Milton Friedman

Definition

Milton Friedman was an influential American economist and a leading figure in the Chicago School of Economics, known for his strong advocacy of free markets and limited government intervention in the economy. His work emphasized the importance of monetary policy over fiscal policy, arguing that control of the money supply is crucial for managing inflation and economic stability. Friedman's ideas have had a profound impact on both economic theory and public policy, particularly regarding fiscal and monetary tools, as well as ethical considerations in business practices.

5 Must Know Facts For Your Next Test

1. Friedman introduced the concept of the 'permanent income hypothesis,' which suggests that people's consumption choices are based on their expected long-term income rather than their current income.
2. He was a strong opponent of Keynesian economics, particularly criticizing its reliance on fiscal policy for stimulating the economy during recessions.
3. Friedman received the Nobel Prize in Economic Sciences in 1976 for his research on consumption analysis, monetary history, and stabilization policy.
4. He played a significant role in advocating for school vouchers as a means to promote educational choice and competition among schools.
5. Friedman's famous phrase 'there's no such thing as a free lunch' encapsulates his belief that every choice has an opportunity cost, emphasizing careful consideration in economic decision-making.

Review Questions

• How did Milton Friedman's views on monetary policy differ from those of Keynesian economists?
  • Milton Friedman believed that controlling the money supply is more effective than fiscal policy for managing economic fluctuations. While Keynesian economists argued that government spending could stimulate demand during recessions, Friedman contended that inflation was primarily influenced by changes in the money supply. He suggested that focusing on long-term monetary stability would yield better economic outcomes than short-term fiscal interventions.
• Discuss how Friedman's ideas have influenced modern public policy regarding government intervention in the economy.
  • Friedman's advocacy for free markets and limited government intervention has shaped modern public policy by promoting deregulation and privatization across various sectors. His ideas led to significant reforms, particularly in the 1980s, when many governments embraced neoliberal policies aimed at reducing state control over the economy. These reforms often involved prioritizing market forces over governmental authority in areas like trade, education, and welfare.
• Evaluate the implications of Friedman's ethical perspective on business practices in today's corporate environment.
  • Milton Friedman famously argued that the primary responsibility of business is to maximize profits for shareholders while adhering to legal and ethical standards. This perspective has profound implications today, as many corporations navigate complex social responsibilities alongside profit motives. The tension between profit maximization and corporate social responsibility often leads to debates on whether businesses should prioritize shareholder value or consider broader societal impacts, reflecting Friedman's belief in prioritizing economic efficiency over social objectives.

Related terms

Monetary Policy: The process by which a central bank manages the money supply to influence economic activity, primarily through interest rates and other financial instruments.

Free Market Economy: An economic system where prices for goods and services are determined by open competition among businesses, with minimal government intervention.

Chicago School: A school of economic thought that emphasizes the efficiency of free markets, with notable contributors like Milton Friedman advocating for minimal government involvement in economic affairs.