This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into 1938-1946, 1946-1959, 1959-1970, and 1970-1979. For each of these subperiods, I consider Friedman's observations on and dealings with key events, issues, and personalities in U.K. monetary policy and in general U.K. economic policy.

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Milton Friedman and U.K. Economic Policy: 1938-1979

Milton Friedman began his teaching career at the University of Chicago isolated intellectually. He defended the ideas that competitive markets work efficiently to allocate resources and that central banks are responsible for inflation. By the 1980s, these ideas had become commonplace. Friedman was one of the great intellectuals of the 20th century because of his major influence on how a broad public understood the Depression, the Fed's stop-go monetary policy of the 1970s, flexible exchange rates, and the ability of market forces to advance individual welfare.

The Contributions of Milton Friedman to Economics

Market Transaction Costs, Asset Demand Functions, and the Relative Potency of Monetary and Fiscal Policy

Milton Friedman died November 16, 2006, at the age of 94. Any attempt to put his contributions to economics into perspective can only begin to suggest the vast variety of ideas he discussed. Burton (1981, 53) commented that "attempting to portray the work of Milton Friedman . . . is like trying to catch the Niagara Falls in a pint pot." 1 At the beginning of his career, Friedman adopted two hypotheses that isolated him from the prevailing intellectual mainstream. First, central banks are responsible for inflation and deflation. Second, markets work efficiently to allocate resources and to maintain macroeconomic equilibrium.2 Because of his success in advancing these ideas in a way that shaped the understanding of the major economic events of this century and influenced public policy, Friedman stands out as one of the great intellectuals of the 20th century. 1. FRIEDMAN'S INTELLECTUAL ISOLATION Until the 1970s, the economics profession overwhelmingly greeted Friedman's ideas with hostility. Future generations can easily forget the homogeneity of the post-war intellectual environment. Friedman challenged an intellectual orthodoxy. Not until the crisis within the economics profession in the 1970s prompted by stagflation and the failure of the Keynesian diagnosis of cost-push inflation with its remedy of wage and price controls did Friedman's ideas begin to receive support. More than anyone, over the decades of the 1950s and 1960s, Friedman kept debate alive within the economics profession.3 Because economics is a discipline that advances through debate and diversity of views, it is hard to account for the near-consensus in macroeconomics in the post-war period and also the antagonism that met Friedman's challenge to that consensus. In order to place his ideas in perspective, this section provides some background on prevailing views in the 1950s and 1960s. The Depression had created a near-consensus that the price system had failed and that it had failed because of the displacement of competitive markets with large monopolies. Intellectuals viewed the rise of the modern corporation and labor unions as evidence of monopoly power. They concluded that only government, not market discipline, could serve as a countervailing force to their monopoly power. Alvin Hansen (1941, 47), the American apostle of Keynesianism, wrote: In a free market no single unit was sufficiently powerful to exert any appreciable control over the price mechanism. In a controlled economy the government, the corporation, and organized groups all exercise a direct influence over the market mechanism. Many contend that it is just this imperfect functioning of the price system which explains the failure to achieve reasonably full employment in the decade of the thirties. . . . It is not possible to go back to the atomistic order. Corporations, trade-unions, and government intervention we shall continue to have. Modern democracy does not mean individualism. It means a system in which private, voluntary organization functions under general, and mostly indirect, governmental control. Dictatorship means direct and specific control. We do not have a choice between "plan and no plan." We have a choice only between democratic planning and totalitarian regimentation. Jacob Viner (1940, 7-8), who taught Friedman price theory at the University of Chicago, aptly characterized the intellectual environment engendered by the Depression: Instead of the economy of effective competition, of freedom of individual initiative, of equality of economic opportunity, of steady and full employment, pictured in the traditional theory, they [economists who reject the competitive market model] see an economy dominated by giant corporations in almost every important field of industry outside agriculture, an economy marked by great concentration of wealth and economic power, and great disparity of income and of opportunity for betterment. They note the apparently unending flow of evidence from investigating committees and courts of the flagrant misuse of concentrated economic power. …

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This article was originally published in the Board of Governors of the Federal Reserve System Open Market Policies and Operating Procedures-Staff Studies, July 1971. It is reprinted here as an addendum to these conference proceedings.

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David Meiselman

Papers

Keynes and the Quantity Theory: A Comment on The Friedman-Meiselman CMC Paper: Reply to Donald Hester