31795

Milton Friedman

May 10, 2023•3,322 words

Presentation

Life

  • Early life
    • Milton Friedman (1912 to 2006)
    • He was born to Jewish immigrant parents in Brooklyn, N.Y., and grew up in New Jersey, 20 miles from New York City
    • His family was not financially stable as he was growing up
    • His father died during his senior year, Friedman had to work various jobs to earn his undergrad degree in economics and mathematics from Rutgers University
    • Friedman was awarded a scholarship to an economics graduate program at the University of Chicago in 1932
    • Earns Ph.D. in Economics from Columbia University in 1946
  • Studies
    • Consumer budget study at the National Resources Committee
    • Theory of the Consumption Function
    • Professional income study at the Bureau of Economic Affairs
    • Introduces his permanent income hypothesis
    • Worked on a on a select team of statistical analysts that studied wartime tax policy for the U.S. Treasury Department and weapon design, military tactics, and metallurgical experiments at University of Columbia
    • At this time, he recommended increasing taxes to suppress inflation and devised the first system of income tax withholding
  • Chicago School of Economics
    • Founded in the 1930s by Frank Hyneman Knight
    • Promotes free-market principles to better society (Classical Liberal origins)
    • Developed monestarism; contending that the money supply should be kept in equilibrium with the demand for money.
    • Milton Friedman is the most well-known contributor to this school, whose theories were drastically different from Keynesian economics.

  • Work

    • Milton Friedman is an American economist, perhaps the single most influential American Economist
    • Nobel laureate
    • Influential advocate of free-market capitalism
    • Advocated monetary policy over fiscal policy
      • Monetary policy: control over the money supply
      • Fiscal policy: Government spending and taxes
    • He popularized this monetary policy
    • At this time (50s and 60s), Keynesian Economics is the dominate school
      • Keynesian Economics
      • Advocates for more government control, essentially fiscal policy over monetary policy
      • Government should moderate recessions by using fiscal policy to manipulate demand, increase consumption, and reduce unemployment
    • His book Capitalism and Freedom was a best seller
    • Apart from his books, he wrote around 300 columns in Newsweek Magazine
    • He as involved in the economic policies of the Reagan and Margaret Thatcher admins
    • He helped to end conscription/draft, broaden educational choice, and to alter the interventionist, regulatory climate of U.S Government
    • In 1976 he was awarded the Nobel Prize
    • Even late in his life he made influential works, his book Free to Choose and its related television series elevated him to higher status, becoming the basis for how Eastern European leaders reconstructed after the collapse of the U.S.S.R

    \

Economic Theory

Permanent Income Hypothesis

  • How to stimulate the economy?
    • Keynesian reponse:
    • Spending is correlated with income
    • Raising incomes increases spending
    • The government should hire people to raise their incomes
    • The spending of this money on the market increases business and therefore had an effect on the incomes of others, having a positive effect
    • Keynesian multiplier
    • Milton Friedman
    • Correlation is not causation
    • People spend more if they have higher income because they are financially stable (or expect to remain so)
    • Promotions in wages from a private employers will typically only increase (or stay the same)
    • Someone who is on government payroll on a lower paying job will not spend that money, the financially smart decision is to save
    • Increasing taxation to raise government salaries only decreases spending because of that reason, because it requires taking more money from everyone else
    • Therefore, one must increase permanent income
  • The hypothesis
    • When your permanent income rises, there will be a proportional increase your annual spending
    • When your non-permanent income rises or falls by a a small amount, the adjustment in the current spending will be small
    • Therefore, permanent income increase is what increases spending
    • Compared over time, spending only increases even if income remains
    • E.g: Friedman uses the example of farmers and factory workers, the former would not increase spending if they had a surge in profits since farming is heavily dependent on market conditions and weather, while the factory worker can expect his increase in wage/profits to be more permanent
    • Friedman carries out similar tests across different nations, races, age groups, etc and found a similar trend that he used to support this idea
    • This is the first achievement listed by the Nobel Prize committee

