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Milton FriedmanOnly a short time ago, the prediction that Professor Milton Friedman would receive the Nobel Prize in economics would have been greeted by a broad spectrum of reactions ranging from horrified impossibility to an unemotional expression of obvious inevitability. Indeed, when the formal announcements were made in the fall of 1976, the range of reactions was exactly what could have been anticipated: joy, hate, respect, envy, amazement, admiration, horror, satisfaction, and almost any other emotion, or combination, that can be imagined.[1]

Among his fellow economists, the range of reaction was, of course, much more limited. Not that all of them agree with his technical analysis or his prescriptions for economic and political policy, let alone his ideology. Agreement or not, like it or not, it is difficult, if not impossible, to find many economists who have had as great or greater impact on professional economic thought in the twentieth century. I can hear voices raised in protest, claiming that greater impact on professional thought came from John Maynard Keynes. Perhaps, but I remain unconvinced, although, if the impact is broadened to include impact on political affairs as well as economic analysis, I might find it necessary to alter my view. But the end is not yet, the past is prologue, and the ultimate verdict, the final judgment of time, is still far off on both political and economic counts.

To facilitate understanding, it may prove helpful to summarize Professor Friedman’s economic roots in order better to interpret the significance of his contributions and to place him properly in the historical development of economic thought. He is, first of all, the heir apparent of the British classicists; he has accepted and adopted many, but never all, of the contributions of Adam Smith, William Petty, David Ricardo, Nassau Senior, David Hume, both Jevonses, both Mills, plus others in the same tradition too numerous to mention here.[2] Above all, not only for Friedman but for all those who might be classified as empirical neoclassicists, a substantial debt must be acknowledged to Alfred Marshall. The Marshallian analysis constitutes the essential pedestal upon which Friedman’s economics rests. Although Friedman’s fame is greatest in the specialty of monetary economics, he began and still remains a generalist in price theory, or what is now called micro-economics, which in the opinion of many is still the essential basic ingredient of all economic analysis. It must be noted, in this connection, that Friedman recently found time to revise and reissue the lectures from his courses in price theory.[3] Most of his views on subjects other than monetary and fiscal policy, or stabilization policy, are traceable to his competence in price theory. Friedman accepted a very large part of the Marshallian analysis, rather than rejecting part and adapting the remainder to his own theoretical structure as was his custom in most cases. In several instances he expanded and improved upon the Marshallian analysis, sometimes demonstrating its applicability to areas Marshall himself had been unwilling to attempt.[4]

Those writers mentioned thus far may be roughly categorized as the predecessors of Milton Friedman. The influence upon his thought by his more or less contemporary teachers and colleagues is more difficult to determine and to evaluate for they are very many indeed; so many that it is probably impossible to identify them all, and certainly impossible to trace specific ideas and comments. Friedman borrowed and adapted, as do all who deal in ideas, expressions and applications, not only from printed works but also from personal contact, discussion and argument—especially the latter. Friedman enjoys intellectual stimulus and challenge; indeed, at any time, and in any group of which he is a part, there will almost inevitably be several points in vigorous dispute. This is probably partly a desire to test his own position on particular questions against different ones, partly a desire to improve on his own presentation, and partly the joy of intellectual thrust and riposte for its own sake. Add to this Friedman’s extensive contacts, person to person, not only with other economists but also with men of affairs in almost all walks of life and in virtually all parts of the world, and one is tempted to sympathize with anyone who has the temerity to try to unravel even a few of the strands of influence.

Some of those whose names come readily to mind for a list of contemporary influences are fairly obvious and would include Friedman’s colleagues at the University of Chicago and the National Bureau of Economic Research, as well as his many students both past and present. Such a list would be both voluminous and boring. But one suspects that a few names ought to be mentioned. These include Frank H. Knight, whose penchant for argument and brash mid-western approach may well have reinforce Friedman’s own predilections; George J. Stigler, whose own contributions to price theory plus a long personal friendship probably resulted in greater influence than can be readily ascertained; and last but not least, there is Aaron Director, professor of economics at the University of Chicago Law School, long time editor of The Journal of Law and Economics, and Milton Friedman’s brother-in-law.[5]

Friedrich Hayek

Friedrich Hayek

Two groups of people who might have been expected to have had a contemporary influence upon Friedman have not been mentioned: one is the so-called Austrian School and, were it not for another Nobel laureate, Friedrich A. Hayek, could well he eliminated entirely; the second is composed of Friedman’s teachers in the narrower sense of those whose university classes he attended and who may have had a special influence, particularly on his monetary theories. The organization of this essay warrants postponing consideration of the first group until the conclusion, but some consideration should be given here to at least three people from the second group: Henry Simons, Wesley C. Mitchell, and Arthur F. Burns.

