Milton Friedman-Monetrisam and Free Market Theory

Personal note!
Milton Freedman becomes familiar to larger audiences with Naomi Klein’s book and movie The Shock Doctrine. Before that he was known in science as economic theorists.  Over the night during last crises Milton Friedman becomes synonym for all that is bad, and cause of all economic problems, crises even wars in some countries. He was an economist at the first place, and he was protagonist of some non-popular and inefficient reforms in USA economy that have spilled over to the rest of the world. In my opinion we cannot call him NOTORIOUS, or creator of the New World Order. He was a part of economics movement so called Chicago School that had been used in the wrong way, in the wrong time and with  the wrong methods as in Chile.

Milton Friedman’s quotes about free market

  • “The great virtue of a free market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another.”
  • “Government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens from crimes against themselves or their property. When government– in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.”
  • “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”
  • “I think that nothing is so important for freedom as recognizing in the law each individual’s natural right to property, and giving individuals a sense that they own something that they’re responsible for, that they have control over, and that they can dispose of.”

 

Who was Prof Milton Friedman?

A half century ago, Milton Friedman’s advocacy of free markets over government intervention and his prescription for inflation-fighting by central banks were treated as fringe notions by many economists. By the time the Nobel Prizewinning economist died yesterday at the age of 94, his views had helped to reshape modern capitalism.

A diminutive man known for his strong-willed and combative style, Mr. Friedman provided the intellectual foundations for the anti-inflation, tax-cutting and anti government policies of President Ronald Reagan and British Prime Minister Margaret Thatcher and an era of more-disciplined central banking. His ideas helped to end the military draft in the 1970s, gave birth to staple conservative causes such as school vouchers and created the groundwork for new economic views about the Great Depression, unemployment, inflation and exchange rates.

Many of his ideas remain controversial to this day, or carry less weight. Central bankers don’t follow his prescriptions for how to implement monetary policy, considering them impractical. And despite his strong advocacy, publicly funded vouchers for students to attend private schools are still rare and researchers struggle to prove their effectiveness. His advocacy of the decriminalization of drugs hasn’t been heeded. But few would argue against the notion that Mr. Friedman — with highly technical academic papers, popular books and columns, and the ear of powerful politicians — helped to shift the center of debate in the U.S. and abroad about the proper role of government in managing a nation’s economy. His influence spread far afield, from Hong Kong to Chile to Russia and Eastern Europe, and his ideas took root with reformers pushing for privatization and open markets.

“Among economic scholars, Milton Friedman had no peer,” Federal Reserve Chairman Ben Bernanke said. “The direct and indirect influences of his thinking on contemporary monetary economics would be difficult to overstate. Just as important, in his humane and engaging way, Milton conveyed to millions an understanding of the economic benefits of free, competitive markets, as well as the close connection that economic freedoms bear to other types of liberty.” President Bush said, “His work demonstrated that free markets are the great engines of economic development.”

Critics said he inspired policies that put millions of people out of work in pursuit of low inflation and demonized almost everything the government did, no matter how beneficial or democratically chosen. “Milton Friedman didn’t make a distinction between the big government of the People’s Republic of China and the big government of the United States,” said James Galbraith, professor of government at the University of Texas and son of the late, liberal economist John Kenneth Galbraith, who often sparred with Mr. Friedman.

Mr. Friedman was awarded the Nobel Prize for Economic Science in 1976. He was best known for explaining the role of money supply in economic and inflation fluctuations. By managing the amount of money sloshing through a financial system, Mr. Friedman theorized, central banks could control inflation without making costly mistakes.

These views were advanced by Mr. Friedman’s early mentor and friend, Arthur Burns, Federal Reserve chairman from 1970 to 1978. Mr. Friedman was harshly critical of Mr. Burns’s monetary policy, and as inflation rose and unemployment took hold, his own views grew in prominence. By the time he won his Nobel, the unemployment rate had climbed to more than 7% and was on its way to surpassing 10%. The inflation rate, too, had flirted with double-digit levels.

Along with economist Edmund Phelps, this year’s Nobel Prize winner, Mr. Friedman in the 1960s also developed the theory that policy makers couldn’t maintain low unemployment by permitting higher inflation. The view holds sway at major central banks today, including the Fed, and helped to defeat the inflation of the 1970s and set the stage for the low inflation and low unemployment of the 1990s and today.

