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Milton Friedman - History

Milton Friedman - History

Milton Friedman

1912-2006

Economist

Milton Friedman was born on July 31, 1912 in Brooklyn New York . He grew up in Rahway New Jersey were he graduated from high school. He went on to Rutgers where he got a BA. He recevied a masters in math from Brown University and an Ma in Economic from Uiversity of Chicago.

1976 Nobel Prize winner Milton Friedman stands as the leader of the monetarist ("Chicago") school of economic thought.

As a long-time professor at the University of Chicago, Friedman held that the money supply was an important determinant of economic activity.

His guiding principle was that free markets largely without government intervention produce the best economic outcomes.


Friedman's smashing success

In the late 1940s, Milton Friedman was considered an important economist who had made significant technical contributions. At the beginning of the 1950s, however, he moved away from Keynesian economics and as a result was increasingly viewed as a bit of a nut. Two decades later, however, Friedman had become far and away the most important macroeconomist in the world. Much of the ongoing macro debate revolved around economists addressing Friedman’s ideas, pro or con. How did this happen?

Edward Nelson’s outstanding two volume study of Friedman provides the most complete answer that I have seen. During the 1960s, Friedman rejected 4 key tenets of Keynesian economics. And within less than a decade, all four of his critiques were shown to be correct. As a result, Keynesian economics absorbed much of monetarism, and this led to the creation of a new macroeconomic framework called New Keynesianism. Keep in mind that when I talk about “Keynesians”, I am not describing the views of J.M. Keynes or the views of modern Keynesians, I am describing the views of many of the most prominent Keynesian economists during the 1960s. (Samuelson, Tobin, Modigliani, Solow, Heller, etc.)

Here are the four Keynesian ideas that Friedman rejected:

1. Nominal interest rates are the correct indicator of the stance of monetary policy. The Fisher effect is not an important factor in the US.

2. Fiscal austerity (higher taxes) is the best way to reduce excessive aggregate demand.

3. There is a stable (negative) relationship between inflation and unemployment (the “Phillips Curve”).

4. Modern economies face an increasing problem of cost/push inflation, and hence wage/price controls are often the best way to control inflation.

Let’s take these one at a time.

In the mid-1960s, Friedman argued that nominal interest rates were rising because of increasing inflation expectations. Nelson points out that Keynesians like James Tobin rejected this claim (vol. 2, p. 113.) By the 1970s, inflation and nominal interest rates had increased much further, and there was almost universal agreement that Friedman was right and Tobin was wrong. Nominal interest rates are not a good indicator of the stance of monetary policy.

Thus the Keynesians were saying that if you want tight money to reduce inflation, you need high interest rates. Friedman basically said no, high interest rates are not the solution you need to reduce growth in the money supply. By the late 1960s, the US had both high interest rates and a fast growing money supply, and inflation kept rising. It turned out that Friedman was right.

But Keynesians did not draw the correct inferences from this episode. Rather they decided that monetary policy must not be very effective, and instead advocated higher taxes as a way to reduce inflation (the MMT approach.) In 1968, LBJ raised income taxes so high that the US budget went into surplus, but inflation continued to increase.

Friedman had two reasons for doubting the efficacy of higher taxes. First, his permanent income theory suggested that temporary tax changes would be offset by changes in private saving, leaving aggregate demand almost unaffected. More importantly, he saw that a tax increase could only slow inflation by reducing velocity, which would have only a one-time effect. Even if velocity fell one or two percent, the contractionary effects (on M*V) would soon be overwhelmed by increasingly rapid growth in the money supply.

Thus Keynesians assumed that tax increases could slow inflation, while Friedman said no, you need to reduce the growth rate of the money supply.

When the tax increases failed to slow inflation, Keynesians began to focus on the Phillips curve, which suggested that there was an inverse relationship between inflation and unemployment. A policy of higher inflation would lead to lower unemployment, and vice versa. Friedman said this was wrong, as workers would eventually catch on to changes in the rate of inflation and demand compensating changes in nominal wage rates. In the long run, unemployment would return to the natural rate, regardless of the trend rate of inflation. By 1970, we had high inflation and high unemployment, which showed that Friedman was right. (Note that this was three years before the first oil shock.)

Thus the Keynesians thought that high unemployment was the solution to inflation. Friedman said no, you need to reduce the growth rate of the money supply.

When the high unemployment of 1970 did not work, Keynesian economists blamed inflation on “cost-push factors”, such as monopoly power or strong labor unions. They supported wage/price controls, which President Nixon implemented in August 1971. After a brief decline in inflation, the problem got much worse during the mid and late-1970s. Friedman saw that while wage/price controls might lead to a one-time drop in the price level of a few percentage points, as long as the money supply was growing rapidly, any gains from wage/price controls would be soon overwhelmed by a rising money supply.

Thus Keynesians said that the solution for high inflation is wage-price controls, whereas Friedman said no, these controls will not work you need to reduce the growth rate of the money supply. See a pattern here?

In the early 1980s, the Fed finally began reducing the growth rate of the money supply, and inflation fell sharply.

Why isn’t the amazing success of Friedman’s ideas better understood? It’s partly because his preferred policy target—stable growth in a monetary aggregate such as M2—was not adopted due to concerns about unstable velocity. Even Friedman eventually accepted inflation targeting as a reasonable alternative. And the other four ideas discussed above all got incorporated in 1990s-era New Keynesianism. NKs accepted the importance of the Fisher effect, switching their focus from nominal to real interest rates. They accepted that monetary policy is the appropriate tool to control inflation, not fiscal policy. They accepted Friedman’s Natural Rate Hypothesis, the idea that higher inflation will not permanently reduce unemployment. And they accepted that a contractionary monetary policy, not wage/price controls, is the solution to inflation.

In one important respect, Friedman’s achievement is even more amazing than what I have outline here. In all four cases, Friedman’s claims were made at a time when they looked wrong. The Fisher effect had not been a very important factor in the setting of US interest rates when inflation expectation were near zero, including the period when the price of gold was pegged at $20.67/oz (1879-1933). And during 1934-68, when gold was $35/oz, inflation expectation were generally pretty low (even as actual inflation bounced around unpredictably.) During the early to mid-1960s, inflation expectations were probably not much more than 1%. The Fisher effect became a major factor after Friedman began warning about the issue. Similarly, in the mid-1960s it was widely believed that tax changes had a big impact on aggregate demand, as the Kennedy tax cuts of 1964 were followed by a strong economy (albeit perhaps for supply-side reasons.) Keynesians were genuinely surprised when the big tax increase of 1968 failed to slow inflation. When Friedman gave famous AEA Presidential address outlining the Natural Rate Hypothesis in late 1967, a stable Phillips curve seemed quite plausible, indeed the 1960s fit the model better than almost any other decade. It was in the 1970s that the relationship completely broke down. And the Nixon wage/price controls seemed to work at first it was only a few years later that they began to fall apart. Thus in all four cases Friedman rejected the orthodox view at a time when the orthodox approach seemed to be working fine, and in all four cases his views were eventually vindicated.

Milton Friedman’s achievements in the late 1960s and early 1970s were truly amazing, and deserve to be better known.

In a subsequent post, I’ll try to explain how Friedman was able to see the flaws in mainstream Keynesianism before most other economists. Why was his model better? We’ll see that all four of his successful critiques have something in common.


Friedman on Capitalism and Freedom

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Capitalism and Freedom

MILTON FRIEDMAN*

IN DISCUSSING the principles of a free society it is desirable to have a convenient label and this has become extremely difficult. In the late 18th and early 19th centuries, an intellectual movement developed that went under the name of Liberalism. This development, which was a reaction against the authoritarian elements in the prior society, emphasized freedom as the ultimate goal and the individual as the ultimate entity in the society. It supported laissez faire at home as a means of reducing the role of the state in economic affairs and thereby avoiding interfering with the individual it supported free trade abroad as a means of linking the nations of the world together peacefully and democratically. In political matters, it supported the development of representative government and of parliamentary institutions, reduction in the arbitrary power of the state, and protection of the civil freedoms of individuals.

Beginning in the late 19th century, the intellectual ideas associated with the term liberalism came to have a very different emphasis, particularly in the economic area. Whereas 19th century liberalism emphasized freedom, 20th century liberalism tended to emphasize welfare. I would say welfare instead of freedom though the 20th century liberal would no doubt say welfare in addition to freedom. The 20th century liberal puts his reliance primarily upon the state rather than on private voluntary arrangements.

The difference between the two doctrines is most striking in the economic sphere, less extreme in the political sphere. The 20th century liberal, like the 19th century liberal, puts emphasis on parliamentary institutions, representative government, civil rights, and so on. And yet even here there is an important difference. Faced with the choice between having the state intervene or not, the 20th century liberal is likely to resolve any doubt in favor of intervention the 19th century liberal, in the other direction. When the question arises at what level of government something should be done, the 20th century liberal is likely to resolve any doubt in favor of the more centralized level—the state instead of the city, the federal government instead of the state, a world organization instead of a federal government. The 19th century liberal is likely to resolve any doubt in the other direction and to emphasize a decentralization of power.

This use of the term liberalism in these two quite different senses renders it difficult to have a convenient label for the principles I shall be talking about. I shall resolve these difficulties by using the word liberalism in its original sense. Liberalism of what I have called the 20th century variety has by now become orthodox and indeed reactionary. Consequently, the views I shall present might equally be entitled, under current conditions, the “new liberalism,” a more attractive designation than “nineteenth century liberalism.”

It is widely believed that economic arrangements are one thing and political arrangements another, that any kind of economic arrangement can be associated with any kind of political arrangement. This is the idea that underlies such a term as “democratic socialism.” The essential thesis, I believe, of a new liberal is that this idea is invalid, that “democratic socialism” is a contradiction in terms, that there is an intimate connection between economic arrangements and political arrangements, and that only certain combinations are possible.

It is important to emphasize that economic arrangements play a dual role in the promotion of a free society. On the one hand, “freedom” in economic arrangements is itself a component of freedom broadly understood, so “economic freedom” is an end in itself to a believer in freedom. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

The first of these roles of economic freedom needs special emphasis. The citizen of Great Britain who after World War II was not permitted, by law, to spend his vacation in the United States because of exchange control was being deprived of an essential freedom no less than the citizen of the United States who was denied the opportunity to spend his vacation in Russia on the grounds of his political views. The one was ostensibly an economic limitation on freedom and the other a political limitation, yet there is no essential difference between the two.

