Milton Friedman is the twentieth century's most prominent economist
advocate of free markets. He was born in 1912 to Jewish immigrants in
New York City. He attended Rutgers University, where he received his
B.A. at the age of twenty, then went on to earn his M.A. from the
University of Chicago in 1933 and his Ph.D. from Columbia University in
1946. In 1951 Friedman won the John Bates Clark Medal honoring
economists under age forty for outstanding achievement. In 1976 he won
the Nobel Prize in economics for "his achievements in the field of
consumption analysis, monetary history and theory, and for his
demonstration of the complexity of stabilization policy." Before that
time, he had served as an adviser to President Nixon and was president
of the American Economic Association in 1967. Since retiring from the
University of Chicago in 1977, Friedman has been a senior research
fellow at the Hoover Institution at Stanford University.
Friedman established himself in 1945 with Income from Independent
Professional Practice, coauthored with Simon Kuznets. In it he
argued that state licensing procedures limited entry into the medical
profession, thereby allowing doctors to charge higher fees than if
competition were more open.
His landmark work of 1957, A Theory of the Consumption Function,
took on the Keynesian view that individuals and households adjust their
expenditures on consumption to reflect their current income. Friedman
showed that, instead, people's annual consumption is a function of their
expected lifetime earnings.
In Capitalism and Freedom, Friedman liberated the study of
market economics from its ivory tower and brought it down to earth. He
argued for, among other things, a volunteer army, freely floating
exchange rates, abolition of licensing of doctors, a negative income
tax, and education vouchers. (Friedman is a passionate foe of the
military draft: he once stated that the abolition of the draft was the
only issue on which he had personally lobbied Congress.) Although his
book did not sell well, many of the young people who did read it were
encouraged by it to study economics themselves. His ideas spread
worldwide with Free to Choose
(coauthored with his wife, Rose Friedman), the best-selling nonfiction
book of 1980, written to accompany a TV series on the Public
Broadcasting System. This book made Milton Friedman a household name.
Although much of his trail-blazing work was done on price theory—the
theory that explains how prices are determined in individual
markets—Friedman is popularly recognized for monetarism. Defying Keynes
and most of the academic establishment of the time, Friedman presented
evidence to resurrect the quantity theory of money—the idea that the
price level is dependent upon the money supply. In Studies in the
Quantity Theory of Money, published in 1956, Friedman stated that in
the long run, increased monetary growth increases prices but has little
or no effect on output. In the short run, he argued, increases in the
money supply cause employment and output to increase, and decreases in
the money supply have the opposite effect.
Friedman's solution to the problems of inflation and short-run
fluctuations in employment and real GNP was a so-called money supply
rule. If the Federal Reserve board were required to increase the money
supply at the same rate as real GNP increased, he argued, inflation
would disappear. Friedman's monetarism came to the forefront when, in
1963, he and Anna Schwartz coauthored Monetary History of the United
In it they contend that the Great Depression was the result of
ill-conceived monetary policies by the Federal Reserve. Upon receipt of
the unpublished manuscript submitted by the authors, the Federal Reserve
board responded internally with a lengthy critical review. Such was
their agitation that the Fed governors discontinued their policy of
releasing minutes from the board's meetings to the public. Additionally,
they commissioned a counter-history to be written (by Elmus R. Wicker) in
the hope of detracting from Monetary History.
Although many economists disagree with Friedman's monetarist ideas, he
has substantial influence on the profession. One measure of that
influence is the change in the treatment of monetary policy given by MIT
Keynesian Paul Samuelson in his best-selling textbook, Economics.
In the 1948 edition Samuelson wrote dismissively that "few economists
regard Federal Reserve monetary policy as a panacea for controlling the
business cycle." But in 1967 Samuelson said that monetary policy had "an
important influence" on total spending. The 1985 edition, coauthored
with Yale's William Nordhaus, states, "Money is the most powerful and
useful tool that macroeconomic policymakers have," adding that the Fed
"is the most important factor" in making policy.
Throughout the sixties Keynesians—and mainstream economists
generally—had believed that the government faced a stable long-run
trade-off between unemployment and inflation—the so-called Phillips
Curve. In this view the government could, by increasing the demand for
goods and services, permanently reduce unemployment by accepting a
higher inflation rate. But in the late sixties Friedman (and Columbia
University's Edmund Phelps) challenged this view. Friedman argued that
once people adjusted to the higher inflation rate, unemployment would
creep back up. To keep unemployment permanently lower, he said, would
require not just a higher, but a permanently accelerating inflation
The stagflation of the seventies—rising inflation combined with
rising unemployment—gave strong evidence for the Friedman-Phelps view
and swayed most economists, including many Keynesians. Again,
Samuelson's text is a barometer of the change in economists' thinking.
The 1967 edition indicated that policymakers faced a trade-off between
inflation and unemployment. The 1980 edition said there was less of a
trade-off in the long run than in the short run. The 1985 edition says
there is no long-run trade-off.
No other economist since Keynes has reshaped the way we think about and
use economics as much as Milton Friedman. By his scope of topics and
magnitude of ideas, Friedman has not only laid a cornerstone of
contemporary economic thought but has also built an entire construction.
Capitalism and Freedom. 1962.
An Economist's Protest: Columns on Political Economy. 1972.
Essays in Positive Economics. 1953.
(With Rose Friedman.) Free to Choose. 1980.
(With Simon Kuznets.) Income from Independent Professional Practice.
(With Anna J. Schwartz.) A Monetary History of the United States,
Price Theory: A Provisional Text. 1962.
(Ed.) Studies in the Quantity Theory of Money. 1956.
A Theory of the Consumption Function. 1957.