Milton Friedman (July 31, 1912 November 16, 2006) was an American Nobel Laureate economist and public intellectual. He is best known among scholars for his theoretical and empirical research, especially consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy. A global public followed his restatement of a libertarian political philosophy that insisted on minimizing the role of government in favor of the private sector. As a leader of the Chicago School of economics, based at the University of Chicago, he had a widespread influence in shaping the research agenda of the entire profession. Friedman's many monographs, books, scholarly articles, papers, magazine columns, television programs, videos and lectures cover a broad range of topics in microeconomics, macroeconomics, economic history, and public policy issues. The Economist hailed him as "the most influential economist of the second half of the 20th century…possibly of all of it".
Originally a Keynesian supporter of the New Deal and advocate of high taxes, in the 1950s his reinterpretation of the Keynesian consumption function challenged the basic Keynesian model. In the 1960s he promoted an alternative macroeconomic policy called monetarism. He theorized there existed a "natural rate of unemployment" and he argued the central government could not micromanage the economy because people would realize what the government was doing and shift their behavior to neutralize the impact of policies. He rejected the Phillips Curve and predicted that Keynesian policies would cause "stagflation" (high inflation and low growth). He argued that a steady expansion of the money supply was the only wise policy, and warned against efforts by the treasury or central bank to do otherwise.
Influenced by his close friend George Stigler, Friedman opposed government regulation of all sorts, as well as public schooling. Friedman's political philosophy, which he considered classically liberal and libertarian, stressed the advantages of the marketplace and the disadvantages of government intervention and regulation, strongly influencing the outlook of American conservatives and libertarians. In his 1962 book Capitalism and Freedom, Friedman advocated minimizing the role of government in a free market as a means of creating political and social freedom. His books and essays were widely read and even circulated underground behind the Iron Curtain.
Friedman's methodological innovations were widely accepted by economists, but his policy prescriptions were highly controversial. Most economists in the 1960s rejected them, but since then they had a growing international influence (especially in the U.S. and Britain), and in the 21st century have gained wide acceptance among many economists. He thus lived to see some of his laissez-faire ideas embraced by the mainstream, especially during the 1980s. His views of monetary policy, taxation, privatization and deregulation informed the policy of governments around the globe, especially the administrations of Ronald Reagan in the U.S., Brian Mulroney in Canada, Margaret Thatcher in Britain, and Augusto Pinochet in Chile, and (after 1989) in Eastern Europe.
Friedman graduated from Rutgers University in New Jersey, where he specialized in Mathematics and initially intended to become an actuary. During his time at Rutgers, Friedman fell under the influence of two economics professors, Arthur F. Burns and Homer Jones, who convinced him that modern Economics could help end the Great Depression.
Friedman took graduate work at the University of Chicago, earning an M.A. in 1933. he was strongly influenced by Jacob Viner, Frank Knight, and Henry Simons. It was at Chicago that Friedman met his future wife, economist Rose Director. In 1933–34 he held a fellowship at Columbia University, where he studied statistics with renowned statistician and economist Harold Hotelling. He was back in Chicago for 1934–35, spending the year working as a research assistant for Henry Schultz, who was then working on his highly quantitative and empirical Theory and Measurement of Demand. During this year, Friedman formed what would prove to be lifelong friendships with George Stigler and Wilson Allen Wallis.
In 1935, he began work at the National Resources Committee, which was then working on a large consumer budget survey. Ideas from this project later became a part of his Theory of the Consumption Function. Friedman moved to the National Bureau of Economic Research in fall 1937 to assist Simon Kuznets in his work on professional income. This work led to their jointly authored Incomes from Independent Professional Practice, which introduced the concepts of permanent and transitory income, a major component of the Permanent Income Hypothesis that Friedman worked out in greater detail in the 1950s. The book hypothesizes that professional licensing artificially restricts the supply of services and raises prices.