The citizen of the United States who is compelled by law to devote something like 10% of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his own personal freedom. How strongly this particular deprivation may be felt, and its closeness to the deprivation of religious freedom, which all would regard as “civil” or “political” rather than “economic,” was dramatized by the recent episode involving a group of Ohio or Pennsylvania farmers of a particular religious sect. On grounds of principle, this group regarded compulsory federal old age programs as an infringement on their own personal individual freedom and refused to pay taxes or accept benefits. As a result, some of their livestock were sold at auction in order to satisfy claims for social security levies. A citizen of the United States who under the laws of various states is not free to follow the occupation of his own choosing unless he can get a license for it, is likewise being deprived of an essential part of his freedom. So economic freedom, in and of itself, is an extremely important part of total freedom.

The reason it is important to emphasize this point is because intellectuals in particular have a strong bias against regarding this aspect of freedom as important. They tend to express contempt for what they regard as material aspects of life and to regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving special attention. But for the ordinary citizen of the country, for the great masses of the people, the direct importance of economic freedom is in many cases of at least comparable importance to the indirect importance of economic freedom as a means of political freedom.

VIEWED AS a means to the end of political freedom, economic arrangements are essential because of the effect which they have on the concentration or the deconcentration of power. A major thesis of the new liberal is that the kind of economic organization that provides economic freedom directly, namely, organization of economic activities through a largely free market and private enterprise, in short through competitive capitalism, is also a necessary though not a sufficient condition for political freedom. The central reason why this is true is because such a form of economic organization separates economic power from political power and in this way enables the one to be an offset to the other. Historical evidence speaks with a single voice on the relation between political and economic freedom. I cannot think of a single example at any time or any place where there was a large measure of political freedom without there also being something comparable to a private enterprise market form of economic organization for the bulk of economic activity.

Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom. The 19th century and the early 20th century in the Western world stand out as striking exceptions from the general trend of historical development. It is clear that freedom in this instance came along with the free market and the development of capitalist institutions.

History suggests only that economic freedom is a necessary condition for political freedom. Clearly it is not a sufficient condition. Fascist Italy or Fascist Spain, Germany at various times in the last 70 years, Japan before World Wars I and II, Czarist Russia in the decades before World War I are all societies that cannot conceivably be described as politically free yet in which private enterprise was the dominant form of economic organization. So it is possible to have economic arrangements that are fundamentally capitalist and yet political arrangements that are not free.

Yet, even in those cases, the citizenry had a good deal more freedom than citizens of a modern totalitarian state like Russia or Nazi Germany in which economic totalitarianism is combined with political totalitarianism. Even in Russia under the Czars it was possible for some citizens under some circumstances to change their jobs without getting permission from political authority because the existence of private property and of capitalism provided some kind of offset to the centralized power of the state.

The relation between political and economic freedom is complex and by no means unilateral. In the early 19th century, Bentham and the Philosophical Radicals were inclined to regard political freedom as a means to economic freedom. Their view was that the masses were being hampered by the restrictions that were being imposed upon them, that if political reform gave the bulk of the people the vote, they would do what was good for them, which was to vote for laissez faire. In retrospect, it is hard to say that they were wrong. There was a large measure of political reform that was accompanied by economic reform in the direction of a great deal of laissez faire. And an enormous increase in the well-being of the masses followed this change in economic arrangements.

Later in the 19th century, when there began to be a movement away from freer economic arrangements and laissez faire toward a greater measure of collectivism and centralization, the view developed, as expressed for example by Lord Acton and in the 20th century by Henry Simons and Friedrich Hayek, that the relation was more nearly the opposite—that economic freedom was the means to political freedom.

In the period since World War II, I think we have seen still a different interconnection between political and economic freedom. In the post-war period, the fears that economic intervention would destroy political freedom seemed to be on the way to being realized. Various countries, and again Britain is perhaps the outstanding example because it has been so much a leader in the realm of ideas and social arrangements, did extend very greatly the area of state intervention into economic affairs and this did threaten political freedom. But the result was rather surprising. Instead of political freedom giving way, what happened in many cases was that economic intervention was discarded. The striking example in British post-war development was the Control-of-Engagements Order issued by the Labor Government. In trying to carry out their economic plans, the Labor Government found it necessary to do something which several years before it had said it would never do, namely, to exercise control over the jobs which people could take. Thanks to widespread popular objection, the legislation was never enforced at all extensively. After being on the books for one year, it was repealed. It seems clear that it was repealed precisely because it quite directly threatened a cherished political freedom. And from that day to this, there has been a trend toward a reduction in the extent of political intervention in economic affairs.

The dismantling of controls dates from the repeal of the Control-of-Engagements Order it would have occurred even if the Labor Government had stayed in power. This may, of course, turn out to be a purely temporary interlude, a minor halt in the march of affairs toward a greater degree of intervention into economic affairs. Perhaps only innate optimism leads me to believe that it is more than that. Whether this be so or not, it illustrates again in striking fashion the close connection between economic arrangements and political arrangements. Not only in Britain but in other countries of the world as well, the post-war period has seen the same tendency for economic arrangements to interfere with political freedom and for the economic intervention frequently to give way.

Historical evidence that the development of freedom and of capitalist and market institutions have coincided in time can never by itself be persuasive. Why should there be a connection? What are the logical links between economic and political freedom? In discussing these questions, I shall first consider the market as a direct component of freedom and then the indirect relation between market arrangements and political freedom. In the process, I shall in effect outline the ideal economic arrangements of the new liberal.

THE NEW LIBERAL takes freedom of the individual as his ultimate goal in judging social arrangements. Freedom as a value in this sense has to do with the interrelations among people it has no meaning whatsoever to a Robinson Crusoe on an isolated island (without his man Friday). Robinson Crusoe on his island is subject to “constraint,” he has limited “power,” he has only a limited number of alternatives, but there is no problem of freedom in the sense that is relevant to the present discussion. Similarly, in a society, freedom has nothing to say about what an individual does with his freedom it isn’t an all-embracing ethic by any manner of means. Indeed, a major aim of the believer in freedom is to leave the ethical problem for the individual to wrestle with. The “really” important ethical problems are those that face an individual in a free society—what an individual should do with his freedom. There are thus two sets of values that a liberal will emphasize—the values relevant to relations among people which is the context in which he assigns first priority to freedom and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy.

Fundamentally there are only two ways in which the activities of a large number of people can be co-ordinated: by central direction, which is the technique of the army and of the totalitarian state and involves some people telling other people what to do or by voluntary co-operation, whch is the technique of the market place and of arrangements involving voluntary exchange. The possibility of voluntary co-operation in its turn rests fundamentally on the proposition that both parties to an exchange can benefit from it. If it is voluntary and reasonably well informed, the exchange will not take place unless both parties do benefit from it.

The simplest way to see the principle at work is to go back to the economist’s favorite abstraction of Robinson Crusoe, only to have a number of Robinson Crusoe households on different islands, each of which is initially self-sufficient. Let the households come into contact with one another. The possibility of trade now emerges. What is it that gives them an incentive to trade? The answer clearly is that if each household concentrates on a small range of activities, producing things for itself indirectly, by trade, rather than doing everything for itself, everybody can be better off. This possibility arises for two reasons: one is that an individual can achieve a higher degree of competence in an activity if he specializes in it rather than engaging in many activities the other, closely associated but not identical, is that people are different and each can specialize in those activities for which he has special capacities. Even if everyone were identical in all his capacities and abilities, there would still be a gain from division of labor which would make a larger total return possible because each individual could concentrate on a particular activity. But in addition, diversity among people becomes a source of strength because each individual can concentrate on doing those things that he can do best. So the incentive for the households to engage in trade and to specialize is the possibility of a greater total output.

The protection to Household A is that it need not enter into an exchange with Household B unless both parties benefit. If exchange is voluntary, it will take place if, and only if, both parties do benefit. Each individual always has the alternative of going back to producing for himself what he did before so he can never be worse off he can only be better off.

OF COURSE, specialization of function and division of labor would not go far if the ultimate productive unit were the household. In a modern society, we have gone much farther. We have introduced enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods. And similarly, specialization of function and division of labor could not go very far if we had to continue to rely on the barter of product for product. In consequence, money has been introduced as a means of facilitating exchange and of enabling the act of purchase and of sale to be separated into two parts.

The introduction of enterprises and the introduction of money raise most of the really difficult problems for economics as a science. But from the point of view of the principles of social organization, they do not fundamentally alter the essential character of economic arrangements. In a modern complex society using enterprises and money it is no less true than in the simple idealized world that co-ordination through the markets is a system of voluntary co-operation in which all parties to the bargain gain.

So long as effective freedom of exchange is maintained, the essential feature of the market is that it enables people to co-operate voluntarily in complex tasks without any individual being in a position to interfere with any other. Many of the difficult technical problems that arise in applying our principles to actual economic arrangements are concerned with assuring effective freedom to enter or not to enter into exchanges. But so long as people are effectively free to enter into an exchange and are reasonably well informed the essential feature of the market remains that of our ideal example. It provides for co-operation without coercion it prevents one person from interfering with another. The employer is protected from being interfered with or coerced by his employees by the existence of other employees whom he can hire. The employee is protected from being coerced by his employer by the existence of other employers for whom he can work the customer by the existence of other sellers, and so on.

Of course, it is partly this feature of the market that leads many people to be opposed to it. What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.

The essence of political freedom is the absence of coercion of one man by his fellow men. The fundamental danger to political freedom is the concentration of power. The existence of a large measure of power in the hands of a relatively few individuals enables them to use it to coerce their fellow man. Preservation of freedom requires either the elimination of power where that is possible, or its dispersal where it cannot be eliminated. It essentially requires a system of checks and balances, like that explicitly incorporated in our Constitution. One way to think of a market system is as part of a broader system of checks and balances, as a system under which economic power can be a check to political power instead of an addition to it.

If I may speculate in an area in which I have little competence, there seems to be a really essential difference between political power and economic power that is at the heart of the use of a market mechanism to preserve freedom. With respect to political power, there is something like a law of conservation of energy or power. The notion that what one man gains another man loses has more applicability in the realm of politics than in the realm of economic arrangements. One can have many different small governments, but it is hard to think of having many different small centers of political power in any single government. It is hard for there to be more than one really outstanding leader, one person on whom the energies and enthusiasms and so on of his countrymen are centered. If the central government gains power, it is likely to do so at the expense of local governments. While I do not know how to formulate the statement precisely, there seems to be something like a fixed total of political power to be distributed.

