The Life and Work of Milton Friedman: An Introduction
Milton Friedman (1912-2006) was an American economist and political philosopher, who won the Nobel Prize in Economics in 1976 “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.” He was a leading proponent of monetarism and laissez-faire capitalism, and he had a great influence on both academic economics and economic policy making.
2. Life and work
Friedman was born in Brooklyn, New York, in 1912. He studied economics at the University of Chicago, where he became a professor in 1945. He later moved to Stanford University. In the early 1960s, Friedman became one of the leaders of the so-called “Chicago school” of economics, which also included George Stigler, Ronald Coase and Gary Becker.
Friedman was an adviser to Republican President Ronald Reagan and served as a member of Reagan’s Economic Policy Advisory Board from 1981 to 1988. He was also a close friend and adviser to Margaret Thatcher, British Prime Minister from 1979 to 1990.
3. Important theories
Friedman is best known for his work on monetarism and for his advocacy of free markets. However, he also made important contributions to other areas of economics, including consumption, wealth, income, spending and interest.
-A theory of natural rate of unemployment
Friedman’s most important contribution to economics was his theory of the natural rate of unemployment. This theory is used to trace the relationship between unemployment and inflation. Friedman argued that there is a natural rate of unemployment, which is determined by structural factors such as the labor market turnover time. He also argued that unemployment below the natural rate would lead to inflation, while unemployment above the natural rate would lead to deflation.
-The consumption function
Friedman also advanced a theory of consumption known as the permanent income hypothesis. This theory states that consumers make spending decisions based on their expected lifetime income rather than their current income. This theory has important implications for understanding saving behavior and consumer demand.
-Wealth, income, spending and interest
Friedman also made important contributions to our understanding of wealth, income, spending and interest. He argued that wealth is not simply a stock of assets but also includes human capital (the value of people’s skills and abilities). He also argued that there is a close relationship between income and spending: when people’s incomes increase, they tend to spend more money (the “income effect”). Finally, he argued that interest rates are determined by people’s preferences for present over future consumption (the “time preference” or “discount rate”).
4. Implications for policy
Friedman’s work had important implications for economic policymaking.
-Friedman’s views on monetary policy
Friedman was a leading critic of Keynesian demand management policies. He argued that fiscal and monetary policies aimed at increasing aggregate demand would only be effective in the short run and would lead to higher inflation in the long run. Instead, he advocated a policy of strict monetary discipline, whereby the money supply would be expanded at a steady rate (the so-called “monetarist rule”).
-Friedman’s views on fiscal policy
Friedman was also a critic of Keynesian fiscal policy. He argued that government spending would only be effective in the short run and would lead to higher taxes in the long run. He also argued that deficit spending would crowd out private investment and lead to higher interest rates.
-Friedman’s views on economic freedom
Friedman was a strong advocate of economic freedom. He argued that government intervention in the economy should be limited to ensuring a free and fair marketplace. He also argued that government should not try to redistribute income or wealth, as this would only reduce economic efficiency.
Friedman was one of the most influential economists of the 20th century. His work had a profound impact on academic economics and economic policymaking. He is widely regarded as the father of monetarism and a leading proponent of free market capitalism.