According to Friedman, any rate of unemployment below the natural rate leads to inflation. When workers expect high inflation, they will demand more generous wages. The real wage remains unchanged when any increase in anticipated inflation is matched by wage inflation. With the real wage rate unchanged, the unemployment rate will remain constant. Friedman thus concludes that it is only unanticipated inflation that can lead to temporary reductions in unemployment below the natural rate. It follows that, in the long run, inflation is totally anticipated and there is no trade-off between inflation and unemployment.

          The long-run Phillips Curve is a vertical line at the natural rate of unemployment. Once unemployment falls to its natural rate, expansionary policies will not take it any lower except for brief periods of time. If the government attempted to increase employment beyond that natural rate by injecting more money, the short-term trade-off between inflation and unemployment would be repeated at ever increasing levels of inflation and unemployment. In addition, the more quickly expectations of inflation adapt, the more quickly unemployment will return to the natural rate, and the less successful the government will be in reducing unemployment through its fiscal and monetary policies. Friedman determined that the impact of a fiscal deficit on nominal income is short-lived and that, after a lag, the increased rate of growth in the money supply has long-term effects on the rate of inflation. He demonstrated that, in the long run, additional monetary growth affects only the inflation rate and has essentially no effect on the level or rate of growth of real production.
 

          Milton Friedman wrote "The Social Responsibility of Business is to Increase Profits" in the September 13, 1970 issue of the New York Times Magazine. This seminal article, along with several more to follow, contained Friedman's thoughts regarding the nature of corporations and the responsibilities of the parties involved with them.

          Friedman explains that corporations do not exist in physical reality, that only people can have responsibilities, and that businesses have no responsibilities as such. He maintains that there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game. To earn profit is the purpose of the corporation which should engage in open and free competition without deception or fraud. Friedman also contends that corporations do not and cannot have any objectionable degree of power except for that power that is received through government intervention. He says that there is a need to curb government power that contending interest groups attempt to use for their own advantages. He does not blame businessmen for going to Washington to attempt to get special privileges (within the rules of the game) but rather blames all of the citizens for adopting rules of the game that permit that to occur.

          He says that the corporate executive is an employee of the owner of a firm and that the relationship between shareholders and the manager is an employee-owner or principal-agent one. His direct responsibility to his employers is to conduct the business in accordance with their desires. By implicit legal contract, salaried executives of a corporation have a fiduciary responsibility to the shareholders of the firm who assign them the right and duty to use corporate resources to increase the wealth of those shareholders by pursuing profits. Under this contract, they do not have the right to act on their own preferences by making discretionary decisions to spend the firm's resources to attain social goals which cannot be demonstrated to be directly related to gaining profits and to their fiduciary responsibility. Managers should use available assets to make investments to maximize the shareholders' wealth. They have no right to dispose of the shareholders' profits in any manner that does not directly benefit the corporation. The critical question is whether or not some action or project is enough in the interest of the corporation to justify the expenditures.

          According to Friedman, if a corporation makes a donation to charity, it is actually the managers who are making donations of assets that belong to the shareholders. They would be spending others' money unless those shareholders express their desire to make such a donation. He explains that managers should not substitute their judgment for the judgment of the shareholders. Friedman maintains that another reason against managers spending funds for social causes is that insofar as those actions increase consumer prices, he is effectively spending customers' money. Similarly, when such actions lower the wages of employees, he is disbursing their money.

          Corporate executives, when acting in their official capacity and not as private persons, are agents of the corporation's shareholders. Friedman explains that the corporate executive is also a person in his own right and as a private person may voluntarily assume responsibilities and spend his money, time, and energy on them. Many supposed corporate socially responsible actions are actually a disguised form of the managers' own self-interest where they donate corporate funds to their own favored schools, hospitals, community organizations, or cultural associations. Friedman maintains that by maximizing corporate profits, executives contribute much more to "social welfare" than they would by spending shareholders' money on what they as individuals view as meritorious projects. He also says that the tax laws should not permit corporate contributions to be deducted and should abolish the capital gains tax (or at the very least index the basis for capital gains).

          Friedman explains that it is better to return money to shareholders in the form of dividends (or as capital gains when they sell their stock) thus permitting them to decide which charities to support. He has argued for the abolition of all corporate taxes and for returning all corporate profits to the stockholders who can then decide as individuals how they will use their money. Individuals could be directly taxed on both their distributed and undistributed earnings and could then decide whether or not to reinvest their profits in that company depending upon their prospective returns from their alternative investment possibilities.

