Friedman, Milton (31 July 1912-16 Nov. 2006), statistician, economist, and public intellectual, was born in Brooklyn, New York, the youngest child of Sarah Landau and Jeno S. Friedman, who emigrated to the United States from an eastern part of the Austro-Hungarian Empire which became part of the Ukraine. Reared in Rahway, New Jersey, in a lower-middle class Jewish family, his father died during his senior year at Rahway High School. Friedman attended Rutgers College, a private college that would become part of the state university system, on a scholarship awarded by the state of New Jersey to outstanding students with financial needs, where he studied mathematics and economics. Two of his professors at Rutgers would become well-known economists: Homer Jones, later the vice president in charge of research of the Federal Reserve Bank of St. Louis, and Arthur F. Burns, later head of the National Bureau of Economic Research and chair of the Federal Reserve System. When Friedman graduated in 1932 they encouraged him to pursue the study of economics at the graduate level.

Friedman chose the University of Chicago, where he encountered Jacob Viner, a leading international trade theorist; Frank Knight, the author of Risk, Uncertainty, and Profit, a classic study of the structure of a capitalist economy; Lloyd Mints, an expert on monetary doctrines and an advocate of the quantity theory of money; and Henry Simons, a young advocate of free market economics. Henry Schultz, a pioneer econometrician at Chicago, helped Friedman obtain a fellowship at Columbia. So after one year Friedman left for Columbia where he studied with Harold Hoteling, a distinguished statistician, and Wesley C. Mitchell, the founder of the National Bureau of Economic Research, among others. After a year at Columbia he returned to Chicago where he served as a research assistant to Schultz. Friedman's skill in statistics was revealed in one of his earliest papers that developed a nonparametric approach to the analysis of variance that was published in the Journal of the American Statistical Association in 1937. At Chicago Friedman met Rose Director, a fellow graduate student in economics, who would become his wife in 1938 and his close intellectual collaborator for the rest of his life. The couple had two children.

Friedman taught part time at Columbia from 1937 to 1940. In 1940 he began teaching full time at the University of Wisconsin-Madison. An offer of a tenured position, however, was not forthcoming due to opposition within the department. During the war Friedman worked first in the Treasury, where one of the projects on which he worked was income-tax withholding, but in 1943 he moved to the Division of War Research at Columbia University. There he worked on several projects that sought to apply statistical methods to problems holding back the war effort, such as the best way of testing the quality of artillery shells. It led to the development of the statistical method known as sequential hypothesis testing.

In 1946 Friedman received his Ph.D. from Columbia. His dissertation, "Income from Independent Professional Practice," consisted of work completed earlier with Simon Kuznets at the National Bureau of Economic Research which showed how the incomes of physicians, dentists, and other professionals were determined by the strength of professional associations, the cost of training, and other economic variables. Publication, a requirement for a Ph.D. at Columbia, had been delayed by a controversy over the claim in the book that the American Medical Association had unduly restricted entry into the medical profession in order to boost the wages of physicians.

Friedman spent the academic year 1945-1946 at the University of Minnesota, but he returned the following academic year to the University of Chicago, where he would remain for the next thirty years. He became a full professor in 1948. In 1951 he was the third recipient of the John Bates Clark Medal, which is awarded biannually by the American Economics Association to the top economist under the age of forty. In 1963 he became the Paul Snowden Russell Distinguished Service Professor of Economics at the University of Chicago. At Chicago he became a pillar of the Chicago School of Economics, a group of scholars who became famous for defending free market economics.

In the 1950s Friedman began publishing a series of path-breaking papers and monographs. He laid out his methodological approach in what became one of his most famous and controversial essays, "The Methodology of Positive Economics," published in 1953. There Friedman argued that economists were spending too much time trying to make the assumptions underlying their models realistic. Economic models should be judged, Friedman argued, not by the realism of their assumptions, but rather by the accuracy of their predictions. If the assumptions that markets were competitive and that business executives aimed to maximize profits produced accurate predictions, Friedman was satisfied. Liberal economists, however, viewed Friedman's argument as a sophisticated attempt to evade evidence that markets were not competitive, that the participants in markets did not behave rationally, and therefore that the case for free market capitalism was seriously flawed.

