by Linda Yueh
It was only in the 1960s that Friedman turned towards political writing. His involvement in public affairs then continued to the very end of his life in 2006. In 2003 he had publicly backed Hollywood actor Arnold Schwarzenegger for Governor of California. (The Terminator claimed, in fact, that Adam Smith and Friedman were among his influences.)
It’s fair to say that Friedman had a career of two halves. The first as an academic economist; the second as a public figure and political influencer. To a certain extent, the second half has overshadowed the first and it has become increasingly necessary to recall just how large and long-standing his contribution to economics was.
Friedman’s views on the Great Depression were game-changing. In the aftermath of the 2008 financial crisis, policymakers were at great pains to try to avoid the mistakes made in the 1930s, most of which had been identified by Friedman. Since the crisis, central banks around the world have thrown the kitchen sink at reviving their battered economies, keen to avoid accusations of repeating the mistakes pointed out by Friedman.
In 2005, one year before his death, he published an article in the Journal of Economic Perspectives. Here he reaffirmed his conjectures over the role of monetary policy in the Great Depression and the grave mistakes made by the Federal Reserve. Had he been alive, Friedman would undoubtedly have had a lot to say about the events that followed a few years later, the reaction of policymakers to them, and where we find ourselves today.
The life and times of Milton Friedman
Milton Friedman was born in 1912 in Brooklyn, his parents having emigrated separately to America in the late nineteenth century from Carpathian Ruthenia, part of the old Austro-Hungarian Empire located in Ukraine, Slovakia and Poland, leaving family and everything else behind. They met in New York’s Jewish community. When Friedman was one year old they moved to the small commuter town of Rahway, New Jersey, twenty miles outside New York City. This is where he grew up with his three sisters. The family was not wealthy and lived modestly, running a shop from their home.
From an early age Friedman was marked out as an excellent student, and spent much of his free time in the local library. He entered the first grade a year early, skipping kindergarten altogether. In the middle of the sixth grade he was promoted into the seventh, making him two years younger than most of his peers. Although he was smaller than the other children, he was talkative and had a loud voice.1
Friedman graduated high school a month short of his sixteenth birthday in 1928. That same year he enrolled at Rutgers University in nearby New Brunswick, leaving the family home for the first time to live on campus. His strong exam performance and family circumstances saw him qualify for a scholarship.
He originally intended to major in mathematics. As a relatively young child, he had observed that ‘individuals who have exceptional mathematical ability get early deferences and develop great confidence in their ability to solve problems’.2 However, like many economists over the years, including several in this book, he was pulled away from the ‘proper’ sciences towards the social science of economics. One of the key influences on Friedman at this time was Arthur Burns, who was later to become America’s central banker as chairman of the Federal Reserve. Friedman’s father had died of a heart attack when he was fifteen and about to enter his final year of high school. Burns was Friedman’s professor at Rutgers, and it was he who convinced the youngster that economics was a useful subject that could help end the depression in which America was then mired. Friedman described Burns as being like a ‘surrogate father’.3 He cited Burns and another Rutgers economics professor, Homer Jones, who would also become a central banker as senior vice-president of the regional Federal Reserve Bank of St Louis, as his reasons for becoming an economist.
When Friedman entered Rutgers, the Roaring Twenties were nearly over. By the time he graduated in 1932 with a Bachelor’s degree in economics, achieving high but not exceptional honours, the Great Depression had set in. With a quarter of the workforce unemployed, the economy seemed to be the urgent problem.
Many people have gone through Friedman’s life, looking for early influences in which his libertarian and monetarist thinking might be rooted. However, if there were any at this time, they were certainly well hidden. It appears that the Great Depression and the potential for economics to play a role in alleviating the crisis were as big a factor as any in piquing Friedman’s interest.
After Rutgers, at the age of just twenty, Friedman headed to the University of Chicago, with which he was later to become so closely associated. The two big names at Chicago at this time were Jacob Viner and Frank Knight. Viner was a leading trade economist and economic historian, while Knight was renowned for his work on the impact of uncertainty on markets. During much of their time at Chicago, Viner and Knight jointly edited the Journal of Political Economy, published by the university’s own press; it remains one of the leading economics journals to this day.
It was there that Friedman met his wife Rose (née Director). Both were postgraduate students and they sat next to each other in Viner’s class. He arranged his students alphabetically, and there was no one between them. Friedman and Rose had much in common. She was born in Russia in 1911, and had moved to the US with her family in 1914 before the outbreak of the First World War. She was also Jewish, but her family was more strictly orthodox. (In fact, Friedman had effectively been agnostic since the age of thirteen.) Rose had completed her undergraduate studies at Chicago. Like Friedman she was good at mathematics and had graduated high school just after her sixteenth birthday, meaning she also skipped at least one year.
Their courtship was slow. Having started dating in 1932, they spent long periods apart as Friedman’s career took him elsewhere. They were finally married in 1938, when they were both twenty-six years old. They had two children: Janet, born in 1943, and David, born two years later. One of the biggest upheavals once they started a family was that Friedman had to change his work habits. His preferred time to work in his youth was from midnight to 4 a.m.
