Milton Friedman

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Milton Friedman

Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist and intellectual who made major contributions to the fields of macroeconomics, microeconomics, economic history, and statistics while advocating laissez-faire capitalism. In 1976, he was awarded the Nobel Memorial Prize for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.

Milton Friedman stands as one of the most influential economists of the late twentieth century. The slogan "money matters" came to be associated with Friedman's monetarist position. He argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman believed laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth, by gradual expansion of the money supply. He advocated the quantity theory of money, that general prices are determined by money. Therefore active monetary (easy credit) or fiscal (tax and spend) policy can have unintended negative effects.


Friedman was considered by many the most influential economist of the second half of the twentieth century, if not all of it. His work, which went far beyond the confines of academia, influencing the public policy of presidents in the United States, as well as reaching the general public both in the US and around the world. Former Federal Reserve Board Chairman Alan Greenspan said of Friedman: "There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people" (Ebenstein 2007). As humankind advances in hope of a society of peace and prosperity for all, Milton Friedman's life and work continues to have impact.


Milton Friedman was born in New York City in 1912 to a working-class family of Jewish immigrants from Austria-Hungary, more specifically from Bergsaß/Beregszász (Berehove) in current Ukraine on the border with Hungary.

After his father's death the family moved to Rahway, New Jersey. He was awarded a scholarship to Rutgers University from which he graduated in 1932. Afterwards, the Chicago University Economics Department offered Friedman a tuition scholarship. He spent the year there, obtaining M.A. in 1933. While in Chicago, he met extremely bright fellow economics student, Rose Director, whom he married six years later. After Chicago, he then went, on a fellowship arranged by Henry Schultz and Harold Hotelling, to Columbia University.

After the year at Columbia, Friedman returned to Chicago, spending a year as research assistant to Henry Schultz, who was then completing his classic, The Theory and Measurement of Demand, and forming a lifelong friendship with two fellow students, George J. Stigler and W. Allen Wallis.

When Wallis went first to work for the New Deal Administration of Franklin Delano Roosevelt in Washington, DC, Friedman followed in the summer of 1935, working at the National Resources Committee on the design of a large consumer budget study. This was one of the two principal components of his later Theory of the Consumption Function. The other came from his next job - at the National Bureau of Economic Research, where he went in the fall of 1937 to assist Simon Kuznets in his studies of professional income. The end result was our jointly published Incomes from Independent Professional Practice, which also served as his doctoral dissertation at Columbia University (Lindbeck, 1992).

He spent 1941 to 1943 at the U.S. Treasury Department, working on wartime tax policy, and 1943-1945 at Columbia University in a group headed by Harold Hotelling and W. Allen Wallis, working as a mathematical statistician on problems of weapon design, military tactics, and metallurgical experiments. In 1945, Friedman joined George Stigler at the University of Minnesota, from which he had been on leave. After one year there, he accepted an offer from the University of Chicago to teach economic theory, a position opened up by Jacob Viner's departure for Princeton. Chicago became his intellectual home for several decades.

Milton Friedman served as Professor of Economics at the University of Chicago 1946-1976, where he helped build a close-knit intellectual community that produced a number of Nobel Prize winners, known collectively as the Chicago School of Economics. He spent the academic year 1953-1954 as a Visiting Fellow at Gonville and Caius College, Cambridge.

Did you know?
Milton Friedman is considered the most influential economist of the second half of the twentieth century

In 1976, he won 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." From 1977, Friedman was affiliated with the Hoover Institution at Stanford University. In 1988 he received the National Medal of Science and Presidential Medal of Freedom. He died at the age of 94 in San Francisco on November 16, 2006 of heart failure. Friedman's son is the philosopher and economist David D. Friedman.


Income hypothesis in consumption

Friedman's early contributions include the "Permanent Income Hypothesis" in consumption (1957), his formulation of risk-aversion and risk-proclivity (1948, with L. J. Savage), his use of evolutionary theory in the theory of the firm, and his propositions for a "positivist" methodology in economics (1953).

His major achievement was his Theory of the Consumption Function (Friedman 1957), which was the work most prominently mentioned in the citation for the Nobel Prize he won in 1974. His investigation was touched off by a well known paradox. Cross-section data appeared to show that the percentage of income saved increased as income rose. On the other hand, time series data showed much less change in the savings proportion over the years. The resolution of the puzzle was that spending and savings decisions depended on people's views of their long-term (“permanent”) income; but they were much less inclined to adjust to transitory income variations in either direction.

Critique of the Phillips curve

Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968). Each of these has implications for the effect of monetary and fiscal policy on output in the short run and the long run.

