Friedman started his college career in mathematics, intending to become an actuary. During his studies, however, he started getting interested in economics. Rather than switching his major, he simply doubled up and earned dual degrees. This combination would serve Friedman very well, as economics was undergoing a transformation from a social science to a mathematical one. It was also at Rutgers that Friedman was introduced to libertarian thought. He credits John Stuart Mill’s Essay on Liberty as “The most concise and clearest statement of the fundamental libertarian principle, ‘The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.’”17
Another early undergraduate influence was a new professor at Rutgers named Homer Jones. Although only 24 years old at the time, Jones seemed like an elder sage to the teenage Milton as he sat in his introductory classes on insurance and statistics. While these dry subjects hardly seem like fertile ground for intellectual inspiration, Jones’s inquiring mind and theoretical bent, combined with the practical sensibilities of an Iowa farm boy, led him to examine the fundamental principles of risk, uncertainty, and profit.
Along the way, according to Friedman, “he put major stress on individual freedom, was cynical and skeptical about attempts to interfere with the exercise of individual freedom in the name of social planning or collective values, yet was by no means a nihilist.”18 He also recalls Jones’s “traits that exerted so great an influence on me in my teens: complete intellectual honesty; insistence on rigor of analysis; concern with facts; a drive for practical relevance; and, finally, perpetual questioning and reexamination of conventional wisdom.”19 They were traits Friedman himself would embody for the rest of his career.
With Jones’s encouragement, Friedman enrolled in graduate studies at the University of Chicago. He was 20 years old at the time and had never been west of Philadelphia. He remembers in his autobiography, “Though 1932–33, my first year at Chicago, was, financially, my most difficult year, intellectually, it opened new worlds. Jacob Viner, Frank Knight, Henry Schultz, Lloyd Mints, Henry Simons, and, equally important, a brilliant group of graduate students from all over the world exposed me to a cosmopolitan and vibrant intellectual atmosphere of a kind that I had never dreamed existed. I have never recovered.”20
In his personal life, the most important event that year was meeting fellow economics student Rose Director. They would be married six years later and live the rest of their life together in a “fairy tale”21 marriage as partners and collaborators.
Friedman earned his master’s degree in economics from the University of Chicago in 1933 and decided to attend Columbia University for his second year of graduate studies on a generous fellowship. It was during this year that Friedman reinforced his statistical approach to economics. While Chicago emphasized economic theory, Columbia and the nearby National Bureau of Economic Research (NBER) strove to measure and understand actual economic activity.
Returning to Chicago—and Rose—in 1934, Milton first met lifelong friends Allen Wallis and George Stigler. Both would become leading figures in academia in their own right. Stigler received the Nobel Prize in 1982 and Wallis later rose to the post of chancellor of the University of Rochester, New York. As the academic year ended, Milton needed a job. Wallis had gone to Washington, D.C., earlier, where he landed a role with the newly formed National Resources Committee (NRC), and he arranged for Friedman to join him.
A Detour to the New Deal
The NRC was part of Franklin D. Roosevelt’s alphabet soup of new governmental organizations spawned in response to the Great Depression. After years of crushing economic deprivation, people across the globe were beginning to wonder whether strong-arm fascism and authoritarian communism were superior to liberal democracy as forms of government. It was in this climate that the NRC published a report advocating the creation of a National Planning Board22 akin to the nightmarish central planning bureau of Rand’s Atlas Shrugged.
