Volume 7, Number 2
Federal Reserve Bank of Dallas
Milton
Friedman—Economist as Public Intellectual
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If asked to name a famous
economist, most Americans would probably say
Milton Friedman. Economists usually make their
contributions behind the scenes at think tanks,
government agencies or universities. Friedman
has done that, but he also has taken his ideas
and policy proposals directly to his fellow
citizens through books, magazine columns and,
especially, television.
It is not an exaggeration
to say he has been the most influential American
economist of the past century. He has changed
policy not only here at home but also in many
other nations, as much of the world has moved
away from economic controls and toward economic
freedom.
Milton Friedman marks
his 90th birthday on July 31, 2002, and the
Dallas Fed commemorates the occasion with this
issue of Economic Insights. Happy
birthday, Milton!
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Bob McTeer
President and Chief Executive Officer
Federal Reserve Bank of Dallas |
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Milton
Friedman—Economist as Public Intellectual
Milton Friedman has been an ardent
and effective advocate for free enterprise and monetarist
policies for five decades.
He was born in Brooklyn, N.Y., in 1912, the son of Jewish
immigrants who had come to America in the late 1890s. He
attended public schools, then entered Rutgers University
in 1928. Being away from home for the first time gave Friedman
important early work experiences, as well as insights into
entrepreneurship and the business processes of the market
economy (Friedman and Friedman 1998, 25–27).
Originally a math major, Friedman
switched to economics in his third year at Rutgers, a decision
that brought him
into the classrooms of two men who would guide his later
life: Homer Jones and, especially, Arthur F. Burns. Burns
later became a fixture at the National Bureau of Economic
Research (NBER), one of the nation’s foremost authorities
on business cycles and, ultimately, chairman of the Federal
Reserve Board of Governors (1970–78). Burns led Friedman
to begin an appreciation of what good scholarship entailed
and introduced the young economist to the works of Cambridge
School of Economics founder Alfred Marshall. Jones, a pivotal
figure in the monetarist camp, introduced Friedman to Frank
Knight and the early Chicago school, especially Knight’s Risk,
Uncertainty, and Profit.
After Friedman received his undergraduate degree from Rutgers,
Jones arranged a scholarship for him to study economics at
the University of Chicago, where Friedman received an M.A.
in 1933. During that year in Chicago, he also met his future
wife, fellow economics student Rose Director, who became
an active partner in his professional work. He continued
his graduate study at Columbia University and completed his
Ph.D there in 1946.
While at Columbia, Friedman met
and was influenced by other famous economists, including
John Maurice Clark, Harold Hotelling
and NBER founder Wesley Clair Mitchell. Friedman was soon
working at the NBER as an assistant to Simon Kuznets, famous
for developing the national income product accounts and many
of the techniques applied to them in the 1920s and ’30s.
Because Friedman’s early study in economics involved constant
contact with theorists such as Burns, Mitchell and Kuznets,
it is not surprising that he became more focused on macroeconomic
issues like monetary theory and business cycles than on the
microeconomics of Burns’ own favorite, Marshall.[1]
Unable to secure a university
appointment because of anti-Semitism and a dearth of openings,
Friedman began his career in 1935
in Washington, D.C., during the early days of the New Deal.
At the National Resources Committee, he used his statistical
acumen to help develop better consumer spending studies so
that improved historical data and better price indexes could
be developed. Friedman’s knowledge of sampling theory was
especially relevant in this undertaking, and his first journal
articles resulted from these early efforts.
In the late 1930s, Friedman began collecting and analyzing
data on the distribution and size of income, which later
figured prominently in what he considers his best work, A
Theory of the Consumption Function. In this 1957 book,
he for the first time put forth his famous permanent income
hypothesis. This explanation for consumption behavior offered
an alternative to the theory propounded in John Maynard Keynes’ The
General Theory of Employment, Interest, and Money. Friedman’s
work showed Keynes’ stable, predictable consumption function
is an empirically inaccurate estimator of shortrun, aggregate
consumption. Friedman offered his alternative permanent income
function, along with a theoretical discussion that plausibly
explained why his theory was better. In producing this work,
Friedman put into practice a methodology that became the
foundation of one of the most cited and attacked—and defended—articles
in the history of economics: On the Methodology of Positive
Economics (1953, 1–43).
The most controversial contention
in this essay is that a theory’s assumptions don’t matter because predictive power
is everything. The essay also asserts that a simpler theory
is preferable if it predicts a higher number of outcomes—a
variation on Occam’s Razor—and that a good theory will "surprise" us
by predicting counterintuitive outcomes. A good theory is
one that "explains a lot by little" and has been
subjected to many attempts at empirical "falsification," a
philosophical stance that Friedman apparently absorbed from
Karl Popper.[2] To his credit, and regardless of the correctness
of his views on scientific method, Friedman’s own empirical
work conforms to his view of the proper way to "do science."