There is no such fixed total, no law of conservation of power, with respect to economic power. You cannot very well have two presidents in a country, although you may have two separate countries, but it is perfectly possible to have a large number of additional millionaires. You can have an additional millionaire without there being any fewer millionaires anywhere else. If somebody discovers a way to make resources more productive than they were before, he will simply add to the grand total of economic wealth. Economic power can thus be more readily dispersed than political power. There can be a larger number of independent foci of power. Further, if economic power is kept in separate hands from political power, it can serve as a check and an offset to political power.

This is a very abstract argument and I think I can illustrate its force for our purpose best by turning to some examples. I would like to discuss first a hypothetical example that helps to bring out the principles involved and then an actual example from recent experience that also illustrates the way in which the market works to preserve political freedom.

I think that most of us will agree that an essential element of political freedom is the freedom to advocate and to try to promote radical changes in the organization of society. It is a manifestation of political freedom in our capitalist society that people are free to advocate, and to try to persuade others to favor socialism or communism. I want to contemplate for a moment the reverse problem. It would be a sign of political freedom in a socialist society that people in that society should be free to advocate, and try to persuade others to favor capitalism. I want to ask the hypothetical question: how could a socialist society preserve the freedom to advocate capitalism? I shall assume that the leading people and the public at large seriously wish to do so and ask how they could set up the institutional arrangements that would make this possible.

THE FIRST problem is that the advocates of capitalism must be able to earn a living. Since in a socialist society all persons get their incomes from the state as employees or dependents of employees of the state, this already creates quite a problem. It is one thing to permit private individuals to advocate radical change. It is another thing to permit governmental employees to do so. Our whole post-war experience with un-American activities committees and the McCarthy investigations and so on shows how difficult a problem it is to carry over this notion to governmental employees. The first thing that would be necessary would therefore be essentially a self-denying ordinance on the part of the government that would not discharge from public employment individuals who advocate subversive doctrines—since of course, in a socialist state the doctrine that capitalism should be restored would be a subversive doctrine. Let us suppose this hurdle, which is the least of the hurdles, is surmounted.

Next, in order to be able to advocate anything effectively it is necessary to be able to raise some money to finance meetings, propaganda, publications, writings and so on. In a socialist society, there might still be men of great wealth. There is no reason why a socialist society shouldn’t have a wide and unequal distribution of income and of wealth. It is clear, however, that most, if not all of the people, of great wealth or income would be the leading figures in the government, directly or indirectly—high level civil servants or favored authors, actors, and the like. Perhaps it doesn’t strain the bounds of credulity greatly to suppose that the government would countenance and tolerate the advocacy of capitalism by minor civil servants. It’s almost incredible that it could tolerate the financing of subversive activity by leading civil servants. It is, therefore, hard to believe that these wealthy or high income individuals could be a source of finance. The only other recourse would be to try to get small sums from a large number of people. But this evades the issue. In order to get a lot of people to contribute you first have to persuade them. How do you get started persuading?

Note that in a capitalistic society radical movements have never been financed by small amounts from many people. They have been financed by a small number of wealthy people being willing to foot the bill. To take an example that is quite old but very striking, who financed Karl Marx? It was Engels, and where did Engels get his money? He was an independent business man of wealth. (In the modern day it’s the Anita McCormick Blaines and Frederick Vanderbilt Fields, the Corliss Lamonts and so on who have been the source of finance of the radical movement.) This is the important source of the strength of freedom in a capitalist society. It means that anybody who has a “crazy” idea that he wants to propagate and promote has only to persuade a small number out of a very large number of potential backers in order to be able to get an opportunity to try out his crazy notions in the market place of ideas.

Moreover, the situation is even more extreme. Suppose somebody has an idea that he thinks will appeal to a large number of people. He doesn’t even have to persuade somebody that he is right. He just has to persuade some capitalist in the society—in this particular case say a publisher or a magazine editor—that there’s a chance that a lot of people will be willing to pay to read about his idea. A publisher, for example, will have an incentive to publish a book, with whose ideas he doesn’t agree in the slightest, if there is a substantial chance that the book will sell enough copies to make money.

By contrast, let’s go back to the hypothetical socialist society. How does the proponent of capitalism in such a society raise money to propagate his ideas? He can’t get it from the wealthy individuals in the society. It is hard to believe that it is feasible for him to raise the necessary amount by getting small sums from a large number of people. Perhaps one can conceive of the socialist society being sufficiently aware of this problem and sufficiently anxious to preserve freedom to set up a governmental fund for the financing of subversive activities. It is a little difficult to conceive of this being done, but even if it were done it would not meet the problem. How would it be decided who should be supported from the fund? If subversive activity is made a profitable enterprise, it is clear that there will be an ample supply of people willing to take money for this purpose. If money is to be got for the asking, there will be plenty of asking. There must be some way of rationing. How could it be rationed?

Even if this problem were solved, the socialist society would still have difficulties in preserving freedom. The advocate of capitalism must not only have money, he must also be able to buy paper, print his material, distribute it, hold meetings, and the like. And, in the socialist society, in each instance this would involve dealing with an instrumentality of the government. The seller of paper in a capitalist society doesn’t care or indeed know whether the paper he’s selling is going to be used to print the Wall Street Journal or the Worker.

In the circumstances envisaged in the socialist society, the man who wants to print the paper to promote capitalism has to persuade a government mill to sell him the paper, a government printing press to print it, a government post office to distribute it among the people, a government agency to rent him a hall in which to talk and so on. Maybe there is some way in which one could make arrangements under a socialist society to preserve freedom and to make this possible. I certainly cannot say that it is utterly impossible. What is clear is that there are very real difficulties in preserving dissent and that, so far as I know, none of the people who have been in favor of socialism and also in favor of freedom have really faced up to this issue or made even a respectable start at developing the institutional arrangements that would permit freedom under socialism. By contrast, it is clear how a free market capitalist society fosters freedom.

A striking example, which may be found in the January 26, 1959, issue of Time, has to do with the “Black List Fade-Out.” Says the Time story, “The Oscar awarding ritual is Hollywood’s biggest pitch for dignity but two years ago dignity suffered. When one Robert Rich was announced as top writer for The Brave One, he never stepped forward. Robert Rich was a pseudonym masking one of about 150 actors blacklisted by the industry since 1947 as suspected Communists or fellow travelers. The case was particularly embarrassing to the Motion Picture Academy because it had barred any Communist or 5th Amendment pleader from Oscar competition.

“Last week both the Communist rule and the mystery of Rich’s identity were suddenly revealed. Rich turned out to be Dalton (Johnny Got His Gun) Trumbo, one of the original Hollywood Ten writers who refused to testify at the 1947 hearing on Communism in the movie industry. Said producer Frank King who had stoutly insisted that Robert Rich was a young guy in Spain with a beard, ‘We have an obligation to our stockholders to buy the best script we can. Trumbo brought us The Brave One and we bought it . . .’ In effect it was the formal end of the Hollywood black list. For barred writers, the informal end came long ago. At least fifteen per cent of current Hollywood films are reportedly written by black list members. Said producer King, ‘There are more ghosts in Hollywood than in Forest Lawn. Every company in town has used the work of black listed people we’re just the first to confirm what everybody knows’.”

One may believe, as I do, that Communism would destroy all of our freedoms, and one may be opposed to it as firmly and as strongly as possible and yet at the same time also believe that in a free society it is intolerable for a man to be prevented from earning his living because he believes in or is trying to promote Communism. His freedom includes his freedom to promote Communism. The Hollywood black-list is a thoroughly unfree act that destroys freedom. It didn’t work, however, precisely because the market made it costly for people to preserve the black list. The commercial emphasis, the fact that people who are running enterprises have an incentive to make as much money as they can, protected the freedom of the individuals who were black listed by providing them with an alternative form of employment, and by giving people an incentive to employ them.

If Hollywood and the movie industry had been government enterprises or if in England it had been a question of employment by the BBC it is difficult to believe that the Hollywood Ten or their equivalent would have found employment.

The essential feature of the market which is brought out by these examples, and one could multiply them many fold, is essentially that it separates the economic activities of the individual from his political ideas or activities and in this way provides individuals with an effective support for personal freedom. The person who buys bread doesn’t know whether the wheat from which it was made was grown by a pleader of the 5th Amendment or a McCarthyite, by a person whose skin is black or whose skin is white. The market is an impersonal mechanism that separates economic activities of individuals from their personal characteristics. It enables people to co-operate in the economic realm regardless of any differences of opinion or views or attitudes they may have in other areas. You and I may buy Mennen drug products even though we may think “Soapy” Williams was a terrible governor of the state of Michigan. This is the fundamental way in which a free-market capitalist organization of economic activity promotes personal freedom and political freedom.

[* ] Milton Friedman, Professor of Economics at the University of Chicago, is the author of Essays in Positive Economics, co-editor of the Cambridge Economic Handbook series, and a contributor of numerous articles to professional journals.


Friedman’s smashing success

In the late 1940s, Milton Friedman was considered an important economist who had made significant technical contributions. At the beginning of the 1950s, however, he moved away from Keynesian economics and as a result was increasingly viewed as a bit of a nut. Two decades later, however, Friedman had become far and away the most important macroeconomist in the world. Much of the ongoing macro debate revolved around economists addressing Friedman’s ideas, pro or con. How did this happen?

Edward Nelson’s outstanding two volume study of Friedman provides the most complete answer that I have seen. During the 1960s, Friedman rejected 4 key tenets of Keynesian economics. And within less than a decade, all four of his critiques were shown to be correct. As a result, Keynesian economics absorbed much of monetarism, and this led to the creation of a new macroeconomic framework called New Keynesianism. Keep in mind that when I talk about “Keynesians”, I am not describing the views of J.M. Keynes or the views of modern Keynesians, I am describing the views of many of the most prominent Keynesian economists during the 1960s. (Samuelson, Tobin, Modigliani, Solow, Heller, etc.)

Here are the four Keynesian ideas that Friedman rejected:

1. Nominal interest rates are the correct indicator of the stance of monetary policy. The Fisher effect is not an important factor in the US.

