Milton Friedman, winner of the 1976 Nobel Prize for Economic Science and arguably the most important, influential, and widely renowned economist of our time, has died of heart failure at age 94. Dr Friedman was Paul Snowden Russell Distinguished Service Professor Emeritus in Economics at the University of Chicago, where he had been on faculty since 1946.
His professional reputation is based on path-breaking work in virtually all areas of economic study: price theory, labour economics, theory of consumer behaviour, macroeconomics, monetary theory, econometrics, methodology of economics, as well as empirical science in general. In his teaching and writing, he consistently applied his theories to real-world issues and problems, and he regularly ventured into social and political commentary as a Newsweek magazine columnist and elsewhere. Some of his books, particularly Capitalism and Freedom (1962) and Free To Choose (1980)—the latter co-written with his wife Rose—were directed to the widest possible popular audience.
Friedman's radical views in favour of free markets and individual liberty decisively shaped the economic strategies of, among many others, Ronald Reagan and Margaret Thatcher. His monetary theories informed the 1980 decision of Paul Volcker, then Chairman of the US Federal Reserve Bank, to clamp down on US money supply growth, bringing to an end the stagflation of the 1970s.
Yet, any attempt to pigeon-hole Friedman as a doctrinaire right-winger was doomed to failure, for he repeatedly argued against public policies favoured by Republicans, for example, the military draft and anti-drug laws. He explicitly rejected the "Republican" and "conservative" labels, preferring to call himself a 19th-century liberal—basically equivalent to "libertarian" in today's political parlance.
Dr Friedman and Edmund Phelps of Columbia University, this year's winner of the Nobel Prize for Economics, developed the now-generally accepted concept of the "natural rate of unemployment" (more accurately but less elegantly called the "non-accelerating inflation rate of unemployment", or NAIRU). Given current labour-market conditions, macroeconomic measures to decrease unemployment below the "natural rate" will generate higher inflation. Moreover, decreases in unemployment, if indeed any result, will be short-lived and unemployment will soon return to the "natural rate".
As a leader in the school of macroeconomic thought now known as "monetarism", Friedman maintained that changes in the money supply always precede changes in the inflation rate. This is summed up in one of his most frequently repeated aphorisms, "Inflation is always and everywhere a monetary phenomenon". He further contended that changes in the money supply can cause only temporary variations in economic production, but not permanent changes, as was held by Keynesianism. If money supply changes are unexpected, transitory economic effects can be large and persistent, but the economy will ultimately tend to return to the level of activity prior to monetary shocks. This points to the importance of the availability and accuracy of information about economic phenomena. Friedman's thought thus also encouraged economic investigation of decision-making under conditions of uncertainty.
Milton Friedman's perspective was very influential to me personally. In the late 1970s, I embarked on graduate studies in the Dept of Economics, University of Washington, at that time staffed by many professors who had graduated from the University of Chicago—Friedman's school. We graduate students used to say, only half-jokingly, that Milton Friedman was the department's patron saint.
Among the books assigned in my courses were Friedman's Price Theory and A Monetary History of the United States, 1867-1960. The latter, co-authored with Anna Schwartz, is considered by some to be Friedman's masterwork. For many students of economics, including me, it was a revelation of the power of theory-driven investigation when combined with credible empirical analysis.
Friedman and Schwartz argued that economic events and trends in US history since 1867 could be explained solely by reference to changes in the money supply and monetary system. They estimated the quantity of money in circulation in the United States and tracked that series alongside economic activity. Finding that the US money supply began to fall precipitously before the Great Depression struck the financial markets, they argued that US Federal Reserve Bank's lack of attention to the total money stock and consequent failure to respond appropriately to bank failures and bank panics were responsible for the onset of the Depression.
That understanding of the Great Depression, of course, flatly contradicts the Keynesian view that it was caused by lack of private spending, which could have been counteracted by lower taxes and/or increased government expenditures.
This work persuaded central bankers in the US and around the world of the importance of maintaining, and paying close attention to, accurate and up-to-date money supply statistics. It has been said that, because of the Monetary History, another economic catastrophe like the Great Depression is impossible. Central bankers would not allow the money supply to fall as much as it did in the late 1920s.
Another great thing about Monetary History is its lack of arcane economic theory and mathematical analysis. It is accessible to non-specialists and, considering the subject matter, a quite enjoyable read. (It does run to almost 900 pages, however.)
A new biography of Milton Friedman is scheduled to be shown on American PBS television just over two months from now.
“Milton was an intellectual entrepreneur, with an insatiable curiosity and a passion for clear thinking,” said Bob Chitester, who produced the Friedman's popular PBS television series “Free to Choose,” and whose new biography of Friedman “The Power of Choice,” will air nationally on PBS stations on January 29, 2007.
“He set forth ideas without regard to their popularity or acceptability. He has been equally tough on himself and others in his search for tools of analysis that consistently and accurately predict outcomes in both micro and macro economics. And he has never compromised the resulting analysis to please those in power. Such courage is essential to the survival of a free society,” Chitester said.
Milton Friedman is survived by his wife and frequent collaborator Rose Director Friedman and two grown children, daughter Janet and son David.
Dr Friedman was one of the towering public intellectuals of the last half of the 20th century. Although I never saw him in person, I watched him on TV several times. A genial and engaging figure, he always had a gleam in his eye as he discussed controversial ideas: He clearly loved intellectual debate. He was one person of whom it may said that his ideas changed the world—much to the better, in my view. Whatever one may think of his theories and opinions, his life is proof that ideas matter.
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