What do you think of Milton Friedman

Milton Friedman: Not just a "monetarist"!

Milton Friedman would have turned 100 on July 31, 2012, he was born in New York City and died on November 16, 2006 in San Francisco. Most scientists, politicians and others interested in economic theory know him primarily as the founder and main representative of the monetarist theory of money. Statements such as: "Inflation is always and everywhere a monetary phenomenon" are inextricably linked with it.

But Friedman is much more than a mere monetary theorist. Even his monetarist theory of money is an attempt to contrast the Keynesian theory with a more microeconomically founded concept. Above all, he criticizes the Keynesian theory, its short-term orientation and the fact that the recommended expansionary monetary and fiscal policy can only develop its effectiveness if the economic actors are permanently deceived. Instead of a short-term business theory, he puts a long-term, rule-based economic policy.

Beyond monetarist doctrine, Friedman has dealt with many different topics. In a much discussed essay he devoted himself to economic methodology; he defended corporate profit maximization against ethical objections; and he advocated the creation and improvement of markets. In addition, he has examined ways of financing schools through education vouchers and anchoring the concept of negative income tax.

There is no doubt that the following overview cannot in any way appreciate Friedman's oeuvre as a whole. Instead, we shall only highlight four central areas of the great thinker1: monetarism, the ethics of profit making, the methodology of positive economics, and liberalism.


Monetarism moves - as the name suggests - a certain type of monetary policy into the center of the analysis. This line of research is inevitably associated with the name Milton Friedman, even if numerous other economists (e.g. Karl Brunner, Philip Cagan, David Laidler, Allan H. Meltzer and Jerome L. Stein) have also made important contributions in this field. Monetarism is a kind of "counter-revolution" against the Keynesian theory.

Even if the term “monetarism” was founded by Karl Brunner2 and spread in Germany by David Fand3 among others, a central spark for this direction lies in Milton Friedman's 1956 article “The Quantity Theory of Money: A restatement”, 4 of the was deepened by him in the following years and decades through numerous contributions.5 While, according to the Keynesian view, the accumulation of savings represents the residue of the unconsumed income, the investment of which is decided in the capital market, investment and consumption decisions are interdependent for Friedman. They are the result of an actor who optimizes the overall portfolio (which also includes investments in education and much more). Money supply variations - brought about exogenously by a central bank - unfold their effect through relative returns and prices and finally reach the real sector. In the short term, an expansionary monetary policy can therefore stimulate the economy. In the long term, however, it will only ensure price increases - inflation. This thesis, which is opposed to Keynesianism, needs justification. Two points in particular should be noted here: the natural rate of underemployment and the adaptive expectations.

In Keynesianism, it is often assumed that in the event of unemployment, a policy of cheap money helps to stimulate employment through increasing demand. Friedman, on the other hand, argues that this effect does not necessarily occur. He agrees with the Keynesians insofar as an expansive monetary impulse ultimately increases investment and consumer demand after many adjustment reactions on the money, capital and education markets. Nonetheless, in the long term, even with unemployment, there will be price increases rather than permanent employment effects. According to Friedman, the reason is that unemployment is usually interpreted as cyclical unemployment, which can be effectively reduced by the expansionary impulse. In fact, however, structural unemployment dominates in the long term: the “natural rate of unemployment”. According to Friedman, this depends on the functionality of the markets (based on institutional conditions) as well as on search processes and frictional adjustment problems. The natural rate of underemployment can only be influenced by monetary and / or fiscal policy in the short term - as long as economic actors have not yet adjusted their inflation expectations - but not in the long term. Analogously, there is also a natural growth rate in this building of thought (which also depends on the market conditions), which can only be changed temporarily through monetary and fiscal policy.

An increased demand due to expansionary fiscal policy will therefore follow the natural growth path and an increased demand for labor will meet the frictions of the labor market and therefore lead to price increases despite underemployment. Inflation expectations are then adjusted and lead to higher wage settlements, which in turn pushes inflation upwards and thereby lowers real income and demand. This shows that money supply effects ultimately only lead to inflation and are not able to generate sustainable employment effects. In terms of model theory, this finding is shown in a horizontal Phillips curve6 and a horizontal macroeconomic supply function (or a natural growth path).

It was not only for these reasons that Milton Friedman saw a case-by-case monetary and fiscal policy as an ineffective means of reducing unemployment. Another problem he cited against Keynesian politics was the incalculability of the temporal dimension of the use of monetary and fiscal policy funds.7 On the long way between monetary and fiscal policy impulses and the effect on the labor market, incalculable delays can and will occur. According to Friedman8, occasional changes in the amount of money are always associated with variable time delays (“lag hypothesis”).

