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More Milton Friedman on Rules

Posted By Don Boudreaux On August 1, 2012 @ 10:40 pm In Hubris and humility,Man of System,Monetary Policy,Reality Is Not Optional,Scientism,Seen and Unseen | Comments Disabled

A few days ago I re-read Milton Friedman [1]‘s insightful 1947 review [2] of Abba Lerner [3]‘s The Economics of Control, and then chose a passage from that review to serve as the July 25th “Quotation of the Day.” [4]

Driving back from class tonight (During the Summer I teach Principles of Microeconomics to journalism students, under the auspices of The Fund for American Studies [5] [Thanks Roger and Joe!]), I realized that the closing section of Friedman’s review reveals the importance that Friedman attached, even as early as 1947, to rules and other constraints that prevent government power from being misused either mistakenly or abusively.  Here are large slices from the final section of Friedman’s review in which Friedman discusses Lerner’s proposals for (in Friedman’s words) “institutional arrangements that, judged solely on a formal level, would permit the conditions for an optimum to be satisfied.”:

None of these arrangements will, of course, operate perfectly in practice.  The most that can be expected is a reasonable approximation to the economic optimum.  They must, therefore, be judged in part by (1) the practical administrative problems entailed in so operating them as to approximate the economic optimum and (2) as a corollary, the extent to which they lend themselves to abuse, that is, the ease with which they can be used for objectives other than the general welfare.  Economic institutions do not operate in a vacuum.  They form part, and an extremely important part, of the social structure within which individuals live.  They must also be judged by (3) their noneconomic implications, of which the political implications – the implications for individual liberty are probably of the most interest and the ethical implications the most fundamental.

….

In the reviewer’s judgment, these gifts [that is, Lerner's gifts as an economic theorist] have been imperfectly realized because they have been employed in a vacuum and have not been combined with a realistic appraisal of the administrative problems of economic institutions or of their social and political implications.

[These passages are from pages 317-319 of Friedman's 1953 collection, Essays in Positive Economics [6].]

Not only do the above-quoted passages reveal that even the young Milton Friedman, fully in the role of academic economist, was attuned to the significance of individual liberty, it shows also that the young Friedman was aware that a quantum of government discretion necessary to achieve in theory some economic bliss point might well, in practice, be a recipe for achieving only some outcome very far indeed from “optimum” or bliss.  Rules that prevent government officials from acting as textbooks – especially those many textbooks that are innocent of institutional realities and of human foibles, frailties, and flaws – would have government officials act were understood by even the young Milton Friedman to play important roles in free societies.

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URLs in this post:

[1] Milton Friedman: http://www.econlib.org/library/Enc/bios/Friedman.html

[2] 1947 review: http://www.jstor.org/discover/10.2307/1825534?searchUrl=%2Faction%2FdoBasicSearch%3FQuery%3Dmilton%2Bfriedman%2Babba%2Blerner%2Beconomics%2Bof%2Bcontrol%2B%2522general%2Bwelfare%2522%26acc%3Doff%26wc%3Don&Search=yes&uid=3739936&uid=2134&uid=2&uid=70&uid=4&uid=3739256&sid=21101126973437

[3] Abba Lerner: http://www.econlib.org/library/Enc/bios/Lerner.html

[4] the July 25th “Quotation of the Day.”: http://cafehayek.com/2012/07/quotation-of-the-day-358.html

[5] The Fund for American Studies: http://www.tfas.org/

[6] Essays in Positive Economics: http://www.amazon.com/Essays-Positive-Economics-Phoenix-Books/dp/0226264033/ref=sr_1_14?s=books&ie=UTF8&qid=1343214574&sr=1-14

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