2. Fiscal austerity (higher taxes) is the best way to reduce excessive aggregate demand.

3. There is a stable (negative) relationship between inflation and unemployment (the “Phillips Curve”).

4. Modern economies face an increasing problem of cost/push inflation, and hence wage/price controls are often the best way to control inflation.

Let’s take these one at a time.

In the mid-1960s, Friedman argued that nominal interest rates were rising because of increasing inflation expectations. Nelson points out that Keynesians like James Tobin rejected this claim (vol. 2, p. 113.) By the 1970s, inflation and nominal interest rates had increased much further, and there was almost universal agreement that Friedman was right and Tobin was wrong. Nominal interest rates are not a good indicator of the stance of monetary policy.

Thus the Keynesians were saying that if you want tight money to reduce inflation, you need high interest rates. Friedman basically said no, high interest rates are not the solution you need to reduce growth in the money supply. By the late 1960s, the US had both high interest rates and a fast growing money supply, and inflation kept rising. It turned out that Friedman was right.

But Keynesians did not draw the correct inferences from this episode. Rather they decided that monetary policy must not be very effective, and instead advocated higher taxes as a way to reduce inflation (the MMT approach.) In 1968, LBJ raised income taxes so high that the US budget went into surplus, but inflation continued to increase.

Friedman had two reasons for doubting the efficacy of higher taxes. First, his permanent income theory suggested that temporary tax changes would be offset by changes in private saving, leaving aggregate demand almost unaffected. More importantly, he saw that a tax increase could only slow inflation by reducing velocity, which would have only a one-time effect. Even if velocity fell one or two percent, the contractionary effects (on M*V) would soon be overwhelmed by increasingly rapid growth in the money supply.

Thus Keynesians assumed that tax increases could slow inflation, while Friedman said no, you need to reduce the growth rate of the money supply.

When the tax increases failed to slow inflation, Keynesians began to focus on the Phillips curve, which suggested that there was an inverse relationship between inflation and unemployment. A policy of higher inflation would lead to lower unemployment, and vice versa. Friedman said this was wrong, as workers would eventually catch on to changes in the rate of inflation and demand compensating changes in nominal wage rates. In the long run, unemployment would return to the natural rate, regardless of the trend rate of inflation. By 1970, we had high inflation and high unemployment, which showed that Friedman was right. (Note that this was three years before the first oil shock.)

Thus the Keynesians thought that high unemployment was the solution to inflation. Friedman said no, you need to reduce the growth rate of the money supply.

When the high unemployment of 1970 did not work, Keynesian economists blamed inflation on “cost-push factors”, such as monopoly power or strong labor unions. They supported wage/price controls, which President Nixon implemented in August 1971. After a brief decline in inflation, the problem got much worse during the mid and late-1970s. Friedman saw that while wage/price controls might lead to a one-time drop in the price level of a few percentage points, as long as the money supply was growing rapidly, any gains from wage/price controls would be soon overwhelmed by a rising money supply.

Thus Keynesians said that the solution for high inflation is wage-price controls, whereas Friedman said no, these controls will not work you need to reduce the growth rate of the money supply. See a pattern here?

In the early 1980s, the Fed finally began reducing the growth rate of the money supply, and inflation fell sharply.

Why isn’t the amazing success of Friedman’s ideas better understood? It’s partly because his preferred policy target—stable growth in a monetary aggregate such as M2—was not adopted due to concerns about unstable velocity. Even Friedman eventually accepted inflation targeting as a reasonable alternative. And the other four ideas discussed above all got incorporated in 1990s-era New Keynesianism. NKs accepted the importance of the Fisher effect, switching their focus from nominal to real interest rates. They accepted that monetary policy is the appropriate tool to control inflation, not fiscal policy. They accepted Friedman’s Natural Rate Hypothesis, the idea that higher inflation will not permanently reduce unemployment. And they accepted that a contractionary monetary policy, not wage/price controls, is the solution to inflation.

In one important respect, Friedman’s achievement is even more amazing than what I have outline here. In all four cases, Friedman’s claims were made at a time when they looked wrong. The Fisher effect had not been a very important factor in the setting of US interest rates when inflation expectation were near zero, including the period when the price of gold was pegged at $20.67/oz (1879-1933). And during 1934-68, when gold was $35/oz, inflation expectation were generally pretty low (even as actual inflation bounced around unpredictably.) During the early to mid-1960s, inflation expectations were probably not much more than 1%. The Fisher effect became a major factor afterFriedman began warning about the issue. Similarly, in the mid-1960s it was widely believed that tax changes had a big impact on aggregate demand, as the Kennedy tax cuts of 1964 were followed by a strong economy (albeit perhaps for supply-side reasons.) Keynesians were genuinely surprised when the big tax increase of 1968 failed to slow inflation. When Friedman gave famous AEA Presidential address outlining the Natural Rate Hypothesis in late 1967, a stable Phillips curve seemed quite plausible, indeed the 1960s fit the model better than almost any other decade. It was in the 1970s that the relationship completely broke down. And the Nixon wage/price controls seemed to work at first it was only a few years later that they began to fall apart. Thus in all four cases Friedman rejected the orthodox view at a time when the orthodox approach seemed to be working fine, and in all four cases his views were eventually vindicated.

Milton Friedman’s achievements in the late 1960s and early 1970s were truly amazing, and deserve to be better known.

In a subsequent post, I’ll try to explain how Friedman was able to see the flaws in mainstream Keynesianism before most other economists. Why was his model better? We’ll see that all four of his successful critiques have something in common.


Milton Friedman’s FREE TO CHOOSE “Who protects the consumer?” Transcript and Video (60 Minutes)

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, and – Power of the Market. From the original Free To Choose series Milton asks: “Who Protects the Consumer?”. Many government agencies have been created for this purpose, yet they do so by restricting freedom and stifling beneficial innovation, and eventually become agents for the groups they have been created to regulate.


The End of Friedmanomics

ILLUSTRATIONS BY MIKE MCQUADE

When he arrived in South Africa on March 20, 1976, Milton Friedman was a bona fide celebrity. He had been invited by the University of Cape Town to deliver a series of lectures on economic policy, but his itinerary was jammed with interviews, fetes, and gaudy extravagances fit for a senator or Hollywood royalty. Newspaper reporters harangued him, the crowded pre-cable TV spectrum reserved room for his insights, and he spent so much of the ensuing three weeks being whirlwinded by the local elite that he barely carved out time to enjoy the wildlife.

A 42-page travelogue recorded by Friedman recounts the experience. Milton and his wife, Rose, slept late after their arrival, savoring an afternoon walk along the glittering Sea Point Promenade in the shadow of Lion’s Head mountain before dinner with the chairmen of a burgeoning fashion chain and a prominent investment house. Two newspaper interviews the next day were followed by an evening at the Dutch country estate of tobacco magnate Anton Rupert. Cocktails at the U.S. Embassy, lunch with the chairman of Mobil Oil South Africa, and a black-tie dinner with the head of the De Beers diamond monopoly would ensue.

After two decades on the intellectual front lines of American politics, Friedman was a bestselling author and no stranger to fine living. But he was astonished by both “the extraordinary affluence of the White community” and the “extraordinary inequality of wealth” in South Africa. Friedman was not a man to scold opulence, and yet he found the tension permeating apartheid South Africa palpable in both taxicabs and hotel ballrooms. The “hardboiled attitudes” of Mobil chairman Bill Beck and his friends were difficult for him to endure. The “complete segregation” of the population was “striking.”

All of which makes a contemporary reading of Friedman’s Cape Town lectures a harrowing experience. His first speech was an unremitting diatribe against political democracy—an explicit rejection of, in Friedman’s words, “one person, one vote,” delivered to a nation in which more than half of the population was disenfranchised by race. Voting, Friedman declared, was inescapably corrupt, a distorted “market” in which “special interests” inevitably dictated the course of public life. Most voters were “ill-informed.” Voting was a “highly weighted” process that created the illusion of social cooperation that whitewashed a reality of “coercion and force.” True democracy, Friedman insisted, was to be found not through the franchise, but the free market, where consumers could express their preferences with their unencumbered wallets. South Africa, he warned, should avoid the example of the United States, which since 1929 had allowed political democracy to steadily encroach on the domain of the “economic market,” resulting in “a drastic restriction in economic, personal, and political freedom.”

The idea that America experienced an erosion of political liberty amid the destruction of Jim Crow is simply impossible to take seriously. Between 1929 and 1976, in addition to the advances in civil rights, explicitly racist immigration quotas were eliminated, prohibition was repealed, and legal barriers to birth control were abolished, as poverty rates plunged across demographic groups and American income inequality reached the lowest levels on record. And yet, as he toured South Africa, Friedman did not retreat from his conviction that the state had dealt a perilous blow to American freedom. In a conversation with the courageous anti-apartheid politician Helen Suzman, Friedman expressed his belief that “a laissez-faire economic policy” was “the only way in which you could get a multiracial community going” in South Africa. And the free market had to be insulated from democratic pressure. The burgeoning activist movement to “urge all foreign enterprises to boycott investment in South Africa,” Friedman believed, would ultimately serve to “hurt the Blacks, not to help them.”

Friedman did not subscribe to biological theories of racial inferiority. His time in South Africa does not instruct us on his moral character or any unique failures of political judgment. It offers instead a window into the deepest currents of his intellectual contributions. The program Friedman prescribed for apartheid South Africa in 1976 was essentially the same agenda he called for in America over his entire career as a public intellectual—unrestrained commerce as a cure-all for inequality and unrest.

That this prescription found political purchase with the American right in the 1960s is not a surprise. Friedman’s opposition to state power during an era of liberal reform offered conservatives an intellectual justification to defend the old order. What remains remarkable is the extent to which the Democratic Party—Friedman’s lifelong political adversary—came to embrace core tenets of Friedmanism. When Friedman passed away in 2006, Larry Summers, who had advised Bill Clinton and would soon do the same for Barack Obama, acknowledged the success of Friedman’s attack on the very legitimacy of public power within his own party. “Any honest Democrat will admit that we are now all Friedmanites,” he declared in The New York Times.

No longer. In the early months of his presidency, Joe Biden has pursued policy ambitions unseen from American leaders since the 1960s. If implemented, the agenda he described in an April 28 address to Congress would transform the country—slashing poverty, assuaging inequality, reviving the infrastructure that supports daily economic life, and relieving the financial strains that childcare and medical care put on families everywhere. It will cost a lot of money, and so far at least, Biden isn’t letting the price tag intimidate him. “I want to change the paradigm,” he repeated three times at a press conference in March.