As a result of these dangers of a discretionary monetary policy, Milton Friedman (since 1959) advocates constant growth in the money supply.9 Friedman proposes a constant growth rate of 3% to 5% per year, whereby the exact amount is less important than the constancy. Such a rule prevents the (possibly well-intentioned) abuse of the monopoly of money by the government because it is simple and transparent. "One has to establish rules for the conduct of monetary policy that enable the public to control monetary policy through their political expertise, and rules that at the same time prevent monetary policy from being subjected to the daily whims of political authorities." 10

Friedman was just as skeptical about the debt possibilities of the state, which could only result in national bankruptcy without being bound by rules. He therefore spoke out in favor of a ban on taking out public loans as early as 1948

The ethics of making a profit

Business ethics is an interdisciplinary field. Scientists with an economic background work here, but also social scientists who are skeptical, if not even negative, about economics. In addition, corporate and business ethical discourses are repeatedly stimulated by the discussion of “stakeholder versus shareholder orientation” (should companies only orient themselves towards the wishes of the capital owners or also take into account the wishes of other interaction partners?).

Behind these discussions is the more general question: Can and should private companies take on social responsibility? Milton Friedman gave a clear answer to this question on September 13, 1970 in the New York Times Magazine; it is already in the title of his article "The Social Responsibility of Business Is to Increase Its Profits". The managers, as the leaders of the company, are, according to Friedman's argument, indebted to the owners. They have made their money available to the company, foregoing other investment opportunities, in the expectation that the company will operate successfully in the market and generate a comparatively attractive return from which they will then benefit accordingly.

As private individuals, managers can get involved in social issues, donate money or invest in social funds. In this case, they act as principals who are responsible for themselves. However, when they make decisions for the company, they are not acting as principals but as agents and are therefore responsible to the investors - the owners. If they make their money available to the company and commission the managers to achieve a comparatively high return, it would be a breach of trust and thus immoral to pursue other goals.

Another argument Friedman uses against managerial social responsibility is the conditions of market competition. In a competitive environment, companies are forced to either produce better products than their competitors (striving for quality leadership) or to offer the same or similar products at comparatively low prices (striving for cost leadership). A company that neglects its efforts to act in one direction or the other in order to pursue social goals instead will sooner or later disappear from the market. Not only do the owners of the capital lose their money, no, the social costs also rise, because the unemployed employees lose income and have to look for a new job.

With these arguments in mind, for Friedman, the pursuit of profit (the strategy of maximizing long-term returns) is the only legitimate responsibility of managers. According to Friedman, anyone who demands something different from company management in a market environment has not understood the laws of the market and causes damage to companies with their exaggerated demands. Friedman sees the legitimate limits to entrepreneurial activity in the laws enacted by the state (or possibly a community of states). These must be “knitted” in such a way that social costs (externalities) are avoided in advance as far as possible. The strategy of self-commitment by the company for social reasons - going it alone - would be of no use to the other party, it would only cause damage.

With this clear plea for companies to be profit-oriented, Friedman attracted a lot of attention and received a lot of criticism.12 One of the main points of criticism is that states are far too slow and slow when it comes to legislation. Regulations, especially in the international arena, are always very sketchy, not to mention the deficiencies in the enforcement of rules. Against this background, if companies do not assume any social responsibility when it comes to environmental problems and exhaust all possibilities of making a profit, as long as this is only legal, then human lives are (unnecessarily) endangered.

This grave objection to Friedman’s position can be resolved if Milton Friedman’s intention is considered. With his remarks, he sets up a “theorem of impossibility”: It is naive, stupid and pointless to prescribe a company that operates in market competition to pursue social goals. The company has to lose because with this strategy it goes against the laws of the market. If you accept this as a business ethicist, you have to look for possible solutions not against, but with Friedman's insights. Here are three possible directions of impact. 13

  • First, a company can reconcile profit and social responsibility by aggressively communicating a certain type of manufacturing that is in line with social responsibility. In this way, it can "awaken" a higher willingness to pay in certain consumers, i.e. profit targets can then also be achieved at higher prices.
  • Second, the company can try to draw attention to gaps in national and international regulations so that these gaps can then be closed by legislation. The new rules then apply to all market players, and no loss of profit is to be expected.
  • Thirdly, a company can try to initiate industry solutions (self-binding of an industry) together with non-governmental organizations. Such ties are known in the field of international anti-corruption, where Transparency International takes on the role of controller. Here, too, the individual company has to reckon with few disadvantages on the profit side compared to going it alone, because the immediate competitors are brought on board and free-riders who break away are publicly pilloried.