It took Paul Volcker, who became Fed chairman in 1979, to put the monetarist theory into practice, adopting money- supply targets that drove interest rates to double digit levels, sent the economy into a deep recession, and ultimately brought inflation down drastically. But unemployment eventually fell as well, proving that Mr. Friedman and Mr. Phelps were right about the absence of a rigid tradeoff between unemployment and inflation.

“That was a victory among many victories,” Mr. Phelps said.

While central bankers still accept that inflation is largely a result of money-supply growth, few target the money supply in practice because it is difficult to measure and its relationship to overall spending often shifts.

Mr. Friedman, who had started his studies at Chicago during the Depression, challenged the Keynesian approach, espousing the idea that the government should stay out of individuals’ affairs whenever possible, and that markets can solve economic problems much more efficiently than government officials can. His ideas formed the basis for what become known as the “Chicago School” of economics, a concept of free-market capitalism. Influenced by such earlier free-market thinkers as Friedrich Von Hayek, Mr. Friedman — some of whose relatives died during the Nazi occupation of Eastern Europe — saw economic and political freedom as inextricably linked. As he wrote in the 1962 text “Capitalism and Freedom,” “a society which is socialist cannot be democratic, in the sense of guaranteeing individual freedom.”

Mr. Friedman’s ideas weren’t all laissez-faire. His concept of a “negative income tax” to eliminate poverty, for example, laid the foundation for today’s Earned Income Tax Credit.

Mr. Friedman considered his best purely scientific contribution to economics to be his work on how people make spending decisions — which was based on data he collected while working with future Nobel laureate Simon Kuznets at the National Bureau of Economic Research. Under his “permanent income” theory, people smooth their spending based on what they expect their incomes to be in the long term — meaning that things such as unexpected tax breaks or other windfalls will have only a limited effect on spending.

By the 1970s, his influence had become substantial. He was a member of the Commission on an All-Volunteer Armed Force, appointed by Mr. Nixon in 1969. Former Fed Chairman Alan Greenspan, who was also a member, says that at the outset, panel Chairman Thomas Gates “was very clearly unconvinced that a volunteer army would work. At the end of the commission hearings he was strongly in favor of it, and the main reason was Friedman kept dissuading him on all the concerns he had.” Mr. Nixon ended the draft in 1973.

In the 1970s, Mr. Friedman courted controversy for his association with Chile’s military government which, after toppling a civilian government in 1973, implemented many free-market and monetarist ideas learned by its advisers who had studied at the University of Chicago. He was widely criticized for meeting with Chilean dictator Augusto Pinochet, whose government was eventually blamed for murdering and torturing thousands. Mr. The Freedman’s Nobel Prize ceremony was disrupted by demonstrators.

That same year Mr. Reagan, who had just made an unsuccessful bid for the presidency, noted the demonstrations in a radio address and said, “It seems when Milton Friedman talked, someone in Chile listened. Wouldn’t it be nice if just once someone in Washington would ask: ‘What did he say?'” In another address, he quoted Mr. Friedman, saying, “When you start paying people to be poor, you wind up with an awful lot of poor people.”

One of the paradoxes of Mr. Friedman’s immense influence on policy was his low regard for policy making. He often advocated abolition of the Fed for its failures during the Great Depression and the 1970s, though he later relented and admitted Mr. Greenspan had done a remarkable job from 1987-2006. After two years in the Treasury Department during World War II, he never served in government, aside from advisory roles.

Lawrence Lindsey, who served in both Bush presidencies and on the Fed board, recalls telling Mr. Friedman in the early 1990s, “Why don’t you come to Washington, we could use you here.” Mr. Friedman replied, “I detest that town.”

Mr. Friedman once described his refusal to leave academia as necessary to his larger mission: “For society to be at once humane and to give opportunity for great human achievements, it is necessary that a small minority of people who do not have materialistic objectives have the greatest degree of freedom.”

Sources

1.       http://www.econlib.org/library/Enc/bios/Friedman.html

2.       http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1976/friedman-bio.html

3.       http://www.edchoice.org/MiltonFriedman.aspx

4.       https://www.wsws.org/en/articles/2006/11/frie-n21.html

5.       Capitalism and Freedom  by Milton Friedman, September 15, 1982

 Image

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s