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1
 MILTON FRIEDMAN: FORMIDABLE OPPONENT
   TO THE KEYNESIAN APPROACH

þ FRIEDMAN FOLLOWED IN TRADTION OF HENRY SIMONS
[1899-46].

þ SIMONS ESSAY A POSITIVE PROGRAM FOR LAISSEZ FAIRE
[1934] SET OUT A REFORM PROGRAM TO BRING
COMPETITIVE PRIVATE ENTERPRISE BACK TO LIFE:

     þ ELIMINATE ALL MONOPOLISTIC MKT POWER,
      INCLUDING BREAKUP OF LARGE OLIGOPOLISTIC
      CORPORATIONS & APPLICATION OF ANTI-TRUST LAWS
      TO LABOR UNIONS;

     þ A FEDERAL INCORPORATION LAW TO LIMIT
       CORPORATE SIZE.

     þ WHERE TECHNOLOGY REQUIRED GIANT FIRMS FOR
       LOW-COST PRODUCTION, FED GOVN. SHOULD OWN &
       OPERATE THEM;

     þ REFORM THE MONETARY SYSTEM & PROVIDE STABLE
       RULES FOR MONETARY POLICY;

     þ REFORM THE TAX SYSTEM & PROMOTE EQUITY THRU
       THE INCOME TAX;

     þ ABOLISH ALL TARIFFS;

     þ LIMIT WASTE BY RESTRICTING ADVERTISING &
       OTHER WASTEFUL MERCHANDISING PRACTICES.

2

 FRIEDMAN, A REP OF CLASSICAL LIBERALISM, IN
   FOOTSTEPS OF ADAM SMITH
 

þ ARGUED THAT BENEFITS FROM A LAISSEZ-FAIRE POLICY
ARE FAR MORE DESIRABLE THAN THOSE OBTAINED FROM
INTERVENTIONIST POLICY THAT MODIFY OPERATION OF
FREE MKTS IN INTEREST OF SOLVING SOME IMMEDIATE
PROBLEMS;

þ EXAMPLE: MIN. WAGE --> DESIGNED TO BENEFIT LOW-
WAGE WORKERS, BUT HAVE OPPOSITE EFFECT --> BECOME
TOO EXPENSIVE FOR EMPLOYERS TO HIRE --> INCREASED
UNEMPLOYMENT.
 
 

þ MOST SIGN. EXAMPLE OF GOVN. INTERVENTION IN
ECONOMY WAS KEYNESIAN MACROECONOMIC PLANNING.

þ FRIEDMAN STRONGLY CRITICIZED USE OF FISCAL POLICY
[I.E. CHANGES IN FED GOVN SPENDING & TAXES] TO
STABILIZE THE ECONOMY.

þ HE STRONGLY SUPPORTED MONETARY POLICY -- OF A
SPECIAL TYPE -- THAN GOES BACK TO SIMONS.

3

 MILTON FRIEDMAN: A MONETARIST WHO WANTS LONGTERM
   GROWTH OF THE MONEY SUPPLY
 

þ FRIEDMAN: EXTREMELY DIFFICULT TO COUNTERBALANCE
  THE SWINGS OF THE PRIVATE SECTOR BY USING
  GOVERNMENT SPENDING OR TAX CHANGES.

     þ DIFFICULT TO FORECAST THE BUSINESS CYCLE;

     þ PROBLEM OF LAGS:

          þ BETWEEN NEED FOR ACTION & GOVN
            RECOGNITION OF NEED;

          þ BETWEEN RECOGNITION OF NEED FOR ACTION
            & TAKING OF ACTION;

          þ BETWEEN THE ACTION & ITS EFFECTS.
 
 

þ RESULT: THE CORRECTIVE ACTION BECOMES A FURTHER
  ERROR, WITH STIMULUS COMING WHEN SPENDING SHOULD
  BE DAMPENED, & VICE VERSA.
 

þ FRIEDMAN: MONETARY SYSTEM HAS FAR MORE PERVASIVE
EFFECT ON ECONOMIC ACTIVITY THAN FISCAL POLICY.
 