Money and Inflation

  • Looked at the demand for money rather than the money supply

    • Wealth is different from money, you can be wealthy without having a lot of actual money (property, assets, stock, etc)
    • Money is supplied by the banking system and the monetary authorities (e.g., the Federal Reserve System, the Bank of Canada in Canada, and the Bank of England in the UK)
    • The government prints money to pay for things
    • If the money supply increases, (so someone is selling something to government or doing government work), then prices will have a proportional increase
    • Inflation is causes by this spending over time, it increases as the money supply expands
    • “inflation is always and everywhere a monetary phenomenon.”
    • Prior to this, wage increases were blamed for rises prices in consumer goods
    • The quantity of money demanded has to equal the quantity of money supplied. Prices must adjust until that equilibrium is reached.

    \

Monetary policy

  • Effects of inflation:
    • First, the wealth held by everyone decreases (effecting the poorest or financially unstable most of all)
    • Typically, wages do not increases proportionally to the monetary supply or proportionally to price changes
    • People tend to spend as a result (since their money is losing value) which has the same effect, further increasing prices because of demand
    • Keynesians believed people would hold on to their money regardless
    • At some point, price levels must rise faster than the money supply. Friedman called this phenomenon overshooting
  • Friedman’s answer
    • Negative inflation
    • Someone will increase their spending if their money saved is being devalued, so why not encourage repressing inflation by decreasing spending
    • Government eliminates a certain percentage of the money supply
    • There is a positive to printing money: if it prints money, it does not need to tax that out of taxes
    • Friedman in the end endorsed a small positive inflation rate on the order of about 2% annually but felt that this was politically likely to be higher, he would even settle for as much as 5%

Monetary History

  • He co-writes Monetary History of the United States, 1857 - 1960

    • This accumulation of research and statistical analysis effectively torpedoes the Keynesian school
    • It showed evidence supporting that when non permanent incomes rise, there is little change in the amount of money people want to hold.
    • there is therefore a predictability to money demand, so changes in the money supply lead to changes in price
    • An increase in new money leads to an increase in spending, and therefore an increase in economic activity (with long and varying delay)
    • Friedman argued that changing the money supply is largely ineffective (and even counter-productive) for short term problems like economic stagnation and recessions, and therefore it’s best for policymakers to focus on the

    long run.

    • He argues for a low and steady rate of money supply growth.
    • His groundbreaking realization is that the fall in the money supply caused the Great Depression of 1930s, which would have otherwise been a minor recession (the money supply had not been stable)
    • The Keynesians thought money was still being printed but people were holding it
    • Banks failed, industry failed, unemployment was high so people were not spending or had no money to spend
    • While some people are critical of the U.S recovery after the 2008 recession, others argue that the policies of expanding the money supply (because of Friedman’s theories) shortened it
    • Note the demand for money is less stable now than it was in Friedman’s day due to digital banking, and savings accounts, crypto, and changes in bank regulation
    • Today, governments tend to control interest rates rather than the money supply due to this, but the aim is still that of Friedman: the control the price increases, keeping it gradual, steady, and predictable
    • In other words, different method

Unemployment

  • Work by the economist William Phillips demonstrated a correlation between high inflation and low unemployment
  • Policymakers tended to face a choice between higher employment and higher inflation
  • Friedman again argues against correlation-causation and holds to his argument that unemployment leads to inflation
    • In 1967, in his farewell address after his term as president of the American Economic Association he explains the difference between real value and wage
    • Inflation can render the work someone does, or a salary, to be increased but given inflation, that does not mean someone is getting more value out of their work
    • People at this time will get jobs or change jobs, but may not be financially better off
    • Inflation distorts the value of work, people looking for employment may not be aware of how much that salary is worth given rises in prices
    • It negatively impacts the employer because rising prices can give the false impression of an increase in demand and therefore misguided business decisions
  • Conclusions:
    • Expected changes in inflation are less disruptive in unemployment
    • Unexpected increases cause a temporary increase in employment but not permanently
    • He therefore believed that it was more important to keep the rate of inflation steady than to keep it low to ease unemployment
    • This is his argument against Phillips and by the 1970s, as inflation and unemployment were on the rise, his prediction was believed to be more accurate
    • Good monetary policy is long-term policy, managing expectations of inflation helps people make better informed decisions on their spending or salary
  • What to do about unemployment?
    • He believed that given the changes and uncertainty in the world, there is a natural rate of unemployment
    • People search for a better job
    • People go back to school
    • People are unable to work
    • People get fired
    • His natural rate hypothesis is now a tenet of macroeconomics
    • 1976: US Congress passed the Humphrey-Hawkins FUll Employment Bill which authorized government to create as many jobs as possible to lower the unemployment rate below 3%
    • This led to less wealth across the population due to increase in tax and inflation and because this reduces spending, it hurts the private sector and therefore gov hiring actually increases private unemployment
    • People who lose their jobs or fail to get them because of the government program do not know that that is the source of their problem. The good effects are visible. The bad effects are invisible. The good effects generate votes. The bad effects generate discontent, which is as likely to be directed at private business as at the government.
    • There is political motivation for self-destructive policies
    • Now, economists and politicians generally agree that there is a natural rate of unemployment

