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History of Economic Thought 101: Milton Friedman


This series of articles aims to provide a brief overview of the evolution of Economic thought through the lens of some of the key contributors to the discipline. Using Adam Smith’s Wealth of Nations as a jumping-off point, through John Maynard Keynes’ General Theory, Karl Marx’s Das Kapital, and the more recent contributions of Joseph Schumpeter and Milton Friedman. The series will conclude with an evaluation of modern-day Economic consensus.

The History of Economic Thought series consists of 6 main articles:

5. History of Economic Thought: Milton Friedman

6. History of Economic Thought: Modern Day

Introduction to Milton Friedman, The Ultimate Free Marketeer

Milton Friedman was a Nobel Prize-winning Economist and the 20th century’s most devout Free Market advocate. He remains to this day synonymous with The Chicago School of Economics, a school of Economic thought which promotes market-based economic functioning, free of heavy or widespread government intervention (Hess, 2019). Friedman was awarded the 1976 Nobel Prize in Economics “for his contribution to consumption analysis and to monetary history and theory, including his observations of the complexity of stabilization policy” (Lundberg, 1976).

Figure 1: Friedman, the Libertarian Idol "chipping away" at the role of Government in Society

A Critique of Keynesian Consumption Theory

Friedman’s fervent defence of the Free Market placed him as a direct opponent to the prevailing Keynesian economic doctrine of his time. For Friedman, Keynes’ previous assertion that a government backed increase in consumer income would in turn prompt a wider surge in economic activity served as a major point of contention. It is worth noting that Keynes himself had provided a caveat to this theory, qualifying that the effectiveness of an increase in consumer income as an economic stimulant would be reliant upon what he termed the given population’s “propensity to consume” (Keynes, 1936).

In spite of Keynes’ own cautionary advice, this working principle had been widely employed as justification for increased government spending and wider economic intervention throughout the post second world war period of the 20th century (Jahan, Mahmud & Papageorgiou, 2014). Under the Keynesian approach, increased government spending was seen as the key driver of economic growth. Or certainly it was until rising stagflation (high inflation in combination with low levels of economic growth) throughout the 1970’s saw a marked fall in the popularity of the Keynesian doctrine.

Figure 2: The Great Depression saw a mass withdrawal of funds from US Banks leading to an unprecedented Economic Crisis

Friedman posited in his 1957 text “A Theory of the Consumption Function”, that temporary changes in income would not have a significant impact on consumer spending. This notion ran counter to the basic tenets of the Multiplier Function previously put forward by Keynes. According to Friedman, Keynes' proposed changes in consumer spending habits would only come about through changes in what he termed “permanent income”. It should be noted that the term “permanent” here takes on the distinction of a short to medium term outlook on current and future earnings. Friedman notes that a period of around three years was the degree to which individuals in the US economy – which served as the basis for his economic modelling – appeared to plan their consumption expenditure around; “A horizon of about three years seems to have characterized the outlook of consumer units” (Friedmann, 1957, P. 227).

This finding had the very practical implication of reducing the extent to which a given economy is reliant upon government expenditure as a means of managing and, or stimulating economic activity. Specifically referring to the Keynesian Consumption Function, Friedman states “The effect is almost certain to be a much smaller estimate of the marginal propensity to consume out of current income than would be obtained from a function that makes consumption dependent on current income alone” (Friedmann, 1957, P. 227). In a later 1963 paper titled “Windfalls, the ‘Horizon,’ and Related Concepts in the Permanent-Income Hypothesis”, Friedman offered further clarification of his views on anticipated consumer expenditure. In answer to the question of how a consumer can be expected to react to an unexpected change in their financial circumstances he cites, “the answer depends on how the change affects the consumer unit’s evaluation of its longer-term income prospects, as summarized in its estimated permanent income” (Friedman, 1963, P. 1)

Monetary Policy, The Great Depression & The Tyranny of Inaction

Arguably Friedman’s greatest economic legacy was his contribution to the field of monetary policy. At the time of the release of Friedman’s “A Monetary History of the United States, 1867-1960” in 1963, the general economic consensus – heavily influenced by the prevailing Keynesian school – placed ultimate emphasis on the importance of fiscal (government spending and taxation) over monetary (control of the quantity of money available) policy. Monetary policy was in terms of economic consideration, at best a distant second (Rockoff, N.D.).

