Milton Friedman. Eamonn Butler
was engaged in all the late 20th century’s most bitter but pivotal intellectual conflicts over the role of government in economic and social affairs. For most of that time, his views were very much in the minority. From the upheavals of the 1930s, through the New Deal, to the economic ‘fine-tuning’ and planning of the postwar years, a belief deepened that government activism in the economy was both essential and inevitable – a belief given credence by the writings of the time’s most prominent economist, John Maynard Keynes. Further afield, the Soviet Union was dominating Eastern Europe and exporting international socialism to Asia, Africa and Latin America, in an onslaught that seemed unstoppable.
Though it often seemed hopeless to resist these sweeping movements, Friedman joined the intellectual battle with enthusiasm. He relished a good argument, and took on even his sternest opponents in a characteristically cheerful manner – his common-sense, optimistic style winning him many supporters. A naturally brilliant teacher and communicator, he spoke to the wider public in popular books, magazine articles and interviews, and through a widely influential worldwide television series, Free to Choose. He was the world’s leading exponent of personal and economic freedom.
Friedman’s economic impact
Friedman won important battles in economic science, too. He is best known for his part in the fight against inflation, where his ideas were hugely successful. Through following the high-spending policies of Keynes and his followers, postwar governments had quickly found their finances getting out of control, their currencies losing their value and prices escalating. By the time the Berlin Wall fell in 1989, world inflation was a staggering 19% and rising. At that rate, prices double every five years.
“Inflation is a disease”, wrote Friedman: “a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society.” It could not be endured or safely traded off against other economic objectives like employment, as mainstream economists believed. He argued that there was a “natural rate” of unemployment, which reflected the realities of the labour market. When governments adopt high-spending policies to expand employment beyond this level, they succeed only in making things worse. Their policies raise inflation, which undermines the delicate workings of the market economy, and so causes more unemployment.
Friedman was blunt: the source of this disease could be explained in a single sentence – “Inflation is always and everywhere a monetary phenomenon.” To cure inflation, governments must take more care with money. It was a simple message from a brilliant communicator that eventually the world came to understand. As more and more governments adopted Friedman’s advice, world inflation plummeted, from a peak of nearly 29% in 1994 to just over 3% a decade later. With that came a significant rise in peace and prosperity. And most of the credit belongs to Milton Friedman.
The Making of an Economist
Though a staunch defender of free-market capitalism, Friedman came from a poor background. He was born in Brooklyn, New York, in 1912, to Hungarian Jewish immigrant parents. His father traded goods and took work as he could get it, while his mother sewed garments in a New York sweatshop. Some 68 years later, Friedman would take his Free to Choose television audience to exactly the same sort of workshop – this time in Hong Kong – to make the point that, while the pay and conditions might be poor, such places gave unskilled and often unloved immigrants their first step onto the ladder of self-improvement.
“My mother came to this country when she was 14 years old. She worked in a sweatshop as a seamstress, and it was only because there was such a sweatshop in which she could get a job that she was able to come to the US. But she didn’t stay in the sweatshop and neither did most of the others. It was a way station for them, and a far better one than anything available to them in the old country. And she never thought it was anything else. I must say that I find it slightly revolting that people sneer at a system that’s made it possible for them to sneer at it.”
– Milton Friedman, Playboy interview (1973)
From this foothold, the Friedmans were eventually able to move to a new home, 20 miles from New York, where they lived over the dry-goods store that his mother now ran while his father worked in New York. In Friedman’s early years, the family never earned enough to be above what today would be considered the poverty line; but through hard work they improved their lives.
Perhaps significantly for his subsequent career, Friedman’s parents spoke English, not their native Hungarian, in the home. Milton entered school earlier than most other children, and was a voracious reader. At 16, he won a scholarship to study mathematics at Rutgers University. And in addition to what he learnt in class, Rutgers also taught him something about the market. Freshmen at Rutgers were expected to wear green neckties: Friedman and a friend made some money by buying up a stock of these ties and selling them door to door. The next year they did a deal with Barnes & Noble to buy their classmates’ used textbooks and supply new ones.
But the big intellectual issue of the time was the stock market crash of 1929 and the Depression that followed it. Two of Friedman’s professors, Arthur Burns and Homer Jones, passed on to him their enthusiasm for how economics might explain these events and prevent them happening again. So Friedman turned to the study of economics.
He entered graduate classes at the University of Chicago, under the tutelage of the economists Jacob Viner, Frank Knight and Henry Simons – founders of what subsequently became known as the Chicago School of Economics, which was critical of the prevailing faith in government economic management. It was at Chicago that Friedman met his future wife, Rose Director, with whom he wrote a number of radical books on public policy, and who provided constructive criticism of nearly all of his professional economics works.
Friedman graduated in 1933, at the dawn of Roosevelt’s New Deal, with its large-scale public works projects aimed at creating new jobs, and high import tariffs aimed at preserving existing ones. Roosevelt’s expanding government was sucking in talented economists, and soon Friedman became one of them, joining the National Resources Committee in Washington. His research there on consumer behaviour gave him insights that would subsequently enable him to challenge Keynes himself.
The wartime Keynesian
Yet at this time, Friedman was – like everyone – a Keynesian. After a short teaching stint and a period at the National Bureau of Economic Research doing research with Simon Kuznets on professional incomes, Friedman returned to Washington in 1942 to undertake wartime work on tax policy for the US Treasury. He even worked on Keynes’s idea of raising taxes to combat inflation, testified to Congress in support of it, and co-authored a 1943 paper on the subject, Taxing to Prevent Inflation.
Years later, Friedman would come to support almost any cut in taxes, famously rejecting the notion that tax rises could affect inflation: only changes in the supply of money, he insisted, could do that. But he had yet to develop these groundbreaking ideas: indeed, he never even mentioned money in his 1942 testimony.
“I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”
– Milton Friedman, interview with John Hawkins (2003)
Friedman spent the rest of the Second World War in Columbia University’s Statistical Research Group, where he and colleagues developed a statistical technique known as sequential analysis. It still remains one of the key tools in quality control experiments, such as the clinical trials of new pharmaceuticals. Only after the war did he begin to strike out as a radical and controversial economic thinker.
The emerging radical
Milton Friedman was scarcely five feet tall. His friend George Stigler was over a foot taller. They acquired ironic nicknames: Mr Macro (Friedman, whose field was macroeconomics, the overall workings of the economy) and Mr Micro (Stigler, who specialised in microeconomics, the behaviour of individual consumers and households). In 1945, Stigler swung Friedman a job at the University of Minnesota, where they collaborated