Friedman contributed to another important effort while in
Washington during World War II. At the Treasury Department,
he helped create the current federal income tax withholding
system. Friedman says he now regrets his role, although at
the time he believed the new system was superior to the one
it replaced (Friedman and Friedman 1998, 123). Working in
Washington gave him great insight and the chance for a firsthand
look at how bureaucracies function.
The war brought many changes.
For the Friedman family it meant a move to New York City,
where Milton joined the Statistical
Research Group at Columbia University in 1943. This group
worked on a number of war-related issues, from proximity
fuses in bombs to the vulnerability of bombers during their
runs. Statisticians’ role in the war has generally been overlooked,
but their contributions were important, especially as they
developed the techniques still used today in modern econometric
analysis.
After the war, Friedman spent
a year teaching at the University of Minnesota, then took
a job at the University of Chicago
in 1947 and stayed there until his retirement from teaching
in 1977. While at Chicago, he became the leader of the first
recognized counterrevolution against Keynesianism. Keynes’ view
poses that government could, and should, fine-tune the nation’s
macroeconomic performance, simultaneously guaranteeing an
end to the business cycle and perpetual full employment.
Friedman, a classical liberal
who believes in free markets, opposed this view and the
theoretical mechanisms that justified
it. He developed the economic paradigm that the University
of Rochester’s Karl Brunner named monetarism. Friedman
himself disapproves of this "unlovely" term (Friedman
and Friedman 1998, 228). Nonetheless, his resurrection of
the classical school’s foundation for its monetary theory—the
quantity theory—led to the establishment of a demand-side
alternative to Keynes for conducting macroeconomic policy.
Given Friedman’s position at Chicago, the prestige of its
economics department and the ability of his students, it
is hardly surprising that monetarism caught on across the
nation and became highly influential during the 1960s and ’70s.
Monetarism stresses the importance of the quantity of money
as an instrument of government policy and as a determinant
of business cycles and inflation.
What accounted for this shift in thinking by economists,
bankers and politicians who had so fervently argued for Keynesianism
for two decades? A series of articles and books and one speech
did the trick. The books were Studies in the Quantity
Theory of Money (1956) and A Monetary History of
the United States (1963). The speech was the presidential
address to the American Economic Association in 1967. Its
thesis was that the so-called tradeoff between inflation
and unemployment, known as the Phillips curve, was not a
sustainable, long-run policy option. In the speech, Friedman
resurrected the classical notion of real factors determining
long-run employment, with monetary changes unable to lower
the unemployment rate in the long run. Considered heresy
at the time, the natural rate hypothesis—as it has come to
be known—is now taught, alongside his permanent income hypothesis,
as standard macroeconomic theory.
In 1962, Friedman published a
book based on a series of lectures he gave at seminars
sponsored by the Volker Foundation.
That book—Capitalism and Freedom, cowritten with
his wife, Rose—subsequently sold half a million copies in
18 languages and launched Friedman’s career as one of America’s
policy intellectuals. His name is known to more Americans
than that of any other economist. Contributing to his visibility
were his triweekly column in Newsweek magazine (1966–84)
and his 10-part PBS program Free to Choose (1980),
which complemented a book of the same name cowritten with
Rose.
During this period, he also was
an adviser to three presidential candidates: Barry Goldwater
(unofficially), Richard Nixon
and Ronald Reagan. Many policy ideas that emerged from this
period bear his stamp: the all-volunteer military, the negative
income tax, floating money-exchange rates, the Dutch auction
procedure for selling government securities, school vouchers
and opposition to wage–price controls. The list is
long and impressive, both in its scope and in the original
thinking applied to several of these issues. The 1976 Nobel
Memorial Prize in Economic Sciences cemented in the public’s
mind his position as one of the world’s leading economists.
Ironically, Friedman dislikes this publicity aspect of the
Nobel Prize (Friedman and Friedman 1998, 443).
After leaving Chicago in 1977,
Friedman became a senior fellow at Stanford’s Hoover Institution and moved to San
Francisco. Even in retirement, Friedman continues to travel,
lecture and write, still in the fray of contested ideas,
still expressing his views on current economic and political
issues. He will be remembered, of course, for his technical
brilliance as an economist. However, like the 19thcentury
French economist–journalist Frédéric
Bastiat, Friedman’s ability to engagingly and directly communicate
economic theory to average people may well be his greatest
legacy.
