The death of Milton Friedman at age 94 ends, after more than 60 years, the greatest rivalry in modern economics—the one between the conservative great Friedman and the liberal great Paul Samuelson. Samuelson lives on, at age 91, and remembers his intellectual foe with respect.
"Milton Friedman was a giant," Samuelson said in a Nov. 16 interview from his office at the Massachusetts Institute of Technology. "No 20th-century economist had his importance in moving the American economic profession rightward from 1940 to the present."
More than anyone else, Milton Friedman was responsible for challenging the worldview of British economist John Maynard Keynes, who believed in the power of government to guide and stimulate economic growth. As an alternative to Keynesianism, he put forth a more laissez-faire philosophy known as monetarism—the doctrine that the best thing the government can do is supply the economy with the money it needs and stand aside.
Friedman blamed inflation on tinkering by governments and central banks. Along with Edmund Phelps of Columbia University, who won the 2006 Nobel prize, Friedman showed that central banks can't buy permanently lower unemployment with slightly higher inflation. Wrote Friedman: "Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."
Friedman won the Nobel prize in economics in 1976. Among his achievements, the Nobel committee cited the monumental book he wrote with Anna Schwartz, A Monetary History of the United States, which explained how missteps by the Federal Reserve deepened and prolonged the Great Depression of the 1930s.
While Friedman taught and researched at the University of Chicago, making it into a bastion of conservative, monetarist thinking, fellow Nobelist Samuelson held forth in the more liberal environs of MIT, where Keynesianism continued to have a foothold. Friedman's students helped spread free-market thinking around the world, including to Chile; Samuelson wrote the best-selling economics textbook, Economics, published by The McGraw-Hill Companies (MHP) (publisher of BusinessWeek), which influenced generations of undergraduates.
At times, the rivalry was right out in the open. From 1966 to the 1980s, Samuelson and Friedman had alternating columns in Newsweek magazine. But their competition was always collegial.
Says Samuelson: "I've known Milton and Rose Friedman for 65 years [Rose Director Friedman, his wife and co-author, survives her husband]. We have had considerable differences on policy. We have had considerable agreement on analytical matters. Knowing that differences on policy and ideology often poison and taint personal relations, I think we should both be admired for the friendship and civility we maintained over all these years."
Friedman was more the traditional economist, harking back to the wisdom of Alfred Marshall, while Samuelson was the innovator. But Friedman's views hold up remarkably well from today's vantage point.
Economists now generally reject heavy-handed Keynesian intervention and agree with Friedman that inflation is a monetary phenomenon. Friedman backed away from the crudest version of monetarism, which said that central banks should do little but set a target for the growth rate of the money supply. For example, he had high praise for former Federal Reserve Chairman Alan Greenspan, even though Greenspan paid little attention to the size of the money supply when setting short-term interest rates.
Theory of Consumption
According to his autobiography for the Nobel prize, Friedman was born on July 31, 1912, in Brooklyn, N.Y., and grew up in Rahway, N.J. He wrote: "Financial crisis was a constant companion. Yet there was always enough to eat, and the family atmosphere was warm and supportive."
He received his bachelor's degree from Rutgers University, studied economics at the University of Chicago, and got his PhD from Columbia University. During the Depression, Friedman worked in Washington on a large consumer-budget study that later led to one of his best-known achievements, the so-called "theory of the consumption function," which says that people's spending is determined by their expectations of future or "permanent" income, not just their current income.
Friedman spent most of his academic career in Chicago, then became a senior research fellow at the conservative Hoover Institution at Stanford University. In the 1970s he and his wife created a PBS documentary series called Free to Choose, which later became a book.
He was a member of President Reagan's Economic Policy Advisory Board and received from Reagan the Presidential Medal of Freedom. In his final years, he and his wife established the Milton & Rose D. Friedman Foundation, devoted to promoting parental choice in schooling through vouchers.
Coy is BusinessWeek's Economics Editor.