There’s no way to appreciate fully the contributions of Nobel Prize-winning economist Milton Friedman (1912-2006), who would have turned 99 years old this weekend, to the growth of libertarian ideas and a free society.

This is the man, after all, who introduced the concept of school vouchers, documented the role of government monopolies on money in creating inflation, provided the intellectual arguments that ended the military draft in America, co-founded the Mont Pelerin Society, and so much more. In popular books such as Capitalism and Freedom and Free to Choose, written with his wife and longtime collaborator Rose, he masterfully drew a through-line between economic freedom and political and cultural freedom.

Yet his ultimate contribution to freedom and liberty is found less in any of the specific argument he made and more in the ways he made them. Friedman provided an all-too-rare example of a public intellectual who was scrupulously honest, forthright, and fair in every debate he entered. Whether he was duking it out with fellow Nobel Prize winners and other high-profile economists or making the case for the morality of capitalism with TV hosts such as Phil Donahue and angry students, he always argued in good faith, admitted when he was wrong, and enlarged the circle of debate.

Long after some of his technical points and social insights have been superseded, that commitment to relentless inquiry and search for truth wherever it takes us will survive.

Milton Friedman gave us something much better than revealed truth: He showed us the process by which we might continue to indefinitely learn about our world and the human condition. In this sense, the Friedman Century is far from over; indeed, it’s just getting started.

Written and narrated by Nick Gillespie. Produced and edited by Jim Epstein, with help from Jack Gillespie.

About 2.30 minutes.

For Reason’s coverage of and interviews with Milton Friedman over the years, go here now.

Go to Reason.tv for downloadable versions, and subscribe to Reason.tv’s YouTube channel to receive automatic updates when new material goes live.

Swedish economist Johan Norberg is the host of the new documentary Free or Equal, which retraces and updates the 1980 classic Free to Choose, featuring Milton and Rose Friedman. Like the Friedmans, Norberg travels the globe to look at the conditions under which prosperity and freedom flourish – and under what conditions they wither and die. Made by the same producer who created Free to Choose, Free or Equal will be appearing on PBS in 2011. For more information, a clip of the new documentary and the entire Free to Choose series, go here.

Norberg is the author of numerous books, including In Defense of Global Capitalism (2002) and Fiscal Fiasco (2009), a look at how the U.S. government’s policies contributed to and have exacerbated the length and intensity of the Great Recession.

Reason’s Nick Gillespie sat down with Norberg to discuss how the changes in the world since the Friedmans’ earlier documentary effect their basic argument that individual economic freedom is a building block for a prosperous and open society. Overall, says Norberg, the Friedmans’ basic insights hold true and some of the places they celebrated – such as Hong Kong, then under British protection and now part of the People’s Republic of China – are still flourishing. But in countries and regions that continue to constrain economic and political liberties, reports Norberg, fear and privation still dominate.

About 6 minutes. Shot by Jim Epstein and Joshua Swain; edited by Swain.

Go to Reason.tv for downloadable versions, and subscribe to Reason.tv’s YouTube Channel to receive automatic notifications when new material goes live.

For an earlier Reason.tv interview with Norberg (about his book Fiscal Fiasco), go here.

Standard measures of the money stock, for example, have not increased greatly. The year-to-year change (ending in January 2011) in M2 was only 4.3 percent; the two-year change, only 6.4 percent. For MZM (money zero maturity), the corresponding rates of change were 2.6 percent and 4.4 percent, respectively. Thus, it would appear that by historical standards money has grown quite moderately in the past two years.

Bernanke and his supporting cast of monetary economists can also point to corroborating evidence that by historical standards the rate of inflation has been modest. The year-to-year change (ending in January 2011) in the all-items consumer price index (CPI) was only 1.7 percent; the two-year change, only 4.3 percent. The implicit price deflator for GDP, the broadest of all price indexes, reveals even less inflation. This index, which is computed on a quarterly basis, shows a one-year change of only 1.4 percent for the year ending in the fourth quarter of 2010, and a corresponding two-year change of only 1.8 percent.

