Milton Friedman’s Influence on Macroeconomics
Milton Friedman was an American economist as well as being a public intellectual. He was born in 1912 and died at the age of 94 in 2006. He was an ardent advocate of economic freedom as well as personal liberty. Before his death Friedman was one of the most influential scholars and figures of authority in the fields of microeconomics, statistics, and economic history as well as the field of macroeconomics, which happens to be the field of study.
Milton Friedman, although unfortunately bereaved, was one of the most influential economics of all time. Many economists as well as economies big and small have adapted to the teachings of Friedman. Why has this been so? In trying to analyze this paper, I will look at some of the major contributions of Friedman to the field of macroeconomics.
Macroeconomics is a sub-discipline in the field of economics. It concerns it self with the structure, performance and the behaviors of national economies. It seeks to find out the determinants of the aggregate movements within the economy.
Macroeconomics gives specific attention to inflation, unemployment, international trade, investments and the national income.
On the other hand, Microeconomics is the branch of economics that concerns itself with the processes that firm’s, households and individuals concerns themselves in allocating limited resources. In this sense microeconomics scrutinizes how these decisions affect the demand and supply schedules and helps determine not only the prices but also how these prices influence the supply and demand of goods and services in any given market segment.
Macroeconomics is generally divided in to two major areas of study; the business cycle which concerns itself mainly with the consequences and causes of the of short term fluctuations in national income and the determinants of the long run economic growth (increases in the national income).
As thus, the field of macroeconomics is of paramount importance in designing, developing and evaluating strategies and policies not only for governments but also for large corporations like Sony and Toyota.
Macroeconomics concerns itself with economic aggregates of the nation’s economic activities. On this field, macroeconomics concerns itself with issues of government actions (spending and taxation), issues of unemployment, inflation as well as general economic policies.
Friedman for a long time worked in isolation. Until the late 70s, many scholars especially in the field of economics met Friedman’s work with a lot of hostility.
Milton Friedman was an ardent opponent to the Keynesian economics; Milton led the “Monetarist school” commonly referred to the Chicago School against the Keynesian school of economics.
Friedman’s contributions include the “Permanent Income Hypothesis” on consumption (1957), in addition to this there was the formulation of risk-aversion and risk-proclivity (1948); he was also influential through his evolutionary theory on the theory of the firm, including his own propositions for a “positivist” methodology in economics (1953).
Friedman was key influential in macroeconomics especially in attacking the Keynesians on their view of the IS-LM analysis. In this attack, Friedman wanted the Keynesians not to ignore money matters in their analysis. He was critical in pinpointing the importance of a laissez-faire economy, but he still held the proposition that concrete policies need to be operational within the economy for there to be harmony in the economy.
In essence, the works and teachings of Friedman came to be an influential part of modern economics especially after the Keynesian analysis failed to offer a solution to the 1970s crisis because of the prevalent cost-push inflation and the inability of Keynesians to offer a solution to the increasing wages and prices. Friedman scathingly attacked the Keynesians for failing to debate or offer directions on the need for competitive markets, this Friedman said was the reason why there had emerged larger monopolies within the 50s and the 60s which led to the ensuing stagflation.
In addition to this, Friedman together with other scholars from the Chicago school provided evidence to prove that within competitive markets the price system could effectively and efficiently to allocate scarce resources. In his own words, Friedman claimed that the price system plays the following roles: firstly, the price system provides incentives for the adoption of the least costly methods of production. The price system also helps in using available resources for the best use available, in addition the price system is used to transmit information on production, available resources and tastes, on top of this the prices can be used to determine the distribution system “who gets what when and how”.
Friedman was also influential in designing test theories. On this issue, Friedman held the opinion that economists should only invoke the predictive ability of the theory and not the descriptive realism of the theory. Friedman was also influential in proposing that governments use countercyclical budget policies.
CASE ANALYSIS: JAPANS MACROECONOMIC POLICIES:
Japan is the world’s second largest economy from the United States. It is a market economy just like the United States although geographically it is very small. Japan is an industrial state although it relies mainly on imported raw materials for its industries. As thus, Japan is highly dependent on the nature of international trade and this means that Freidman’s analysis of price theories, inflation and free trade has a huge impact within the Japanese macroeconomic policies.
Within Japan, the economy has followed the teachings of Friedman in the following ways. Firstly, the country has realized the importance of laissez faire economics. For this reason, given that the country relies mostly on imported raw materials for its industries have, been one of the major advocate’s free trade. This has been commissioned in many ways including being one of the influential members of the world trade organization. Secondly, the country has adopted Friedman’s teachings in the way the country designs its fiscal policy; this has been done mainly by changing the composition of public spending instead of expanding it.
Thirdly, the countries central bank, the bank of Japan has also followed Friedman’s rules in inflation targeting and interest rate benchmarking. In addition to these, the Japanese cabinet especially in recent years has been very vocal in trying to push for structural reforms as well as the adoption of stringent business policies especially in the financial sector that has been affected by banking crisis for a very long time.
Concerning the activities of the bank of Japan, it is important to note that for a long time now the bank has been steadily increasing the money supply. This is intended to contain inflation as well as being a way of supporting the fiscal policy. In addition to this, the Japanese economy has been under a condition of a liquidity trap. According to the monetarist theory, mainly influenced by Milton Friedman, a country would most likely move out of a liquidity trap by turning to the printing press or increasing the money supply. In order for Japan to move out of the liquidity trap, the bank of Japan has resulted to the printing press as well as the purchase of Japanese government’s treasury bonds. These are all monetarist activities and they go on to show us how the Japanese economy has gone in line with the teachings of Milton Friedman.
Although Friedman was very influential on the field of macroeconomics, very many different schools of thought have criticized, or have held different views from those of Friedman. These include the Marxists, the Keynesians and neo-Keynesians.
The Keynesians and neo-Keynesians advocate for a mixed economy. In this view, they consider an equally important role to be played by both the private sector and the government. . Thus Keynes believed that the government was responsible for not only helping the economy rise out of a depression by increasing aggregate spending but also it could increase general levels of investments by pumping more money into the economy, then the citizens are encouraged to spend more because more money is in circulation. Once this is done then People will start to invest more, and the economy will react by increasing productive ventures.
Thus, Keynes argued that government investment in public goods that will not be provided for by the market would encourage the private sector’s growth. This would include government spending on such things as basic research, public health, education, and infrastructure. On the other side, the Marxists beliefs in a social state where neither the government nor the market takes control. Karl Marx believed that the state was a manifestation of the ruling class, in many instances he claimed, that the ruling class was the bourgeoisie (owners of the means of production). Whose aim was self-enrichment under such a state developments of either the infrastructure or education would be done if it were to their benefit and not to the benefit of the workers (Proletariat).
The works of Milton Friedman will continue to hold the field of economics for a long time to come, especially in these days of globalization and increasing interdependence of states.
Hadjimichalakis M. (1982) Modern Economics, Prentice Hall Publishers, New Jersey
H. Stratton (1999) Economics: A New Introduction, Pluto Press, USA
Martin U. (1976) Agricultural Production Economics and Resources Used, Oxford University Press, Oxford
Paul Anthony Samuelson (1964) Economics, McGraw-Hill publishers, USA
Thomas A. and Paschal Francis (1995) Beyond Rhetoric and Realism in Economics: Towards a reformulation of economic methodology, Rout ledge, UK Ian Livingstone (1970) Economics and Development: an introduction, Oxford University Press, Oxford
Jay M. Shafritz, Philip H. Whitbeck (1978), Classics of Organization Theory, Moore Pub Co, (Original from the University of Michigan).