At first, the young Friedman was totally on board with the direction Roosevelt was taking the country. New Deal Washington was a lively place. He writes that the “explosion of government, combined with the paucity of academic and business jobs, attracted the best and brightest . . . and enabled them to achieve positions of far greater responsibility than was possible under more static conditions. There was a sense of excitement and achievement in the air. We had the feeling . . . we were in at the birth of a new order that would lead to major changes in society.”23
Perhaps this is where Friedman started to learn that facts, not feelings, are what count. As his work around Washington progressed, he started to realize that the empirical data he was analyzing just didn’t match up with the political rhetoric of collectivist ideas proffered by FDR and his team. He joined the National Bureau of Economic Research in the fall of 1937, where he jointly published a study on professional income with co-author and 1971 Nobel Prize recipient Simon Kuznets, which also served as Friedman’s doctoral dissertation at Columbia. That work was finished by 1940, but its publication was effectively censored until after the war because of controversy among some NBER directors about Friedman and Kuznets’s observed conclusion that doctors’ effective monopoly power had substantially raised the incomes of physicians relative to those of dentists.
From 1941 to 1943 Friedman worked at the U.S. Treasury on wartime tax policy, and then from 1943 to 1945 at Columbia as a mathematical statistician on problems of weapon design, military tactics, and metallurgical experiments. “My capacity as a mathematical statistician undoubtedly reached its zenith on V.E. Day, 1945,” he once wisecracked.24
Friedman’s years in Washington led him to initially support welfare but not the regulatory aspects of Roosevelt’s New Deal. While he favored jobs programs for the unemployed, his time at Chicago had taught him the virtues of the price system too well for him to support direct government intervention in markets. Over time, based on additional research and study of the facts, Friedman would temper his support of welfare and move toward a strict framework of capitalism free from interference. But it wouldn’t happen overnight.
In 1945, he rejoined colleague George Stigler at the University of Minnesota, where he co-wrote a pamphlet deriding rent control called “Roofs or Ceilings? The Current Housing Problem.” “For those, like us, who would like even more equality than there is at present . . . it is surely better to attack directly existing inequalities in income and wealth at their source than to ration each of the hundreds of commodities and services that compose our standard of living.”25 Stigler was impressed by his collaborator and his contribution to the work, saying of Friedman, “It did not take long to recognize Milton’s talents: he was logical, perceptive, quick to understand one’s arguments—and quick to find their weaknesses.”26
The pamphlet was widely attacked by both sides of the political spectrum. Some found its message too conservative and squarely at odds with the pro-government and pro-intervention tone of the times. “‘Roofs or Ceilings?’ outraged the profession,” according to Paul Samuelson. “That shows you where we were in our mentality in the immediate postwar period.”27 Robert Bangs wrote in the American Economic Review that the work was “a political tract.”28 He later concluded in a popular column, “Economists who sign their names to drivel of this sort do no service to the profession they represent.”29
On the opposite end of the political continuum, Ayn Rand herself labeled the pamphlet “collectivist propaganda” and “the most pernicious thing ever issued by an avowedly conservative organization.” It wasn’t a criticism of the authors’ conclusion per se, but a rejection of the approach Friedman and Stigler used to get there. They argued for lifting rent controls on practical, humanitarian grounds, not as Rand would have insisted, in defense of “the inalienable right of landlords and property owners.”30
A Historic Economic History
In Atlas Shrugged, when the reader first meets Hugh Akston, he is laboring as
a short-order cook in a diner. When he is recognized by Dagny Taggart, the brilliant railroad executive who is the central protagonist of the book, she asks, “Hugh Akston? . . . The philosopher? . . . The last of the advocates of reason?” Akston replies, “Why, yes. . . . Or the first of their return.”
And so it was with Milton Friedman, who would labor deep in a mine of obscure economic data to restore reason to economics.
During the Great Depression, economics had been taken by storm by the British savant John Maynard Keynes. He diagnosed the Depression as a failure of “aggregate demand,” and prescribed massive government spending to stimulate it back to life. This became the dominant paradigm that guided the New Deal and captured the economics profession for decades after. For economics, this was a plunge into what amounts to a dark age. It was as though crisis had erased a century and a half of the economics of reason guided by the enlightened thinking of great minds like Adam Smith. Friedman’s greatest contribution would be a monumental empirical investigation that would prove—not just argue, but prove—that the Keynesian diagnosis of, and prescription for, the Depression was in error.