He gained an intellectual partner in Rose, who played a significant role in Friedman’s research, and they would later write books together. He recalls ‘many a pleasant summer evening discussing consumption data and theory in front of a blazing fire’.4
After graduating in 1933 from Chicago with a Master’s degree in economics, Friedman was to spend a year at Columbia University in New York before returning to Chicago. But as the academic year came to a close, he needed a job. America was in the midst of the Great Depression and President Franklin D. Roosevelt’s New Deal programme had been attracting the brightest minds to Washington, DC. Friedman’s friend from Chicago, Allen Wallis, had gone to work for the National Resources Committee. He followed. Between 1935 and 1937 he worked on developing a cost of living index. His work there contributed towards the PhD he earned from Columbia and was the basis for A Theory of the Consumption Function, which he would publish twenty years later while a professor at Chicago. Friedman considered this his most technical piece of research, for which he was to later win the Nobel Prize, along with his work on monetary economics and business cycles.5
After two years in Washington, Friedman moved back to New York to work at the National Bureau of Economic Research (NBER). One of his professors from Columbia, Wesley Mitchell, was director. He also taught part-time at Columbia and worked as a research assistant for Simon Kuznets, who was to go on and win the 1971 Nobel Prize in economics. He had encouraged Friedman to work with empirical data, which at the time was a field in its formative stage, and became an important part of Friedman’s approach to economics.
In September 1939 war broke out in Europe, but with little immediate effect on either Friedman or America generally, which was not to enter the war for another two years. So life continued fairly normally for Friedman. During the 1940–41 academic year, he moved to the University of Wisconsin as a visiting professor. By now he was twenty-eight, and it was his first proper academic appointment. Although he was then o
ffered a non-tenured position at the university, he turned it down in order to head back to Washington to work as an aide to Secretary of the Treasury Henry Morgenthau, who had played a key role in developing and financing the New Deal under Roosevelt.
In 1943 he relocated again to New York to join the Statistical Research Group at Columbia University. This was a prolific research period, during which he spent time developing techniques for improving the measurement of war materials. It was a formidable department run by his friend Allen Wallis. In May 1945 the war in Europe was winding down and Friedman returned to teaching. His good friend from Chicago, George Stigler, who would go on to win the 1982 Nobel Prize, was at the University of Minnesota teaching microeconomics and put in a good word for him. Friedman joined to teach macroeconomics and through the academic year 1945–46, they shared an office, becoming known as ‘Mr Micro’ and ‘Mr Macro’.6
Towards the end of the academic year, an opportunity arose at the University of Chicago. Ironically, it was Stigler who was targeted, but he failed his interview with the president of the university. Chicago was the then home to the Cowles Commission for Research in Economics, which was a centre focused on linking economics to mathematics. Stigler was not deemed mathematical enough. He was in good company. Friedrich Hayek also claimed he was rejected on similar grounds. But this meant that opportunity knocked for Friedman. Stigler was generous, saying that his own rejection was to be a great service to Chicago.7
Friedman started teaching at the University of Chicago in 1946. It was then, and still is, one of the world’s leading departments for economics. Its faculty was full of eminence: twenty-nine winners of the Nobel Prize in Economic Sciences since its inception in 1969 have had some connection with Chicago’s Department of Economics. But things had changed significantly since Friedman attended as a student a decade earlier. Its two leading lights had faded. Viner had moved to Princeton University, and Knight’s influence in economics had waned as he moved into political philosophy.
The department had been the home of the Cowles Commission since 1939. Friedman certainly acknowledged the scholarship Cowles brought to the university, but ultimately saw the world differently. His background at the National Resources Committee, the Statistical Research Group and the NBER steered him towards a statistical presentation of economic data rather than the formulaic presentation of theory favoured by the commission. Friedman believed strongly that economic theory should be subject to empirical corroboration to test its relevance to the real world. Prediction was the key factor; theories and policies should be evaluated not on the basis of the realism of their assumptions but solely on the basis of the accuracy of their predictions. He considered Cowles as excessively formal and too concerned with tautological mathematics rather than explaining the world.
Friedman was able to push Cowles out of Chicago as his own power in the faculty grew. In 1951 he was awarded the third ever John Bates Clark Medal, the then-biennial (since 2009, annual) award for the best American economist under the age of forty, and probably the most prestigious prize in economics at the time since the Nobel Prize in economics didn’t yet exist. He was now where Viner had been previously as the dominant figure in the department. In fact, he was teaching Viner’s old course on price theory.
He was a popular teacher, but at the same time a tough grader who demanded high standards. It was not uncommon for him to award no ‘A’ grades in an entire academic year, and often he would only read and grade the first 500–1,000 words of his students’ essays to encourage them to write more clearly and concisely. If a student were late to class, he would usually stop teaching until the student had taken his seat. Students had to present their work in order to participate at his workshops. Despite these pressures and the risk of low grades, students flocked to his classes because of his insight and his explanatory powers. Outside the classroom he was regarded as kind and generous. When he and Rose spent a year travelling the world in the early 1960s, they were hosted by many of his former students.