Even if Milton Friedman were to be accused of having drawn too little attention to such opportunities to implement ties, 14 his excursion into business ethics must be credited with making a crucial point: business ethical demands on companies must, in order to be successful, observe the conditions of the market, otherwise they will cause damage and lead to higher and not lower social costs.

The methodology of positive economics

Just as Friedman once said about corporate responsibility, he did it once about economic methodology. As provocative as in his essay on economic ethics, in his 1953 essay "The Methodology of Positive Economics" he advocated the thesis that it is completely irrelevant whether the assumptions of an economic model are realistic.15

Friedman contradicts those critics of economic modeling who complain that the assumptions on which the models are based are always unrealistic and have little or nothing to do with the behavior of flesh and blood people. His argument is that one learns nothing from models that are based on true assumptions (if that is possible at all). Particularly those models that point out certain problems and suppress other facts through abstraction and falsifying materialization of the real world are expedient. The fertility of the theory or model is a result that arises due to the controlled anti-realism of the assumptions. To put it provocatively, this led to the F (riedman) twist hypothesis criticized by Samuelson: The more unrealistic the assumptions, the more valid and insightful the explanatory hypotheses and prognoses of the model! 16

Friedman received a lot of criticism from non-economists and economists for this view. Since he stuck to his rule “if you have a lot of criticism, you cannot answer all critics, so nobody is answered”, the discussion about the realism of the assumptions continues to this day. And especially in this day and age, the question is more topical than ever, because experimental economics is looking for the “true core” of human behavior and positions its results against numerous assumptions of standard economics.

Since there is no place here to even begin to touch on the discussions in all their facets, the following will only address the question: Can or should one criticize model assumptions at all, or is the only touchstone of the model the validity of the generated hypothesis ? Or in more succinct words: Does the model output alone decide, and not the model input, about the quality of the model?

Friedman sees the point in setting up models to gain knowledge in order to solve real problems. The assumptions constitute the model world and ultimately a testable hypothesis is generated. If, strictly speaking, i.e. measured against the real world, the assumptions are (or must be) always wrong, the question arises as to whether the assumptions can be criticized at all. The Nobel laureate Ronald Coase says in a readable and neglected discussion of Friedman’s point of view "yes", one can and should criticize the assumptions

Friedman's remarks and, above all, the discussion about Friedman's methodological point of view lead to the false impression, according to Coase, that the assumptions (the model input) ultimately do not matter. Coase, on the other hand, argues that the assumptions are the building blocks of the model and that the model itself always contains an implicit hypothesis about what the driving forces of a problematic issue are in reality. Assumptions and model links thus create insights that one either accepts or rejects - regardless of the truth content of the generated hypothesis. It is therefore of great importance to discuss these insights and thus also the model assumptions and the model links.And Coase continues that the great paradigmatic model worlds - classical, Keynesianism, monetarism - were not replaced because certain hypotheses were more valid than others, but because the driving forces anchored in the models (which depend on the assumptions) convinced the community.

With Coase one can therefore say that the discussion about assumptions and models depends not only on the output, the truth of the hypothesis, but to a decisive extent on the persuasiveness of the model and its assumptions themselves. Therefore, of course, one has to discuss the assumptions. But not against the background of the truthfulness of the assumptions (Friedman is correct here), but against the background of the question of whether the driving forces of a real problem are actually represented by the assumptions and the model structure. This last point, pointed out by Ronald Coase, is not in conflict with Milton Friedman's intention. Friedman just doesn't put it into concrete terms. It would have been all the more interesting to hear Friedman's opinion on the point from Coase. However, that would have been difficult to do even during Friedman's lifetime, because, as already mentioned, he adhered to the self-imposed rule not to answer the critics.

Friedman and Liberalism

Milton Friedman is without a doubt an advocate of liberalism - more precisely: neo-liberalism. Contrary to the interpretations of some Internet blogs, it is the hallmark of neo-liberalism that the state (as the agent of the citizens) is not only assigned night watchman tasks (such as securing property rights), but also the provision of collective services, and this also in the field of the social. But: Friedman is not a conceptual neo-liberal. He does not try to be a social theorist who puts forward a complete liberal concept, as did Hayek, Nozick or Buchanan, for example. Friedman is a liberal thinker who has made suggestions from a liberal point of view on various problem areas.