In 1936 Keynes bundled his major theories into his magnum opus, called The General Theory of Employment, Interest and Money. It is a choppy and poorly structured book, as difficult to plow through as Finnegans Wake and open to almost as many interpretations. Containing a dearth of objective formulations and no explicit mathematical models, Keynes’s book was essentially the product of an armchair sophist arguing against free-market efficiency from the basis of conjecture and philosophical theorizing.
At the core of his argument was the belief that a free-market economy was disastrously inefficient and would not reach an acceptable equilibrium of employment and inflation if left to its own devices. Laissez-faire capitalism, he felt, would inevitably lead to prolonged slumps due to what he termed a “paucity of demand” as the rich saved too much and didn’t consume the products of working labor. His solution? Active government intervention on a massive scale that engaged in deficit spending during downturns to stimulate demand, and then raised taxes during upturns to stave off inflation. The goal? To establish perpetual “full employment” and steady economic growth with the government acting like a countercyclical thermostat to the market’s boom-bust cycle.
After World War II, Keynes’s ideas on economic policy were broadly accepted by leading Western economies. A Time cover story from late 1965 entitled “The Economy: We Are All Keynesians Now” trumpeted the success of the 1960s economic expansion, crediting government stimulus as the chief cause. “Basically, Washington’s economic managers scaled these heights by their adherence to Keynes’s central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government. Keynes was the first to demonstrate convincingly that government has not only the ability but the responsibility to use its powers to increase production, incomes, and jobs.”31 During the postwar period, Keynesian theories were a major factor in spurring the cause of social liberalism, expanded government intervention, and the explosion of government spending.
Then came Friedman.
In 1963, with co-author Anna J. Schwartz, Friedman published the monumental Monetary History of the United States, 1867–1960, a vast research project sponsored by the National Bureau of Economic Research and published by Princeton University Press. Instead of Keynesian-style fireside pipe-smoking pontification, Friedman dug into the data. Using meticulous research methods unearthing for the first time a comprehensive history of money in America, he demonstrated how the United States Federal Reserve allowed the money supply to contract by a third during the period 1929 to 1933. His statistical work gave powerful credence to the idea that it was government mismanagement, not free-enterprise capitalism, that had in fact caused the Great Depression. What made the Depression so bad wasn’t the Keynesians’ lack of demand; it was the government’s efforts to save the gold standard that kept interest rates artificially high. This government meddling overwhelmed the economy’s normal recovery mechanisms. By way of empirical proof, once countries left the gold standard (Britain in 1931, the United States in 1933), recoveries began. Between 1933 and 1936, U.S. unemployment dropped from 25 to 17 percent.
Despite Keynes’s lack of mathematical rigor in his theories, many models were later developed by Keynesian-inspired economists like Paul Samuelson to fill the credibility gap. A famous example was the Phillips curve, which posited an inverse relationship between unemployment and inflation. It implied that unemployment could be reduced by government stimulus, which would then lead to inflation. Conversely, low inflation meant high unemployment.
With the Phillips curve, statist economists were able to concede to Friedman that monetary policy was more effective than government spending to smooth out business cycles. But at the same time, they could now anoint the Federal Reserve—responsible for monetary policy—as their agent for government control of the economy. For the neo-Keynesians armed and dangerous with the Phillips curve, if Congress couldn’t control the economy, then the Fed would. The new mantra: If you can’t spend your way to prosperity, inflate your way there.
Then came Friedman. Again.
In 1968 he published a paper arguing that the fixed relationship implied by the Phillips curve did not exist.32 Friedman suggested that sustained Keynesian policies of easy money could lead to both unemployment and inflation rising at once. That was his prediction—and the proof of it came just a few years later in the 1970s, when the world saw the phenomenon that soon became known as stagflation, when double-digit unemployment accompanied skyrocketing inflation. If predictive ability is the hallmark of sound science, then Friedman transcended and demolished the theoretical philosophizing of his Keynesian colleagues in one fell swoop.
