Milton Friedman

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Milton Friedman, 1989.

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Milton Friedmanwas an American economist and educator, one of the leading proponents of monetarism in the second half of the 20th century. He was awarded the Nobel Prize for Economics in 1976.

(Read Milton Friedman’s Britannica entry on money.)

Friedman was one year old when his family moved from Brooklyn, New York, to Rahway, New Jersey, where he grew up. He won a scholarship to Rutgers University, studied mathematics and economics, and earned a bachelor’s degree there in 1932. While at Rutgers he encountered Arthur Burns, then a new assistant professor of economics, whom Friedman ultimately regarded as his mentor and most important influence. Burns introduced him to Alfred Marshall’s Principles of Economics, and Friedman later would approvingly quote Marshall’s description of economics as “an engine for the discovery of concrete truth.” Friedman always insisted that the study of economics was not merely a mathematical game and that it should enable one to understand how the real world works.

Friedman continued his economics studies at the University of Chicago (A.M., 1933) and Columbia University (Ph.D., 1946). While at Chicago he took Jacob Viner’s price theory course and met his future wife, Rose Director. In 1935 he moved to Washington, D.C., to assist with a consumer budget study for the Natural Resources Committee. Two years later Friedman took a job with the National Bureau of Economic Research in New York City so that he could join Simon Kuznets in studies of income and wealth distribution, in particular the distribution of professional incomes. His finding—that barriers to entry maintained by the American Medical Association helped to explain the much higher incomes of physicians relative to other comparable professional groups—was the source of some controversy when it was finally published.

In the early years of World War II, Friedman worked at the Department of the Treasury in the Division of Tax Research and later for the Statistical Research Group at Columbia University, where he was a member of a team that applied statistical analysis to war research. He also taught for one year each at the Universities of Wisconsin and Minnesota.

In 1946 he accepted a position in the economics department at the University of Chicago, which, except for occasional sabbaticals or visiting appointments, would be his academic home for the next 30 years. He became a full professor in 1948, was named the Paul Snowden Russell Distinguished Service Professor of Economics in 1962, and became an emeritus professor in 1983.

At Chicago Friedman taught courses in price theory and monetary economics, and in 1953 he established the Money and Banking Workshop—an important forum for faculty members, graduate students working on dissertations in the field, and occasional outside visitors. The workshop became renowned for the presentation and critical appraisal of papers in monetary economics.

In 1947 Friedman attended the opening meeting of the Mont Pèlerin Society, an organization founded by F.A. Hayek and dedicated to the study and preservation of free societies. Friedman would later say that his participation at the meeting “marked the beginning of my active involvement in the political process.” His multifold involvement included advising Presidents Richard M. Nixon and Ronald W. Reagan on economic policy, participating in various institutes and societies, and writing a regular column from 1966 to 1984 for Newsweek magazine, in which his articles would alternate with those presenting more liberal views on economic matters, by scholars such as Paul Samuelson and Lester Thurow.

Friedman’s public policy positions included support of flexible exchange rates and a monetary growth rule, school vouchers, a balanced-budget amendment, and the decriminalization of recreational drugs (see also drug use); he opposed conscription and various forms of price controls—from the minimum wage to rent controls.

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Milton Friedman, 1989.

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Friedman’s contributions to economic theory are numerous. One of his earliest, described in A Theory of the Consumption Function (1957), was the articulation of the permanent income hypothesis, the idea that a household’s consumption and savings decisions are more affected by changes in its permanent income than by income changes that household members perceive as temporary or transitory. The permanent income hypothesis provided an explanation for some puzzles that had emerged in the empirical data concerning the relationship between the average and marginal propensities to consume. It also helped to explain why, for example, fiscal policy in the form of a tax increase, if perceived as temporary, might not lead to the intended reductions in consumption; instead, the increased tax might be financed out of savings, leaving consumption levels unchanged. That was Friedman’s novel finding: if households do not perceive permanent income as changing, they will maintain their established spending patterns.

Friedman’s best-known contributions are in the realm of monetary economics, where he is regarded as the founder of monetarism and as one of the successors of the “Chicago school” tradition of economics. In the 1950s macroeconomics was dominated by scholars who adhered to theories promoted by John Maynard Keynes. Keynesians believed in using government-sponsored policy to counteract the business cycle, and they held that fiscal policy was more effective than monetary policy in neutralizing, for example, the effects of a recession.

