Friedman’s Rise and Fall

Milton Friedman:
The Last Conservative
by jennifer burns
farrar, straus and giroux, 592 pages, $35

Anyone who lived through the fall of the Berlin Wall in 1989 will remember the pitiable figure cut by the Eastern Bloc residents interviewed back then. They looked stunned, tongue-tied, disoriented, like rescuees emerging into the sunlight after days in a collapsed mine. Whether they were philosophers, firemen, or housewives, how inconsequential appeared the lives they had spent “building communism.” The vision of Karl Marx—only lately passed off as a magical combination of charity, machismo, and economic rationality—now looked mediocre and servile.

Our own economic ideology, though—well, that was another story! People were beginning to place free markets at the heart of Western civilization, in terms once reserved for Christianity or universal manhood suffrage. “Capitalism,” for perhaps the only time in its history, seemed synonymous with “freedom.”

Who was the author of this vision? A lot of people, but most prominent was the cantankerous and combative economist Milton Friedman (1912–2006). For a generation after the inflation of the 1970s, and thus in the triumphal decades when the United States was laying down the rules of the post–Cold War order, Friedman was the main spokesman for, and symbol of, the idea that free markets and free societies were basically the same thing.

Friedman spoke in every register of authority recognized by late-twentieth-century Americans. He was a brave and often solitary dissident from mid-century academic orthodoxies, arguing that the Keynesian theories out of which Franklin Roosevelt’s New Deal had been built rested on a misunderstanding about who spent money on what. He had a powerful influence on conservative policymakers: Barry Goldwater and Richard Nixon in the 1960s, Ronald Reagan and Margaret Thatcher in the 1980s. In 1976 he won the Nobel Prize. His Monetary History of the United States (1963) revolutionized the public’s understanding of the Great Depression of the 1930s. In his column for Newsweek and on his television show, he advanced cranky ideas that over time would come to sound like common sense: a volunteer army, for instance, or privatized package delivery. Most important, beginning in the 1960s he argued—in the teeth not just of contradiction but of outright mockery—that the United States was hurtling toward a never-before-seen combination of high inflation and high unemployment that might wreck the economy as we knew it. His vindication was swift and almost total.

Milton Friedman: The Last Conservative, by the Stanford historian Jennifer Burns, touches on the details of the economist’s life: his childhood in then-rural Rahway, New Jersey; his marriage to the economist Rose Director; his combative (but never ad hominem) classroom style. The particulars are not scintillating: Friedman collected ties depicting the Scottish economic philosopher Adam Smith. His license plates bore the macroeconomic equation

“MV = PY.” He liked woodworking. The only striking thing about Friedman the person was his sheer physical tininess. He stood five feet high, if that. The Labour politician Denis Healey, who as chancellor of the Exchequer presided over the long collapse of the British economy in the 1970s, once dismissed Thatcherism as the “half-understood, half-baked theories of that Jewish leprechaun Milton Friedman.”

Despite its trappings and its title, this is not really a biography. It is the intellectual history of a recusant tendency that arose within mid-twentieth-century managed capitalism and ended up overthrowing it. It is also a kind of business book, about the industry of academic economics.

Friedman credited Arthur Burns, his professor at Rutgers in the 1930s and decades later Richard Nixon’s Federal Reserve chairman, with having turned him into an economist. Burns would later call Friedman the greatest economist of his generation. But it was “price theory,” as taught in his years as a graduate student at the University of Chicago, that made a capitalist renegade of Friedman. A price is a privileged piece of information, an equilibrium between two pulsating, multifactorial complexities, namely supply and demand. Scholars can use price to study those complexities: The price of a vacuum cleaner can be a window on an entire marriage regime. Policymakers, meanwhile, must understand that messing with a price can send distortions and inefficiencies ricocheting invisibly through an economy.

Of course, money itself has a price: the interest rate. There may be gluts and shortages of money that, in accordance with the laws of supply and demand, affect its price. Since the resulting distortions can be tremendously consequential, it seems unsurprising that Friedman chose to focus his academic work on money. In the 1930s, though, it was an oddball decision. Monetary economics was thought an academic backwater, a waste of time for a young scholar of Friedman’s talents. Starting in the 1960s, Friedman’s research would help turn the Federal Reserve’s rate-setting into the main tool for stimulating or dampening economic activity, replacing (or at least supplementing) government spending. And in the 1970s, saving the American economy from runaway inflation would require the kind of monetary expertise that few besides Friedman possessed.

