The Life and Times of Milton Friedman
Remembering the 20th century's most influential libertarian.
When Milton Friedman stepped forward on December 10, 1976, to receive the Nobel Memorial Prize in Economic Sciences from the King of Sweden, he needed bodyguards. His moment of glory was marred by a mob of protesters outside gathering to condemn Friedman's alleged complicity in the crimes of the military regime ruling Chile, which allegedly lived and died according to his theories. One heckler even slipped inside, shouting "down with capitalism, freedom for Chile" from the balcony.
It was a telling moment in a controversial career. Despite being a professional academic, Friedman had never locked himself away in an ivory tower. Until his death at the age of 94 on November 16, 2006, he remained an intellectual warrior for ideas in the day-to-day world, and he helped change that world in important and positive ways. Along the way he made a lot of enemies, some of whom shouted their insults from places more respectable than a mob outside the Stockholm Concert Hall.
Writing in The Washington Post, the journalist Bernard Nossiter claimed Friedman won only because the Nobel in economics, rather than being one of the original prizes established in Alfred Nobel's will, was a later addition financed by the Swedish Central Bank—and central banks, he declared, adored Friedman. In fact, Friedman had long advocated the abolition of the U.S. Federal Reserve, the world's mightiest central bank. He thought it better to replace its control over interest rates and the money supply with a mechanical rule for monetary growth.
In The New Republic, in those days the leading voice of American liberalism, Melville J. Ulmer likened Friedman's economics prize to a peace prize for Idi Amin or a literature prize for Spiro Agnew. While acknowledging that no economist seemed surprised or appalled at Friedman's laurel, Ulmer claimed that "much of the world" bridled at his winning. Despite his pique, Ulmer did accurately summarize what Friedman represented for the millions of people who read his popular column of political and economic commentary in Newsweek and the hundreds of thousands who had read his 1962 book Capitalism and Freedom, which argued that free markets were an essential part of any truly free society.
"Friedman," Ulmer wrote, "is best known as a tireless, peppery advocate of liberalism in the 19th century European sense, perhaps the nation's outstanding intellectual exponent of laissez-faire.…He opposes government activity of practically all kinds.…He would abolish virtually all regulations on industry, working conditions, and the professions. He would turn over to private industry the nation's schools, highways, federal parks, the post office and all other publicly operated services like water supply, local buses and subways. He would scrap Social Security, the entire welfare system and the progressive income tax schedule. Few, if any, measures to protect the environment or the consumer would win his approval. He would terminate all government efforts to stabilize the economy through fiscal and monetary policies, public works or other means. He would leave presidential candidates, and I suppose all other candidates for public office, with nothing to talk about." (Italics in original.)
Friedman did call for all that, and the intellectual acumen that won him the Nobel helped him become the most widely heeded and influential advocate for libertarian ideas in the 20th century. Because of his successes, we now live, to a delightful degree, in Friedman's world. Beyond his specific policy victories on matters such as ending the draft and curbing inflation, on a higher level he lived to see communism, the antithesis of his economic and social beliefs, die. Smuggled copies of Friedman's writings helped inspire and educate dissidents in the Soviet bloc, and the most economically successful former republic of the USSR, Estonia, achieved its growth with policies inspired directly by Friedman's work.
Throughout his life, Friedman spoke bravely and compellingly for the idea that the world should be shaped by our free choices. Reviewing his life and career as an economist and polemicist, we find a story of unexpected, unprecedented success promoting ideas that pushed against the Zeitgeist and in many ways managed to change it.
Friedman the Young Scholar
Milton Friedman was born in Brooklyn on July 31, 1912, the son of two Jewish immigrants from Carpatho-Ruthenia, now part of Ukraine. Both of his parents worked as dry goods merchants when they moved to Rahway, New Jersey, shortly after Milton was born.
Friedman originally intended to be a mathematician, and later an actuary. He studied at Rutgers under two professors who imbued him with a passion for economics: Arthur Burns, who later became chairman of Friedman's bete noire, the Federal Reserve, and Homer Jones, who was pursuing a doctorate at the University of Chicago while teaching at Rutgers. Jones helped Friedman win a scholarship to pursue a master's degree in economics at Chicago, which Friedman chose over an offer to study mathematics at Brown. His choice was inspired by the ongoing Great Depression and his belief that economists could help solve it. That decision guided the rest of Friedman's career, as his reputation would be forever intertwined with the University of Chicago, the colleagues and students he met there, and the intellectual tradition its economics department came to represent.