Fortunately, in the case of Henry Simons, we have an extended evaluation of his influence by Friedman himself in a lecture delivered on May 5, 1967 at the University of Chicago Law School, entitled “The Monetary Theory and Policy of Henry Simons.”[6] Said Friedman:

It is a great honor for me to give the Henry Simons lecture. He was my teacher and friend—and above all, a shaper of my ideas. No man can say precisely whence his beliefs and his values come—but there is no doubt that mine would be very different than they are if I had not had the good fortune to be exposed to Henry Simons. If, in this lecture, I express much disagreement with him, that, too, bespeaks his influence. He taught us that an objective, critical examination of a man’s ideas is a truer tribute than a slavish repetition of his formulas.

Little is to be gained by repeating the points Friedman himself has emphasized. Those familiar with Friedman’s views on money, and some other issues, can easily trace several of the ideas by comparing Simons’ published works.[7] For example, Simons’ proposal for a monopoly of money creation becomes the one hundred percent reserve plan early in Friedman’s writings; and Simons’ locked-in, constant money supply becomes Friedman’s constant rate of increase in the money supply. Over and over again, Friedman emphasizes his respect for, and agreement with, Simons’ monetary theory but his rejection of Simons’ proposals for monetary reform. That Simons was a strong influence, therefore, is indicated not only by Friedman’s tribute to his former teacher but also by the documentary evidence in their respective works.

In his Nobel lecture, Friedman refers to “one of my great teachers, Wesley C. Mitchell” who “impressed on me the basic reason why scholars have every incentive to pursue a value-free science, whatever their values and however strongly they may wish to spread and promote them.” This is a point that he makes again and again from “The Methodology of Positive Economics” in 1953 to the present. If it was Mitchell who so impressed Friedman, it was a lasting impression.

Arthur F. Burns

Arthur F. Burns

The influence of Arthur F. Burns, whose classes at Rutgers University were attended by Friedman, is much more difficult to assess. When Burns was appointed Chairman of the Board of Governors of the Federal Reserve System, Friedman’s column in Newsweek (February 2, 1970) was both congratulatory and laudatory, expressing confidence that, at long last, the Reserve System had the right man, in the right place, at the right time—a highly competent monetary economist, who could be expected to improve greatly the Federal Reserve System’s performance. It is difficult to believe that the improvement Friedman predicted and expected materialized. There has been very little change in either the frequency or tenor of Friedman’s criticisms of Federal Reserve policy.[8]

Other students of monetary economics, of monetary theory and policy, may be able to give a more accurate and satisfactory estimate of the influence of Friedman on Burns, and Burns on Friedman. One cannot overlook the possibility that whatever influence there may have been was exercised through personal contact as friends and at the National Bureau of Economic Research. This writer, however, recently re-read the first two Moorhouse lectures given at Fordham University; Burns gave the first, Friedman the second.[9] Although doubtless influenced by the advantages of hindsight, it is not the similarities but the differences that stand out, especially in their respective precision in presentation and in the widely different degree of permitted discretionary authority explicit or implicit in the two presentations. It seems to this writer that Friedman has rejected much, if not most, of Burns’ monetary theory, as well as his proposals—and vice versa!

Some readers will be disappointed by the failure to include other names in each and all of the above categories, particularly the names of those who might be classified as “monetarists.” But the basic quantity theory of money is “as old as the hills”—hundreds of years old—and any list would have to be very long indeed. Friedman himself is, of course, a long time student of these “monetarists” and doubtless might single out names like William Stanley Jevons, Henry Thornton, Gustav Cassel, Knut Wicksell and Irving Fisher. Friedman describes the latter as “by far the greatest American economist.”[10]

Friedman’s main professional fame is, and has been, in monetary theory. What he has accomplished, as a result of more than thirty years sustained effort, is the formulation of an increasingly accepted theory of monetary dynamics. In retrospect, one can recognize the goal he set for himself in one of his most famous early essays:

The weakest and least satisfactory part of current economic theory seems to me to he in the field of monetary dynamics, which is concerned with the processes of adaptation of the economy as a whole to changes in conditions and so with short period fluctuations in aggregate activity. In this field we do not even have a theory that can appropriately be called “the” existing theory of monetary dynamics.[11]

I shall endeavor here to summarize briefly, and therefore unfortunately to oversimplify, the basic propositions contained in Friedman’s theory of monetary dynamics—the end result of his efforts to achieve the goal he set for himself. These propositions Friedman would doubtless label as the net product of extensive empirical research, uncontradicted up to now, and essentially free from either ideological or other political value judgments, although, in turn, they form the basis for both his predictions and his policy predictions.

First, Friedman’s preferred definition of money, somewhat arbitrarily, consists of the non-bank, general public’s holding of currency (paper and coin) plus all deposits (both checking and time) in commercial banks.[12] This is his quantity of money, or money stock, or money supply and can be measured with a high degree of precision. Notice that it is a stock concept and thus distinguishes “money” from “income” which, in currently accepted economic terms, is a flow of monetary payments over time. This makes possible the logical distinction between real, and nominal stocks of money at different points in time, and between real, and nominal income over time although the degree of precision obtainable in measuring real money stock and real income is less than when measuring their nominal counterparts.

