Milton Friedman – “There Is No Such Thing As A Free Lunch”

Few people have had as profound an impact on modern economics as economist Milton Friedman.

His Nobel Prize-winning ideas on free enterprise resonated throughout the world and continue to do so.

Johan Norberg, a Senior Fellow at the Cato Institute, tells Friedman’s fascinating story and what his theories have taught us.


“There is no such thing as a free lunch.”

That’s basically all you need to know about economics—or for that matter, about life.

Everything comes with a price and there are no perfect solutions, only trade-offs.

If you think you’re getting something for “free,” you’re fooling yourself. One way or another somebody has to pay for it—and that “somebody” usually includes you!

This bit of priceless wisdom was popularized in the 1970s by University of Chicago economist, Milton Friedman. And it made him, along with his many other penetrating insights, the most influential economist of his time.

Born in Brooklyn in 1912, the son of two poor Jewish immigrants from what is now Ukraine, Friedman never took the opportunities America offered him for granted. He devoted his life to making the case for free enterprise. No one has ever made it more persuasively.

His scholarly work centered on monetary theory, the idea that the growth or contraction of the money supply has a profound impact on a nation’s economy. The Great Depression of the 1930s, which had caused so much suffering, and which Friedman had lived through personally, made his case.

Friedman showed that the Depression was not a failure of an out-of-control free market, but an out-of-control Federal Reserve—the Fed—the central bank of the United States.

Instead of keeping the money supply stable in a recession, the Fed choked it off. This started a series of “bank runs”—people literally running to get their money out of their bank before their bank ran out of money.

But that, according to Friedman, was not the Fed’s biggest mistake. The biggest mistake was that the Fed existed at all. No Fed, Friedman believed, no Great Depression. The free market would have figured things out on its own just as it had in previous economic upheavals.

But the Fed’s members had no confidence in the market. Their confidence was in their own ability to fine-tune America’s incredibly complex economy.

This confidence was misplaced. The Fed, and the President who dominated the decade, Franklin Roosevelt, made one bad decision after another, and the Depression dragged on.

Friedman saw another grave mistake being done in the early 1970s. He made the bold prediction that the Fed’s efforts to print money to keep the country out of a recession would lead to something worse: stagflation, the combination of high inflation and high unemployment.

And that’s exactly what happened. Many economists who had previously dismissed Friedman now acknowledged that he was right. In 1976, he received the Nobel Prize in Economics, yet another vindication of his work.

But as perceptive as his economic theories were, his special gift was his ability to explain his theories to the public and his willingness, indeed eagerness, to do so.

He wrote best-selling books and had a column in Newsweek for 18 years. In 1980 he hosted the popular ten-part TV series Free to Choose for PBS.

The theme of the show was pure Friedman: while others trusted the government to make good decisions, Friedman trusted people and the market.

Excessive government control, regulation, and taxation, he persuasively argued, distorted incentives and put money in the hands of politicians and bureaucrats who had not earned it and suffered no consequences if their policies failed.

There were other ways government intervention distorted the free market, Friedman said: protectionism, for example, increased prices for consumers and discouraged innovation; overregulation allowed big business with its lawyers and lobbyists to drive out small competitors; minimum wage laws led to fewer jobs for those who needed them most.

It all followed from Friedman’s basic idea that millions of people working for their own purposes could make better decisions than a bunch of unelected bureaucrats who had no stake in the outcome.

But Friedman didn’t just complain about the problem. He had solutions ready when and where they were needed.

When communism collapsed in Eastern Europe in the late 1980s, economists in places like Estonia, Poland, and Czechia who had read Friedman in secret, sometimes by candlelight, now embraced his low tax, light regulation model to great effect.

And when my own country, Sweden, faced a welfare state-induced crisis in the early 1990s, it was Friedman’s ideas that guided the Swedish reformers. They opened up markets, tightened social security benefits, and in 1992, Sweden implemented Friedman’s idea about a national school voucher system.

