Milton Friedman
Milton Friedman (1912 – 2006) is an outstanding American economist, the Winner of the Nobel Prize in Economics in 1976, and a consistent supporter of free-market capitalism.
From 1930 to 1960 most academic economists in both the United States and Europe clung to one or another set of ideas – from socialism to Keynesianism. In the field of monetary regulation, Milton Friedman stood for monetary policy and free markets. Most economists of that time supported ideas of Keynesian economics. According to them, fiscal policy – decisions of the government on taxation and government spending – is more significant than monetary policy – a set of measures the government implements to manage cash flows in the country.
Having stood up against Keynesianism, Milton Friedman and his followers claimed that governments could influence economic stability by controlling the pace of monetary expansion. Besides, they advocated publicly the free-market system.
After his death, the Wall Street Journal recognized that his ideas had a lot of influence on the economy and that he had "reshaped modern capitalism".
Early life and education
Milton Friedman was born on July 31, 1912 in Brooklyn (New York, U.S.) in a family of Jewish immigrants from Eastern Europe. At the age of 16, he was admitted to Rutgers University and had an opportunity to receive a partial scholarship. In 1932, he got two bachelor's degrees at once – in economics and mathematics. While studying at the university, he was influenced by A. F. Burns and G. Jones, two American economists. In 1932, a Rutgers professor provided him with strong recommendations for a scholarship at the University of Chicago.
After that Friedman became a research assistant at the University of Chicago, carried out research at Columbia University on military statistics, landed several government roles, which all helped him deepen knowledge of statistics and economics and start his career.
For instance, he took part in a large-scale consumer budget research project for the National Resources Committee in Washington and it had a great impact on the development of the Theory of the Consumption Function.
During the World War II, he participated in the development of tax policy on behalf of the U.S. Treasury Department in Washington. It should be mentioned that at first Milton Friedman advocated an increase in tax rates to overcome inflation.
Main achievements
In 1946, Friedman accepted an invitation from the University of Chicago to be a teacher of economic theory. Over the next three decades, Friedman was a professor in Chicago, where he became one of the founders of the intellectual school, which produced several Nobel laureates, and created free-market theories.
Workshop on money and banking. When working at the university, he studied the role of money in economic cycles and arranged a Workshop on Money and Banking in 1951, which contributed to the revival of the study of monetary phenomena.
The Chicago School of Economics. Milton Friedman was known as a graduate of the Chicago School of Economics. The founder of the School was a philosopher and sociologist Frank Knight. It was established to promote free markets and ideas of rational expectations, a theory explaining that economic agents have the information and can use it to forecast the economic processes in an economic model, for example, they can predict inflation or a response of supply and demand.
The Nobel Prize winner (1976). In 1976, the Nobel Prize in economics was awarded to Friedman for his research on consumption – he proved the influence of long-term assessment of current income on economic processes – monetary policy, and stabilization policy.
Hoover lnstitution of Stanford University. In 1977, he left the University of Chicago after working there for 30 years and moved to San Francisco, where he became a researcher at the Hoover Institution of Stanford University, political research center in the U.S.
Achievements in theoretical economics
Milton Friedman was one of the most influential theoretical economists of the 20th century. Some of his ideas were so brilliant that even neo-Keynesian critics were impressed by them.
For instance, in his model on consumption behavior the term utility indicates preferences of consumers and he claims that they choose and buy goods to receive the maximum “utility” from using it.
Followers of Keynesianism had explained consumer choices from the perspective of psychology. For example, people tend to increase their consumption of goods and services with income growth, but not to the same extent.
Theory of the consumption function. In the second half of the 1950s, Milton Friedman formulated and proposed a new theory of the consumption function based on the relationship between permanent income and consumption in the economy. In his book "The Theory of the Consumption Function" published in 1957, he offered a hypothesis that consumer decisions are determined mainly by the permanent part of disposable income, and the transient part of income primarily affects savings.
Forecast of stagflation. One of his greatest achievements that impressed many Western economists is the study of the phenomenon called stagflation – inflation, accompanied by stagnation or decline in production and high unemployment rates.
In a presidential address "The Role of Monetary Policy" he predicted a previously unknown phenomenon of stagflation. His prediction was fully justified in the 1970s and it played a decisive role in the recognition of the ideas of monetarism.
Before that Keynesian economists invoked the Phillips curve to demonstrate that the correlation between unemployment and inflation justifies the increase of the money supply and the practice in which a government spends more money than it receives as revenue.
However, Friedman argued that although there is a correlation between unemployment and inflation, it will result in high inflation and unemployment rates. When it turned out that the monetarists predicted and explained the phenomenon of stagflation quite accurately, it was called one of the great triumphs of economics.
Monetarism
The fundamental work “A Monetary History of the United States" published in 1963 and written by Milton Friedman and a specialist in the field of economic history Anna Schwartz, allowed to demonstrate the role of money in the U.S. economy in different historical cycles and proved the Keynesian case wrong.
Keynesianism developed as a reaction to the Great Depression in the United States. Keynesians claimed that extra funds pumped into the economy would not boost the economy and this was the reason why they stood for fiscal policy.
In the book called “Capitalism and Freedom” Milton Friedman made it clear that the government aggravated the Great Depression by not following monetary policies. According to him, the government needed to increase the money supply in circulation and let the market distribute the money supply itself.
Paul Krugman, one of the Neo-Keynesian critics, took an opposite position and claimed that the Federal Reserve did increase the money supply but it didn’t help prevent the depression.
Implementation of monetarism
In 1959, Milton Friedman first touched upon the question of monetarism in his book “A Program for Monetary Stability” and then it became one of the most frequent economic topics discussed. He always emphasized the role of the money supply in his works and, eventually, gained recognition as an advocate of monetarism.
Margaret Thatcher, the Prime Minister of the U.K., shared the ideas of monetarism. However, after the failures of the monetary policy initiatives, she decided to stop implementing it.
In the U.S. monetarism became widespread in the 1970s. In 1979, when inflation rates in the United States reached 20%, the Fed changed its operational strategy in accordance with monetarist theory. However, in the following decades, monetarism lost popularity, as it seemed to be less able to explain the development of the US economy. Nevertheless, some of the ideas that monetarists brought to economic analysis were adopted by economists from other schools.
Milton Friedman vs. John Keynes
- Milton Friedman and John Maynard Keynes were considered to be the most famous and influential economists of the U.S. in the 20th century. Milton Friedman was a talented student, the successor to Keynes and the man who completed his work.
- Although many politicians and economists began to support the ideas of monetarism in the 1970s, it was criticized by the scientific school that it had replaced - Keynesianism. Before that the U.S. government policy was driven by the concept that it wasn’t necessary to place limitations on the Fed in terms of money supply.
- Critics of Keynes claimed that his ideas were pseudo-scientific and they were aimed at spending more money than the government could take in from taxes and other revenues.
- Friedman's theories were often criticized as their application in some countries had led to negative consequences, such as high unemployment rates and government demonization.
