Milton Friedman

Overview

Milton Friedman ( ; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. With George Stigler, Friedman was among the intellectual leaders of the Chicago school of economics, a neoclassical school of economic thought associated with the faculty at the University of Chicago that rejected Keynesianism in favor of monetarism before shifting their focus to new classical macroeconomics in the mid-1970s. Several students, young professors and academics who were recruited or mentored by Friedman at Chicago went on to become leading economists, including Nobel laureates Gary Becker (1992), Robert Fogel (1993), and Robert Lucas Jr. (1995). Friedman's challenges to what he called "naive Keynesian theory" began with his interpretation of consumption, which tracks how consumers spend. He introduced the permanent income hypothesis, a theory which would later become part of mainstream economics and he was among the first to propagate the theory of consumption smoothing. During the 1960s, he became the main advocate opposing both Marxist and Keynesian government and economic policies, and described his approach (along with mainstream economics) as using "Keynesian language and apparatus" yet rejecting its initial conclusions. He theorized that there existed a natural rate of unemployment and argued that unemployment below this rate would cause inflation to accelerate. He argued that the Phillips curve was in the long run vertical at the "natural rate" and predicted what would come to be known as stagflation. Friedman promoted a macroeconomic viewpoint known as monetarism and argued that a steady, small expansion of the money supply was the preferred policy, as compared to rapid and unexpected changes. His ideas concerning monetary policy, taxation, privatization, and deregulation influenced government policies, especially during the 1980s. His monetary theory influenced the Federal Reserve's monetary policy in response to the 2008 financial crisis. After retiring from the University of Chicago in 1977, and becoming emeritus professor in economics in 1983, Friedman served as an advisor to Republican U.S. president Ronald Reagan and Conservative British prime minister Margaret Thatcher. His political philosophy extolled the virtues of a free market economic system with minimal government intervention in social matters. In his 1962 book Capitalism and Freedom, Friedman advocated policies such as a volunteer military, freely floating exchange rates, abolition of medical licenses, a negative income tax, school vouchers, and opposition to the war on drugs and support for drug liberalization policies. His support for school choice led him to found the Friedman Foundation for Educational Choice, later renamed EdChoice. Friedman's works cover a broad range of economic topics and public policy issues. His books and essays have had global influence, including in former communist states. A 2011 survey of economists commissioned by the EJW ranked Friedman as the second-most popular economist of the 20th century, following only John Maynard Keynes. Upon his death, The Economist described him as "the most influential economist of the second half of the 20th century ... possibly of all of it".

Early life

Friedman was born in Brooklyn, New York City, on July 31, 1912. His parents, Sára Ethel (née Landau) and Jenő Saul Friedman, were Jewish working-class immigrants from Beregszász in Carpathian Ruthenia, Kingdom of Hungary (now Berehove in Ukraine). They emigrated to the United States in their early teens. They both worked as dry goods merchants. Milton was the youngest of four children and only son. Shortly after his birth, the family relocated to Rahway, New Jersey. Friedman's father died during Friedman's senior year of high school, leaving Friedman and two older sisters to care for their mother. In his early teens, Friedman was injured in a car accident, which scarred his upper lip. A talented student and an avid reader, Friedman graduated from Rahway High School in 1928, just before his 16th birthday. He was the first in his family to attend a university. Friedman was awarded a competitive scholarship to Rutgers University and graduated in 1932. Friedman initially intended to become an actuary or mathematician, however, the state of the economy, which was at this point in a depression, convinced him to become an economist. He was offered two scholarships to do graduate work, one in mathematics at Brown University and the other in economics at the University of Chicago. Friedman chose the latter, earning a Master of Arts degree in 1933. He was strongly influenced by Jacob Viner, Frank Knight, and Henry Simons. Friedman met his future wife, economist Rose Director, while at the University of Chicago. During the 1933–1934 academic year, he had a fellowship at Columbia University, where he studied statistics with statistician and economist Harold Hotelling. He was back in Chicago for the 1934–1935 academic year, working as a research assistant for Henry Schultz, who was then working on Theory and Measurement of Demand. During the 1934–1935 academic year, Friedman formed what would later prove to be lifetime friendships with George Stigler and W. Allen Wallis, both of whom later taught with Friedman at the University of Chicago. Friedman was also influenced by two lifelong friends, Arthur Burns and Homer Johnson. They helped Friedman better understand the depth of economic thinking.

