Commemorating Milton Friedman
20 years after his death

“Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government – in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”

Milton Friedman

Attempting to portray Milton Friedman’s vast body of work in just a few pages may seem quite presumptuous, for it is “like trying to catch the Niagara Falls in a pint pot” (John Burton). And yet, especially today in the midst of socialism’s newly gained popularity (despite its theoretical blunders and catastrophic record), it is important to outline life and work of this inspiring free market scholar who died 20 years ago in San Francisco.

Early life and career

Milton Friedman was born on July 31, 1912 in New York City, the fourth child of Eastern European immigrants, and grew up in abject poverty in Rahway, one of the bleak industrial towns west of New York City. Having lost his father at a young age, he had to work odd jobs not only to support his family but also to provide for his own basic education. Luckily a modest personal scholarship in addition to his evening and night jobs enabled him to study mathematics at the private Rutgers University. An equally modest grant and a favorable recommendation permitted him to attend classes thought by Jakob Viner (1892-1970) or Frank H. Knight (1885-1972) among others at the University of Chicago’ Department of Economics. Much to his disappointment, the publication of his dissertation was prevented from proceeding by the U.S. medical lobby exclusively due to Friedman’s exposure of their monopolistic practices between 1935 and 1945. At age 25 he was appointed by the NBER (National Bureau of Economic Research) and tasked with empirical studies of the U.S. income and consumption patterns. In 1938, he married Rose Director, his fellow student at Chicago. Sixty years later, they published their joint biography: Two Lucky People (1998).

During WWII, Friedman worked as a mathematician in calculations and accuracy studies in the ordnance production, where he first formulated his statistical technique that became known and influential after the war as “sequential sampling” In 1946, he returned to Chicago and remained there for the next 30 years. Long overdue, in 1976 he was awarded the Nobel Prize in Economics as a co-founder of the renowned Chicago School of Economics. From 1978 onward until his death in 2006 he worked as Hoover Institution Research Fellow at Stanford University and lived in San Francisco.

Economic thought and contributions

Friedman’s academic fame rests primarily on his influential work on consumption theory, monetary theory, his theory of the natural rate of unemployment, and his somewhat controversial methodological approach, which essentially derives from Popper’s work on The Logic of Scientific Discovery (1934). For Friedman, the usefulness of a theory is determined solely by its predictive and controlling power, whereby the realism of its assumptions is irrelevant to their validity. The only test of a theory or hypothesis is therefore its ability to make falsifiable predictions about phenomena not yet observed.

In his groundbreaking book A Theory of the Consumption Function (1957), Friedman introduced the concepts of “permanent” and “transient” income and empirically demonstrated that consumption patterns hardly change despite fluctuating incomes. Around the same time, he also succeeded in reformulating his quantity theory of money. Money is defined here as a measure of wealth, including real capital, human capital, and money substitutes, and incorporates expectations regarding a decline in purchasing power into the equation. While Lord Keynes considered interest rates and the demand for assets to be important determinants of economic activity, Friedman argues that money exerts a direct influence on the economy. Friedman successfully integrates wealth and income as influences on consumer behavior.

While conventional economics assumed a stable interaction between inflation and unemployment, thus leaving economic policy with the only choice between low unemployment with higher inflation or higher unemployment with lower inflation, Friedman on the other hand demonstrated as early as 1961 that this trade-off is merely an illusion. In his essay on “The Role of Monetary Policy” (1961), he rebuffed the theories that free markets are not only incapable of simultaneously guaranteeing unemployment and price stability, but that unemployment and depression can only be overcome through increased government spending. Higher employment cannot generally be achieved through inflation – rather unexpected inflation can temporarily lead to lower unemployment. However, as soon as employers’ output is met not by an increase in relative demand, but only by a general rise in prices, and employees begin to feel the loss of purchasing power in their wages, unemployment will return to its pre-inflationary level. Therefore, unemployment can only be kept below this level with ever-increasing doses of unexpected inflation.

His classic Capitalism and Freedom was published in 1962 and in the same year he was elected president of the Mont Pelerin Society (MPS), which Friedrich A. von Hayek (1899-1992) had founded in Switzerland in 1947. With his book A Monetary History of the United States, 1867–1960 (1963), he (together with Anna J. Schwartz (1915-2012) succeeded in dismantling another dogma: both demonstrated that the Great Depression of the early 1930s in the United States was caused neither by underconsumption nor by the failure of the capitalist system. Rather, the rapid reduction of the money supply, as well as the failure of the financial authorities to implement the urgently needed increase in liquidity, triggered the catastrophic bank failures, the collapse of prices, and the excessive unemployment in the United States.

Friedman’s thoroughly misunderstood (and therefore frequently cited) essay on “The Social Responsibility of Business” (1970), especially his interview in the then disreputable “Playboy Magazine” (1973), his hugly popular weekly “Newsweek” articles, and his successful call for the abolition of the military draft pushed him into academic disrepute for a while.

However in 1974, he published the monetary and economic policy framework of his system, which became known as Monetarism. In a considerably diluted forms, it was applied from 1979 onward as “Thatcherism” in the UK or “Reaganomics” in the USA. According to Friedman, while simultaneously reducing government activity, the money supply controlled by then Central Bank should never grow faster than the productivity of the economy increases over the same period.

As mentioned above, long overdue and despite worldwide protests, Friedman was awarded the Nobel Prize in 1976. In his acceptance speech, he defined the “natural rate of unemployment” as the lowest rate that can be achieved without unexpected or accelerated inflation. For him, any attempt to reduce unemployment below this “natural rate” by increasing the money supply is doomed to failure due to accelerated inflation.

Together with his wife Rose, they published the international bestseller “Free to Choose” in 1980 , which has been translated into 14 languages. The German translation was published in 1980 as Chancen die ich meine: Ein persönliche Bekenntnis. The English version was adapted even into a highly successful 10 part television series about the ideas of the free market economy. The series was rebroadcast in 1990 with an introduction by Arnold Schwarzenegger and with Linda Chavez moderating all 10 episodes. Barely four years later, Friedman published another bestseller, The Tyranny of the Status Quo. Friedman demonstrates that, despite all campaign promises, even the most honest politicians, after initial and spectacular successes, find themselves helplessly caught in a web of privilege, bureaucracy, and the next election campaign just nine months after taking office.

After some 40 books and 600 scholarly essays, Friedman is considered one of the most original and influential economists of our time. His reputation as the undisputed head of the Chicago School of Economics, as a Nobel laureate, advisor, and eloquent advocate of the free market remains legendary. His art to debate, his charming humor and modesty as colleague were delightful. His last essay was published in WSJ (The Wall Street Journal). By far the best introduction and access to his entire oeuvre is still to be found in the successful book The Essence of Friedman (Hoover Institution Press, Stanford University 1986).