Milton Friedman

American economist

• Born: July 31, 1912
• Birthplace: Brooklyn, New York
• Died: November 16, 2006
• Place of death: San Francisco, California

Friedman’s monetary research helped explain inflation and interest rates and inspired the earned-income tax credit and the idea of school vouchers. Also, he helped end conscription in the United States. He was awarded the Nobel Prize in Economics in 1976, leading to controversy among those opposed to his economic philosophy.

Early Life

Milton Friedman (FREED-muhn) was born in Brooklyn, New York, to Jewish parents who had immigrated from Eastern Europe. Soon after his birth, the family moved to Rahway, New Jersey, where they set up a retail dry-goods store. Despite the family’s meager income, Friedman was able to attend Rutgers University, graduating in 1932 with concentrations in mathematics and economics.

Friedman’s experience in the Reserve Officers Training Corps (ROTC) gave him a strong dislike for compulsory military service. At Rutgers, he was influenced by two economists who were to achieve prominence. One was Arthur F. Burns, who subsequently headed the Federal Reserve (and whose policies were strongly criticized by Friedman). The other was Homer Jones, who later headed the research department of the Federal Reserve Bank of St. Louis, which became a stronghold of “monetarism,” the kind of analysis Friedman helped to develop.

On the encouragement of Burns and Jones, Friedman undertook graduate work in economics at the University of Chicago. There he met Rose Director, also an economics graduate student and sister of an economics professor. They were married six years later. She collaborated with Friedman on several books, notably Free to Choose (1979). Their son, David, also became a creative economist.

Friedman divided his graduate study between Chicago and Columbia, ultimately completing his doctorate at Columbia in 1946. Over the same period he held research positions with the U.S. government’s National Resources Committee and with the (private) National Bureau of Economic Research (NBER), a connection that continued throughout his career. He joined the Chicago faculty in 1946 and did his most scholarly work there.

Life’s Work

Friedman’s doctoral research evolved out of collaborative research with national-income pioneer Simon Kuznets at the NBER. The work was ultimately published as Income from Independent Professional Practice (1945). Here, Friedman first expressed his lifelong opposition to licensing and other types of restrictions on entry into a business or profession.

Friedman’s time with the National Resources Committee had left him with a strong interest in consumer behavior. This interest culminated in his book A Theory of the Consumption Function (1957), which stressed that aggregate consumption would be largely determined by people’s “permanent income,” which could be approximated for the entire economy by an average of current and past incomes.

In 1948, NBER persuaded Friedman to undertake a study of the role of money in business cycles. This began a project that continued over the next thirty years, producing three huge volumes of data and analysis and helping to transform the whole study of monetary economics. In this project, Friedman collaborated with Anna Jacobson Schwartz, an economic historian skilled in the management of statistical data. Their first and most influential work was A Monetary History of the United States, 1867-1960 (1963). This book primarily described and explained historical changes in the U.S. supply of currency and bank deposits. Underlying these topics was Friedman’s conviction that changes in the money supply had been a major cause of changes in income, output, and employment. The book provided much evidence to show that badly chosen Federal Reserve policies had been a major cause of the Great Depression following 1929.

During this research, Friedman’s ideas were evolving. At the University of Chicago, where he taught until 1977, he established the Workshop in Money and Banking and directed a number of pathbreaking doctoral dissertations by students who became important scholars in monetary analysis. Friedman and his leading students (and many others) became known as monetarists. Their most important doctrine was that “inflation is always and everywhere a monetary phenomenon,” a view that had been neglected in the 1940’s and 1950’s.

An important conclusion of monetarism was that rapid monetary growth would tend to raise interest rates rather than lower them, as more traditional analysis indicated. The process worked as follows: rapid monetary growth would tend to cause the prices of goods and services to rise (inflation). As people come to expect further inflation, prospective borrowers become more eager to borrow, hoping to beat price increases and to repay what they borrowed with depreciated dollars. Lenders become less eager to lend, fearing they will be repaid in depreciated dollars. Increased demand for loans and decreased supply of loan funds would combine to produce higher interest rates.

In 1967, Friedman was elected president of the American Economic Association (AEA). In his AEA presidential address, he articulated additional radical ideas that ultimately became widely accepted. He argued that monetary policy, although it can affect the aggregate demand for goods and services, can do little to remedy unemployment. He felt there is a “natural rate of unemployment,” determined by microeconomic factors, toward which the economy gravitates. Efforts to lower unemployment below the natural rate through demand stimulation would only aggravate inflation. His argument was very timely, for the Federal Reserve in the 1970’s added to inflationary pressure in a vain effort to lower both interest rates and unemployment by monetary expansion.