Second, although the amount of money (nominal) held by an individual can be whatever his wealth, abilities and desires dictate, the total money held by all individuals together is determined by the actions of the monetary and banking authorities independent of the sum of individual wealth and desires. Attempts on the part of all individuals to increase or to decrease their monetary cash balances bring about changes in monetary income and/or prices, but do not change the total money stock, which is independently determined by the actions of the monetary authorities.

Third, there is a consistent, demonstrable relationship between the rate of change in the quantity of money and the rate of change of nominal (money) income; and between the rate of change of nominal (money) income and the rate of change in the general price level measured, as precisely as possible, by devices such as index numbers, all of which are somewhat imperfect. Rates of change may be positive or negative, but the relationship between the rates of change is direct, not inverse.

Fourth, changes in the rate of change in the quantity of money are, after a time lag which is itself consistent but variable, associated with changes in the rate of growth of nominal income. Despite the variability of the time lag, Friedman believes there is a tendency toward an average noticeable at different times, in different societies, and under substantially different monetary and banking institutions.

Fifth, changes in the rate of change of nominal income are followed after a short but variable time lag by changes in real physical output. After a longer, and highly variable time lag, changes in nominal income and physical output are followed by and associated with changes in the general price level.

Sixth, changes in the rate of change of the quantity of money are, to a high degree but not completely, independent of the later changes in nominal income, physical output and general price levels. Changes in the general price level and physical output interact and produce in turn effects on nominal income, quantity of money, employment and other variables, but these are secondary interactions. Friedman considers the quantity of money to be, to a large extent, the independent and, therefore, the causal factor. He also believes that changes in the quantity of money have more important effects over the period of the business cycle on such things as nominal income, physical output and business activity than on general price levels. But, over the longer run, Friedman believes changes in the quantity of money exert more important effects on the general price level. In short, changes in the quantity of money produce and determine changes in the general price level. In this sense, Friedman asserts over and over again, all inflations are the same and all deflations the same.

Seventh, there is a relationship between rates of change in the quantity of money and interest rates. That relationship is at first direct, with a rather short time lag, and some time later becomes inverse. In other words, interest rates are low when the prior rate of change in the quantity of money has been low, and high when the prior rate of change in the quantity of money has been high. The short term effect of increasing the rate of increase in the quantity of money is to lower interest rates, but this is followed by increased spending and an increased demand for loans, so that the net effect is really inverse. The short term effect of reducing the rate of increase in the quantity of money is to increase interest rates, but this is followed by reduced spending and reduced demand for loans, so that the net effect, again, is inverse. In both cases there is an effect upon expectations. An increase, say, in the rate of monetary growth brings about rising prices (proposition six above); people then come to expect a further rise. Both borrowers and lenders are willing to pay and receive higher nominal interest rates, including in their estimates the expected rise in prices.

“Paradoxically,” Friedman wrote in his presidential address to the American Economic Association, “the monetary authority could assure low nominal rates of interest—but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy.”[13]

Eighth, a somewhat analogous relation to the seventh proposition also exists between rates of change in monetary growth and the volume of unemployment, but with much longer time lags. As in the case of interest rates, the relationship is at first direct and, some time later, inverse. If, by increasing the monetary growth rate, the monetary authority attempts to reduce the rate of unemployment, the initial effect will be increased incomes and spending, then increased output and employment. But this increase in aggregate demand will be followed by increased prices of final products—an increase in the general price level, or put briefly, inflation. With unchanged, nominal, or money, wage rates, this means that real wage rates will have declined. In turn, this will lead to demands for increased money wage rates and, with the increased demand for labor, money wage rates will rise and the fall in real wage rates will be reversed. But increased money wage rates will again raise the unemployment rate to its former level, or even beyond. To maintain the lower level of unemployment, the monetary authority would have to accelerate the rate of monetary growth, and this (proposition six again) means accelerating the rate of inflation.[14]

51daCVC+qrLEarlier, Friedman had summarized this proposition by saying, “There is always a temporary trade-off between inflation and unemployment there is no permanent trade-off. The temporary trade-off comes not from inflation per se, but from unanticipated inflation….A rising rate of inflation may reduce unemployment, a high rate will not.”[15] It should be apparent to all that Friedman’s monetary dynamics is in direct contrast to the Keynesian orthodoxy which came to dominate so much of economic thought over the past thirty to forty years. The economic theories of John Maynard Keynes in his General Theory of Employment, Interest and Money revolutionized both economics and governmental practices; it permitted—indeed, it fostered—the growth of the governmental sector relative to the private sector in virtually every Western nation. Further, it was accomplished by an essentially simple rule for solving any and every economic problem: maintain high aggregate demand by increasing (and presumably decreasing where appropriate) monetary expenditure. The extent to which these Keynesian views were accepted can hardly be over estimated. If Friedman’s views are essentially valid and correct, the Keynesian theories provided a prescription, intended or not, for perpetual inflation with intermittent but accelerating unemployment. Friedman’s monetary dynamics constitute a counterrevolution, requiring, if accepted, a complete revision and reversal not only of monetary theory but also of governmental monetary and fiscal policies based upon the Keynesian theories.[16]

Has the counterrevolution succeeded?