          According to Friedman, businessmen undermine the basis of a free society when they espouse corporate social responsibility. He explains that many executives embrace and advance their social goals in order to please individuals and groups who believe that corporations have social responsibilities and thus should set social goals. Friedman says that the only legitimate way of enlisting the help of business in solving social problems is to frame laws that enable businesses to profit by providing for social needs.

          Friedman's fundamentalist theory of social responsibility states that corporations have nothing more than obligations to make a profit within the framework of the legal system. He sees corporate social responsibility as a subversive doctrine and as a pernicious idea that shows a fundamental misconception of the character and nature of a free society and that undermines its foundations.

          Friedman's view on corporate social responsibility could certainly have been strengthened if he had a theory of individual rights. He could have said that the social responsibility of the corporation, through its directors, managers, and other employers is simply to respect the natural rights of individuals. Individuals in a corporation have the legally enforceable responsibility or duty to respect the moral agency, space, or autonomy of persons. This involves the basic principle of the noninitiation of physical force and includes: the obligation to honor a corporation's contracts with its managers, employees, customers, suppliers, and so on; duties not to engage in deception, fraud, force, threats, theft, or coercion against others; and the responsibility to honor representations made to the local community. Beyond the above, a corporation and its managers are not ethically required to be socially responsible. If managers, as agents of the stockholders, were to breach an agreement with the shareholders to maximize profits in order to give one or more groups more benefits than they freely agreed upon, they would be violating the rights so the owners. Managers should not divert corporate funds for other purposes. Of course, the idea that a corporation should respect rights leads to the same conclusions as Friedman reaches.
 

Public Policy

          For the most part, Friedman rejects programs based on paternalism because they force taxpayers to provide assistance and limit the freedom of the recipients of the aid to act as they choose. He speaks of distortions in the marketplace that accompany government programs and proclaims that the only case for government occurs when it is not feasible for market arrangements to make individuals pay. Friedman declares that the market should be the main instrument for organizing economic activity but also acknowledges that there are areas that cannot be handled through the market or that can be privately conducted, but at so great a cost, that political approaches may be preferable. He prefers to allow everyone the opportunity to use his own resources as effectively as he can to promote his own values as long as he does not interfere with anyone else. In addition, he naturally wants to leave problems of an ethical nature to the individual to deal with. Many of Friedman's policy prescriptions would reduce the centers of decision making by abolishing bureaucratic or political agencies.

          Friedman has offered an astounding range of public policy ideas across a number of areas, including but not limited to: social welfare programs; taxation (including the negative income tax); education; social security; the FDA; narcotics laws; trade restrictions; deregulation and privatization; discrimination; occupational and medical licensure; monopolies and antitrust; wage and price controls; fixed exchange rates; unions; labeling; environmental pollution; the all volunteer army; and the black market. We will now take a detailed look at his positions in several of these areas.

          Friedman is in favor of a flat-rate income tax perhaps above a certain exemption but with no additional exemptions, deductions, or loopholes. With such a system he believes that there would be less interference with private incentives and that such a system would be more efficient and more equitable. It is interesting to note that Friedman was an employee of the Treasury Department between 1941 and 1943 and was involved in the development of the withholding tax – a government scheme that contributed to the growth of big government. Of course, he now says that he wishes there was some way to abolish it.

          According to Friedman, the tax code can be used to get people off conventional welfare in order to live on earned income while at the same time eliminating welfare bureaucracies. He was the first person to suggest that poverty could be abolished through a negative income tax involving the transfer of money directly to the poor by a much simpler formula and with fewer adverse effects on work incentives. Friedman sees the negative income tax as an expedient alternative to the present welfare system. His proposal would substitute a minimum income for the variety of welfare, disability, and unemployment programs that have multiplied each with its own inefficient and expensive administrative organization. There would be a floor below which no person's net income could fall – a guaranteed income. This "public charity" would be granted on the basis of income, up to a predetermined maximum, would eliminate bureaucratic determination, could be withdrawn by majority vote, and would be in cash so that recipients could spend it as they choose. People who work would lose only a fraction of a grant dollar for every dollar they earn thus providing them with an incentive to work. Under the negative income tax, the poor would fill out income tax forms and if a family's income falls below some predetermined level, the U.S. Treasury would write a check to bring the income up to a minimum amount. A version of Friedman's idea came into law with the tax credit for low-income taxpayers in the Tax Reduction Act of 1975. His negative income tax is still embodied in today's earned-income tax credit.

