Milton Friedman

• 1. Introduction

  ›

  Milton Friedman died on the 16th of November 2006, and his last column ran in The Wall Street Journal the very next day. He was still a working economist at 94. That detail alone tells you something about the man. Born in Brooklyn on the 31st of July 1912 to Jewish immigrants from Carpathian Ruthenia, Friedman rose from a working-class household in Rahway, New Jersey to become, in the words of The Economist upon his death, "the most influential economist of the second half of the 20th century... possibly of all of it." A 2011 survey commissioned by the EJW ranked him second among economists of the entire 20th century, trailing only John Maynard Keynes. The questions his life raises are not merely biographical. How did a boy who lost his father during high school and graduated at barely 16 reshape the way governments around the world think about money, markets, and freedom? What did he actually believe, and how did those beliefs collide with the messiest events of his era?

• 2. Brooklyn to Chicago

  ›

  Friedman graduated from Rahway High School in 1928, just before his 16th birthday, the first in his family to reach university. A competitive scholarship took him to Rutgers, where he graduated in 1932. At that point he had intended to become an actuary or mathematician. The Depression changed his mind. He chose a graduate economics scholarship at the University of Chicago over a mathematics fellowship at Brown University, earning a Master of Arts in 1933. At Chicago he fell under the influence of Jacob Viner, Frank Knight, and Henry Simons, and he met Rose Director, the economist he would marry six years later in 1938. A fellowship at Columbia during 1933-1934 put him in the classroom of statistician Harold Hotelling. Returning to Chicago for 1934-1935, he worked as a research assistant for Henry Schultz on Theory and Measurement of Demand, and formed what he would later call lifetime friendships with George Stigler and W. Allen Wallis. When he could not find an academic position after graduation, he followed Wallis to Washington in 1935, joining the National Resources Planning Board. He was working on a large consumer budget survey there, and the ideas he encountered on that project would seed a book that would define much of his career.

• 3. The Permanent Income Hypothesis

  ›

  A Theory of the Consumption Function, published in 1957 by Princeton University Press, is the work Friedman himself called his best scientific work. Its central idea was that households do not calibrate their spending to whatever income they happen to earn this week or this year. Instead, they smooth their consumption against "permanent income," the average of expected earnings over several years. Friedman introduced a formula with p representing the permanent component and t representing the transitory component of income. Windfalls, by this logic, get saved rather than spent, because of diminishing marginal utility. The book directly contradicted the Keynesian view that aggregate consumption tracks current income closely. Friedman had been building toward this argument for years. His work at the National Bureau of Economic Research starting in the autumn of 1937, assisting Simon Kuznets on professional income, produced the jointly authored Incomes from Independent Professional Practice. That book introduced the concepts of permanent and transitory income and drew a separate controversy: it argued that licensing by bodies such as the American Medical Association artificially restricted the supply of services and raised physician wages above those of comparable professionals. Christopher D. Carroll later expanded on the permanent income hypothesis, particularly regarding the absence of liquidity constraints, and Keynesian economists remained critical of the framework for exactly that reason.

• 4. Money, the Fed, and the Great Depression

  ›

  A Monetary History of the United States, 1867-1960, co-authored with Anna Schwartz and published in 1963, is among the most discussed economics books ever produced. Robert J. Shiller has described it as the "most influential account" of the Great Depression. Its central claim was stark: the Federal Reserve allowed the money supply to contract by one-third between 1929 and 1933, and that contraction turned what Friedman called "a garden-variety recession" into a catastrophe. Friedman and Schwartz named the episode "The Great Contraction," and that chapter was later published as a standalone book by Princeton University Press. Ben Bernanke, at a University of Chicago event honoring Friedman, offered a direct concession on behalf of the institution that had been in the dock. "Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again," Bernanke said. The Monetary History grew out of work Friedman began when Arthur Burns, then head of the National Bureau of Economic Research, asked him to study the role of money in the business cycle. That inquiry produced the Chicago Workshop in Money and Banking and a collaboration with Schwartz that ran for decades. Friedman's monetary thinking also shaped the Federal Reserve's policy response to the 2008 financial crisis, though Paul Krugman and others later contested whether the central bank could actually control broad money in a deep recession.

