Milton Friedman

Throughout his extensive career, Milton Friedman made a lasting impact on economic theory and policy. Despite being considered radical at first, his unwavering advocacy for free markets and minimal government intervention gradually gained broader acceptance. Friedman significantly changed the way policymakers and the general public perceived crucial topics such as inflation and the Federal Reserve's role. Even for those who question his analyses and solutions, engaging with Friedman's perspective is essential for navigating today's economic environment.

How did a young man from a small town in New Jersey manage to become one of the most influential economists of the twentieth century? Milton Friedman's exceptional academic abilities were evident among his peers in Rahway in the late 1920s, with economics eventually capturing his interest and propelling his career. Born to Jenő Saul Friedman and Sára Ethel, Hungarian Jewish immigrants who ran a successful family-owned store in Rahway, Milton grew up in a supportive environment alongside his three older sisters. Despite the sudden passing of his father during high school, Friedman remained determined, pursuing higher education at Rutgers College with the goal of becoming an actuary. It was during his sophomore year that an introductory economics course, along with the guidance of professors Arthur Burns and Homer Jones, steered him towards the field of economics and ultimately led him to the University of Chicago for graduate studies. The backdrop of the Great Depression further fueled Friedman's academic journey, as he engaged with pressing economic issues amidst the challenges faced by the nation.

That autumn, Milton Friedman and Rose Director arrived in Chicago with uncertain ideas and plans. While Rose had a stronger connection to the department through her brother Aaron, who was already a faculty member, she was also undecided about continuing her studies or finding a job. Friedman's professors, such as the formidable Jacob Viner and the critical Frank Knight, were deeply engaged in discussions on the origins and solutions to the worsening economic crisis. The department focused heavily on "price theory," a refined mathematical examination of supply, demand, and market balance introduced by earlier neoclassical economists. In this environment, Friedman and Director excelled in their studies, forming a close friendship and eventually developing romantic feelings for each other. With a one-year fellowship in hand, Friedman soon left for Columbia University to pursue his doctoral studies, where he would begin shaping his unique theories on the causes and remedies for economic downturns.

Friedman enrolled at Columbia in 1933, entering a department that was the polar opposite of the University of Chicago – both intellectually and politically. While Chicago prized free markets and was skeptical of government intervention, Columbia hosted the nation's largest economics program, which focused heavily on detailed economic planning. Still enrolled in his PhD program, Friedman landed in Washington, DC; he’d been hired by a New Deal agency to assist with a massive survey tracking family spending. His statistical innovations brought him to the attention of Simon Kuznets at the National Bureau of Economic Research. Soon after, Friedman moved to New York City and married Rose Director, his collaborator and college sweetheart.

Controversy surrounded Friedman, as his doctoral research on medical licensing accused the American Medical Association of artificially limiting the number of doctors to increase their earnings. This accusation angered his superiors at the National Bureau of Economic Research (NBER), leading to years of disagreements regarding methodology and ideology. They believed that Friedman was overly applying Chicago-style free market theory to practical issues. While the economics field underwent a revolution inspired by John Maynard Keynes, Friedman diverged from the mainstream by focusing on Chicago price theory and challenging the idea of an inevitable economic cycle. Despite an opportunity to teach at the University of Wisconsin, conflicts persisted as the economics faculty there divided into opposing factions. Criticism from his adversaries led to his resignation, causing Friedman to contemplate between government work and academia. The decision became urgent following a traumatic event in his personal life. Serving in the Treasury Department during wartime, Friedman made significant contributions to military testing through innovative statistical methods. His collaboration with Abraham Wald on sequential analysis revolutionized postwar statistics. Despite his success in navigating wartime challenges, Friedman faced ongoing conflicts with NBER superiors until he eventually succeeded in publishing his disputed thesis. With the postwar boom in higher education, Friedman secured a teaching position and later found a fitting role at the University of Chicago economics department. This marked the beginning of his rise as a prominent public figure and policy advocate, leading to the development of his monetarist ideas that challenged Keynesian economics in the 1970s.

