Milton Friedman

Definition

Milton Friedman was a renowned American economist known for his strong belief in free-market capitalism and minimal government intervention in the economy. His theories and writings have greatly influenced modern economic policies, particularly in the areas of monetary policy and fiscal policy.

5 Must Know Facts For Your Next Test

1. Friedman received the Nobel Prize in Economic Sciences in 1976 for his contributions to consumption analysis, monetary history, and the formulation of stabilization policy.
2. He was a leading advocate for the idea that inflation is primarily a monetary phenomenon, arguing that it occurs when too much money chases too few goods.
3. Friedman's work on the permanent income hypothesis suggests that consumers base their spending on long-term income expectations rather than just current earnings.
4. He played a significant role in shaping U.S. economic policy during the 1980s, particularly under President Reagan's administration, promoting tax cuts and deregulation.
5. Friedman's advocacy for a volunteer military and school vouchers demonstrated his belief in limited government and individual choice.

Review Questions

• How did Milton Friedman’s theories challenge traditional views of fiscal policy and automatic stabilizers?
  • Milton Friedman challenged traditional views of fiscal policy by emphasizing the importance of monetary policy over discretionary fiscal measures. He believed that automatic stabilizers could be less effective than expected, as they could lead to inefficiencies and delays in response to economic fluctuations. Instead, Friedman argued that controlling the money supply is crucial for managing economic stability, positing that inflation is primarily caused by excessive growth in money supply rather than fiscal spending alone.
• Discuss Friedman’s views on money supply and its relationship with inflation, including how this perspective influences current economic policies.
  • Friedman asserted that inflation results from an increase in money supply outpacing economic growth. This view led to his advocacy for monetarism, which argues that managing the money supply is essential for controlling inflation. His theories influence current economic policies by encouraging central banks to focus on stable growth rates of money supply rather than discretionary fiscal actions, aiming to prevent inflation and promote overall economic stability.
• Evaluate how Milton Friedman’s Permanent Income Hypothesis contributes to our understanding of consumer behavior and its implications for macroeconomic policy.
  • Milton Friedman's Permanent Income Hypothesis shifts the focus from current income to expected lifetime income when analyzing consumer behavior. This understanding implies that short-term fiscal measures may not significantly impact consumption patterns since consumers adjust their spending based on long-term expectations. Policymakers need to consider these behavioral insights when designing macroeconomic policies, as they must recognize that consumers might save tax cuts or stimulus payments rather than spend them immediately, limiting the effectiveness of such policies in stimulating economic growth.

Related terms

Monetarism:

An economic theory that emphasizes the role of governments in controlling the amount of money in circulation, which Friedman strongly advocated.

Natural Rate of Unemployment:

The level of unemployment consistent with a stable rate of inflation, which Friedman argued is determined by real factors rather than cyclical ones.

Permanent Income Hypothesis: Friedman's theory suggesting that people's consumption choices are determined not just by current income, but by their expected lifetime income.