          Friedman views public education at the elementary and secondary school levels as a large socialist enterprise that teaches socialist values. He wants to end compulsory education so that parents can decide if they want their children to attend school and when and where they should go to school. Friedman sees no valid reason for nationalized schools which limit parents' freedom to spend their own money on their own schooling choices. Public education is a monopoly insulated from the challenges of efficiency and excellence that stem from free competition. He states that competition would improve all schools and would provide variety and flexibility. He would like to see teachers' salaries to be able to respond to market forces. Friedman cautions businesses not to support government schools because businesses have been adversely affected by the low quality of the public school system. Instead, they should support private schools and the private school system.

          Friedman laments the fact that a parent who decides to send his child to a private school is required to pay twice – once in the form of taxes and again in the form of tuition. He suggests providing parents with educational vouchers that they can spend at any school rather than solely through a monopolistic public school system. Friedman is a tireless advocate of free choice as a means of empowering parents and improving the performance of students and schools. A voucher system could be used to provide parents of school-age children with redeemable tuition certificates worth a certain number of dollars per child to spend on the schools of their choice as long as these meet certain educational standards. He is confident that parents would generally select a good education for their children. Friedman sees the voucher system as an incremental step in moving toward a private educational system. He maintains that vouchers are a good, partial, and attainable solution in moving away from a government system. Friedman would like to see the government entirely out of the education business but sees vouchers as a step in the right direction. Today's charter schools represent an adaptation of Friedman's voucher idea.

          Against mandatory participation in the Social Security program, Friedman calls for separation of retirement funding from the state and wants people to be able to buy their annuities from private concerns. He is concerned about the redistribution of money from the young to the old and that poor people pay a larger percentage of their income into the system than do the wealthy. He criticizes the pay-as-you-go Social Security system for restricting the ability of persons to decide how much and, and in what form, to save for retirement. Friedman explains that the fraction of an individual's income that it is appropriate for him to set aside for retirement depends upon that person's values and circumstances. Each person can best judge for himself how to use his resources.

          Friedman wants to abolish the Food and Drug Administration (FDA). He says that it is in the self-interest of pharmaceutical firms not to produce unsafe drugs and that tort law can handle any problems. Friedman points out that people never see the lives that are lost due to the slowness of the FDA in approving a drug that eventually turns out to be beneficial. He observes that the FDA has an interest in being late in approving drugs. If the FDA approves a drug that turns out to be bad, then it is in trouble. On the other hand, if it disapproves a drug that later turns out to be valuable, then it is only the drug companies that criticize the FDA. Friedman says that there is evidence that the FDA causes more deaths because of delayed approval than it has saved by early approval of drugs.

          Friedman wants to legalize drugs. He says that the fight against narcotics is an immoral war that has destroyed the lives of people at home and abroad. The prohibition of drugs destroys civil rights at home and has wrecked nations. Victims of the "war on drugs" include many minority members who have been jailed for low-level drug offenses. Friedman contends that the United States has become a police state that arrests around 1.5 million people annually who are suspected of drug offenses. He deplores the social tragedy that has resulted from the effort to keep people from ingesting an arbitrary list of substances depicted as "illegal drugs."

          According to Friedman, the real cost of the war on drugs is what is done to our civil rights, judicial system, and to other countries. He observes that we have destroyed Colombia because we cannot enforce our own laws prohibiting the consumption of certain substances. Friedman argues that under prohibition law enforcement can temporarily reduce the supply of drugs causing drug prices to rise. Higher prices, in turn, attract new sources of supply and newer drugs to the market resulting in a greater supply. The government then reacts with tougher law enforcement and legislation.

          He explains that individuals do not have great incentives to report drug crimes which tend to be victimless crimes much unlike assault, murder, and theft. When a willing buyer and seller transfer a drug, there is no real incentive to report what the government has declared to be a crime. Instead, evidence must be obtained through informants, searches, and seizures of property often without due process. Friedman contends that drug prohibition is unethical and that teenagers are primarily attracted to drugs because they are illegal. He says that the people who would benefit the most from legalization are addicts who would have an assurance of quality and who would not have to become "criminals" in order to support their habit. Friedman does not want people in prisons because of the mistaken attempt to control what people put into their bodies.