Chicago Price Theory

  • Friedman believed that economics should be about real-world problems that the average person might need to ask for their own spending, for their business, or a policy.
    • Outside Chicago, price theory were viewed as separate from macroeconomics and monetary theory
    • Friedman’s monetary theories depend on why people choose not to spend
    • Debate among graduate students and faculty at Chicago elevated the learning of all participants, allowing them to break down the logic of their theories and how to better analyze the validity of their assumptions
    • He led a “money workshop” in which a guest speaker would submit some research on which all participants would comment and critique, page by page
    • The Chicago approach begins with an analysis on the role of prices, markets, and incentives in economic activity
    • Gary Becker, Ronald Coase, Sherwin Rosen, George Stigler, and others developed this approach

Social Theory

Relation Between Economic Freedom and Political Freedom

Role of Government in a Free Society

Monetary and fiscal policies

Monopolies and Business’ Social Responsibility

International Trade

Education

Discrimination

Distribution of Income and Social Welfare

Capitalism and Freedom

  • Why does economic freedom matter?
    • Private enterprise, competitive capitalism, and economic freedom are necessary for political freedom
    • Politics and economics are not separate fields
    • The two are connected, and there are only certain possible combinations
    • “Democratic socialism” cannot exist, as seen in Russia
    • Socialist society cannot be a democracy, the two are incompatible and it cannot guarantee individual freedom

Duty of the citizen

  • “ask not what your country can do for you, but what you can do for your country”
    • implies that the government is the patron, the citizen the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny. The organismic “what you can do for your country” implies that government is the master of the deity, the citizen, the servant or the votary
    • Does not this relation is worthy of the ideals of free men in a free society
  • To the free man, a country is a collection of individuals, they compose it, it is not something above them
    • government is impartial, something not worshiped or served, and something that does not provide
    • He recognizes no national goal except as it is the consensus of the goals that citizens severally serve. He recognizes no national purpose expect as it is the consensus of the purposes for which the citizens severally strive.
    • Believed government should be used to discharge individual responsibilities
    • Felt strongly for the need of mechanisms of safety for freedoms
    • The great threat to freedom is the concentration of power, even if it can be used to exercise freedom
    • One needs to benefit from government while avoiding the threat to freedom

\
\
Duty of government

  • Major functions:
    • Protect freedom from enemies abroad and from other citizens
    • Preserve law and order
    • Enforce private contracts
    • Foster competitive markets
    • At times, accomplish/coordinate what people cannot arrange themselves (but this is dangerous)
    • We should avoid using government
    • The use of “political channels” strains social cohesion because it forces conformity
    • Use of the market reduces strain because it does not require conformity
    • The fewer issues on which agreement is necessary, the greater is the likelihood of getting agreement while maintaining a free society
  • Gov power
    • If government should exercise power, it is better for it to be local
    • It is easier to move to another community, most cannot leave the country
    • Two sided coin: power used by government for social programs for example, is the same power used to do harm
    • Power changes, different leaders have different incentives
    • Centralization was led by men of good will, Friedman again thinks long term
    • power must be limited for the preservation of freedom
    • Gov cannot replication the variety and efficiency of individual action
    • If it does improve something (uniform standardizing), it leads to stagnation
    • of totalitarian society: To deny that the end justifies the means is indirectly to assert that the end in question is not the ultimate end, that the ultimate end is itself the use of proper means
  • When can the market not handle?
    • Law: it is meaningless if no one adheres to it, and will not prevail with external sanctions
    • mediation, enforcement, and legitimization of law
    • As a attractive as anarchy may be as a philosophy, it is not feasible in a world of imperfect men
    • One man’s freedom must be limited to preserve another’s \
    • Market freedom
    • The idea of free enterprise means allowing everyone to compete
    • \
  • Private sector
    • The role of the private sector (voluntary cooperation and private enterprise) is as a check on the powers of the government
  • Role of the market