þ HE REVIVED QUANTITY THEORY OF MONEY: THE QUANTITY
OF MONEY DETERMINES THE GENERAL LEVEL OF PRICES:

     þ MONETARY SYSTEM AFFECTS LEVEL OF AGGREGATE
       DEMAND & NATIONAL OUTPUT IN WIDE VARIETY OF
       SUBTLE WAYS.

4

 FRIEDMAN: OPPOSED TO ACTIVE USE
   OF MONETARY POLICY
 

þ KEYNESIANS HAVE NEVER DENIED IMPORTANCE OF
  MONETARY POLICY:

     þ USED IT AS ONE OF TWIN ARMS OF
     MACROECONOMIC POLICY -- IN COORDINATION WITH
     FISCAL POLICY.
 

þ FRIEDMAN DID NOT LIKE THE ACTIVE USE OF MONETARY
  POLICY:

     þ WANTED NEITHER EASY MONEY TO PROMOTE FULL
       EMPLOYMENT;

     þ NOR TIGHT MONEY TO PREVENT INFLATION;

     þ LONGRUN EFFECTS MIGHT BE OPPOSITE OF
       INTENDED SHORT-RUN EFFECTS.
 

þ FRIEDMAN WANTED A NEUTRAL MONETARY POLICY
  ORIENTED TO LONGRUN GROWTH:

     þ ADVOCATED A GRADUAL & STEADY INCREASE IN
       MONEY SUPPLY AT A FIXED PERCENT ANNUALLY, AS
       AN AID TO ECONOMIC EXPANSION & GROWTH.
 

þ WHAT ABOUT BUSINESS CYCLES & DEPRESSIONS?

     þ WOULD NOT FRIEDMAN'S POLICIES LEAVE COUNTRY
       OPEN TO ANOTHER SEVERE DEPRESSION?

     þ NO, FRIEDMAN & ANNA SCHWARTZ STUDIED
       MONETARY HISTORY OF THE U.S., WROTE
       A MONETARY HISTORY OF THE UNITED STATES
       [1963].

5

 FRIEDMAN: OPPOSED TO ACTIVE USE
   OF MONETARY POLICY
 
 

þ FRIEDMAN & SCHWARTZ  ARGUED THAT INSTABILITY IN
  MONETARY SYSTEM WAS ALWAYS CHIEF CAUSE OF
  INSTABILITY IN EMPLOYMENT & OUTPUT.

          þ MONETARY POLICIES OF FED RESERVE HELPED
            TO BRING ON GREAT DEPRESSION & MADE IT
            MUCH WORSE AFTER IT CAME.
 
 

þ FRIEDMAN ADVICE: STABILIZE MONETARY SYSTEM &
  ECONOMIC STABILITY WILL FOLLOW.
 

þ FRIEDMAN & FOLLOWERS CALLED MONETARISTS BECAUSE
  OF THEIR EMPHASIS ON MONETARY FACTORS.
 

þ FRIEDMAN CONTENDS THAT GOVN SPENDING DESIGNED TO
  PREVENT RECESSIONS IS A SIGN. CAUSE OF INFLATION.
 

þ IN SUM, THE ATTACK ON KEYNESIAN POLICIES BY
  FRIEDMAN & THE CHICAGO SCHOOL BROKE THE ALMOST
  COMPLETE DOMINANCE OF KEYNESIAN MACROECONOMICS IN
  THE FORMATION OF GOVN. POLICY.
 
 

þ MUCH OF WORK OF MONETARISTS WAS INTEGRATED INTO
THE LARGER BODY OF ECONOMIC THEORY. BUT THERE
REMAINS A STRONG AREA OF DISAGREEMENT BETWEEN:

     þ ACTIVE LIBERAL --> ADVOCATES STRONG GOVN.
       ACTION TO SOLVE SOCIETY'S PROBLEMS;

     þ LAISSEZ-FAIRE LIBERAL --> SEES THAT PATH AS
       WRONG, WANTS GOVN ONLY TO EST. A FRAMEWK
       WITHIN WHICH FREE MKTS CAN FUNCTION.


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