Published by EH.Net (January 2022).

Edward Nelson. Milton Friedman & Economic Debate in the United States: 1932-1972. Volumes 1 and 2. Chicago: University of Chicago Press, 2020. xx + 737 pp. and xiv + 587 pp. $50 each (hardcover), ISBN: 978-0226683775 and 978-0226684895.

Reviewed for EH.Net by Scott Sumner, Professor Emeritus of Economics, Bentley College.


Milton Friedman was at the center of economic policy debates in the US during much of the 20th century. Edward Nelson, an economist at the Federal Reserve System, has now completed the first two volumes of an intellectual biography of Friedman’s career, focusing on his policy views during the period from 1932 to 1972. It is work of outstanding quality.

While much has been written on Friedman’s career, no previous biographer has Nelson’s deep and sophisticated understanding of monetary economics. This makes his new book especially useful for those with a serious interest in policy issues, especially macro policy. While Friedman had policy views on a wide variety of issues, including the military draft and education voucher programs, Nelson focuses his attention on the areas where Friedman’s influence was greatest–the field of macroeconomics.

The timing of this book is particularly fortuitous. Friedman began his career during a period when left-wing economics was ascendant. During the middle of his career, the economics profession in the US and other developed countries shifted to the right–the so-called neoliberal revolution.  Indeed, Friedman played a major role in that intellectual shift, probably more than any other single economist.

After Friedman’s death in 2006, however, the profession began moving back again toward the left, and Friedman’s reputation declined somewhat. Some younger economists may be unaware of the extent to which ideas they take for granted were highly controversial when first proposed by Friedman.

Today, Friedman is often associated with monetarism, particularly the idea that the Fed should stabilize the growth rate of the money supply, perhaps at 3% or 4% per year. After the early 1980s, however, money supply targeting fell out of favor, mostly due to perceptions that velocity was too unstable. This led many to erroneously conclude that monetarism was discredited.

Nelson shows that money supply targeting was not Friedman’s most important contribution to monetary economics. Instead, Friedman’s critique of Keynesian economics is where he had an enduring influence. Indeed, that critique eventually led to a major evolution in Keynesian thought, toward an approach often dubbed “New Keynesianism”, which combined older Keynesian ideas with monetarist insights developed by Friedman and others.

While the two-volume set covers many topics, here I’ll focus on four key areas where Nelson shows that Friedman dissented from Keynesian orthodoxy during the 1950s and 1960s. Consider these mainstream Keynesian ideas from the 1960s:

1. High nominal interest rates indicate tight money, and vice versa.

2. Fiscal policy is the most effective tool for managing the business cycle.

3. The Phillips Curve demonstrates that we can permanently reduce unemployment by accepting higher inflation.

4. Wage and price controls are often a useful way to control inflation, whereas monetary policy does more harm than good.

Nelson shows that at various times during the 1960s and early 1970s, all four of these ideas were widely accepted by many prominent Keynesian economists. In all four cases, Friedman argued against the conventional wisdom, and in all four cases subsequent events vindicated Friedman’s views. Let’s take them one at a time.

While Irving Fisher’s analysis of nominal and real interest rates was known to most economists, even as late as the 1960s the importance of this distinction was often overlooked. Keynes himself viewed the distinction as a mere theoretical curiosity, except during times of hyperinflation. Thus when Friedman argued that interest rates were rising during the late 1960s due to the Fisher effect, prominent Keynesians such as James Tobin rejected his claim.

By the late 1970s, however, evidence for the importance of the Fisher effect from both time series and cross-sectional data had become overwhelming. Eventually, this insight was incorporated into monetary policymaking, most famously in various versions of the Taylor Rule.

During the second half of the 1960s, many Keynesian economists did understand that the economy was overheating and that inflation was a threat. They advocated fiscal austerity to reduce aggregate demand, and President Johnson responded with a tax increase in 1968, which pushed the Federal budget into surplus. Contrary to popular opinion, the peak years of the Vietnam War were not associated with highly expansionary fiscal policy–the national debt was falling rapidly as a share of GDP.

Friedman argued that the real problem was rapid growth in the money supply, and that fiscal austerity would not reduce inflation. As the rate of inflation continued to accelerate in 1969 and 1970, Friedman’s warning proved to be accurate.  Monetary policy dominates fiscal policy.

During the 1960s, many Keynesian economists became convinced that the Phillips Curve provided a reliable tool for reducing unemployment. In their view, a bit less unemployment could be purchased at the cost of slightly higher inflation.  Friedman argued that this relationship was illusory. Only unanticipated inflation reduced unemployment. Once workers began to anticipate a higher rate of inflation, they would demand compensating pay increases and unemployment would return back to its natural rate.

By the 1970s, it was clear that Friedman was correct. Unemployment was higher than during the 1960s, despite inflation also being much higher. The 1980s would provide further evidence in support of Friedman’s Natural Rate Hypothesis, as after inflation was brought down to much lower levels, the increase in unemployment proved to be only temporary.

When the economy experienced stagflation during the early 1970s, many Keynesians became discouraged by the poor performance of Phillips Curve models. Theories of “cost-push inflation” replaced standard Keynesian demand-pull explanations. This led many prominent Keynesians to support wage/price controls. Friedman warned that artificially suppressing inflation would not solve the problem, and that the only enduring solution was a slower rate of growth in the money supply.

By the mid-1970s it was clear that the wage/price controls had not worked, as inflation reached even higher levels than in the late 1960s. Inflation would not be brought down to a low level until Paul Volcker adopted a contractionary monetary policy during the early 1980s, slowing the growth rate of the money supply.

All four of the insights discussed here have one thing in common; they reflect Friedman’s understanding of the importance of changes in the growth rate of the money supply, as distinct from one-time changes in levels. In 1975, Friedman said:

“Double-digit inflation and double-digit interest rates, not the elegance of theoretical reasoning or the overwhelming persuasiveness of serried masses of statistics massaged through modern computers, explain the rediscovery of money.”

And in the same year:

“As I see it, we have advanced beyond [the theory of money proposed in the eighteenth century by David] Hume in two respects only; first, we now have a more secure grasp of the quantitative magnitudes involved; second, we have gone one derivative beyond Hume.”

Persistent increases in the growth rate of the money supply made the Fisher effect much more important than during the gold standard era. Persistent changes in inflation caused the Phillips Curve to break down. And the inflationary forces unleashed by rapid money growth were too powerful to restrain with fiscal austerity or wage/price controls.

And as Nelson demonstrates, it was Friedman himself who pushed the profession “one derivative beyond Hume.”

In my view, graduate programs in macroeconomics now put too much weight on technique and too little emphasis on the history of macroeconomic ideas and policy. We’d all be better off if graduate students in macroeconomics read Nelson’s authoritative study of the development of Milton Friedman’s views on economic policy.


Scott Sumner is Professor Emeritus of Economics at Bentley College, as well as a research associate in the Program on Monetary Policy at the Mercatus Center at George Mason University and a Research Fellow at the Independent Institute. His most recent book is The Money Illusion: Market Monetarism, the Great Recession, and the Future of Monetary Policy (University of Chicago Press, 2021). He blogs at

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