\

  • Proportional representation
    • The market permits unanimity without conformity
    • Appropriate means are free discussion and voluntary cooperation
    • Goal is unanimity
    • The market can represent more groups than government
    • Representational system cannot create unanimity
    • System must compromise, no one gets what they want, must conform
    • Majority rule, when people cannot agree, is an expedient: some issues are not decided by the bare majority
    • Constitution is so important is requires concessions to expediency: what is made in essential consensus must have essential consensus to alter them
  • \
  • \

Criticism

Legacy

Sources

The Essential Milton Friedman

Life

  • Early life
    • Milton Friedman (1912 to 2006)
    • He was born to Jewish immigrant parents in Brooklyn, N.Y., and grew up in New Jersey, 20 miles from New York City
    • His family was not financially stable as he was growing up
    • His father died during his senior year, Friedman had to work various jobs to earn his undergrad degree in economics and mathematics from Rutgers University
    • Friedman was awarded a scholarship to an economics graduate program at the University of Chicago in 1932
    • Earns Ph.D. in Economics from Columbia University in 1946
  • Studies
    • Consumer budget study at the National Resources Committee
    • Theory of the Consumption Function
    • Professional income study at the Bureau of Economic Affairs
    • Introduces his permanent income hypothesis
    • Worked on a on a select team of statistical analysts that studied wartime tax policy for the U.S. Treasury Department and weapon design, military tactics, and metallurgical experiments at University of Columbia
    • At this time, he recommended increasing taxes to suppress inflation and devised the first system of income tax withholding
  • Chicago School of Economics
    • Founded in the 1930s by Frank Hyneman Knight
    • Promotes free-market principles to better society (Classical Liberal origins)
    • Developed monestarism; contending that the money supply should be kept in equilibrium with the demand for money.
    • Milton Friedman is the most well-known contributor to this school, whose theories were drastically different from Keynesian economics.
  • Work
    • Milton Friedman is an American economist, perhaps the single most influential American Economist
    • Nobel laureate
    • Influential advocate of free-market capitalism
    • Advocated monetary policy over fiscal policy
      • Monetary policy: control over the money supply
      • Fiscal policy: Government spending and taxes
    • He popularized this monetary policy
    • At this time (50s and 60s), Keynesian Economics is the dominate school
      • Keynesian Economics
      • Advocates for more government control, essentially fiscal policy over monetary policy
      • Government should moderate recessions by using fiscal policy to manipulate demand, increase consumption, and reduce unemployment
    • His book Capitalism and Freedom was a best seller
    • Apart from his books, he wrote around 300 columns in Newsweek Magazine
    • He as involved in the economic policies of the Reagan and Margaret Thatcher admins
    • He helped to end conscription/draft, broaden educational choice, and to alter the interventionist, regulatory climate of U.S Government
    • In 1976 he was awarded the Nobel Prize
    • Even late in his life he made influential works, his book Free to Choose and its related television series elevated him to higher status, becoming the basis for how Eastern European leaders reconstructed after the collapse of the U.S.S.R

The Free Market

  • Freedom
  • Efficiency
  • Morality

Issues of State Intervention

  • Monetary Policy
  • International trade
  • Education
  • Discrimination
  • Registration, Certification, and Licensures
  • Welfare
  • Poverty

What the state should do

More from 31795
All posts