At Chicago, economics had ideological implications. Frank Knight, theorist of risk and mentor to Friedman’s generation, was given to exploring the paradoxes of capitalism—including the paradox that, in an efficient capitalist system (one in which everyone had all necessary information), profits (supposedly capitalism’s driving force and raison d’être) would tend to disappear. Knight concluded that profit “arises out of the inherent, absolute unpredictability of things.” Profit-making is therefore a sign of high character; a man who makes a profit has been willing to brave that unpredictability. Far from undermining the case for profits, this line of thinking gave birth to the myth of the entrepreneur as a risk-taking swashbuckler, even an existential hero, a myth that triumphed in the 1980s and survives today. Like socialism, price theory had a tendency to turn into moral browbeating.

Friedman’s brother-in-law, the legal theorist Aaron Director, had preceded him to the Chicago economics department. Doomed to writer’s block his whole life, Director never managed to produce the American version of Hayek’s Road to Serfdom that he had promised. But he did conceptualize the “law and economics” approach to regulation, by means of which his protégé Robert Bork would lead the dismantling of New Deal–era antitrust law. One can see it as a brilliant interdisciplinary innovation. One can also see it (as Jennifer Burns seems to) as a form of legalistic obscurantism: using an economic theory (whereby monopolies are transient and less dangerous than they look) to sabotage antitrust law (or undermine the will to enforce it).

Friedman himself thought monopolies tended to disappear. He also thought that capitalism in general was as likely to reduce income inequality as to exacerbate it. Burns not only pays commendable attention to the academic projects out of which these arguments arose, she also charts the influence of “a new type of institution”: the first nonprofit conservative foundations, such as the anti-communist William Volker Fund and the Foundation for Economic Education. Civic-minded pamphlet-printers and forum-conveners, these institutions spread ivory-tower research to a mass audience, albeit at the risk of shunting economists into what Friedman called “hack work.”

All of these people were laboring in the long shadow of the Cambridge economist John Maynard Keynes (1883–1946). The bombshell of Keynes’s General Theory of Employment, Interest and Money detonated in 1936 and, as Burns puts it, “would set the intellectual agenda for Friedman’s entire career.” Keynesianism called for tempering the business cycle through “demand management”—accelerating government spending when the economy was sluggish, pulling back when the economy was running too hot.

But there was a problem with Keynesianism. It worked better on the blackboard than in a parliamentary democracy. Spending programs could be introduced as planned, but cuts and tax hikes would meet resistance. So, although bloating the state was not a part of Keynesian theory, it tended to result from Keynesian practice. Lyndon Johnson notoriously tried to fight an all-out war in Vietnam and build a mammoth welfare state at home. In any previous administration this would have been seen for the folly it was. In the heyday of Keynesianism, pushing the frontiers of spending ever outward seemed virtuous. Advisers could advise, but the people in charge were politicians with elections to win. Already in the early 1960s, the shapers of John F. Kennedy’s “new economics” were leaning on lenders to bring down mortgage rates, arguably laying the groundwork for this century’s subprime crisis.

It was in this intellectual climate, as president of the American Economic Association during the 1967–68 academic year, that Friedman began to point out that policymakers were underestimating the growth in certain monetary “aggregates” (compound measures of the amount of money in circulation). The American economy, Friedman warned, was headed for an unprecedented mix of inflation and unemployment. Since the economy was booming, after a fashion, Friedman’s jeremiads were met with sniggering mockery from the (mostly) Harvard professors who were still making economic policy. Friedman had his backers, too, but they tended to be angry galoots from the free-market foundations.

In an almost Shakespearean twist, it was at just this moment that Friedman’s mentor and oldest friend, Arthur Burns, began assailing him in public for his positions on employment and welfare. Nixon nominated Burns to lead the Federal Reserve in 1969. After an academic career dedicated to warning of the dangers of inflation, Arthur Burns would wind up misreading monetary aggregates. He pumped too much money into the economy on the eve of the 1972 election (not necessarily for devious reasons, Jennifer Burns believes) and set off one of the most calamitous episodes of inflation in American history.

It was Paul Volcker, Jimmy Carter’s 1979 nominee as Fed chairman, who eventually succeeded in bringing inflation under control—a tremendous vindication for Friedman’s worldview in its general outlines, which by then had come to be called monetarism. But on policy matters, Volcker diverged from Friedman’s prescriptions. He paid some attention to Friedman’s beloved monetary aggregates but put his main focus on publishing a target federal funds rate—and wound up durably lowering inflation. Friedman would remain an important supporter of Reaganomics and an important symbol of the American capitalist order for another quarter century. But his time as an intellectual leader was over.