(I have computed all of the figures mentioned in this article from basic data available at the website maintained by the Federal Reserve Bank of St. Louis.)

The foregoing variables are the ones that macroeconomists and monetary analysts at the Fed consult most often in their analysis of the economy’s performance and of the relation between money and inflation. So, if Bernanke tells us that inflation is not a problem, he is clearly resting his case on the kinds of evidence that the country’s recognized experts in the great universities view as scientifically de rigueur.

A serious problem lurks, however, in the way the mainstream experts think about the economy, and hence in the kind of analysis they undertake to assess its current performance and its likely future changes. All too often, they model the macroeconomy as a black box into which flow undifferentiated “labor” services and “capital” services and out of which flows a uniform substance called “output,” measured empirically by estimates of real GDP. Units of this output command a price known as the “price level,” measured empirically by the GDP deflator; otherwise, prices play no role in the model. The interest rate plays only a limited role as a determinant of the demand for money and as a minor determinant of saving and investment spending. Time is essentially irrelevant. There is no time structure of production in which certain kinds of production must precede others in a process running from raw materials to intermediate goods to completed consumer goods because, as mentioned, such distinctions among different kinds of goods are ignored in favor of positing a single homogeneous “output.” Just as time plays no role, and hence the interest rate (the price of goods available now relative to goods available later) plays no role in resource allocation, so location does not matter. It’s as though all production took place at a Euclidean point, and therefore no one need worry about, say, the government’s injecting “stimulus” money into Connecticut in order to lower unemployment in Nevada.

Although modern macroeconomic models, which have been constructed since the 1930s, vary in many ways, and some of them do not conform to the foregoing description in one way or another, the general approach of macroeconomic analysis fits my description all too well. It is a mode in analysis in which the time structure of production is ignored, interest rates play little or no role in allocating resources between time periods, a single output is produced, and inputs are viewed as homogeneous in kind, quality, and location. If one suspects that such extreme simplification may be squeezing every feature of the Prince of Denmark out of Hamlet, one’s instincts are alive and well.

Because this approach to thinking about the macroeconomy is essentially timeless―inputs flow in and outputs flow out simultaneously during any arbitrarily defined period of time―the Fed’s scrutiny of the economy’s performance tends to be extraordinarily focused on the recent past (from which its most up-to-date data come) and the near-term future. Truly long-run considerations scarcely come into play, as the Fed attempts to fine tune its policy instruments at monthly or more frequent intervals to keep the economy on a smooth growth path with a low rate of inflation and a low rate of unemployment―in truth, an impossible task even if performed with the greatest competence, because the number of targets exceeds the number of instruments. So, Bernanke is always referring to the most recent report on inflation, for example, to demonstrate that the Fed has taken the optimal policy stance; and he always assures us that whenever new data reveal a deviation from the desired economic conditions, the Fed will take appropriate steps to correct its misbehavior.

Such myopic monetary policy making has great potential for creating too much monetary stimulus in certain periods, then overreacting by creating too much monetary contraction, thereby introducing or amplifying fluctuations in the economy’s real growth or its rate of inflation that would not occur if the Fed did not exist. As Roger Garrison observes, the Fed is a loose cannon on the economy’s deck, rolling with great momentum here and there as the ship pitches and rolls and wreaking havoc as it crashes into everything in its compass. Bernanke claims to have absorbed Milton Friedman’s teachings about the Fed’s responsibility for causing the Great Depression, but he evidently skipped Friedman’s class on the day that the professor told the pupils that monetary policy exerts its effects with long and variable lags. Because of these unpredictable lags, the Fed is always, as it were, reacting to information that does not tell the full story about how the economy is already responding, or eventually will respond, to monetary policy changes that extend for a year or more into the past.

One error the Fed makes time and again is failure to recognize until it is too late that it has already built inflation into the system. So, we might well wonder whether the Fed is making that very error now. Several indicators suggest strongly that it is doing so.