In 1958 Friedman published The Theory of the Consumption Function. At that time the consumption function, the relationship between income and consumption, was being studied intensively by economists because it was a crucial building block of Keynesian economics. One of Keynes's main points was that if the government spent more money, for example, by employing people to build roads, that spending would have a multiplied effect on the economy. The people who built the roads would spend part of their additional income on food, and that would mean more income for producers of food, who would spend more on gasoline, and so on, multiplying employment. Clearly, the size of the "multiplier effect" would depend on what proportion of their extra income each recipient chose to spend on consumption. If the recipients of extra income initially decided to save all of their extra income, there would be no further rounds of spending. But if they consumed 75 percent, there would be future rounds. Friedman's point was that the proportion consumed would depend on whether the recipients of the increased government spending regarded their additional income as temporary or permanent. If someone's income rises temporarily, they are likely to save a large part of their extra income. After all, there will also be bad years when their income is unusually low and the prudent policy is to save for a rainy day. Friedman's study of consumption, while it had many critics, made a deep impression on the economics profession and continued to be a staple of policy discussions in the decades that followed.



Money Matters

In 1948 Friedman began his collaboration with Anna Jacobson Schwartz on the monetary history and statistics of the United States at the National Bureau of Economic Research, an umbrella organization that was a leader in compiling the basic economic statistics of the United States. Friedman and Schwartz accepted the task of compiling and analyzing the data on the stock of money. Their collaboration resulted in three major publications: A Monetary History of the United States (1963), Monetary Statistics of the United States (1970), and Monetary Trends in the United States and the United Kingdom (1982). The first volume was enormously influential, and the second volume also proved to be a valuable resource. Developments in economic theory and statistical theory meant that the methodology of the third volume, however, was viewed as outdated when it finally appeared.

A Monetary History was one of the most important books on economics published in the twentieth century, surpassed only by John Maynard Keynes's The General Theory of Employment, Interest and Money (1936). The central thesis of A Monetary History is that "money matters." The Federal Reserve, accordingly, is a powerful institution whose decisions have important consequences for the economy. Later this view was taken for granted, but when A Monetary History was published, the common view among economists was very different. Keynesian economists thought that any impact on the economy from monetary policy was negligible. True, there is a correlation between money and economic activity, but Keynesian economists thought that this correlation was the result of changes in the economy producing changes in the stock of money--reverse causation. In A Monetary History Friedman and Schwartz sought to show that causation ran from money to income by analyzing "natural experiments" to be found in American monetary history: cases when historical analysis showed that the stock of money had changed because of events that were unrelated to the ongoing developments in the economy.

The most important set of natural experiments came from the Great Depression. Keynesian economists minimized the importance of monetary events in fomenting the Depression. But Friedman and Schwartz argued that the banking panics in the early 1930s had produced a sharp decline in the stock of money and that this had been an important force turning an ordinary, if severe, recession into the Great Depression. The Federal Reserve, they argued, could have prevented the fall in the stock of money, but various factors, including infighting among different parts of the Federal Reserve, prevented it from acting. It was as if a building was burning, but the firemen were so busy arguing among themselves that they failed to heed the alarm.

In 1967 Friedman was elected president of the American Economic Association. His presidential address proved to be one of the most influential in the history of the organization. The so-called Phillips curve--the idea that there was a tradeoff between inflation and unemployment--had been gaining traction among economists. If the government used expansionary monetary and fiscal policies, it would create more inflation, but unemployment would fall. Liberals promoted a high-inflation-low-unemployment equilibrium while conservatives preferred a low-inflation-high-unemployment equilibrium. Voters simply had to choose the philosophy they agreed with. Not so fast, Friedman argued. The tradeoff was temporary. There was, Friedman argued, a "natural rate of unemployment" to which the economy would return in the long run, unless the rate of inflation was pushed to ever higher levels. Liberals objected to the term "natural rate of unemployment" and instead preferred the term "NAIRU," which stood for "non-accelerating inflation rate of unemployment." (The Nehru suit was popular at the time.) But whether called the natural rate or the NAIRU the idea gained widespread acceptance among economists, in part because of the association of high unemployment and high inflation in the 1970s, a phenomenon that became known as stagflation.

Given all his work on money, what did Friedman recommend as the best policy for the Federal Reserve? He argued that the best the Federal Reserve could do would be simply to increase the stock of money at a slow, steady rate. This would stabilize the rate of inflation at a low level, possibly zero, and the unemployment rate would then stabilize at the natural rate. In "The Optimum Quantity of Money" (1969) he showed that under some conditions deflation would be optimal because it would encourage the use of cash, which costs almost nothing to produce. This essay became one of the most cited in the field of monetary theory.