Friedman started at Chicago in the fall of 1932; there he met his future wife and writing partner, Rose Director. He earned his master's degree at Chicago in 1933 and took a graduate fellowship at Columbia University, where the influential statistician Harold Hotelling gave him a grounding in that discipline. He initially found it hard to land an academic teaching post—in part, he suspected, because of anti-Semitism. So in 1935 he began a two-year stint in the federal government, on the Natural Resources Committee, doing what he described in a 1995 interview with this author as "work on the New Deal…just [as] technical statisticians and economists, not anything that had any policy role."
In 1937 Friedman began his long affiliation with the National Bureau of Economic Research (NBER). There he began the work that led to his doctoral dissertation and the first of many controversies over conclusions too libertarian for some of his colleagues. Working with future Nobel laureate and national income statistics pioneer Simon Kuznets, Friedman produced a study that bothered an official on an NBER review board. (It doubled as his doctoral thesis at Columbia, which gave him his Ph.D. in 1946.) The official, who worked in the pharmaceutical business, delayed publication of the work for more than three years because he objected to its assertion that professional licensing was used to restrict entry and thus raise income for licensed doctors.
Friedman lectured at Columbia during the late 1930s and taught for one year at the University of Wisconsin in 1940–41. In 1941 he was offered a position at the U.S. Treasury's tax research division, where he worked until 1943. There he was partially responsible for developing the withholding system for paying income tax. Many libertarians, including his own wife, have excoriated Friedman for this. "We were paying almost no attention to the postwar consequences of anything we did," Friedman admitted years later. "We were just asking ourselves: What can we do to win the war? I have no apologies for it, but I really wish we hadn't found it necessary to do that and I wish there were some way of abolishing withholding now."
It was at the Treasury Department that Friedman discovered a feature of bureaucracies that later became a central theme in his 1984 book The Tyranny of the Status Quo: They are loath to change. The Internal Revenue Service, Friedman later recalled, was the biggest opponent of the withholding idea, insisting there was no way it could work. Today, alas, it takes a different view.
For the remainder of the war, Friedman did statistical work at the Division of War Research at Columbia. He and his colleagues came up with a sampling technique, known as sequential sampling, which became, in the words of The New Palgrave Dictionary of Economics, "the standard analysis of quality control inspection." The dictionary adds: "Like many of Friedman's contributions, in retrospect it seems remarkably simple and obvious to apply basic economic ideas to quality control; that however is a measure of his genius." He was also a key member of the team that developed a new proximity fuse for anti-aircraft projectiles, preventing bombs from going off unless they are near the object they are meant to destroy.
After the war, Friedman taught at Chicago from 1946 to 1976, with occasional stints as a visiting professor at other institutions. At Chicago he was not only a teacher but a prime intellectual mentor to generations of young economists who tended to approach both economics and politics in a Friedmanite manner, making the "Chicago school" America's most influential brand of pro-market economic thought.
Friedman the Libertarian
In 1962 Friedman published Capitalism and Freedom, a comprehensive exposition of the libertarian position. The book made his first major splash outside his academic discipline. It was launched into a barren environment for individualist thought. As Friedman later noted, though it was "destined to sell more than 400,000 copies in the next 18 years, written by an established professor at a leading university and published by a leading university press…it was not reviewed in a single popular American publication."
Capitalism and Freedom contained almost all the themes Friedman would stress during his career as a public intellectual. It emphasized the connection between economic and political freedom—a familiar idea today but not in the early 1960s, when the dream of democratic socialism was still prevalent. It explained how markets permit unanimity without conformity—that they allow us all, for the most part, to get the products and services we want, even if they aren't the same as what the majority wants. It gave some credence to the danger of monopolies but still argued that an unregulated private monopoly is a lesser evil than government attempts to regulate it, on the grounds that "dynamic changes are highly likely to undermine" private monopolies, while government programs and regulations tend to last forever. Friedman granted that certain market actions might have neighborhood effects—harms, such as pollution, that affect third parties—and that those might warrant government action. But he advised that the initial presumption must always be against such action.
Friedman explained how unions help cartelize industry, to the consumer's detriment. He attacked the idea of "corporate responsibility." (Friedman believed a corporation's responsibility to its shareholders is simply to make profits, and that individual shareholders should be able to decide for themselves how much of their money they want to give to other causes, not have that decision made for them by corporate executives.) He showed how occupational licensing allows professionals to block competition and neither ensures quality nor helps consumers. He accepted the idea of a government-set income floor but advocated a negative income tax—a set stipend that you could spend as you wished—as a replacement for all current welfare programs. That, he insisted, is the cheapest and least bureaucratic way to assist the poor, and the method that leaves them with the greatest personal autonomy. This idea entered the policy debate over poverty programs before the decade ended and influenced the earned income tax credit we now have.