But the real turn is not about deficits or spending levels. It is the relationship between economic policy and democracy itself. For Friedman, liberty lived in the marketplace, rendering government a necessary evil under the best of circumstances. Today’s Democrats, by contrast, have reclaimed state power as an essential component of self-government. When he laid out his agenda in April, Biden declared “it’s time to remember that ‘We the People’ are the government—you and I. Not some force in a distant capital. Not some powerful force that we have no control over. It’s us.”

The new consensus on Friedman’s work among economists has essentially reversed Summers’s verdict from 2006. “Almost nothing remains of his intellectual legacy,” according to Columbia University economist Jeffrey Sachs. “It has proven to be a disastrous misdirection for the world’s economies.”

In 2021, 15 years after his body gave out, Milton Friedman is finally dead.

Act I: His Rise to Fame

Friedman was born in 1912 to Hungarian Jewish immigrants who ran a dry goods store in Rahway, New Jersey. Recognized as brilliant from an early age, he graduated from high school at 16 and earned a degree from Rutgers before his twentieth birthday. Though he would pursue graduate studies in economics on an on-again, off-again basis for the next 14 years, Friedman spent most of the Great Depression and World War II in the employ of Franklin Delano Roosevelt’s federal government, moving between influential positions at the National Resources Planning Board and the Treasury Department, where he helped establish the modern income tax withholding system to help finance the war effort.

On paper, Friedman was a gifted New Dealer with sterling credentials. He had opposed the right-wing America First isolationism and supported the U.S. entry into the war, and he then devoted himself to the statistical efficiency of the war program. But intellectually he had fallen under the sway of conservative University of Chicago economists Frank Knight and Henry Simons, who had helped him earn a master’s degree in the early 1930s. When he at last won his Ph.D. from Columbia in 1946, Friedman shipped out to Chicago to join a fringe right-wing intellectual movement calling itself “neoliberalism.” Despite their chosen moniker, the neoliberals loathed the politics of the New Deal, seeking instead to revive the most conservative strands of Enlightenment-era economic thought, so-called classical liberalism, for the twenty-first century.

Friedman made quite a splash. His dissertation, based on research he co-conducted with future Nobel laureate Simon Kuznets, suggested that professional licensing regulations raised the cost of important expert services—including medical services. But it was a 1946 pamphlet on housing policy co-written with fellow Chicagoan George Stigler that transformed Friedman from an obscure ex-bureaucrat into an academic sensation. Titled “Roofs or Ceilings? The Current Housing Problem,” Friedman and Stigler’s paper argued that California’s rent regulations ultimately ended up raising the price of housing, hurting the very low-income people politicians sought to help. The argument was simple: By artificially depressing the price of housing, regulators deprived potential homebuilders of an incentive—higher profits—to build more homes, which would in time bring down housing costs.

The blunt unsophistication of the pamphlet was an intellectual call to arms. Friedman and Stigler weren’t really writing about housing at all—they were writing about economics itself, calling for a return to the simple nineteenth-century analyses that Friedman would later credit for producing the “free market” and “the greatest expansion of human freedom the world had ever seen.” The reaction was furious. Writing in The Washington Post, economist Robert Bangs decried the “drivel” in Friedman’s “insidious little pamphlet,” and denounced him for publishing it through a “propaganda front for reactionary interests” (which was true—“Roofs or Ceilings?” was released by the Foundation for Economic Education, one of a handful of specialty right-wing organizations that sprang up in the postwar world aiming to unwind the New Deal).

Friedman had thus cultivated a very particular brand. Academically he was a succès de scandale—not many economists in 1946 were being written up in The Washington Post. Politically, though, the pamphlet was a dead letter. Whatever people thought about Friedman himself, arguing that government regulation simply couldn’t work had been losing at the ballot box for 14 years. The country did not recall the Hoover years with fondness Harry Truman’s biggest electoral problem was the fact that he wasn’t FDR. Friedman had made a name for himself, but in doing so he had yoked himself to a far fringe of American politics that exercised almost no influence over public discourse—yet.

There were some very wealthy people on that fringe, however. In 1947, a Kansas City home furnishing heir named Harold Luhnow paid for Friedman to travel to Switzerland for a meeting of leading neoliberals that would become known as the Mont Pèlerin Society. Friedman was young and relatively unaccomplished for the group, which included titans of the European intellectual right like Ludwig von Mises and Lionel Robbins, but the organization proved to be a forum that would help foster his professional ambitions and those of his new allies. Though it began as an obscure elite salon, the Mont Pèlerin Society would grow into one of the most influential intellectual bodies in the world, with the University of Chicago serving as its principal American outpost. Luhnow underwrote a position at the University of Chicago Law School for Friedman’s brother-in-law Aaron Director, who soon went to work attacking New Deal antitrust rules as counterproductive. Luhnow also financed a job at Chicago for Friedrich Hayek, whose 1944 political tract The Road to Serfdom had transformed him into a hero for American businessmen by arguing that Roosevelt’s New Deal had turned the United States away from Western individualism and risked sending the country headlong into Soviet-style domestic butchery.

Friedman spent most of the 1950s trying to shore up his reputation as an academic, which had taken a hit for his associations with the hard right. In 1953, he published one of his most influential works of theory, “The Methodology of Positive Economics”—a sweeping statement on the power of economics to break down barriers between people and resolve political disagreements. It was a declaration of principles from a man who recognized he lived on the political outskirts. Liberals might disagree with his ideas, Friedman suggested, but their complaints were really superficial—ultimately, he argued, he was engaged in the same intellectual project and motivated by the same values as his opponents: building a fair and prosperous society.

It was a brilliant essay that captured the imaginations of people far to Friedman’s political left in the profession. It also wasn’t true. The chief political disputes of the 1950s and 1960s, as today, really were about moral values, not technical predictions. And by 1954, that conflict erupted spectacularly with the Supreme Court’s Brown v. Board of Education decision that prohibited segregation in public schools.

Act II: The Entry Into Politics—and Race

Friedman responded to Brown in 1955 with “The Role of Government in Education,” an essay that called for the ostensibly race-neutral program of privatizing the school system by providing families with education vouchers that could be spent where parents wished. As in his essay on housing nine years before, Friedman appealed to the simple nineteenth-century logic of market competition and equilibrium to make his case. Public schools were a “monopoly” that put private schools at an unfair “disadvantage.” By transitioning from public schools to vouchers, families would enjoy a diversity of education options, and market competition over the quality of education would in time enhance the lot of students everywhere.

It was every bit as neat and tidy as Friedman’s case against rent regulations. But as Leo Casey has detailed for Dissent magazine, Friedman gave away the political game in a lengthy footnote. Though he insisted, “I deplore segregation and racial prejudice,” Friedman nevertheless believed in the right of the private market to develop “exclusively white schools, exclusively colored schools, and mixed schools.” If multiracial education was really so good, it would get better results, and segregated schools would wither away.

Though Friedman claimed to be striking a middle ground between “forced nonsegregation” and “forced segregation,” he was in practice taking the side of the segregationists.

Though Friedman claimed to be striking a middle ground between “forced nonsegregation” and “forced segregation,” he was in practice taking the side of the segregationists. His voucher proposal wasn’t original—it had already been implemented by segregationists in Prince Edward County, Virginia, who were using it to get around Brown and allow white families to maintain a separate, publicly financed all-white educational system. Friedman lamely acknowledged in an infamous footnote, “This fact came to my attention after this paper was essentially in its present form.”

Much of Friedman’s political relevance within the Republican Party derived from his willingness to defend conservative policies on race during the 1950s and 1960s. “Missing from most analyses of Friedman’s economic thought is the inseparable role of race,” said Darrick Hamilton, the director of the New School’s Institute on Race and Political Economy. “The racialization of poverty and ideas about those who are deserving and undeserving allows us to have a system without empathy where those in despair are treated as surplus populations.”

“The Role of Government in Education” marks the earliest appearance of what remains Friedman’s most damaging belief—the idea that bigotry and violence could be forced out of public life by the magic of the market. Friedman would insist on this basic proposition again and again throughout his career. In 1972, he would go so far as to suggest that the free market could have put a stop to the war in Vietnam if people had really wanted it to end. Enough chemists would have refused to make napalm that the cost of producing the explosive would have become prohibitively high. This was the appropriate way to stop a war—not the crude “voting mechanism” of “the political system.”

Such arguments are difficult to take seriously today, but they worked with a substantial slice of the political spectrum in the 1950s and 1960s, particularly liberals. Where most hard-nosed conservatives were content to espouse white supremacy or pro-war attitudes, Friedman instead appealed to the liberal faith in the basic decency of humanity. Surely government intervention would not be necessary if people were the generally kind and caring sort that liberals imagined them to be. His appeal to liberal sensibilities was more than accidental. Throughout his life, Friedman preferred to be identified as either a “neoliberal” or a “classical liberal,” invoking the prestige of the great eighteenth- and nineteenth-century economists—while conveniently gliding past their often profound differences with his political project. (John Stuart Mill, for instance, identified as a “socialist,” while Adam Smith supported a variety of incursions against laissez-faire in the name of the public interest.) While many of his friends embraced the label of “conservative,” Friedman resisted. “Good God, don’t call me that,” he told an interviewer in 1978. “The conservatives are the New Dealers like [John Kenneth] Galbraith who want to keep things the way they are. They want to conserve the programs of the New Deal.”

But whatever the semantics, the political alliance was unmistakable. Friedman began contributing to William F. Buckley’s National Review and turned down an offer to join Dwight D. Eisenhower’s Council of Economic Advisers, concluding that the moderate Eisenhower would demand too many intellectual concessions of him: “I think society needs a few kooks, a few extremists.” (Friedman’s quote is recorded by historian Angus Burgin in his wonderful 2012 book, The Great Persuasion.) But being a professional kook was a lonely crusade. In 1962, Friedman’s neoliberal colleague Friedrich Hayek left the University of Chicago and decamped to the political wilderness of the University of Freiburg in West Germany. Friedman’s longtime benefactor Harold Luhnow had gone insane, financing Holocaust-deniers and claiming the supernatural ability to connect his mind with Soviet Premier Nikita Khrushchev before shuttering his philanthropy outright.