In addition to his scholarly writings, Friedman wrote extensively for general readers. His book Capitalism and Freedom (1962) advocated such unconventional policies as flexible foreign exchange rates, a volunteer military, and a negative income tax (to relieve poverty).

Friedman received the Nobel Prize in Economics in 1976, leading to much controversy. From the 1950’s, Friedman had become widely known as an intense and effective defender of personal liberty and freedom of economic enterprise. These views went against prevailing opinion (especially among intellectuals), which stressed the failures of free-market arrangements, praised the achievements of the Soviet Union, and favored collectivist interventions in the U.S. economy.

Shortly after receiving his Nobel Prize, Friedman developed a television series that focused on his principal ideas; the series was broadcast on public television in 1980. With his wife, Rose Friedman, he composed the book Free to Choose , elaborating on the issues featured in the program. It became a best seller. In 1984, they presented another television series, Tyranny of the Status Quo , followed by a book with the same title. Friedman died in San Francisco, California, on November 16, 2006.

Significance

Friedman was a charismatic teacher who attracted many disciples. He clearly enjoyed controversy and was courageous in defending unconventional and unpopular opinions. He also had the ability to present ideas in a simple and direct fashion sometimes too simple, according to critics.

Friedman’s work was often viewed skeptically by fellow economists. He was slow to present his analysis in mathematical form (in contrast, say, to fellow Nobel laureate Franco Modigliani), and while his monetary studies were based on quantitative data, they used rather primitive analytical techniques at a time when mainstream economics emphasized correlation and regression analysis. Other monetarists employed both mathematics and econometrics to extend Friedman’s ideas.

Although Friedman did not hold any significant government position, his views on inflation were influential in Ronald Reagan’s successful presidential campaign in 1980 and in the successful anti-inflation policies of Federal Reserve chair Paul Volcker from 1981 to 1983. Friedman’s general opposition to government regulatory programs helped to promote deregulation of major industries, such as banking, railroads, airlines, highway carriers, electricity, and natural gas.

The earned-income credit, incorporated into the federal income tax, was a direct offshoot of Friedman’s proposed negative income tax. He was a strong critic of generous welfare benefits unrelated to work, and his views helped shape the welfare reform of President Bill Clinton’s administration. Friedman had been one of the earliest critics of fixed foreign-exchange rates, and he helped bring many economists to support the more flexible rates in existence since the 1960’s.

Bibliography

Breit, William, and Roger L. Ransom. The Academic Scribblers. 3d ed. Princeton, N.J.: Princeton University Press, 1998. Chapter 14, devoted to Friedman, reviews his life and work, with readable but technical emphasis on his monetary ideas.

Burton, John. “Positively Milton Friedman.” In Twelve Contemporary Economists, edited by J. R. Shackleton and Gareth Locksley. London: Macmillan, 1981. In less than twenty pages, Burton summarizes Friedman’s technical work in terms accessible to university undergraduates.

Butler, Eamonn. Milton Friedman: A Guide to His Economic Thought. Aldershot, England: Gower, 1985. Most of the book is devoted to Friedman’s ideas on money and macroeconomics, followed by a short section on his analysis of market economy and economic methodology.

Ebenstein, Lanny. Milton Friedman: A Biography. New York: Palgrave Macmillan, 2007. This biography covers Friedman’s early life, his education, and his ideas on consumerism, monetarism, capitalism, public policy, school vouchers, and more. Recommended especially for its updated content.

Friedman, Milton, and Rose Friedman. Two Lucky People: Memoirs. Chicago: University of Chicago Press, 1998. A collaborative autobiography by Milton and Rose Friedman.

Hirsch, Abraham, and Neil de Marchi. Milton Friedman: Economics in Theory and Practice. Ann Arbor: University of Michigan Press, 1990. The second half of this book provides a good overview and useful criticisms of Friedman’s economic research. Comprehensive bibliography.

Silk, Leonard. The Economists. New York: Basic Books, 1976. A lengthy section on Friedman (identified as “Prophet of the Old-time Religion”) is readable but relatively unsympathetic to Friedman’s views.

Sobel, Robert. The Worldly Economists. New York: Free Press, 1980. Sobel, a prolific writer on business and economic topics for nonspecialists, provides an excellent introduction to Friedman’s life and work in chapter 7.