Milton Friedman's policies of monetarist economics has become synonymous with Thatcherism, writes Antóin Murphy

I met Milton and Rose Friedman in their flat on Nob Hill overlooking San Francisco Bay in the spring of 2000. They were both impeccably dressed in white cotton tracksuits. Despite the fact that they were in their late eighties, they had been playing tennis.

The impression was of two people still intensely occupied with enjoying life and contributing to advancing the world around them. Milton talked about economics with great passion and wanted to know how the Irish health system was funded because he was working on the economics of healthcare in the United States.

Milton Friedman had an enormous influence on the political and economic landscape in recent decades. In the 1950s and the early 1960s, he was regarded as a type of economic maverick tilting at the windmills of the Keynesian economic consensus. Keynes had been deified and those who opposed him were very much outsiders.

However, Friedman advanced an alternative approach that came to be known as the monetarist counter-revolution. The essence was that, consistent with classical economic principles, markets worked and therefore governments should interfere as little as possible in the economy. Against this backdrop, Friedman argued governments were responsible for the accelerating rates of inflation that were being experienced in the global economy.

Pithily he contended that inflation was always and everywhere a monetary phenomenon. If inflation was to be controlled, politicians would have to take their fingers off the printing presses that expanded the money supply.

This in turn implied that governments had to stop running budget deficits and financing them through the printing presses. The solution was to abolish budget deficits and public sector borrowing requirements through higher taxation or cutbacks in government expenditure.

Friedman, consistent with his free-market approach, was against higher taxation, believing it killed the inventive to work. Instead he said the solution could be produced through cutbacks in government expenditure which could be greatly accommodated through the denationalisation of many public sector companies.

So monetarism came to be associated with policies aimed at controlling the rate of growth of the money supply, cutbacks in public sector expenditure, privatisation of state companies, and reductions in taxation. Britain's adoption of Friedman's brand of monetarism took place through an academic forum called the Money Study Group in the 1970s. This group was led by the late Harry Johnson, who had dual chairs in economics in both Chicago and the London School of Economics.

Johnson imported many of Friedman's ideas and they were eagerly discussed by economists such as David Laidler, Michael Parkin and Alan Walters. Politicians were welcomed into the Money Study Group and one of these, Keith Joseph, served to spread the word to one of his colleagues, Margaret Thatcher.

As British prime minister, Thatcherism was synonymous with monetarism. The Friedman template of monetary targeting, cutbacks in government expenditure and privatisations became very much the order of the day.

The influence has persisted in Britain with Lady Thatcher apparently suggesting that her greatest legacy was Tony Blair.

Friedman's influence was far greater than just changing British macroeconomic policy. His greatest book, in my opinion, was A Monetary History of the US 1867-1960, which he co-authored with Anna Schwartz. There he analysed how the Great Depression was caused by a sharp fall in the money supply that had not been countered by the Federal Reserve System.

Friedman and Schwartz showed that, faced with huge outside shocks, the central bank needed to make plenty of liquidity available to the system to prevent a financial implosion. Federal Reserve chairman Alan Greenspan followed this advice closely during the shocks produced by the stock market crash of 1987 and aftermath of September 11th, 2001.

When I asked him about the current state of macroeconomics, Friedman said he was profoundly depressed. New classical macroeconomics had become too mathematical and economists were losing their sense of intuition.

However, our meeting finished on a bright note with both Milton and Rose animatedly discussing their foundation to help disadvantaged students to participate in third-level education. Friedman, the man who had coined the term "there is no such thing as a free lunch", was obviously prepared to make an exception when it came to education for the poor.

Antóin E. Murphy is associate professor in economics at Trinity College Dublin.