It should be no surprise to most here that I’m a strident fan of Milton Friedman and that his passing was quite a bit more than a garden variety celeb obit for me. While I’m a geek of rather high proportions, there are quite a few of us for whom the loss left an almost personal hollowness.

“The current danger is that India will stretch into centuries what took other countries only decades” - Milton Friedman, 1963Because he called San Francisco home, I actually had the honor of seeing Uncle Milt speak in person about 2 years ago at a benefit gala for a thinktank I’m a contributor to.

And earlier this spring, I had another opportunity to see Milton & Rose Friedman in person at the unveiling of a PBS documentary on his life and times. At the time, I implored several friends to join me with the argument that “at 94, homey ain’t gonna be around too much longer - see him while you can.” Unfortunately, a bout of flu kept Friedman from joining us that evening (Rose did, however make it) and alas, my words were sadly prophetic.

Interestingly, at that event, Gary Becker was on tap for Milton & Rose’s intro. In nearly any other context, Becker’s own Nobel Prize would have garnered him a headline act. But given Friedman’s ginormous stature, Becker’s intro speech was instead somewhat rudely met with idle chatter from the back of the banquet hall. You’d think scoring a Nobel prize would earn a little more respect - apparently not so when you’re between an audience and the Friedman’s.

‘Tis the curse of the passage of a generation that we take for granted previous, hard fought accomplishments - both material and intellectual. In its extreme, we just assume that he world we see around us had to be rather than recgonize the role of volition, creativity, and intellectual accomplishment which enabled it to be.

In Friedman, India, and recent economic history, we see all this wrapped up in a neat tidy little package. So much that seems obvious now was contrarian then. And so many of the arguments we use to excuse and ignore the outcome of disastrous policy was plainly predicted and evident decades ago.

For the SM crew, one of the most striking and relevant pieces of Friedman’s massive body of work was an article written in 1963 after a series of official and not-so-official trips to India to gauge its economic climate [Friedman’s essay on India in 1963.pdf (66 KB) - thanks for the doc Prashant!]. The treatise is classic Friedman - simple, direct language that is both approachable by non-economists and simultaneously sophisticated & rigorous enough for the most seasoned policy makers. It’s ominous thesis, written all those years ago, is proof of the power of a few percentage points of compounded growth and a real world forecast of economic crisis -“India lacks none of the basic requisites for economic growth … comparable to that which occurred in Japan after the Meiji restoration” - Uncle Milt

Even at the officially estimated 1 1/2 percent per year growth in per capita output, it would take over a century of steady growth at that rate for India to reach the current level of per capita income in Japan, and well over three centuries to reach the current level of per capita income in the United States. The current danger is that India will stretch into centuries what took other countries decades.

Count Friedman as one of the fiercest opponents of the so-called Hindu Rate of Growth. In describing his hopes and dreams for the teeming throngs of Desi’s, Friedman had high expectations and decidedly first world aspirations for the subcontinent -

I am myself still persuaded, as I was in 1955, that India lacks none of the basic requisites for economic growth except a proper economic policy. I believe that drastic, but technically feasible, changes in economic policy-the substitution of a freely floating exchange rate for the present fixed rate and elimination of the exchange controls, import restrictions, and export subsidies designed to prop up the present rate; and a similar policy of substituting the free market for direct controls in the domestic economic scene-could release an enormous reservoir of energy and drive and produce a dramatic acceleration of economic growth in India comparable to that which occurred in Japan after the Meiji restoration.

The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the United States 150 years ago. - Friedman, 1955

The problem connecting this potential with reality, of course, was a disastrous intellectual climate which drove equally disastrous economic policy -

When India attained its independence, it was strongly socialist in its orientation, its intellectual atmosphere having been shaped largely by Harold Laski of the London School of Economics and his fellow Fabians. In the initial decade after independence, a series of left-wing advisers, including Oskar Lange and Michael Kalecki from Poland, and Nicholas Kaldorand John Strachey from Britain, visited India.

…The intellectual climate of opinion about economic policy is almost wholly adverse to any changes in the direction that seems to me required.There is a deadening uniformity of opinion in India, particularly among economists, about issues of economic policy. In talks to and with students and teachers of economics at a number of universities, personnel of the planning commission, economists in the civil service, financial journalists, and businessmen, I encountered again and again the same stereotyped responses expressed often in precisely the same words. It was as if they were repeating a catechism, learned by rote, and believed in as a matter of faith. And this was equally so when the responses were patently contradicted by empirical evidence as when they were supported by the evidence or at least not contradicted.

