Milton Friedman

Milton Friedman

A champion of the free market and enemy of big government


Milton Friedman was an American economist and winner of the Nobel Memorial Prize in Economic Sciences. An advisor to both Ronald Reagan and Margaret Thatcher, The Economist has described Friedman as “the most influential economist of the second half of the 20th century… possibly of all of it.”1 His work, published in books including Capitalism and Freedom (1962) and A Monetary History of the United States, 1867–1960 (1963), popularized new ways of thinking about the economy, contradicting the dominant Keynesian thinking of the time.

For all his influence, Friedman was (and remains) a polarizing figure. As a libertarian, he was a staunch defender of the free market, garnering him effusive praise from some corners and withering criticism from others. Still, his ideas have redefined the way people approach business and macroeconomics, as well as how Western societies think about government in general.

One of the great mistakes is to judge policies and programs by their intentions rather than their results.

– Milton Friedman

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Monetarism and the quantity theory of money – The importance of the money supply

Monetarism is a macroeconomic school of thought that has guided economic policy around the world and has informed the responses of governments in times of economic crises. Even though Friedman wasn’t the first person to talk about monetarism, it was his book, A Monetary History of the United States (co-authored with Anna Schwartz) that popularized it, and today, Friedman is the figure most quickly associated with this approach. According to monetarism, the money supply is the main tool that governments have to control the economy. An important component of monetarism is the quantity theory of money, which says that the price of goods and services is proportional to the amount of money in circulation.2

“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

― Milton Friedman

In the monetarist view, the great financial disasters of modern history have been caused by government mismanagement of the money supply. In their book, Friedman and Schwartz argued that one of the main causes of the Great Depression was the choice by the Federal Reserve to reduce the U.S. money supply and raise interest rates in 1931, in response to the economic downturn. This caused a panic, where consumers and business people didn’t want to borrow because they were afraid they wouldn’t be able to pay back their loans—which just made the decline even worse.3

Monetarism stands in sharp contrast to Keynesian economics, which was the standard school of thought at the time. In the Keynesian view, governments should rely mostly on fiscal policy—government expenditures and taxes—to manage the economy. Nowadays, governments use both monetary and fiscal policy. For example, after a global recession hit in 2007, the U.S. central bank stimulated the economy by increasing the money supply (a monetarist approach),4 but the government also passed a stimulus package (a fiscal approach).5

“Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government—in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”

― Milton Friedman

The Friedman doctrine – The responsibility of corporations to their shareholders

Also known as shareholder theory or stockholder theory, the Friedman doctrine has come to define the way people approach business, and has had huge implications for how executives make decisions. First introduced in a 1970 article that Friedman wrote for the New York Times, the Friedman doctrine states that a firm has one purpose and one purpose only: to make money for its shareholders. Friedman argued that in a free-enterprise, private-property system, company executives should be considered employees of their company’s stockholders. As employees, they have a direct responsibility to fulfill whatever goal their employers had in mind—which almost always means generating more shareholder value.6

Sure, Friedman said, sometimes the shareholders might have a different endgame, like if the firm in question is a hospital or a school. But the nature of the goal doesn’t matter; all that matters is that the executive is bound to do whatever the shareholders want them to do. Friedman wrote extremely derisively about people who talked about the “social responsibility” of corporations. He wrote that they were “preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” If a company executive felt any sense of social responsibility, they did that on their own time, as an individual—but not in their capacity serving the shareholders.

The Economist has declared the Friedman doctrine to be “biggest idea in business,”7 and it is now widespread in the financial world. It is also one of the reasons many firms use stock-based compensation, wherein employees (and often CEOs) are paid in shares instead of cash—because this gives them a more vested interest in the success of the company. In theory, this should cut down on extravagant or irresponsible expenditures by executives, and put the focus on increasing profits.

Despite how pervasive it has become, shareholder theory has also been widely criticized by economists and CEOs.1 It has been called “the world’s dumbest idea,” “pernicious nonsense,” “totally idiotic,” and more. And the blowback isn’t just on theoretical grounds: studies have shown that companies on the stock market invest far less in innovation than private companies do, suggesting that the Friedman doctrine actually makes executives less entrepreneurial. Shareholder theory has also been blamed for lost manufacturing jobs, which have been sent overseas where labor is cheaper.8

“Underlying most arguments against the free market is a lack of belief in freedom itself.”