Friedman’s influence spanned the globe. Israel, Chile, New Zealand, the UK, and of course, the United States put his ideas into practice. They worked.

The Economist magazine appropriately (and cleverly) titled its obituary of the great economist in 2006, “How Milton Freed Man.”

As his fame spread, Friedman always held fast to his guiding principle: that freedom is not the rule but the exception. “The typical state of mankind,” he wrote, “is tyranny, servitude, and misery.”

So, the price of liberty is eternal vigilance—and knowing Milton Friedman.

I’m Johan Norberg, Senior Fellow at the Cato Institute, for Prager University.

Which Is More Accurate, ‘Say’s Law’ or ‘Keynes’s Law’?

This Mark Skousen article from 2017 is both thought-provoking and enlightening, so I am posting it here.

Students almost always get this wrong, until it is explained

“They say children are the future, but really teachers are the key to the future.” – Author Unknown

We all know that teachers, especially at the college level when students are away from their parents, can have tremendous influence.

My best example is when I ask my economics students “Which is more accurate, Say’s law or Keynes’s law?” Say’s law (defined below) is named after the 19th-century French economist J.-B. Say, while Keynes’s law is named after the 20th-century British economist John Maynard Keynes.

Most of the students have never heard of either law, so on the blackboard or PowerPoint, I simplify the definition as follows:

  • Say’s Law: “Supply creates demand”
  • Keynes’s Law: “Demand creates supply”

Before we have any discussion, I ask the students to intuitively decide which one makes more sense, and why.

Invariably, the vast majority of students side with Keynes. Demand, they say, is essential. Without consumers willing to buy a product, suppliers will go out of business. They conclude consumer spending drives the economy.

Currently, I am a Presidential Fellow at Chapman University in California, where I teach a course entitled, “Modern Political Economy: Who is Winning the Battle of Ideas?” I have 22 students. In the above exercise this week, fifteen students voted with Keynes, and seven voted for Say.

For the next hour, I took the students through a series of exercises, historical examples, and economic studies that suggest that Say’s law, not Keynes’s law, is a far more accurate view of the economy. I won’t go into all the arguments here but they can be found in chapter 2 of my history book, “The Making of Modern Economics” (3rd edition published by Routledge Publishers) and chapter 17 of my textbook, “Economic Logic” (4th edition, published by Capital Press).

Essentially, I demonstrate that economies grow not because consumers demand more and are willing to go into debt, but largely because of a willingness of entrepreneurs and businesses to save and invest in new products and technologies – the supply side of the economy.

I use Seattle as an example. Seattle residents did not become wealthy because consumers decided to demand more, but because creative businesses such as Boeing, Microsoft, Starbucks, and Amazon came up with new products and services (consumers didn’t know they wanted these things until they were created). I conclude that business is the catalyst of economic progress, and consumer spending is the effect, not the cause, of prosperity.

I end the lecture by quoting some experts on the subject, including CNBC economist Larry Kudlow, who says, “Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs, and then consumers spend. Profitable firms also purchase new equipment because they need to modernize and update all their tools, structures, and software.”

I also include in the lecture a discussion of gross output (GO), the new “top line” in national income accounting that demonstrates that business spending is almost twice the size of consumer spending in the economy. (See for more details.)

At the end of the hour, I ask if any of the students have changed their minds. In this case, it was 22-0 in favor of Say.

Teachers can make a difference.

Trickle Down Economics – Gaslighting At It’s Best

As Joe Biden and his cronies push tax increases and other hidden forms to increase their taxation take, you are seeing more and more articles published on why Trickle Down Economics doesn’t work.

Thomas Sowell, now 91, is known as an American economist, social theorist, and senior fellow at Stanford University’s Hoover Institution. In this April 2015 article, he explains that Trickle Down Economics as a theory never existed and is just a tool that Democrats have used successfully to thwart Republican efforts to reduce taxes.