But before he did so, Luhnow had paid Friedman to develop a series of lectures that the two men hoped could be collected into a Cold War–era update on Hayek’s aging publishing smash, The Road to Serfdom. The product of that effort, 1962’s Capitalism and Freedom, became the bestselling work of Friedman’s career and a rallying cry for young American free marketeers. Capitalism and Freedom argued that the market was the true realm of democratic expression. People voiced their preferences for the way society ought to be ordered with their pocketbooks, and industry responded by providing what was profitable. The political system, by contrast, inherently functioned as a restriction on individual liberty by limiting the kinds of preferences people could demand from the market. Democracies could choose between “laissez-faire” freedom or state socialism, but they could not have both—and in Friedman’s telling, the style of government the United States had been pursuing since the New Deal was on the wrong side of that line.

In 1964, Friedman tried to put these ideas into practice by advising the presidential campaign of far-right Arizona Senator Barry Goldwater. As the Republican nominee toured the country insisting that he agreed personally with the goals of the Civil Rights Act and the Brown decision, Goldwater voiced an objection in principle to the use of federal power to “impose that judgment … on the people of Mississippi or South Carolina.” Segregation was “their business, not mine.” Advising Goldwater, Friedman called this attack on the legal foundation of the civil rights movement an “excellent” expression of the principle of “equal treatment of all, regardless of race.”

Friedman wrote: “The man who objects to buying from or working alongside a Negro, for example, thereby limits his range of choice. He will generally have to pay a higher price for what he buys or receive a lower return for his work. Or, put the other way, those of us who regard color of skin or religion as irrelevant can buy some things more cheaply as a result.” The relentless logic of the market would drive such inefficiency from public life.

Of course, the voters who backed Goldwater in 1964 didn’t believe a word of that. They supported Goldwater because they believed he would maintain the Jim Crow order, not because they expected economic freedom to unleash a wave of radical egalitarian social change across the South. This was clear to conservative political commentators during the campaign. As Robert Novak wrote (with his partner Rowland Evans) for The Washington Post in June 1963, “These Republicans want to unmistakably establish the Party of Lincoln as the white man’s party.”

From the twenty-first century, it is hard to believe Friedman was merely naïve and not breathtakingly cynical about these political judgments, particularly given the extreme rhetoric he used to attack anti-discrimination efforts. In Capitalism and Freedom, he even compared the Fair Employment Practices Commission that FDR established to prohibit discrimination in the defense industry to “the Hitler Nuremberg laws,” arguing that prohibiting discrimination and promoting discrimination both “involve a kind of state action that ought not to be permitted.” And yet he appears to have genuinely believed what he said about markets eliminating racism. Friedman’s travelogue from South Africa was a private recording he created to help him remember his trip. It contains the same basic political ideas Friedman presented in the Goldwater campaign, alongside clear discomfort with the racist attitudes of the South African business elite. Friedman knew that he was entering a political coalition with violent racists by joining the Goldwater effort, but, as he had stated in Capitalism and Freedom, he believed politics to be an inherently dirty business. There had been a paranoid catastrophism to much of the right since The Road to Serfdom. The belief that America was on the verge of full-blown communism could make ugly compromises appear necessary.

It is worth noting, however, that not everyone made the same compromises. Hayek, for instance, supported the Civil Rights Act. Backing Goldwater was an all-in career gamble that isolated Friedman from nearly every mainstream Republican leader, from Nelson Rockefeller to George Romney. But it paid off in one key respect: Goldwater’s landslide loss accelerated the purge of moderates from the party. The future of the party would belong to men like Milton Friedman. Though Republicans emerged from the 1964 election in a state of historic political weakness, Friedman had leaped to the top of the heap. In just a few years, his gamble would bear fruit.

Act III: Taking on Keynes

This open association with the radical right would have destroyed Friedman’s professional reputation had he not continued to publish top-tier economic research. In 1963, he at last delivered on the empirical promises he made to the field in 1953, publishing the work that made him the most famous economic thinker of his era, A Monetary History of the United States, 1867–1960. Co-written with Anna Jacobson Schwartz, the book offered a sweeping, meticulous account of changes in the quantity of money across the American economy over the course of nearly a century, with detailed explanations for the various forms of currency creation and destruction that occurred along the way. Friedman had never published anything nearly so ambitious, and would never do so again.

Constructing a 93-year account of fluctuations in the money supply is a curious endeavor to assume for its own sake. But of course Friedman had an intellectual motivation, which he detailed in a famous 1967 speech before the American Economic Association: He hoped to dethrone the ghost of John Maynard Keynes.

Ever since the publication of The General Theory of Employment, Interest and Money in 1936, Keynes and his theory of effective demand had dominated policymaking around the world. In Keynesian theory, the price of credit and the quantity of money were sideshows to the real drivers of economic activity: the purchasing power of the consumer and the investment decisions of the state. In the Keynesian framework, if the economy was in recession, it was because somebody, somewhere wasn’t spending enough. If people were being laid off, that meant somebody, somewhere couldn’t afford to buy whatever it was that person might have produced. The political corollary was straightforward: If people were out of work, the government should spend money—preferably at a deficit—to create employment. If you wanted to fix unemployment, you paid people to work.

The Keynesian aura
of authority, Friedman recognized, resulted from the consensus opinion that Keynes had cured the Depression with his appeal to deficits and public works spending.

The Keynesian aura of authority, Friedman recognized, resulted from the consensus opinion that Keynes had cured the Depression with his appeal to deficits and public works spending. And so Friedman’s book took direct aim at the Keynesian account of the Great Depression, hoping to show that the entire Keynesian project of the subsequent quarter-century was based on a mistake. He called his alternative macroeconomic framework “monetarism.” The problem in the 1920s and 1930s, Friedman argued, was not a collapse in consumer demand—it was a collapse in the quantity of money. The Federal Reserve had botched the job—where it should have maintained a healthy amount of money in the economy, it had instead allowed the money supply to fall by failing to rescue the banking system when it fell apart in the early years of the Depression. There was truth to this. The Fed really did botch the Great Depression. Letting the banks fail in multiple waves between 1929 and 1932 was a disastrous policy choice that subsequent central bankers have strenuously avoided.

Friedman elevated this account to a comprehensive theory of money and the economy. Everything important in the economy—inflation, deflation, unemployment—was a product of changes in the money supply, or expectations about changes in the money supply. And if you allowed a little inflation to take hold by letting too much money into the economy, a catastrophic spiral could set in, as consumers and businesses bid up prices inexorably without regard to how much money was really in circulation.

Friedman’s book did make many scholars revisit the Depression years. But it did not make an immediate dent in the Keynesian consensus. The history of inflation in the postwar period just didn’t fit his narrative. Outbreaks of inflation had occurred, but they had been brief and quickly contained—not some irrepressible spiral of chaos.

Act IV: The Age of Friedman Dawns…

All of that would change in the 1970s. The name given to the economic dilemma of that era reflects the assumptions of the Keynesian economists who interpreted it. “Stagflation”—persistent high inflation and high unemployment at the same time, producing stagnant demand—became a concept because, under the existing doctrine, it should have been impossible.

Keynes himself never said anything about stagflation. But in the early 1960s, his most influential American interpreter, Paul Samuelson, had identified a remarkable statistical trend in U.S. inflation and unemployment data. There seemed to be a very clear trade-off between the two. More inflation meant lower unemployment. Higher unemployment indicated lower inflation. Policymakers, it seemed, could pick and choose how much of either evil they wanted. It worked for most of the 1960s. But during the 1970s the correlation fell apart. Unemployment and inflation rose together, and the era of “stagflation” was on. It wasn’t just an embarrassment for Samuelson and his Keynesian academic allies. It presented a genuine policy crisis.

Just why unemployment and inflation soared together in the 1970s remains in dispute to this day. Multiple oil crises were obviously part of the problem. When OPEC cut off the supply of fuel, the price of fuel increased, along with the price of everything that needed fuel to be shipped—in other words, everything. But the Johnson and Nixon administrations also spent an enormous amount of money on just about everything—from welfare to war to long-term investments in research, development, and infrastructure. Some of these investments were simply sunk costs—higher napalm output did not increase the productivity of any society. But there were almost certainly some time lags involved in the grander infrastructure upgrades. Faster trains, more efficient electrical grids, and early research into the internet elevated the long-run productive power of the economy. But in the short-term, they produced a lot of paychecks while the economy waited for its big boost.

Whatever the cocktail, stagflation arrived. And it gave Friedman the opportunity he had been waiting for. He was ready. In 1966, he had accepted a position with Newsweek that would allow him to maintain the public profile he craved without the weird right-wing associations that besmirched his academic reputation. His columns expressed essentially the same worldview he had espoused in National Review in the 1950s, but now it reached a far wider and politically diverse middle-class audience. By the Carter years, Friedman’s ideas had been reaching households for a decade. Free-market evangelism was no longer the domain of kooks—it was on the coffee tables in the homes of die-hard Democrats. When Friedman was awarded the Nobel Prize in economics in 1976, it bestowed a new aura of prestige on the simple story Friedman offered to explain the economic frustrations of the era: All of this Keynesian meddling had pushed the economy beyond its natural constraints, creating unnecessary economic pain. The very interventions that had been intended to help the most vulnerable had, in the long run, hurt them. Roofs, ceilings, vouchers, and votes.

Friedman was inspiring enormous changes not only to the politics of inflation, but also on another key front where long-held presumptions were suddenly under attack: the idea of corporate responsibility. In 1970, he had published what may be his single most influential piece of writing, this time for The New York Times Magazine, and it formed the core of what the magazine called the “Friedman doctrine.” Titled “The Social Responsibility of Business Is to Increase Its Profits,” the essay was a simple, powerful distillation of his beliefs about the power of the free market—and the horrors that lay outside it.

“Businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers,” Friedman wrote. “In fact they are—or would be if they or anyone else took them seriously— preaching pure and unadulterated socialism.”

Markets, Friedman claimed, established arenas for individual choice, allowing consumers to express themselves with their wallets. To pursue profit was to seek a legitimate reward from satisfied customers. Any activity that interfered with profits—however noble in appearance—thus undermined the ability of a business to do what the consuming public wanted it to do. Worse, Friedman claimed, by “spending someone else’s money for a general social interest,” socially conscious businessmen were in effect levying taxes on their shareholders and then deciding how to spend that tax revenue.

