Milton Friedman is my grand-teacher. I am one of the lucky few to be able to say that. I have been taught by a Professor Dougan in Public Finance and Price Theory who long ago studied under Friedman at the University of Chicago. Dr. Dougan would tell me that when Friedman would speak in a Chicago seminar, everyone would stop and listen. Friedman would wait until everyone had a chance to speak and then enlighten the entire crowd–graduate students, visiting faculty, and even colleagues, who at Chicago are always extremely brilliant.
However, Friedman’s life was not always like that–one in which he spoke and the crowd listened. In the early 1950s and 1960s, economists were busy studying the Great Depression and ways to learn from it. Many economists believed that the price system would lead to monopolies, modern corporations, and unemployment and that more governmental control is needed. More government control, or a more Keynesian approach, was deemed unsuccessful after the low growth, high inflation of the 1970s. It was not until then where economists started to listen to Friedman’s theory that prices could allocate resources efficiently. His theory stated 3 important functions of prices: they transmit information about tastes, resource availability and productive possibilities; they perform an incentive for people to use the least costly methods of production and highest valued uses for scarce resources; they determine who gets what by distribution of income. Friedman’s famous 1957 book, A Theory of the Consumption Function, shows that people’s annual consumption is a function of their expected average income, which rebukes Keynesian theory that people consume on what their current income is. Other key contributions on microeconomic issues in price theory related to how professional licenses (for dentists and doctors) distorts prices, abolishing the military draft, free-floating exchange rates and a negative income tax.
“When a young man is forced to serve at $45 a week, including the cost of his keep, of his uniforms, and his dependency allowances, and there are many civilian opportunities available to him at something like $100 a week, he is paying $55 a week in an implicit tax. … And if you were to add to those taxes in kind, the costs imposed on universities and colleges; of seating, housing, and entertaining young men who would otherwise be doing productive work; if you were to add to that the costs imposed on industry by the fact that they can only offer young men who are in danger of being drafted stopgap jobs, and cannot effectively invest money in training them; if you were to add to that the costs imposed on individuals of a financial kind by their marrying earlier or having children at an earlier stage, and so on; if you were to add all these up, there is no doubt at all in my mind that the cost of a volunteer force, correctly calculated, would be very much smaller than the amount we are now spending in manning our Armed Forces.” Presentation “Why Not a Volunteer Army” from December 1966, University of Chicago
Although Friedman’s work in price theory was monumental, many remember him for his work on monetary policy. In Friedman’s most influential work with co-author Anna Schwartz, A Monetary History of the United States, 1867-1960, they explain that monetary behavior is independent of nominal income and prices. Showing a time series of data, Friedman and Schwartz state that the increase or decrease in money supply created by the Fed led to all of the deep depressions in 1875-1878, 1892-1894, 1907-1908, 1920-1921, 1929-1933 and 1937-1938. Before this book, many, such as Keynes, viewed the Depression as a failure of the free market system rather than misguided Fed actions.
Inflation is always and everywhere a monetary phenomenon. The Counter-Revolution in Monetary Theory (1970)
Friedman dedicated his career to furthering monetary policy and proving that increasing money supply just increases inflation. He was a proponent of abolishing the Federal Reserve or creating policy rules to benchmark money supply growth, because monetary policy cannot ever completely smooth inflation and economic fluctuations.
Friedman was born in 1912 to Jewish immigrants in New York. His family relocated to Rahway, NJ (right near my home town) and he attended Rutgers University where he held a degree in Mathematics and Economics. His graduate work was completed at the University of Chicago. He passed away November 2006, but his career includes a Nobel Prize and a stint as an economic adviser to President Reagan among many other great accomplishments. As The Economist said, Friedman is “the most influential economist of the second half of the 20th century, possibly all of it”.
This is a great video of Friedman debunking a young man’s argument about the Ford Pinto:
Dr. Dougan often talks about how Friedman’s Monetary class was the best class he ever had. I too am thankful for my grand-teacher’s research and insight into price theory and monetary theory. The larger research has been passed down in books and journal articles, but the “family insight” into the life of Friedman adds a personal flare.