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Economic Insights

Milton Friedman
Economist as Public Intellectual

Professor Steven N.S. Cheung

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, government 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,
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 commemorates the occasion with this issue of Economic Insights. Happy birthday, Milton!
— Bob McTeer
President, Federal Reserve Bank of Dallas

Milton Friedman has been an ardent
and effective advocate for free enterprise 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 experiences, as well as insights into entrepreneurship 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 authorities 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

Milton Friedman
introduced the young economist to the
works of Cambridge School of Economics founder Alfred Marshall. Jones,
a pivotal figure in the monetarist camp,
introduced Friedman to Frank Knight
and the early Chicago school, especially Knight’s Risk, Uncertainty, and
After Friedman received his undergraduate 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 economics student Rose Director, who became an active partner in his professional work. He continued his graduate
study at Columbia University and completed 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-

uct accounts and many of the techniques 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 surprising 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 Committee, he used his statistical acumen to
help develop better consumer spending 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

asserts that a simpler theory is preferable if it predicts a higher number
of outcomes—a variation on Occam’s
Razor—and that a good theory will
“surprise” us by predicting counterintuitive 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 absorbed 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 current federal income tax withholding
system. Friedman says he now regrets
his role, although at the time he believed the new system was superior
to the one it replaced (Friedman and
Friedman 1998, 123). Working in Washington gave him great insight and the
chance for a firsthand look at how
bureaucracies function.
The war brought many changes.

Historical Myths in American Economic Development
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 history, 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 individualism was most rugged. The evidence of this is to be found in the statistics that economists have constructed 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

Hoover Institution

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 behavior offered an alternative to the theory propounded in John Maynard
Keynes’ The General Theory of Employment, Interest, and Money. Friedman’s
work showed Keynes’ stable, predictable consumption function is an empirically inaccurate estimator of shortrun, aggregate consumption. Friedman
offered his alternative permanent income function, along with a theoretical
discussion that plausibly explained
why his theory was better. In producing this work, Friedman put into practice a methodology that became the
foundation of one of the most cited
and attacked—and defended—articles
in the history of economics: On the Methodology of Positive Economics (1953,
The most controversial contention
in this essay is that a theory’s assumptions don’t matter because predictive
power is everything. The essay also

Rose and Milton Friedman in 1987.

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 techniques 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 recognized counterrevolution against Keynesianism. Keynes’ view poses that government could, and should, fine-tune
the nation’s macroeconomic performance, 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 economic paradigm that the University of
Rochester’s Karl Brunner named monetarism. 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—

A Monetarist
Looks at Inflation
The recognition that substantial inflation is always and everywhere a monetary
phenomenon is only the beginning of an
understanding of the cause and cure of inflation. 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

the quantity theory—led to the establishment of a demand-side alternative
to Keynes for conducting macroeconomic policy. Given Friedman’s position at Chicago, the prestige of its economics 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 government 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 tradeoff between inflation and unemployment, known as the Phillips curve, was
not a sustainable, long-run policy option.
In the speech, Friedman resurrected
the classical notion of real factors determining long-run employment, with
monetary changes unable to lower the
unemployment rate in the long run.
Considered heresy at the time, the natural 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—Capitalism 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

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 military, the negative income tax, floating
money-exchange rates, the Dutch auction procedure for selling government
securities, school vouchers and opposition 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 leading economists. Ironically, Friedman dislikes this publicity aspect of the Nobel
Prize (Friedman and Friedman 1998,
After leaving Chicago in 1977,
Friedman became a senior fellow at

Does Business Have a “Social Responsibility?”
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 economy. 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 pursuing 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, chosen 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

Who Pays for Foreign Export Subsidies?
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 subsidies 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, foreign aid, but ignoble for foreign countries to send us gifts in the indirect form of goods and services 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 citizens who own or work in the industries that are subsidized. No doubt, if such subsidies are introduced suddenly or erratically, that will adversely affect owners and workers in U.S. industries producing 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 sudden changes should be applied evenhandedly to domestic and foreign trade. ■
—Free to Choose: A Personal Statement, 45

Stanford’s Hoover Institution and
moved to San Francisco. Even in retirement, Friedman continues to travel,
lecture and write, still in the fray of
contested ideas, still expressing his
views on current economic and political issues. He will be remembered, of
course, for his technical brilliance as an
economist. However, like the 19thcentury 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 changing the world.”
Federal Reserve Chairman Alan
Greenspan, who attended the ceremony, added, “There are many Nobel
Prize winners in economics, but few
have achieved the mythical status of
Milton Friedman.” ■
— Robert L. Formaini
Senior Economist



He did not ignore Marshall and microeconomics, however. He has written or coauthored many articles on choice under uncertainty 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 microeconomics. See Walters (1987, 426).
Popper (1968). Two points: Popper was
inconsistent in his belief in the inductive
problem or its possible solution, and falsification can only work if a theory is formulated
in such a way that it can be falsified by
empirical evidence.

Sources and Suggested Reading

——— (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
——— (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
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).

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

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