As early as 1946, in an essay18 that he wrote together with Stigler, he spoke out against any government rent control. In his liberal bible “Capitalism and Freedom” 19 from 1962, he adds further liberal policy recommendations: He advocates the end of state subsidies, demands free international trade without import tariffs and other restrictions, opposes state minimum wages, wants state subsidies in residential construction. Furthermore, he opposes compulsory military service, the postal monopoly and calls for the privatization of statutory social insurance. He also calls for the abolition of all state restrictions on access to career choices.

Friedman's proposal from 1955 to counter discrimination in school education by issuing education vouchers has also become known.20 The education voucher is for the amount that corresponds to the state's average expenditure on education per student. Parents can redeem this education voucher at a school of their choice. The school in turn presents the vouchers to the state and receives the monetary value of the education vouchers back. What at first glance looks like a detour and a complication of the payment channels turns out to be a procedure that offers several advantages at second glance: poor and rich families have the same opportunities to choose a school. For their part, schools are now facing more competition and have to actively seek good training and a good reputation. So you will try to acquire good teachers and develop good concepts. Even if these positive characteristics of competition never occur as smoothly in reality as in the model (in reality, distances, the parents' willingness to obtain information, and transaction costs when changing schools also play a role), it is worthwhile to think seriously about the proposal .

Friedman's plea for the concept of negative income tax was and will be heatedly discussed.21 In his book “Capitalism and Freedom” he suggests replacing all state welfare programs with a single instrument - negative income tax. Its aim is, on the one hand, to create transparency and reduce discrimination against the welfare state and, on the other hand, to increase work incentives for social welfare recipients (with low marginal tax rates as income levels rise).

These brief remarks on Friedman's liberal ideas show that as a liberal thinker, one can stimulate economic and political discussion even without an explicit, well-declined liberal conception of society. His liberal reform concepts are still controversially discussed today.

Conclusion: You will continue to rub yourself against his theses

Milton Friedman was an advocate of the market economy. In his opinion, the market economy is superior to all other coordination mechanisms and creates opportunities and prosperity for the citizens, provided it is flanked by an adequate state (economic) policy. For this reason, Friedman stood up against (perhaps well-intentioned, but nonetheless) bad and inefficient government measures throughout his life and countered the faulty policy with concrete proposals.

From this perspective, positive effects of the market economy are by no means a sure-fire success. According to Friedman, they only come about when the citizens actively choose the “right” policy. In order for them to be able to do this, Friedman was never too bad to present his ideas to the economically uneducated citizens. In this context, reference should be made to his many television interviews and to his TV series "Free to Choose" (broadcast in 1980 by the Public Broadcasting Service), in which he explained the functioning of free markets and the effects of "wrong" and "right" policies. Many excerpts are still available today on the YouTube platform.

Even after his death on November 16, 2006, his theses live on. Scientists and politically interested citizens continue to rub against his (very concrete) proposals - and this will remain so for a long time, because Friedman's statements are always targeted and clearly formulated and are still relevant today.