In 1940, Friedman was appointed an assistant professor teaching Economics at the University of Wisconsin–Madison, but encountered antisemitism in the Economics department and decided to return to government service. Friedman spent 1941–43 working on wartime tax policy for the Federal Government, as an advisor to senior officials of the United States Department of the Treasury. As a Treasury spokesman in 1942 he advocated a Keynesian policy of taxation, and during this time he helped to invent the payroll withholding tax system, although he later regretted it.
In his autobiography, he comments on "how thoroughly Keynesian I was then". As Friedman grew older he reversed himself; in 2006 he observed, "You know, it's a mystery as to why people think Roosevelt's policies pulled us out of the Depression. The problem was that you had unemployed machines and unemployed people. How do you get them together by forming industrial cartels and keeping prices and wages up?
In 1946, Friedman accepted an offer to teach economic theory at the University of Chicago (a position opened by departure of his former professor Jacob Viner to Princeton University). Friedman would stay at the University of Chicago for the next 30 years. There he helped build a close-knit intellectual community that produced a number of Nobel Prize winners, known collectively as the Chicago School of Economics.
At the same time he moved to the University of Chicago, Arthur Burns, who was then the head of the National Bureau of Economic Research, asked Friedman to rejoin the Bureau's staff. He accepted the invitation, and assumed responsibility for the Bureau's inquiry into the role of money in the business cycle. As a result, he founded the "Workshop in Money and Banking" (the "Chicago Workshop"), which led a revival in monetary studies. During the latter half of the 1940s, Friedman began a collaboration with Anna Schwartz, an economic historian at the Bureau, which would ultimately result in the 1963 publication of a book co-authored by Friedman and Schwartz, A Monetary History of the United States, 1867–1960.
Friedman spent the 1954–55 academic year as a Visiting Fellow at Gonville and Caius College, Cambridge. At the time, the Cambridge economics faculty was deeply divided into a Keynesian majority (including Joan Robinson and Richard Kahn) and a virulently anti-Keynesian minority (headed by Dennis Robertson). Friedman speculates that he was invited to the fellowship because his extreme laissez-faire views were unacceptable to both of the Cambridge factions, a fact that highlights how far out of the mainstream Friedman was in the 1950s. On the other hand his weekly columns for Newsweek magazine (1966-84) were widely read and increasingly influential in political and business circles.
Friedman served as an unofficial adviser to Ronald Reagan during his 1980 presidential campaign, and then served on the President's Economic Policy Advisory Board for the rest of the Reagan Administration. In 1988, he received the National Medal of Science and Reagan honored him with the Presidential Medal of Freedom. Milton Friedman is today known as one of the most influential economists of the 20th century. Throughout the 1980s and 1990s, Friedman continued to write op-eds and appear in the media. He made several trips to Eastern Europe and to China.
In Friedman's last email interview in 2006, he said that the greatest threat to the world's economy is "Islamofascism, with terrorism as its weapon". In an in-person interview with both his wife and him in that same month, he said that he opposed the U.S. invasion of Iraq: "What's really killed the Republican Party isn't spending, it's Iraq. As it happens, I was opposed to going into Iraq from the beginning. I think it was a mistake, for the simple reason that I do not believe the United States of America ought to be involved in aggression." His wife disagreed that it was aggression. However, after a short argument with his wife, he added "But, having said that, once we went in to Iraq, it seems to me very important that we make a success of it. Milton Friedman died at the age of 94 in San Francisco on November 16, 2006. Friedman's son is the philosopher and economist David D. Friedman.
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 famously quipped that deflation can be fought against by "dropping money out of a helicopter". Friedman's arguments were designed to counter popular claims that inflation at the time was the result of increases in the oil price, or increases in wages: as he wrote, Friedman 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.