Some economists would argue that Friedman's most important contribution to macroeconomics lay, not in his technical monetary work, but in his 1967 presidential address to the American Economic Association. Here he demonstrated that the idea of a stable trade-off between inflation and unemployment which held sway under the name of the Phillips curve and which seemed to give policymakers a menu of choices was invalid. His argument was as follows: Suppose that a government or central bank tried to raise output and employment at the expense of accepting higher inflation. Once market participants started to take into account inflation in their behavior, the economy would eventually end up with the same rate of unemployment as before but a higher rate of inflation. If the authorities nonetheless persisted in trying to achieve an over-ambitious target unemployment rate, the result would not be merely inflation, but accelerating inflation, with which no society could live for long.

This family of Friedman doctrines was sometimes called the vertical Phillips curve, sometimes the accelerationist hypothesis and sometimes the natural rate of unemployment. The latter was the level at which the economy would settle once any stable rate of inflation had been established. The name was later changed by some users to the ”NAIRU”: the Non-Accelerating Inflation Rate of Unemployment to banish the idea that there was anything natural or inevitable about it.

It was in fact these ideas related to the NAIRU which caused the conversion of many economists away from post-war Keynesianism rather than any of Friedman's more technical monetary ideas. The basic propositions are now quite familiar, but at the time they were explosive stuff for the British economic establishment and also for many American economists on the Eastern seaboard.

Quantity theory of money

Friedman was the leading proponent of the monetarist school of economic thought. He maintained that there is a close and stable link between inflation and the money supply, mainly that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the Federal Reserve Bank; he rejected the use of fiscal policy as a tool of demand management; and he held that the government's role in the guidance of the economy should be severely restricted.

Friedman wrote extensively on the Great Depression, which he called the "Great Contraction," arguing that it had been caused by an ordinary financial shock whose duration and seriousness were greatly increased by the subsequent contraction of the money supply caused by the misguided policies of the directors of the Federal Reserve:

The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933. … Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.(Friedman & Friedman 1999: 233)

It was in the late 1950s and 1960s that Friedman developed the monetarist doctrines by which he became best known. He treated money as an asset. The public desire to hold this asset depended on incomes, the rate of interest, and expected inflation. If more money became available the effect would be initially to raise real output and incomes, but eventually just to raise prices more or less in proportion. Here was where the famous long and variable lags appeared: typically nine months before real output and income were affected and a further nine months before the main effects on prices came through. In Capitalism and Freedom (1962) Friedman wrote,

"There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects (Friedman 1962)

These time periods were much cited and much derided; but they were not the heart of Friedman's message.

Characteristically, his work began as a by-product of an attempt to establish the factual record of the US money supply, which turned up so many problems and brought to light so much new material that the more ambitious volume more or less suggested itself.

The policy conclusion Friedman drew was his famous money supply rule, namely a stable growth of the money supply, year in year out. He accepted that this was not the only policy that could be derived from monetarist findings. But nearly all suggested monetarist strategies became embroiled in difficulties as financial assets proliferated and with them the number of rival definitions of money. In the early 1990s some monetarists were accusing the Federal Reserve of depressing the US economy with too tight a policy and at the same time as other monetarists were criticizing it for expanding too much.

Friedman himself sometimes gave the impression that whatever a central bank did, it could do no right. To gain his favor it had not only to pursue monetary targets, but pursue them by a particular method known as monetary base control; and when the Federal Reserve attempted such a method in 1979-1982 it was damned for getting the mechanics wrong. One of his famous quotes:

Just as banks all around the country were closing, the Fed raised the discount rate; that's the rate they charge for loans to banks. Bank failures consequently increased spectacularly. We might have had an economic downturn in the thirties anyway, but in the absence of the Federal Reserve System—with its enormous power to make a bad situation worse—it wouldn't have been anything like the scale we experienced. (Friedman’s interview in Playboy 1973).

Monetary History of the United States (1867-1960) and Monetarism

The book in which he tried most fully to demonstrate money's active role was Monetary History of the United States, 1867-1960, published in 1963 and written jointly with Anna Schwartz; it was one of Friedman's skills that he always found the right collaborator for a particular work.

The Monetary History is Friedman's masterpiece. Containing hardly any equations, it has been read with profit and pleasure as history, even by people who have disagreed with, or been indifferent to, the doctrines it was designed to advance. Characteristically, it began as a by-product of an attempt to establish the factual record of the US money supply, which turned up so many problems and brought to light so much new material that the more ambitious volume more or less suggested itself (Friedman 1963).

Public policy positions and legacy

In the fall of 1950, Friedman spent a few months in Paris as a consultant to the U.S. governmental agency administering the Marshall Plan. His major assignment was to study the Schuman Plan, the precursor of the European Common Market. This was the origin of his interest in floating exchange rates, since Friedman concluded that a common market would inevitably founder without floating exchange rates. His essay, The Case for Flexible Exchange Rates (Friedman 1953), was one product.

