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Friedman, Milton (1912-2006)

Milton Friedman was an American economist and leading representative of the Chicago School during the last half of the 20th century. Friedman received the Nobel Prize in 1976, having made significant contributions to several branches of economic theory, while also writing and speaking on public policy issues from a distinctly free-market perspective. His combination of technical acumen and policy advocacy made him one of the most influential economists and libertarians of his generation.

Friedman was born in New York City to immigrants from central Europe who moved to northern New Jersey when Friedman was a child. He graduated from high school just prior to his 16th birthday, and he attended Rutgers University on a scholarship. After graduating from Rutgers in 1932, Friedman pursued graduate studies in economics at the University of Chicago, which would become his intellectual home for the most productive period of his career. While at Chicago, he met a fellow graduate student, Rose Director, who would become his wife, lifelong partner, and frequent coauthor. In 1998, they published their memoirs, Two Lucky People.

Friedman received his MA from Chicago in 1933 and then accepted a fellowship at Columbia University. While at Columbia, he also held a position with the National Bureau of Economic Research, where he worked closely with future Nobel laureate Simon Kuznets on a study titled Incomes from Independent Professional Practice. Friedman recounted,

That book was finished by 1940, but its publication was delayed until after the war because of controversy among some Bureau directors about our conclusion that the medical profession’s monopoly powers had raised substantially the incomes of physicians relative to that of dentists.

It also served as his doctoral dissertation, which was approved by the Columbia faculty in 1946.

During the Great Depression and World War II, Friedman held several government positions in Washington, D.C. He also taught briefly at the University of Wisconsin and the University of Minnesota, before returning to the University of Chicago in September 1946, where he would spend the next 30 years, retiring in 1977. He and Rose then moved to California, where he accepted a position at Stanford University’s Hoover Institution, which he held until his death.

Friedman’s contributions to economics have been enormous and far reaching. In 1953, he published his Essays in Positive Economics. The introductory essay set forth his fundamental methodological position:

the relevant question to ask about the “assumptions” of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.

In a 1996 interview, he elaborated: “The validity of a theory depends upon whether its implications are refuted, not upon the reality or unreality of its assumptions.”

Friedman’s methodological position, adopted by most of his colleagues at Chicago and eventually a good portion of the profession, laid the groundwork for important empirical work and elegant mathematical modeling that have helped economists better understand the world. It also placed the Chicago School squarely in opposition to the Austrian School, whose proponents embraced many of the same promarket positions as Friedman, but who argued that economists must base their work on a set of assumptions that can be demonstrated to be logically correct. Moreover, the Austrians argued that much empirical work was of limited value because social scientists cannot model human behavior in the same way that physical scientists model their objects of study. One can say, for instance, that a price control will lead to a shortage, but the magnitude of that shortage will be difficult, if not impossible, to predict.

Friedman considered his A Theory of the Consumption Function, published in 1957, as his “best purely scientific contribution” to economics. In it, he argues for the “permanent income hypothesis,” which maintains that people make consumption decisions based on the permanent component of their income stream, not on transitory components. In short, people are forward-looking and act based on long-term income prospects. This hypothesis has several implications. First, people tend to smooth their consumption over their lifetimes. For instance, young people with high future earning power may rationally accumulate debt early in life, knowing that they will be able to pay it off as their incomes increase. Second, tax cuts may not spur consumption if the public believes those cuts to be only temporary. The permanent income hypothesis has become one of the cornerstones of modern macroeconomics.

Although Friedman considered A Theory of the Consumption Function to be his most significant contribution, his work in the area of monetary theory was surely his most influential. Inflation, Friedman famously argued, was “always and everywhere a monetary phenomenon.” It is not fundamentally caused by unions demanding higher wages for their members, thus increasing labor costs and the prices of goods. Nor is it a product of companies wielding expansive market power and charging monopolistic prices. Instead, it is caused by too much money chasing too few goods. Central banks, Friedman concluded, should focus narrowly on maintaining price stability and adopt rules that would ensure such an outcome.

In 1963, Friedman, with Anna J. Schwartz, published A Monetary History of the United States, 1867-1960. The book spanned almost a century of monetary history, but its most important section dealt with what the authors called “the great contraction.” Friedman and Schwartz argued that the Great Depression was not caused by the failings of the market system. Rather, they maintained, the Federal Reserve had pursued a monetary policy that was excessively tight and that had led to a sharp decline in economic activity. A Monetary History was a rare scholarly achievement: It has had great influence among both the economics profession and policymakers.