On May 9, 2002, Friedman was
honored for lifetime achievements by President George W.
Bush, who said during the ceremony, "He
has used a brilliant mind to advance a moral vision—the vision
of a society where men and women are free, free to choose,
but where government is not as free to override their decisions.
That vision has changed America, and it is changing the world."
Federal Reserve Chairman Alan
Greenspan, who attended the ceremony, added, "There
are many Nobel Prize winners in economics, but few have
achieved the mythical status of
Milton Friedman."
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Robert L. Formaini
Senior Economist |
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| Notes
- He did not ignore Marshall and microeconomics,
however. He has written or coauthored many
articles on choice under uncertainty and has
examined Marshall’s demand function in great
detail. See Friedman (1949). Some economists
argue that Friedman’s great success in changing
minds on macro issues flows from his mastery
of microeconomics. See Walters (1987, 426).
- Popper (1968). Two points: Popper was inconsistent
in his belief in the inductive problem or its
possible solution, and falsification can only
work if a theory is formulated in such a way
that it can be falsified by empirical evidence.
Sources and Suggested
Reading
Frazer, William,
and Lawrence Boland (1983), "An
Essay on the Foundation of Friedman’s Methodology," American
Economic Review 73 (March): 129–44.
Friedman, Milton
(1949), "The Marshallian
Demand Curve," Journal of Political
Economy 57 (December): 463–95.
——— (1953), "On the Methodology of Positive
Economics," in Essays in Positive Economics (Chicago:
University of Chicago Press), 1–43.
——— (1957), A Theory of the Consumption
Function (Princeton, N.J.: Princeton University
Press).
——— (1981), Milton
Friedman’s Monetary Framework:
A Debate With His Critics (Chicago: University
of Chicago Press).
——— (1982), Capitalism and Freedom (Chicago:
University of Chicago Press), orig. pub. 1962.
——— (1983), Bright
Promises, Dismal Performance: An Economist’s
Protest (San Diego: Harcourt
Brace Jovanovich).
——— (1992), Money Mischief: Episodes in
Monetary History (New York: Harcourt Brace
Jovanovich).
——— (1993), Why Government Is the Problem (Palo
Alto, Calif.: Hoover Institution).
Friedman, Milton, and Rose Friedman (1980), Free
To Choose: A Personal Statement (New York:
Harcourt Brace Jovanovich).
——— (1998), Two Lucky People: Memoirs (Chicago:
University of Chicago Press).
Friedman, Milton, and Anna Schwartz (1963), A
Monetary History of the United States,
1867–1960 (Princeton, N.J.: Princeton
University Press).
Hirsch, Abraham, and Neil De Marchi (1990), Milton
Friedman: Economics in Theory and Practice (New
York: Simon and Schuster International).
Popper, Karl (1968), The Logic of Scientific
Discovery (New York: Harper Torchbooks).
Walters, Alan (1987), "Milton Friedman," in The
New Palgrave: A Dictionary of Economics,
vol. 2, ed. John Eatwell, Murray Milgate and
Peter Newman (New York: Stockton Press). |
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Historical Myths
in American Economic Development
While the nineteenth
century was a period of rugged individualism,
almost every other feature
of the myth [of the robber barons] is false.
Far from being a period in which the poor were
being ground under the heels of the rich and
exploited unmercifully, there is probably no
other period in history, in this or any other
country, in which the ordinary man had as large
an increase in his standard of living as in the
period between the Civil War and the First World
War, when unrestrained individualism was most
rugged. The evidence of this is to be found in
the statistics that economists have constructed
of what was happening to national income, but
it is documented in a much more dramatic way
by the numbers of people who came to the United
States during that period. That was a time when
we had completely unrestricted immigration, when
anybody could come to these shores and the motto
on the Statue of Liberty had some real meaning.
This was a country of hope and of promise for
immigrants and their children….Did people come
to this country to be ground under the heels
of merciless capitalists? Did they come to make
their own conditions worse?
There is no more dramatic way in which people
can vote than with their feet. The fact that
East Germany had to build a wall to keep people
from going to West Germany is striking evidence
of which country had the better conditions of
life. In the same way, the fact that year after
year hundreds of thousands of people left the
countries of Europe to come to this country was
persuasive evidence that they were coming to
improve their lot, not to worsen it. Far more
effective evidence, I believe, than any statistics
on per capita real income, which show that real
income went up decade after decade at a rate
of 2, 2.5, 3 percent per year. They came with
empty hands....It was the poor and the miserable
who flocked here, and they found a home and the
opportunity to improve their lot. And they found
it, not despite rugged individualism but because
of rugged individualism. It was rugged individualism
that induced the developments in industry, in
trade, that offered opportunities to people.