The question is a difficult one to answer. That Friedman has profoundly and probably indelibly altered economic theory and monetary theory, in particular, is hardly debatable. Undoubtedly, many, perhaps most, professional economists specializing in monetary economics would agree with the eight propositions summarized above. This does not mean that they would also endorse all the policy implications Friedman draws from them. Taking all economists, regardless of specialty, the proportion of agreement and endorsement would be much smaller. It took a long time for the Keynesian revolution to become a new orthodoxy, and one does not have to ponder long to come to the conclusion that the Friedmanite counterrevolution has not yet achieved anything approaching the status of a new, new orthodoxy. “Custer’s last stand,” it seems, will be that of the politicians whose almost religious devotion to Keynesian ideals, and essentially short run view of the future, will not, I fear, easily succumb to an assault based upon professional competence, empirical evidence, and cold reason. Indeed, the oft-quoted quip by Keynes that, in the long run, we shall all be dead, seems to me a rather optimistic, if fatalistic, view of the future.

Milton Friedman

Milton Friedman

The policy implications and prescriptions drawn by Friedman from the eight empirical propositions summarized above are many and varied.[17] They, too, can be summarized, however, by looking upon them as a sort of three legged stool, designed to prevent the introduction of destabilizing and disequilibrating influences into the economic system by monetary and fiscal policies. First, Friedman advocates a one hundred percent reserve plan to prevent disequilibrating influences emanating from commercial banks and other financial institutions, and to reduce the discretionary powers of the Federal Reserve authorities (the central bank). Second, he advocates the most stringent limitation possible on central bank discretionary power by suggesting an inviolate and unchanging legal command to the monetary authority to increase the money supply at a constant annual rate—no more, no less—with a minimal amount of less than annual variation. Although he advocates a monetary growth rate of about three to four per cent per year, or about average annual real growth of the economy over the long run, the precise rate in Friedman’s view is much less important than its constancy. This recommendation is designed to prevent any exercise of discretionary monetary authority on the part of the central bank and government, both of which Friedman regards as major sources of disequilibrium and instability even with the best of intentions. An adjunct recommendation is that the central bank do away with its discretionary power to vary the discount rate—a power which the Bank of England, oddly enough, recently gave up voluntarily. Third, Friedman has long advocated, and very ably, freely flexible, floating rates of exchange between national currencies.[18] Taken together, these constitute the three pillars of policy of the “Chicago school” of monetarism: one hundred percent reserves; a constant rate of increase in the money supply; and freely flexible exchange rates. It is essentially an attempt to eliminate all discretionary power over the domestic money supply.

Some have argued that Friedman’s policy prescriptions are “oversimplified.” It is a criticism I do not share and cannot accept. Taken as a whole, the prescriptions are remarkably sophisticated, as many simple things often are, whether or not one agrees with them or supports them. True, if one examines the evolution and development of policy recommendations in Friedman’s writings, one is impressed by the way in which he has eliminated a multiplicity of specific suggestions and substituted a few more easily explainable, but still difficult to attain, fundamentals. I have the distinct impression that he began with an even-handed desire to eliminate all disequilibrating forces whether originating in the private or the public sector, and ended by considering the latter of much greater importance and danger. But the package remains a consistent and powerful whole. Reporting an imaginary conversation among members of the Board of Governors of the Federal Reserve System, who are prompted to a discussion of Friedman’s policy recommendations by the newly appointed chairman Arthur Burns, Alfred Malabré, Jr. has Governor Dewey Daane exclaim in a shocked voice: “I’m beginning to think Professor Friedman wants to do us out of our jobs.”[19] Quite true and right on, to use the modern expression, that is precisely the idea.

In principle, the Friedman propositions in monetary dynamics relating to changes in the money supply, price levels, interest rates and unemployment have no ideological or normative content. Policy conclusions, as Friedman himself has emphasized repeatedly, cannot be completely divorced from normative judgments.[20] He is a liberal in the classical nineteenth century sense of the word, who regards the market mechanism as the most efficient instrument for coordinating the economic activities of men, and who mistrusts the exercise of governmental powers in practically every area. His policy conclusions, as distinct from his positive monetary theory, do contain normative overtones. For example:

Control over monetary and banking arrangements is a particularly dangerous power to entrust to government because of its far reaching effects upon economic activity at large—as numerous episodes from ancient times to the present and over the whole of the globe tragically demonstrate.[21]

