The Life and Times of Milton Friedman

Remembering the 20th century's most influential libertarian.

Brian Doherty from the March 2007 issue

(Page 3 of 3)

This was heresy to the Keynesians. The “Phillips Curve” supposedly showed that the government could manipulate a tradeoff between unemployment and inflation: By increasing inflation, the Fed could give the economy a revivifying jolt that would create jobs. Friedman’s theories explained why this might sometimes appear to be so but also why in the long term it was not so—and how belief in the Phillips Curve helped cause the stagflation of the 1970s, which perplexed Keynesian economic managers by combining inflation with a lack of economic growth.

New money in the economy can give businesses the mistaken impression of greater demand for their specific product, leading them to increase production and hire more people. This is the initial jolt that makes inflation an irresistible drug to politicians. But after a while, people realize there was no real increased demand for their product in relation to all other products; the apparent extra demand was merely a result of more money in people’s hands. The holders of the extra money begin to bid up all prices and soon realize their overall purchasing power is falling. They then try to spend more, faster, and for a while nominal incomes increase more than the general inflation rate as the extra money enters specific people’s hands before the overall price level rises to catch up. Only with constantly accelerating rates of inflation can the initial Phillips Curve effect that increased employment keep working—and that path can end only by reducing the currency to uselessness.

On that issue, Friedman’s views carried the day. But another Keynesian notion—using targeted tax breaks to achieve an immediate economic stimulus—still enjoys political support. Friedman helped to discredit that idea in what he considered his greatest achievement as an economist, his 1957 book The Theory of the Consumption Function. Friedman challenged the notion that people made consumption decisions based on how much money was available to them at any given moment. Consumption decisions were instead based on a theoretical construct Friedman called “permanent income.” If someone gains a sudden windfall, he isn’t apt to spend it all immediately; if he suffers a sudden loss, he isn’t apt to immediately cut his consumption by the amount of that loss. One implication of this theory is that if the government attempts to manipulate our economic behavior through quick tax raises or cuts here and there, the effects are not likely to be what the politicians hope for.

Although Friedman frequently was on the “wrong side” of his profession, in the sense that his beliefs went against then-standard opinions, the cogency of his reasoning, his rigorous reliance on empirical evidence, and such real-world phenomena as stagflation ensured that, as the Fortune Encyclopedia of Economics put it, “No other economist since Keynes has reshaped the way we think about and use economics as much as Milton Friedman.”

Friedman the Adviser

Friedman had a long-lasting and controversial avocation as an adviser to politicians and governments across the globe. This began in 1950, when some former students invited him to work with a Marshall Plan agency. While there he proposed that Germany float its exchange rate. The idea went nowhere at the time, but it was an international reality as of 1973.

Friedman went on over the course of his career to give advice to officials in nations from Israel to China, from England to Yugoslavia. This practice caused him great trouble in the 1970s because of his “links” to Augusto Pinochet’s repressive regime in Chile. Pinochet’s government was infamous for the brutal suppression of political opponents, including one grim episode in which a football stadium was used as a mass detention center where political prisoners were tortured and killed.

For years, the University of Chicago had a partnership with the Catholic University of Chile in which Chileans received scholarships to study at Chicago. Pinochet thus had Chicago-trained economic advisers, who were known as “the Chicago boys” and often assumed to be mindless transmitters of Friedman’s commands. New York Times columnist Anthony Lewis declared in 1975 that “the Chilean junta’s economic policy is based on the ideas of Milton Friedman…and his Chicago School,” adding that “if the pure Chicago economic theory can be carried out in Chile only at the price of repression, should its authors feel some responsibility?” The Spartacus Youth League, a Trotskyist sect, began ginning up protests against Friedman for his alleged complicity with the Chilean government. Such demonstrators followed him wherever he went for years.

In fact, Friedman’s only direct connection with Chile came when fellow Chicago economist Arnold Harberger, who was closely involved with the Chilean program, invited him to give a week of lectures and public talks in Chile in 1975. While there, Friedman did have one brief meeting with Pinochet. The dictator asked the professor to write him a letter laying out what he thought Chile’s economic policies should be. Friedman did this, calling for quick and severe cuts in government spending and inflation as well as a more open trade policy. He did not take the opportunity to upbraid Pinochet for any of his repressive policies.

That was the extent of Friedman’s involvement with the regime. Defending himself against accusations of complicity with or approval of Pinochet in a 1975 letter to the University of Chicago student newspaper, Friedman noted that when he spoke to communist leaders he “never heard complaints” that he was giving aid and comfort to their governments. “I approve of none of these authoritarian regimes—neither the Communist regimes of Russia and Yugoslavia nor the military juntas of Chile and Brazil,” he wrote. “But I believe I can learn from observing them and that, insofar as my personal analysis of their economic situation enables them to improve their economic performance, that is likely to promote not retard a movement toward greater liberalism and freedom.”

Friedman the Polemicist

Friedman was the most widely read libertarian polemicist of his time, mostly thanks to his Newsweek column. From 1966 to 1984, in the context of commenting on current events, Friedman explained to millions of readers the basics of intelligent monetary policy; why wage and price controls can’t be effective; why urban renewal, rent control, the minimum wage, and usury laws don’t work as advertised; and his principle, now taken very seriously among fiscal conservatives, that since governments always spend what they tax plus some more, you should never raise taxes in an attempt to eliminate deficit spending. He also advocated school vouchers, an idea that would become the focus of his polemical energy during his final years through the work of the Milton and Rose D. Friedman Foundation.

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Friedman’s other great splash as a libertarian polemicist was his TV series and book Free to Choose, both of which he produced in collaboration with his wife, Rose. The series aired nationally on PBS in 1980, with each episode reaching, on average, 3 million viewers. The book version, released the same year, sold 400,000 copies in hardcover. The book and the TV series revisited Friedman’s basic theme that the free market’s competitive forces, rather than government controls, are the best guarantee of wealth and satisfaction for the largest number of people, whether in our roles as producers, consumers, or citizens. They also praised the varied, rich, and lovable culture that arises when people have the widest possible range of choices in how they live, work, spend their money, and educate their children.

Friedman the World Changer

In 1995 I asked Friedman how he explained his unique success as an advocate of libertarian ideas. He replied that it was merely the glow of the Nobel Prize. But he was being too modest. Many of the qualities that guaranteed his reputation were apparent well before his Nobel, and he was the most successful libertarian polemicist of the era even before winning that award. The qualities that led to his success included his skill in buttressing his reputation as a political advocate with his professional successes as an economist; his calm, scholarly, respectful treatment of his intellectual and ideological opposition; and his willingness to suggest politically realistic steps in the direction he wanted to go rather than insisting on a leap to complete liberty.

Milton Friedman’s relentless belief in the power of a free people and the justice of a free society had vivid real-world effects. Thanks to Friedman, we are no longer forced into the armed services. Thanks to Friedman’s monetary ideas, the cash in our pockets is worth something close to what it was a year ago. Thanks to Friedman, many more people appreciate the arguments against government policies that are no longer considered as untouchable and unquestionably right as they were before he came along.

Milton Friedman was never a politician. He could never make things happen. He could only attempt to persuade his fellow citizens and their leaders, making himself an exemplar of the virtues of the truly liberal intellectual. Because of him, the world is a freer and better place.

Senior Editor Brian Doherty is author of Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement, from which this article is adapted. Copyright © 2007. Reprinted by arrangement with PublicAffairs , a member of the Perseus Books Group. All rights reserved.

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