Milton Friedman

Definition

Milton Friedman was an influential American economist who played a significant role in shaping economic thought and policy during the 20th century. His ideas and theories had a profound impact on various aspects of macroeconomics, including the balance between Keynesian and neoclassical models, the pitfalls of monetary policy, government spending, fiscal policy and economic growth, as well as the causes of unemployment and inflation around the world.

5 Must Know Facts For Your Next Test

1. Friedman was a prominent advocate of free-market capitalism and a critic of Keynesian economics, arguing that government intervention in the economy often leads to unintended consequences.
2. Friedman's monetarist theory challenged the Keynesian belief that government fiscal policy was the primary tool for stabilizing the economy, emphasizing instead the importance of monetary policy.
3. Friedman's Permanent Income Hypothesis challenged the Keynesian view that temporary changes in income would have a significant impact on consumption, arguing that individuals base their spending on their long-term expected income.
4. Friedman's concept of the natural rate of unemployment challenged the Keynesian idea that there was a stable trade-off between inflation and unemployment, known as the Phillips curve.
5. Friedman's ideas had a significant influence on the shift towards neoliberal economic policies in the 1970s and 1980s, including the deregulation of financial markets and the reduction of government intervention in the economy.

Review Questions

• Explain how Milton Friedman's views on the balance between Keynesian and neoclassical models influenced economic thought and policy.
  • Milton Friedman was a prominent critic of Keynesian economics, arguing that government intervention in the economy often led to unintended consequences. He advocated for a neoclassical, free-market approach, emphasizing the importance of monetary policy over fiscal policy in stabilizing the economy. Friedman's monetarist theory challenged the Keynesian belief that government spending was the primary tool for economic stabilization, instead arguing that the money supply was the key driver of economic activity. This shift in economic thought had a significant impact on the policy decisions made by governments and central banks, leading to a greater emphasis on monetary policy and a reduction in government intervention in the economy.
• Describe how Friedman's views on the pitfalls of monetary policy influenced the conduct of central banking.
  • Friedman was highly critical of the Keynesian belief that central banks could fine-tune the economy through active monetary policy. He argued that the lags and uncertainties involved in the transmission of monetary policy made it difficult for central banks to accurately predict and respond to economic conditions. Friedman's views on the limitations of monetary policy led to a shift towards more rules-based, passive monetary policy frameworks, such as targeting the money supply or inflation rates, rather than attempting to actively manage the economy through discretionary policy decisions. This change in the approach to monetary policy had significant implications for the conduct of central banking and the way in which policymakers sought to achieve economic stability.
• Analyze how Friedman's perspectives on the role of government spending, fiscal policy, and their impact on economic growth influenced the policy debates surrounding these issues.
  • Friedman was a strong advocate of free-market capitalism and was highly critical of the role of government in the economy. He argued that government spending and interventionist fiscal policies often led to unintended consequences, such as crowding out private investment and distorting market signals. Friedman's views challenged the Keynesian belief that government spending and fiscal policy could be used to actively manage the economy and promote economic growth. His ideas influenced the shift towards more limited government, deregulation, and a greater reliance on market forces to drive economic activity. This shift in economic thought had a significant impact on the policy debates surrounding the role of government in the economy, with Friedman's ideas providing a theoretical foundation for the neoliberal economic policies that gained prominence in the 1970s and 1980s.

Related terms

Monetarism:

An economic theory developed by Friedman that emphasizes the role of the money supply in influencing economic activity and the importance of monetary policy in controlling inflation.

Friedman's Permanent Income Hypothesis: A theory developed by Friedman that suggests individuals base their consumption decisions on their long-term, or permanent, income rather than their short-term, or transitory, income.

Natural Rate of Unemployment:

A concept introduced by Friedman that suggests there is a natural level of unemployment in an economy, which is determined by factors such as the labor market, regulations, and the structure of the economy.