Milton Friedman, the famous Nobel Prize-winning economist, was born 97 years ago today. Friedman was born in Brooklyn, N.Y., to Jewish immigrants Sarah Ethel and Jeno Saul Friedman, but grew up in Rahway, N.J., where his family moved when he was one year old. In an early sign of Friedman's aptitude for study, he graduated from Rahway High School before he turned 16.

Unfortunately, during Friedman's senior year in high school his father passed away, leaving his mother to support the family and Friedman to finance his college studies himself. (For more background reading on economic history, check out The History Of Economic Thought.)

College Years
Using a scholarship and working multiple jobs to finance college, Friedman attended Rutgers University with an initial intention of becoming an actuary with a specialization in mathematics. Friedman's interest shifted towards economics when he met two economic professors teaching at Rutgers: Arthur F. Burns and Homer Jones. Both professors piqued Friedman's interest in economics and helped shape the path Friedman would take later in his career. With Jones' recommendation, Friedman was able to get a tuition scholarship to the University of Chicago Economics Department, where he would also meet his wife, and never looked back.

Early Contributions
In 1957, Friedman published "A Theory of the Consumption Function," which provided a new perspective on how to explain relationships between saving and spending. Friedman argued that consumer consumption patterns are based on rational longer-term expectations of how people will spend their money over their whole lifetime rather than by their current income. Friedman's analysis of consumption behavior was one of the things that contributed to his academic reputation.

What made Friedman even more famous was his hypothesis to debunk the idea that there was a permanent tradeoff between inflation and unemployment. In the 1960s it had been observed that there was a historical correlation between inflation and unemployment, with data showing low unemployment correlated with periods of high inflation. This caused discussions on whether the U.S. should use higher inflation to achieve lower unemployment - which Friedman argued against doing. He argued that in the short term employment will rise but would eventually fall. One of the reasons he used to argue against this policy was that there would only be a temporary increase in employment when inflation is high because prices would be rising faster than wages, creating more profits. But as soon as people realized that the purchasing power of their wages have decreased, they will demand higher wages to match increases in prices and hiring would stop.

Later Contributions
In the 1970s, a period of high inflation, Friedman's hypothesis was put to the test. Initially employment rose and inflation increased, but the correlation didn't hold - just as Friedman had hypothesized. As inflation reached double digits, unemployment began to soar - this is commonly referred to as stagflation. This confirmation of Friedman's hypothesis likely put him in the same category as John Maynard Keynes and other great economists in history. (Learn more about how Friedman helped the American economy in the '70s, read Stagflation, 1970s Style.)

In 1976, Milton Friedman was recognized for his contributions in economics by being awarded the Nobel Prize in Economics for his work in consumption analysis, demonstrating complexities in economic stabilization policies and monetary history and theory.

Read a more in-depth history of Milton Friedman in our article Free Market Maven: Milton Friedman.

Related Articles
  1. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  2. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  3. Markets

    Can Deflation Be Good?

    General economic theory consensus rules that deflation is bad for the economy. But the Swiss economy, which is growing despite a drop in prices for the last four years, is proving otherwise. ...
  4. Professionals

    7 Careers That No Longer Exist

    Learn how technology and innovation has led to the near-extinction and elimination of seven careers that once employed hundreds of thousands of people.
  5. Investing

    World Bank Data For Dummies

    Developing countries can't always afford to track the data crucial to setting the right economic policies and programs. That's where the World Bank steps in.
  6. Economics

    Explaining Devaluation

    Devaluation is the deliberate decrease in one county’s currency relative to the currency of other countries.
  7. Investing Basics

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  8. Economics

    Management Strategies From A Top CEO

    Jack Welch is a legend in the business world: during the two decades he was CEO of General Electric, the company’s value rose by 4000%.
  9. Economics

    The Taylor Rule: Calculating Monetary Policy

    The Taylor Rule suggests how the central bank should change interest rates to account for inflation and other economic conditions.
  10. Investing

    Is US Inflation Too Low?

    One reason the Fed has delayed its first rate hike: U.S. inflation has been persistently running below the stated 2 % level the central bank seeks to target.
  1. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  2. Are Canadian Pension Plans inflation-protected?

    The Canada Pension Plan protects pension holdings against inflation and adjusts its annual rates for inflation. The Canada ... Read Full Answer >>
  3. When is the best time to invest in inflation-protected securities?

    Investment timing decisions are among the most challenging faced by investors as they have a significant impact on ultimate ... Read Full Answer >>
  4. Should I include inflation-protected securities in my 401(k)?

    One of the most significant challenges faced by 401(k) account owners is the creation of an investment plan that can withstand ... Read Full Answer >>
  5. Is Social Security inflation-protected?

    Social Security benefits are inflation-protected. Social Security was created in 1935, and taxes were collected for the first ... Read Full Answer >>
  6. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>

You May Also Like

Trading Center