Milton Friedman - History of Economic Thought - Lecture Slides, Slides of Economics

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Milton Friedman

Milton Friedman (1912-2006)

• A Monetary History of the United States (1963), with Anna J. Schwartz
• A theory of the consumption function (1957)
• Selected Bibliography

Money affects output

• Money supply does have a positive effect on employment and production in the short run - This is because of “money illusion”.
• Indeed, Friedman argued, the Great Depression was probably caused by a sharp reduction in money supply by the US central bank, the Fed.
• In the long run, however, the quantity of money affects the price level alone

Monetary policy

• But there are lags that make monetary policy ineffective. - Observation lag - Decision lag - Effect lag
• Monetary policy should follow simple rules and not try to adjust to shifting economic situations. - In particular, if an economy’s GDP normally grows at the rate of 3.5% per year, then its central bank should increase the quantity of money at the same rate every year. This will keep prices stable over the long run. - Friedman consequently favored the abolition of the Federal Reserve

Flexible Exchange Rates

• Friedman was among those who first realized - and could explain - why the Bretton Woods System with relatively fixed rates of exchange was bound to break down sooner or later.

Libertarianism

• Vigorous participant in public policy debates
  • Had a weekly column in Newsweek, recorded TV documentary series, wrote popular books on economic issues
• Legalization of drugs and prostitution
• Volunteer army
• School vouchers
• Abolition of licensing requirements of doctors
• Negative income tax