Milton Friedman

Who Was Milton Friedman?

Milton Friedman was an American economist and statistician best known for his strong belief in free-market capitalism.

Key Takeaways

  • Milton Friedman was one of the leading economic voices of the latter half of the 20th century and popularized many economic ideas that are still important today.
  • Friedman's economic theories became what is known as monetarism, which refuted important parts of Keynesian economics.
  • In his book A Monetary History of the United States, 1867-1960, Friedman illustrated the role of monetary policy in creating and, arguably, worsening the Great Depression.

Understanding Milton Friedman

Milton Friedman was born on July 31, 1912, in New York, and died on Nov. 16, 2006, in California. Friedman grew up on the East Coast and attended Rutgers University, studying mathematics and economics. He graduated from college in 1932 and went on to earn a Ph.D. in economics at Columbia University in 1946.

In 1937, Friedman took a position at the National Bureau of Economic Research (NBER) to study income distribution in the United States. After his work on income inequality, he focused on tax research and statistical analysis. A strong advocate for war in the early 1940’s, he went to work for the U.S. Federal government at the Division of War Research and as an adviser to the Treasury Department, where he recommended increasing taxes to suppress wartime inflation and devised the first system of income tax withholding.

In 1946, after graduating with a Ph.D., Friedman took an economics position at the University of Chicago, where he conducted his most impactful work. During his time as a professor at the University of Chicago, Friedman developed numerous free-market theories that opposed the views of traditional Keynesian economists. In his book A Monetary History of the United States, 1867-1960, Friedman illustrated the role of monetary policy in creating and, arguably, worsening the Great Depression.

Theory of the Consumption Function

Friedman's first big breakthrough in the field of economics was his Theory of the Consumption Function in 1957, which championed the idea that a person's consumption and savings decisions are more greatly impacted by permanent changes to income, rather than changes to income that are perceived as ephemeral. This theory produced the permanent income hypothesis, which explained why short-term tax increases actually decrease savings and keep consumption levels static, all else being equal.

Friedman's seminal contribution to economics came through his analysis of prevailing macroeconomic theories. During his time as a professor, macroeconomics was dominated by Keynesian economic theory. This school of economic thought, pioneered by British economist John Maynard Keynes, emphasizes the usefulness of macroeconomic aggregate variables, holds 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.


Within the general framework of Keynesian economics, Friedman developed his own economic theory with slightly different conclusions for economic policy. Through this theory, called Monetarism, Friedman expressed the importance of monetary policy and pointed out that changes in the money supply have real short-term and long-term effects—specifically, the money supply affects price levels. Further, Friedman used monetarism to openly contradict the Keynesian principles of the Keynesian multiplier and the Phillips curve

Friedman was awarded the Nobel Prize in Economics in 1976 for his research on income and consumption and for his developments in monetary theory. Over the course of his career, he published pioneering books on the modern economy, as well as numerous influential articles, changing the way economics is taught.

Milton Friedman and Monetarism vs. Keynesian Economics

John Maynard Keynes and Milton Friedman were two of the most influential economic and public policy thinkers of the 20th century. If Keynes was the most influential economic thinker of the first half of the 20th century, Friedman was the most influential economic thinker of the second half.

While Keynes is widely credited with creating the first systematic approach to macroeconomic government policy, Friedman rose to fame in part by criticizing Keynes' policy proposals and instead arguing for more emphasis on monetary policy.

Keynes's Theories

Keynes argued that an interventionist government could help smooth out recessions by using fiscal policy to prop up aggregate demand. Strategic government spending could spur consumption and investment, argued Keynes, and help alleviate unemployment.

Keynes's theories gave rise to a new dominant paradigm in economic thought, which was subsequently dubbed Keynesian economics. While still popular, some have argued that Keynesian economics has provided a pseudo-scientific justification for short-sighted elected politicians to run fiscal deficits and accumulate massive levels of government debt.

Friedman's Free Market Thinking

As Friedman developed his ideas about monetarism, he came to oppose many of the policy proposals espoused by the Keynesian economists in the post-War period. He argued for deregulation in most areas of the economy, calling for a return to the free market of classic economists, such as Adam Smith. He challenged contemporary notions of deficit spending and suggested that, in the long run, only dis-coordination results from expansionary fiscal policy.

Friedman argued for free trade, smaller government, and a slow, steady increase of the money supply in a growing economy. His emphasis on monetary policy and the quantity theory of money became known as monetarism. The popularity of Friedman attracted other free-market thinkers to the University of Chicago, giving rise to a coalition referred to as the Chicago School of economics.

Reshaping Academic Economic Thought

When Friedman won the Nobel Prize in Economic Sciences in 1976, it marked the turning of the tide in academic economic thought, away from Keynesianism and toward the burgeoning Chicago School. Friedman brought about a renewed emphasis on prices, inflation, and human incentives, a direct counter to Keynes' focus on employment, interest, and public policy.