Friedman believes that a free market structure is a highly stable one and, particularly in the case of monetary disturbances, the sources of instability have originated in government, outside the market structure, and not from any inherent weaknesses with­ in the market structure. Even a cursory reading of his The Monetary History of the United States[22] can lead one to no other conclusion. To use his own words:

Government intervention in monetary matters, far from providing the stable monetary framework for a free market that is its ultimate justification, has proved a potent source of instability…. The central problem is not to construct a highly sensitive instrument that can offset instability, but rather to prevent monetary arrangements from themselves becoming a primary source of instability….Monetary policy is but one segment of governmental policy let alone of the far wider range of private and public economic arrangements that effect the course of events….After all, uncertainty and instability are unavoidable concomitants of progress and change. They are but one face of a coin of which the other is freedom.[28]

1976_r_imgWhen the Nobel Prize in economics was announced, some newspaper reaction expressed disbelief that, given the history of the past quarter of a century, such recognition could be given to a “conservative.” Of course, part of the problem lies in a misunderstanding or misuse of terms. Friedman is a liberal, not a conservative, although he has, on occasion, called himself a “neo-liberal” with something less than enthusiasm. Moreover, he is a radical, as he is fond of proclaiming in two senses: in the sense that he seeks to go to the root of the matter, as well as in the sense that he advocates a direction of policy quite divergent from that espoused by those currently occupying seats of power—current orthodoxy—not only in monetary matters but in almost other things as well. To label him a conservative defender of the status quo, or of “big business,” is patent nonsense. Exactly the opposite is true. He has advocated an all volunteer army; a negative income tax in place of a myriad of welfare schemes; a voucher system for education and other problems designed to avoid both integration and segregation if either are forced; auctioning off of state universities or nationalized companies or, if no one will buy, giving them away; he has emphatically opposed the licensing of medical doctors or other professions by governments and has vigorously opposed both general and specific price and wage controls in almost every conceivable application. The list could he expanded, if not ad infinitum, at least far enough to demonstrate not only that he is radical but brash, provocative, independent and intellectually stimulating even, occasionally, down right quarrelsome. He may sometimes be wrong, but he is never uncertain.

It may well be that these qualities, plus an extraordinary talent for writing readable material, not only in the technical journals of analytical economics (in itself no mean accomplishment), but also in popular prose of more widely read magazines, particularly his columns in Newsweek.[24] In addition, he has the extraordinary ability to speak intelligently, persuasively, and extemporaneously on the most esoteric of economic subjects and to make them intelligible to non-technically trained audiences who, even when they disagree with him, reluctantly express both respect and admiration. Although the Nobel Prize, if one can believe the citation, was awarded for his technical, theoretical contributions “in the field of consumption analysis, monetary history and theory, and…stabilization policy,” his general fame (some would say notoriety) lies more in his ability to communicate with students, politicians, and even the general public, rather than with other professionally trained economists. Add to this a dogged determination to speak out, to speak “truth” as he sees it, again and again, and yet again, tirelessly­—or it appears so—and virtually relentlessly. But his is not the bulldog type of attack; he does not seize upon a position, as a bulldog might a leg, and steadfastly never budge. Rather, his behavior is like that of the terrier, who shifts continually from one tempting and vulnerable extremity to another without losing sight of his ultimate objective.

One net result of Friedman’s extraordinary collection of qualities has been a somewhat greater success in turning people about ideologically, shifting them away from a march toward socialism and other forms of totalitarianism to a recognition of the virtues of freedom and the free market than have many of us who share his liberal (classical sense) views and prejudices.

On the technical side, Friedman is well aware that other monetarists not sharing his normative views could seize upon his empirical work and pursue discretionary techniques in monetary and other matters in an effort, say, to “fine tune” the economy in accordance with some central plan. Such would be anathema to him, especially in the present state of economic knowledge. His presidential address to the American Economic Association contains a warning that “we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks it cannot achieve, and, as a result, in danger of preventing it from making the contribution that it is capable of making.”[25] Just as Marx is reported to have said, “Je ne suis pas Marxiste,” and Keynes is said to have muttered, “I am not a Key­nesian,” it would not surprise me someday to hear Milton Friedman deny that he is a Friedmanite. During the Wincott lecture at the University of London, with a bow in the direction of John Maynard Keynes’ contributions to monetarism, Friedman said, “In­deed, I may say, as have so many others since there is no way of contradicting it, that if Keynes were alive today he would no doubt be at the forefront of the counterrevolution. You must never judge a master by his disciples.”[26] All of which is vaguely reminiscent of the English Major in Shaw’s Joan of Arc who, while lighting the faggots beneath her, whispers that, of course, there is nothing personal in all this.