Thus in the 1950s, Friedman was much better known for his advocacy of floating exchange rates than for monetarism. The background was the widespread concern about a supposed dollar shortage, which Friedman believed entirely due to overvalued exchange rates in Europe and elsewhere. "Sure," he would say, "there is a dollar shortage in Britain - in exactly the same way as there is a dollar shortage for every US citizen." He had the last laugh, as within a few years the supposed dollar shortage had turned into an equally mythical dollar surplus.

Beginning in the early 1960s, Friedman was increasingly drawn into the public arena, serving in 1964 as an economic adviser to the ultra-Conservative Senator Goldwater in his unsuccessful quest for the presidency, and, in 1968, as one of a committee of economic advisers during Richard Nixon's successful quest. In 1966, he began to write a triweekly column on current affairs for Newsweek magazine, alternating with Paul Samuelson and Henry Wallich.

Bob Chitester persuaded all of them to join him in producing a major television program presenting Friedman's economic and social philosophy. The end result was Free to Choose (Friedman 1980), ten one-hour programs, each consisting of a half-hour documentary and a half-hour discussion. The first of the ten programs appeared on PBS (Public Broadcasting System) in January 1980, and subsequently in many foreign countries.

It can be asserted that Milton Friedman’s influence via these programs—aimed at ordinary people in not so democratic and the outright Communist countries alike (where they were clandestinely reproduced and run for mass audiences) by preaching that the world recognized the need for free markets, free trade, and limited governments—changed the political history of Central and Eastern Europe and USSR and, to certain extent, in Asia more than any other political exercise of force.

For us, who lived in the communist world, Milton Friedman was the greatest champion of freedom, of limited and unobtrusive government and of free markets. Because of him I became a true believer in the unrestricted market economy (Czech president Vaclav Klaus 2007).

Hence, this might be Milton Friedman’s greatest and most important legacy, surpassing even his great scientific endeavors.

Milton Friedman continued to be active in public policy; he continued his tri-weekly column in Newsweek magazine until it was terminated in 1983. Since then, he published numerous signed articles on the opinion pages in major newspapers. He served as an unofficial adviser to Ronald Reagan during his candidacy for the presidency in 1980, and as a member of the President's Economic Policy Advisory Board during his presidency. In 1988, President Reagan awarded Milton Friedman the Presidential Medal of Freedom and in the same year he was awarded the National Medal of Science.

Friedman traveled extensively in these later years of his life. Perhaps the most notable foreign travel consisted of three trips to China: one in 1980 when he gave a series of lectures under the auspices of the Chinese government; one in 1988 when he attended a conference in Shanghai on Chinese economic development, and one in 1993 with a group of Chinese friends from Hong Kong traveling throughout the country. The three visits covered a period of revolutionary economic growth and development, the first stage of a shift from an authoritarian, centrally planned economy to a largely free market economy.

One of his down-to-earth examples with which he connected to ordinary people goes like this:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40 percent of our national income. (Fox News interview with David Asman, May 2004)

Other honors and recognition

Friedman allowed the Cato Institute to use his name for its Milton Friedman Prize for Advancing Liberty in 2001. His wife Rose, sister of Aaron Director, with whom he founded the Milton and Rose D. Friedman Foundation for School Choice, served in the international selection committee.

According to Harry Girvetz and Kenneth Minogue, Friedman was co-responsible with Austrian economist Friedrich von Hayek for providing the intellectual foundations for the revival of classical liberalism in the twentieth century.

At a ceremony celebrating Friedman's achievements, Alan Greenspan said "There are many Nobel Prize winners in economics, but few have achieved the mythical status of Milton Friedman" (Formaini 2002).