  • 1 Wikipedia describes Milton Friedman as "the most influential economist of the twentieth century alongside John Maynard Keynes". This is certainly also due to the fact that Friedman - often together with his wife Rose - appeared as an eloquent and media-effective mediator of economic and political ideas. Many of his television appearances are set on YouTube.
  • 2 Cf. K. Brunner: The Role of Money and Monetary Policy, in: Federal Reserve Bank of St. Louis Review, Vol. 50 (1968), pp. 8-24; K. Brunner: The Monetarist Revolution in Monetary Theory, in: Weltwirtschaftliches Archiv, 105th year (1970), pp. 1-30.
  • 3 D. Fand: A monetarist model of the money effect process, in: Kredit und Kapital, 3rd year (1970), pp. 361-385.
  • 4 Cf. M. Friedman: The Quantity Theory of Money: A restatement, in: M. Friedman (Ed.): Studies in the Quantity Theory of Money, Chicago 1956, pp. 3-21.
  • 5 Cf. M. Friedman: Money: the Quantity Theory, in: International Encyclopedia of the Social Sciences, 1968, pp. 432-437; ders .: The Role of Monetary Policy, in: American Economic Review, Vol. 58 (1968), pp. 1-17; ders .: The Optimum Quantity of Money and Other Essays, London 1969; ders .: A Theoretical Framework for Monetary Analysis, in: Journal of Political Economy, Volume 78 (1970), pp. 193-238; ders .: A Monetary Theory of National Income, in: Journal of Political Economy, 79th vol. (1971), pp. 323-337; and M. Friedman, A. J. Schwartz: A Monetary History of the United States, 1867-1960, Princeton 1963.
  • 6 The Phillips curve originally described a negative relationship between the nominal wage growth rate and the unemployment rate, published by Alban Phillips in 1958, see AW Phillips: The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957, in : Economics, Volume 25 (1958), pp. 283-299. This original Phillips curve was transformed by Samuelson and Solow in 1960 into a negative relationship between inflation and the unemployment rate, see PA Samuelson, RM Solow: Analytical Aspects of Anti-Inflation Policy, in: American Economic Review, vol. 50 (1960), p 177-194. The idea of ​​the long-term horizontal Phillips curve goes back not only to Friedman, but also to Phelps, see M. Friedman: The Role of Monetary Policy, op. and E. S. Phelps: Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time, in: Economica, vol. 34 (1967), pp. 254-281.
  • 7 M. Friedman: The Lag in the Effect of Monetary Policy, in: Journal of Political Economy, 69th vol. (1961), pp. 447-466.
  • 8 M. Friedman: A Monetary and Fiscal Framework for Economic Stability, in: American Economic Review, vol. 38 (1948), pp. 245-264; ders .: The Supply of Money and Changes in Prices and Output, in: The Relationship of Prices to Economic Stability and Growth, Washington DC 1958, pp. 249-250; as well as: The Lag in the Effect of Monetary Policy, loc. cit.
  • 9 Cf. inter alia M. Friedman: The Demand for Money: Some Theoretical and Empirical Results, in: Journal of Political Economy, 67th year (1959), pp. 327-351.
  • 10 M. Friedman: Capitalism and Freedom, translated from the English by Paul C. Martin, with a preface by Horst Siebert, Frankfurt a.M. 2002, p. 75.
  • 11 M. Friedman: A Monetary and Fiscal Framework for Economic Stability, loc. Cit., P. 250.
  • 12 Cf. A. Suchanek: Profit maximization as a corporate social responsibility? Milton Friedman and business ethics, in: I. Pies, M. Leschke (ed.): Milton Friedmans economic liberalism, Tübingen 2004, pp. 105-124.
  • 13 Cf. on these basic possibilities to implement desirable ties, K. Homann, F. Blome-Drees: Wirtschafts- und Unternehmensethik, Göttingen 1992.
  • 14 See A. Suchanek, loc. Cit.
  • 15 Cf. M. Friedman: The Methodology of Positive Economics, in: ders .: Essays in Positive Economics, Chicago, London 1953, pp. 3-43.
  • 16 Cf. P. A. Samuelson: Problems of Methodology - Discussion, in: American Economic Association, Dec. Meeting 1962, 1963, p. 232.
  • 17 See R. H. Coase: How Should Economists Choose ?, published by the American Enterprise Institute for Public Policy Research, Washington, London 1982.
  • 18 Cf. M. Friedman, G. Stigler: Roofs or Ceilings ?, Irvington-on-Hudson, New Jersey 1946.
  • 19 M. Friedman: Capitalism and Freedom, Chicago 1962.
  • 20 Cf. M. Friedman: The Role of Government in Education, in: R. A. Solo (Ed.): Economics and the Public Interest, New Brunswick, New Jersey 1955, pp. 123-144.
  • 21 The concept of negative income tax goes back to the British economist Juliet Rhys-Williams (reprinted in a Liberal Party pamphlet in 1944). It represents a reform proposal for social security in connection with the income tax system. Households or individuals with low incomes receive transfer payments - the negative tax -; as incomes rise, the transfer payments then decrease to a threshold value and then have to accept (positive) income taxes to be paid to the state. Since the transfer payments are not reduced by the same amount as income rises, there is always an incentive to expand employment. In this way a “poverty trap” is avoided.

Title: Milton Friedman: More than a Monetarist!

Abstract: Milton Friedman was one of the most prominent advocates of free market economics. Of course, Friedman is popularly recognized for monetarism. His so-called money supply rule and his skepticism of public debt are being rediscussed seriously in the light of the present crises. But Friedman was more than a monetarist. His famous thesis "The Social Responsibility of Business is to Increase its Profits" caused a heated debate that continues today. In a similar way Friedman initiated a controversial discussion by introducing an argument in support of unrealistic assumptions (in his essay "The Methodology of Positive Economics"). Furthermore, his very clear and concrete proposals to promote a liberal society will be remembered long after his death.

JEL classification: E5, B41