Not long ago I found myself writing a new introduction to a new edition of a volume of interdisciplinary essays entitled Essays in Individuality,[27] which originated as the net result of a week long conference held in Princeton, New Jersey in 1956. In addition to political and natural scientists, literary practitioners and others, two economists provided an essay each and participated in the discussions; one was Milton Friedman, the other Friedrich A. Hayek. I purposefully omitted any consideration earlier in this essay of the possible influence upon Friedman by the Austrian School­—Böhm-Bawerk, Menger, Mises, Machlup, and others. One finds very few references to any of these; so few in fact that one suspects that, were the ideologies not so compatible, there would be more than a few quarrels. The exception is Hayek, and it is difficult to trace the intricacies of mutual influence, partly because these are so deeply ingrained as part of my own judgments and prejudices. There are some obvious connections between the two men: Hayek and Friedman have been personal friends for more than thirty years (and I have been friend to both for more than twenty); Hayek spent quite a few years at the University of Chicago in the 1950’s and 1960’s, although not, it is true, in the department of economics; both men have lectured at the same time at many universities and campuses—two results of which were Hayek’s The Constitution of Liberty and Friedman’s Capitalism and Freedom; both men are clearly classical liberals, although Friedman calls himself a neo-liberal and Hayek labels himself an “old Whig;” and last, but not least, both are Nobel laureates in economics. On a personal note, I have learned much from both, not as a formal student sitting in their university classes and lectures, but as colleagues and friends. My own conviction is that there has been a great mutual influence and, beyond any doubt, mutual admiration and respect.

Ludwig von Mises

Ludwig von Mises

Similarities could be expanded even further but the differences are more interesting, more difficult to describe, and probably more illuminating. I can see no reason why Hayek would disagree in any substantive way with the eight monetary propositions summarized above, nor would I. But Hayek’s methodology is quite different from Friedman’s—Austrian subjectivism with direct ties to Ludwig von Mises—and, in contrast, Friedman is the epitome of empiricism. One has only to compare Hayek’s Nobel lecture with that by Friedman to realize how deep are the differences in their methodological approaches. Yet Friedman pays tribute to Hayek’s “The Use of Knowledge in Society,” which is a direct and fundamental challenge to much of accepted economic methodology, calling it “brilliant”—a compliment which Friedman rarely pays, if at all, to any other member of the Austrian School. Yet, despite decidedly different methodological approaches and techniques, both men arrive ultimately at the same conclusion: inflation cannot reduce unemployment except temporarily and, in the longer run, more unemployment is the direct and inevitable result of creating more inflation.

As might be expected, the two men differ somewhat in their policy prescriptions­—more, indeed, than they differ in ideology. Friedman, although he occasionally has a kind word to say about a “true” gold standard, and the frequency of such kind words has increased over the past twenty years, still will relegate it to the category of “too costly” or impossible of being achieved in this day and age. Hayek, on the other hand, is much more impressed by the international gold standard and wishes, rather wistfully, that it might be restored; he even has some favorable things to say about fixed exchange rates as hobbles in governmentally produced inflation; and lastly, he has some doubts about tying the hands of monetary authorities too tightly. But this is not an article intended to emphasize the differences between these two men, fascinating as such an undertaking might be.[28] As a long time, staunch advocate of the international gold standard, I have frequently crossed swords with Professor Friedman—a conflict which one should undertake only with great trepidation plus extensive preparation—although I agree wholeheartedly with his monetary dynamics if not with all his policy prescriptions.

On one specific subject, I have an uncompromisable difference with Friedman. He pays tribute to Irving Fisher as “by far the greatest American economist.” I disagree completely; no prohibitionist could be that good! My choice, without qualification, for greatest American economist, is Milton Friedman but, despite that, I still remain an unreconstructed, sterling Hayekian—about 0.925 pure.

Books on the topic of this essay may be found in The Imaginative Conservative Bookstore. Republished with gracious permission of Modern Age (Winter 1978). 


[1] I have no intention of giving much space to the left-wing Allendeños, who could not have cared less whether the prize was awarded to Milton Friedman or Donald Duck, but who were able, unfortunately, to buy world-wide publicity cheap through well planned demonstrations.

[2] One should mention, perhaps, John Neville Keynes separately. Friedman’s famous essay on the methodolgy of positive economics begins with a quotation from J. N. Keynes approving Keynes’ distinction between positive and normative economics. It seems to me, however, that Friedman might have chosen to quote the earlier Nassau Senior who must have influenced J. N. Keynes.

[3] First published as Price Theory: A Provisional Text (Chicago, 1962; revised and reissued as Price Theory (Chicago, 1976).

[4] “The Marshallian Demand Curve,” in Essays in Positive Economics (Chicago, 1953).

[5] In conversation Aaron Director was fond of reversing the phraseology by emphasizing that Milton Friedman was his brother-in-law!

[6] Reprinted in The Optimum Quantity of Money and other Essays (Chicago, 1969), pp. 81-93.

[7] Economic Policy for a Free Society (Chicago, 1948); A Positive Program for Laissez-Faire, Public Policy Pamphlet #15 (Chicago, 1934); Simons’ “Rules Versus Authorities in Monetary Policy,” is reprinted in Landmarks in Political Economy, I (Chicago, 1962) , pp. 199-228 and is an obvious and strong influence on Friedman.