Capitalism and Freedom was filled with Friedman's particular concerns as a monetary economist. He called for strict rules defining a set rate of growth in the money supply from year to year. He also called for floating exchange rates between national currencies—allowing the price of currency in international markets to be set by market forces, not government commands.
The book argued for the abolition of a long list of government functions: price supports, tariffs, licensing, minimum wages, Social Security, housing subsidies, the draft, toll roads, the post office, and national parks. The one that is now gone, the draft, was Friedman's pet issue, and his role in its abolition is the policy victory of which he was most proud.
Martin Anderson, the libertarian-leaning author of The Federal Bulldozer (on the dire effects of urban renewal), had been director of research for the 1968 Nixon campaign, and he was a special assistant to the president in the early days of the Nixon administration. Anderson had already been influenced by Friedman's arguments for a volunteer military, and he urged Nixon to appoint a 15-member advisory commission, with Friedman as a member, to contemplate the future of the draft. The president adopted the suggestion, creating the Gates Commission—named after Chairman Thomas Gates, a former secretary of defense—in March 1969.
Friedman used his polemical powers to win the commission over to his belief in an all-volunteer army. Vietnam troop commander William Westmoreland gruffly announced during one commission hearing that he was not interested in leading an army of "mercenaries." Friedman coolly replied, "Would you rather command an army of slaves?"
Westmoreland bristled. "I don't like to hear our patriotic draftees referred to as slaves," he said. "I don't like to hear our patriotic volunteers referred to as mercenaries," Friedman snapped back—and pointed out that if they were, then he was a mercenary professor and Westmoreland a mercenary general.
At the outset, the commission's members ostensibly were evenly split three ways—five opposed to the draft, five in favor, five undecided. In less than a year of meetings, spurred by Friedman's argumentative power and moral force, the commission unanimously recommended ending the draft in February 1970. (That said, with Anderson's thumb on the scales, the commission was intended from the beginning to come up with a workable, realistic plan for shifting to an all-volunteer force.) Nixon agreed with the general shape of the Gates Commission's suggestions, though he didn't move as quickly as Friedman would have wanted (the draft didn't officially end until 1973); nor did he raise the salaries of enlisted men as much as Friedman thought would be necessary and proper.
The political pressure of street unrest was also important in compelling Nixon to end the draft. But Nixon later said that "I would not have followed through after the election had I not become convinced that a voluntary army was economically feasible and militarily acceptable." And that achievement was largely the result of Friedman's persuasive power.
Friedman the Economist
As an economist, Friedman is best known as the apostle of "monetarism": the idea that changes in the money supply are the prime causes of inflation and the business cycle. Over time, this view triumphed over the Keynesian notion that fiscal policy—taxing and spending—is government's best tool to manage the economy. Friedman argued that fiscal policy was likely to be impotent in the long term. In the simplest layman's terms, if the government taxed to spend more, citizens would have that much less to spend. If the government borrowed to spend more, that much less money would be available for private borrowers. Similarly, if the government tried the reverse fiscal policies, spending less by cutting either taxes or borrowing, it would leave more for citizens to spend. Hence government attempts to manipulate "aggregate demand" are generally useless, since no matter what the government does to manipulate its own demand, counterbalancing changes in demand from the private sector in the opposite direction would blunt those effects.
Even if fiscal policy could have some useful effects, which Friedman doubted, there's no reason to believe government managers could use the policy at the right times and in the proper amounts to achieve the desired effect. As he wrote in Capitalism and Freedom, what government fiscal manipulations really tended to do was introduce "a largely random disturbance that is simply added to other disturbances." Besides, private spending was a truer representation of consumer wants than government spending.
Friedman famously believed that the true test of economic theory was not whether it seemed to make sense but whether it led to testable predictions that were borne out by observable evidence. Thus he didn't depend only on logical argument to make his point. He and his collaborator Anna Schwartz scrupulously accrued data that showed, in as close to controlled experiments as history allows, how monetary changes usually had far greater effect on nominal income, prices, and output than did fiscal changes.
That doesn't mean monetary policy provides a magic wand for the government to use in fine-tuning the economy. The juicy libertarian implication of Friedman's dry and scientific work is that government stabilization attempts, whether through fiscal or monetary policy, are bound to fail, since the effects of money on the economy work only through a lag that's both long and variable. Any attempt to respond to an economic ailment by increasing or decreasing the money supply is apt to be either too little, too late or too much, too soon. When the Federal Reserve jiggers with the money supply, it is as likely to exacerbate problems as solve them.
Friedman thus thought the Fed should lose its ability to make such arbitrary decisions. He advocated abolishing the central bank and setting money growth on automatic pilot: a 3 percent to 5 percent increase each year, to keep up with expected growth in population and production.
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.
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.