The remainder of his article is a series of examples of just how much entrepreneural energy was waiting to be unleashed and just how badly it was being held back by an intelligentsia obsessed with top down economic planning. For example, the following bit demonstrates the utter impotence of external policy tools like aid and directed investment in truly influencing growth rates -

Pacific Research Institute - Sept 2004: My glimpse of Milton & Rose Friedman in Real Life

…the years after independence saw a great inflow of resources from abroad. External assistance during the decade spanning the first two Five Year Plans averaged about 11/2 per cent of national income, which means that it provided something like a fifth of net investment; and external assistance was disproportionately concentrated in the Second Five Year Plan period, when it amounted to about 2 1/2 per cent of national income or to over a fourth of net investment. On that score alone, growth should have accelerated during the Second Five Year Plan rather than apparently slowing down a bit.

Got that? It takes a serious economic basket case to take in twice as much money as last time around and convert it into roughly half the growth. Usually this sort of calculus is the domain of “diminishing marginal returns” for cutting edge development, not the deep “come from behind” that characterized India of the era. Or how about here, where Milton describes a supply chain disaster of Randian proportions -

Some of the entrepreneurs at Ludhiana estimated that an eighth to a quarter of their working time was being spent on either getting allocations or finding ways to acquire the materials they needed by more devious channels.

Presumably, the people’s representatives in charge of these “allocations” were there to ensure that higher, social justice needs were being met as material was directed towards the benefit of the broader community of stakeholders. At the minimum they were needed to protect India’s rich body of social tradition in the face of rapacious, Western capitalism. Or something like that. At least at first. Blech.

Reading the article it’s impressive to observe Friedman’s knowledge of and respect for the texture of India, the role of the diaspora & how it could shape it’s unique growth path forward. Here are a few excerpts from the nearly dozen snippets in the PDF -

The hope for India lies not in the exceptional Tatas or similar giants, but precisely in the hole-in-the-wall firms, in the small- and medium-size enterprisesWhat is the reason for the disappointingly slow rate of growth? One frequently heard explanation is that it reflects the social institutions of India, the nature of the Indian people, the climatic conditions in which they live. Religious taboos, the caste system, a fatalistic philosophy are said to imprison the society in a strait jacket of custom and tradition….These factors may have some relevance in explaining the present low level of income in India, but I believe they have almost none in explaining the low rate of growth.

…[Post-Partition,] The Punjabis have doubled the average agricultural yield in the area in which they resettled, and have besides been among the most enterprising, active, and dynamic business groups in India. The Bengali have had great difficulties in resettling, many of them are still in government resettlement camps some 15 years after partition, and they have been a drain on the country rather than a source of growth.

…One reason why westerners so often feel that enterprise and entrepreneurial capacity is lacking in India is because they look at India with expectations derived from the advanced countries of the West. They think in terms of the large, modern corporations, of General Motors, General Electric, and other industrial giants. But it was not firms like this that produced the Industrial revolution; they are, if anything, its end products. The hope for India lies not in the exceptional Tatas or similar giants, but precisely in the hole-in-the-wall firms, in the small- and medium-size enterprises, in Ludhiana, not Jamshedpur; in the millions of small entrepreneurs who line the streets of every city with their sometimes minuscule shops and workshops.

Moreso than his Nobel-prize winning papers, “Capitalism And Freedom” is widely considered Friedman’s Magnum Opus

Looking forward, Friedman accurately predicts both the 1990s currency crisis and the window for policy upheaval it produced -

The Achilles heel of the Indian economy at the moment is the artificial and unrealistic exchange rate… It will, I fear, take a major political or economic crisis to produce a substantial change in the course on which India is now set in economic policy, and I am not at all optimistic that such a crisis if it occurs, will produce a shift toward greater freedom rather than toward greater authoritarianism.

For privileged folks today, it’s actually sorta hard to envision just how real the forces of authoritarianism were back in the day. Just imagine if India’s currency crisis had hit, not in 1991 but instead a decade prior — before the fall of the Berlin Wall & with it, much of the Soviet intellectual ediface. The answer to the crisis could have just as easily been more government to save us rather than less… For contemporaries of Friedman’s work, memories of the role of economic crises leading to Nazi Germany, the Soviet Union, Red China, and to a lesser extent authoritarian Chile, Argentina, Bolivia, and so on burned fresh.

Thankfully, history rolled a different way and Uncle Milt was able to watch, approvingly, as the economic reforms of ‘91 were enacted. In a new forward written in 2000 he had the following to say -

I have been in India only once since our 1963 trip. That was in 1979 when we filmed briefly in India in connection with our television programme ‘Free to Choose’. Nevertheless, I have tried to follow from a distance the economic developments within India. I continue to be impressed by India’s enormous potential and depressed by the contrast between that potential and the minimal progress that has been achieved in the forty-five years since I was first in India. The latest decade shows more signs of change. India may finally be on the way to realizing its potential. If so, it will be a blessing for the people of India and for the world as a whole.

I leave you with the following video that’s been widely circulated on the blogosphere since Uncle Milt’s death. Depending on your proclivities, it either has everything or nothing to do with India. Either way, it’s a highly entertaining and educational experience & a tribute to a man of great ideas -