Friedman also argued for the cessation of government intervention in currency markets, thereby spawning an enormous literature on the subject, as well as promoting the practice of freely floating exchange rates. Friedman's macroeconomic theories were soon displaced. His close friend George Stigler explained, "As is customary in science, he did not win a full victory, in part because research was directed along different lines by the theory of rational expectations, a newer approach developed by Robert Lucas, also at the University of Chicago.
Friedman was also known for his work on the consumption function, the permanent income hypothesis (1957), which Friedman himself referred to as his best scientific work. This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved. Tax reductions likewise, as rational consumers would predict that taxes would have to rise later to balance public finances. Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968). This critique associated his name, together with that of Edmumd Phelps, with the insight that a government that brings about higher inflation cannot permanently reduce unemployment by doing so. Unemployment may be temporarily lower, if the inflation is a surprise, but in the long run unemployment will be determined by the frictions and imperfections in the labour market.
Friedman's essay "The Methodology of Positive Economics" (1953) set the epistemological course for his own subsequent research and to a degree that of the Chicago School of Economics. There he argued that economics as science should be free of value judgments for it to be objective. Moreover, a useful economic theory should be judged not by its descriptive realism (hair color, etc.) but by its simplicity and fruitfulness as an engine of prediction.
Friedman was supportive of the state provision of some public goods that the market is not seen as being able to provide. However, he saw the scope of such goods as being minimal, and argued that many of the services performed by government could be performed better by the private sector. Above all, if some public goods are provided by the state, he believed that they should not be a legal monopoly where private competition is prohibited. For, example, in response to the United States Post Office's legal monopoly on mail, he said
Friedman made headlines by proposing a negative income tax to replace the existing welfare system and then opposing the bill to implement it because it merely supplemented the existing system rather than replace it.
In 2005, Friedman and more than 500 other economists called for discussions regarding the economic benefits of the legalization of marijuana. Michael Walker of the Fraser Institute and Friedman hosted a series of conferences from 1986 to 1994. The goal was to create a clear definition of economic freedom and a method for measuring it. Eventually this resulted in the first report on worldwide economic freedom, Economic Freedom in the World. These annual report has since provided data for numerous peer-reviewed studies and has influenced policy in several nations. Along with sixteen other distinguished economists he opposed the Copyright Term Extension Act and filed an amicus brief in Eldred v. Ashcroft.
Friedman argued for stronger basic legal (constitutional) protection of economic rights and freedoms in order to further promote industrial-commercial growth and prosperity and buttress democracy and freedom and the rule of law generally in society.
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. Friedman's son, David D. Friedman, has carried on his tradition of arguing in favor of free markets, but to a further extreme, advocating anarcho-capitalism.
One month before his death, he wrote the article "Hong Kong Wrong - What would Cowperthwaite say?" in the Wall Street Journal, criticizing Donald Tsang, Chief Executive of Hong Kong, for abandoning "positive noninterventionism". Tsang later said he was merely changing the slogan to "big market, small government", where small government is defined as less than 20% of GDP. In a debate between Tsang and Alan Leong, rivals for the position of Chief Executive, Leong brought up the topic and accused Tsang of angering Friedman to death.
In 1975, two years after the military coup that toppled the government of Salvador Allende, the economy of Chile experienced a crisis. Friedman accepted the invitation of a private foundation to visit Chile and lecture on principles of economic freedom. Friedman also met with the military dictator, President Augusto Pinochet, during his visit, but he did not serve as a formal advisor to the Chilean government. Instead, Chilean graduates of The Chicago School of Economics and its new local chapters were appointed to key positions in the new government, which allowed them to advise the dictator on economic policies in accord with the School's economic doctrine.
At home, several critics attacked Friedman's association with Pinochet, who had violently deposed Allende, the elected head of state. He came under heavy criticism from exiled Chilean Foreign Affairs Minister Orlando Letelier, who criticized Friedman's economic theories. In 1976, Letelier wrote:
Friedman encapsulated his philosophy in a lecture at La Universidad Católica de Chile, saying: "free markets would undermine political centralization and political control.