[8] Friedman’s column in the February 2, 1970 issue of Newsweek was reprinted in the first edition of An Economist’s Protest (Glenridge, N. J., 1972), pp. 52-56. But in the revised, second edition (Glenridge, N. J., 1975), it is omitted.

[9] Arthur F. Burns, Prosperity Without Inflation (New York, 1958); Milton Friedman, A Program for Monetary Stability (New York, 1960).

[10] The Counter­ Revolution in Monetary Theory, Institute of Economic Affairs, Occasional Paper #33 (London, 1970), p. 8.

[11] “The Methodology of Positive Economics,” in Essays in Positive Economics (Chicago, 1953), p. 42.

[12] Those seeking more technical definitions and measurements may consult a current Federal Reserve Bulletin which lists M¹, M², M³, and so on for various definitions. Friedman’s expressed preference is for M². M¹consists of coin and paper currency adjusted for bank holdings, plus demand deposits adjusted for   such things as interbank deposits, cash items in process, and a few other technical adjustments. M² consists of M¹ plus time deposits in commercial banks after a few other technical adjustments. The preference for M² over M¹ is not crucial to most of the theory and, at least in part, is due to American law prohibiting the payment of interest on demand deposits.

[13] “The Role of Monetary Policy,” American Economic Review, Vol. LVIII, No. 1 (March, 1968), p. 7.

[14] Economists will recognize this as denying the existence of a stable trade-off between inflation and unemployment, the so-called “Phillips Curve.” Friedman devoted practically his entire Nobel lecture to this question: Inflation and Unemployment (delivered November 29, 1976). It seems probable that he did so because he recognized that this question has been of major concern among economists and politicians alike, and that his explanation was, indeed, a revolutionary view of the economic stabilization, or destabilization, process.

[15] “The Role of Monetary Policy,” op. cit., p. 11.

[16] This is the very title Friedman used twice: once for an early lecture at the London School of Economics in the late 1950’s, and again in 1970 at the University of London (The Counter Revolution in Monetary Theory, Occasional Paper #33, Institute for Economic Affairs, London, 1970).

[17] Those interested in the historical development, evolution of and minor alterations in the specific policy recommendations should read all his technical writings. But a good overview can be obtained from “A Monetary and Fiscal Framework for Monetary Stability,” in Essays in Positive Economics, op. cit., pp. 133-156; A Program for Monetary Stability, op. cit.; “The Lag in Effect of Monetary Policy,” Journal of Political Economy, Vol. LXIX, No. 5 (October, 1961); and ”The Role of Monetary Policy,” op. cit.—preferably in that order.

[18] ”The Case for Freely Flexible Exchange Rates,” in Essays in Positive Economics,” op. cit.

[19] “Themes and Variations,” The Wall Street Journal, Jan. 2, 1970.

[20] “The Methodology of Positive Economics,” in Essays in Positive Economics, op. cit., p. 5.

[21] A Program for Monetary Stability, op. cit., p. 4.

[22] With Anna J. Schwartz.

[23] A Program for Monetary Stability, op. cit., pp. 23, 99.

[24] An Economist’s Protest, op. cit., composed largely of these columns (plus an interivew in Playboy, but not a centerfold) has thus far had two editions.

[25] “The Role of Monetary Policy,” op. cit., p. 3.

[26] The Counter-Revolution in Monetary Theory, op. cit., p. 8.

[27] University of Pennsylvania Press, Philadelphia, 1958; a second edition is to be published by Liberty Fund, Indianapolis, 1977.

[28] I would recommend the subject enthusiastically as a Ph. D. thesis.

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  1. Excellent. I admit a lot went over my head, but I am not an economist. Milton Friedman is probably one of the most significant individuals of the second half of the 20th century. I would advise all the Distributists who come here to read what real economics (per Friedman) is and not some theory devised up by some social activists.

  2. When I hear that a person has had a great impact in some field, I want to ask the same question Rocky J. Squirrel would always ask Bullwinkle the Moose when the Moose was conjuring up spirits. ‘Are they friendly spirits’ Rocky would ask. And so here, we need to ask if Friedman’s impact is a friendly impact.

    America has been gradually been changing from systems that included more government intervention to the current neoliberal system with the latter being borrowing more from Milton Friedman. More government involvement was initiated after the economic collapse starting with 1929 and it wasn’t until 1973 that we saw another collapse in the market. But since then, we’ve been on an approximate 7 year cycle for significant stock market problems. We could possibly attribute this cycle to the gradual embracing of neoliberal capitalism or as just a part of more modern times. Neither case bodes well for at least some of the practices advocated by Friedman.

    But something more significant than that should be noted. By reducing government involvement in the market, we have reduced democratic control of the economy and the market when governments are democracies and thus have consolidated wealth and then power so that those who are hurt the least and recover the most from the 7 year stock market itch are those with the most wealth. The rest of us become more and more vulnerable.

