Milton Friedman

Definition

Milton Friedman was an influential American economist known for his strong belief in free markets and minimal government intervention. His ideas have shaped modern economic policies and he is particularly recognized for his work on monetary theory, advocating for the control of the money supply to achieve economic stability and growth.

5 Must Know Facts For Your Next Test

1. Friedman won the Nobel Prize in Economic Sciences in 1976 for his research on consumption analysis and monetary history.
2. He proposed the 'permanent income hypothesis,' which suggests that people's consumption choices are based not just on current income but on expected long-term average income.
3. Friedman's work highlighted the importance of controlling inflation through monetary policy rather than fiscal policy, influencing central banking practices globally.
4. He was a strong critic of Keynesian economics, arguing that government intervention often leads to inefficiencies and economic instability.
5. Friedman's views led to the establishment of 'Friedman Rules' for monetary policy, emphasizing a fixed annual increase in the money supply.

Review Questions

• How did Milton Friedman's theories challenge traditional views on government intervention in the economy?
  • Milton Friedman challenged traditional Keynesian views by arguing that government intervention often disrupts natural market mechanisms. He believed that free markets could allocate resources more efficiently without government interference. His emphasis on monetarism demonstrated how controlling the money supply could effectively manage inflation and stabilize the economy without relying heavily on fiscal policies.
• What role did Friedman's work play in shaping contemporary monetary policy practices among central banks?
  • Friedman's emphasis on controlling the money supply became a cornerstone for contemporary monetary policy. His insights into inflation targeting led central banks to prioritize managing inflation through money supply regulation rather than focusing solely on interest rates. This shift significantly influenced how central banks design their monetary frameworks, making them more proactive in addressing inflationary pressures.
• Evaluate how Friedman's theories regarding consumer behavior impact our understanding of economic fluctuations and their effects on unemployment rates.
  • Friedman's theories, particularly his permanent income hypothesis, provide a nuanced understanding of consumer behavior during economic fluctuations. By positing that consumers base their spending decisions on expected long-term income rather than current income, it highlights how consumer confidence can drive economic cycles. This perspective has implications for unemployment rates, as it suggests that during downturns, even if jobs are lost, consumers may maintain spending based on their perceived future earnings, potentially stabilizing employment levels more than previously understood.

Related terms

Monetarism:

An economic theory that emphasizes the role of governments in controlling the amount of money in circulation, asserting that changes in the money supply are the primary drivers of economic activity and inflation.

Consumer Theory: A branch of microeconomics that studies how individuals make decisions about the allocation of their resources, including preferences, budget constraints, and consumption choices.

Natural Rate of Unemployment:

The level of unemployment consistent with a stable rate of inflation, where the labor market is in equilibrium and there is no cyclical unemployment due to economic downturns.