Thomas Sowell – Why attack ‘trickle-down economics?’ It doesn’t exist – and never has

During this election campaign, some intelligent people – politicians and columnists – have attacked “trickle-down economics” in the mistaken belief that it exists. Or that it ever existed. It’s a myth. In his classic book, Basic Economics, Thomas Sowell gives a brief history. Here’s the excerpt:

There have been many economic theories over the centuries, accompanied by controversies among different schools of economists. But one of the most politically prominent economic theories today is one that has never existed among economists – the ‘trickle down’ theory. Yet this non-existent theory has been attacked from the New York Times to a writer in India. Franklin D. Roosevelt’s speechwriter Samuel Rosenman referred to:-

“‘the philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid, in the belief that prosperity would trickle down to the bottom of the heap and benefit all.’
The same theme was repeated in the election campaign of 2008 when candidate Barack Obama attacked what he called ‘the economic philosophy’ which
“‘says we should give more and more to those with the most and hope that prosperity tickles down to everyone else.’
Whether in the United States or in India, and whether in the past or in the present, ‘trickle down’ has been a characterization and rejection of what somebody else supposedly believed. Moreover, it has been considered unnecessary to cite any given person who had actually advocated any such thing.

The phrase ‘trickle down’ often comes up in discussions of tax policies. Tax revenues have in a number of instances gone up when tax rates have been reduced. But any proposal by economists or others to cut tax rates, including reducing the tax rates on higher incomes or on capital gains, can lead to accusations that those making such proposals must believe that benefits should be given to the wealthy in general or to business in particular, in order that these benefits will eventually ‘trickle down’ to the masses of ordinary people.

But no recognized economist of any school of thought has ever had any such theory or made any such proposal. It is a straw man. It cannot be found in even the most voluminous and learned histories of economic theories.

What is sought by those who advocate lower rates of taxation or other reductions of government’s role in the economy is not the transfer of existing wealth to higher-income earners or businesses but the creation of additional wealth when businesses are less hampered by government controls or by increasing government appropriation of that additional wealth under steeply progressive taxation laws. Whatever the merits or demerits of this view, this is the argument that is made – and which is not confronted, but evaded, by talk of a non-existent ‘trickle down’ theory.

More fundamentally, economic processes work in a directly opposite way from that depicted by those who imagine that profits first benefit business owners and that benefits only belatedly trickle down to workers.

When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens. Even when one person decides to operate a store or hamburger stand without employees, that person must first pay somebody to deliver the goods that are being sold. Money goes out first to pay expenses and then comes back as profits later – it at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.

Even with successful and well-established businesses, years may elapse between the initial investment and the return of earnings. From the time when an oil company begins spending money to explore for petroleum to the time when the first gasoline resulting from that exploration comes out of a pump at a filling station, a decade may have passed. In the meantime, all sorts of employees have been paid – geologists, engineers, refinery workers, and truck drivers, for example. It is only afterward that profits begin coming in. Only then are there any capital gains to tax. The real effect of a reduction in the capital gains tax is that it opens the prospect of greater future net profits and thereby provides incentives to make current investments that create current employment.

Nor is the oil industry unique. No one who begins publishing a newspaper expects to make a profit – or even break even – during the first year or two. [note: Sowell was writing at a time when newspapers were profitable] But reporters and other members of the newspaper staff expect to be paid every payday, even while the paper only shows red ink on the bottom line. Similarly, began operating in 1995 but its first profits did not appear until the last quarter of 2001 after the company had lost a total of $2.8 billion over the years. Even a phenomenally successful enterprise like the McDonald’s restaurant chain ran up millions of dollars in debts for years before it saw the first dollar of profit. Indeed, it teetered on the brink of bankruptcy more than once in its early years. But the people behind the counter selling hamburgers were paid regularly all that time.

In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a ‘trickle down’ theory. The workers must be paid first and then the profits flow upward later – if at all.