Inflation does not usually appear equally throughout the economy. Instead, it usually begins in the markets for raw materials and intermediate goods and then works its way to consumer-goods markets, where retailers always explain to irate buyers that they are raising prices only because their cost of goods has risen. If such inflation is occurring now, we can identify it by checking the producer price index (PPI) and some of its components.

Looking first at the overall PPI, we find that the year-to-year change (ending in January 2011) was 5.7 percent, or 4 percentage points greater than the change in the CPI; the two-year change was 12.3 percent, or 8 percentage points greater than the change in the CPI.

Some important components of the PPI have risen even faster. For the PPI for crude foodstuffs and feedstuffs, the one-year change was 20.6 percent, the two-year change, 25.6 percent. The PPI for fuels and power shows a one-year change of 6.5 percent and a two-year change of 33.1 percent. Because food, feed, fuel, and power are so critical to many of the world’s poorer countries, these rapid increases in prices have already provoked riots and other displays of desperation throughout the world. It is reasonable to assume that before long the price increases in these markets will have an effect on the rate of increase in consumer-goods prices in the United States and other advanced economies.

We may also look for price changes that reflect market participants’ expectation of future inflation and hence their attempts to purchase real goods that might serve them as hedges against such price acceleration. Here the most notable indicators include, of course, the price of gold. For the closing gold price in January 2011, the one-year increase was 24.0 percent, the two-year increase, 44.3 percent. Other such indicators come from the stock market, where traders bid up share prices in the expectation of future net income to be earned from the firms’ sales of real goods and services. For the Standard & Poor’s 500 index, the one year increase (ending in January 2011) was 19.8 percent, the two-year increase, 55.7 percent.

Bernanke dismisses evidence such as the foregoing by noting, correctly, that the prices of producer goods typically vary more than the prices of consumer goods. In his view, one only muddies the waters of one’s analysis of inflation by taking note of producer prices. He might similarly dismiss the zooming prices of gold and corporate stocks as the product of forces unrelated to monetary policy―which they might be, of course, but in the present case I do not think they are.

Bernanke is a celebrated mainstream macroeconomist. His achievements in this field account for his having become Fed chairman in the first place. But this background, training, and research have predisposed him, as it has predisposed almost all mainstream macro and monetary economists, to think about the macroeconomy and about the relation between money and inflation in a way that hides essential elements of what is actually occurring. The root of all of these evils is excessive aggregation. The reigning macroeconomic analysis also has other important flaws, as I have suggested, but however these other problems might be dealt with, as long as mainstream analysts continue to work within the confines of such highly aggregated models, continued failures to understand and control the economy’s movements are well-nigh inevitable.

In my last post, I explained the best way to end unemployment is an Ebay / Paypal style solution to auction off the “Man Weeks” of our unemployed:

1. All registered workers are guaranteed an income of $10,400 per year, at least $6 per hour.  The minimum bid is $1, and the government uses current Unemployment Insurance I monies to add up to $5.
2. Current UI ends after 90 days.  To receive any extra aid of any kind (food stamps, Section 8, energy assistance, etc.) able bodied workers must register in this system. They receive a Debit Card where their pay is deposited every Friday.  They can choose to earn less, but they cannot decline to work and get GI.
3. We are all allowed to bid on any worker’s Man Week, as long as we have first deposited the money to cover the bid in the system; no credit will be extended.  This bid covers employer taxes, workers compensation, everything soup-to-nuts.

Below you will find the pay schedule I’m suggesting, but first I want to talk about a gorgeous side effect of this plan: it ends illegal immigration.  In fact, it actually causes current illegals to deport themselves.

The reason is simple: When farmers can bid $4.00 per hour to have unemployed American citizens pick the grape crop, they will no longer hire illegals.  You get the drift?  Immediately, there will be no jobs open to illegal immigrants.  Since (in this $4 case) the government is adding $3.50 per hour, the US citizen is earning $7.50 ($15,600 per year).

We’ll leverage the extra pay provided by the government (money we spend anyway) to end demand for non-citizen workers.

