The Age of Friedman

America's most influential living economist since World War II was once isolated and ignored

By Robert J. Samuelson

It is only in the past 10 or 15 years that Milton Friedman has been seen for what he is: the most influential living economist since World War II. For decades, Friedman--now 85 and long retired from the University of Chicago--was regarded as a brilliant outcast. He extolled "freedom," praised "free markets" and attacked big government. He was a cheerful dissenter in an era when government seemed the solution to most social problems. Confident of his views, Friedman would debate almost anyone, anywhere, but he was widely dismissed as a throwback.

Not anymore. Friedman's impact has been so huge that he's approaching John Maynard Keynes (1883-1946) as the century's most significant economist. He almost singlehandedly resurrected the "quantity theory of money": the idea that inflation stems from "too much money chasing too few goods." Once governments accepted this, they could control inflation by slowing money growth. Abroad, Friedman has promoted market economics from Chile to China. At home, his ideas now permeate public debate. Even in the 1950s, he advocated a flat tax, school vouchers and a "negative income tax" for the poor (embodied in today's earned income-tax credit).

We now have Friedman's story of his odyssey from pariah to prophet in an autobiography written with his wife of nearly 60 years, Rose, "Two Lucky People" (University of Chicago Press. $35). It is a remarkable tale of sheer doggedness. His early intellectual isolation was extraordinary. For a while in the 1950s, the library at a university as eminent as Duke didn't carry his books; his ideas were considered too loony.

Disapproval was so high in part because he never disguised his rejection of Keynes, who then mesmerized most economists. Where Keynes saw the private economy as highly unstable and therefore in need of governmental guidance, Friedman thought that government intervention often deepened economic slumps. Where Keynes toasted intellectuals and mocked capitalists--comparing the stock market, for example, to a "casino"--Friedman saw individual creativity as the wellspring of social progress. The contempt of many intellectuals for capitalism struck him as self-indulgent: biting the hand that fed them.

Like many postwar economists, Friedman has viewed economics as a "science"--much like physics--in which basic truths can be proved with evidence. As it happens, much of his scholarly work has discredited Keynesian economics. In 1957, he published "A Theory of the Consumption Function," which refuted a central Keynesian tenet: that people spend less of their income--and save more--as societies grow wealthier. This presumably occurred because people's wants were satisfied. If true, it would justify higher government spending to offset weak private spending. But by analyzing historic consumption patterns, Friedman showed it wasn't true. People always developed new wants.

More important was his explanation of the Great Depression. In the 1930s, Keynes had argued the private economy could drop into a deep slump from which it might not automatically recover. In 1963, Friedman and Anna Schwartz published "A Monetary History of the United States," contending that, on the contrary, the Depression resulted from governmental errors. Between 1929 and 1933, about 10,000 banks failed, leading to a one-third drop in the money supply and widespread bankruptcies. But Congress had created the Federal Reserve in 1913 to prevent banking panics, Friedman and Schwartz noted. If the Fed had done its job, the Depression would have been only a normal business slump.

Finally in 1968, Friedman conceived (simultaneously with economist Edmund Phelps of Columbia) of the "natural rate of unemployment." Until then, Keynesian dogma held that a bit less unemployment would bring only a bit more inflation and that the two could coexist in a stable relationship--say, 4 percent unemployment with 4 percent inflation. This implied that governments could select the most desirable mix of unemployment and inflation. Not so, said Friedman. If government tried to push unemployment below its "natural rate," inflation would rise ever higher. This ultimately described the pursuit of "full employment" in the 1960s and 1970s: inflation went from 1 percent in 1960 to 13 percent in 1979.

Friedman's influence also reflects his success as a popularizer. In 1962, he published "Capitalism and Freedom," which described his then heretical views. In 1966, he was invited (along with two other prominent economists) to write a column for NEWSWEEK; he did so until 1984. In 1980, he hosted a 10-part public television series entitled "Free to Choose" and wrote a book (with Rose, also an economist) by the same name. They condemned, among other things, welfare dependency and centrally planned economies.

Despite his advocacy, Friedman doubts that intellectuals can initiate political change. The "tyranny" of the status quo is too strong. "Only a crisis--actual or perceived--produces real change," he once wrote. Then, "the actions that are taken depend on the ideas that are lying around." So he has sprinkled about "alternatives to existing policies." Crisis also remade his image. As inflation rose, he became more respectable. Communism's collapse vindicated his harsh view of central planning.

"Two Lucky People" chronicles this story, but as autobiography, it is disappointing--a rambling book that lacks introspection. It never asks the central puzzle: how did Friedman become Friedman?

By all odds, he belonged on the political left. Born to two poor Russian, Jewish immigrants, Friedman grew up in Rahway, N.J. The family lived above a clothing store that his mother maintained, while his father worked in Manhattan. He recalls their arguing often over money. Public institutions treated him well. The local library helped make him a voracious reader; a high-school civics teacher rates lavish praise; he attended Rutgers University on a public scholarship. He graduated in 1932 at the depth of the Depression, when political pressures pushed students to the left.

"Two Lucky People" hardly explains how, given this climate, Friedman emerged by the early 1940s with an outlook so out of tune with the times. In conversation, he says that after Rutgers "I was mildly socialistic"--much like millions of other young people. He attributes his change to graduate study at the University of Chicago, where a cadre of economists did not accept the common view of the Depression as an inevitable crisis of capitalism. His government service during World War II--working on tax policy and a variety of weapons problems --may also have played a part. He felt the thrill of Washington but also saw firsthand the "manipulation, dishonesty, and self-seeking" of politics.

Some biographer may unravel this and other puzzles. Friedman's skepticism of government has never been total hostility. He has consistently seen a role for government in everything from reducing poverty to promoting education. But he has favored policies that checked government power and emphasized private responsibility. Though called a "conservative," Friedman disdains the label and sees himself as a libertarian or "radical"--someone who so prizes freedom that he would make dramatic political changes to enhance it. A true conservative, by contrast, only reluctantly alters existing social arrangements. Friedman's ambitions have never been so modest.

Newsweek 6/15/98 Business/Economics: The Age of Friedman