Public service

Friedman was unable to find academic employment, so in 1935 he followed his friend W. Allen Wallis to Washington, D.C., where Franklin D. Roosevelt's New Deal was "a lifesaver" for many young economists. At this stage, Friedman said he and his wife "regarded the job-creation programs such as the WPA, CCC, and PWA appropriate responses to the critical situation", but not "the price- and wage-fixing measures of the National Recovery Administration and the Agricultural Adjustment Administration". Foreshadowing his later ideas, he believed price controls interfered with an essential signaling mechanism to help resources be used where they were most valued. Indeed, Friedman later concluded that all government intervention associated with the New Deal was "the wrong cure for the wrong disease", arguing the Federal Reserve was to blame, and that they should have expanded the money supply in reaction to what he later described in A Monetary History of the United States as "The Great Contraction". Later, Friedman and his colleague Anna Schwartz wrote A Monetary History of the United States, 1867–1960, which argued that the Great Depression was caused by a severe monetary contraction due to banking crises and poor policy on the part of the Federal Reserve. Robert J. Shiller describes the book as the "most influential account" of the Great Depression. During 1935, he began working for the National Resources Planning Board, 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, a book which first described consumption smoothing and the permanent income hypothesis. Friedman began employment with the National Bureau of Economic Research during the autumn of 1937 to assist Simon Kuznets in his work on professional income. This work resulted in their jointly authored publication 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. Incomes from Independent Professional Practice remained quite controversial within the economics community because of Friedman's hypothesis that barriers to entry, which were exercised and enforced by the American Medical Association, led to higher than average wages for physicians, compared to other professional groups. Barriers to entry are a fixed cost which must be incurred regardless of any outside factors such as work experience, or other factors of human capital. During 1940, Friedman was appointed as an assistant professor teaching economics at the University of Wisconsin–Madison, but encountered antisemitism in the Economics department and returned to government service. From 1941 to 1943 Friedman worked 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 during 1942, he advocated a Keynesian policy of taxation. He helped to invent the payroll withholding tax system, since the federal government needed money to fund the war. He later said, "I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now." In Milton and Rose Friedman's jointly written memoir, he wrote, "Rose has repeatedly chided me over the years about the role that I played in making possible the current overgrown government we both criticize so strongly."

Early years

In 1940, Friedman accepted a position at the University of Wisconsin–Madison, but left because of differences with faculty regarding United States involvement in World War II. Friedman believed the United States should enter the war. In 1943, Friedman joined the Division of War Research at Columbia University (headed by W. Allen Wallis and Harold Hotelling), where he spent the rest of World War II working as a mathematical statistician, focusing on problems of weapons design, military tactics, and metallurgical experiments. He was a member of the Statistical Research Group. He was consulted during the Battle of the Bulge as an expert on the proximity fuzes of air burst shells. In 1945, Friedman submitted Incomes from Independent Professional Practice (co-authored with Kuznets and completed during 1940) to Columbia as his doctoral dissertation. The university awarded him a PhD in 1946. Friedman spent the 1945–1946 academic year teaching at the University of Minnesota (where his friend George Stigler was employed). On February 12, 1945, his only son, David D. Friedman, who would later follow in his father's footsteps as an economist, was born.

University of Chicago

In 1946, Friedman accepted an offer to teach economic theory at the University of Chicago (a position opened by the departure of his former professor Jacob Viner to Princeton University). Friedman would work for the University of Chicago for the next 30 years. There, he contributed to the establishment of an intellectual community that produced a number of Nobel Memorial Prize winners, known collectively as the Chicago school of economics. At the time, Arthur F. Burns, who was then the head of the National Bureau of Economic Research, and later chairman of the Federal Reserve, 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 initiated the "Workshop in Money and Banking" (the "Chicago Workshop"), which promoted a revival of monetary studies. During the latter half of the 1940s, Friedman began a collaboration with Anna Schwartz, an economic historian at the Bureau, that 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. In 1951, Friedman was awarded the John Bates Clark Medal, which at the time was awarded every other year to the best economist under the age of 40, by the American Economic Association.

University of Cambridge

Friedman spent the 1954–1955 academic year as a Fulbright Visiting Fellow at Gonville and Caius College, Cambridge. At the time, the Cambridge economics faculty was divided into a Keynesian majority (including Joan Robinson and Richard Kahn) and an anti-Keynesian minority (headed by Dennis Robertson). Friedman speculated he was invited to the fellowship because his views were unacceptable to both of the Cambridge factions. Later his weekly columns for Newsweek magazine (1966–84) were well read and increasingly influential among political and business people, and helped earn the magazine a Gerald Loeb Special Award in 1968. From 1968 to 1978, he and Paul Samuelson participated in the Economics Cassette Series, a biweekly subscription series where the economist would discuss the days' issues for about a half-hour at a time.

A Theory of the Consumption Function

One of Milton Friedman's most popular works, A Theory of the Consumption Function, challenged traditional Keynesian viewpoints about the household. This work was originally published in 1957 by Princeton University Press, and it reanalyzed the relationship displayed "between aggregate consumption or aggregate savings and aggregate income". Friedman's counterpart Keynes believed people would modify their household consumption expenditures to relate to their existing income levels. Friedman's research introduced the term "permanent income" to the world, which was the average of a household's expected income over several years, and he also developed the permanent income hypothesis. Friedman thought income consisted of several components, namely transitory and permanent. He established the formula

y =

y

p

+

y

t

{\displaystyle y=y_{p}+y_{t}}

to calculate income, with p representing the permanent component, and t representing the transitory component. Milton Friedman's research changed how economists interpreted the consumption function, and his work pushed the idea that current income was not the only factor affecting people's adjustment household consumption expenditures. Instead, expected income levels also affected how households would change their consumption expenditures. Friedman's contributions strongly influenced research on consumer behavior, and he further defined how to predict consumption smoothing, which contradicts Keynes' marginal propensity to consume. Although this work presented many controversial points of view which differed from existing viewpoints established by Keynes, A Theory of the Consumption Function helped Friedman gain respect in the field of economics. His work on the permanent income hypothesis is among the many contributions which were listed as reasons for his Sveriges-Riksbank Prize in Economic Sciences. His work was later expanded on by Christopher D. Carroll, especially in regards to the absence of liquidity constraints. The permanent income hypothesis faces some criticism, mainly from Keynesian economists. The primary criticism of the hypothesis is based on a lack of liquidity constraints.

