Milton Friedman: Objective scientist first, free-market promoter second
The founder of the 'Chicago school' of economics reinvigorated the world's faith in capitalism.
Above all, economist Milton Friedman was an independent, objective thinker who systematically applied the scientific method to economic problems and eventually to the entire spectrum of the social sciences. He was without peer in achieving this intellectual imperialism, and his fame and accomplishments result from his scientific prowess rather than mere ideology.
As founder of the famous (University of) Chicago "school" of economics, Friedman was a thoroughgoing empiricist and utilitarian, believing that all theories must be subjected to rigorous testing. He was taught that the only worthwhile theory was a simple one that could be validated or rejected with empirical evidence. To test a theory, he developed sophisticated statistical methods and econometric models.
In the 1950s, Friedman was one of the first to apply this methodology consistently. Today, it is a universal technique among economists and social scientists. Prior to Friedman, many social scientists designed theories based on their own biases and experiences. In the 1930s, John Maynard Keynes never did any quantitative work to validate his "new economics" – a set of claims that emboldened government intervention in economies.
Friedman felt that biases could be overcome by objective examination. He discouraged labels. "I am not a supply-side economist," he insisted. "I am not a monetarist economist. I am an economist."
Ironically, it was his painstaking, objective analysis in the landmark work, "A Monetary History of the United States, 1867-1960," that gave him such labels. In that work, he and coauthor Anna J. Schwartz asserted that the Great Depression was not a failure of market capitalism, but of government policy. They showed that the Federal Reserve acted ineptly in allowing the money stock to decline by "more than a third," converting a garden-variety recession into the worst economic catastrophe of the 20th century.
Free-market economists such as Ludwig von Mises and Friedrich Hayek failed in their attempts to dislodge Keynesianism because they refused to do any empirical work. But Friedman's quantitative efforts were so powerful that he changed professional opinion about the cause of the Great Depression.
His empirical studies at Chicago convinced him that "money mattered" more than fiscal policy (spending and taxes). Friedman also discovered that "long and variable lags" in Federal Reserve policy would confound Keynesian efforts to fine tune the economy. Instead, he advocated a steady monetary rule – an emphasis that former Fed Chairman Alan Greenspan says was instrumental in guiding Europe and the US toward low inflation during the past two decades.
Friedman also overturned the "Phillips Curve" trade-off between inflation and unemployment. That's important, because for years central bankers wrongly believed – and some still do – that they had to accept high inflation as the price of low unemployment.
It wasn't long before his philosophy of "theory plus history" was extended to all sorts of disciplines: sociology, law, finance, history, politics, and religion.
Through his books, "Capitalism and Freedom" (1962) and "Free to Choose" (1980), Milton Friedman reinvigorated the world's faith in capitalism. He discovered, through rigorous science, that markets work, and that we as individuals are better suited to making our own decisions than our government leaders or technocrats (the very opposite view of John Kenneth Galbraith, who preferred centralized planning). He favored the invisible hand of laissez faire over the heavy hand of government. It is too early to tell if his policy recommendations will prevail: flat income taxes, drug decriminalization, privatization of Social Security, and school vouchers. But there is precedence for victories, such as flexible exchange rates and a volunteer army.
Yet Friedman's empiricism also led him into disagreements with his free-market supporters. He dismissed the conservative view that deficit spending was necessarily bad, or that tax cuts stimulated the economy in the short run.
Friedman used the same strategy of "testing the evidence" when it came to Mr. Galbraith's criticisms. For example, the evidence failed to support Galbraith's contention that big business can manipulate customers at will or ignore stockholders because of its size and power.
Well did Chicago colleague George J. Stigler say of these two economists: "All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman."
• Mark Skousen, editor of Forecasts & Strategies, taught economics at Columbia University and is the author of "The Making of Modern Economics."