          According to Friedman, the government should step aside from its efforts in a number of unjustifiable areas. He says that tariffs and other trade restrictions hurt us and that the U.S. should move unilaterally to free trade even if trading partners do not. This would be easier with floating exchange rates because they are prompt, automatic, and effective and do not require government involvement. International government should cease attempting to maintain fixed exchange rates and instead allow the market to determine the price of foreign currency.

          In a private market, one person benefits only as long as the other person does also. On the other hand, in a government market a person can only satisfy his needs at the expense of someone else. It follows that Friedman is in favor of deregulation in areas such as airlines, trucking, railroads, utilities, interest rates, broker rates, the petroleum industry, and so on. He also wants to remove government support for the many medical, legal, and professional restrictions with respect to competition. According to Friedman, occupational and medical licensure and certification interfere with the rights of individuals to enter voluntarily into professions and to pursue activities of their own choosing. In the medical field, the restriction of new doctors forces people to pay more for less satisfactory medical services. Less expensive medical service would result if there were no monopoly. He says that, because only "first-rate" physicians are permitted, some people receive no medical care at all. Friedman adds that private markets, rather than the government, can take care of any needs for professional certifications. He is also in favor of private labeling because, if customers really want to know about a product's ingredients, it would be in the self-interest of the company producing it to list them on the package. He does not know why so-called "experts" in Washington know more about what customers want to be disclosed on packages. Although some reforms would be gradual and others immediate and radical, deregulation would result in enhanced and widespread competition and in reduced prices.

          Friedman observes that many public enterprises should be privatized. This involves the transfer, divestiture, or contracting out of assets or services from the tax-supported public sector to the competitive markets of the private sector. In many cases, market arrangements are far more effective than command and control arrangements. He says that private monopoly is generally superior to public monopoly or regulation. He opposes government ownership or regulation of industries except where monopolies or other imperfections exist which result in divergences between social and private costs. Of course, even in these cases, he contends that government intervention is seldom justified. If a private venture fails, it shuts down but if a government venture fails, it is expanded.

          Friedman explains that public-sector spending would be severely reduced because private enterprises would do much of what government currently does. He notes the problem of overcoming vested interests and thwarting rent-seeking with respect to changing the status quo regarding government policies and programs. Privatization can be undertaken all levels of the government. At the national level, there are Social Security, national parks, the air traffic control system, AMTRAK, surplus military bases, public hospitals, the U.S. Post Office, turnpikes, and so on. At the state level, prison management and utilities are good examples. There are also numerous candidates at the local level including garbage collection, waste treatment, street cleaning, fire and police protection, parking structures, jails, snow removal, etc. It is obvious that Friedman's ideas for privatization and other steps toward smaller government have had a great influence in the U.S. and around the world.

          Rather than direct regulation, Friedman has advocated graduated charges for pollution thus creating a market incentive to clean up the air and water. He has talked about selling the right to emit a certain amount of pollutants into the air thereby establishing a market in effluent rights.

          Friedman is opposed to wage and price controls, price supports for agriculture, rent controls, government control of output, legal minimum wages or maximum prices, control of radio and TV by the FCC, and laws that favor unions which hold wage rates up artificially. He says he is more cautious regarding antitrust enforcement because the actual extent of market competition is a subtle matter that requires the analysis of empirical evidence in the form of concentration ratios, market share analyses, consumer surplus analyses, and so on. Friedman views the black market as a positive way of getting around government controls thus enabling the free market to work via mutually beneficial exchanges. He also defends the market as a destroyer of discrimination. Finally, Friedman is also famous for being the intellectual godfather of our all-volunteer army.
 

Methodology

          Friedman says that economists form and use theories to help anticipate and control future events and that a theory is useful if it can predict and control such events. He says that the primary objective of positive economics is the making of ever more accurate predictions. His methodological position is based on the philosophy of science known as instrumentalism. If a theory predicts accurately, then it is a good theory. Predictive power is thus the hallmark of a good theory. Friedman requires that theories be simple yet have the ability to predict future events. He says that accurate predictions can be made from simplified assumptions, that truly important and significant hypotheses will be found to have assumptions that are wildly inaccurate descriptive representations of reality, and that, in general, the more significant the theory, the more unrealistic the assumptions.

