Milton Friedman

Biography

Milton Friedman was born in 1912 in Brooklyn, New York, to Jewish immigrant parents from Hungary. He studied at Rutgers University, where he earned a bachelor's degree in economics, and at the University of Chicago, where he earned his master's degree. He completed his doctorate at Columbia University in 1946. During the Second World War, he worked for the U.S. Treasury Department and the Statistical Research Group at Columbia, where he developed his skills in mathematical and statistical analysis.

Friedman spent most of his academic career at the University of Chicago, where he was a professor of economics from 1946 to 1977. He was the leading figure of the Chicago School of Economics, which emphasized free markets, monetary policy, and the critique of government regulation. His major works include Capitalism and Freedom (1962), A Monetary History of the United States, 1867-1960 (1963, with Anna Schwartz), and Free to Choose (1980, with Rose Friedman). In 1976, he was awarded the Nobel Prize in Economics. He died in 2006 at the age of 94.

Historical Background

Friedman wrote during a period of expanding government power and growing influence of Keynesian economics. The post-war consensus in the Western democracies was based on the belief that government should play a major role in managing the economy, providing welfare, and regulating business. The New Deal in the United States and the welfare state in Europe had created a large and growing government sector, and the Keynesian theory of demand management was the dominant economic doctrine.

Friedman's project was to challenge this consensus. He argued that the expansion of government was a threat to individual freedom, that the Keynesian theory of economic management was fundamentally flawed, and that the free market was the most effective mechanism for organizing economic activity. His ideas, which were considered radical in the 1950s and 1960s, became increasingly influential in the 1970s and 1980s, as the problems of inflation, unemployment, and slow growth undermined the Keynesian consensus.

Core Ideas

Free Markets and Economic Freedom

Friedman's central thesis, developed in Capitalism and Freedom, is that economic freedom is a necessary condition for political freedom. The free market, he argued, is the only mechanism that can coordinate economic activity without coercion. In a free market, individuals are free to choose their own occupations, to start their own businesses, and to enter into voluntary contracts with others. The market disperses power, prevents the concentration of authority, and provides a check on the power of the state.

The relationship between economic freedom and political freedom is not automatic, but Friedman argued that the historical record shows that societies with free markets tend to be more politically free than societies with centrally planned economies. The reason is that economic freedom creates independent centers of power that can resist the encroachments of the state. When the government controls the economy, it has the power to control every aspect of life, and political freedom becomes impossible.

Monetarism

Friedman's theory of monetarism is his most important contribution to economic theory. He argued that the quantity of money in the economy is the primary determinant of the level of economic activity and the rate of inflation. The central bank, by controlling the money supply, can stabilize the economy and prevent both inflation and depression. The goal of monetary policy, Friedman argued, should be a steady, predictable rate of growth of the money supply, rather than discretionary attempts to fine-tune the economy.

The monetarist theory was a direct challenge to the Keynesian orthodoxy that dominated economic policy in the post-war period. Friedman and his colleague Anna Schwartz, in A Monetary History of the United States, argued that the Great Depression was caused not by a failure of market capitalism but by the failure of the Federal Reserve to prevent a massive contraction of the money supply. This analysis had a profound influence on the conduct of monetary policy, and the shift toward monetarist policies in the 1980s was a direct result of Friedman's work.

The Critique of Government Regulation

Friedman was a relentless critic of government regulation and intervention in the economy. He argued that most government regulations, however well-intentioned, have unintended consequences that are worse than the problems they were designed to solve. Minimum wage laws, for example, may help some workers but they also create unemployment among the least skilled workers. Rent control may help some tenants but it also reduces the supply of housing and leads to deterioration of the housing stock.

Friedman's critique of regulation was based on the insight that government officials, like everyone else, are motivated by self-interest and are subject to the same limitations of knowledge as everyone else. The idea that government officials can disinterestedly regulate the economy for the public good is a naive fantasy. The market, despite its imperfections, is a more effective mechanism for organizing economic activity than the government, because it harnesses the self-interest of individuals and coordinates their activities through the price system.

The Negative Income Tax

Friedman's proposal for a negative income tax was one of his most innovative and influential policy ideas. The negative income tax would replace the complex system of welfare programs with a simple cash transfer to individuals whose income falls below a certain threshold. The negative income tax is a tax credit that is paid to low-income individuals, and it phases out as income rises, providing a guaranteed minimum income without creating a poverty trap.

The negative income tax was a radical departure from the existing welfare system, which Friedman criticized as inefficient, paternalistic, and destructive of individual initiative. The negative income tax, he argued, would be more efficient, more respectful of individual choice, and more effective in reducing poverty. The proposal has influenced the debate about welfare reform, and it has been implemented in various forms in several countries, including the Earned Income Tax Credit in the United States.

The Shareholder Theory of Corporate Responsibility

Friedman's shareholder theory of corporate responsibility is one of his most controversial and influential ideas. In a famous article in The New York Times Magazine in 1970, he argued that "the social responsibility of business is to increase its profits." The managers of a corporation are the employees of the shareholders, and their primary duty is to maximize the value of the corporation for its owners. Any attempt to use corporate resources for social purposes, Friedman argued, is a form of taxation without representation, and it undermines the legitimacy of the market system.

The shareholder theory has been enormously influential in the theory of corporate governance, and it has shaped the practice of corporate management for decades. It has also been the subject of intense criticism, particularly from advocates of corporate social responsibility and stakeholder theory. The debate about the purpose of the corporation is one of the most important debates in contemporary business ethics and political economy.

Major Works

Friedman's major works include Capitalism and Freedom (1962), his most famous book and a classic of classical liberal political philosophy; A Monetary History of the United States, 1867-1960 (1963, with Anna Schwartz), his most important contribution to economic theory; Free to Choose (1980, with Rose Friedman), a popular defense of free markets that was the basis for a television series; and "The Methodology of Positive Economics" (1953), his most important methodological essay.

Philosophical Influence

Friedman's influence on economic policy and political thought in the late twentieth century was immense. His ideas shaped the economic reforms of Margaret Thatcher in Britain and Ronald Reagan in the United States, and the shift toward free markets, deregulation, and monetary discipline that characterized the period from the 1980s onward. His critique of government regulation and the welfare state changed the terms of political debate, and his defense of free markets influenced a generation of economists, politicians, and public intellectuals.

Friedman's influence extends beyond economics to political philosophy, public policy, and the methodology of the social sciences. The Stanford Encyclopedia notes that Friedman's work is essential reading for anyone who wishes to understand the revival of classical liberalism in the twentieth century and the relationship between economic freedom and political freedom.

Related Concepts

Friedman's philosophy connects to several major themes in modern thought. His defense of free markets connects to the tradition of classical liberalism, from Smith to Hayek, and to the contemporary theory of market processes. His monetarism connects to the tradition of monetary theory, from Hume to the contemporary theory of monetary policy. His critique of regulation connects to the tradition of public choice theory, from Buchanan to the contemporary theory of government failure. His proposal for a negative income tax connects to the tradition of welfare reform, from the guaranteed minimum income to the contemporary theory of basic income. And his shareholder theory connects to the tradition of corporate governance, from the theory of the firm to the contemporary debate about corporate social responsibility.

Sources

1. Stanford Encyclopedia of Philosophy, "Milton Friedman." A comprehensive scholarly reference covering Friedman's life, his economic and political philosophy, and his influence on economic policy and classical liberal thought.
2. Internet Encyclopedia of Philosophy, "Milton Friedman." An accessible overview of Friedman's philosophical contributions and historical significance.