drafts and ideas for a post. I have read old journal articles and excerpts from his books and I have poured over this stuff in a way that I haven't since I left grad school. I've been trying to find a way to put down on paper what MF means to me. My wife thinks I'm crazy. I mean, I never even met this man. I never heard him speak in person. But I don't know how to explain the loss that I feel over this, except to say that by studying his work over the years he has had the largest impact on the framework I've developed to think about
everything that goes on in this world.And one of the reasons that I'm so sad is that he spent his entire career advocating ideas that were and are correct, and when I look at the newspaper today, I see the world disregarding those ideas, much in the same way that they always have, and to their own detriment.
The most common misconception made by his critics was that Milton Friedman hated poor people. Why? He opposed the following ideas:
1. The welfare system
2. The minimum wage, or wage controls of any kind
3. Organized labor unions who keep wages higher than they would be otherwise
4. The military draft
These are ideas and policies that are easy to get behind and support. They sound great. We should raise the minimum wage. Of course! Help the poor! The only one that is counterintuitive is the 4th one: Milton Friedman supported an all volunteer army. His critics said that a volunteer army would be composed mostly of low income soldiers, because the rich would never choose to put themselves in harms way, and the only ones who would be attracted to the army's relatively low wages were poor people. So, MF must hate the poor and downtrodden citizens of the world. He wants to change the welfare system, he wants to abolish the minimum wage, he wants to get rid of labor unions, and he wants to send all of our poor off to die in times of war.
If the reader gets sick of all my babbling and only gets one point out of this entire piece, let it be this one:
Milton Friedman understood that you cannot judge a policy based on its intentions. On the contrary, a policy should be judged based on its results.After all, the road to hell is paved with good intentions. What do I mean by this? Well, each of the policies above is only meant to help the group that it is aimed at. It has only the best interest of the poor in mind. However, the group that winds up getting hurt the most by these policies is the very group that were supposed to be helped! MF believed that the welfare system had to be overhauled in a big way. He believed that we were paying people too much to be poor, and were actually encouraging them to stay that way. One of his solutions was a sort of reverse income tax. This is one of the few MF innovations that we see actually working today in the real world: The Earned Income Tax Credit. In effect, this tax credit reduces the payroll taxes of low income people and actually acts as an income supplement. As the amount of money earned by a low income person increases, so does the credit. This goes on up to a certain plateau level, and then begins to phase itself out as the person continues to make more money. The plan rewards the low income worker for working. It does not pay the person who sits and home hoping to collect a check from the government. As well as this program has worked, none of his other ideas for welfare reform were implemented. He realized that people respond to incentives, and as long as we keep lowering the cost of being poor with government subsidies like welfare, we would continue to see an awful lot of poor people.
Probably the most frequently debated and most controversial topic has always been the minimum wage. This is something that is on the front page of the WSJ even today, and it was one of the hot button topics of the most recent Democratic victory in the House and Senate. It is a gimme. We can make low income citizens better off by raising the minimum wage! And if you oppose such a thing, you must hate the poor and you must be insensitive. This could not be farther from the truth. Dr. Friedman has (and many others have) explained many times over that by raising the minimum wage (or forcing higher wages in any way) you are actually hurting the low income worker. When you raise the minimum wage, you raise unemployment. The worker who was being paid $6/hour will now likely be out of a job if his employer is forced to pay him $7/hour, because he isn't worth that to the employer! Why would the employer keep him on? Charity? Proponents of wage controls simply don't believe this fact. They believe that an evil capitalist sits atop the company holding workers as wage slaves and reaping all the benefits, but this idea is silly. If i own a business, I have to hire workers in order for the business to run. I want the best employees I can have, so I have to attract them with wages and benefits, but I will only pay them what they are worth to me. I can hire a worker for $5/hour and he provides me with $10/hour of labor. This is great! I get to keep the leftover $5! However, my competitor also wants employees and he sees that I have this good one. He offers my worker $6/hour to do the $10/hour worth of work that the employee can do, and he keeps the $4. It is still worth it to me to offer $7/hour for the $10/hour worth of labor, so I do it. Do you see where this is going? If a worker is being underpaid, he can always go somewhere else and make more money. A worker will get paid what he is worth based on his skill level. If I am hiring somebody at todays minimum wage of $5.15/hour or whatever it is, and then I am forced to pay him more by law, I won't do it. If they raise the minimum wage to a level of $7/hour, I will only keep on those employees that are worth $7/hour and I will fire all of those who are worth less. By simply existing, the minimum wage is discriminating against low skilled laborers. I don't know how much more simply to explain this.