    Thus, when associating economic systems with freedom, we should note that only some are free. And that some are those with the most wealth. With reduced government control the citizen’s voice becomes more faint in saying how the economy and the markets should be run. This might explain why when neoliberal Capitalism was being introduced/forced on some nations, some governments were first seized so that violence could be used to introduce neoliberal measures. Chile in 1973 comes to mind here.

  3. “Taken together, these constitute the three pillars of policy of the “Chicago school” of monetarism: one hundred percent reserves; a constant rate of increase in the money supply; and freely flexible exchange rates.”

    As usual, one cannot apply only a portion of a remedy and expect a cure. Thus, we have freely flexible exchange rates and nominal fractional reserve banking (but realisticaly we have negative reserve banking) and a deeply unstable rate of increase of the money supply.

    In this situation, the freely flexible exchange rates, particularly under fiat currency where the dollar is not tied to gold, and far fewer nation-states are tied to the dollar (or are fast untying themselves from the dollar) only lead to a sitution where China can de-value its’ currency and the United States cannot do anything.

    Knowing human nature, I expect the US government to eventually attempt to peg the exchange rate in some desperate “trade war” [more like “relevancy war” – since the USD is fast becoming irrelevent] sooner than institute a 100% reserve ratio, move to gold or at the very least aim for a stable rate of growth of the money supply.

    Which brings us to the real problem: politics, not economics, and the lack of political leadership in the Federal Reserve because we have a somewhat ridiculous idea that the central bank should be independent of political concerns and administered by experts (an idea going back to the Prussian school of “Public Administration” as opposed to “politics”).

    Yet the nation-states with healthy monetary policies are those where political power is exercised rather explicitly over the central bank (albeit subtely). Naturally, political power can be exercised badly (Zimbabwe comes to mind), but the chaos of democracy is no better than the failings of tyranny.

    Some posit that it would be preferable to have a totally private banking system, but if political authority is so corrupt and civic mindedness so missing that it is impossible for people to rule themselves through institutions of government, if privatizing the banking system is the only recourse left, then this means that the country is already lost.

    A privatized banking system – a privatized government – simply means that rather than be governed by themselves, a people will be governed by someone else’s (stronger) government.

    We are really back to square one: how to limit government and aim it towards the common good. Many good policy ideas exist, but the fact is that without wise and strong political authority to execute policy, government policy (including monetary policy) will be the result of chaotic chance factors or tyrannical whim on the part of the one, few or many).

    I do not see much capacity in the American body politic to check these tendencies. It is not that people have forgotten Friedman, nor that those who disagree with him now run things – it is that there is not one iota of thought going into present economic policy beyond the immediate fears surrounding re-election or the self-interest of some lobby.

    President Obama once established many “czars” over different initiatives. Yet really, there must be one Czar over everything, or as Machiavelli said “uno solo.” This is what America lacks – besieged as it is by woes on all fronts. Some say this risks an “imperial executive” or that we now have an imperial executive – but I say that the American system now is more like what the Polish system was in the 1930s: a Dictatorship without a Dictator, or the tyranny of organized and systematic political anarchy.

  4. I think Mr. Friedman must have received great comfort in his later years, because his anti-inflationary monetarism was fully adopted by the Greenspan Fed. It worked for a while. Business people will always find a way to escape their chains however, and the emergence of derivatives and hedge funds and other blurring of banking and insurance must have troubled him… meanwhile ostensible authority till rested with the Fed and SEC. Sure… too bad the derivatives and hedge funds and other blurring of banking and insurance, didn’t trouble anyone of authority.

    Looking at the bailouts passed in 2008, I think Friedman was rolling in his grave.

  5. Mr. Friedman, like most modern defenders of capitalism, was completely deaf, dumb, and blind to concentrations of private power. In fact he thought they were real nifty. Thought monopolies were awesome. As such his policies have nothing to do with free markets, small government, etc., but end up being essentially fascist as large corporations simply buy off the government. And not surprisingly when you run an economy based on shareholder capitalism it benefits shareholders, i.e., the 1 or 5% based on how you calculate it. The resulting inequality is not a bug or a feature it is the very goal of shareholder capitalism.

    • Right on Judd– this is what I keep trying to tell conservatives: stop inveighing against a communism that is long gone and start worrying about a fascism in your midst! In fairness to Friedman though, I do not think he would have approved of the bailouts.

    • Darrell,
      As much as I don’t like Freidman, he was opposed to monopolies and thought that the gov’t had a legitimate interest in controlling those who had accummulated so much power and wealth that they could control the market. My gripe with Freidman and his free market is that by cutting the social responsibility ties between business and society as represented by the gov’t, he was in essence vying for business getting a free lunch at the expense of others. Basically, his position denies the interdependencies that exist in both society and our economic system.

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