Economic Insights FEDERAL RESERVE BANK OF DALLAS VOLUME 7, NUMBER 2 Milton Friedman Economist as Public Intellectual If asked to name a famous economist, most Americans would probably say Milton Friedman. Economists usually make their contributions behind the scenes at think tanks, gov- ernment agencies or universities. Friedman has done that, but he also has taken his ideas and policy proposals directly to his fellow citizens through books, magazine columns and, especially, television. It is not an exaggeration to say he has been the most influential American economist of the past century. He has changed policy not only here at home but also in many other nations, as much of the world has moved away from economic controls and toward economic freedom. Milton Friedman marks his 90th birthday on July 31, 2002, and the Dallas Fed commem- orates the occasion with this issue of Economic Insights. Happy birthday, Milton! —Bob McTeer Professor Steven N.S. Cheung Professor President, Federal Reserve Bank of Dallas Milton Friedman Milton Friedman has been an ardent introduced the young economist to the uct accounts and many of the tech- and effective advocate for free enter- works of Cambridge School of Eco- niques applied to them in the 1920s prise and monetarist policies for five nomics founder Alfred Marshall. Jones, and ’30s. Because Friedman’s early decades. He was born in Brooklyn, N.Y., a pivotal figure in the monetarist camp, study in economics involved constant in 1912, the son of Jewish immigrants introduced Friedman to Frank Knight contact with theorists such as Burns, who had come to America in the late and the early Chicago school, espe- Mitchell and Kuznets, it is not surpris- 1890s. He attended public schools, then cially Knight’s Risk, Uncertainty, and ing that he became more focused on entered Rutgers University in 1928. Being Profit. macroeconomic issues like monetary away from home for the first time gave After Friedman received his under- theory and business cycles than on Friedman important early work experi- graduate degree from Rutgers, Jones the microeconomics of Burns’ own ences, as well as insights into entrepre- arranged a scholarship for him to study favorite, Marshall.1 neurship and the business processes of economics at the University of Chicago, Unable to secure a university the market economy (Friedman and where Friedman received an M.A. in appointment because of anti-Semitism Friedman 1998, 25–27). 1933. During that year in Chicago, he and a dearth of openings, Friedman Originally a math major, Friedman also met his future wife, fellow eco- began his career in 1935 in Washington, switched to economics in his third year nomics student Rose Director, who be- D.C., during the early days of the New at Rutgers, a decision that brought him came an active partner in his profes- Deal. At the National Resources Com- into the classrooms of two men who sional work. He continued his graduate mittee, he used his statistical acumen to would guide his later life: Homer Jones study at Columbia University and com- help develop better consumer spend- and, especially, Arthur F. Burns. Burns pleted his Ph.D there in 1946. ing studies so that improved historical later became a fixture at the National While at Columbia, Friedman met data and better price indexes could be Bureau of Economic Research (NBER), and was influenced by other famous developed. Friedman’s knowledge of one of the nation’s foremost authori- economists, including John Maurice sampling theory was especially relevant ties on business cycles and, ultimately, Clark, Harold Hotelling and NBER in this undertaking, and his first journal chairman of the Federal Reserve Board founder Wesley Clair Mitchell. Friedman articles resulted from these early efforts. of Governors (1970–78). Burns led was soon working at the NBER as an In the late 1930s, Friedman began Friedman to begin an appreciation of assistant to Simon Kuznets, famous for collecting and analyzing data on the what good scholarship entailed and developing the national income prod- distribution and size of income, which later figured prominently in what he asserts that a simpler theory is prefer- considers his best work, A Theory of the able if it predicts a higher number Consumption Function. In this 1957 of outcomes—a variation on Occam’s book, he for the first time put forth his Razor—and that a good theory will famous permanent income hypothesis. “surprise” us by predicting counterintui- This explanation for consumption be- tive outcomes. A good theory is one havior offered an alternative to the the- that “explains a lot by little” and has ory propounded in John Maynard been subjected to many attempts at Keynes’ The General Theory of Employ- empirical “falsification,” a philosophical ment, Interest, and Money. Friedman’s stance that Friedman apparently