Friedman’s paean to greed continued themes that he had been presenting for years. When Friedman warned that socially conscious businessmen were the “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades,” he was trafficking in familiar Cold War paranoia. There were, as ever in Friedman’s writing, only two choices facing society—freedom or socialism. The New Dealers and their Keynesian accomplices had cast their lot with socialism, and it was essential that corporate executives not fall into the trap.

The Friedman doctrine is an embarrassment borne of overconfidence. If profit maximization is really the sole responsibility of each business, then why are there so many different kinds of business? Why settle for the meager profits of, say, automobile manufacturing when the blockbuster returns of high-leveraged financial speculation are available? And if profit is proof of true social value, then on what grounds could a society ever outlaw anything a profitable business does? And yet by the late 1970s, the intellectual alternatives to Friedmanism weren’t looking so hot. Friedman’s simple stories about how the economy worked—inflation and profit, freedom and competition—filled an intellectual void in a world where Keynesian economists struggled to explain stagflation.

What’s more, Friedman in the 1970s took care to highlight the areas in which he agreed with the cultural left. His repeatedly stated opposition to the draft was no small matter in the era of the Vietnam War, and his support for the legalization of recreational drugs created a bridge between hippies and neoliberals that remains intact today. Nouveau-hippies and conventional libertarians both love jam bands. It is astonishing to see so many different ideological adherents to music that is, let us not mince words, terrible.

Fundamentally however, Friedman won by losing. America in the late 1970s was a frustrated and angry place, and however weird some of Friedman’s ideas might have been, nobody in their right mind would have held him responsible for the condition of the country. He hadn’t been in power. Goldwater lost. The Civil Rights Act passed. Even Richard Nixon had declared himself a “Keynesian,” prompting Friedman to denounce the man he’d advised as a “socialist.”

All of that finally changed in August 1979, when a new Federal Reserve chairman named Paul Volcker began putting Friedman’s monetary ideas into practice.

Act V: …and Conquers

Monetarism gave Friedman a unique policy flexibility that many of his neoliberal allies lacked. Friedrich Hayek, for instance, had maintained in the 1930s that recessions were an inevitable price to be paid for prior periods of economic excess. But Friedman recognized that telling the public “you just have to let the bottom drop out of the world” wasn’t a politically viable option, and his emphasis on the money supply gave him a policy lever to pull when the going got rough.

Manipulating the money supply had, however, never been attempted. Instead of doing that, the Fed regulated the price of credit, buying and selling securities to move interest rates up or down. But interest rates, Friedman insisted, were ultimately controlled by financial markets, not the government. The failure to cure inflation over the previous decade was a result of this persistent tactical error. When Volcker took office, inflation had eclipsed double digits for the second time in five years.

“My condolences to you on your ‘promotion,’” Friedman wrote sardonically to Volcker. “As you know, I do not believe that the System can rise to that challenge without major changes in its method of operation.” Volcker’s success or failure, Friedman argued in Newsweek, would rest on whether or not he would “renounce” the Fed’s “love affair with controlling interest rates” and switch to targeting the money supply.

Volcker did it almost immediately. That fall, he gave a press conference stating that he would curb growth in the money supply no matter what the implications might be for interest rates. The results were horrific. When Volcker ascended to the chairmanship of the Federal Reserve, the unemployment rate had been slowly but steadily declining for more than four years, from a peak of 9.0 percent in May 1975 to a more respectable 6.0 percent. Under Volcker’s new monetary management, interest rates skyrocketed, slamming the economy into recession and driving unemployment to 10.8 percent in 1982, a level it would not match again for more than 37 years.

With even Friedman himself on the run from Volcker, the punishing recession of the early 1980s should have afforded Keynesian economists and the Democratic Party with opportunities to reassert the value and utility of political democracy. The program Friedman had pursued for decades was proving to be a disaster.

But by 1981, Friedman’s 35 years of laissez-faire evangelism had established a new rhetorical reality. The ascension of Ronald Reagan had moved Barry Goldwater’s fringe ideas about small government to the seat of American power. In 1980, PBS aired a show written and narrated by Friedman called Free to Choose, about the virtues of free markets and the inevitable failures of government intervention. This was an extraordinary level of visibility for an economist, something that had only been achieved previously by John Kenneth Galbraith, a member of the Kennedy-Camelot royalty. Friedman’s ideas not only dominated the bully pulpit, they had taken over the liberal redoubt of public television.

And his political opposition had collapsed. It was a Democrat, Jimmy Carter, who had nominated Volcker to the Fed to pursue Friedman’s monetarism. Ted Kennedy’s failed primary challenge to Carter was the last gasp of the old-line New Deal, Great Society–oriented Democratic Party (and even Kennedy backed deregulation of the airlines and trucking industry). When Jesse Jackson attempted to revive the old vision in 1984, the rank and file were no longer interested, and Jackson was able to secure only 18 percent of the popular vote. Without political patrons in Washington, the once-dominant Keynesian economists were reduced to oddball status in academia, writing for obscure left-wing journals or overhauling their intellectual framework to embrace core tenets of Friedmanism while attempting to make room for the occasional embarrassing budget deficit.

Friedman didn’t achieve this intellectual conquest alone. He had an entire academic and political movement behind him, replete with deep-pocketed funders. But he was the most prominent voice of that movement around the world, having advised not only American presidents but a military dictator in Chile, the communist government in China, and leaders of three political parties in apartheid South Africa. Friedman never warmed to the Democratic Party, but when Bill Clinton declared “the era of big government is over,” pursuing a policy of balanced budgets, free trade, and financial deregulation, he was, with a few exceptions, attempting to out-Friedman the Republicans. There was a fight within the Clinton administration over this turn, and many of Clinton’s oldest political allies felt betrayed—but the Friedman wing, represented by Robert Rubin and his protégé Larry Summers, emerged victorious.

Despite this comprehensive intellectual victory, Friedman could claim few policy achievements when he died in 2006. Volck­er eventually abandoned his efforts to directly target the money supply, and no Fed chair has tried doing so since. Even under Ronald Reagan, the overall size of the government did not really decrease—government spending as a percentage of GDP was about where it had been in the 1960s and 1970s its targets had simply shifted from social welfare to defense contracting.

But the intellectual assumptions of the entire political class had become Friedmanesque. This is what Larry Summers meant by his claim from the eve of the financial crisis that “we are now all Friedmanites”—everyone took the social benefits of laissez-faire for granted political conflict was largely waged over which edges to sand off.

The financial crisis of 2008 should have demolished this thinking. Markets, the crash made clear, often simply don’t serve the public interest. But the Democratic leaders who ascended to power in the Obama administration had been educated at the height of Friedman’s intellectual hegemony. There simply weren’t many New Deal–style thinkers in the top echelons of the Democratic Party anymore. Obama was as intellectually serious as American presidents get, but his coterie of intellectuals had been working under Friedmanesque assumptions for so long that they could not adapt to the reality that events had discredited those assumptions. Obama ultimately devoted more political energy to reducing the long-term federal budget deficit than to combating economic inequality. A unique historical moment to reclaim political democracy became, instead, the era of bending the cost curve.

If Obama’s presidency revealed the durability of Friedman’s legacy within the Democratic Party, Donald Trump’s presidency revealed its fragility among Republicans. On an almost weekly basis, Trump subjected sacred tenets of Friedman’s worldview—from free trade to monetary policy to fiscal stimulus—to overt rhetorical abuse. And the party faithful loved it. But some of Trump’s most consequential policies—a massive tax cut for the rich and a big bank deregulation bill—were perfectly aligned with 1980s-era Friedmanism. For today’s GOP, Friedman’s ideas seem to be valuable only insofar as they can be used to persecute undesirable elements in a political milieu constructed almost entirely of identitarian grievance—Keynes for me, Friedman for thee.

Epilogue: What’s Next?

Predicting the future course of Republican ideas is like estimating the blast radius of a bag of unlit fireworks. But whatever the GOP chooses to do with Friedman’s ghost, the future of his legacy—or lack thereof—lies with the Democratic Party. Friedman may have devoted his life to the American right, but the political magic of his persona was always on the left. His insistence that market mechanisms could be used to promote essentially progressive social values was the key to popularizing a worldview that ultimately amounted to little more than the celebration of political rule by the rich. In 2021, it is extremely difficult to imagine a Republican leader persuading Democrats that the QAnon brigade is really on board with Black Lives Matter, if you could just see it from the perspective of consumer choice.

Whatever the GOP chooses to do with Friedman’s ghost, the future of his legacy— or lack thereof—lies with the Democratic Party.

Friedman’s major theoretical contribution to economics—the belief that prices rose or fell depending on the money supply—simply fell apart during the crash of 2008. “Whether people openly admit it or not, his monetary views are no longer included in serious analysis and forecasting,” said Skanda Amarnath, research director at Employ America, a think tank focused on economic policy. “The Fed’s balance sheet swelled enormously during and after the financial crisis, and it did not matter a lick for inflation. There was a huge role for fiscal policy that Friedman just ignored.”

And few serious economists today accept Friedman’s hard divide between economic fact and political reality. “Friedman developed a fantasy land of theory that ignored the way economic power can be used to capture elements of the political system to generate additional economic gains for those at the top,” said the New School’s Hamilton.

This vicious cycle has been degrading American democracy for decades. Joe Biden is the first president to desecrate not only the tenets of Friedman’s economic ideas, but the anti-democratic implications of his entire philosophy. He is also the first Democratic president since the 1960s who has formulated and publicly endorsed a coherent defense of American government as an expression of democratic energy. It is a powerful vision that enjoys the support of a large majority of American citizens. He has nothing to fear but Friedman himself.


Milton Friedman quotes about taxes and capitalism

23. “Inflation is taxation without legislation.” – Milton Friedman

24. “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” – Milton Friedman

25. “We have a system that increasingly taxes work and subsidizes non-work.” – Milton Friedman

26. “Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” – Milton Friedman

27. “History suggests that capitalism is a necessary condition for political freedom. Clearly, it is not a sufficient condition.” – Milton Friedman

28. “The problem of social organization is how to set up an arrangement under which greed will do the least harm, capitalism is that kind of a system.” – Milton Friedman

29. “The most important ways in which I think the Internet will affect the big issue is that it will make it more difficult for government to collect taxes.” – Milton Friedman


Milton Friedman

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𠅏riedman 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 States, 1867-1960. 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 counterhistory 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𠅊nd 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 rate. (See Phillips Curve.)