What fitted Friedman for the half-prophetic, half-political role he played in the years leading up to the Cold War’s end? There is a paradox to it. Despite his generally classical-liberal policy preferences, Jennifer Burns calls him “the last conservative,” mostly because he had a nineteenth-century vision of economics as more a philosophical than a mathematical endeavor. He was the youngest brilliant economist whose worldview had hardened before the Keynesian revolution swept Washington and the world in the 1930s. His youthful reluctance to align himself with new lines of economic research, which might have made him seem unusually hidebound in the Truman and Eisenhower years, gave him an unusually open mind in the Nixon and Carter years, when quarrels over economic doctrine tended to pit one set of dug-in Keynesians against another.

Many Americans knew Friedman simply as a wisecracking economic pundit. You might have called him a maverick or a crank. He favored abolishing the Federal Reserve and, on that basis, built a number of friendships with like-minded leftists. He once proposed abolishing the federal bond market. He was the first to imply that favored businesses were collecting a kind of corporate welfare, and defended illegal immigration precisely on the grounds of its illegality, which provided an escape from the high wages and onerous benefits accorded workers over years of trade-union dominance. It is easy to associate Friedman with the low-IQ libertarian gripery that took over American public discussion as Great Society programs continued to lay waste to the country in the late 1970s.

None of this would have meant anything, though, if not for Friedman’s mastery of monetary economics and policy. Among the many arguments Friedman formulated in A Monetary History of the United States, the most consequential concerned the Great Depression of the 1930s: By allowing the money supply to contract rapidly, the United States had turned a passing crisis into a catastrophe. Until the book’s publication, the Depression had been considered the macroeconomic equivalent of a perfect storm. Friedman’s revisionist interpretation has proved not just a historiographical but a political landmark. It implies that the policy of first resort at the first signs of systemic sputtering should be to turn a fire hose of money on the economy, even at the risk that this money will be scooped up by the fat cats who brought the problems on in the first place. At any rate, this has been the model for government intervention in the twenty-first century’s increasingly frequent economic crises: around 9/11, the subprime collapse, Covid. Macroeconomic potlatch in times of downturn is today Friedman’s most enduring legacy, even if it is at odds with the values of “conservatism” and “sound money” that still define his reputation.

Here Jennifer Burns brings in a note of skepticism. Friedman’s monetary history had a co-author, Anna Jacobson Schwartz of the National Bureau of Economic Research, whose name tends to get zipped over and forgotten, as if she were some kind of amanuensis or research assistant. Schwartz was an accomplished economic historian who, by the time she and Friedman began collaborating, had already co-written (with Walt Rostow, later an adviser to presidents Kennedy and Johnson on Vietnam war matters) a history of the British economy from 1790 to 1850. The heart of A Monetary History of the United States is its calculation of money aggregates from multiple conflicting sources, and this work seems to have been done mostly by Schwartz. She had, too, a better sense of the book’s arc and its argument.

For long stretches of her own book, Burns focuses on the invisibility of woman economists, even highly qualified and active ones, in the years after World War II, and our subsequent tendency to overvalue men. It was Rose Friedman, for instance, who turned Milton’s lectures into the 1962 bestseller Capitalism and Freedom. Burns has a particular fascination with Dorothy Brady of Chicago, a longtime collaborator of Rose’s. One of Milton Friedman’s towering academic accomplishments was to undermine, in A Theory of the Consumption Function (1957), the Keynesian idea of who spent what. If, as the mid-century economic establishment believed, the rich socked away their money while the poor had no choice but to spend it immediately, then transfers from the former to the latter would stimulate economic activity. Egalitarianism was good for business. If this was not the case, though—and Friedman believed it was not—then income transfers might be futile or even counterproductive. From there it was but a short step to “Greed is good.” Brady, Burns notes, reached similar conclusions in research that antedated his.

Burns has a rare ability to wield economic terms and concepts clearly and precisely, without either dumbing them down or resorting to phony erudition. Rather than simply tell us that Friedman was marked by an early reading of Alfred Marshall, she will tell us what is in Alfred Marshall and where it shows up in Friedman’s work. In explaining how Friedman’s ideas of the Fed’s role differed from those of his rivals, she explains what “open market operations” are, what a “primary dealer” is, what the “federal funds rate” is, and so on. The arguments are both sophisticated and easy to follow.

