Milton Friedman: A Birthday Appreciation

Milton Friedman was born on this day in 1912 and died on November 16, 2006, at the age of 94. He shares a birthday with two important people in my life, one fictional (Harry Potter) and one not (my older son Jacob), and he would have been 107 today. While Paul Krugman “suspect(s) that a few decades from now, historians of economic thought will regard him as little more than an extended footnote,” I suspect his place in this history of economic ideas is a little more secure. 

He was awarded the 1976 Nobel Prize in economics “for his achievements in the fields of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” It’s a heady citation, and any one of these contributions would have been Nobel-worthy, to say nothing of all three.

Remarkably, Friedman won one of the economics profession’s highest honors — the John Bates Clark Medal for most accomplished economist under age 40 — in 1951, before he had published most of the work for which he is justly remembered. As Arnold Kling puts it, “He received the most prestigious award that the profession offers, and in hindsight he had not even gotten started.” Having turned 40 earlier this year myself, I take some comfort in the fact that the work for which Friedman is most remembered came later in life, after he had won the Clark Medal.

Friedman was a phenomenal scholar, teacher, and writer, and his contributions to economic science, economic policy, and economic conversation are practically unrivaled. He did path-breaking research on monetary theory and monetary history, with perhaps his most important publication in this vein being his 1963 book with Anna J. Schwartz, A Monetary History of the United States. 

The book brought the Federal Reserve’s mismanagement of the money supply to the center of the debate over the Great Depression. His 1957 book A Theory of the Consumption Function questioned the Keynesian argument that people consume based on their current income and developed the permanent income hypothesis, which says that people’s consumption choices depend on their permanent income and not their current income. They are, in short, more forward-looking than a Keynesian theory emphasizing income this year would predict.

In his highly influential 1967 presidential address to the American Economic Association, “The Role of Monetary Policy,” Friedman explained how and why monetary policy mattered — but only in the short run. A monetary authority would not be able to simply choose a preferred combination of inflation and unemployment because (yet again) people are more forward-looking than the men of system who were making stabilization policy wished to think. Monetary policy, he argued, could have real effects in the short run. In a 50th-anniversary retrospective on Friedman’s address, Robert E. Hall and 2011 economics Nobel laureate Thomas Sargent argued that Friedman’s claim, which they call the “monetary-policy invariance hypothesis,” has fared well in light of extensive empirical investigation. 

Friedman advanced our understanding of monetary theory and history. He also contributed mightily to public policy. His insistence that “inflation is always and everywhere a monetary phenomenon” laid the groundwork for what have been four continuous decades of relatively low price inflation. His arguments against conscription were vital to ending the military draft in the United States. In the 1950s and then again in his classic Capitalism and Freedom, Friedman laid out the mechanics of how a system of government-funded vouchers for schooling would work. In 1996, he and his wife Rose — an excellent economist in her own right — established the Friedman Foundation for Educational Choice, now simply called EdChoice, to advance their vision.

In a 2009 article, Andrei Shleifer dubbed the liberalizing, free market–embracing years between 1980 and 2005 “The Age of MIlton Friedman.” He identifies three major shifts: the beginning of free market reforms under Deng Xiao Ping in China in 1979, Margaret Thatcher’s election to the position of prime minister of the United Kingdom in 1979, and Ronald Reagan’s election to the US presidency in 1980. All three statesmen recognized Friedman as an important influence. Shleifer explains how the world liberalized, embraced Friedmanite free market reforms, and grew richer and healthier as a result.

None of this should suggest that Friedman was a starry-eyed visionary. He was an exemplar of what Thomas Sowell called the constrained vision: his enthusiasm for liberty and free markets wasn’t born out of a naive view that we would solve every problem by sprinkling free market fairy dust on it. Rather, he recognized and faced head-on the unhappy trade-offs in an imperfect and limited world. Most importantly, he recognized his own limitations. Friedman was not trying to design a utopia in which everyone lived as he thought they should. He was trying to identify the institutions that would allow people to live as they wished, guided by their own inner lights, with minimal interference from others. He was confident, but humble: he didn’t think himself fit to run other people’s lives.

Friedman also contributed to the public economic conversation. He wrote a regular column for Newsweek. His 1970 New York Times Magazine article “The Social Responsibility of Business Is to Increase Its Profits” is a staple of business-ethics courses. His 1962 book Capitalism and Freedom offered a compelling and accessible defense of the free society. In 1980, he and Rose published Free to Choose: A Personal Statement and starred in a 10-part PBS documentary of the same title. Friedman lectured widely and carried his message to the big audiences of popular programs like Donahue. He did not shy away from a challenge, and he was such a formidable debater because he often knew his opponents’ arguments better than they did. 

His public persona and vigorous defense of liberty in the face of an academic and political world that disagreed with him (to put it mildly) made him a very controversial figure. He has been linked to and even blamed for the grotesque human rights abuses of Augusto Pinochet’s military government in Chile in the 1970s. It’s odd, I think, to paint Friedman as sort of a villainous mastermind behind the Chilean coup, the subsequent disappearances, and the brutality of Pinochet’s regime based on a short meeting to discuss monetary policy — and as for the “Chicago Boys” and their role in Pinochet’s regime, I think the actual story, as recounted, for example, in this email I received from Arnold Harberger, is rather different from the sinister conspiracy theory in which some of Friedman’s detractors believe.

Friedman was the very model of a careful thinker, a first-rate scholar, and a clear communicator. He left an intellectual and institutional legacy that will be often imitated but likely never equaled. Our world is better because he was with us.

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