Notice that we don’t need to staff up the Immigration Department to chase down coyotes; we don’t need to raid companies looking for illegal immigrants; we don’t need to build a wall across Mexico; we don’t need to waste time passing harsh laws.

To solve illegal immigration we just need to do two things:

1. Admit that many of our own fellow citizens have skill sets worth only a couple of bucks per hour.
2. Accept that these fellow citizens are due a level of income beyond what they are able to earn in the free market, and we will help those who help themselves.

When I wrote the last post, I was gladdened to see that many of those who commented were comfortable with the political reality of #2.  And yet there were some who still screamed, “No!”

I understand your indignation that people would be given something they did not earn.  But you are not recognizing how far we are from your utopia.  This is far better than half a loaf.  If you just relent and accept a Guaranteed Income replacement for Minimum Wage and Unemployment Insurance (now past 99 weeks), in return we receive:

1. 100% employment for our citizens overnight.
2. Less overall spending by the government; this saves money compared to current programs in real dollars.
3. Lower costs of services to make you more productive – cleaning, lawn care, child care, etc.
4. A far smaller trade deficit – we keep the cheap jobs here, instead of losing them to India and China.
5. An end to illegal immigration.
6. The Fed no longer has any reason to print money, as we have solved completely for one side of their dual mandate (Unemployment).

One of the heroes of modern conservatism, Milton Friedman (perhaps my favorite economist after Robert Mundell), once proposed a Negative Income Tax.   In order to end all other forms of aid, we just guarantee a level of income and send them an IRS check if they made less than the minimum.

I’m sure that in the modern age of the Internet, Friedman would prefer my solution.

Bidding on Man Weeks of the unemployed means that all of us are constantly combing through the database looking at resumes, reading feedback from past employers, looking for a good deal; workers who we bid a bit more on because we think we’ll gain more from them than the next employer will.   The more we bid, the less the government spends.

In an Ebay model, both sides give feedback, so both employers and employees gain reputations that each side can use when bidding / accepting work.

Employees who shine in multiple jobs will find more employers bidding on them, so they earn more while the government gives them less money.

We can investigate those who keep getting fired and threaten to end all types of aid they receive if they do not start to perform suitably.  Employers who are abusive or break the basic rules of the system can be barred from participating.

Keeping the incentives lined up on a pay schedule was easy.  Here’s what I came up with:

Nevertheless, in part because mainstream macroeconomics never settled into a fixed orthodoxy for very long, competing interpretations of the Great Depression continued to attract adherents and to incorporate new elements of analysis during the past thirty years. The Austrians, once again attracting young economists to their ranks from the 1970s onward, persisted in waging guerrilla warfare against Keynesian, monetarist, New Classical, and other varieties of interpretation of the Depression.

With the onset of the current economic troubles—what some call the Great Recession—the debate about the Great Depression flared up anew, because many commentators began to compare these two episodes of exceptionally subpar overall economic performance. In 2008, an article by Gauti Eggertsson, “Great Expectations and the End of the Depression,” was published in the leading mainstream journal, the American Economic Review. This article advances a variation on one of the leading themes among mainstream economists, attributing the U.S. recovery after 1933 to a regime change associated with the New Deal’s abandonment of the gold standard and its commitment to active intervention in the private economy, allegedly in sharp contrast to the Hoover administration’s hands-off policy stance.

Steven Horwitz has taken issue with Eggertsson’s article in an important critique published in 2009 in the online journal Econ Journal Watch, edited by Daniel B. Klein. Eggertsson replied to Horwitz’s critique in 2010. Now, Horwitz has rejoined this back-and-forth in a new contribution to Econ Journal Watch titled “Unfortunately Unfamiliar with Robert Higgs and Others: A Rejoinder to Gauti Eggertsson on the 1930s.” No one will be surprised if I recommend Horwitz’s original critique and his follow-up piece as important contributions to this highly significant debate.