Upon returning to Chicago, Friedman reunited with a close-knit group of Frank Knight's followers, which included George Stigler, Allen Wallis, and his wife, Rose. Together, they engaged in lengthy discussions about Knight's theories while dismissing alternative ideologies like institutionalism. Friedman's education at Chicago distinguished him by emphasizing the expansion of price theory to tackle societal issues, rather than aligning with more popular schools of thought such as institutionalism. The social environment within the emerging Chicago school was crucial, connecting Friedman with conservative, market-oriented thinkers who shared a common mission. As Franklin Roosevelt reshaped national politics around New Deal liberalism, Friedman's circle emerged as a rising force in economics and economic policy. In 1946, on a warm summer day, Friedman unexpectedly encountered his mentor, Henry Simons, in Hyde Park. What should have been a joyous reunion turned foreboding as Simons, usually lively, spoke disjointedly about suicide. Shortly after, Simons passed away from an apparent accidental overdose. This tragic event marked a somber beginning to Friedman's anticipated return to Chicago, where he hoped to reunite with his fellow scholars. However, the department had been weakened by the loss of key figures and was increasingly influenced by the Keynesian-oriented Cowles Commission for Research in Economics.

Through strategic alliances, Friedman outmaneuvered the Cowles economists, leading to their departure for Yale. In their absence, Friedman played a pivotal role in fostering two new intellectual movements that critically examined market failures: law and economics, initiated by his brother-in-law Aaron Director, and regulatory capture analysis by George Stigler. Between these movements, Friedman began to articulate his distinct vision of liberalism, balancing state intervention with individual freedom and market principles. He proposed innovative policy solutions like school vouchers and negative income taxes to address social issues through direct cash grants. By shifting his focus from equality to freedom, Friedman differentiated himself from both conservative reactionaries and Keynesian liberals, while still upholding his mentors' commitment to social progress. By the late 1950s, Friedman and his allies had cultivated a unique Chicago counter-tradition across economics, law, and political science, challenging the prevailing paradigm of demand management, regulation, and Keynesian planning. These foundational elements laid the groundwork for Friedman's enduring legacy.

Milton Friedman made a lasting impact as a prominent economist by challenging Keynesian beliefs from the outset. Despite facing initial skepticism, Friedman's policy recommendations gradually gained acceptance as empirical evidence began to support many of his theories and cautions. His pioneering work in monetary theory laid the groundwork for his most significant contributions. In their 1963 publication, A Monetary History of the United States, 1867-1960, Friedman and collaborator Anna Schwartz attributed the severity of the Great Depression primarily to misguided decisions by the Federal Reserve, directly challenging the prevailing Keynesian narrative that blamed inherent instability in private investment. Subsequently, the Federal Reserve acknowledged the accuracy of Friedman's conclusions. Friedman's extensive research on money supply and consumption formed the basis for his famous assertion that “inflation is always and everywhere a monetary phenomenon.”

Despite facing opposition for years, this fundamental monetarist principle has stood the test of time, serving as the basis for inflation targets set by contemporary central banks. Friedman's influence peaked during the late 1970s and early 1980s when Federal Reserve Chairman Paul Volcker adopted Friedman's monetarist strategies to combat soaring inflation, shifting focus to controlling money supply rather than interest rates. Though a challenging process, this monetary tightening successfully tackled stagflation. In the realm of politics, Friedman's advocacy for limited government and belief in free markets resonated with President Reagan's policies, leading to Friedman informally advising and shaping the administration's stance on taxation, regulation, and education.

Outside of the academic world, Friedman became a prominent advocate of free markets and libertarianism. His 1980 television series and the corresponding book, "Free to Choose," presented a compelling argument to the general public in favor of limited government and economic freedom. His proposal to replace welfare programs and bureaucratic agencies with a basic negative income tax to ensure basic sustenance foreshadowed current discussions on a universal basic income. Friedman's fundamental ideas have consistently resurfaced over time. The response to the COVID pandemic reignited discussions on government stimulus and central bank policies, bringing Friedman's concepts to the forefront once more. With the unexpected return of inflation in 2021, after a period of dormancy, some viewed Friedman as being vindicated once again. Regardless of one's ideological beliefs, the profound impact of Friedman's contributions solidifies his legacy as a key figure in economic thought. Similar to his intellectual inspiration, Adam Smith, one can appreciate the lasting wisdom and influence of Friedman's work without necessarily aligning with his political views. Whether in agreement or opposition, engaging with his inquiries and theories remains crucial for comprehending the contemporary economic environment.