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. 1945.

(With Anna J. Schwartz.) A Monetary History of the United States, 1867-1960. 1963.


Milton Friedman, the Father of Economic Freedom

The Heritage Foundation bids goodbye to a leading intellectual light of the 20th century whose powerful ideas continue to transform our world. Milton Friedman's economic, philosophical, and political writing inspired decades of Heritage work in such diverse areas as Social Security reform, competition in education, and tax policy. We are particularly indebted for his role in championing economic freedom, and that effort lives on in the Heritage Foundation/Wall Street Journal annual Index of Economic Freedom. The life of Milton Friedman is proof that a single individual's ideas can shape history for the better.

Born in New Jersey to Jewish Hungarian immigrants, Friedman witnessed most of mankind's most murderous century. The years of his life-1912 to 2006-neatly encompassed all the most barbarous acts of which the human race is capable. But Friedman remained an optimist.

Friedman was an optimist because he believed in an unfettered capitalist economy that could produce prosperity that would balance and often outweigh every horror of society's latest social experiment. Over his life, fascism replaced plutocracy, communism replaced fascism, socialism eclipsed communism, and Islamism rose in the end. The drumbeat of collectivism-the submission of the individual to the state-was the 20th century's most characteristic political feature, and each new form was nearly as appalling as the last. Even today, the world has not learned this lesson. The siren song of autocracy-the forging together of a nation, a religion, a race to increase its collective power-relegates society to near-perpetual adolescence.

Writing in the early 1960s, Friedman accurately described the danger of collectivism. In 1962, he published Capitalism and Freedom, ultimately his most famous book, partly as a response to the growing scope of the U.S. federal government under Presidents Eisenhower and Kennedy. Here is how he responded to the rhetoric of Kennedy's inaugural address:

The free man will ask neither what his country can do for him, nor what he for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: "How can we keep the government from becoming a Frankenstein that will destroy the very freedom we establish it to protect?" Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is concentration of power.

Friedman's greatest legacy may be his demonstration that good economic policy strengthens democracy and, thereby, freedom. For instance, a monetary policy that creates inflationary pressure and high interest rates can lead to the breakdown of democracy, as factions battle for government relief.

Friedman sensibly argued that economic policy should create a level playing field. In the area of monetary management, the Federal Reserve should attempt to maintain a stable price level, rather than fine-tune the economy to achieve certain output and employment results.

Friedman's work was heretical, and not just among economists. In the 1950s and early 1960s, the Great Depression was too recent, and fear of a recurrence quite real. Franklin Delano Roosevelt was a popular hero because his interventionist New Deal was believed to have pulled America out of the hopeless economic mire created by his predecessor, the laissez-faire Herbert Hoover. Interventionist economics-popularized by the New Deal and formalized by economists like John Maynard Keynes-was the only game in town. Yet Friedman had an edge over his opponents-university professors, the mainstream media, both superpowers, and most of the rest of the world-because in the end, Friedman was right.

Friedman's bold prediction that monetary policy would become the dominant economic tool of the modern age proved prescient. Today, few, if any, government officials have more economic influence than the Chairman of the Federal Reserve. The cult of Alan Greenspan that grew over the last 20 years owes more to Milton Friedman than it does-with all due respect-to Alan Greenspan. And modern U.S. economic policy, despite all the predictions of the 1950s, is based on limited government interference, monetarism, and the free market-Friedman's then-heretical ideas.

America is hardly unique in this. Across the world, countries that adopted free markets have prospered. There are now an easily identifiable club of market economies and a no-less-identifiable club of protectionist dinosaurs. The United States, Australia, the United Kingdom, and Ireland share more than a common ethnic heritage they share an Anglo-Saxon model of economics that builds prosperity exactly as Friedman described.

When state spending and taxes rise, economic growth falls, as Britain discovered in the 1970s. There is a reason why France suffers a 9 percent unemployment rate and why its growth languishes at 2 percent per year. And there is a reason why Hong Kong, Singapore, Chile, and the United Arab Emirates have prospered, particularly relative to their neighbors. Friedman's theories of economic freedom have been adopted, in practice, by virtually every state that aspires to be an economic power. Some countries have attempted to restrict the political consequences of economic liberalization by allowing economic freedom only. But as Pinochet's Chile and Gorbachev's Soviet Union can attest, this is risky and ultimately untenable-Friedman was right that economic freedom underlies other freedoms.

Friedman's last major work, Free to Choose, built on Capitalism and Freedom, containing more concrete suggestions and less philosophical debate. The book was enthusiastically received, selling 400,000 copies in its first year of publication. The television series that accompanied Free to Choose has been re-released several times and remains popular today, 26 years after its premier.

The unifying theme of Friedman's life and work was belief in the power of the individual, prosperity, and freedom. He has left both mankind and the profession of economics with enormous gifts and was able to enjoy that rare experience of worldwide validation during his lifetime.

By making his powerful insights accessible in clear language, Friedman saved millions or billions of people from decades of oppressive statism. Even so, he has been taken from us too soon.


Notes

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Milton Friedman: The Forgotten History of the Godfather of Conservative Libertarianism

“I would like to say to Milton and Anna [co-author of A Monetary History of the United States, 1867–1960]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Federal Reserve Chairman Ben Bernanke, acknowledging the central bank’s role in causing the Great Depression

Milton Friedman is the Godfather of American conservative libertarianism. He was, at a time when it was deeply unfashionable in official circles, a fierce critic of Keynesian economics. He was a leader of the second generation of libertarian economists to come out of the University of Chicago. Among the people recruited or mentored by him at the university include Thomas Sowell, Gary Becker, Robert Fogel and Robert Lucas, Jr.Friedman often used the jargon and methodology of Keynesians while rejecting their basic premises, coming to very different conclusions than his Keynesian counterparts.

One of his groundbreaking theoretical innovations is the notion of a natural rate of unemployment. Friedman believed that when the unemployment rate was too low, inflation was the result. Using this and his unique interpretation of the Phillips Curve, Friedman predicted “stagflation” long before there was even a word for such things. Friedman likewise broke with Austrian orthodoxy in advocating for small, controlled expansions of the money supply as the proper monetary policy. This became known as “monetarism” – the theory leveraged by the Federal Reserve during the 2008 financial crisis.

As an advisor to both United States President Ronald Reagan and United Kingdom Prime Minister Margaret Thatcher, it can be said that, in some ways, Milton Friedman was the forerunner of neoliberal economics on the international scale.

Friedman’s Path to Economics

Friedman came from humble beginnings, the son of two Jewish immigrants from an area of the Kingdom of Hungary currently located in Ukraine. His family soon moved to New Jersey. And at 16, he won a scholarship to Rutgers University, where he studied mathematics and economics with an eye toward becoming an actuary. He was offered two different scholarships: One to Brown University to study math, the other to the University of Chicago to study economics. He opted for the latter. It is here that he met his future wife, Rose Director, also an economist.

He was unable to find work in academia, so he and his wife moved to Washington, D.C., to work as economists for President Franklin Delano Roosevelt. He actually believed in many of the programs designed toward job creation and infrastructure development (such as the Works Progress Administration, the Civilian Conservation Corps and the Public Works Administration) while opposing those programs which regulated and controlled wages and prices. Indeed, an opposition to wage and price control can be considered the central core of Friedman’s opposition to government intervention.

Later on, Friedman declared that he believed all government intervention to end the New Deal was wrong, not on the basis of moral reasons, but because it simply did not lead to the recovery the nation needed. He called it “the wrong cure for the wrong disease.” Later, in A Monetary History of the United States, 1867–1960, a book he co-authored with Anna Schwartz, he argued that the Depression was caused by a severe constriction of the money supply and unwise policy on the part of the Federal Reserve. In fact, subsequent Fed Chairman Ben Bernanke agreed with Friedman, saying in 2002: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

In 1940, Friedman finally got the academic position that had eluded him for so long. The University of Wisconsin-Madison hired him as an assistant professor of economics. However, he left either due to antisemitism or competing ideas about the coming war, and re-entered government service. He worked for the United States Department of the Treasury, where he was responsible for, among other things, the income tax withholding scheme that has you paying your income tax as you go rather than writing one big check per year.

He supported the United States war effort during World War II as a mathematical weapons statistician. When the war was over, he received his doctorate from Columbia University. He then accepted his position at the University of Chicago, a position he would keep for the next 30 years. He was the intellectual godfather of a group of economics academics and intellectuals known as the Chicago School, many of whom would receive Nobel Prizes over the years.

Capitalism and Freedom

Capitalism and Freedom is the book that eventually brought him popular acclaim. Published by the University of Chicago in 1962, it has sold over half a million copies and has been translated into 18 different languages, no small feat for a popular book on the subject of economics. In the book, he argues for a classically liberal society where free markets solve problems of efficiency, using the United States as an example. He argues for free markets on the basis of both pragmatism and philosophy. He concludes the book with an argument that most of America’s successes are due to the free market and private enterprise, while most of its greatest failures are due to government intervention.

The book was a touchstone for the conservative movement in the United States. He supported the campaign of Senator Barry Goldwater in 1964, and was later an advisor to President Ronald Reagan, whose own political career was inspired by Goldwater. He received the Presidential Medal of Freedom and the Medal of Science from Ronald Reagan as he was preparing to leave office in 1988. Friedman claimed that he was a libertarian with a small “l” but a Republican out of expediency. He labeled his own views “classical liberalism,” while at the same time declaring that it didn’t matter what people called him.

Friedman believed that Social Security benefits were the genesis of the welfare state and dependency on government handouts. He advocated the replacement of all welfare programs in America with a negative income tax (effectively a universal basic income) because he did not believe that society would distribute resources evenly enough for all people to earn a living.

Friedman was an idiosyncratic figure who would be hard to pigeonhole in the current political spectrum. He inspired the conservative movement, but was against any discrimination against gay people, in addition to being an agnostic. He was a libertarian who advocated for a progressive income tax system that even went into the negative to ensure that everyone could, at the very least, meet their basic needs.

Perhaps that is what makes him such a hero. Rather than resorting to rote ideological responses to the issues of his life, Friedman instead chose to think about them flexibly and novelly. This is a precedent set during his acceptance of some Great Depression relief programs (but not others), which followed him throughout his life. We should all be so creative in our thoughts.

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Watch the video: Free to Choose Part 2: The Tyranny of Control Featuring Milton Friedman (January 2022).