• 5. Capitalism and Freedom

  ›

  Capitalism and Freedom, published in 1962 by the University of Chicago Press, grew out of lectures Friedman gave at Wabash College. It was written in non-mathematical prose, deliberately aimed at a general audience rather than professional economists. In its first eighteen years it sold over 400,000 copies, and more than half a million since publication. The book was translated into eighteen languages. Its policy agenda was remarkable in breadth. Friedman argued for a volunteer military, freely floating exchange rates, abolition of medical licenses, a negative income tax, and school vouchers. He also criticized Social Security as a creator of welfare dependency, while in the same volume acknowledging that poverty in wealthy countries was real and that private charity alone could not address it because the benefits of poverty alleviation are shared by people who did not pay for it. He proposed the negative income tax as the most efficient floor under living standards, a position he reiterated eighteen years later in Free to Choose, with the proviso that it would only be acceptable if it replaced rather than augmented existing welfare programs. The book concluded with Friedman's "classical liberal" argument that government should confine itself to cases where its absence would threaten national survival. A later 1962 essay built on arguments by A. V. Dicey to explain why free societies were inherently unstable equilibria: the benefits of government intervention are visible to concentrated groups, while the harms fall on diffuse workers and consumers who cannot organize to resist them.

• 6. The Phillips Curve and Stagflation

  ›

  In 1968, Friedman delivered a critique of the Phillips curve that, along with parallel work by Edmund Phelps, would prove to be one of the most accurate predictions in the history of macroeconomics. The Phillips curve at that time was read as a reliable menu: governments could permanently trade a bit more inflation for a bit less unemployment. Friedman argued this was wrong. Any reduction in unemployment below its natural rate would only last as long as workers were surprised by inflation. Once they adjusted their expectations, unemployment would return to its natural level and inflation would be permanently higher. He predicted what became known as stagflation. When stagflation arrived in the 1970s, it seemed to confirm his analysis and badly damaged the Keynesian framework he had been challenging since the 1950s. Robert Lucas, also at the University of Chicago, subsequently pushed the argument further, replacing Friedman's adaptive expectations with rational expectations. Neil Wallace, a graduate student at Chicago between 1960 and 1963, described Friedman's theoretical courses as "a mess," capturing the friction between the monetarist and new classical camps even within the institution. Friedman's own stated preference for monetary policy was systematic rather than discretionary: a steady, predetermined expansion of the money supply each year, a rule now called his k-percent rule. He believed the Federal Reserve should ultimately be replaced by a computer program that would automatically buy and sell securities in response to money supply changes.

• 7. Chile and Controversy

  ›

  In March 1975, two years after the coup that ended Salvador Allende's government and brought Augusto Pinochet to power, Friedman and Arnold Harberger accepted an invitation from a private Chilean foundation to give lectures in Santiago. Friedman spent seven days there, speaking at the Pontifical Catholic University of Chile and the University of Chile. On the 21st of April 1975, he wrote to Pinochet directly, describing Chile's core economic problem as inflation running at 10-20 percent a month and recommending a "shock treatment" approach rather than gradualism. He outlined a sample package of eight monetary and fiscal measures, including removing obstacles to the private market and suspending laws against discharging employees. His letter acknowledged that his knowledge of Chile was "too limited to enable me to be precise or comprehensive." The economists who implemented versions of these ideas were Chicago-trained graduates who became known as the Chicago Boys. Sergio de Castro, a Chicago School alumnus, became Chile's Minister of Finance in 1975. When Friedman received the Nobel Prize in 1976, protests ran from Sweden to the United States over his Chilean involvement. He answered consistently that he had never been an adviser to the dictatorship, only a lecturer, and that the same lectures he gave in Chile he later gave in China. He stressed in a 1991 statement: "I have nothing good to say about the political regime that Pinochet imposed. It was a terrible political regime." He argued that economic liberalization had ultimately helped generate the political pressure that led to Chile's 1990 transition to democratic government.

• 8. Legacy and Later Life

  ›

  In 1977, Friedman retired from the University of Chicago after thirty years, moved to San Francisco with Rose, and became affiliated with the Hoover Institution at Stanford University. Bob Chitester and the Free to Choose Network approached him that year about a television series. Three years of work produced Free to Choose, a ten-part series broadcast on PBS in 1980. The companion book, co-authored with Rose, was the bestselling nonfiction title of 1980. He served on President Reagan's Economic Policy Advisory Board starting in 1981, and in 1988 Reagan awarded him both the Presidential Medal of Freedom and the National Medal of Science. The citation for the Medal of Freedom read: "He has used a brilliant mind to advance a moral vision: the vision of a society where men and women are free, free to choose, but where government is not as free to override their decisions." His influence extended to countries that had never met him personally. Estonia's prime minister Mart Laar, who was 32 when he took office, said Free to Choose was the only economics book he had read before implementing the flat tax and other reforms that helped transform Estonia into the "Baltic Tiger." Laar won the Milton Friedman Prize for Advancing Liberty in 2006. In 1996, Friedman and Rose founded the Friedman Foundation for Educational Choice; the organization renamed itself EdChoice in 2016 at the family's request, honoring their wish that the movement outlast their names. Harvard President Lawrence Summers, on Friedman's death, called him "The Great Liberator" and said that "any honest Democrat will admit that we are now all Friedmanites."