The notion of the ‘Chicago School’ has become associated with monetarism (a belief that the total amount of money in an economy could not permanently alter the economy) and laissez-faire capitalism. It coincided with Friedman’s tenure at the university, which was to span three decades between 1946 and 1976. Perhaps it should really be referred to as the ‘Friedman School’?
In 1976, Friedman was awarded the Nobel Prize in economics. At the time, the award was then only in its seventh year, but it was still a big deal and, without any doubt, the biggest prize available in economics. His award raised eyebrows due to his perceived closeness to the Chilean junta led by General Augusto Pinochet which was then in government. It was a controversial topic, particularly in Scandinavia with its strong social democratic tradition and home to many Chilean refugees.
Since the 1950s, a number of students from Chile had studied economics at the University of Chicago. Friedman had little direct contact with them unless they had either taken his course or attended his workshops. Before the military coup that brought Pinochet to power in 1973, free-market policy ideas held little sway in Chile. In March 1975 Friedman had visited Chile as part of the Chicago–Chilean studies programme. He met Pinochet for forty-five minutes. This trip was seen by many in the context of the growing influence of the ‘Chicago Boys’ in Chilean economic policy. As a result, Friedman was perceived to be closely associated with the regime, The New York Times going so far as to identify him personally as the guiding light of the junta’s economic policy. There were protests at the University of Chicago and for the next decade Friedman often entered public debates through side entrances. As he stood to make his laureate speech, a member of the audience shouted: ‘Down with capitalism. Freedom for Chile.’ Friedman is so far the only recipient of a Nobel Prize to be heckled at his acceptance presentation.
Although he was an advocate of the economic reforms introduced in Chile, he never publicly endorsed or supported the regime. In fact, as a libertarian, the suppression of freedoms would have run counter to his beliefs. He himself viewed the protests as hypocritical and baseless. In a speech in Chile, Friedman had criticized the regime as being too restrictive and argued that freedom was the best way of achieving prosperity for the country. He turned down honorary degrees from Chilean universities since he did not want acceptance to be conveyed as support for the regime politically.
It should be said that the majority of the media was supportive of his award, including the Wall Street Journal, The Financial Times and Newsweek. He had, after all, been awarded the prize for his contribution to economics rather than politics.
In terms of his political leanings, Milton Friedman is closely associated with strong libertarian views. He once wrote:
Fortunately, we are waking up. We are again recognizing the dangers of an overgoverned society, coming to understand that good objectives can be perverted by bad means … Fortunately, also, we are as a people still free to choose which way we should go – whether to continue along the road we have been following to ever bigger government, or to call a halt and change direction.8
He also had some pithy sayings to encapsulate his views: ‘If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.’ And, in an echo of Adam Smith: ‘With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.’9
His views were set out in his best-selling Capitalism and Freedom (1962), which sold over a million copies. Despite its success, Friedman felt a little frustrated that it was not more widely acclaimed. Perhaps because Friedman was, as yet, little known outside economic and academic circles, it had largely been ignored by the main US publications. It was reviewed only by top-ranked economics journals such as the American Economic Review.
Capitalism and Freedom was largely collated from his Volker Lectures given between 1956 and 1961, organized by the William Volker Fund to promote libertarian views, and wa
s strongly influenced by John Stuart Mill’s On Liberty. The book argued for a limited role for government in a free society with more to be done by the market. He highlighted a number of unjustified activities of government. The list included unnecessary intervention in markets. Friedman opposed price support for agriculture, tariffs, rent control, minimum wages, maximum ceiling prices and fixed exchange rates. He also opposed direct government involvement in the economy, highlighting the detailed regulation of industry, the control of radio and television, toll roads, public housing and national parks, and the legal prohibition of carrying mail for profit as examples of taking government too far. Friedman was also in favour of the legalization of drugs, school vouchers, health saving accounts and an end to conscription in peacetime.
In short, Friedman advocated a limited role for government, countering objections with: ‘Underlying most arguments against the free market is a lack of belief in freedom itself.’10 For Friedman, each government policy needed to be carefully analysed for its impact on the economy. In his view: ‘One of the great mistakes is to judge policies and programs by their intentions rather than their results.’11
He also argued for a negative income tax to replace the plethora of social security and welfare schemes and to guarantee a minimum income. This was first proposed in the 1950s, but became a serious policy prospect when in 1969 President Richard Nixon proposed the Family Assistance Program. It bears some resemblance to the universal basic income (UBI) now being debated, whereby the government gives a basic level of income to every citizen. Friedman’s concept of a negative income tax would return income to those earning below a threshold. It is somewhat more complex than UBI, but would still have been simpler than the welfare system at the time. The original idea was to make sure that work paid more than state benefits. However, the work provision was eventually removed, much to the annoyance of Friedman. The idea dominated welfare reform discussions until failing in the Senate Finance Committee in 1970. Friedman also advocated a flat tax, which removed entirely any progressiveness in the tax system (when those with higher income levels pay a higher proportion of their earnings in tax). This was not just about incentivizing work but also about improving the simplicity of the system and lowering the high costs of compiling tax returns. In the end, he settled for a significant reduction in the top rate of tax from 70 per cent to 28 per cent, which President Ronald Reagan delivered in the 1980s.