Milton Friedman was an American economist who advocated for free-market capitalism. Friedman’s free-market theories influenced economic policies during his time as one of the University of Chicago’s leading intellectuals.
Most of Friedman’s opinions criticized the Keynesian-style economic model, which he observed to be ineffective, or at best, effective only to a small extent because it leads to the crowding out of an investment. He notably illustrated the concept in his book titled “A Monetary History of the United States, 1867-1960.”
Milton Friedman was an influential economist who advocated for a free-market economy, and whose work is reflected in his major books such as “Capitalism and Freedom (1962).”
Most of Friedman’s impactful works in the course of his career transpired at the University of Chicago.
Friedman is regarded as an economist intellectual and free-market thinker – only comparable with John Keynes.
Understanding Milton Friedman
Early Life and Education
Milton Friedman was born on July 31, 1912, in Brooklyn, New York, by Jewish immigrants from Eastern Ukraine. He passed away on November 16, 2006, in California. He attended Rutgers University under a state scholarship program where he earned his Bachelor’s degree in Economics and Statistics in 1932.
One year later, Friedman earned a Master’s degree at Chicago University and obtained his Ph.D. at Columbia University in 1946. He later studied income distribution in the U.S. at the National Bureau of Economic Research (NBER). At this point, he focused his work on the analysis of income-expenditure surveys and, thereafter, worked on tax research and statistical analysis.
During WWII, Friedman worked for the federal government as a mathematical statistician for military-economic research at the Division of War Research and as an advisor of the U.S. Department of the Treasury. In 1942, he proposed the Keynesian policy of taxation and recommended increasing taxes to curb wartime inflation and invented the first payroll withholding system.
After earning a Ph.D. in 1946, Friedman accepted an offer to teach economics at the University of Chicago, where he played a role in establishing an intellectual community. The 1957 Theory of Consumption Function marked his first literary breakthrough in the economic discipline.
According to the theory, permanent changes to income greatly impact an individual’s consumption and saving decisions, rather than the perceived ephemeral changes to income. In connection with Friedman’s theory, he developed the permanent income hypothesis, which explained why increasing tax in the short term reduces savings and maintains the level of static consumption.
Friedman also contributed immensely to seminal works, where he analyzed the prevailing macroeconomic theories when the Keynesian Economic Theory dominated macroeconomics. The Keynesian theory, which emphasizes the value of macroeconomic variables and asserts that fiscal policy is more important than monetary policy, was coined by British economist John Maynard Keynes.
Monetarism and Consumption Theory
Within the composition of the Keynesian theory, Friedman devised the theory of monetarism that embodied a slightly adjusted economic policy. He outlined the role of monetarism and suggested that monetary supply affects price levels. Friedman further criticized the Phillips Curve and the Keynesian multiplier based on the theory of monetarism.
In 1957, he proposed a treatise called A Theory of Consumption Function, whose viewpoint went against that of the Keynesian’s. By introducing the term “permanent income,” he changed how economists interpreted the consumption function.
The treatise, alongside monetary theory, earned Friedman a Nobel Prize in Economics in 1976. He also published pioneering books throughout his career, focusing on the modern economy. Additionally, he published numerous impactful scholarly articles that contributed immensely to the field of economics.
Keynesian Economics vs. Milton Friedman and Monetarism
John Maynard Keynes
Keynes and Friedman are hailed as the two most influential economists of their time. While Keynes rose to fame by first developing the systematic macroeconomic policy for governments, Friedman is widely credited for proposing monetary policy and criticizing Keynes’ line of thought.
Keynes demonstrated how governments could use monetary policy to control aggregate demand and smoothen out recessions. He argued that governments could only spur investment and consumption through strategic spending. As a result, it would help to alleviate unemployment.
Keynesian proposals resulted in a new economic school of thought, which earned the name Keynesian economics. Critics of Keynesian theories argued that his pseudo-scientific justifications were meant for politicians without a long-term vision to run fiscal deficits and amass high levels of debt.
Friedman worked to render Keynesian economics obsolete as he devised his ideas about monetarism. He called for free-market capitalism to deregulate most areas of the economy. He also called for the return of classic economists, such as Adam Smith, who criticized the contemporary ideas of spending deficits and further suggested that expanding fiscal policy only results in impaired coordination.
Instead, Friedman advocated for free trade and the use of monetary policy to grow an economy. The slow and steady increase of money supply in an economy and the quantity theory of money was dubbed monetarism. His contributions and popularity attracted similar free-market intellectuals in the University of Chicago to form the free-thinkers community referred to as the Chicago School of Economics.
Through his new paradigm in economics, Friedman brought about renewed concepts of human niceties, inflation, public policy, interest, emphasis on prices, and employment. After the 1976 Nobel Prize in Economics, he became the new face of free-market economics, bringing Keynesian policies to an end.