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December 4 , 2006
Milton Friedman: A Remembrance

by george benston, john h. harland professor of finance, accounting and economics

In 1958, after having seen how much my wife, Alice, was enjoying her Ph.D. studies at Emory’s Institute of Liberal Arts and having found teaching very rewarding (part time at Georgia State while I worked at the First National Bank of Atlanta), I used my GI bill and a fellowship to pursue graduate studies in finance and economics at the University of Chicago. I did not realize until later how lucky I was to have gone to Chicago, since it was there that I became a student for life of Milton Friedman.

Although enrolled in the Graduate School of Business, where I studied finance, I could take courses in the Department of Economics. Professor Friedman’s price theory course was the beginning of my real education as an economist.

I boned up on math, but he didn’t use it much. Rather, he would admonish us to “think like an economist.”
What is the question or concern? What hypotheses can be drawn that would allow us to structure the economic issues? What data can be obtained that could disprove or be consistent with the hypotheses? What are the policy implications that one could draw from the empirical tests? These were the questions he wanted us to ask and that, since then, have largely directed my own research.

During my third and fourth years as a graduate student and in the following four years as a GSB faculty member, I participated in Milton Friedman’s Money and Banking Workshop.

From his intense and insightful questioning of the authors of papers presented at the workshop and of us, the participants (who were expected to have critically read the papers in advance), I learned how to apply economic reasoning and models to empirical testing to many issues.

Of greatest importance, I learned from his example and from his questions to examine research critically and precisely and to be prepared to defend what I did and be willing to admit that I had not done it well enough. He was polite and never dismissive of inadequate work, but he gave no quarter.

We could tell, though, that a paper was beyond redemption if he didn’t ask many questions of the paper’s author. Then he would turn to, say, me, and ask: “So, Benston, what did you think about the reasoning on page 4?”

From these workshop experiences, I learned how to use statistics intelligently as well as technically. And, as a student of banking and financial markets, I learned about the macro-economy and its relationship to the supply of money.

For Professor Friedman, almost any issue could be analyzed as an economic problem, from the market for taxicab medallions, to professional licensing, to the regulation of banking and medical services. Indeed, I can’t recall many casual conversations that did not involve some aspect of economic analysis.

We used to compare the approach of MIT and Chicago economists in this manner. MIT economists say “economics is a great game; I really like to play it, but what has it to do with real life?” Chicago economists say of economics, “is there anything else to real life?”

From the vantage point of 2006 it is difficult for me and perhaps not possible for many others to realize how different economics was in the early 1960s, when I and the world first learned from Milton Friedman. His great work with Anna Schwartz (to whom Emory granted an honorary Ph.D.) was published in 1963.

Before then, most economists and policy makers had fully accepted the theories of John Maynard Keynes. Keynes thought that governments had successfully controlled the supply of money to reduce inflations and recessions.

Consequently, he developed the theory that the Great Depression was caused by inadequate demand by consumers and a paucity of profitable investments by businesses. Hence, he urged governments to “prime the pump” by engaging in deficit spending on public works projects, and to get more involved in managing the economy.

Before Friedman and Schwartz, economists generally accepted both Keynes’ ideas and his belief that the Federal Reserve’s and other central banks’ mismanagement of the money supply was not an important cause of the Great Depression, even though they did not have the data to support or reject the hypothesis.
Friedman and Schwartz’s careful compilation and analysis of the data showed that Keynes was wrong. Instead, they found that the Fed had allowed the money supply to decline by over a third, thereby causing banks to fail and the economy to collapse.

Friedman and Schwartz also showed that inflations were caused primarily by substantial increases in the supply of money, usually as a result of government actions. More money chasing the same amount of goods results in higher prices, all other things being equal.

Before Friedman and Schwartz provided and analyzed the data, the “other things” were thought to dominate, and the increase in money was seen as causing more demand and greater output, rather than higher prices. Governments and many economists thought many problems (such as unemployment and poverty) could be solved, or at least alleviated, with little cost simply by printing and spending more money.

Milton Friedman recognized that factors other than the supply of money affect prices, particularly how often money was exchanged for goods and services (velocity) and exogenous decreases and increases in output (such as from wars and earthquakes and inventions and discoveries), and the effects on prices of changes in the supply of money were not only not instantaneous, but might be unstable. However, he pointed out and provided the data that showed that, once the government controlled the money supply (as does the Federal Reserve), it can cause or constrain inflations and depressions.

Greedy businesspersons and workers are not to blame. To paraphrase and invert Cassius’ remark in Shakespeare’s Julius Caesar, “the fault, Dear Brutus, is not in ourselves, but in our government.”

Milton Friedman maintained that the Federal Reserve should not use its power over the money supply to try to control prices and output. He pointed out that economists and policy makers simply do not know enough to smooth out all the bumps and turns in the economy and are as or more likely to make things worse as better. Rather, he urged, the Federal Reserve should simply increase the money supply steadily and not interfere in generally desirable privately determined consumption and investment.

Another related aspect of Milton Friedman’s thought and work is his view that consumers are the best judge of what is best for them, and that they and the nation prosper when essentially unregulated producers compete for consumers’ favor. He did not contend that the poor should not be helped. This help, though, should be in the form of a transfer of funds (negative income tax), rather than through programs such as public housing.

Similarly, children’s education is a public obligation that would be enhanced if teachers and schools competed for the opportunity to provide that education. This could be accomplished, he suggested, by giving parents vouchers.

Some of Milton Friedman’s specific proposals have been adopted and others have not. But, the efficacy of market solutions to economic problems is now generally accepted, and it is difficult to recall that, when he began his work, this was not the case. His research, teachings and writings changed the way people in general now think. I, in particular, am in his debt. He taught me to think like an economist.

Milton Friedman, who died on Nov. 16, was the recipient of the 1976 Nobel Memorial Prize for economic science, and the 1988 Presidential Medal of Freedom and the National Medal of Science.

He was also the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976, and a member of the research staff of the National Bureau of Economic Research from 1937 to 1981.

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