― Milton Friedman

The natural rate of unemployment – Why “full employment” is not the same as “zero unemployment”

The concept of the natural rate of unemployment, and its relationship to inflation, had a major impact on how governments and central banks manage the economy.9 Friedman developed this idea with economist Edmund Phelps in the late 1960s. The natural rate of unemployment is defined as the rate of unemployment that would occur if there were no cyclical unemployment—that is, unemployment that’s due to economic fluctuations. “Natural” unemployment is caused by two main factors that are not influenced by cycles of the economy: when people voluntarily leave their jobs to look for new ones, and when there are fundamental shifts in the economy (caused by things such as new technologies or government policy) that result in a loss of jobs. These causes are known as frictional and structural unemployment, respectively.10,11

This idea has a lot of implications for monetary and fiscal policy. Friedman and Phelps argued that, counterintuitively, measures that are put in place to protect workers, such as a minimum wage and trade unions, would actually do more harm than good to the working class, because these things raise the natural rate of unemployment.12

Their work also challenged the longstanding belief that inflation and unemployment were inversely correlated. In the 1960s and early 1970s, central banks operated on the assumption that, by lowering interest rates and allowing higher inflation, unemployment could be lowered. But Friedman and Phelps showed that this effect only happens in the short term: for a period of time, before workers realize that prices have gone up due to inflation, they accept jobs that they otherwise wouldn’t have. But in the long run, there is no relationship between inflation and unemployment. Friedman and Phelps made the case for increasing inflation at a small but consistent rate.9 Not all economists agree with this analysis, but it remains extremely influential, especially with conservatives who argue against minimum wage increases and labor protections.

“Society doesn’t have values. People have values.”

― Milton Friedman

Historical Biography

Milton Friedman was born in 1912 in Brooklyn, New York. His parents were immigrants from what was then Austria-Hungary; his mother owned a dry goods store, while his father was (in Friedman’s words) a “most unsuccessful” businessman,13 who died right before Friedman’s sixteenth birthday. After winning a scholarship to Rutgers University, he initially focused on mathematics and had plans to become an actuary.

At Rutgers, Friedman met two economists who would become his mentors: Arthur Burns and Homer Jones, who introduced him to economic theory and the scientific method. Because of their influence, Friedman decided to become an economist. He received a scholarship to study at the University of Chicago, where he met his fellow economist and future wife, Rose Director. In the 1930s and early 1940s, he worked as an economic researcher and as an advisor to the Department of the Treasury, before later coming back to the University of Chicago as a professor.14

When Friedman began his career, macroeconomics was dominated by Keynesian theories of the economy. Based on the work of the economist John Maynard Keynes, this school of thought tends to advocate for direct government intervention in the economy and favors fiscal policy changes over monetary ones.14 Friedman rejected Keynesian economics and challenged many of the assumptions underlying popular economic theory at the time. Largely because of his work, standard economic theory moved away from Keynesianism and towards the Chicago School of economics, a neoclassical movement that Friedman helped spearhead.15

“Now here’s somebody who wants to smoke a marijuana cigarette. If he’s caught, he goes to jail. Now is that moral? Is that proper? I think it’s absolutely disgraceful that our government, supposed to be our government, should be in the position of converting people who are not harming others into criminals, of destroying their lives, putting them in jail. That’s the issue to me. The economic issue comes in only for explaining why it has those effects. But the economic reasons are not the reasons”

― Milton Friedman

In one of Friedman’s best-known works, he overturned the Keynesian assumption that people’s decisions about how to spend their money are based on the amount of income they had coming in at the time. According to this perspective, temporary changes to income should lead households to decrease their spending in kind. But in A Theory of the Consumption Function (1957), Friedman presented the permanent income hypothesis: the idea that people’s consumption is based on their expected income over periods of several years. In this view, only permanent changes to somebody’s income should be expected to affect their spending. (This makes sense from a behavioral science standpoint, given how prone we are to being overly optimistic.) This hypothesis fit the empirical data on consumption patterns, and it explained why fiscal policy changes, such as tax increases, might not affect consumption if people believe them to be temporary.14