In 1976 Friedman was awarded the Nobel Prize in Economics for "his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy." Some observers believe he could well have been awarded several more Nobel Prizes. In 1977 Friedman retired from the University of Chicago and moved to San Francisco, where he became a senior research fellow at the Hoover Institution at Stanford University. In 1988 he was awarded both the Presidential Medal of Freedom and the National Medal of Science.



The Public Intellectual

In 1962 Friedman published a short book for the educated layperson entitled simply Capitalism and Freedom. It was the beginning of Friedman's career as a public intellectual, and it proved to be both enormously influential and controversial. In it Friedman defended capitalism and offered a series of policy proposals for solving America's economic difficulties by relying on markets. The theme of the book was, as the title suggests, that capitalism is a necessary condition for a high degree of personal freedom. He recognized, of course, that capitalism was only a necessary condition, not a sufficient condition. There are many obvious examples of unfree societies where considerable amounts of capital remained in private hands and considerable amounts of economic activity took place through markets: Franco's Spain and Hitler's Germany, for example. But, Friedman argued, there were no examples of countries that had abandoned private property and yet permitted a high degree of personal freedom.

Friedman's book went beyond a mere statement of the relationship between capitalism and freedom; it advocated a series of radical policies for resolving the major economic problems facing the United States. In the long run these proposals proved extraordinarily influential. These were not brand-new ideas. Rather, Friedman's genius was in showing how these proposals followed simply and logically from generally accepted economic principles that could be understood by the educated layperson.

His criticism of Keynesian economics is a good example. Although the literature of economics was filled with criticisms of Keynesian economics, Friedman was able to distill their criticisms in a way that the lay reader could understand. If the government spends more money, Friedman wrote, you have to ask where the money came from. Suppose the government finances additional spending by issuing bonds. If the people buying additional government bonds (perhaps indirectly through financial institutions) buy fewer bonds issued by the private sector, the impact on the economy of the increased government spending will be offset by the decrease in private spending. This argument for the "crowding out" of private spending by government spending was largely rejected by economists following the Keynesian revolution, but was revived by Friedman, and continued to hold adherents.

Criticisms of Keynesian fiscal policy occupy only a small part of Capitalism and Freedom. One of the most important and most complicated chapters dealt with international economic relations. Here Friedman advocated flexible exchange rates, a policy that he had pushed earlier in "The Case for Flexible Exchange Rates" (1953). When Capitalism and Freedom appeared, Friedman's criticism of fixed exchange rates appeared to many as merely tilting at windmills. The gold standard, although abandoned in the 1930s, was still regarded with reverence because it had generated a long period of price stability and fixed exchange rates that promoted international flows of commodities and capital. After World War II it had been supplanted with the Bretton Woods system, where gold was replaced by the US dollar, and the International Monetary Fund was created to help nations deal with temporary payment imbalances. But in the late 1960s and early 1970s, the US balance of payments worsened, and the Bretton Woods System came under increasing pressure. Events came to a head in 1973, when foreign nations were unwilling to finance a growing American payments deficit, and the Bretton Woods System was abandoned in favor of flexible exchange rates. Economic forces were undoubtedly the major factor making for change in the system of exchange rates, but Friedman's powerful case for flexible exchange rates may well have played a role.

Capitalism and Freedom also addressed the alleviation of poverty. Friedman argued that most existing government antipoverty policies failed to accomplish their objective. Friedman advocated replacing these failed and misshapen policies with a "negative income tax." People who had no source of income would receive a basic income provided by the government. As their income rose because they found work or for some other reason, the subsidy would be reduced, but the reduction of the subsidy would be only a fraction of the additional income they had earned. Since their net income from earning more would always be higher they would always have an incentive to work. At some point the income tax would shift from negative to positive, and they would be paying taxes, rather than receiving a subsidy. Friedman's negative income tax was one of the inspirations for the Earned Income Tax Credit adopted in 1975, which became one of the largest anti-poverty programs in the United States.

Friedman also tackled education in Capitalism and Freedom. For primary and secondary education Friedman agreed that the state had an interest in compelling students to attend in order to inculcate a "common core of values." But he saw no reason to make this a government monopoly. "Parents who choose to send their children to a private school," Friedman wrote, "would be paid a sum equal to the estimated cost of educating a child in a public school, provided that at least this sum was spent on education in an approved school" (p. 91). Friedman also called for a voucher system for higher education, and later for primary and secondary education as well. In 1996 friends of Milton and Rose Friedman founded the Friedman Foundation for Educational Choice to promote the couple's ideas about education.

