The free market revolutionary who changed Economics

Early Life and Studies

Milton Friedman was born on July 31, 1912 in Brooklyn, New York. His parents were recent Jewish immigrants from the Kingdom of Hungary (now Ukraine). They both worked as dry goods merchants. Shortly after Milton’s birth, the family relocated to New Jersey. He was a talented student, and graduated from Rahway High School in 1928, with less than 16 years. Then, he went to Rutgers University, where he specialized in Mathematics and Economics and initially intended to become an actuary. During his time at Rutgers, he became convinced that modern economics could help end the Great Depression. After graduating from Rutgers, he went with a scholarships to do graduate work in economics at the University of Chicago, and earned a Master of Arts degree in 1933. In a fellowship he had at Columbia University, he studied statistics with renowned statistician and economist Harold Hotelling. He met his future wife in Chicago, economist Rose Director, and formed what would prove to be lifelong friendships with George Stigler and Allen Wallis.

During WWII he worked for the Treasury Department. He was part of the work group that brought about income tax withholding as a “temporary” measure to help fund the war. Though he never questioned the necessity of it in wartime, Friedman later regretted having forced withholding on Americans. When the government made the emergency measure a permanent part of its peacetime taxation, Milton was devastated.

Contribution to Economics

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Image courtesy of ellenm1 at Flickr.com

His Theory of the Consumption Function was his first big breakthrough in the field of economics in 1957. “Friedman argued that the best way to make sense of saving and spending was not, as Keynes had done, to resort to loose psychological theorizing, but rather to think of individuals as making rational plans about how to spend their wealth over their lifetimes. This wasn’t necessarily an anti-Keynesian idea, in fact, the great Keynesian economist Modigliani simultaneously and independently made a similar case, with even more care in thinking about rational behavior, in work with Albert Ando. But it did mark a return to classical ways of thinking, and it worked. The details are a bit technical, but Friedman’s ‘permanent income hypothesis’ and the Modigliani ‘life cycle model’ resolved several apparent paradoxes about the relationship between income and spending, and remain the foundations of how economists think about spending and saving to this day.” Said Paul Krugman, on an article in New York Times.

But, his seminal contribution to economics came through his analysis of prevailing macroeconomic theories. At the time, macroeconomics was dominated by Keynesian economists. This school of economic thought, pioneered by John Maynard Keynes, believes that fiscal policy is more important than monetary policy, that government spending should be used to neutralize the volatility of the business cycle and that prices are inherently sticky.

Friedman opposed these views with his own economic theory of free-market monetarism. Friedman began to focus more and more on the role of money in the economy. Originally, he supported a gold standard to check inflation and prevent bank runs, but he moved toward a hard money policy where the amount of money in circulation would increase at the same pace as the nation’s economic growth. He believed this would be a sufficient check to keep governments from printing as much money as they pleased, while still increasing the money supply enough to allow growth to continue. His book “Capitalism and Freedom” defended free market capitalism. The book espoused the free-market solutions to many problems and caught a lot of attention for proposing a negative income tax for people under a certain income and school vouchers to improve the education system. And later, Friedman used monetarism to openly contradict the Keynesian principles of the Keynesian multiplier and the Phillips curve.

Related: To read more about the book from Milton Friedman, Patrick Dwyer invites you to go to Capitalism and Freedom.

Late Years and Death

Friedman, after an intense burst of childhood piety, rejected religion altogether, and described himself as an agnostic. He received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. He was best known for explaining the role of money supply in economic and inflation fluctuations. By managing the amount of money sloshing through a financial system, Milton theorized, central banks could control inflation without making costly mistakes. He died of heart failure at the age of 94 years in San Francisco. He was still a working economist performing original economic research; his last column was published in The Wall Street Journal the day after his death.

If you are interested in the First United States Secretary of the Treasury, follow the link to history of Alexander Milton.

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