The Keynesians were stunned by the apparent contradiction. The Phillips curve told them that stagflation was impossible. Yet there it was. Hugh Akston could have told them what to do: “By the essence and nature of existence, contradictions cannot exist. . . . [C]heck your premises. You will find that one of them is wrong.” In this case, Akston’s axiom was too modest. All of the Keynesians’ premises were wrong.
Then Friedman delivered the coup de grâce. If monetary policy couldn’t be used proactively to artificially create prosperity—in other words, if the best it could do was avoid catastrophes like the Great Depression—then who needs a Federal Reserve with policies controlled by political appointees? Instead, Friedman said that “central banks could profitably be replaced by computers geared to provide a steady rate of growth in the quantity of money.”33 No, Friedman never got all the way to the radical libertarianism of Congressman Ron Paul, who has called for outright abolition of the Fed. But this was a classic Friedman finesse, and it shows why he was so effective: accept the reality that there is a Federal Reserve, and find an elegant way to deprive it of its powers to interfere with economic liberty.
From Academia to Main Street
When Ayn Rand was once asked to very briefly describe Objectivism, she reduced her philosophy of politics to a single word: capitalism. Friedman was making the same philosophical journey at the same time—understanding that a society’s economics was inexorably linked to the political structure it chose. It was only a short step from trumpeting economic freedom to championing individual liberty as an integrated cornerstone of a successful socioeconomic system.
Friedman put it all together in his 1962 book Capitalism and Freedom. In just 200 pages of succinct and engaging prose, he covered a vast range of topics on the role of government in a free society—international trade, social welfare, fiscal policy, distribution of income, education, and discrimination. He laid out the case for free-market capitalism as both a means to achieve economic freedom and a fundamental requirement of political freedom.
Throughout the book, Friedman dove deep into a raging sea of complex social and economic questions and recovered from them e
xactly how free-market solutions are superior to the force of government. But he was no extremist, no anarchist. Government, he believed, was a valuable instrument with a critical role to play. That role, however, was that of an umpire, not a dictator or even a paternalistic provider. The umpire enforces the rules, mediates disputes, and maintains a free field of play; the umpire doesn’t dictate outcomes or advantage one team over another.
“The need for government in these respects arises because absolute freedom is impossible. However attractive anarchy may be as a philosophy, it is impossible in a world of imperfect men,” Friedman wrote. “Men’s freedoms can conflict, and when they do, one man’s freedom must be limited to preserve another’s—as a Supreme Court Justice once put it, ‘My freedom to move my fist must be limited by the proximity of your chin.’”34
When Capitalism and Freedom was first published at the dawn of the 1960s, not a single mainstream U.S. newspaper or magazine would review it; not the New York Times, the Chicago Tribune, Newsweek, or Time. Since then, Capitalism and Freedom has sold over half a million copies in English and has been translated into 18 languages. Atlas Shrugged had received the same treatment—or worse—when it had debuted five years before. It, too, enjoyed a brilliant future despite having been ignored or maligned by the mainstream media.
Starting in the 1960s, Friedman became more active in public affairs. He served as an informal economic adviser to Barry Goldwater in his unsuccessful campaign for the presidency in 1964, to Richard Nixon in his successful 1968 campaign, and to Ronald Reagan in his 1980 campaign (Ayn Rand supported the first two, opposed the third). Friedman recalls his friend Stigler as fond of saying later, “Milton wants to change the world; I only want to understand it.”35
In 1969, Friedman was appointed as a member of the Gates Commission, a presidentially appointed panel assigned to consider replacing the draft with an all-volunteer military. This was a challenge worthy of Friedman’s great mind—putting the burden to show that voluntary market forces could take the place of involuntary government coercion that virtually everyone had come to think of automatically as utterly necessary to wage war.
I Am John Galt Page 29