As the Vietnam War accelerated in the late 1960s Friedman became popular, for perhaps the only time, with left-wing students because of his opposition to the draft. The only valid way for a free society to assemble an army, Friedman claimed, was by paying soldiers salaries that were high enough that they would be willing to serve voluntarily. In 1969 President Richard Nixon established the President's Commission on an All-Volunteer Armed Force, with Friedman as a member. The commission's report concluded that an all-volunteer armed force was both feasible and desirable and in 1973 the draft was allowed to expire.



The Celebrity

Friedman's brilliance, his ability to communicate sophisticated ideas to the general public, and his witty and charming personality made him a hero to conservatives and a frustrating antihero to liberals. He served as a columnist at Newsweek from 1966 to 1983. In 1973 he achieved a milestone of sorts--at least for economists--when he was interviewed by Playboy magazine. Appearing in 1979 on the Phil Donahue Show, the talk show host, a convinced and articulate liberal, had his hands full with a feisty Friedman vigorously defending capitalism.

Perhaps Friedman's most controversial action was his visit to Chile in 1975. In 1970 Salvador Allende, a staunch leftist, was elected president and then moved aggressively to establish a socialist state. One consequence of his policies was soaring inflation. In 1973 Allende was overthrown in a military coup led by Augusto Pinochet, who then established a brutal dictatorship. In 1975 Friedman went to Chile where he met with Pinochet. After the meeting Friedman wrote a memo for Pinochet in which he called for an immediate halt to money creation in order to halt inflation, a policy he described as "shock therapy." The effects of Friedman's policies, and those of the University of Chicago Ph.D.s who worked in the Pinochet regime, the so-called Chicago Boys, have been bitterly debated. When Friedman was awarded the Nobel Prize in 1976, it sparked controversy and protests mainly because of his connection to Pinochet. Friedman answered his critics by claiming that he believed that people benefitted from free market policies no matter the politics of the government that ruled them.

Perhaps Friedman's most prominent turn on the public stage took place in 1980, when a series of programs that Friedman narrated, Free to Choose, was broadcast on Public Television. Friedman again provided a vigorous defense of capitalism. The book based on the series, which he co-authored with his wife, Rose, was a best seller. The series was rebroadcast in 1990 with introductions by Arnold Schwarzenegger, Ronald Reagan, Steve Allen, and other celebrities. Once a lonely voice on the outside, Friedman had become mainstream. He died in San Francisco.

Milton Friedman was one of the most influential economists of the twentieth century. His academic work had a major and lasting impact on the economics profession. Friedman was also important as a public intellectual. Few of the ideas that he pushed over the years have been adopted in full. The all-volunteer armed force and flexible exchange rates are the best examples. But others--legalizing recreational drugs such as marijuana, a negative income tax, a monetary growth rule, and school vouchers--have influenced the discussion of public policy and left a long-run imprint. Whatever one's political leanings, his writings remain well worth reading.

 



Bibliography

Milton Friedman's personal papers are at the Hoover Institution, Stanford University. "The Methodology of Positive Economics" and "The Case for Flexible Exchange Rates" appear in Milton Friedman, Essays in Positive Economics (1953). He laid out his ideas about monetary policy and banking regulation in the Millar Lectures published as A Program for Monetary Stability (1959). His analysis of the Phillips Curve is found in "The Role of Monetary Policy," The American Economic Review (1968). His theoretical analysis of monetary growth rules is found in "The Optimum Quantity of Money" in The Optimum Quantity of Money and Other Essays (1969). His Nobel Lecture was published as "Inflation and Unemployment," Journal of Political Economy (1977). Friedman's writing for the general public includes: Capitalism and Freedom (1962); Free to Choose (1980), with Rose Friedman; Tyranny of the Status Quo, with Rose Friedman (1984); and his memoir, Two Lucky People, also with Rose Friedman. Thoughtful and informative writings about Friedman include Abraham Hirsch, Milton Friedman: Economics in Theory and Practice (1990); John Cunningham Wood and Ronald H. Woods, eds., Milton Friedman: Critical Assessments (four volumes, 1990); and Lanny Ebenstein, Milton Friedman: A Biography (2007). Obituaries appeared in the New York Times on 16 Nov. 2006 and the Wall Street Journal on 17 Nov. 2006.



Hugh Rockoff




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