Milton Friedman: Economist as Public Intellectual Economic Insights, Volume , Number Dallas Fed

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Insights

Economic

introduced the young economist to the

works of Cambridge School of Eco-

nomics founder Alfred Marshall. Jones,

a pivotal figure in the monetarist camp,

introduced Friedman to Frank Knight

and the early Chicago school, espe-

cially Knight’s Risk, Uncertainty, and

Profit.

After Friedman received his under-

graduate 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 eco-

nomics student Rose Director, who be-

came an active partner in his profes-

sional work. He continued his graduate

study at Columbia University and com-

pleted 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 prod-

Milton Friedman has been an ardent

and effective advocate for free enter-

prise 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 experi-

ences, as well as insights into entrepre-

neurship 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 authori-

ties 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

FEDERAL RESERVE BANK OF DALLAS VOLUME 7, NUMBER 2

Milton Friedman

Economist as Public Intellectual

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, gov-

ernment 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 commem-

orates the occasion with this issue of Economic Insights. Happy birthday, Milton!

— Bob McTeer

President, Federal Reserve Bank of Dallas

uct accounts and many of the tech-

niques 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 surpris-

ing 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 Com-

mittee, he used his statistical acumen to

help develop better consumer spend-

ing 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

Pr

ofessor Steven N.S. Cheung

Milton Friedman

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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 tech-

niques 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 recog-

nized counterrevolution against Key-

nesianism. Keynes’ view poses that gov-

ernment could, and should, fine-tune

the nation’s macroeconomic perform-

ance, 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 eco-

nomic paradigm that the University of

Rochester’s Karl Brunner named mone-

tarism. 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 —

asserts that a simpler theory is prefer-

able if it predicts a higher number 

of outcomes — a variation on Occam’s

Razor — and that a good theory will

“surprise” us by predicting counterintui-

tive 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 ab-

sorbed 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 cur-

rent federal income tax withholding

system. Friedman says he now regrets

his role, although at the time he be-

lieved the new system was superior 

to the one it replaced (Friedman and

Friedman 1998, 123). Working in Wash-

ington gave him great insight and the

chance for a firsthand look at how

bureaucracies function.

The war brought many changes.

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 be-

havior offered an alternative to the the-

ory propounded in John Maynard

Keynes’ The General Theory of Employ-

ment, Interest, and Money. Friedman’s

work showed Keynes’ stable, predict-

able consumption function is an em-

pirically inaccurate estimator of short-

run, aggregate consumption. Friedman

offered his alternative permanent in-

come function, along with a theoretical

discussion that plausibly explained

why his theory was better. In produc-

ing this work, Friedman put into prac-

tice a methodology that became the

foundation of one of the most cited

and attacked — and defended — articles

in the history of economics: On the Meth-

odology of Positive Economics (1953,

1– 43).

The most controversial contention

in this essay is that a theory’s assump-

tions don’t matter because predictive

power is everything. The essay also

Rose and Milton Friedman in 1987.

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 his-

tory, 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 individu-

alism was most rugged. The evidence of this is to be found in the statistics that economists have con-

structed 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

Historical Myths in American Economic Development

Hoover Institution

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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 mili-

tary, the negative income tax, floating

money-exchange rates, the Dutch auc-

tion procedure for selling government

securities, school vouchers and opposi-

tion 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 lead-

ing economists. Ironically, Friedman dis-

likes this publicity aspect of the Nobel

Prize (Friedman and Friedman 1998,

443).

After leaving Chicago in 1977,

Friedman became a senior fellow at

the quantity theory — led to the estab-

lishment of a demand-side alternative

to Keynes for conducting macroeco-

nomic policy. Given Friedman’s posi-

tion at Chicago, the prestige of its eco-

nomics 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 govern-

ment 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 trade-

off between inflation and unemploy-

ment, known as the Phillips curve, was

not a sustainable, long-run policy option.

In the speech, Friedman resurrected

the classical notion of real factors de-

termining long-run employment, with

monetary changes unable to lower the

unemployment rate in the long run.

Considered heresy at the time, the nat-

ural 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—Capital-

ism 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

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 econ-

omy. 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 pur-

suing 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, cho-

sen 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

Does Business Have a “Social Responsibility?”

The recognition that substantial infla-

tion is always and everywhere a monetary

phenomenon is only the beginning of an

understanding of the cause and cure of infla-

tion. 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

A Monetarist 

Looks at Inflation

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Notes

1

He did not ignore Marshall and microeco-

nomics, however. He has written or coauth-

ored many articles on choice under uncer-

tainty 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 microeco-

nomics. See Walters (1987, 426).

2

Popper (1968). Two points: Popper was

inconsistent in his belief in the inductive

problem or its possible solution, and falsifi-

cation 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).

Stanford’s Hoover Institution and

moved to San Francisco. Even in retire-

ment, Friedman continues to travel,

lecture and write, still in the fray of

contested ideas, still expressing his

views on current economic and politi-

cal issues. He will be remembered, of

course, for his technical brilliance as an

economist. However, like the 19th-

century 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 chang-

ing the world.”

Federal Reserve Chairman Alan

Greenspan, who attended the cere-

mony, added, “There are many Nobel

Prize winners in economics, but few

have achieved the mythical status of

Milton Friedman.”

■

— Robert L. Formaini

Senior Economist

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

Federal Reserve Bank of Dallas

P.O. Box 655906

Dallas, TX  75265-5906

Visit our web site at www.dallasfed.org.

——— (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).

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 subsi-

dies 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, for-

eign aid, but ignoble for foreign countries to send us gifts in the indirect form of goods and ser-

vices 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 cit-

izens who own or work in the industries that are subsidized. No doubt, if such subsidies are intro-

duced suddenly or erratically, that will adversely affect owners and workers in U.S. industries pro-

ducing 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 sud-

den changes should be applied evenhandedly to domestic and foreign trade.

■

—Free to Choose: A Personal Statement, 45

Who Pays for Foreign Export Subsidies?