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Who Was Milton Friedman? What Is Monetarism?

Milton Friedman was an American economist and statistician who believed in free-market capitalism and was regarded as a leader of the Chicago School of monetary economics.

In 1976, he earned the Nobel Prize in economic sciences for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy.

Friedman is the author of several books, including Capitalism and Freedom. He was awarded the Presidential Medal of Freedom in 1988.

Milton Friedman died on Nov. 16, 2006.

Key Takeaways

  • Milton Friedman was an American economist who advocated for free-market capitalism.
  • He is the founder of monetarism, an active monetary policy where governments control the amount of money in circulation.
  • Friedman helped develop income tax withholding during World War II.
  • Milton Friedman served as the economic advisor to President Richard Nixon and President Ronald Reagan.
  • He was awarded the 1976 Nobel Prize in economic sciences.

Early Life and Education

Milton Friedman was born on July 31, 1912, in Brooklyn, New York. After earning a bachelor’s degree from Rutgers University, Friedman completed a master’s degree at the University of Chicago and a Ph.D. at Columbia University,

In 1935, he joined the National Resources Planning Board conducting a consumer budget survey, a position that would later spur his book, A Theory of the Consumption Function.

Income Tax

In 1941, Milton Friedman joined the U.S. Treasury Department, working on wartime tax policy during the first two years of World War II. Friedman once noted that his wife “has never forgiven me for the part I played in devising and developing withholding for the income tax.”

As part of a think tank that brought about income tax withholding as a “temporary” measure to help fund the war, Friedman never questioned the necessity of it in wartime, citing “there is no doubt that it would not have been possible to collect the amount of taxes imposed during World War II without withholding taxes at the source.”

Friedman later regretted having forced withholding on Americans and was appalled when the government made the emergency measure a permanent part of its peacetime taxation.

Friedman vs. Keynes

Following the end of WWII, Friedman joined the faculty at the University of Chicago, becoming a full professor in 1948.

At the university, Friedman led the postwar challenge to the theories of John Maynard Keynes, the British economist who maintained that governments must help capitalist economies through periods of recession and prevent boom times from exploding into high inflation.

Milton Friedman argued that the government stay out of the economy and let the free market work.Where Keynesians may support short-term solutions to spur consumer spending and the economy, by offering a temporary tax break or stimulus check, Friedman theorized that people adjust their spending habits in response to real changes in their lifetime income, not temporary changes to their current income.

In 1957, Friedman debunked Keynesian thinking with A Theory of the Consumption Function, his book on consumer spending.

Milton Friedman and others at the Chicago school garnered several Nobel Prizes in economic science for their work in dismantling Keynesian concepts, including Friedman’s 1976 Prize for his achievements in the fields of consumption analysis, monetary history, and theory demonstration of the complexity of stabilization policy.

Monetarism

Regarded as a leader of the Chicago School of monetary economics, Friedman stressed the importance of the quantity of money as an instrument of government policy and a determinant of business cycles and inflation.

His monetarism theory proposed that money supply changes have immediate and long-term effects. In his 1963 book, A Monetary History of the United States, Milton Friedman, and co-author Anna Schwartz argued it was monetary policy, and not a failure of free-market capitalism, that led to the Great Depression.

Surveying a century of monetary policy during crashes, booms, recessions, and depressions, Friedman concluded that the Federal Reserve was a main cause of the depression because it curtailed the money supply by over a third between 1929 and 1933. This contraction caused a crash that extended into a depression.

Monetarism

A monetary economic theory which focuses on the role governments play in controlling the amount of money in circulation. 

Originally supporting a gold standard, Milton Friedman moved toward a hard money policy where the amount of money in circulation increases at the same pace as the nation’s economic growth. In keeping with his opposition to Keynesian thinking, Milton Friedman took an active dislike to the Bretton Woods Agreement, an attempt to fix currencies rather than let them float in a free market.

When the Keynesian system buckled under stagflation in the 1970s, academics began to take Friedman’s anti-inflation, hard money policies seriously. Monetarism eclipsed Keynesian solutions.

Former Federal Reserve chair, Alan Greenspan observed that Friedman came along as it became clear that the Keynesian consensus, which had worked well from the 1930s, could not explain the stagflation of the 1970s. In 1979, Federal Reserve Chair Paul Volcker implemented Friedman’s monetary policies.

Friedman became a guiding force for economic policies espoused by President Ronald Reagan in the United States and Prime Minister Margaret Thatcher in Britain. 

Legacy

Milton Friedman conceived many innovations in economic theory during the second half of the 20th century. His work explaining monetary supply and its effect on economic and inflationary shifts garnered him worldwide respect.

A Friedman collaborator, Edmund Phelps, was the 2006 Nobel Prize winner in economics for a theory the two Nobelists developed in the 1960s regarding unemployment and inflation, a theory that continues to be used as a practical guide among the world’s major central banks, including the U.S. Federal Reserve.

Friedman served as a senior fellow at the Hoover Institution from 1977 until 2006. He was the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976 and was a member of the research staff of the National Bureau of Economic Research from 1937 to 1981.

Friedman acted as president of the American Economic Association, the Western Economic Association, and the Mont Pelerin Society. He also was a member of the American Philosophical Society and the National Academy of Sciences.

What Was Milton Friedman’s Role at the Hoover Institution?

Milton Friedman was a senior research fellow at the Hoover Institution from 1977 to 2006. Based at Stanford University, it is a public policy think tank that seeks to improve the human condition by advancing ideas that promote economic opportunity and prosperity.

What Is the Theme of Milton Friedman’s Book “Capitalism and Freedom?”

Capitalism and Freedom was a commentary on public policy with an emphasis on the preservation and extension of individual freedom. The book espoused the free-market solutions to many economic issues, such as proposing a negative income tax for those under a certain income level and school vouchers to improve the education system.

What School of Thought Did Milton Friedman Align With?

Milton Friedman is associated with the Chicago School, which believes that government should have limited involvement in free-market activities and that the best outcomes result when markets freely allocate resources in an economy.

The Bottom Line

Milton Friedman was an American economist and Nobel Laureate. Regarded as the founder of monetarism, his work and theories influenced economic policies in the United States and abroad. Friedman is remembered as a leader of the Chicago school of monetary economics and an advocate for free-market capitalism.

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