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.