Starting in the late 1940s, Friedman became more politically involved, serving as an advisor to Presidents Richard Nixon and Ronald Reagan, as well as writing columns about the economy for Newsweek. As he wrote about in Capitalism and Freedom (1962), Friedman believed that a society could only be truly free if it had economic freedom, and that the forces of the free market, when left to their own devices, would naturally generate the best possible outcomes. He fiercely opposed military conscription, argued against minimum wage and rent controls, and advocated for the creation of school vouchers—essentially subsidies for students (rather than schools) that he believed would improve education by forcing schools into competition with each other.16 While not all of his ideas have been come to fruition—school vouchers have never really found purchase, nor did his calls to decriminalize recreational drugs and prostitution—it is undeniable that Friedman’s work, and the libertarian spirit underlying it, has shaped our understanding of the economy.

Additional Sources

Free to Choose (PBS Series)

This ten-part television series, which Friedman produced with his wife, Rose, alternates between two main segments. In the first half of each episode, Milton Friedman explores the workings of the free market in countries all over the world, going everywhere from handloom factories in Japan to housing projects in England. The second half is a question-and-answer session, filmed at the University of Chicago, where Friedman and several other notable economists debate certain aspects of economic theory. The Q&A portion includes thinkers with a range of positions, and showcases the heated controversy that often sprung up around Friedman’s ideas.

A Friedman doctrine—The Social Responsibility of Business is to Increase its Profits” (The New York Times)

In this 1970 op-ed, Friedman lays out his now-infamous shareholder theory. This article encapsulates Friedman’s approach to the economy and the free market, and is a useful read for anybody trying to get a handle on the man and his work.

There’s No Such Thing As A Free Lunch” (Talk)

The saying “there’s no such thing as a free lunch” is a well-known economic truism, which Friedman used as the title of one of his books. In this 1993 lecture that Friedman gave at the Cato Institute, a libertarian think tank, he uses this phrase as a springboard to argue against socialist policies.


  1. Denning, S. (2013, July 5). The origin of ‘The world’s dumbest idea’: Milton Friedman. Forbes.
  2. Barone, A. (2020, May 14). What is the quantity theory of money? Investopedia.
  3. Romer, C. D. (n.d.). The Great Depression. Encyclopedia Britannica.
  4. Jahan, S., & Papageorgiou, C. (2014, March). What is monetarism? International Monetary Fund.
  5. Zhou, L. (2020, March 30). “This one is scarier”: Obama-era officials say current economic crisis is fundamentally different from 2008. Vox.
  6. Friedman, M. (1970, September 13). A Friedman doctrine: The Social Responsibility Of Business Is to Increase Its Profits. The New York Times
  7. Analyze This. (2016, March 31). The Economist
  8. Denning, S. (2017, July 18). Making sense of shareholder value: ‘The world’s dumbest idea’. Forbes.
  9. Cengage. (n.d.). Natural rate of unemployment.
  10. Kagan, J. (2020, May 20). How frictional unemployment occurs in an economy. Investopedia.
  11. Kenton, W. (2020, August 31). Structural unemployment. Investopedia.
  12. Perry, M. J. (2016, December 5). Milton Friedman in a 1966 newsweek op-ed: The minimum-wage law is a ‘monument to the power of superficial thinking’. American Enterprise Institute.
  13. Friedman, M. (n.d.). Milton Friedman: Biographical. Nobel Prize.
  14. Caldwell, B. J. (n.d.). Milton Friedman. Encyclopedia Britannica.
  15. Chappelow, J. (2020, April 30). Milton Friedman. Investopedia.
  16. Friedman, Milton. (1975). There’s No Such Thing as a Free Lunch. LaSalle. Retrieved from

About the Authors

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Dan Pilat

Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.

Sekoul Krastev's portrait

Dr. Sekoul Krastev

Sekoul is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. A decision scientist with a PhD in Decision Neuroscience from McGill University, Sekoul's work has been featured in peer-reviewed journals and has been presented at conferences around the world. Sekoul previously advised management on innovation and engagement strategy at The Boston Consulting Group as well as on online media strategy at Google. He has a deep interest in the applications of behavioral science to new technology and has published on these topics in places such as the Huffington Post and Strategy & Business.

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