Figure 3: The Federal Reserve under previous Chairman Ben Bernanke have accepted Friedman's criticism of their role in the Great Depression

Friedman took major issue with the perceived necessity of widespread government intervention in the economy. His famous investigation into the causes of the Great Depression summarising these views quite succinctly: “The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy” (Friedman, 1962, P. 39). Friedman’s analysis effectively boils down to inaction on the part of the US Federal Reserve turning what might have been a moderate to severe economic contraction into a full blow depression. Fears of a widespread banking system failure prompted huge swathes of the US public to withdraw all of their funds at once. Such was the panicked mood of the time, that everyday US citizens viewed it as a safer option to withdraw their money and hold onto it in physical cash, rather than leaving it to rest in their accounts. In the absence of a federal bank guarantee, if their banks were to collapse, their savings would do so along with them.

Given that the US, along with literally every other country on earth, employs a fractional reserve banking system. Whereby less than 100% of depositors’ funds are kept available for withdrawal at any given time. The Federal Reserve’s failure to bolster the existing money supply at this point led directly to the collapse of much of the wider banking system (Friedman, 1962). With many banks no longer able to retain functionality in the face of an unprecedented demand for, as Friedman put it, “currency over deposits”. This was precisely the time for the Federal Reserve to step in. They did not. Setting the stage for the largest scale economic contraction in US economic history. Friedman noted in this context that “the System's failure was a failure of will, not of power”, wryly observing that “A system established largely to prevent bank panics produced the most severe banking panic in American history.” (Friedman, 1962, P. 163).

Impact on Future Economic Policymaking, Rules Instead of Authorities

Friedman’s key takeaway from his exhaustive analysis of the monetary oriented causes of the Great Depression was simple and concise: “Any system which gives so much power and so much discretion to a few men that mistakes - excusable or not - can have such far reaching effects is a bad system” (Friedman, 1962, P. 49). His proposed solution was for a move toward “a government of law instead of men”. This would manifest through “a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money” (Friedman, 1962, P. 52). By enshrining monetary policy regulations in law, rather than in the hands of individuals, the potential for human error would be significantly reduced.

Figure 4: Friedman is as much associated with his advocacy of Individual Freedoms as he is with Economic Free Market Practices

The veracity of Friedman’s assessment of the cause of the Great Depression was acknowledged by then acting head of the Federal Reserve, Ben Bernanke. In a 2002 address celebrating Friedman’s 90th birthday, Bernanke stated “You're right, we did it. We're very sorry. But thanks to you, we won't do it again” (Bernanke, 2002). Bernanke was given an opportunity to quite literally put his money where his mouth was in the aftermath of the 2008 Financial crisis. A 2017 paper by Mankiw and Reis focusing on Friedman’s contribution to the ongoing development of Macroeconomic policy cited;

“At first, a new depression seemed imminent. But the Federal Reserve (and many other central banks) responded aggressively. By preventing bank failures, providing emergency credit to financial intermediaries, and increasing bank reserves, the central bank made sure that M2 did not fall as precipitously as it did during the Great Depression” (Mankiw and Reis, 2017).

The authors note with regard to this policy action, “Friedman would have approved”. Friedman himself however might have argued that if the Federal Reserve had followed his proposed guidelines for consistent, stable, rule-governed growth of the money supply, as opposed to a monetary policy governed by individual discretion. The crisis may not have happened in the first place.

Social Views and Controversies

In attempting to summarise Milton Friedman’s vast contribution to the History of Economic Thought, it is important to consider his wider social relevance. Having famously endorsed in his landmark text Capitalism and Freedom; “there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud” (Friedman, 1962, P. 112). Friedman doubled down on this assertion in his seminal 1970 essay for The New York Times “A Friedman doctrine - The Social Responsibility Of Business Is to Increase Its Profits”.

