Milton Friedman

Milton Friedman was an American economist of the Chicago school who is regarded as one of the most influential economists of the twentieth century. He championed free markets, monetary policy, and the limitation of government, and he was awarded the Nobel Memorial Prize in Economic Sciences in 1976.

Early Life and Education

Friedman was born in 1912 in Brooklyn, New York, to immigrant parents from Hungary. He studied at Rutgers University and at the University of Chicago, where he was influenced by Frank Knight and Jacob Viner.

He worked for the National Bureau of Economic Research and for the government during the Second World War. He took his doctorate at Columbia University.

He joined the faculty of the University of Chicago in 1946 and taught there for three decades. He became the leader of the Chicago school of economics.

Monetary Theory

Friedman argued that inflation is always and everywhere a monetary phenomenon. He emphasised the role of the money supply in determining the price level.

He developed the quantity theory of money and the permanent income hypothesis of consumption. The latter distinguished between transitory and permanent changes in income.

He advocated a rule for the growth of the money supply rather than discretionary policy. The approach became known as monetarism.

A Monetary History

A Monetary History of the United States, 1867-1960, written with Anna Schwartz, was published in 1963. The book argued that the Great Depression was caused by the failure of the Federal Reserve to prevent the contraction of the money supply.

The thesis changed the understanding of the Depression and of the role of monetary policy. It was a central contribution to the revival of monetary economics.

Friedman also wrote on the consumption function, on the Phillips curve, and on the natural rate of unemployment. He predicted the combination of inflation and unemployment that came to be known as stagflation.

Public Policy and Popular Writing

Friedman was a prolific writer and a gifted communicator. His book Capitalism and Freedom defended free markets and criticised government regulation.

He wrote a column for Newsweek and presented a television series, Free to Choose. He advocated the negative income tax, school vouchers, and the volunteer army.

He advised political leaders, including Barry Goldwater and Ronald Reagan, and he influenced the policies of several governments. His ideas were adopted in the 1980s in Britain and in the United States.

Legacy

Friedman is regarded as the most influential economist of the second half of the twentieth century. He revived the study of monetary economics and shaped the debate about the role of government.

His views were criticised by Keynesians and by others who favoured a more active role for the state. The debate between the two traditions continues.

He is remembered for his intellectual rigour and for his skill as a communicator. His work on consumption and on monetary history remains fundamental.

The Chicago School

Friedman led the Chicago school of economics, which emphasised the role of markets and the importance of monetary policy. The school produced many influential economists, including Gary Becker and Robert Lucas.

The workshop system at Chicago trained graduate students in the methods of price theory. The approach was characterised by the application of economic analysis to a wide range of problems.

Friedman's seminar was famous for its rigour and for its combative style. He insisted on the discipline of clear thinking and of empirical evidence.

The Permanent Income Hypothesis

Friedman argued that consumption depends on permanent income rather than on current income. The hypothesis was developed in A Theory of the Consumption Function, published in 1957.

The theory implied that temporary changes in income have little effect on consumption. It explained the observed pattern of saving and of spending.

The hypothesis was a major contribution to the study of consumption and influenced later research. It was tested and refined by other economists.

The Natural Rate of Unemployment

Friedman introduced the concept of the natural rate of unemployment, which is determined by the structure of the labour market. He argued that attempts to reduce unemployment below the natural rate would lead to accelerating inflation.

The argument was developed in his presidential address to the American Economic Association in 1967. It predicted the phenomenon of stagflation.

The theory challenged the prevailing view of the Phillips curve. It became central to the new classical economics and to the policy of central banks.

Public Policy

Friedman advocated a wide range of policies, including the negative income tax, school vouchers, and the legalisation of drugs. He argued for the reduction of government regulation and for the extension of markets.

He was a critic of the welfare state and of the regulation of business. He argued that the free market is the most effective mechanism for the allocation of resources.

He also wrote on the methodology of economics and insisted on the importance of predicting behaviour rather than of describing assumptions. The essay on methodology is widely cited.

The Nobel Prize and Later Years

Friedman received the Nobel Memorial Prize in 1976 for his work on monetary theory and history. He continued to write and to lecture after his retirement from Chicago.

He worked at the Hoover Institution at Stanford and remained active in public debate. He was an adviser to several governments and to political candidates.

He died in 2006 at the age of ninety-four. He is remembered as one of the most influential economists of the twentieth century and as a tireless advocate of free markets.

See also

• Monetarism
• Chicago school of economics