A Monetary History of the United States

A Monetary History of the United States, which he co-authored with Anna J. Schwartz, was the second major book published by Milton Friedman, released in 1963. In this book, Friedman discusses how the changes in the money supply caused major economic crises. Friedman and Schwartz used historical data and economic analysis to demonstrate that large changes in the money supply affected the U.S. economy significantly. They further asserted that changes in the money supply can lead to adverse consequences, and good monetary policies are essential for achieving economic stability. In the book, the authors explained the role of the Federal Reserve in the Great Depression. They claimed that the Federal Reserve's policy of responding to the supposed imperatives of the Gold Standard was unnecessarily conservative and that the consequent failure to maintain a stable supply of money caused deflation between 1930 and 1933, driving many commercial banks to fail, and was the main reason the Great Depression occurred. This book changed the way economists think about recession and was influential in the development of monetarism. It also inspired lots of policymakers and guided them to make modern monetary policies.

Capitalism and Freedom

His book Capitalism and Freedom, inspired by a series of lectures he gave at Wabash College, brought him national and international attention outside academia. It was published in 1962 by the University of Chicago Press and consists of essays that used non-mathematical economic models to explore issues of public policy. It sold over 400,000 copies in the first eighteen years and more than half a million since 1962. Capitalism and Freedom was translated into eighteen languages. Friedman talks about the need to move to a classically liberal society, that free markets would help nations and individuals in the long-run and fix the efficiency problems currently faced by the United States and other major countries of the 1950s and 1960s. He goes through the chapters specifying an issue in each respective chapter from the role of government and money supply to social welfare programs to a special chapter on occupational licensure. Friedman concludes Capitalism and Freedom with his "classical liberal" stance that government should stay out of matters that do not need it and should only involve itself when absolutely necessary for the survival of its people and the country. He recounts how the best of a country's abilities come from its free markets while its failures come from government intervention.

Post-retirement

In 1977, at the age of 65, Friedman retired from the University of Chicago after teaching there for 30 years. He and his wife moved to San Francisco, where he became a visiting scholar at the Federal Reserve Bank of San Francisco. From 1977 on, he was affiliated with the Hoover Institution at Stanford University. During 1977, Friedman was approached by Bob Chitester and the Free to Choose Network. They asked him to create a television program presenting his economic and social philosophy. Friedman and his wife Rose worked on this project for the next three years, and during 1980, the ten-part series, titled Free to Choose, was broadcast by the Public Broadcasting Service (PBS). The companion book to the series (co-authored by Milton and his wife, Rose Friedman), also titled Free To Choose, was the bestselling nonfiction book of 1980.

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. Ebenstein says Friedman was "the 'guru' of the Reagan administration". In 1988, he received the National Medal of Science and Reagan honored him with the Presidential Medal of Freedom. Friedman is known now as one of the most influential economists of the 20th century. Throughout the 1980s and 1990s, Friedman continued to write editorials and appear on television. He made several visits to Eastern Europe and to China, where he also advised governments. He was also for many years a Trustee of the Philadelphia Society.

Personal life

Friedman had two children, David and Jan. He met his wife, Rose Friedman (née Director), at the University of Chicago in 1932, and wed six years later, in 1938. Friedman was noticeably shorter than some of his colleagues; he measured 5 feet 0 inches (1.52 m), and has been described as an "Elfin Libertarian" by Binyamin Appelbaum. Rose Friedman, when asked about Friedman's successes, said that "I have never had the desire to compete with Milton professionally (perhaps because I was smart enough to recognize I couldn't). On the other hand, he has always made me feel that his achievement is my achievement." During the 1960s, Friedman built (and subsequently maintained) a cottage in Fairlee, Vermont. Friedman also had an apartment in Russian Hill, San Francisco, where he lived from 1977 until his death.

Religious views

According to a 2007 article in Commentary magazine, his "parents were moderately observant Jews, but Friedman, after an intense burst of childhood piety, rejected religion altogether". He described himself as an agnostic. Friedman wrote extensively of his life and experiences, especially in 1998 in his memoirs with his wife, Rose, titled Two Lucky People. In this book, Rose Friedman describes how she and Milton Friedman raised their two children, Janet and David, with a Christmas tree in the home. "Orthodox Jews of course, do not celebrate Christmas. However, just as, when I was a child, my mother had permitted me to have a Christmas tree one year when my friend had one, she not only tolerated our having a Christmas tree, she even strung popcorn to hang on it."