The Hindu Business Line : Friedman's unexpected legacy

He was eulogised and lionised after he died and even more so during his life. Milton Friedman had won them all - the Nobel (though Paul Samuelson beat him to it by a few years) and the John Bates Clark prize for the best young American economist under the age of 40.

Money is all, said Friedman. Inflation is always and everywhere a monetary phenomenon. His prescription to central banks was simple: don't create volatility in liquidity. Keep money supply growing moderately and steadily to accommodate the needs of the economy.

Governments received pithy advice: Reduce taxes and spending, avoid (macro and micro) economic management - in short, a minimalist government and maximum economic freedom, epitomised in the famous book, `Free to Choose', which he co-authored with his wife.

It was but one short step for Friedman and his followers to equate free markets to democracy. In fact, they went much further, hypothesising that the existence of a market economy was a fundamental condition for political freedom.

What began as a counter to Keynesianism assumed the form of an aggressive ideology, opposed to even the mildest government and public intervention in markets.

And it has its enthusiastic votaries in emerging countries like India where being pro-free market is like a fashion statement.

Friedman probably had in mind the Soviet Union and east Europe where socialism was accompanied by political suppression.

But Chile and India contradicted him. Chile's free market reforms were implemented by a brutal dictatorship, while India's socialism made no compromise on democratic rights.

Meanwhile, Friedman's monetarism was taking a knock. Money supply must be controlled, but how do you define money - M0, M1, M2 or M3? Not to mention the inroads made by technology, creating plastic, electronic and smart money, making the task of monetary measurement difficult if not impossible.

The bitterest blow must have been the US Fed Reserve's recent decision to stop publishing M3 statistics - so redundant had they become. It had, of course, given up monetary targeting long back, adopting a `decide as we go along' strategy.

In a final act of throwing in the towel, Friedman himself commended Mr Alan Greenspan, the previous Fed Chairman, for his non-rule based, discretionary approach to policy.

What, then, of Friedman's legacy survives? And can we in India learn anything?

Surprisingly, the one Friedman prescription that is winning adherents in the US and warrants the most serious consideration in India has nothing to do with conventional free market economics and could be the answer to improving the abysmal quality of education in public schools.

Let the government give vouchers to parents, which they can use to send their children to public schools of their choice, said Friedman.

This free exercise of preference for schools delivering quality education, will, in course of time, force the laggards to catch up or close down for lack of support.

There is no reason the same principles cannot be applied to public healthcare and hospitals.

Shows market solutions can go beyond pure commerce and envelop social sectors, doesn't it?

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Friedman's unexpected legacy