Discussion on Milton Friedman's Legacy, featuring Jennifer Burns and our article author
Milton Friedman, a renowned economist, left an indelible mark on the field of economics with his groundbreaking contributions. His work, spanning over four decades, included the development of monetarism, a comprehensive analysis of the Great Depression, and influential work on economic policies emphasizing free markets and limited government intervention.
Monetarism and Money Supply
Friedman revitalized the study of the money supply's role in the economy, arguing that inflation is primarily caused by increases in the money supply. He advocated for controlling inflation by growing the money supply at a steady, predictable rate rather than through discretionary fiscal policies. His famous analogy of "dropping money out of a helicopter" illustrated how excessive money injection leads to inflation.
Great Depression Analysis
In collaboration with Anna J. Schwartz, Friedman revolutionized the understanding of the Great Depression with their book "A Monetary History of the United States." They argued that the Great Depression was worsened significantly by Federal Reserve policy errors. Specifically, the Fed allowed the money supply to contract drastically, a phenomenon Friedman termed "The Great Contraction," which deepened the economic downturn dramatically.
Phillips Curve and Unemployment
Friedman challenged the Keynesian idea of a stable trade-off between inflation and unemployment represented by the Phillips curve. He argued that any reduction in unemployment below its "natural rate" was temporary and would lead to accelerating inflation because workers only react to unexpected inflation.
Economic Policy and Free Markets
Beyond theoretical economics, Friedman was a strong advocate for economic liberty as a foundation of personal freedom. In "Capitalism and Freedom" (1962), he supported policies such as deregulation, tax simplification, school vouchers, floating exchange rates, and reducing the role of government in the economy. His ideas deeply influenced conservative economic policies in the U.S. and U.K., including those of Ronald Reagan and Margaret Thatcher.
According to Friedman, when policy becomes discretionary rather than rule-based, people start competing for control of the rules instead of competing in markets. He viewed the economy as a game that requires clear, transparent rules to function properly. In 1967, Friedman made a remarkable prediction that high inflation and high unemployment could occur simultaneously, a view that was unconventional at the time.
Friedman's theories and insights continue to influence economic policy and central banking practices. The Federal Reserve's policy allowed the money supply to contract by a third, triggering a catastrophic liquidity crisis during the Great Depression. This insight led to a new approach for central banks handling financial crises, from 2008 to COVID-19.
Friedman's prediction of simultaneous high inflation and high unemployment was vindicated during the stagflation of the 1970s. His work contributed significantly to the development of monetarism, an economic theory focusing on the control of the money supply to maintain stability. Friedman fundamentally changed how we think about money, markets, and the role of government in economic life.
In recognition of his contributions, Friedman was awarded the Nobel Prize in Economics in 1976. His groundbreaking work was carried out at the University of Chicago. The book "A Monetary History of the United States" revealed that the Great Depression was not a failure of capitalism, but a failure of government policy. No Fed chair wants to repeat the mistakes documented by Friedman and Schwartz in their book.
The business community and the world of finance have been greatly influenced by Friedman's work on monetarism, which emphasizes maintaining economic stability through the careful management of the money supply. Beyond economics, Friedman's advocacy for economic liberty extends to other sectors, such as education and self-development, where he supported policies like school vouchers and tax simplification that encourage individual freedoms.