ab- work showed Keynes’ stable, predict- sorbed from Karl Popper.2 To his credit, able consumption function is an em- and regardless of the correctness of his pirically inaccurate estimator of short- views on scientific method, Friedman’s Hoover Institution run, aggregate consumption. Friedman own empirical work conforms to his Rose and Milton Friedman in 1987. offered his alternative permanent in- view of the proper way to “do science.” come function, along with a theoretical Friedman contributed to another discussion that plausibly explained important effort while in Washington For the Friedman family it meant a move why his theory was better. In produc- during World War II. At the Treasury to New York City, where Milton joined ing this work, Friedman put into prac- Department, he helped create the cur- the Statistical Research Group at tice a methodology that became the rent federal income tax withholding Columbia University in 1943. This group foundation of one of the most cited system. Friedman says he now regrets worked on a number of war-related and attacked—and defended—articles his role, although at the time he be- issues, from proximity fuses in bombs in the history of economics: On the Meth- lieved the new system was superior to the vulnerability of bombers during odology of Positive Economics (1953, to the one it replaced (Friedman and their runs. Statisticians’ role in the war 1–43). Friedman 1998, 123). Working in Wash- has generally been overlooked, but The most controversial contention ington gave him great insight and the their contributions were important, in this essay is that a theory’s assump- chance for a firsthand look at how especially as they developed the tech- tions don’t matter because predictive bureaucracies function. niques still used today in modern power is everything. The essay also The war brought many changes. econometric analysis. After the war, Friedman spent a year teaching at the University of Historical Myths in American Economic Development Minnesota, then took a job at the University of Chicago in 1947 and While the nineteenth century was a period of rugged individualism, almost every other feature stayed there until his retirement from of the myth [of the robber barons] is false. Far from being a period in which the poor were being teaching in 1977. While at Chicago, he ground under the heels of the rich and exploited unmercifully, there is probably no other period in his- tory, in this or any other country, in which the ordinary man had as large an increase in his standard became the leader of the first recog- of living as in the period between the Civil War and the First World War, when unrestrained individu- nized counterrevolution against Key- alism was most rugged. The evidence of this is to be found in the statistics that economists have con- nesianism. Keynes’ view poses that gov- structed of what was happening to national income, but it is documented in a much more dramatic ernment could, and should, fine-tune way by the numbers of people who came to the United States during that period. That was a time the nation’s macroeconomic perform- when we had completely unrestricted immigration, when anybody could come to these shores and the motto on the Statue of Liberty had some real meaning. This was a country of hope and of promise ance, simultaneously guaranteeing an for immigrants and their children….Did people come to this country to be ground under the heels of end to the business cycle and perpetual merciless capitalists? Did they come to make their own conditions worse? full employment. There is no more dramatic way in which people can vote than with their feet. The fact that East Friedman, a classical liberal who Germany had to build a wall to keep people from going to West Germany is striking evidence of which believes in free markets, opposed this country had the better conditions of life. In the same way, the fact that year after year hundreds of thousands of people left the countries of Europe to come to this country was persuasive evidence that view and the theoretical mechanisms they were coming to improve their lot, not to worsen it. Far more effective evidence, I believe, than that justified it. He developed the eco- any statistics on per capita real income, which show that real income went up decade after decade at nomic paradigm that the University of a rate of 2, 2.5, 3 percent per year. They came with empty hands....It was the poor and the miserable Rochester’s Karl Brunner named mone- who flocked here, and they found a home and the opportunity to improve their lot. And they found it, tarism. Friedman himself disapproves not despite rugged individualism but because of rugged individualism. It was rugged individualism that induced the developments in industry, in trade, that offered opportunities to people.