An ardent economic liberal and defender of individual freedoms, Friedman cited with regard to growing calls for greater Corporate Social Responsibility his deep rooted fear, "the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity” (Friedman, 1970). Friedman’s belief in non-interventionist government policy was replicated on a social as well as economic level. He argued strongly for the legalisation of drugs and prostitution, believing that the prohibition of these activities constituted “trying to make illegal an act between two willing people” (Ammeson, 2006). To this day he remains an established figurehead of the Libertarian Political philosophy, which strongly advocates individual freedoms and reduced government intervention (Anderson, 2020).

Conclusion and Legacy

If Karl Marx represents one necessary extreme on the spectrum of Economic Thought, then Milton Friedman surely represents the other. A defender to his dying day of individual freedoms and the value of free market functioning. Friedman is best remembered from an Economics perspective for his re-thinking, and in turn re-popularisation of Monetary and Consumption Theory, his contributions to the field immortalised by his 1976 Nobel Prize. His legacy in terms of wider society meanwhile lives on through his advocates, and his critics, in equal measure.


Ammeson, J., (2006). An Interview with Milton Friedman, The Nobel laureate will forever be associated with the "Chicago Boys." Chicago Life Magazine. Retrieved from

Anderson, K., (2020). How Liberals Opened the Door to Libertarian Economics. The New York Times. Retrieved from

Bernanke, B. S., (2002). Remarks by Governor Ben S. Bernanke, At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, On Milton Friedman's Ninetieth Birthday. Federal Reserve. Retrieved from

Friedman, M. (1957). A Theory of the Consumption Function. National Bureau of Economic Research. Retrieved from

Friedman, M., (1962). Capitalism and Freedom. Internet Archive. Retrieved from

Friedman, M., (1963). “Windfalls, the ‘Horizon,’ and Related Concepts in the Permanent-Income Hypothesis”. Collected Works of Milton Friedman Project records. Hoover Institution Library & Archives, Stanford, CA. Retrieved from

Friedman, M., (1970). A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits. The New York Times. Retrieved from

Henderson, D. R., (2021). Milton Friedman 1912-2006. Econ Lib. Retrieved from

Hess, D. (2017). Chicago school of economics. Encyclopedia Britannica. Retrieved from

Jahan, S., Mahmud, A. S., & Papageorgiou, P. (2014). What Is Keynesian Economics? FINANCE & DEVELOPMENT, September 2014, Vol. 51, No. 3., Back to Basics, IMF. Retrieved from,appropriate%20policy%20response%20for%20stagflation.

Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. International Relations and Security Network, Primary Resources. Retrieved from

Lundberg, E., (1976). Award ceremony speech, Presentation Speech by Professor Erik Lundberg of the Royal Academy of Sciences. Nobel Prize. Retrieved from


Rockoff, H., (1963). A Monetary History of the United States, 1867-1960, Review Essay, On Monetarist Economics and the Economics of a Monetary History. Economic History Association. Retrieved from

Image Sources

Figure 1: The Friedman Foundation for Educational Choice, CC0, via Wikimedia Commons, (2004). Portrait of Milton Friedman. [Photograph]. Retrieved from

Figure 2: Strobridge & Co. Lith., Public domain, via Wikimedia Commons, (1895). The war of wealth. [Illustration]. Retrieved from

Figure 3: Jimenez, J., Wong, A., Chicago History Museum, (2015). In failing to rescue Lehman Brothers, Ben Bernanke and the Fed repeated errors from the Great Depression. [Hybrid Art]. Retrieved from

Figure 4: Macy, J., (2009). MF-Freedom Milton Friedman Freedom poster in the style of Obama "Hope". [Poster]. Retrieved from

Figure 5: The Badlands: Politics and Philosophy Podcast, (2018). Episode 13, Free Market Libertarianism vs. Progressivism. [Cartoon]. Retrieved from


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James Duggan

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