Milton Friedman

Milton Friedman

Milton Friedman was born in Brooklyn, New York on 31 July 1912, the son of Jewish immigrants from central Europe. Shortly thereafter Friedman's family moved to Rahway, New Jersey, where his parents ran a dry goods store. At Rutgers University he studied mathematics and took economics courses taught by Homer Jones and Arthur Burns. He did graduate work in economics at the University of Chicago, where he worked with Jacob Viner, Frank Knight, Henry Simons and Henry Schultz, and at Columbia, where he worked with Harold Hotelling and Wesley Mitchell. Friedman's first research involved statistical studies of consumption with the National Resources Committee in Washington from 1935 to 1937 (Ebenstein, 2007). He then went to the National Bureau of Economic Research to do a study with Simon Kuznets on the incomes of professionals. During World War II he initially worked with the Division of Tax Research in the Treasury and then with the Statistical Research Group at Columbia University, where he and W. Allen Wallis developed the statistical idea of sequential analysis to aid in the efficient testing of ordnance (Wallis, 1980). in 1946, Friedman began a teaching career at the University of Chicago that lasted until 1976.

At the University of Chicago, Friedman became a primary exponent of the Chicago School of economics, which emphasized the use of simple theoretical models to derive testable hypothesis. Its basic working hypothesis was that free markets work well to organize economic activity (Friedman, 1953). At a microeconomic level, the price system allocates resources efficiently. The government does not need to intervene to defend individuals against monopoly and large concentrations of economic power, provided it allows free entry and refrains from imposing controls on prices. At a macroeconomic level, the economy is basically self-equilibrating. The government does not need to conduct countercyclical policies to offset economic instability and should concentrate on providing a stable monetary and fiscal framework.

Friedman's most important contribution to economic theory, the permanent-income hypothesis, was part of the mainstream program of macroeconomics at the time. Like other macroeconomists, he worked on giving the structural relationships in macroeconomic models a sound price-theoretic underpinning (Friedman, 1980). In the permanent-income hypothesis, Friedman explained consumption as a function of wealth rather than contemporaneous income. Friedman's (1957) exposition reflected his desire to construct theories that could be contradicted by data. He used his permanent-income hypothesis to explain seemingly contradictory empirical evidence on the marginal propensity to consume coming from cross-section and time series data. Friedman (1969) also contributed significantly to monetary theory with his work on the optimum quantity of money.

In 1948, under the sponsorship of Arthur Burns, Friedman became a research associate at the NBER. Aided by Anna Schwartz, he carried on Wesley Mitchell's investigation of the interrelationship between money and the business cycle. The collaboration with Anna Schwartz ultimately led to a series of NBER monographs on monetary economics (Krugman, 2007). Beginning in the early 1950s, Friedman began to challenge the prevailing Keynesian views of income ...