Milton Friedman

File:MiltonFriedman2.JPG

Milton Friedman

Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist and intelectual 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.

Biography

He 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 nowadays Slovakia. 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 New Deal Washington, 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 ( Lindbeck, 1992 ).

He spent 1941 to 1943 at the U.S. Treasury Department, working on wartime tax policy, and 1943-45 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 has become his intellectual home ever since (Lindbeck, 1992).

Milton Friedman served as Professor of Economics at the University of Chicago 1946-76, 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 1953-54 as a Visiting Fellow at Gonville and Caius College, Cambridge. 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.

Major Works

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. 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 behaviour, the economy would eventually end up with the same rate of unemployment as before but a higher rate of inflation. If the authorities none the less 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 conversion of many economists 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

It was in the late 1950 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. These time periods were much cited and much derided; but they were not the heart of Friedman's message.

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.

The policy conclusion Friedman drew was his famous money supply rule 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 Fed 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 favour it had not only to pursue monetary targets, but pursue them by a particular method known as monetary base control; and when the Fed attempted such a method in 1979-82 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).

Yet he clearly defined money’s active role in the following work:

Monetary History of the US ( 1867-1960) and Monetarism

The book in which he tried most fully to demonstrate money's active role was A Monetary History of the US, 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 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 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, I 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 them to join him in producing a major television program presenting my economic and social philosophy. The resulting effort, spread over three years, proved the most exciting adventure of our lives. 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. Since then, the series has been shown in many foreign countries.

It seems certainly easy to claim 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 clandestine reproduced and run for mass audiences) by preaching that the world recognized the need of free markets, trade and limited governments ---- changed the political history of Central and Eastern Europe and USSR and, to certain extend, 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 as well be by far Milton Friedman’s greatest and most important legacy, far surpassing even his other giant scientific endeavours.

Milton Friedman continued to be active in public policy since 1977. He continued his tri-weekly column in Newsweek until it was terminated in 1983. Since then, he has published numerous op-eds 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.

He had traveled extensively since 1977, including a trip through Eastern Europe in 1990, where we filmed a documentary on former Soviet satellites. The documentary was included in a shortened reissue of Free to Choose ( Friedman 1980 ).

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 when I traveled with a group of Chinese friends from Hong Kong 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% of our national income….” ( Fox News interview, May 2004)

Other honors and recognition

Friedman allowed theCato 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.

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...."

According to Harry Girvetz and Kenneth Minogue, Friedman was co-responsible with Friedrich von Hayek for providing the intellectual foundations for the revival of classical liberalism in the 20th century.

Selected References

• Friedman,M.,C.Shoup & R.Mack,Taxing to Prevent Inflation: Techniques for Estimating Revenue Requirements,Columbia University Press 1943, 236 pp.
• Friedman, M.& S. Kuznets, Income from Independent Professional Practice ,1945, Friedman's PhD thesis), Lindbeck 1992
• Friedman,M.& G.Stigler, Roofs or Ceilings?: The Current Housing Problem,Foundation for Economic Education, 1946, 22 pp.
• Friedman,M., "A Monetary and Fiscal Framework for Economic Stability," 1948, American Economic Review, vol. 38, No. 3 (Jun., 1948), pp. 245-264; JSTOR
• Friedman,M.,"The Marshallian Demand Curve," The Journal of Political Economy, vol. 57, No. 6 (Dec., 1949), pp. 463-495 JSTOR
• Friedman,M.,"Commodity-Reserve Currency," Journal of Political Economy,vol.59, No. 3 (Jun., 1951), pp. 203-232 JSTOR
• Friedman, M.,"Price, Income, and Monetary Changes in Three Wartime Periods," American Economic Review, vol. 42, No. 2, Papers and Proceedings of the Sixty-fourth Annual Meeting of the American Economic Association (May, 1952), pp. 612-625 JSTOR
• Friedman, M. “The Case for Flexible Exchange Rates” in: Essays in Positive Economics , Chicago: University of Chicago,1953
• Friedman, M., Essays in Positive Economics, University of Chicago Press1953
• Friedman,M.,"Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, vol. 61, No. 4 (Aug., 1953), pp. 277-290 JSTOR
• Friedman, M.,"The Quantity Theory of Money: A restatement," 1956, in: Friedman (ed.), Studies in Quantity Theory, pp. 277-290 JSTOR;
• Friedman, M., A Theory of the Consumption Function, NBER, Princeton, 1957
• Friedman,M. & Gary S. Becker "A Statistical Illusion in Judging Keynesian Models," Journal of Political Economy,vol. 65, No. 1 (Feb., 1957), pp. 64-75 JSTOR
• Friedman, M., "The Supply of Money and Changes in Prices and Output," 1958, in: Relationship of Prices to Economic Stability and Growth.
• Friedman, M.,"The Demand for Money: Some Theoretical and Empirical Results," Journal of Political Economy,vol. 67, No. 4 (Aug., 1959), pp. 327-351 JSTOR
• Friedman,M.,"Monetary Data and National Income Estimates," Economic Development and Cultural Change,vol. 9, No. 3, (Apr., 1961), pp. 267-286 JSTOR
• Friedman,M.,"The Lag in Effect of Monetary Policy," Journal of Political Economy, vol. 69, No. 5 (Oct., 1961), pp. 447-466 JSTOR
• Friedman,M.,"Money and Business Cycles," The Review of Economics and Statistics,vol. 45, No. 1, Part 2, Supplement (Feb., 1963), pp. 32-64 JSTOR
• Friedman,M.,"The Role of Monetary Policy," American Economic Review, Vol. 58, No. 1 (Mar., 1968), pp. 1-17 JSTOR presidential address to American Economics Association
• Friedman,M.& W.Cohen, Social Security: Universal or Selective?, 1972
• Friedman, M.& R. Friedman, Free to Choice: A personal statement, Richardson & Snyder, 1980, paperback
• Friedman, M., Money Mischief: Episodes in Monetary History, 1994; ISBN 0-15-162042-3, 286 pp.
• Friedman, M.& R. Friedman, "The Case for Free Trade," 1997, Hoover Digest magazine article
• Klaus, V.,"Remarks at Milton Friedman Memorial Service," University of Chicago, Rockefeller Chapel, Monday, January 29, 2007
• Leube, Kurt R. ed., The Essence of Friedman, 1987, (ISBN 0-8179-8662-6)
• Lindbeck, Assar , ed., Nobel Lectures, Economics 1969-1980, Editor, World Scientific Publishing Co., Singapore, 1992
• Stigler, George, “A Personal Reminiscence,” Journal of Political Economy,vol. 101, No. 5 (Oct., 1993), pp. 768-773 JSTOR
• Stigler, George, 1911-1991: Biographical Memoir, National Academy of Sciences, 1998; online

Credits

New World Encyclopedia writers and editors rewrote and completed the Wikipedia article in accordance with New World Encyclopedia standards. This article abides by terms of the Creative Commons CC-by-sa 3.0 License (CC-by-sa), which may be used and disseminated with proper attribution. Credit is due under the terms of this license that can reference both the New World Encyclopedia contributors and the selfless volunteer contributors of the Wikimedia Foundation. To cite this article click here for a list of acceptable citing formats.The history of earlier contributions by wikipedians is accessible to researchers here:

• Milton_Friedman  ^history

The history of this article since it was imported to New World Encyclopedia:

• History of "Milton Friedman"

Note: Some restrictions may apply to use of individual images which are separately licensed.