Major works

  • Friedman, M. 1948. "A Monetary and Fiscal Framework for Economic Stability." American Economic Review 38 (3) (June 1948): 245-264.
  • Friedman, M. 1949. "The Marshallian Demand Curve," The Journal of Political Economy 57 (6) (Dec. 1949): 463-495.
  • Friedman, M. "Commodity-Reserve Currency," Journal of Political Economy 59 (3) (Jun., 1951): 203-232
  • Friedman, M. 1952. "Price, Income, and Monetary Changes in Three Wartime Periods," American Economic Review 42 (2) Papers and Proceedings of the Sixty-fourth Annual Meeting of the American Economic Association (May, 1952): 612-625.
  • Friedman, M. 1953. “The Case for Flexible Exchange Rates” in: Essays in Positive Economics. Chicago, IL: University of Chicago Press.
  • Friedman, M., [1953] 1966. Essays in Positive Economics. Chicago, IL: University of Chicago Press. ISBN 978-0226264035
  • Friedman, M. 1953. "Choice, Chance, and the Personal Distribution of Income." Journal of Political Economy 61 (4) (Aug., 1953): 277-290.
  • Friedman, M. 1956. "The Quantity Theory of Money: A restatement," in Friedman (ed.), Studies in the Quantity Theory of Money. Chicago, IL: University of Chicago Press, 277-290. ASIN B000GSKNSU
  • Friedman, M. [1957] 2008. A Theory of the Consumption Function. Princeton, NJ: Princeton University Press. ISBN 978-0691138862
  • Friedman, M. & Gary S. Becker. 1957. "A Statistical Illusion in Judging Keynesian Models," Journal of Political Economy 65 (1) (Feb., 1957): 64-75.
  • Friedman, M. 1958. "The Supply of Money and Changes in Prices and Output," in Relationship of Prices to Economic Stability and Growth.
  • Friedman, M. 1959. "The Demand for Money: Some Theoretical and Empirical Results," Journal of Political Economy 67 (4) (Aug., 1959): 327-351.
  • Friedman, M. 1961. "Monetary Data and National Income Estimates," Economic Development and Cultural Change 9 (3) (Apr., 1961): 267-286.
  • Friedman, M. 1961. "The Lag in Effect of Monetary Policy," Journal of Political Economy 69 (5) (Oct., 1961): 447-466.
  • Friedman, M. [1962] 2002. Capitalism and Freedom. Chicago, IL: University of Chicago Press. ISBN 978-0226264219
  • Friedman, M. 1963. "Money and Business Cycles," The Review of Economics and Statistics 45 (1) Part 2, Supplement (Feb., 1963): 32-64.
  • Friedman, M. 1968. "The Role of Monetary Policy," American Economic Review 58 (1) (Mar., 1968): 1-17 Presidential address to American Economics Association.
  • Friedman, M. [1976] 2007. Price Theory. Aldine Transaction. ISBN 978-0202309699
  • Friedman, M. 1993. Why Government Is the Problem (Essays in Public Policy). Stanford, CA: Hoover Institute Press. ISBN 978-0817954420
  • Friedman, M. 1994. Money Mischief: Episodes in Monetary History. Harvest Books. ISBN 978-0156619301
  • Friedman, M. & W. Cohen. 1972. Social Security: Universal or Selective? Washington, DC: American Enterprise Institute. ISBN 978-0844720272
  • Friedman, M. & R. Friedman. [1980] 1990. Free to Choose: A Personal Statement. Harvest Books. ISBN 978-0156334600
  • Friedman, M. & R. Friedman. 1997. "The Case for Free Trade," Hoover Digest magazine article
  • Friedman, M. & R. Friedman. 1999. Two Lucky People: Memoirs. Chicago, IL: University of Chicago Press. ISBN 978-0226264158
  • Friedman, M. & S. Kuznets. [1945] 1992. Income from Independent Professional Practice. (Friedman's Ph.D. thesis) Lindbeck
  • Friedman, M., C. Shoup, & R. Mack. 1943. Taxing to Prevent Inflation: Techniques for Estimating Revenue Requirements. Columbia University Press.
  • Friedman, M. & A. J. Schwartz. 1971. Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press. ISBN 978-0691003542
  • Friedman, M. & G. Stigler. 1946. "Roofs or Ceilings?: The Current Housing Problem," Foundation for Economic Education.


  • Ebenstein, Lanny. 2007. Milton Friedman: A Biography. London: Palgrave Macmillan. ISBN 978-1403976277
  • Formaini, Robert L. 2002. Milton Friedman—Economist as Public Intellectual. Economic Insights 7(2) Federal Reserve Bank of Dallas. Retrieved December 29, 2007.
  • Girvetz, Harry K. and Minogue Kenneth. Liberalism, Encyclopedia Britannica (online), retrieved May 16, 2006
  • Hayek, F. A. [1944] 1996. The Road to Serfdom. Chicago, IL: University of Chicago Press. ISBN 978-0226320618
  • Klaus, V. 2007. "Remarks at Milton Friedman Memorial Service," University of Chicago Rockefeller Chapel, Monday, January 29, 2007.
  • Leube, Kurt R. (ed.) 1987. The Essence of Friedman. Stanford, CA: Hoover Institute Press. ISBN 978-0817986612
  • Lindbeck, Assar. (ed.) 1992. Nobel Lectures, Economics 1969-1980. Singapore: World Scientific Publishing Co. ISBN 978-9810208349
  • Stigler, George. 1993. “A Personal Reminiscence,” Journal of Political Economy 101(5) (Oct. 1993): 768-773
  • 'Your World' Interview With Economist Milton Friedman Transcript from David Asman's May 15, 2004 interview with economist Milton Friedman on Fox News. Retrieved December 29, 2007.

External links

All links retrieved November 19, 2013.


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