Milton Friedman

Definition

Milton Friedman was a prominent American economist and a leading figure in the Chicago School of Economics, known for his advocacy of free-market policies and his influential work on consumption analysis, monetary policy, and inflation. His ideas have shaped economic thought and policy debates, particularly regarding the role of government in the economy and the importance of monetary supply.

5 Must Know Facts For Your Next Test

1. Milton Friedman won the Nobel Prize in Economic Sciences in 1976 for his research on consumption analysis and the theory of monetary policy.
2. Friedman's famous 'Permanent Income Hypothesis' suggests that people's consumption choices are based on their expected long-term average income rather than their current income.
3. He was a strong advocate against government intervention in the economy, arguing that free markets lead to more efficient outcomes compared to centrally planned economies.
4. Friedman played a significant role in shaping monetary policy during the late 20th century, promoting the idea that controlling the money supply is crucial to managing inflation.
5. His work on the Phillips Curve challenged traditional views, proposing that there is no stable trade-off between inflation and unemployment in the long run.

Review Questions

• How did Milton Friedman's Permanent Income Hypothesis alter traditional views on consumer behavior?
  • Milton Friedman's Permanent Income Hypothesis shifted traditional views by suggesting that consumers base their spending not just on current income but on their expected lifetime income. This perspective emphasizes that consumption decisions are more about future income expectations rather than immediate financial situations. As a result, it changed how economists view consumer behavior and influenced policies aimed at stimulating demand during economic downturns.
• Analyze how Milton Friedman's theories on monetary policy have influenced modern central banking practices.
  • Milton Friedman's theories on monetary policy, particularly his emphasis on controlling the money supply, have significantly influenced modern central banking practices. Central banks now often focus on targeting inflation rates and adjusting interest rates to manage economic growth. Friedman's assertion that excessive money supply leads to inflation has led central banks to prioritize maintaining price stability as a key objective in their monetary policy frameworks.
• Evaluate the implications of Milton Friedman's critique of government intervention in the economy for contemporary economic policy debates.
  • Milton Friedman’s critique of government intervention emphasizes that excessive regulation can lead to inefficiencies and hinder economic growth. This perspective continues to resonate in contemporary economic policy debates, where discussions revolve around the balance between necessary regulation and free-market principles. His ideas encourage policymakers to consider market-driven solutions and often advocate for reduced government involvement, influencing arguments related to taxation, welfare programs, and regulatory measures in today's economic climate.

Related terms

Monetarism:

An economic theory that emphasizes the role of governments in controlling the amount of money in circulation, arguing that variations in the money supply have major influences on national output in the short run and the price level over longer periods.

Natural Rate of Unemployment:

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

Friedman Doctrine: The principle that a firm's primary responsibility is to its shareholders, emphasizing profit maximization as the main goal of business operations.