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Economists - Milton Friedman (1912- )

Milton Friedman

Milton Friedman  is a well-known economist and was born in New York in 1912 and after some time working at Columbia University and for the government, he became Professor of Economics at Chicago University. It is here that he did much of his best-known work. They are often termed the 'Chicago school' of Monetarist economists for obvious reasons. Milton Friedman is more than just an economist though - he is almost an evangelist! He is a great believer in the power of the free market and much of his work has been based around this. He even made a series of television programs in the early 1980s entitled 'Free to choose'. There is also a book of the same name. He was always a controversial character, but fought his corner very skillfully. His work remains highly influential and is still controversial.

Milton Friedman, acknowledged as the father of modern monetarist economic theory, won the 1976 Nobel prize in economics for "his achievements in the fields of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy." Among his books are Capitalism and Freedom (1962), A Monetary History of the United States, 1867-1960 (1963), Dollars and Deficits (1968), A Theoretical Framework for Monetary Analysis (1971), and Free to Choose (1980), the latter written with his wife, Rose Friedman. In promoting monetarist thought, he argued vehemently against the widely accepted Keynesian economic policies, which stressed government's role in shaping economic growth primarily through tools like taxation and budget spending. Proponents of other theories argue that the monetarists' focus on the money supply is too limited, and point to the historically high interest rates in the early 1980s. Still, his work has influenced U.S. economic policy, particularly during the Reagan administration. He has also been credited with pushing other countries-including those in Latin America and Eastern Europe-toward freer markets.

Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom. 

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other. 

The liberal conceives of men as imperfect beings, he regards the problem of social organization to be as much a negative problem of preventing "bad" people from doing harm as of enabling "good" people to do good; and, of course, "bad" and "good" people may be the same people, depending on who is judging them. 

The basic problem of social organization is how to co-ordinate the economic activities of large numbers of people. Even in relatively backward societies, extensive division of labor and specialization of function is required to make effective use of available resources. In advanced societies, the scale on which co-ordination is needed, to take full advantage of the opportunities offered by modern science and technology, is enormously greater. Literally millions of people are involved in providing one another with their daily bread, let alone with their yearly automobiles. The challenge to the believer in liberty is to reconcile this widespread interdependence with individual freedom. 

The possibility of co-ordination through voluntary co-operation rests on the elementary-yet frequently denied-proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed. 

Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy-what we have been calling competitive capitalism. 

The basic requisite is the maintenance of law and order to prevent physical coercion of one individual by another and to enforce contracts voluntarily entered into, thus giving substance to "private".

The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on. 

Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated-a system of checks and balances. 

An impersonal market separates economic activities from political views and protects men from being discriminated against in their economic activities for reasons that are irrelevant the their productivity whether these reasons are associated with their views or their color. 

Milton Friedman's best known work is on the Quantity Theory of Money. He extended this Classical piece of analysis, tested it and put it into a more modern context. However, he also did quite a bit of work on the theory of distribution and argued for a new way of looking at the way people decide on their consumption - the permanent-income hypothesis.

His main published works include:

  • Taxing to prevent inflation (1943)
  • Essays in positive economics (1953)
  • A theory of the consumption function (1957)
  • A monetary history of the United States 1867-1960 (1963)
  • The optimum quantity of money (1969)
  • Free to choose: a personal statement (1980)

The monetary history of the United States was co-written with Anna Schwartz and was an important work, arguing that governments must bear responsibility for most of the fluctuations in prices, output and employment as they were rooted in monetary fluctuations.

It was in his work Studies in the Quantity Theory of Money (1956) that he developed his best known thesis. This is summed up in the quote:

"Inflation is always and everywhere a monetary phenomenon"

Friedman has made two particularly fundamental contributions to the economic policy debate. They are his work on the Quantity Theory of Money and the expectations-augmented Phillips Curve.

He has also been a darling of right-wing governments throughout the world helping them to justify their particular brand of 'laissez-faire' economics. He has argued the case eloquently for non-interventionist policies by governments. Any attempt to manage the level of demand (in a Keynesian way) would simply be de-stabilizing and make things worse. The role of government is simply to use its monetary policy to control inflation and supply-side policies to make markets work better and reduce unemployment.

The Phillips Curve showed a trade-off between unemployment and inflation. However, the problem that emerged with it in the 1970s was its total inability to explain unemployment and inflation going up together - stagflation. According to the Phillips Curve they weren't supposed to do that, but throughout the 1970s they did. Friedman then put his mind to whether the Phillips Curve could be adapted to show why stagflation was occurring, and the explanation he came up with was to include the role of expectations in the Phillips Curve - hence the name 'expectations-augmented' Phillips Curve. Once again the supreme logic of economics comes to the fore!

Friedman argued that there were a series of different Phillips Curves for each level of expected inflation. If people expected inflation to occur then they would anticipate and expect a correspondingly higher wage rise. Friedman was therefore assuming no 'money illusion' - people would anticipate inflation and account for it.

Any attempt to reduce inflation below the level is often known as the natural rate of unemployment.

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