In his 1967 presidential address to the American Economic Association, Friedman questioned the theoretical and empirical validity of the “Phillips curve,” a statistical relationship that purportedly demonstrated a permanent tradeoff between unemployment and inflation. This tradeoff implied a set of choices for society. If you wanted greater employment, you simply had to increase the money supply. That in turn would produce higher inflation, which might be acceptable given current circumstances. Conversely, if inflation became too high, one could simply tighten the money supply and accept more unemployment. Not surprisingly, these ideas were popular with activist policymakers. Friedman challenged these conclusions, arguing that the tradeoff between unemployment and inflation was temporary and resulted only from unanticipated changes in inflation. The public, he claimed, was unlikely to be systematically fooled, and policymakers could not easily manipulate the economy. He later recalled,

As employers and workers caught on to what was happening, any trade-off would disappear. I introduced the concept of a “natural rate of unemployment” to which the level of unemployment would tend whatever the rate of inflation once economic agents came to expect that rate of inflation. To keep unemployment below the natural level requires not simply inflation, but accelerating inflation.

Friedman’s argument was later refined and expanded by economists Edward Prescott and Finn Kydland, and it would become increasingly accepted as stagflation gripped the American economy in the 1970s.

While Friedman was engaged in technical economic research at the highest levels, he also took an active interest in public-policy issues. In 1962, he published Capitalism and Freedom, the product of a series of lectures he gave at Wabash College in 1956. Although directed at a general audience, the book contains sophisticated and sometimes technical arguments for a number of free-market proposals, all presented in clear and accessible prose. For instance, Friedman called for the establishment of unilateral free trade and flexible exchange rates, introduced the idea of school vouchers, and argued for the privatization of social security. Also, as the title of the book suggests, Friedman argued that economic freedom is a necessary prerequisite for political freedom, a proposition that has been criticized by many political scientists. In Capitalism and Freedom, Friedman made it clear that he believed some state involvement was necessary if a stable and prosperous society were to function. “The consistent liberal is not an anarchist,” he wrote. Yet he later rejected or greatly qualified his support for certain government actions that he defended in the book, such as antitrust laws to counter monopolies. Empirical work by his colleagues at the University of Chicago had demonstrated, Friedman argued, that antitrust laws were more often counterproductive than beneficial. His policy advocacy was based on an abiding belief in human freedom—in liberalism—as well as the findings of modern economic science.

Friedman was the author of a column for Newsweek from 1966 to 1983, as was Paul Samuelson, a long-time friend of the Friedmans and the leading Keynesian economist of the 20th century during most of this period. Some of Friedman’s Newsweek articles were later collected in two anthologies, An Economist’s Protest and There’s No Such Thing as a Free Lunch.

Perhaps more than any other endeavor, Free to Choose, cowritten with his wife, brought the Friedmans’ liberal ideas to a wide audience. In its preface, the authors compare Free to Choose to Capitalism and Freedom, noting that the new volume “is a less abstract and more concrete book. Readers of Capitalism and Freedom will find here a fuller development of the philosophy that permeates both books—here, there are more nuts and bolts, less theoretical framework.” In addition, they wrote that much of the analysis in Free to Choose is informed by work done in the 1960s and 1970s by public choice economists who modeled the political system, like the economic system, as a market with self-interested actors. Free to Choose became a best seller, selling more than 400,000 copies in its first year. Perhaps even more important, however, was the 10-part PBS series that accompanied its publication. Each episode dealt with a chapter in the book, followed by debates in which Friedman took on his critics. The show was a huge success and brought liberalism into the living rooms of thousands of people who were unfamiliar with such ideas.

Friedman served as an economic advisor to Barry Goldwater during his 1964 presidential candidacy, as well as to Presidents Nixon and Reagan. Although he had their ear, they often did not follow his advice. The most grievous example was Nixon’s imposition of wage and price controls in 1971, which Friedman widely criticized. Friedman also was a stalwart opponent of conscription, persuasively arguing that a volunteer army was both more just and more efficient. In addition, Friedman actively campaigned for tax and spending limitations on the state level; in fact, he was in Michigan speaking in favor of such a proposal when he was informed that he had won the Nobel Prize. He also spent much energy promoting school vouchers, establishing the Milton and Rose D. Friedman Foundation for Educational Choice in 1996.

Friedman died in 2006, survived by his wife Rose, his daughter Janet, and his son David, also an economist. “Milton Friedman was a giant,” stated Paul Samuelson upon Friedman’s death. “No 20th-century economist had his importance in moving the American economic profession rightward from 1940 to the present.”

Further Readings

Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962.

———. Essays in Positive Economics. Chicago: University of Chicago Press, 1953.

———. “The Role of Monetary Policy.” American Economic Review 58 no. 1 (March 1968): 1–17.

———. A Theory of the Consumption Function. Princeton, NJ: Princeton University Press, 1957.

Friedman, Milton, and Rose D. Friedman. Free to Choose. New York: Harcourt Brace Jovanovich, 1980.

———. Two Lucky People: Memoirs. Chicago: University of Chicago Press, 1998.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press, 1963.

Hetzel, Robert L. “The Contributions of Milton Friedman to Economics.” Federal Reserve Bank of Richmond Economic Quarterly 93 no. 1 (Winter 2007): 1–30.by Aaron Steelman

Originally published August 15, 2008. See alsoEconomics, Chicago School of; Friedman, David (1945-); Money and Banking.
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