Medal for a Monetarist

When he learned last week that the Swedish Royal Academy of Science had chosen him as this year's winner of the Nobel Prize in Economics, the University of Chicago's feisty Milton Friedman pronounced himself "happy and pleased." But, he added with characteristic bluntness, "it is not the pinnacle of my career. The true judges of my work are today's economists. " Brooklyn-born Friedman, 64, leader of the so-called Chicago School of monetarist economics, thus became the sixth American to win or share the tax-free $ 160,000 award since the prize in economics was established eight years ago.

The Nobel committee cited Friedman for "independence and brilliance" as an economic thinker, and there, certainly, other economists would agree. In some ways, it was a peculiar award to come out of Stockholm, the capital of the West's most thoroughgoing welfare state. Politically, Friedman is the most conservative American economist of note today. In economic policy, he is committed to laissez-faire, free-market solutions. He has, in fact, not had--or sought--much influence even in the Republican-occupied White House since August 1971, when Richard Nixon announced a pay-price freeze to fight the Viet Nam-era inflation. Friedman quit as a Nixon adviser, announcing with characteristic acerbity that the freeze was "pure window dressing, which will do harm rather than good."

Big Gap. What the Nobel committee clearly intended to honor was not Friedman's politics but his contributions to practical economic theory. "It is very rare," said Friedman's citation, "for an economist to wield such influence, directly and indirectly, not only on the direction of scientific research but also on actual policies." One of Friedman's most influential achievements goes back to the 1950s, when he refuted a once widely accepted element of Keynesian economics: the idea that rich people save a greater proportion of their incomes than do the poor. Among other implications, this meant that developing countries should preserve a big gap in income between rich and poor, in order to encourage growth. Friedman countered that notion with his own theory of "permanent income": Whether rich or poor, consumers will spend less if they expect their income to be temporary than if they expect the same income level to continue permanently.

The best known area of Friedman's economic iconoclasm has been his ideas on monetarism. Friedman's argument, laid out in his 1963 work, A Monetary History of the United States, 1867-1960, co-authored with Anna Schwartz, is that to bring about stability--steady expansion in jobs and incomes without flaring inflation--Government policymakers need only to pursue a gradual, controlled growth in the money supplied by the Federal Reserve. By reducing the nation's money supply in the 1930s, Friedman argues, the Federal Reserve Board caused a recession to turn into the Great Depression.

Cult Hero. Since the 1960s, when most economists were committed to the Keynesian view that a balance between inflation and unemployment was best maintained by a "fine tuning" of Government spending levels and other kinds of intervention (including controls), the policymakers have indeed paid more attention to monetary factors. That trend has been reinforced because Keynesian stimulative measures for a while seemed to perform uncertainly during the recent bout with "slumpflation." Many economists still feel that Friedman's following remains more of a cult than a school, but the Federal Reserve Board recently made a bow to Friedmanism by formally setting annual targets for expanding the money supply. In the past, Federal Reserve Chairman Arthur Burns, who taught Friedman when he was a student at Rutgers in the 1930s, remained unconvinced by the monetarists. Now he, like many other economists, seems persuaded that "money matters," at least somewhat, even if they do not fully agree with Friedman that "only money matters."

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