—Bright Promises,
Dismal Performance: An Economist’s Protest,
62–63. |
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A Monetarist Looks at Inflation
The recognition that substantial inflation
is always and everywhere a monetary phenomenon is
only the beginning of an understanding of the
cause and cure of inflation. The more basic
questions are: Why do governments increase
the quantity of money too rapidly? Why do they
produce inflation when they understand its
potential for harm?
Before turning to
those questions, it is worth dwelling a while
on the proposition that inflation
is a monetary phenomenon. Despite the importance
of that proposition, despite the extensive historical
evidence to support it, it is still widely denied—in
large part because of the smoke screen with which
governments try to conceal their own responsibility
for inflation.
If the quantity of
goods and services available for purchase—output, for short— were
to increase as rapidly as the quantity of money,
prices would
tend to be stable. Prices might even fall gradually
as higher incomes led people to want to hold
a larger fraction of their wealth in the form
of money. Inflation occurs when the quantity
of money rises appreciably more rapidly than
output, and the more rapid the rise in the quantity
of money per unit of output, the greater the
rate of inflation. There is probably no other
proposition in economics that is as well established
as this one.
—Money Mischief: Episodes
in Monetary History, 193. |
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Does Business
Have a "Social Responsibility?"
The view has been gaining
widespread acceptance that corporate officials
and labor leaders
have a "social responsibility" that
goes beyond serving the interest of their stockholders
or their members. This view shows a fundamental
misconception of the character and nature of
a free economy. In such an economy, there is
one and only one social responsibility of business—to
use its resources and engage in activities
designed to increase its profits so long as
it stays within the rules of the game, which
is to say, engages in open and free competition,
without deception or fraud….It is the responsibility
of the rest of us to establish a framework
of law such that an individual in pursuing
his own interest is, to quote Adam Smith again, "led
by an invisible hand to promote an end which
was no part of his intention. Nor is it always
the worse for the society that it was no part
of it. By pursuing his own interest, he frequently
promotes that of the society more effectually
than when he really intends to promote it.
I have never known much good done by those
who affected to trade for the public good."
Few trends could so thoroughly undermine the
very foundations of our free society as the
acceptance by corporate officials of a social
responsibility other than to make as much money
for their stockholders as possible. This is
a fundamentally subversive doctrine. If businessmen
do have a social responsibility other than
making maximum profits for stockholders, how
are they to know what it is? Can self-selected
private individuals decide what the social
interest is? Can they decide how great a burden
they are justified in placing on themselves
or their stockholders to serve that social
interest? Is it tolerable that these public
functions of taxation, expenditure, and control
be exercised by the people who happen at the
moment to be in charge of particular enterprises,
chosen for those posts by strictly private
groups? If businessmen are civil servants rather
than the employees of their stockholders then
in a democracy they will, sooner or later,
be chosen by the public techniques of election
and appointment.
—Capitalism and Freedom,
133–34. |
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Who Pays for Foreign Export Subsidies?
Another source of "unfair
competition" is said to be subsidies by
foreign governments to their producers that
enable them to sell in the United States below
cost. Suppose a foreign government gives such
subsidies, as no doubt some do. Who is hurt
and who benefits? To pay for the subsidies
the foreign government must tax its citizens.
They are the ones who pay for the subsidies.
U.S. consumers benefit. They get cheap TV sets
or automobiles or whatever it is that is subsidized.
Should we complain about such a program of
reverse foreign aid? Was it noble of the United
States to send goods and services as gifts
to other countries in the form of Marshall
Plan aid or, later, foreign aid, but ignoble
for foreign countries to send us gifts in the
indirect form of goods and services sold to
us below cost? The citizens of the foreign
government might well complain. They must suffer
a lower standard of living for the benefit
of American consumers and some of their fellow
citizens who own or work in the industries
that are subsidized. No doubt, if such subsidies
are introduced suddenly or erratically, that
will adversely affect owners and workers in
U.S. industries producing the same products.
However, that is one of the ordinary risks
of doing business. Enterprises never complain
about unusual or accidental events that confer
windfall gains. The free enterprise system
is a profit and loss system.
As already noted, any measures to ease the
adjustment to sudden changes should be applied
evenhandedly to domestic and foreign trade.
—Free to Choose: A Personal Statement, 45. |
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| About Economic
Insights
Economic Insights
is a publication of the Federal Reserve Bank of
Dallas. The views expressed are those of the authors
and should not be attributed to the Federal Reserve
System.
Please address all correspondence
to
Economic Insights
Public Affairs Department
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