Burns doesn’t seem to like Friedman much. She is more inclined to qualify and contextualize his insights than to marvel at them. Certain of his political engagements get on her nerves. One is his (minor) role as an economic adviser to General Augusto Pinochet’s Chile. Burns deserves credit for correcting a misunderstanding about the Chicago-trained economists who sparked an economic revival in Chile in the 1970s and 1980s. It is a myth of progressive oratory and journalism that, once Pinochet overthrew the elected Marxist government of Salvador Allende in a brutal 1973 coup, various unscrupulous American institutions (including the capitalist ideologues of the Chicago economics faculty) rallied to his cause, indifferent to his record of executions and expulsions.

In fact, economists at the Pontifical Catholic University of Chile in Santiago who came to be known as the “Chicago Boys” antedated not only Pinochet but even Allende. Many were indeed followers of Friedman’s doctrines. They traced their origins to a visit from the chairman of Chicago’s economics department in the early 1950s. Yet Pinochet took power without any economic program beyond stopping Allende’s expropriations. Only when the Chilean economy seemed to defy all attempts to revive it did he ask the Chicagoans for help. Friedman’s rationale for visiting was that Chile was not a worse dictatorship than the Soviet Union, which he had been happy to visit. This shows him to have been “literal-minded to a fault,” in Burns’s view. “Pinochet’s Chile,” she writes, “was not the time and place to assert that what felt like freedom was actually the road to serfdom.”

Burns’s other complaint concerns Friedman’s opposition to the Civil Rights Act of 1964. Here, too, she is extremely insightful, seeing clearly, as few historians of the period do, that the assassination of Kennedy was as important in shifting the country away from Barry Goldwater’s anti–civil rights vision as any moral argument. She deftly links Friedman’s thinking on the subject of discrimination to his perspective as the son of Ruthenian Jewish immigrants and his experience of anti-Semitism. But for that reason she is wrong to view Friedman’s invocation of the Nazis’ Nuremberg Laws as “astonishing,” and she is arbitrary in describing this particular dissent—hardly his most bizarre—as a “shadow over his legacy.” Friedman’s skepticism about government plans to redistribute goods and opportunities by race was not a moral deficiency. It proceeded from a fear that another shoe might drop. On today’s American college campuses, the tight correlation between anti-Jewish sentiment and anti-racist zeal is a sign that he was on to something.

There is a basic question about Friedman’s supposed importance that was raised as soon as Volcker began tacking away from his policy suggestions: If Friedman was such an innovative thinker, then why do experts no longer rely on his policy rules? Burns’s answer is original and profound. “Slowly, painfully,” she writes, “Friedman would learn that monetarism was built on data from a world that no longer existed: the regulated and regimented postwar era, the land the New Deal built and inflation swept away.” Friedman and his allies had gathered evidence that the New Deal–managed economy was rife with inefficiencies and injustices—but only in a such an economy was it possible to gather such evidence in the first place. Our economy is too complex to manage that way. The post–New Deal order would perhaps be more efficient, but it would also be less accountable.

A balanced assessment of this order would become possible only after the global financial crisis of 2008. The vitality Friedman and others had attributed to entrepreneurial capitalism would turn out to have been bought at an astronomical price in middle-class security and political stability. Friedman’s reputation today is falling—but it stands much higher than that of the system he championed, mostly because there was a good deal more to him than his political engagements.

Friedman’s method of studying monetary aggregates, in fact, has lately been making a modest comeback. For almost all the economists who shaped economic life between World War II and the arrival of Volcker, the model of a successful economy was a war economy. But “Bidenomics,” as the present order is sometimes called, explicitly seeks to revive that tradition, and “Bidenflation” has been the result. Since inflation returned throughout the West in 2021 and 2022, many policymakers have blamed the aggregates. Most notably, the European Central Bank board member Otmar Issing linked galloping inflation in the Eurozone to a 30-percent hike in the money supply.

Friedman was a prophet of our present predicament. Where “cultural elites” develop, many crucial political questions come to pit those with intellectual credentials against a large mass of angry people who have none—but who may nonetheless be right. Economic policymaking fell into this situation long before society as a whole did. For much of his career, Friedman spoke for a side that was held to be discredited in advance. That kind of thinker never gets his full measure of credit. Year in, year out, he crafts arguments that are dismissed as idiocy, until one day their truth becomes absolutely undeniable—at which point they are dismissed as common sense.

Christopher Caldwell is a contributing editor of the Claremont Review of Books.

Image by The Friedman Foundation for Educational Choice via RobertHannah89 licensed via Creative Commons. Image cropped.