Keynes was seen as an enemy of laissez-faire, and Friedman became the new public face of free markets. Friedman won a major intellectual victory after three decades of Keynesian policies ended in stagflation in the late 1970s, something establishment Keynesians generally thought was impossible.

Key Implications of Milton Friedman's Theories

The following are some lessons that can be taken from Friedman and his economic theories.

1. Judge policies by their results, not their intentions.

In many ways, Friedman was an idealist and libertarian activist, but his economic analysis was always grounded in practical reality. He famously told Richard Heffner, host of "The Open Mind," in an interview: "One of the great mistakes is to judge policies and programs by their intentions rather than their results."

Many of Friedman's most controversial positions were based on this principle. He opposed raising the minimum wage because he felt it unintentionally harmed young and low-skilled workers, particularly minorities. He also opposed tariffs and subsidies because they unintentionally harmed domestic consumers.

His famous 1989 "Open Letter" to then-drug czar Bill Bennett called for the decriminalization of all drugs, mostly because of the devastating unintended effects of the drug war. This letter lost Friedman a swath of conservative supporters, who he said failed "to recognize that the very measures you favor are a major source of the evils you deplore."

2. Economics can be communicated to the masses.

During Friedman's landmark interviews on Phil Donahue's show in 1979 and 1980, the host said his guest was "a man who will never be accused of making economics confusing," and told Friedman "the nice thing about you is that when you speak, I almost always understand you."

Friedman gave lectures on college campuses, including Stanford and NYU. He ran a 10-series television program entitled "Free to Choose" and wrote a book with the same name, adjusting his content for his audience.

Economist Walter Block, sometimes a friendly agitator of Friedman, memorialized his contemporary's 2006 death by writing, "Milton's valiant, witty, wise, eloquent and yes, I'll say it, inspirational analysis must stand out as an example to us all."

3. "Inflation is always and everywhere a monetary phenomenon."

The most famous excerpt from Friedman's writings and speeches is, "Inflation is always and everywhere a monetary phenomenon." He defied the intellectual climate of his era and reasserted the quantity theory of money as a viable economic tenet. In a 1956 paper titled "Studies in the Quantity Theory of Money," Friedman found that, in the long run, increased monetary growth increases prices but does not really affect output.

Friedman's work busted the classic Keynesian dichotomy on inflation, which asserted that prices rose from either "cost-push" or "demand-pull" sources. It also put monetary policy on the same level as fiscal policy.

4. Technocrats must not control the economy.

In a 1980 Newsweek column, Milton Friedman said: "If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand." Though perhaps poetic, this famous quote illustrates Friedman’s often doctrinaire opposition to government intervention into the economy; the Sahara Desert has in fact long been largely owned by various (African) national governments and has never experienced a shortage of sand. 

Friedman was a vocal critic of government power and was convinced free markets operated better on grounds of morality and efficiency. In terms of the actual economics, Friedman rested on a few truisms and basic, incentive-based analyses. He offered that no bureaucrat would or could spend money as wisely or as carefully as the taxpayers from whom it was taken. He spoke often of regulatory capture, the phenomenon where powerful special interests co-opt the very agencies designed to control them.

To Friedman, government policy is created and carried out through force, and that force creates unintended consequences that do not come from voluntary trade. The valuable political power of government force creates an incentive for the wealthy and devious to misuse it, helping generate what Friedman dubbed "government failure."

5. Government failures can be as bad, or worse, than market failures.

Friedman combined his lessons about unintended consequences and the bad incentives of government policy.

Friedman loved pointing out government failures. He exposed how President Richard Nixon's wage and price controls led to gasoline shortages and higher unemployment. He railed against the Interstate Commerce Commission (ICC) and Federal Communications Commission (FCC) for creating de facto monopolies in transportation and media. Famously, he contended that the combination of public schooling, minimum wage laws, drug prohibition, and welfare programs had unintentionally forced many inner-city families into cycles of crime and poverty.

This concept wraps up many of Friedman's most powerful ideas: policies have unintended consequences; economists should focus on results, not intentions; and voluntary interactions between consumers and businesses often produce superior results to crafted government decrees.

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  1. The Nobel Prize. "Milton Friedman: Biographical." Accessed Jan. 25, 2021.

  2. Milton Friedman, Anna Jacobson Schwartz. "A Monetary History of the United States, 1867-1960." Princeton University Press, 1995.

  3. PBS. "Open Mind." Accessed Jan. 25, 2021

  4. Hoover Institute. “An Open Letter to Bill Bennett." Accessed Jan. 25, 2021.

  5. Mises Institute. "Milton Friedman RIP." Accessed Jan. 25, 2021.

  6. Hoover Institution. "Studies in the Quantity Theory of Money." Accessed Jan, 25, 2021.