          Friedman says that predictions must be based on theories, in the sense of explanatory hypotheses, that must constantly be tested empirically. He focused on the problem of deciding whether or not a suggested hypotheses or theory should be tentatively accepted as part of a body of systematized economic knowledge. For Friedman, assumptions are useful as economical means of expressing and determining the status of the premises of a theory in order to provide an empirical basis for predictions. Assumptions specify the conditions under which the theory is expected to apply.

          Friedman endeavors to demonstrate that economics meets positivist standards. He maintains that there is no test of a theory in terms of whether or not its assumptions are realistic and explains that the falsity of assumptions is unimportant unless such falsity detracts from the theory's ability to predict the phenomenon in question. His thesis is that the truth of assumptions is irrelevant to the acceptance of a theory, provided that its predictions succeed. Friedman also points to cases where changing premises to make them more realistic has resulted in the reduced usefulness (i.e., ability to predict) of the theories.

          Relying on Popper's falsification criterion (and rejection of induction), Friedman maintains that confirming a proposition does not add to the probability that it is true. He says that we do not have an inductive logic and offers the alternative of accepting an hypothesis as a matter of methodological judgment as a positive statement to be tentatively accepted on the basis of empirical evidence. Friedman contends that we can never prove a theory – the most we can do is fail to disprove it. The process is to promulgate new theories and test them to see if they do in fact predict. An empirical process is used to eliminate those theories that do not predict the future and those that predict less reliably than others.

          Friedman denounces the theorist whose goal is a set of assumptions that are more realistic. He rejects introspection and the realism or plausibility of assumptions of ways of assessing a theory. He asserts that assumptions for theorizing should be derived from observation rather than from introspection. Friedman explains that, with regard to introspection, realistic assumptions are needed to deduce acceptable economic theory, and that such assumptions cannot be made a priori in the absence of a true inductive process.

          According to Friedman, efforts to eliminate unrealism deteriorate into pure tautology which avoids dealing with reality and makes impossible the refutable hypothesis, the primary research instrument. He also warns that economic theorists who value the realism of assumptions have to in some way take each new event and assimilate it into the theory. The theory thus becomes a description of what has occurred rather than a theory with predictive power.

          It is interesting to note that in practice Friedman argues based on the realism or reasonableness of assumptions. He accumulates facts, forms and hypothesis to explain them, makes predictions, compares the predictions with facts, reviews his assumptions and hypothesis in response to the outcomes of his empirical testing, and continues in an iterative process. Although he says we do not need to test the truth of assumptions, he also acts to change an assumption that is false whenever he comes across a particular conclusion that is false.

          Whereas absurd premises can yield correct conclusions, there can be no confidence that they will do so. Confidence in economics is based on direct and causal confirmation of realistic assumptions. Friedman's espoused approach can lead economists to give advice based on ridiculous theoretical constructs. It follows that he should stress understanding, as well as prediction, as the test of scientific validity.

          Friedman's models are simplified representations of the entire economy and his economic concepts are aggregations and averages. His economic approach is to engage in a process of pattern prediction to see overall effects and order. We should not forget that these aggregates are the result of a multitude of individual human actions.
 

Conclusion

          Milton Friedman has made significant contributions in macroeconomics, methodology, economic history, and in a variety of public policy areas. No one has done more to dismantle Keynesian economics and the welfare state. Friedman did this by using Keynes' own language and apparatus to prove him wrong. The paradox is that this libertarian economist, who shares the scientific paradigm of neoclassical social engineers, tries to defend incrementally more libertarian policies that are sometimes in contradiction with the principle of freedom. He has been known to use his talents to help the state to do more efficiently tasks that it should not be undertaking.

          Friedman knows what the libertarian ideal is but is willing to entertain less than ideal changes as long as they point in the right direction. He draws a distinction between his ultimate goals and interventionist reforms that he believes will get us on the right path.

          He maintains on empirical evidence that only competitive markets can coordinate the diverse elements of a complex society. Friedman constructs his liberalism around empiricism in attempting to refute the claims of interventionists. Unfortunately, empirical testing can only demonstrate that interventionist policies have contingently failed. This means that the failure of particular interventionist measures does not necessarily preclude the demand for more and different interventionist measures. Friedman's positivism and pragmatism have led to a number of incremental successes in the battle for a free society but more philosophical and moral approaches are required to win the war.