According to his critics, Friedman did not criticize Pinochet's dictatorship at the time, nor the assassinations, illegal imprisonments, torture, or other atrocities that were well-known by then. Later, in Free to Choose, he said the following: "Chile is not a politically free system and I do not condone the political system ... the conditions of the people in the past few years has been getting better and not worse. They would be still better to get rid of the junta and to be able to have a free democratic system.
When he went to receive his Nobel prize in Stockholm, he was met by demonstrations. In an interview on the PBS program Commanding Heights in 2000, Friedman attributed these demonstrations by opponents he recognized from earlier occasions to communists seeking to discredit anyone with even the slightest connection to Pinochet — such as himself — adding that "there was no doubt that there was a concerted effort to tar and feather me".
Friedman defended his role in Chile on the grounds that, in his opinion, the move towards open market policies not only improved the economic situation in Chile but also contributed to the softening of Pinochet's rule and to the eventual transition to a democratic government in 1990. That idea followed from Capitalism and Freedom, in which he declared that economic freedom is not only desirable in itself but is also a necessary condition for political freedom. He stressed that the lectures he gave in Chile were the same lectures he later gave in China and other socialist states. In the 2000 PBS documentary The Commanding Heights, Friedman continued to claim that criticism over his role in Chile missed his main point that freer markets led to freer people, and that Chile's unfree economy had led to the military government. Friedman argued that the economic liberalization he advocated led to the end of military rule and a free Chile.
Friedman made a great impact on a group of young intellectuals in the Independence Party, including Davíð Oddsson who became Prime Minister in 1991 and began a radical program of monetary and fiscal stabilization, privatization, tax rate reduction (e.g., lowering the corporate income tax rate from 45% to 18%), definition of exclusive use rights in fisheries, abolition of various government funds for aiding unprofitable enterprises and liberalization of currency transfers and capital markets. In 1975, Iceland had the 53rd freest economy in the world, while in 2004, it had the 9th freest economy, according to the Economic Freedom of the World index designed by Canada’s Fraser Institute. According to the index designed by the Heritage Foundation, Iceland as of 2008 has the 5th freest economy in the world. Davíð Oddsson was Prime Minister for thirteen and a half years, to 2004. The present Prime Minister, Geir H. Haarde supports similar policies.
In the aftermath of the Great Depression, there were many people saying that markets can never work. Friedman had the intellectual courage to say that markets can too work, and his showman's flair combined with his ability to marshal evidence made him the best spokesman for the virtues of free markets since Adam Smith. But he slipped all too easily into claiming both that markets always work and that only markets work. It's extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.
Naomi Klein, in her book _The_Rise_of_Disaster_Capitalism, accuses Friedman of being complicit in millitary coups in countries such as Chile and Indonesia that were used as a way to shock the population into accepting unpopular neoliberal policies for the benefit of foreign multinational companies. Johan Norberg, of the Cato Institute, has written in reply to Klein's claims in the book and writes that he finds them to have little basis in the statements or writings of Friedman.
In 1971, libertarian economist Murray Rothbard wrote a lengthy article for The Individualist which heavily criticized several of Friedman's viewpoints as totalitarian and statist. In particular, Rothbard criticized Friedman's viewpoint that the micro- and macro-spheres are entirely separate with the government needing to take an active role in the macro-sphere as false and dangerous, the view that it is beneficial for the government to control currency to maintain constant price levels as bogus and harmful, and the viewpoint that nonpaying beneficiaries of positive externalities created by various services should be taxed to pay producers of that service as an absurd position that opens the door for the most ridiculous forms of totalitarianism. More generally, he criticizes Friedman's efforts to make the government more efficient as highly detrimental to individual liberty, and concludes that "And so, as we examine Milton Friedman’s credentials to be the leader of free-market economics, we arrive at the chilling conclusion that it is difficult to consider him a free-market economist at all.