Misunderstanding the Great Depression has caused much mischief in modern macroeconomics and, more important, in government fiscal and monetary policies based on or influenced by this faulty understanding. If we are ever to arrive at a sound understanding of the Depression, we will have to persuade the economics profession to take Austrian economics seriously, as most economists did before the publication of Keynes’s magnum opus in 1936. Keynesianism in particular has proven itself to be a fundamentally flawed mode of analysis, yet one that has survived, evolved, and—like the zombies in the film “Night of the Living Dead”—keeps coming back, no matter how many times anti-Keynesians credit themselves with having dealt it a fatal blow. Monetarist, New Classical, and other recent critiques have themselves been inadequate or indefensible in various ways, as well.

Horwitz’s recent contributions have valuable things to say, not only about our understanding of the Great Depression, but also about the most productive way to do economic analysis and about the importance of working with correct historical facts, as opposed to the “stylized facts” that mainstream economists all too often are content to accept as an adequate foundation for the development and testing of their models.

It isn’t hard to see where things went awry in California: just look back to the heady years of the historic 2003 recall of Gray Davis.  Davis was swept out of office due a massive deficit brought on by his rapid expansion of state government during the dot com economy combined with his mishandling of the state’s electricity crisis.  Candidate Schwarzenegger won on a platform of “blowing up the boxes” of bureaucracy while “cutting up” the state’s “credit cards” – Schwarzenegger did neither.  Instead, he gave California seven years of uneven leadership, veering from the right to the left while calling his erratic leadership “post-partisanship.” Schwarzenegger pushed through the largest state tax increase in U.S. history, expanded government spending, debt and regulatory hurdles while shrinking the sphere of liberty – curious actions for a self-avowed fan of the late Milton Friedman.  Schwarzenegger’s voter approval rating hit 22 percent this summer, matching Gray Davis’ recall-eve rating – something Davis, if he wishes to indulge in schadenfreude, might see as poetic symmetry.

While the Democrats had a great election night in the Golden State, there are some signs of hope for the majority of Californians who don’t take their ideological cues from San Francisco.

First of all, Prop. 26 passed.  Prop. 26 makes it nearly impossible for Democrats to pass higher taxes by disguising them as fees.  Taxes require a two-thirds majority vote to pass in California.  Fees, usually defined as a payment for a specific government service, just require a simple majority to enact.  The problem is, that prior to Prop. 26, Democrats got quite adept at changing the definition of a “fee” to cover just about anything they wanted it to.  Assuming that Prop. 25 doesn’t allow Democrats to raise taxes with a majority vote by simply inserting a tax increase into the budget bill, Prop. 26 will make it very tough for Democrats to raise enough revenue to pay for all that government they love.

Secondly, Prop. 20 passed and Prop. 27 went down in flames.  Thanks to the foresight and funding of Charles Munger, Jr., a longtime Republican activist and atom smasher (he’s an experimental physicist at the Stanford Linear Accelerator Center), Prop. 20 will extend the mandate of the independent redistricting commission (created by Munger’s Prop. 11 in 2008) to include congressional seats too.  Prop. 27 sought to repeal Prop. 11 and would have canceled out Prop. 20 if it had received more votes, returning the responsibility of redistricting to legislative Democrats.  That Prop. 20 won with 61.4 percent, the most “yes” votes of any of the propositions, shows that the public remains extremely wary of its politicians.  The practical impact of Prop. 20 is two-fold: first of all, Republicans will likely gain a few more congressional seats in the 2012 election as Democrats lose their gerrymander advantage in California; secondly, legislative districts will be more competitive, causing some currently safe districts, both Democrat and Republican, to be in play in future elections.  This, by itself, is a victory for representative democracy.