Another interesting debate involves the military draft and the all volunteer army. Critics say that the poor will be "forced" to go and die, while the rich stay home and enjoy being rich. The defense of the all volunteer army stands on the foundation that individuals should be allowed to self-select into an occupation, and they will choose the option that is best for them. The critics are correct that the army would be made up mostly of lower income individuals, but what they fail to recognize is that these individuals are better off in the army and would be worse off if they could not volunteer. Nobody is forced into wages that they don't deserve. If the army pays $15k/year, and I can only make $10k/year because I have few skills, then I am better off by choosing to go into the army. However, if I am highly skilled and I make a good wage for myself, I am made much worse off by being made to join the army. I lose my high wages, and society loses my high output because of my skills. And if I am a low skilled individual and I'm not selected by the draft, I am being denied the opportunity to better myself and my situation. It's just rational.
You can see that the ideas of Dr. Friedman are based on a few ideas:
1. Individual freedom to choose is paramount because,
2. Individuals can better choose for themselves what is best for themselves, and
3. The government cannot choose it better for me.
I could almost cry when I look at the news lately and see how so many of MF's ideas are horribly misunderstood at best, and completely disregarded at worst. Look at the campaign platform of the democrats who just came into power! Raise the minimum wage! Let's make this economy more "fair"! What does that even mean, "fair"? That sounds like the rantings of a child that doesn't have a toy that his friend has. The fact that some people are rich and others are poor has nothing to do with fairness, and you can't make it "more fair" by taking what the rich have and spreading it around so that we are all equal. That isn't what fair is. Fair is everyone having an opportunity to succeed. Being created equal doesn't guarantee equal outcomes, just equal opportunities. The fallacy believed by so many in this country is that we can solve the problem of poverty and wage inequality. There will always be people who are less able than others. We can't make our society better off by punishing its most productive members (the highly skilled) and rewarding its least productive members (the low skilled). What we can do is to have policies in place that actually work to make life better for the least of our population, not just policies that sound like they should work. Artificially increasing wages won't do this. At best you get higher prices to cover the new higher costs of wages, and this is just redistributing wealth by taking it from the rest of the world in the form of higher costs and giving it to the workers in the form of higher wages. At worst, you get increased unemployment.
I could go on for days here. I haven't even touched 25% of my notes, and what I have written so far is scatterbrained enough as it is. But I will close with a positive takeaway that really just came to me this morning:
I think that politicians and the general population might finally be understanding the fact that we have an economy that works from the bottom up. The consumer makes demands of producers for goods that they want and at what prices and quality, and the producers then produce those goods as best they can. The most recent attack on Walmart has been a consumer driven one: a boycott. Barack Obama said in the teleconference supporting the movement that if you disagree with Walmart's wage practices, you should shop at Costco like he does. There they pay a much higher wage and much better benefits. He isn't recommending a new law requiring Walmart to raise its wages; Obama is recommending letting market forces regulate wages. I hope this means that he realizes that you can't tell the American people what they should want or what is best for them. In the same vein, I recently saw a commercial for Gateway that was highlighting their policy of 100% North American based tech support. Basically what they are saying is, if you hate all this outsourced tech support, if you hate talking to some guy in India every time your computer messes up, then buy a Gateway. Presumably you will pay more because an American tech support worker costs more than an Indian one, but if you buy the computer it means that this is something that is important to you. So, you are keeping some tech support jobs here in North America. This isn't because of some protectionist law requiring Gateway to hire only locals; it is because there is demand from consumers for this job to stay in the United States! And if these kinds of things go well, you will see more of this from other companies. How long will it take for governments to realize that they can't tell their citizens what they should want? When governments try to legislate choices on the people, they only cause inefficiencies and loss of both jobs and money. Look at what happened with trans fats. The government won't have a chance to outlaw them because companies will stop using them first because of consumer choice! In all of these situations, people are better off because they have chosen for themselves what is best, and not because of politicians in DC choosing for them. So maybe there is a silver lining. Maybe these ideas aren't so radical after all. Maybe, as Milton Friedman so often suggested, things aren't always as they first appear.
This will likely be my last post for a good long while. I am currently studying for the CFA (just google it) and that is taking up all of my free time. However, I am completely open to discussion of anything I've written here. I actually think it would make me feel better. Free market ideas are always better when discussed rather than when presented. I want to leave you with the following link. This is Milton Friedman saying most of the stuff I've been struggling to get out, and doing it in the style in which he always did it: one that is easy to understand, and astoundingly brilliant. It is shocking how applicable everything he says in this video is today.
Milton Friedman on Everything
Thank you for indulging me this post. Milton Friedman is an idol of mine and I will miss him.