Friedman opposed the Keynesian view that “money doesn’t matter”—a phrase Friedman often used to frame the classic Keynesian–monetarist debate—arguing instead that changes in the money supply affect real economic activity in the short run and the price level in the long run. He stated his case in his introduction to Studies in the Quantity of Money (1956), a collection of articles that had been contributed by participants in the Money and Banking Workshop. That work was followed by an article, The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897–1958 (1963), coauthored with David Meiselman, in which the stability and importance of the Keynesian multiplier was questioned. The multiplier, forming a link between changes in autonomous expenditure and subsequent changes in national income, is a key element in the Keynesian case for effective and predictable fiscal policy.

In 1963 Friedman published the first of three books he would coauthor with Anna J. Schwartz, A Monetary History of the United States, 1867–1960. Combining theoretical and empirical analysis with institutional insights, that volume provided an intricately detailed account of the role of money in the U.S. economy since the Civil War. Especially influential was the authors’ claim that the Great Depression would have been a typical downturn had it not been for policy errors made by the Federal Reserve.

In 1967 Friedman made another seminal contribution to Keynesian-monetarist debates in his presidential address before the American Economic Association. In it he questioned the validity of another key Keynesian construct, the Phillips curve, which asserted that a stable trade-off exists between the rate of wage inflation and the unemployment rate. Friedman argued that the trade-off was temporary and depended on workers’ being “fooled” by unanticipated wage inflation into thinking that a rise in their nominal wage was a rise in their real wage, thus inducing them to produce more output. According to Friedman, reducing unemployment below what he dubbed the “natural rate” required not a one-time wage increase but accelerating wage inflation.

The stagflation of the 1970s (literally, a combination of economic stagnation and inflation), impossible in a simplified Keynesian framework, was seen by many as confirmation of Friedman’s hypothesis. In any event, it marked the end of the dominance of the Keynesian model in macroeconomics. Although Keynesianism fell out of favor for a time, it regained prominence after the financial crisis of 2007-08, when governments turned to large-scale fiscal stimulus—often alongside aggressive monetary easing. Modern economic policy often reflects a blend of the ideas of Keynes and Friedman, combining fiscal spending with active monetary management to support growth and stabilize markets.

In 1975 Friedman traveled to Chile, where he delivered a series of lectures and public talks and met with the country’s then military dictator, Augusto Pinochet. Friedman advised Pinochet in a subsequent letter to administer a “shock treatment” to the Chilean economy to cure it of runaway inflation. His prescriptions, eventually implemented under the direction of a group of Chilean economists who had trained at the University of Chicago in the 1950s and ’60s (the “Chicago boys”), included drastic cuts in public spending, the privatization of state-operated enterprises, the elimination of wage and price controls, and the deregulation of financial markets and foreign trade. The consequences of those measures have been intensely debated in numerous studies. Friedman was widely criticized for apparently lending support to the dictatorship, a charge that he and his supporters regarded as unfair.

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U.S. Pres. George W. Bush (left) paying tribute to Milton Friedman at a White House event, May 9, 2002.

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In 1976, the year he retired from the University of Chicago, Friedman was awarded the Nobel Prize for Economics. In 1977 he became a member of the Hoover Institution on War, Revolution and Peace, a conservative think tank. About the same time, he began work with his wife, Rose, on the Public Broadcasting Service (PBS) television series Free to Choose, a counterpoint to John Kenneth Galbraith’s Age of Uncertainty. Their popular series extolling the virtues of a free market system eventually led to a book (1980) and a set of educational videos of the same title. In 1998 the Friedmans published their memoirs, Two Lucky People.

Over the course of his career, Friedman became an articulate spokesman for free markets and free societies in an era when many social scientists disparaged market solutions to social problems. Friedman’s collaborative work with Anna J. Schwartz has remained a vital resource for those interested in the monetary history of the United States. Other legacies include Friedman’s revival of a monetary approach to macroeconomics and his persistent critique of Keynesian economics.

The best source of information on Friedman’s life is the autobiographical Milton Friedman and Rose D. Friedman, Two Lucky People: Memoirs (1998), cited in this article. Also noteworthy are Alan O. Ebenstein, Milton Friedman: A Biography (2007); and Jennifer Burns, Milton Friedman: The Last Conservative (2023).

Friedman’s approach to economics and his positions on public policy are examined in Robert A. Cord and J. Daniel Hammond (eds.), Milton Friedman: Contributions to Economics and Public Policy (2016); J. Daniel Hammond, Theory and Measurement: Causality Issues in Milton Friedman’s Monetary Economics (1996); Abraham Hirsch and Neil de Marchi, Milton Friedman: Economics in Theory and Practice (1990); and William Ruger, Milton Friedman (2011).