Thirdly, Steve Cooley looks set to win the very close race for attorney general. This will mark the first time in 12 years that a Republican has occupied California’s top law enforcement office.  Always an important post, now it is especially so.  First of all, Attorney General-elect Cooley will be able to investigate political corruption.  Given that corruption tends to flower when one party has a lock on power, Cooley will likely be very busy for the next four years.  Next, with the state budget deficit at $14 billion and growing and Prop. 26’s passage limiting Democrats’ ability to hike taxes, there is a looming threat of a massive prison inmate release.  The state prison budget is about $11 billion a year. Rather than cut the $49,000 per year that it costs to incarcerate an inmate in California, more than double the national average of $24,000, Democrats would likely just vote to release violent felons as a way to free up more money for welfare.

Lastly, Republicans showed strength in the hard-hit Central Valley, with Andy Vidak defeating Rep. Jim Costa and David Harmer locked in a tight race with Rep. Jerry McNerney in two widely watched congressional races.

So, what do the results portend?

A lot depends on Jerry Brown’s back-to-the-future act.  As governor in the 1970s, Brown dismantled the merit-based civil service system and erected the public sector employee union system in its place.  Ever since, state employee costs have increased almost as much as the rate of government union donations to politicians.  Gov. Brown has a chance to undo some of this damage, in an “only Nixon could go to China” sort of a way.  In interviews after the election, Brown has broadly hinted that voters showed their opposition to new taxes in their votes for Prop. 26 and against Props. 21 and 24.  The difficulty for Brown will be in finessing the majority’s new power to pass budgets without an single Republican vote with the fact that taxes will be very tough to increase. This in essence gives Democrats all the responsibility for the budget but none of the authority to balance it short of acting like Republicans (cutting spending) and / or irresponsibly releasing 50,000 violent inmates on largely Democrat-voting urban areas.

Of course, there is the possibility that Democrats will move to reopen the historically-late 2010-11 budget, as suggested by Senate President Pro-Tem Darrell Steinberg, and vote to increase spending.  Such an act would accelerate California’s date with insolvency.  In doing this, Democrats would seek to force the hand of Sacramento’s remaining band of legislative Republicans, trying to pin the blame of IOUs and bond defaults squarely on their shoulders unless they vote for a $20 billion tax increase.  This drive-the-car-off-the-cliff blackmail maneuver worked in February 2009 when Republican legislative leaders decided to “responsibly” raise taxes rather than allow California to go broke.

Gov. Brown may be reticent on taxes, knowing that there is little voter appetite for them and perhaps understanding that higher taxes won’t create jobs, but in the area of “green” policy, Brown appears ready to double down on Schwarzenegger’s errors.  A recent L.A. Times Op-Ed by 60s radical and Brown ally Tom Hayden illuminates Brown’s green path.  Hayden lauds California’s coming green era, seeing it as a long-awaited opportunity for centralized government planning to pump billions of dollars into “green” energy while at the same time using it as a mechanism “…to ensure that all Californians benefit from the state’s green energy push.”  Hayden says that this green push must benefit “black and brown” and warns that “the green future cannot be purely white.”  He then links these green jobs for minorities to the prison system, writing that “…it makes far more sense to employ at-risk youth weatherizing homes and installing solar collectors than locking them up in the largest mass incarceration system in the world.”

Given Spain’s utter failure to generate a cornucopia of green jobs – 2.2 old-fashioned, but paying, jobs were destroyed for every “green” job created at the cost of $774,000 per subsidized employee, it’s hard to see how Brown’s green effort will do anything other than serve as just another avenue for wealth redistribution.

The next two years will likely see California mired in recession, increasingly lagging behind the rest of America.  Texas will become the favored destination of hard-working Californians and their jobs-creating capital.  California’s continued economic pain will be compounded by liberal policymakers who never see a problem that government couldn’t make worse.  This will provide an opening for Republicans, but only if they have the moral courage to offer a bold break from the failed Democrat policies.

California remains America’s largest manufacturing state.  The Golden State generates a prodigious amount of new technology.  One of eight Americans call California home.  Should California not reform itself soon, it will remain the misfiring cylinder in America’s economic engine, acting to slow the national recovery.

In politics, nothing lasts forever – including the Democrats’ dominance of California. For California’s sake, and America’s, all Americans should hope California voters catch up with the rest of America in 2012.