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. Active Trading Fundamentals

    The Top 5 Impact Investing Firms

    Learn what impact investing is and obtain information on some of the top impact investing firms ranked by total assets under management.
  2. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  3. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  4. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  5. Economics

    Explaining the Participation Rate

    The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job.
  6. Economics

    What Qualifies as Full Employment?

    Full employment is an economic term describing a situation where all available labor resources are being utilized to their highest extent.
  7. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  8. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  9. Markets

    The Vodka Industry Keeps Growing, But Why?

    Understand what the vodka industry is and where it performs best. Learn about the growth of the industry and three reason why it continues to grow.
  10. Stock Analysis

    How Rollins Inc. Transformed from Radio to Pest Control

    Discover how Rollins, Inc. grew and expanded, making numerous acquisitions, transitioning from the radio industry to the pest control industry.
RELATED TERMS
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  2. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  3. Cost, Insurance and Freight - CIF

    A trade term requiring the seller to arrange for the carriage ...
  4. International Monetary Fund - IMF

    An international organization created for the purpose of standardizing ...
  5. Inflation

    The rate at which the general level of prices for goods and services ...
  6. Delivered Duty Unpaid - DDU

    A transaction in international trade where the seller is responsible ...
RELATED FAQS
  1. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  2. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  3. Are Social Security benefits adjusted for inflation?

    Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For ... Read Full Answer >>
  4. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  5. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
  6. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!